Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the Quarterly Period ended December 31, 2010

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  ¨    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.

4,628,750 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of February 7, 2011.

 

 

 

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OBA FINANCIAL SERVICES, INC. AND SUBSIDIARY

Form 10-Q Quarterly Report

Table of Contents

 

PART I – FINANCIAL INFORMATION
		Forward-Looking Statements Disclosure			2
Item 1.		Financial Statements
		Consolidated Statements of Condition (Unaudited) As of December 31, 2010 and June 30, 2010			4
		Consolidated Statements of Income (Unaudited) for the three and six months ended December 31, 2010 and 2009			5
		Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) for the six months ended December 31, 2010 and 2009			6
		Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2010 and 2009			7
		Notes to Consolidated Financial Statements (Unaudited)			8
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			23
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			31
Item 4.		Controls and Procedures			31
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings			31
Item 1A.		Risk Factors			31
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			31
Item 3.		Defaults Upon Senior Securities			31
Item 4.		[Reserved]			31
Item 5.		Other Information			31
Item 6.		Exhibits			31
Signatures					32

 

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Forward-looking Statements

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

•

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

 

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

 

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PART I – FINANCIAL INFORMATION

 

Item 1.

Financial Statements

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Condition (Unaudited)

 

		December 31, 2010				June 30, 2010
(In thousands, except share data)
Assets:
Cash and due from banks		$	11,041			$	16,946
Federal funds sold			3,163				19,100
Cash and cash equivalents			14,204				36,046
Interest bearing deposits with other banks			5,612				5,072
Securities available for sale			23,602				29,346
Securities held to maturity (fair value of $4,104 and $4,809)			4,007				4,637
Federal Home Loan Bank stock, at cost			3,469				3,883
Loans			286,011				277,835
Less: allowance for loan losses			2,170				1,737
Net loans			283,841				276,098
Premises and equipment, net			6,350				6,231
Bank owned life insurance			8,445				8,297
Other assets			4,686				4,485
Total assets		$	354,216			$	374,095
Liabilities:
Deposits:
Noninterest-bearing		$	26,300			$	23,499
Interest-bearing			201,399				209,942
Total deposits			227,699				233,441
Securities sold under agreements to repurchase			13,357				20,292
Federal Home Loan Bank advances			31,176				36,834
Advance payments from borrowers for taxes and insurance			253				2,262
Other liabilities			1,135				1,044
Total liabilities			273,620				293,873
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 4,628,750 shares at December 31, 2010 and June 30, 2010			46				46
Additional paid-in capital			44,774				44,759
Unearned ESOP shares			(3,518	)			(3,610	)
Retained earnings			38,819				38,284
Accumulated other comprehensive income			475				743
Total stockholders’ equity			80,596				80,222
Total liabilities and stockholders’ equity		$	354,216			$	374,095

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2010				2009				2010				2009
(In thousands, except per share data)
Interest and Dividend Income:
Loans receivable, including fees		$	3,850			$	3,703			$	7,607			$	7,447
Investment securities:
Interest - taxable			266				364				584				711
Dividends			2				1				9				15
Federal funds sold			13				9				31				19
Total interest and dividend income			4,131				4,077				8,231				8,192
Interest Expense:
Deposits			638				974				1,314				2,064
Federal Home Loan Bank advances			352				609				744				1,205
Securities sold under agreements to repurchase			66				58				131				124
Total interest expense			1,056				1,641				2,189				3,393
Net interest income			3,075				2,436				6,042				4,799
Less provision for (recovery of) loan losses			245				(55	)			403				93
Net interest income after provision for (recovery of) loan losses			2,830				2,491				5,639				4,706
Non-Interest Income (Loss):
Customer service fees			104				122				220				242
Loan servicing fees			11				12				22				24
Bank owned life insurance income			78				87				148				169
Impairment losses on investment securities:
Total other-than-temporary impairment losses			—				(82	)			—				(84	)
Losses previously recognized in other comprehensive income before taxes			—				(244	)			—				(466	)
Net impairment losses recognized in income			—				(326	)			—				(550	)
Net gain on the sale of investments			—				—				—				3
Net gain on sale of loans			70				19				95				24
Other non-interest income			45				22				76				41
Total non-interest income (loss)			308				(64	)			561				(47	)
Non-Interest Expense:
Salaries and employee benefits			1,449				1,217				2,910				2,398
Occupancy and equipment			470				390				921				764
Data processing			179				162				338				315
Directors’ fees			79				78				167				153
FDIC assessments			71				97				148				192
Other non-interest expense			469				363				918				707
Total non-interest expense			2,717				2,307				5,402				4,529
Income before income taxes			421				120				798				130
Income tax expense (benefit)			138				23				263				(12	)
Net income		$	283			$	97			$	535			$	142
Basic earnings per share		$	0.07				N/A			$	0.13				N/A
Basic weighted average shares outstanding			4,272,387				N/A				4,270,072				N/A

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

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

Six Months Ended December 31, 2010 and 2009

 

		Common Stock				Additional Paid-in Capital				Unearned ESOP Shares				Retained Earnings				Accumulated Other Comprehensive Income (Loss)				Total
(In thousands)
Balances at July 1, 2009		$	—			$	—			$	—			$	38,994			$	(492	)		$	38,502
Comprehensive income:
Net income															142								142
Other comprehensive income (loss), net of tax:
Unrealized losses on debt securities for which a portion of impairment has been recognized in income, net of tax benefit of ($33)																			(51	)			(51	)
Net unrealized gains on other available for sale securities, net of tax of $113																			178				178
Reclassification adjustment for other-than-temporary impairment losses included in income, net of tax of $215																			335				335
Reclassification adjustment for gain on sales of investments, net of tax benefit of ($1)																			(2	)			(2	)
Total comprehensive income																							602
Balances, December 31, 2009		$	—			$	—			$	—			$	39,136			$	(32	)		$	39,104
Balances at July 1, 2010		$	46			$	44,759			$	(3,610	)		$	38,284			$	743			$	80,222
Comprehensive income:
Net income															535								535
Other comprehensive loss, net of tax:
Net unrealized losses on available for sale securities, net of tax benefit of ($171)																			(268	)			(268	)
Total comprehensive income																							267
ESOP shares committed to be released (9,258 shares)							15				92												107
Balances, December 31, 2010		$	46			$	44,774			$	(3,518	)		$	38,819			$	475			$	80,596

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

		Six Months Ended December 31,
(in thousands)		2010				2009
Operating Activities:
Net income		$	535			$	142
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses			403				93
Depreciation and amortization of premises and equipment			336				265
Net amortization (accretion) of securities premiums and discounts			96				(7	)
Net gains on sale of investment securities			—				(3	)
Impairment losses on investment securities			—				550
Proceeds from sales of loans held for sale			3,352				1,494
Originated loans held for sale			(3,257	)			(1,470	)
Net gains on sales of loans			(95	)			(24	)
Amortization of net deferred loan fees			(24	)			(112	)
Earnings on investment in bank-owned life insurance			(148	)			(169	)
ESOP expense			107				—
Amortization of mortgage servicing rights			4				1
Amortization of brokered deposit premiums			14				15
Changes in other assets and liabilities, net			63				(2,243	)
Total adjustments			851				(1,610	)
Net cash provided by (used in) operating activities			1,386				(1,468	)
Investing Activities:
Principal collections and maturities of securities available for sale			5,215				3,583
Principal collections and maturities of securities held to maturity			623				5,119
Proceeds from sales of securities available for sale			—				2,478
Purchases of securities available for sale			—				(2,475	)
Purchases of securities held to maturity			—				(9,983	)
Redemption of Federal Home Loan Bank Stock, net			414				—
Purchases of interest bearing deposits with Banks, net			(540	)			—
Loan purchases			(4,140	)			—
Loan originations less principal collections			(4,001	)			9,333
Purchases of premises and equipment			(455	)			(116	)
Purchases of bank-owned life insurance			—				(2,500	)
Net cash (used in) provided by investing activities			(2,884	)			5,439
Financing Activities:
(Decrease) increase in deposits			(5,742	)			1,497
Funds collected for stock offering			—				105,088
Net decrease in securities sold under agreements to repurchase			(6,935	)			(5,305	)
Repayment of advances from the FHLB			(5,658	)			(10,009	)
FHLB Advances			—				4,300
Net decrease in advance payments from borrowers for taxes and insurance			(2,009	)			(2,255	)
Net cash (used in) provided by financing activities			(20,344	)			93,316
(Decrease) increase in cash and cash equivalents			(21,842	)			97,287
Cash and cash equivalents at beginning of period			36,046				33,657
Cash and cash equivalents at end of period		$	14,204			$	130,944
Supplemental Disclosures:
Interest paid		$	2,220			$	3,447
Income taxes paid			195				15
Non cash investing activities:
Loans transferred to foreclosed assets			—				47

See notes to consolidated financial statements.

 

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OBA Financial Services, Inc. and Subsidiary

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations

In December 2007, OBA Bank (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 as separate legal entities and a stock holding company, OBA Financial Services, Inc., of which OBA Bank became a wholly owned subsidiary, sold and issued shares of capital stock to eligible depositors of OBA Bank. A total of 4,628,750 shares were issued in the conversion at $10 per share, raising $46.3 million of gross proceeds. OBA Financial Services, Inc.’s common stock began trading on the NASDAQ Capital Market under the symbol “OBAF” on January 22, 2010.

In accordance with Office of Thrift Supervision (“OTS”) regulations, at the time of the conversion from a mutual holding company to a stock holding company, OBA Bank substantially restricted retained earnings by establishing a liquidation account. The liquidation account will be maintained for the benefit of eligible account holders who continue to maintain their accounts at the Bank after conversion. The liquidation account will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Bank is a community-oriented savings institution, providing a variety of financial services to individuals and small businesses through its offices in Maryland and Washington, D.C. Its primary deposits are demand and time certificate accounts and its primary lending products are residential and commercial mortgage loans.

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 footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation are of a normal and recurring nature and have been included.

Operating results for the three and six months ended December 31, 2010, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011 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, 2010.

Use of Estimates

In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Statement of Condition and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. A material estimate that is particularly sensitive to significant change in the near term relates to the determination of the allowance for loan losses.

Recent Accounting Pronouncements

Accounting Standards Update 2010-06

In January 2010, the FASB issued Accounting Standards Update 2010-06, Fair Value Measurement and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.

 

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This Update requires new disclosures and clarifies some existing disclosure requirements about fair value measurements as set forth in Codification Subtopic 820-10.

ASU 2010-06 is effective for fiscal years beginning after December 15, 2009 and for interim periods within those fiscal years except the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements are effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. This update did not and is not expected to have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update 2010-20

In June 2010, the FASB issued Accounting Standards Update 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.

The update requires a greater level of disaggregated information about the credit quality of financing receivables and the allowance for credit losses. The amendment also requires disclosures of credit quality indicators, past due information, and modifications of financing receivables.

ASU 2010-20 is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company adopted this amendment on December 31, 2010 and has provided the required credit quality disclosures in the footnotes to these consolidated financial statements. Refer to Accounting Standards Update 2011-01 below for an update related to the adoption of ASU 2010-20.

Accounting Standards Update 2011-01

The amendments in this Update temporarily delay the effective date of the disclosures about troubled debt restructurings required by Update 2010-20 for public entities. Under the effective date in Update 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods ending on or after December 15, 2010. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011. The deferral in this amendment was effective upon issuance.

 

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NOTE 2 – COMPREHENSIVE INCOME

U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the Statement of Condition, such items, along with net income, are components of comprehensive income.

The components of other comprehensive income (loss) and related tax effects are as follows:

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2010				2009				2010				2009
		(In thousands)
Unrealized losses on debt securities for which a portion of impairment has been recognized in income		$	—			$	(82	)		$	—			$	(84	)
Unrealized gains (losses) on other available for sale securities			(301	)			(110	)			(439	)			291
Reclassification adjustment for OTTI losses included in income			—				326				—				550
Reclassification adjustment for gain on sale of investments			—				—				—				(3	)
Net unrealized gains (losses)			(301	)			134				(439	)			754
Tax effect			(117	)			53				(171	)			294
Net of tax amount		$	(184	)		$	81			$	(268	)		$	460

Accumulated other comprehensive income consists of the following:

 

		December 31, 2010				June 30, 2010
		(In thousands)
Unrealized gains on available for sale securities		$	778			$	1,218
Tax effect			(303	)			(475	)
Total		$	475			$	743

 

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NOTE 3 – SECURITIES

The amortized cost and fair value of securities with gross unrealized gains and losses are as follows:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
December 31, 2010
Securities available for sale:
Debt Securities:
Residential mortgage-backed securities (1)		$	22,648			$	804			$	(5	)		$	23,447
Trust preferred securities			126				—				(21	)			105
Total debt securities available for sale			22,774				804				(26	)			23,552
Equity Securities			50				—				—				50
Total securities available for sale			22,824				804				(26	)			23,602
Securities held to maturity:
Debt Securities:
Residential mortgage-backed securities (1)			4,007				97				—				4,104
Total debt securities held to maturity			4,007				97				—				4,104
Total investment securities		$	26,831			$	901			$	(26	)		$	27,706
June 30, 2010
Securities available for sale:
Debt Securities:
Residential mortgage-backed securities (1)		$	27,944			$	1,243			$	—			$	29,187
Trust preferred securities			135				—				(26	)			109
Total debt securities available for sale			28,079				1,243				(26	)			29,296
Equity Securities			50				—				—				50
Total securities available for sale			28,129				1,243				(26	)			29,346
Securities held to maturity:
Debt Securities:
Residential mortgage-backed securities (1)			4,637				172				—				4,809
Total debt securities held to maturity			4,637				172				—				4,809
Total investment securities		$	32,766			$	1,415			$	(26	)		$	34,155

 

(1)

All residential mortgage-backed securities were issued by United States government agencies including the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, or Government National Mortgage Association. The Company had no private label residential mortgage-backed securities at December 31, 2010 and June 30, 2010 or during the six months or year then ended, respectively.

 

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The amortized cost and fair value of debt securities by contractual maturity at December 31, 2010 are as follows:

 

		Available for sale								Held to Maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Due after ten years		$	126			$	105			$	—			$	—
Residential mortgage-backed securities			22,648				23,447				4,007				4,104
Total		$	22,774			$	23,552			$	4,007			$	4,104

At December 31, 2010 and June 30, 2010, the carrying amount of securities pledged to secure repurchase agreements was $16.4 million and $22.3 million, respectively.

The following table presents a summary of cumulative credit losses related to other-than-temporary impairment charges recognized in income for trust preferred securities during the six months ended December 31, 2010 and 2009:

 

		Six Months Ended December 31,
		2010				2009
		(In thousands)
Beginning balance of cumulative credit losses		$	—			$	1,020
Additions to credit losses recorded on securities			—				550
Ending balance of cumulative credit losses		$	—			$	1,570

During the three and six month periods ended December 31, 2009, the Company owned two bank and bank holding company backed pooled trust preferred securities (PreTSL VII and PreTSL VIII) which had a cumulative total of $1.6 million in other-than-temporary credit related charges. At December 31, 2009, the Company did not intend to sell the securities and believed it was not more likely than not that the Company would be required to sell the securities.

During the quarter ended March 31, 2010, the Company re-evaluated its intent regarding the pooled trust preferred securities. Due to the continued deterioration in the financial condition of some issuers, lack of improvement in the securities’ liquidity, the amount of management’s time and related costs of monitoring, valuing, and accounting for the securities and tax related considerations, the Company decided to sell the securities. Consequently, the Company has zero cumulative credit losses related to other-than-temporary impairment charges at December 31, 2010.

 

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Information pertaining to securities with gross unrealized losses at December 31, 2010 and June 30, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

 

		Less than 12 Months								12 Months or More								Total
		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
		(In thousands)
December 31, 2010
Residential mortgage-backed securities		$	5			$	4,105			$	—			$	—				5				4,105
Trust preferred securities			—				—				21				105				21				105
Total		$	5			$	4,105			$	21			$	105			$	26			$	4,210
June 30, 2010
Trust preferred securities		$	—			$	—			$	26			$	109			$	26			$	109
Total		$	—			$	—			$	26			$	109			$	26			$	109

At December 31, 2010, the Company owned several residential mortgage backed securities that had gross unrealized losses due to changes in market interest rates. At December 31, 2010, the Company owned one trust preferred security backed by insurance and insurance holding companies. The pooled trust preferred security is in the senior tranche and is rated AA by the rating agency Fitch and A+ by the rating agency Moody’s. The security was purchased at par. The decline in the fair value of this security has been caused by (1) collateral deterioration due to failures and credit concerns across the financial services sector, (2) the widening of credit spreads for asset-backed securities, and (3) general illiquidity and, as a result, inactivity in the market for these securities.

The unrealized loss in the table above related to this security was not recognized in income as the Company does not intend to sell the security, believes it is not more than likely than not that the Company will be required to sell the security and believes the present value of expected cash flows is sufficient to recover the entire amortized cost basis.

NOTE 4 – CREDIT QUALITY OF LOANS AND ALLOWANCE FOR LOAN LOSSES

Various Company policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets, or portions of assets, classified as loss are those considered uncollectible and of such little value that their continuance as an asset is not warranted. Assets that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are required to be designated as Special Mention.

The Company maintains an allowance for loan losses at an amount estimated to equal all credit losses incurred in the loan portfolio that are both probable and reasonably estimable at the statement of condition date. The Company’s determination as to the classification of assets is subject to review by the Company’s principal federal regulator, the OTS. The Company regularly reviews the asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

Management evaluates the allowance for loan losses based upon the combined total of the specific and general components as discussed below. Generally, when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally, when the loan portfolio decreases, absent other factors, the allowance for loan loss methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

Commercial real estate loans generally have greater credit risks compared to the one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on loans secured by income-producing properties typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

Commercial business loans generally have greater credit risks compared to the one- to four-family residential mortgage loans, as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment experience on commercial business loans typically depends on the successful operation of the related business and thus may be subject to a greater extent to adverse conditions in the real estate market and in the general economy.

 

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Generally, the Company underwrites commercial real estate loans at a loan-to-value ratio of 75% or less and residential real estate loans are underwritten at a loan-to-value rate not exceeding 80%. Accordingly, in the event that a loan becomes past due, management will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to ascertain property values. The Company may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s condition. For loans initially determined to be impaired loans, the Company utilizes the ascertained or appraised property value in determining the appropriate specific allowance for loan losses attributable to a loan. 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 OTS will periodically review the allowance for loan losses. The OTS may require the Company to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of December 31, 2010:

 

		Pass				Special Mention				Substandard				Doubtful				Total
Commercial and industrial		$	29,795			$	2,106			$	59			$	—			$	31,960
Commercial real estate			91,994				4,051				1,863				—				97,908
Commercial construction			1,500				—				—				—				1,500
Residential mortgage			117,792				—				1,436				—				119,228
Home equity			35,118				—				—				—				35,118
Total		$	276,199			$	6,157			$	3,358			$	—			$	285,714

Loans are placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. Loans are also placed on non-accrual status if collection of principal or interest, in full, is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed and further income is recognized only when full repayment of the loan is complete or the loan returns to accrual status, at which point income is recognized to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally six months), and full payment of principal and interest is expected.

 

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The performance and credit quality of the loan porfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due and non-accrual status as of December 31, 2010:

 

		31-60 Days Past Due				61-90 Days Past Due				Greater than 90 Days Past Due				Total Past Due				Current				Total Loans Receivable				Total Non-Accrual Loans
Commercial and industrial		$	—			$	—			$	—			$	—			$	31,960			$	31,960			$	—
Commercial real estate			—				—				—								97,908				97,908				—
Commercial construction			—				—				—				—				1,500				1,500				—
Residential mortgage			—				262				—				262				118,966				119,228				460
Home equity			170				131				—				301				34,817				35,118				—
Total		$	170			$	393			$	—			$	563			$	285,151			$	285,714			$	460

The Company provides for loan losses based upon the consistent application of the documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in management’s judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The allowance for loan losses consists primarily of two components:

 

(1)

specific allowances established for impaired loans. The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the present value of the loan’s expected cash flows discounted at the loan’s effective interest rate, or the loan’s observable market price, if any, or the fair value of the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the present value of the loan’s expected cash flows discounted at the loan’s effective interest rate, or the loan’s observable market price, or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan are not considered in establishing specific allowances for loan losses; and

 

(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.

Actual loan losses may be significantly more than the allowance for loan losses established, which could have a material negative effect on financial results.

The adjustments to historical loss experience are based on management’s evaluation of several qualitative and environmental factors, including:

 

•

changes in any concentration of credit (including, but not limited to, concentrations by geography, industry, or collateral type);

 

•

changes in the number and amount of non-accrual loans, classified loans, and past due loans;

 

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•

changes in national, state, and local economic trends;

 

•

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.

In addition, management may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

The following table sets forth the allocation of the allowance for loan losses by loan category for the six months ended December 31, 2010.

 

		Commercial and industrial				Commercial real estate				Commercial construction				Residential mortgage				Home equity				Unallocated				Total
Allowance for loan losses:
Beginning Balance		$	237			$	945			$	2			$	214			$	175			$	164			$	1,737
Charge-offs			—				—				—				—				—				—				—
Recoveries			—				—				—				—				30				—				30
Provisions			32				75				1				286				(41	)			50				403
Ending balance		$	269			$	1,020			$	3			$	500			$	164			$	214			$	2,170
Ending balance: individually evaluated for impairment		$	18			$	509			$	—			$	403			$	—			$	—			$	930
Ending balance: collectively evaluated for impairment		$	251			$	511			$	3			$	97			$	164			$	214			$	1,240
Loans receivables:
Ending balance		$	31,960			$	97,908			$	1,500			$	119,228			$	35,118							$	285,714
Ending balance: individually evaluated for impairment		$	59			$	1,863			$	—			$	1,436			$	—							$	3,358
Ending balance: collectively evaluated for impairment		$	31,901			$	96,045			$	1,500			$	117,792			$	35,118							$	282,356

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2010:

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance				Average Recorded Investment				Interest Income Recognized
With no related allowance recorded:
Commercial and industrial		$	—			$	—			$	—			$	—			$	—
Commercial real estate			—				—				—				—				—
Commercial construction			—				—				—				—				—
Residential mortgage			—				—				—				—				—
Home equity			—				—				—				—				—
With an allowance recorded:
Commercial and industrial		$	59			$	59			$	18			$	60			$	2
Commercial real estate			1,863				1,863				509				1,865				62
Commercial construction			—				—				—				—				—
Residential mortgage			1,436				1,436				403				1,572				52
Home equity			—				—				—				—				—
Total:
Commercial and industrial		$	59			$	59			$	18			$	60			$	2
Commercial real estate			1,863				1,863				509				1,865				62
Commercial construction			—				—				—				—				—
Residential mortgage			1,436				1,436				403				1,572				52
Home equity			—				—				—				—				—

 

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NOTE 5 – FAIR VALUE MEASUREMENTS AND DISCLOSURES

Management uses its best judgment in estimating the fair value of the Company’s assets and liabilities; however, there are inherent weaknesses in any estimation technique. Therefore, for substantially all assets and liabilities, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in a sale transaction on the dates indicated. The estimated fair value amounts have been measured as of their respective reporting dates and have not been re-evaluated or updated subsequent to those respective dates. As such, the estimated fair values of these assets and liabilities subsequent to the respective reporting dates may be different than the amounts reported at each reporting date. Accounting guidance related to fair value measurements and disclosures establishes a fair value hierarchy that prioritizes the inputs to valuation methods used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are as follows:

 

Level 1:		Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.
Level 2:		Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.
Level 3:		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at December 31, 2010 and June 30, 2010 are as follows:

 

(In thousands)
Description		December 31, 2010				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Securities available for sale		$	23,602			$	—			$	23,497			$	105
Description		June 30, 2010				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Securities available for sale		$	29,346			$	—			$	29,237			$	109

The following table presents a reconciliation of the securities available for sale measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended December 31, 2010:

 

		Three Months Ended December 31, 2010				Six Months Ended December 31, 2010
(In thousands)
Beginning balance		$	109			$	109
Principal repayments			(4	)			(9	)
Unrealized gains included in other comprehensive income			—				5
Ending balance, December 31, 2010		$	105			$	105

Level 3 securities consist of trust preferred securities at December 31, 2010 and June 30, 2010.

 

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For assets measured at fair value on a nonrecurring basis at December 31, 2010 and June 30, 2010, the fair value measurements by level within the fair value hierarchy are as follows:

 

(In thousands)
Description		December 31, 2010				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Impaired loans		$	2,428			$	—							$	2,428
Foreclosed assets		$	193			$	—							$	193
Description		June 30, 2010				(Level 1) Quoted Prices in Active Markets for Identical Assets				(Level 2) Significant Other Observable Inputs				(Level 3) Significant Unobservable Inputs
Impaired loans		$	1,993			$	—							$	1,993
Foreclosed assets		$	193			$	—							$	193

The methods and assumptions used to estimate the fair values included in the above tables are included in the disclosures that follow.

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is only provided for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate fair values at December 31, 2010 and June 30, 2010:

Cash and Cash Equivalents (Carried at Cost)

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

Securities Available for Sale (Carried at Fair Value)

The fair values of securities available for sale, excluding trust preferred securities, are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices.

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

 

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Securities Held to Maturity (Carried at Amortized Cost)

A review of the investment portfolio may indicate that certain securities held to maturity are impaired. If necessary, the Company performs fair value modeling and evaluations on these securities. All processes and controls associated with determination of the fair value of those securities are consistent with those performed for securities available for sale.

Federal Home Loan Bank Stock (Carried at Cost)

The carrying amount of Federal Home Loan Bank stock approximates fair value and considers the limited marketability of such securities.

Loans Receivable (Carried at Cost)

The fair values of loans (except impaired loans) are estimated using discounted cash flow analyses which use market rates at the statement of condition date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.

Impaired Loans (Generally Carried at Fair Value)

Impaired loans are those for which the Company has measured impairment generally based on the fair value of the loan’s collateral. Fair value of real estate collateral is generally determined based upon independent third-party appraisals of the properties, which consider sales prices of similar properties in the proximate vicinity or by discounting expected cash flows from the properties by an appropriate risk adjusted discount rate. Fair value of collateral other than real estate is based on an estimate of the liquidation proceeds. Impaired loans are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. The fair value consists of the loan balances net of a valuation allowance.

Foreclosed Assets (Carried at Lower of Cost or Fair Value less Estimated Selling Costs)

Fair values of foreclosed assets are based on independent third party appraisals of the properties or discounted cash flows based upon the expected sales proceeds upon disposition of the assets. These values were generally determined based on the sales prices of similar properties in the proximate vicinity. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Mortgage Servicing Rights (Carried at Lower of Cost or Fair Value)

At origination, the Company estimates the fair value of mortgage servicing rights at 1% of the principal balances of loans sold. The Company amortizes that amount over the estimated period of servicing revenues or charges the entire amount to income upon prepayment of the related loan. Due to the small size of the balance of mortgage servicing rights at December 31, 2010 and June 30, 2010, the Company did not perform any further analysis or estimate their fair values. Therefore, the Company has disclosed that the carrying amounts of mortgage servicing rights approximate fair value.

Deposit Liabilities (Carried at Cost)

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered in the market on certificates to a schedule of aggregated expected monthly maturities.

Federal Home Loan Bank Advances (Carried at Cost)

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party.

Securities Sold Under Agreements to Repurchase (Carried at Cost)

The carrying amounts of securities sold under agreements to repurchase approximate fair value for short-term obligations. The fair values for longer term repurchase agreements are based on current market interest rates for similar transactions.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest approximate fair value.

 

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Off-Balance-Sheet Credit-Related Instruments (Disclosures at Cost)

Fair values for off-balance-sheet financial instruments (lending commitments and letters of credit) are based on fees currently charged in the market to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair value of these instruments is not material.

 

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

 

		December 31, 2010								June 30, 2010
		Carrying Amount				Fair Value				Carrying Amount				Fair Value
		(In thousands)
Financial assets:
Cash and cash equivalents		$	14,204			$	14,204			$	36,046			$	36,046
Interest bearing deposits with other banks			5,612				5,612				5,072				5,072
Securities available for sale			23,602				23,602				29,346				29,346
Securities held to maturity			4,007				4,104				4,637				4,809
Federal Home Loan Bank stock			3,469				3,469				3,883				3,883
Loans receivable, net			283,841				292,258				276,098				283,876
Accrued interest receivable			1,209				1,209				1,206				1,206
Mortgage servicing rights			91				91				63				63
Financial liabilities:
Deposits			227,699				229,017				233,441				235,186
Securities sold under agreements to repurchase			13,357				13,645				20,292				20,539
Federal Home Loan Bank Advances			31,176				34,257				36,834				39,929
Accrued interest payable			210				210				241				241
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, all letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of December 31, 2010, the Company had $491 thousand of outstanding letters of credit. Management believes that 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 that the current amount of the liability as of December 31, 2010 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%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

The loan is secured by the shares purchased with the loan proceeds and will be repaid by the ESOP over the 20-year term of the loan with funds from OBA Bank’s contributions to the ESOP and dividends payable on the stock, if any. The interest rate on the ESOP loan is an adjustable rate equal to the lowest prime rate, as published in The Wall Street Journal. The interest rate will adjust annually and will be the prime rate on the first business day of the calendar year.

Shares purchased by the ESOP will be held by a trustee in an unallocated suspense account, and shares will be 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 will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. As shares are committed to be released from the suspense account, OBA Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders’ equity. Compensation expense recognized for the three months and six months ended December 31, 2010 amounted to $56 thousand and $107 thousand, respectively.

 

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

 

Shares committed to be released			18,515
Unearned shares			351,785
Total ESOP shares			370,300
Fair value of unearned shares, in thousands		$	4,862

NOTE 8 – EARNINGS PER SHARE

Basic earnings per share are computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period. The Company had no dilutive potential common shares for the three or six month periods ended December 31, 2010. Because the mutual to stock conversion was not completed until January 21, 2010, per share earnings data is not presented for the three and six months ended December 31, 2009.

 

(Dollars in thousands, except per share data)		Three Months Ended December 31, 2010				Six Months Ended December 31, 2010
Basic
Net income		$	283			$	535
Shares:
Weighted average common shares outstanding			4,272,387				4,270,072
Net income per common share, basic		$	0.07			$	0.13

NOTE 9 – SUBSEQUENT EVENTS

The Company announced on September 27, 2010 that the Bank entered into a definitive agreement with EagleBank, Bethesda, Maryland to transfer a portion of the deposits of OBA Bank’s Washington, D.C. branch located at 700 7^th Street, NW to EagleBank. EagleBank will operate a branch office at that location. The transaction was completed on January 21, 2011. The total amount of deposits transferred to Eagle Bank was approximately $10.5 million.

 

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FINANCIAL REVIEW

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

Overview of Income and Expenses

Income

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

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

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

Expenses

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

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

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

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

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

Other expenses include expenses for charitable contributions, advertising and marketing, attorneys, accountants and consultants, franchise taxes, 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 Form 10-K for the fiscal year ended June 30, 2010.

Comparison of Financial Condition at December 31, 2010 and June 30, 2010

Assets. Total assets decreased $19.9 million, or 5.3%, to $354.2 million at December 31, 2010 from $374.1 million at June 30, 2010. The decrease was primarily due to a decrease in cash and cash equivalents and securities available for sale partially offset by an increase in total loans.

Cash and Cash equivalents. Cash and cash equivalents decreased $21.8 million, or 60.6%, due primarily to an increase in total loans outstanding and a decrease in interest-bearing deposits, Federal Home Loan Bank borrowings, and repurchase agreements.

Loans. At December 31, 2010, total gross loans were $286.0 million. During the six months ended December 31, 2010, the loan portfolio increased $8.2 million, or 2.9%. The increase was primarily due to an increase of $25.9 million in total commercial loans partially offset by a reduction in fixed rate residential mortgage loans of $18.0 million. The reduction in the fixed rate residential mortgage loan portfolio is a result of management’s decision to sell newly-originated, longer-term (primarily 30 year) fixed rate one- to four-family residential real estate loans to mitigate interest rate risk, as well as prepayments exceeding other originations that were held in the portfolio.

 

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Allowance for Loan Losses.

The following table summarizes activity in the allowance for loan losses for the three and six months ended December 31, 2010 and 2009:

 

		Three Months Ended December 31,								Six Months Ended December 31,
(in thousands)		2010				2009				2010				2009
Balance at beginning of period		$	1,925			$	1,315			$	1,737			$	1,167
Provision for (recovery of) loan losses			245				(55	)			403				93
Loans (charged-off) / recovered, net			—				(136	)			30				(136	)
Balance at end of period		$	2,170			$	1,124			$	2,170			$	1,124
Ratios:
Net charge-offs (recoveries) to average loans			—	%			0.19	%			(0.02	)%			0.10	%
Allowance for loan losses to loans			0.76				0.41				0.76				0.41

At December 31, 2010, the allowance for loan losses was $2.2 million compared with $1.1 million at December 31, 2009, $1.7 million at June 30, 2010, and $1.9 million at September 30, 2010. The allowance for loan losses as a percentage of total loans at December 31, 2010 was 0.76% compared to 0.41% at December 31, 2009, 0.63% at June 30, 2010, and 0.67% at September 30, 2010. Net charge-offs (recoveries) as a percentage of average loans were 0.00 % for the three months ended December 31, 2010 and 0.19% for the three months ended December 31, 2009. Net charge-offs (recoveries) as a percentage of average loans were (0.02)% for the six months ended December 31, 2010 and 0.10% for the six months ended December 31, 2009. The increase in the allowance for loan losses for the three months ended December 31, 2010 was primarily a result of an increase in total commercial loans, an increase the allowance requirement for home equity loans and home equity lines of credit, and an increase in the specific allowances due to troubled debt restructure loans partially offset by a reduction in total classified assets and fixed rate residential mortgage loans, as discussed in “Loans” in “Comparison of Financial Condition at December 31, 2010 and June 30, 2010.”

Non-performing Assets. Loans are placed on non-accrual status when payment of principal or interest is 90 days or more delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally six months), and full payment of principal and interest is expected. At December 31, 2010 and June 30, 2010, the Company had $653 thousand and $639 thousand in total non-performing assets, respectively.

 

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The following table summarizes non-performing assets as of December 31, 2010 and June 30, 2010:

 

(in thousands)		December 31, 2010				June 30, 2010
Non-performing assets
Non-accrual loans:
One-to four-family residential		$	460			$	446
Total non-accrual loans			460				446
Other real estate owned			193				193
Total non-performing assets		$	653			$	639
Asset quality ratios:
Non-performing loans to total loans			0.16	%			0.16	%
Non-performing assets to total assets			0.18				0.17

Non-performing loan and asset ratios are effectively unchanged since June 30, 2010. The non-performing loans to total loans ratio remained unchanged at 16 basis points as of December 31, 2010 as compared to June 30, 2010. The non-performing assets to total assets ratio increased one basis point from 17 basis points as of June 30, 2010 to 18 basis points as of December 31, 2010.

Troubled Debt Restructurings. Loans are periodically modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. Generally, the Bank does not forgive principal or interest on loans or modify the interest rate on loans to rates that are below market rates. At December 31, 2010 and June 30, 2010, the Bank had $3.2 million and $3.4 million of these modified loans, respectively. At December 31, 2010, the Bank had $1.1 million in one- to four family residential mortgage loans and home equity loans and lines of credit that were considered troubled debt restructures. At December 31, 2010, the Bank had $2.1 million in commercial real estate loans that were considered troubled debt restructures. At June 30, 2010, the Bank had $1.9 million in one- to four-residential real estate loans and home equity loans and lines of credit that were considered troubled debt restructures. At June 30, 2010, the Bank had $1.5 million in commercial real estate loans that were considered troubled debt restructures.

Securities. At December 31, 2010, the securities portfolio totaled $27.6 million, or 7.8% of total assets as compared to $34.0 million, or 9.1%of total assets, at June 30, 2010.

Deposits. During the six months ended December 31, 2010, deposits decreased by $5.7 million, or 2.5%. The decrease resulted primarily from the reduction of higher cost deposits partially offset by an increase in lower cost checking account balances. Specifically, total certificates of deposit decreased by $4.6 million, and total money market accounts decreased by $4.7 million. Total checking accounts increased by $4.0 million.

Borrowings. During the six months ended December 31, 2010, total borrowings decreased $12.6 million, or 16.3%, as management continued to allow higher cost borrowings to run off. At December 31, 2010, Federal Home Loan Bank advances totaled $31.2 million, or 11.4% of total liabilities, and decreased by $5.7 million, or 15.4%. Repurchase agreements totaled $13.4 million, or 4.9% of total liabilities and decreased by $6.9 million, or 4.9%, from June 30, 2010.

At December 31, 2010, the Company had access to additional Federal Home Loan Bank advances of up to $51.9 million.

Equity. Equity totaled $80.6 million and $80.2 million for the periods ending December 31 and June 30, 2010, respectively. The increase of $374 thousand was primarily the result of increased retained earnings partially offset by a decrease in accumulated other comprehensive income.

Capital and Liquidity. The Company’s goal is to maintain a strong capital position that supports its strategic goals while, at the same time, exceeding regulatory standards. At December 31, 2010, the Bank exceeded all regulatory minimum capital requirements and met the definition of a “well-capitalized” institution; total risk-based capital ratio exceeding 10%, Tier 1 risk-based capital ratio exceeding 6%, and leverage capital ratio exceeding 5%.

The Company’s primary sources of funds are deposits, borrowed funds, amortization and prepayment of loans, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions, and competition. In addition, the Company invests excess funds in short-term interest-earning and other assets which provide liquidity to meet lending requirements.

 

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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 December 31, 2010 and 2009

General. Net income increased $186 thousand to $283 thousand for the three months ended December 31, 2010 from $97 thousand for the three months ended December 31, 2009. The increase in net income was primarily a result of an increase in net interest income of $639 thousand, or 26.2%, and non-interest income of $372 thousand. This was partially offset by increases in the provision for loan losses of $300 thousand and non-interest expense of $410 thousand, or 17.8%.

Net Interest Income. Net interest income increased $639 thousand, or 26.2%, to $3.1 million for the three months ended December 31, 2010, compared to $2.4 million for the three months ended December 31, 2009. Interest expense decreased $585 thousand, or 35.6%, for the three months ended December 31, 2010 as low market interest rates resulted in the reduction of the cost of deposits and borrowings. Interest and dividend income increased $54 thousand, or 1.3%, for the three months ended December 31, 2010. The net interest margin was 3.76% for the three months ended December 31, 2010, compared to 2.89% for the three months ended December 31, 2009. The improvement in the net interest margin was the result of a decrease in the average cost of interest-bearing liabilities of 56 basis points and an increase in the average yield of interest-earning assets of 21 basis points.

Interest and Dividend Income. Interest and dividend income increased $54 thousand, or 1.3%, to $4.1 million for the three months ended December 31, 2010 compared to the three months ended December 31, 2009. Interest income on loans increased $147 thousand, or 4.0%, to $3.9 million for the three months ended December 31, 2010 from $3.7 million for the three months ended December 31, 2009, as the average yield on loans increased twelve basis points, to 5.38% for the three months ended December 31, 2010 from 5.26% for the three months ended December 31 2009, reflecting an increase in commercial loans and the run-off of lower yielding residential mortgage loans.

Average loans increased $4.3 million, or 1.5%, reflecting an average balance increase in consumer and commercial loans of $671 thousand and $31.0 million, respectively, for the three months ended December 31, 2010 as compared to the three months ended December 31, 2009. This reflects the recent focus on originating commercial loans. Commercial loans generally carry higher yields and assist in managing interest rate risk. The increase in the consumer and commercial portfolios were partially offset by a reduction in the average balance of one- to four-family residential real estate loans of $27.4 million for the three months ended December 31, 2010. The reduction resulted from management’s decision to sell newly-originated, longer-term (primarily 30 year) fixed-rate one- to four-family residential real estate loans to help mitigate interest rate risk, as well as, prepayments exceeding other originations that were held in the portfolio. Interest income on securities decreased $98 thousand, or 27.0%, to $266 thousand for the three months ended December 31, 2010 from $364 thousand for the three months ended December 31, 2009, as the average yield on securities decreased 114 basis points to 3.40% for the three months ended December 31, 2010 from 4.54% for the three months ended December 31, 2009, reflecting continued low market interest rates and prepayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $585 thousand, or 35.6%, to $1.1 million for the three months ended December 31, 2010 from $1.6 million for the three months ended December 31, 2009. Interest expense on both deposits and borrowings decreased. Continued low market interest rates and a decrease in higher-cost certificates of deposit allowed for the reduction of deposit interest expense by $336 thousand, or 34.5%, as the average rate paid on deposits decreased 48 basis points to 1.24% for the three months ended December 31, 2010 from 1.71% for three months ended December 31, 2009.

Interest expense on borrowings decreased $249 thousand, or 37.3%, to $418 thousand for the three months ended December 31, 2010 from $667 thousand for the three months ended December 31, 2009, due to a $20.2 million, or 27.5%, decrease in the average balance of borrowings, primarily in Federal Home Loan Bank advances, as well as, a 48 basis points decrease in the average cost of borrowings to 3.07% for the three months ended December 31, 2010 from 3.55% for the three months ended December 31, 2009, reflecting continued low market interest rates and the run-off of higher cost borrowings.

Provision for Loan Losses. The Company’s provision for loan losses for the three months ended December 31, 2010 was $245 thousand, an increase of $300 thousand from the credit to provision for loan losses of $55 thousand in the three month period ended December 31, 2009. The credit to provision for loan losses in the three month period ended December 31, 2009 was the result of the payoff of one loan and a lower loss on that loan than was previously allocated. The provision for loan losses for the three months ended December 31, 2010 was primarily a result of an increase in total net loans, including an increase in commercial loans, an increase in the allowance requirement for home equity loans and home equity lines of credit, and an increase in the specific allocation of the allowance due to troubled debt restructure loans partially offset by a reduction in fixed rate residential mortgage loans and a reduction in total classified assets. For further discussion related to the “Provision for Loan Losses,” see “Allowance for Loan Losses.” For a further discussion related to loan portfolio performance, see “Non-performing Assets.”

 

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Non-Interest Income. The following table summarizes changes in non-interest income (loss) between the three months ended December 31, 2010 and 2009.

 

		Three Months Ended December 31,								Change
		2010				2009				$				%
		(In thousands)
Customer service fees		$	104			$	122			$	(18	)			(14.8	)%
Loan servicing fees			11				12				(1	)			(8.3	)
Bank owned life insurance income			78				87				(9	)			(10.3	)
Other non-interest income			45				22				23				104.5
Non-interest income before net gains and impairment on investment securities			238				243				(5	)			(2.1	)
Impairment losses on investment securities			—				(326	)			326				(100.0	)
Net gain on sale of loans			70				19				51				—
Net gains & impairment losses			70				(307	)			377				(122.8	)
Total non-interest income (loss)		$	308			$	(64	)		$	372				—

Total non-interest income before net gains and impairment on investment securities was essentially unchanged for the quarter ended December 31, 2010 from December 31, 2009 having decreased $5 thousand to $238 thousand. Customer service fees decreased $18 thousand to $104 thousand for the quarter ended December 31, 2010. Other non-interest income increased $23 thousand to $45 thousand for the quarter ended December 31, 2010. Net gains on the sale of loans increased $51 thousand to $70 thousand for the quarter ended December 31, 2010. Impairment losses on investment securities were zero for the quarter ended December 31, 2010, a decrease of $326 thousand from the quarter ended December 31, 2009. The decrease is the result of the Company’s previous sale of its bank and bank holding company pooled trust preferred securities in March 2010. The reduction in impairment losses on investment securities is primarily the reason behind the increase of $372 thousand in the total non-interest income (loss) for the quarter ended December 31, 2010 to $308 thousand as compared to a $64 thousand loss for the quarter ended December 31, 2009.

Non-Interest Expense. The following table summarizes changes in non-interest expense between the three months ended December 31, 2010 and 2009.

 

		Three Months Ended December 31,								Change
		2010				2009				$				%
		(In thousands)
Salaries and employee benefits		$	1,449			$	1,217			$	232				19.1	%
Occupancy and equipment			470				390				80				20.5
Data processing			179				162				17				10.5
Directors’ fees			79				78				1				1.3
FDIC assessments			71				97				(26	)			(26.8	)
Other non-interest expense			469				363				106				29.2
Total non-interest expense		$	2,717			$	2,307			$	410				17.8

Salaries and employee benefits increased $232 thousand, or 19.1%, to $1.4 million for the quarter ended December 31, 2010 from $1.2 million for the quarter ended December 31, 2009. The Company hired four commercial bankers as part of the business strategy to increase the commercial loan portfolios and a manager of the residential real estate department. Additionally, $56 thousand of expenses associated with the Employee Stock Ownership Plan, which was not in existence in 2009, are included in salaries and

 

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employee benefits for the three months ended December 31, 2010. Occupancy and equipment includes costs for the opening of one branch and costs for repairs to other branches. Other non-interest expense increased primarily due to increased legal and accounting costs necessary to operate as a public company and professional fees associated with the hiring of the aforementioned commercial bankers.

Income Taxes. The Company recorded an income tax expense of $138 thousand for the three months ended December 31, 2010, reflecting an effective tax rate of 32.8%, compared to income tax expense of $23 thousand for the three months ended December 31, 2009, reflecting an effective tax rate of 19.2%. The difference between the effective tax rate and statutory rate is primarily due to the amount of income received from bank-owned life insurance, which is tax-free for federal and state tax purposes, relative to total pre-tax income for each period.

Comparison of Operating Results for the Six months ended December 31, 2010 and 2009

General. Net income increased $393 thousand to $535 thousand for the six months ended December 31, 2010 from $142 thousand for the six months ended December 31, 2009. The increase in net income was primarily a result of an increase in net interest income of $1.2 million, or 25.9%, and non-interest income of $608 thousand. This was partially offset by an increase in the provision for loan losses of $310 thousand and non-interest expense of $873 thousand, or 19.3%.

Net Interest Income. Net interest income increased $1.2 million, or 25.9%, to $6.0 million for the six months ended December 31, 2010, compared to $4.8 million for the six months ended December 31, 2009. Interest expense decreased $1.2 million, or 35.5%, for the six months ended December 31, 2010 as low market interest rates resulted in the reduction of the cost of deposits and borrowings and higher cost deposits and borrowings were allowed to run-off. The net interest margin was 3.61% for the six months ended December 31, 2010, compared to 2.84% for the six months ended December 31, 2009. The improvement in the net interest margin was the result of a decrease in the average cost of interest-bearing liabilities of 59 basis points and an increase of seven basis points in the average yield on interest-earning assets.

Interest and Dividend Income. Interest and dividend income was essentially unchanged for the six months ending December 31, 2010 as compared to the six months ending December 31, 2009. Interest and dividend income increased $39 thousand, or 0.5%, to $8.2 million for the six months ended December 31, 2010. Interest income on loans increased $160 thousand, or 2.1%, to $7.6 million for the six months ended December 31, 2010 from $7.4 million for the six months ended December 31, 2009, as the average yield on loans increased eleven basis points, to 5.37% for the six months ended December 31, 2010 from 5.26% for the six months ended December 31 2009, reflecting an increase in commercial loans and a continued reduction in the one- to four-family residential real estate loans.

Total average loans were unchanged at $280.9 million for the six-months ended December 31, 2010. Average balances increased in consumer and commercial loans $559 thousand and $26.8 million, respectively, for the six months ended December 31, 2010 as compared to the six months ended December 31, 2009, reflecting the recent focus on originating commercial loans. Commercial loans generally carry higher yields and assist in managing interest rate risk. The increase in the consumer and commercial loan portfolios were partially offset by a reduction of an average of $27.5 million, or 19.1%, as compared to an average balance of $143.6 million for the six months ended December 31, 2009. The reduction resulted from management’s decision to sell newly-originated, longer-term (primarily 30 year) fixed-rate one- to four-family residential real estate loans to help mitigate interest rate risk, as well as prepayments exceeding other originations that were held in the portfolio. The average balance of one- to four-family residential real estate loans was $116.1 million for the six months ended December 31, 2010.

Interest income on securities decreased $166 thousand to $545 thousand for the six months ended December 31, 2010 from $711 thousand for the six months ended December 31, 2009, as the average yield on securities decreased 98 basis points to 3.59% for the six months ended December 31, 2010 from 4.57% for the six months ended December 31, 2009, reflecting continued low market interest rates and prepayments within the mortgage backed securities portfolio. The average balance of securities decreased $802 thousand to an average balance of $30.4 million for the six months ended December 31, 2010.

Interest Expense. Interest expense decreased $1.2 million, or 35.5%, to $2.2 million for the six months ended December 31, 2010 from $3.4 million for the six months ended December 31, 2009. Interest expense on both deposits and borrowings decreased. Continued low market interest rates and a decrease in higher-cost certificates of deposit allowed for the reduction of deposit interest expense by $750 thousand, or 36.3%, as the average rate paid on deposits decreased 54 basis points to 1.26% for the six months ended December 31, 2010 from 1.80% for six months ended December 31, 2009. The average balance of deposits decreased $20.5 million to an average balance of $204.3 million for the six months ended December 31, 2010.

Interest expense on borrowings decreased $454 thousand, or 34.2%, to $875 thousand for the six months ended December 31, 2010 from $1.2 million for the six months ended December 31, 2009. The reduction was due to a $17.7 million, or 24.4%, decrease in the average balance of borrowings, primarily in Federal Home Loan Bank advances, as well as, a 46 basis points decrease in the average cost of borrowings to 3.12% for the six months ended December 31, 2010 from 3.58% for the six months ended December 31, 2009; reflecting continued low market interest rates.

 

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Provision for Loan Losses. The Company’s provision for loan losses for the six months ended December 31, 2010 was $403 thousand, an increase of $310 thousand from $93 thousand in the six month period ended December 31, 2009. The provision for loan losses for the six months ended December 31, 2010 was primarily a result of an increase in total net loans, including an increase in commercial loans, an increase in the allowance requirement for home equity loans and home equity lines of credit, and an increase in the specific allocation of the allowance due to troubled debt restructure loans partially offset by a reduction in fixed rate residential mortgage loans and a reduction in total classified assets. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses.” For a further discussion related to loan portfolio performance, see “Non-performing Assets.”

Non-Interest Income. The following table summarizes changes in non-interest income (loss) between the six months ended December 31, 2010 and 2009.

 

		Six Months Ended December 31,								Change
		2010				2009				$				%
		(In thousands)
Customer service fees		$	220			$	242			$	(22	)			(9.1	)%
Loan servicing fees			22				24				(2	)			(8.3	)
Bank owned life insurance income			148				169				(21	)			(12.4	)
Other non-interest income			76				41				35				85.4
Non-interest income before net gains and impairment on investment securities			466				476				(10	)			(2.1	)
Impairment losses on investment securities			—				(550	)			550				(100.0	)
Net gain on the sale of investments			—				3				(3	)			(100.0	)
Net gain on sale of loans			95				24				71				—
Net gains & impairment losses			95				(523	)			618				(118.2	)
Total non-interest income (loss)		$	561			$	(47	)		$	608				—

Total non-interest income before net gains and impairment on investment securities was essentially unchanged for the quarter ended December 31, 2010 from December 31, 2009 having decreased $10 thousand to $466 thousand. Customer service fees decreased $22 thousand to $220 thousand and other non-interest income increased $35 thousand to $76 thousand for the quarter ended December 31, 2010. In addition, Bank owned life insurance income decreased $21 thousand to $148 thousand. Net gains on the sale of loans increased $71 thousand to $95 thousand for the quarter ended December 31, 2010. Impairment on investment securities was zero for the quarter ended December 31, 2010, a decrease of $550 thousand from the quarter ended December 31, 2009. The decrease is the result of the Company’s previous sale of its bank and bank holding company backed pooled trust preferred securities in March 2010. The reduction in impairment on investments is primarily the reason behind the increase of $608 thousand in the total non-interest income (loss) for quarter ended December 31, 2010 as compared to a $47 thousand loss for quarter ended December 31, 2009.

 

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Non-Interest Expense. The following table summarizes changes in non-interest expense between the six months ended December 31, 2010 and 2009.

 

		Six Months Ended December 31,								Change
		2010				2009				$				%
		(In thousands)
Salaries and employee benefits		$	2,910			$	2,398			$	512				21.4	%
Occupancy and equipment			921				764				157				20.5
Data processing			338				315				23				7.3
Directors’ fees			167				153				14				9.2
FDIC assessments			148				192				(44	)			(22.9	)
Other non-interest expense			918				707				211				29.8
Total non-interest expense		$	5,402			$	4,529			$	873				19.3

Salaries and benefits increased $512 thousand, or 21.4%, to $2.9 million for the period ended December 31, 2010 from $2.4 million for the period ended December 31, 2009. In connection with the mutual-to-stock conversion, the Company increased the depth of the management team by hiring a new Chief Financial Officer. The Company also hired four commercial bankers as part of the business strategy to increase the commercial loan portfolios and a manager of the residential real estate department. Additionally, $107 thousand of expenses associated with the Employee Stock Ownership Plan, which was not in existence in 2009, are included in salaries and employee benefits for the six months ended December 31, 2010. Occupancy and equipment includes costs for the opening of one branch and costs for repairs to other branches. Other non-interest expense increased primarily due to increased legal and accounting costs necessary to operate as a public company and professional fees associated with the hiring of the aforementioned commercial bankers.

Income Taxes. The Company recorded an income tax expense of $263 thousand for the six months ended December 31, 2010, reflecting an effective tax rate of 32.9%, compared to income tax benefit of $12 thousand for the six months ended December 31, 2009, reflecting an effective tax rate of (9.2)%. The difference between the effective tax rate and statutory rate is primarily due to the amount of income received from bank-owned life insurance, which is tax-free for federal and state tax purposes, relative to total pre-tax income for each period.

 

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

 

ITEM 4.

CONTROLS AND PROCEDURES

An evaluation was performed under the supervision and with the participation of the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of December 31, 2010. Based on that evaluation, the Company’s management, including the President and Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended December 31, 2010, there were no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – OTHER INFORMATION

 

ITEM 1.

LEGAL PROCEEDINGS

As of December 31, 2010, the Company was not subject to any legal actions.

 

ITEM 1A.

RISK FACTORS

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

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4.

[Reserved]

 

ITEM 5.

OTHER INFORMATION

None

 

ITEM 6.

EXHIBITS

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

 

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SIGNATURES

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

 

		OBA FINANCIAL SERVICES, INC.
		(Registrant)
Date: February 11, 2011		/S/    CHARLES E. WELLER
		Charles E. Weller
		President and Chief Executive Officer
Date: February 11, 2011		/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.

 

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