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, 2012

or

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

For transition period from                      to                     

Commission File Number 001-34593

OBA FINANCIAL SERVICES, INC.

(Exact Name of Registrant as Specified in Charter)

Maryland	27-1898270
(State or Other Jurisdiction of Incorporation)	(I.R.S. Employer Identification No.)
20300 Seneca Meadows Parkway, Germantown, Maryland	20876
(Address of Principal Executive Offices)	(Zip Code)

(301) 916-0742

Registrant’s telephone number, including area code

Not Applicable

(Former name or former address, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

Indicate the number of shares outstanding of each of the Issuer’s classes of common stock as of the latest practicable date.

4,300,368 shares of Common Stock, par value $0.01 per share, were issued and outstanding as of February 7, 2013.

OBA FINANCIAL SERVICES, INC. AND SUBSIDIARY

Form 10-Q Quarterly Report

Table of Contents

PART I – FINANCIAL INFORMATION
	Forward-Looking Statements Disclosure	3
Item 1.	Financial Statements
	Consolidated Statements of Condition (Unaudited) as of December 31, 2012 and June 30, 2012	5
	Consolidated Statements of Income (Unaudited) for the three and six months ended December 31, 2012 and 2011.	6
	Consolidated Statements Comprehensive Income (Loss) (Unaudited) for the three and six months ended December 31, 2012 and 2011.	7
	Consolidated Statements of Stockholders’ Equity (Unaudited) for the six months ended December 31, 2012 and 2011	8
	Consolidated Statements of Cash Flows (Unaudited) for the six months ended December 31, 2012 and 2011	9
	Notes to Consolidated Financial Statements (Unaudited)	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37
PART II – OTHER INFORMATION
Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	37
Item 3.	Defaults Upon Senior Securities	37
Item 4.	Mine Safety Disclosures	37
Item 5.	Other Information	37
Item 6.	Exhibits	37
Signatures		38

2

Forward-looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

3

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

4

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Condition (Unaudited)

	December 31, 2012			June 30, 2012
(In thousands, except share data)
Assets:
Cash and due from banks	$	10,251		$	14,916
Federal funds sold		1,711			16,609
Cash and cash equivalents		11,962			31,525
Interest bearing deposits with other banks		8,533			9,490
Securities available for sale		43,307			34,454
Securities held to maturity (fair value of $1,992 and $2,549)		1,862			2,396
Federal Home Loan Bank stock, at cost		1,785			2,169
Loans held for sale		415			—
Loans		297,564			296,241
Less: allowance for loan losses		3,125			3,035
Net loans		294,439			293,206
Premises and equipment, net		5,937			6,186
Bank owned life insurance		9,042			8,898
Other assets		3,677			3,762
Total assets	$	380,959		$	392,086
Liabilities:
Deposits:
Noninterest-bearing	$	39,200		$	40,003
Interest-bearing		227,453			229,569
Total deposits		266,653			269,572
Securities sold under agreements to repurchase		9,791			16,434
Federal Home Loan Bank advances		26,936			26,997
Advance payments from borrowers for taxes and insurance		309			1,707
Other liabilities		1,587			1,661
Total liabilities		305,276			316,371
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 4,301,450 and 4,387,050 shares at December 31, 2012 and June 30, 2012, respectively		43			43
Additional paid-in capital		37,918			38,695
Unearned ESOP shares		(3,148	)		(3,240	)
Retained earnings		40,066			39,409
Accumulated other comprehensive income		804			808
Total stockholders’ equity		75,683			75,715
Total liabilities and stockholders’ equity	$	380,959		$	392,086

See notes to consolidated financial statements.

5

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Income (Unaudited)

	Three Months Ended December 31,						Six Months Ended December 31,
	2012			2011			2012			2011
(In thousands, except share and per share data)
Interest and Dividend Income:
Loans receivable, including fees	$	3,684		$	3,723		$	7,285		$	7,491
Investment securities:
Interest — taxable		277			248			547			530
Dividends		14			6			21			11
Federal funds sold		9			25			23			54
Total interest and dividend income		3,984			4,002			7,876			8,086
Interest Expense:
Deposits		314			628			666			1,384
Federal Home Loan Bank advances		219			277			457			568
Securities sold under agreements to repurchase		47			55			94			118
Total interest expense		580			960			1,217			2,070
Net interest income		3,404			3,042			6,659			6,016
Less provision for loan losses		(17	)		229			95			376
Net interest income after provision for loan losses		3,421			2,813			6,564			5,640
Non-Interest Income:
Customer service fees		93			92			183			183
Loan servicing fees		5			7			10			16
Bank owned life insurance income		71			75			144			150
Net losses		(24	)		(31	)		(24	)		(25	)
Other non-interest income		30			29			62			59
Total non-interest income		175			172			375			383
Non-Interest Expense:
Salaries and employee benefits		1,734			1,667			3,504			3,405
Occupancy and equipment		380			399			768			785
Data processing		189			173			386			350
Directors’ fees		89			89			183			169
FDIC assessments		69			69			138			136
Other non-interest expense		447			457			850			945
Total non-interest expense		2,908			2,854			5,829			5,790
Income before income taxes		688			131			1,110			233
Income tax expense		291			49			453			63
Net income	$	397		$	82		$	657		$	170
Basic earnings per share	$	0.10		$	0.02		$	0.17		$	0.04
Diluted earnings per share	$	0.10		$	0.02		$	0.17		$	0.04
Basic weighted average shares outstanding		3,799,778			3,924,869			3,812,501			4,059,359
Diluted weighted average shares outstanding		3,871,539			3,933,087			3,862,525			4,064,369

See notes to consolidated financial statements.

6

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

	Three Months Ended December 31,						Six Months Ended December 31,
	2012			2011			2012			2011
(In thousands)
Net income	$	397		$	82		$	657		$	170
Other comprehensive income (loss):
Net unrealized gains (losses) on available for sale securities, net of tax benefit of ($148), ($93), ($3) and ($2), respectively		(231	)		(144	)		(4	)		(2	)
Other comprehensive income (loss)		(231	)		(144	)		(4	)		(2	)
Comprehensive income (loss)	$	166		$	(62	)	$	653		$	168

See notes to consolidated financial statements.

7

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)

Six Months Ended December 31, 2012 and 2011

	Common Stock			Additional Paid-in Capital			Unearned ESOP Shares			Retained Earnings		Accumulated Other Comprehensive Income			Total
(In thousands)
Balances at July 1, 2012	$	43		$	38,695		$	(3,240	)	$	39,409	$	808		$	75,715
Net income											657					657
Other comprehensive income (loss), net of tax													(4	)		(4	)
Purchase and retirement of 85,600 shares of Company stock					(1,321	)										(1,321	)
Share-based compensation expense					469											469
Tax benefit of 49,485 restricted shares vesting					21											21
ESOP shares committed to be released (9,258 shares)					54			92					—			146
Balances, December 31, 2012	$	43		$	37,918		$	(3,148	)	$	40,066	$	804		$	75,683
Balances at July 1, 2011	$	46		$	44,419		$	(3,425	)	$	39,141	$	679		$	80,860
Net income											170					170
Other comprehensive income (loss), net of tax													(2	)		(2	)
Purchase and retirement of 391,200 shares of Company stock		(4	)		(5,625	)										(5,629	)
Share-based compensation expense					395											395
ESOP shares committed to be released (9,258 shares)					41			92								133
Balances, December 31, 2011	$	42		$	39,230		$	(3,333	)	$	39,311	$	677		$	75,927

See notes to consolidated financial statements.

8

OBA Financial Services, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended December 31,
	2012			2011
(in thousands)
Operating Activities:
Net income	$	657		$	170
Adjustments to reconcile net income to
Net cash provided by operating activities:
Provision for loan losses		95			376
Depreciation and amortization of premises and equipment		331			343
Net amortization of securities premiums and discounts		193			242
Proceeds from sales of loans held for sale		1,105			307
Originated loans held for sale		(1,504	)		(301	)
Net gains on sales of loans		(16	)		(6	)
Amortization of net deferred loan fees		(18	)		(6	)
Write-down of foreclosed assets		40			31
Bank owned life insurance income		(144	)		(150	)
ESOP expense		146			133
Share-based compensation expense		469			395
Amortization of mortgage servicing rights		5			5
Amortization of brokered deposit premiums		—			6
Changes in other assets and liabilities, net		(32	)		468
Total adjustments		670			1,843
Net cash provided by operating activities		1,327			2,013
Investing Activities:
Principal collections and maturities of securities available for sale		7,334			5,388
Principal collections and maturities of securities held to maturity		532			609
Purchases of securities available for sale		(16,384	)		(10,140	)
Redemption of Federal Home Loan Bank stock, net		384			516
Decrease (increase) in interest bearing deposits with other banks, net		957			(2,481	)
Loan originations less principal collections, net		(1,310	)		309
Purchases of premises and equipment		(82	)		(402	)
Net cash used in investing activities		(8,569	)		(6,201	)
Financing Activities:
Decrease in other deposits		(2,919	)		(5,158	)
Decrease in securities sold under agreements to repurchase		(6,643	)		(5,374	)
Proceeds from FHLB advances		5,000			15,000
Repayment of FHLB advances		(5,061	)		(2,560	)
Net decrease in advance payments from borrowers for taxes and insurance		(1,398	)		(1,636	)
Vesting restricted shares		21			—
Purchase and retirement of Company stock		(1,321	)		(5,629	)
Net cash used in financing activities		(12,321	)		(5,357	)
Decrease in cash and cash equivalents		(19,563	)		(9,545	)
Cash and cash equivalents at beginning of period		31,525			37,968
Cash and cash equivalents at end of period	$	11,962		$	28,423
Supplemental Disclosures:
Interest paid	$	1,258		$	2,183
Income taxes refunded, net		154			—

See notes to consolidated financial statements.

9

OBA Financial Services, Inc. and Subsidiary

Notes to the Consolidated Financial Statements (Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Business

OBA Bank (the “Bank”) is a community-oriented banking institution providing a variety of financial services to individuals and small businesses through its offices in Montgomery, Anne Arundel, and Howard Counties, Maryland. Its primary deposits are checking, money market, and time certificate accounts and its primary lending products are commercial mortgage and commercial business loans and residential mortgage loans.

In December 2007, the Bank reorganized into a three-tier mutual holding company structure. As part of the reorganization, the Bank converted from a mutual savings bank into a federally chartered stock savings bank and formed OBA Bancorp, Inc., a federally chartered mid-tier stock holding company, and OBA Bancorp, MHC, a federally chartered mutual holding company. The Bank became a wholly-owned subsidiary of OBA Bancorp, Inc. and OBA Bancorp, Inc. became a wholly-owned subsidiary of OBA Bancorp, MHC.

On January 21, 2010, OBA Bancorp, MHC completed its plan of conversion and reorganization from a mutual holding company to a stock holding company. In accordance with the plan, OBA Bancorp, MHC and OBA Bancorp, Inc. ceased to exist and a newly formed stock holding company, OBA Financial Services, Inc. (of which OBA Bank became a wholly owned subsidiary) sold shares of capital stock to eligible depositors of OBA Bank. OBA Financial Services, Inc.’s common stock is quoted on the NASDAQ Capital Market under the symbol “OBAF.”

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

Basis of Presentation

The consolidated financial statements include the accounts of OBA Financial Services Inc. and OBA Bank. All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information and are presented in accordance with instructions for Form 10-Q and Rule 10-01 of the SEC Regulation S-X. Accordingly, they do not include all of the information and notes required by 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, 2012, are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2013 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, 2012.

In preparing the accompanying consolidated financial statements, the Company has evaluated subsequent events through the financial statement issue date. There were no subsequent events identified by the Company as a result of the evaluation that require recognition or disclosure in the consolidated financial statements.

Use of Estimates

In preparing the consolidated financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the Consolidated Statement of Condition and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly sensitive to change in the near term relates to the determination of the allowance for loan losses, values related to the share-based incentive plans, and other than temporary impairment of investment securities.

10

Reclassifications

From time to time, certain amounts in the prior period consolidated financial statements are reclassified to conform with current period presentation. Such reclassifications, if any, have no impact on consolidated net income or total stockholders’ equity.

Recent Accounting Pronouncements

There are no recent accounting pronouncements that will have a material impact to the consolidated financial statements.

NOTE 2 — COMPREHENSIVE INCOME (LOSS)

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

	Three Months Ended December 31,						Six Months Ended December 31,
	2012			2011			2012			2011
	(In thousands)
Unrealized gains (losses) on available for sale securities	$	(379	)	$	(237	)	$	(7	)	$	(4	)
Tax effect		(148	)		(93	)		(3	)		(2	)
Net of tax amount	$	(231	)	$	(144	)	$	(4	)	$	(2	)

Accumulated other comprehensive income (loss) consists of the following:

	December 31, 2012		June 30, 2012
	(In thousands)
Unrealized gains (losses) on available for sale securities	$	1,317	$	1,324
Tax effect		513		516
Total	$	804	$	808

11

NOTE 3 — SECURITIES

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
December 31, 2012
Securities available for sale:
Debt Securities:
Residential mortgage-backed securities (1)	$	41,892	$	1,329	$	(12	)	$	43,209
Trust preferred security		48		—		—			48
Total debt securities available for sale		41,940		1,329		(12	)		43,257
Equity Securities		50		—		—			50
Total securities available for sale		41,990		1,329		(12	)		43,307
Securities held to maturity:
Debt Securities:
Residential mortgage-backed securities (1)		1,862		130		—			1,992
Total debt securities held to maturity		1,862		130		—			1,992
Total investment securities	$	43,852	$	1,459	$	(12	)	$	45,299
June 30, 2012
Securities available for sale:
Debt Securities:
Residential mortgage-backed securities (1)	$	33,010	$	1,340	$	—		$	34,350
Trust preferred security		70		—		(16	)		54
Total debt securities available for sale		33,080		1,340		(16	)		34,404
Equity Securities		50		—		—			50
Total securities available for sale		33,130		1,340		(16	)		34,454
Securities held to maturity:
Debt Securities:
Residential mortgage-backed securities (1)		2,396		153		—			2,549
Total debt securities held to maturity		2,396		153		—			2,549
Total investment securities	$	35,526	$	1,493	$	(16	)	$	37,003

⁽¹⁾  All residential mortgage-backed securities were issued by United States government agencies including FNMA, FHLMC, and GNMA.

12

The amortized cost and fair value of debt securities by contractual maturity at December 31, 2012 are as follows:

	Available for sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Due after ten years	$	48	$	48	$	—	$	—
Residential mortgage-backed securities		41,892		43,209		1,862		1,992
Total	$	41,940	$	43,257	$	1,862	$	1,992

At December 31, 2012 and June 30, 2012, the market value of securities securing dealer and customer repurchase agreements was $10.7 million and $20.8 million, respectively.

Information pertaining to securities with gross unrealized losses at the dates listed aggregated by investment category and length of time that individual securities have been in a continuous loss position, are as follows:

	Less than 12 Months				12 Months or More				Total
	Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value
	(In thousands)
December 31, 2012
Residential mortgage-backed securities	$	—	$	—	$	12	$	2,839	$	12	$	2,839
Trust preferred security		—		—		—		—		—		—
Total	$	—	$	—	$	12	$	2,839	$	12	$	2,839
June 30, 2012
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—
Trust preferred security		—		—		16		54		16		54
Total	$	—	$	—	$	16	$	54	$	16	$	54

At December 31, 2012 and at June 30, 2012, all residential mortgage backed securities and their contractual cash flows were guaranteed by U.S. Government Agencies; FNMA, FHLMC, and GNMA. The Company’s sole trust preferred security is a variable rate pool of trust preferred securities issued by insurance companies or their holding companies. These positions and the related unrealized losses are not material to the Company’s consolidated financial position or results of operations. The decline in the residential mortgage backed securities has been primarily caused by the movement in market interest rates. The Company has no intent or requirement to sell these securities.

13

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

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

The Bank maintains an allowance for loan losses at an amount estimated to equal all credit losses in the loan portfolio that are both probable and reasonably estimable at the consolidated statement of condition date. The Bank’s determination as to the classification of loans is subject to review by the Bank’s primary federal regulator, the Office of the Comptroller of the Currency (“OCC”). The Bank regularly reviews the loan portfolio to determine whether any loans require classification in accordance with applicable regulations.

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

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

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

Generally, the Bank underwrites commercial real estate loans at a loan-to-value ratio of 75% or less and residential mortgage loans at a loan-to-value ratio not exceeding 80%. In the event that a loan becomes past due, management will conduct visual inspections of collateral properties and/or review publicly available information, such as online databases, to estimate property values. The Bank may request a formal third party appraisal for various reasons including, but not limited to, age of previous appraisal, changes in market condition, and changes in borrower’s condition. In addition, changes in the appraised value of properties securing loans can result in an increase or decrease in the general allowance for loan losses as an adjustment to the historical loss experience due to qualitative and environmental factors.

The loan portfolio is evaluated on a quarterly basis and the allowance is adjusted accordingly. While the best information available is used to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, as an integral part of their examination process, the OCC will periodically review the allowance for loan losses. The OCC may require the Bank to recognize additions to the allowance based on its analysis of information available at the time of the examination.

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The classes of loans are as follows:

	December 31, 2012			June 30, 2012
	(In thousands)
Commercial business	$	40,357		$	32,183
Commercial real estate		135,628			136,036
Construction		3,455			1,850
Residential mortgage		87,780			93,266
Home equity loans and lines of credit		30,334			32,765
Loans		297,554			296,100
Net deferred commercial loan fees		(282	)		(204	)
Net deferred home equity costs		292			345
Loans net of deferred (fees) costs		297,564			296,241
Allowance for loan losses		3,125			3,035
Total loans, net	$	294,439		$	293,206

The following tables present the classes of the loan portfolio summarized by loan rating within the Bank’s internal risk rating system:

December 31, 2012:

	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Commercial business	$	36,690	$	—	$	3,667	$	—	$	40,357
Commercial real estate		129,196		192		6,240		—		135,628
Construction		3,455		—		—		—		3,455
Residential mortgage		86,223		—		1,557		—		87,780
Home equity loans and lines of credit		30,227		75		32		—		30,334
Total	$	285,791	$	267	$	11,496	$	—	$	297,554

June 30, 2012:

	Pass		Special Mention		Substandard		Doubtful		Total
(In thousands)
Commercial business	$	28,785	$	—	$	3,398	$	—	$	32,183
Commercial real estate		129,409		184		6,443		—		136,036
Construction		1,850		—		—		—		1,850
Residential mortgage		91,320		—		1,946		—		93,266
Home equity loans and lines of credit		32,657		75		33		—		32,765
Total	$	284,021	$	259	$	11,820	$	—	$	296,100

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

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The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following tables present the classes of the loan portfolio summarized by the past due and non-accrual status:

December 31, 2012:

	31-60 Days Past Due		61-90 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Total Non-Accrual Loans
(In thousands)
Commercial business	$	—	$	—	$	—	$	—	$	40,357	$	40,357	$	—
Commercial real estate		631		—		5,079		5,710		129,918		135,628		5,079
Construction		—		—		—		—		3,455		3,455		—
Residential mortgage		292		—		513		805		86,975		87,780		650
Home equity loans and lines of credit		369		—		—		369		29,965		30,334		210
Total	$	1,292	$	—	$	5,592	$	6,884	$	290,670	$	297,554	$	5,939

June 30, 2012:

	31-60 Days Past Due		61-90 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total Loans Receivable		Total Non-Accrual Loans
(In thousands)
Commercial business	$	—	$	—	$	—	$	—	$	32,183	$	32,183	$	—
Commercial real estate		1,520		—		3,560		5,080		130,956		136,036		5,080
Construction		—		—		—		—		1,850		1,850		—
Residential mortgage		—		—		894		894		92,372		93,266		891
Home equity loans and lines of credit		139		—		—		139		32,626		32,765		75
Total	$	1,659	$	—	$	4,454	$	6,113	$	289,987	$	296,100	$	6,046

There are no loans over 90 days past due that are still accruing at the dates indicated.

The Bank provides for loan losses based upon the consistent application of the documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to the same. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in Management’s judgment, deserve current recognition in estimating probable losses. Management regularly reviews the loan portfolio and makes provisions for loan losses in order to maintain the allowance for loan losses in accordance with U.S. GAAP. The Bank considers residential mortgage loans and home equity loans and lines of credit as small, homogeneous loans, which are evaluated for impairment collectively based on historical loss experience. Commercial real estate and commercial business loans are reviewed individually. Loans are considered impaired if the probability exists that the Bank will be unable to collect contractually obligated principal and interest cash flows. The allowance for loan losses consists primarily of three components:

(1) specific allowances established for impaired loans (as defined by U.S. GAAP). For a non-collateral dependent loan, the amount of impairment, if any, is estimated as the difference between the estimated present value based on Management’s assumptions regarding future cash flows and discounted at the loan’s original yield, and the carrying value of the loan. Impaired loans for which the estimated present value of the loan exceeds the carrying value of the loan do not reduce specific allowances;

(2) general allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped into similar risk characteristics, primarily loan type. The Bank applies an estimated loss rate to each loan group. The loss rates applied are based upon loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions; and

(3) unallocated allowances established to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

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

The adjustments to historical loss experience are based on Management’s evaluation of several qualitative and environmental factors, including, but not limited to:

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

• changes in the number and amount of non-accrual loans, watch list loans, and past due loans;

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• changes in national, state, and local economic trends;

• changes to other external influences including, but not limited to, legal, accounting, peer, and regulatory changes;

• changes in the types of loans in the loan portfolio;

• changes in the experience and ability of personnel and management in the loan origination and loan servicing departments;

• changes in the value of underlying collateral for collateral dependent loans;

• changes in lending strategies; and

• changes in lending policies and procedures.

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

	Three Months Ended December 31,						Six Months Ended December 31,
(In thousands)	2012			2011			2012			2011
Balance at beginning of period	$	3,140		$	2,408		$	3,035		$	2,246
Provision for loan losses		(17	)		229			95			376
Charge-offs		—			(18	)		(8	)		(18	)
Recoveries		2			—			3			15
Balance at end of period	$	3,125		$	2,619		$	3,125		$	2,619

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The following tables set forth the activity in and allocation of the allowance for loan losses by loan portfolio class for the periods as listed:

Three Months Ended December 31, 2012

	Commercial business		Commercial real estate			Construction		Residential mortgage			Home equity loans and lines of credit			Unallocated		Total
(In thousands)
Allowance for loan losses:
Beginning Balance	$	698	$	1,156		$	6	$	815		$	380		$	85	$	3,140
Charge-offs		—		—			—		—			—			—		—
Recoveries		—		2			—		—			—			—		2
Provisions		84		(81	)		7		(97	)		(5	)		75		(17	)
Ending balance	$	782	$	1,077		$	13	$	718		$	375		$	160	$	3,125

Six Months Ended December 31, 2012

	Commercial business		Commercial real estate			Construction		Residential mortgage			Home equity loans and lines of credit			Unallocated			Total
(In thousands)
Allowance for loan losses:
Beginning Balance	$	670	$	951		$	7	$	773		$	393		$	241		$	3,035
Charge-offs		—		(8	)		—		—			—			—			(8	)
Recoveries		—		3			—		—			—			—			3
Provisions		112		131			6		(55	)		(18	)		(81	)		95
Ending balance	$	782	$	1,077		$	13	$	718		$	375		$	160		$	3,125

Three Months Ended December 31, 2011

	Commercial business		Commercial real estate			Construction		Residential mortgage		Home equity loans and lines of credit		Unallocated		Total
(In thousands)
Allowance for loan losses:
Beginning Balance	$	493	$	746		$	2	$	600	$	405	$	162	$	2,408
Charge-offs		—		(18	)		—		—		—		—		(18	)
Recoveries		—		—			—		—		—		—		—
Provisions		129		(76	)		—		111		9		56		229
Ending balance	$	622	$	652		$	2	$	711	$	414	$	218	$	2,619

Six Months Ended December 31, 2011

	Commercial business		Commercial real estate			Construction		Residential mortgage		Home equity loans and lines of credit			Unallocated		Total
(In thousands)
Allowance for loan losses:
Beginning Balance	$	383	$	706		$	2	$	528	$	440		$	187	$	2,246
Charge-offs		—		(18	)		—		—		—			—		(18	)
Recoveries		—		—			—		15		—			—		15
Provisions		239		(36	)		—		168		(26	)		31		376
Ending balance	$	622	$	652		$	2	$	711	$	414		$	218	$	2,619

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The following tables present the balance in the allowance for loan losses and the recorded in investment in loans by portfolio class and based on impairment method:

December 31, 2012:

	Commercial business		Commercial real estate		Construction		Residential mortgage		Home equity loans and lines of credit		Unallocated		Total loans
(In thousands)
Allowance for Loan Losses:
Ending allowance balance related to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	149	$	—	$	—	$	149
Collectively evaluated for impairment		782		1,077		13		569		375		160		2,976
Total ending allowance balance	$	782	$	1,077	$	13	$	718	$	375	$	160	$	3,125
Loans:
Ending loan balance
Individually evaluated for impairment	$	7	$	6,240	$	—	$	1,045	$	32			$	7,324
Collectively evaluated for impairment		40,350		129,388		3,455		86,735		30,302				290,230
Total ending loan balance	$	40,357	$	135,628	$	3,455	$	87,780	$	30,334			$	297,554

June 30, 2012:

	Commercial business		Commercial real estate		Construction		Residential mortgage		Home equity loans and lines of credit		Unallocated		Total loans
(In thousands)
Allowance for Loan Losses:
Ending allowance balance related to loans:
Individually evaluated for impairment	$	—	$	—	$	—	$	150	$	—	$	—	$	150
Collectively evaluated for impairment		670		951		7		623		393		241		2,885
Total ending allowance balance	$	670	$	951	$	7	$	773	$	393	$	241	$	3,035
Loans:
Ending loan balance
Individually evaluated for impairment	$	9	$	6,442	$	—	$	1,434	$	33			$	7,918
Collectively evaluated for impairment		32,174		129,594		1,850		91,832		32,732				288,182
Total ending loan balance	$	32,183	$	136,036	$	1,850	$	93,266	$	32,765			$	296,100

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The following tables summarize information in regards to impaired loans by portfolio class as of and for the periods ended:

							December 31, 2012
	At December 31, 2012						Three Months Ended				Six Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(In thousands)
With No Related Allowance Recorded:
Commercial business	$	7	$	7	$	—	$	8	$	—	$	8	$	—
Commercial real estate		6,240		6,329		—		6,245		19		6,341		38
Residential mortgage		75		75		—		266		—		266		10
Home equity loans and lines of credit		32		32		—		33		1		33		1
Total with no allowance recorded	$	6,354	$	6,443	$	—	$	6,552	$	20	$	6,648	$	49
With an Allowance Recorded:
Commercial business	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—		—		—		—
Residential mortgage		970		970		149		971		14		972		20
Home equity loans and lines of credit		—		—		—		—		—		—		—
Total with allowance recorded	$	970	$	970	$	149	$	971	$	14	$	972	$	20
Total:
Commercial business	$	7	$	7	$	—	$	8	$	—	$	8	$	—
Commercial real estate		6,240		6,329		—		6,245		19		6,341		38
Residential mortgage		1,045		1,045		149		1,237		14		1,238		30
Home equity loans and lines of credit		32		32		—		33		1		33		1
Total	$	7,324	$	7,413	$	149	$	7,523	$	34	$	7,620	$	69

							December 31, 2011
	At June 30, 2012						Three Months Ended				Six Months Ended
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
(In thousands)
With No Related Allowance Recorded:
Commercial business loans	$	9	$	9	$	—	$	—	$	—	$	—	$	—
Commercial real estate		6,442		6,532		—		6,368		118		6,662		379
Residential mortgages		458		461		—		—		—		—		—
Home equity loans and lines of credit		33		33		—		—		—		—		—
Total with no allowance recorded	$	6,942	$	7,035	$	—	$	6,368	$	118	$	6,662	$	379
With an Allowance Recorded:
Commercial business loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial real estate		—		—		—		—		—		—		—
Residential mortgages		976		976		150		693		8		695		27
Home equity loans and lines of credit		—		—		—		—		—		—		—
Total with allowance recorded	$	976	$	976	$	150	$	693	$	8	$	695	$	27
Total:
Commercial business loans	$	9	$	9	$	—	$	—	$	—	$	—	$	—
Commercial real estate		6,442		6,532		—		6,368		118		6,662		379
Residential mortgages		1,434		1,437		150		693		8		695		27
Home equity loans and lines of credit		33		33		—		—		—		—		—
Total	$	7,918	$	8,011	$	150	$	7,061	$	126	$	7,357	$	406

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The following table presents troubled debt restructurings occurring during the three and six month periods listed below:

	2012						2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments		Number of Contracts		Pre-Modification Outstanding Recorded Investments		Post- Modification Outstanding Recorded Investments
(In thousands)
Three months ended December 31:
Commercial real estate		—	$	—	$	—		—	$	—	$	—
Total Troubled Debt Restructurings		—	$	—	$	—		—	$	—	$	—
Six months ended December 31:
Commercial real estate		—	$	—	$	—		1	$	3,198	$	3,198
Total Troubled Debt Restructurings		—	$	—	$	—		1	$	3,198	$	3,198

Generally, the Bank does not forgive principal or interest on loans or modify the interest rate on loans to rates that are below market rates based on the risks associated with the modified loans. Although, loans can be modified to make concessions to help a borrower remain current on the loan and to avoid foreclosure. These troubled debt restructurings include deferrals of interest and/or principal payments and temporary or permanent reductions in interest rates due to financial difficulties of the borrower. During the six months ended December 31, 2012 and 2011, no loans previously classified as troubled debt restructurings subsequently defaulted.

NOTE 5 — FAIR VALUE MEASUREMENTS AND DISCLOSURES

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

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2: Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability.

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported with little or no market activity).

An asset or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Transfers between fair value hierarchy levels are recognized as of the actual date of the event or change in circumstances that caused the transfer. There were no transfers between fair value hierarchy levels for the six months ended December 31, 2012 or 2011.

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For assets measured at fair value on a recurring basis, the fair value measurements by level within the fair value hierarchy used at the periods listed are as follows:

(In thousands)	December 31,		(Level 1) Quoted Prices in Active Markets for Identical		(Level 2) Significant Other Observable		(Level 3) Significant Unobservable
Description	2012		Assets		Inputs		Inputs
Residential mortgage-backed securities	$	43,209	$	—	$	43,209	$	—
Trust preferred security		48		—		—		48
Equity securities		50		—		50		—
Securities available for sale	$	43,307	$	—	$	43,259	$	48

	June 30,		(Level 1) Quoted Prices in Active Markets for Identical		(Level 2) Significant Other Observable		(Level 3) Significant Unobservable
Description	2012		Assets		Inputs		Inputs
Residential mortgage-backed securities	$	34,350	$	—	$	34,350	$	—
Trust preferred security		54		—		—		54
Equity securities		50		—		50		—
Securities available for sale	$	34,454	$	—	$	34,400	$	54

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, 2012:

(In thousands)	Three Months Ended			Six Months Ended
Beginning balance	$	54		$	54
Principal repayments		(18	)		(22	)
Unrealized gains included in other comprehensive income		12			16
Ending balance	$	48		$	48

Level 3 securities consist of one trust preferred security at December 31, 2012.

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For assets measured at fair value on a nonrecurring basis at the dates listed, the fair value measurements by level within the fair value hierarchy are as follows:

(In thousands)	December 31,		(Level 1) Quoted Prices in Active Markets for Identical		(Level 2) Significant Other Observable		(Level 3) Significant Unobservable
Description	2012		Assets		Inputs		Inputs
Impaired loans	$	821	$	—	$	—	$	821
Real estate owned	$	—	$	—	$	—	$	—

Description	June 30, 2012		(Level 1) Quoted Prices in Active Markets for Identical Assets		(Level 2) Significant Other Observable Inputs		(Level 3) Significant Unobservable Inputs
Impaired loans	$	826	$	—	$	—	$	826
Real estate owned	$	40	$	—	$	—	$	40

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, 2012 and June 30, 2012:

Cash and Cash Equivalents and interest bearing securities with other banks (Carried at Cost)

The carrying amounts of cash and short-term instruments approximate fair value and are classified within level 1 of the fair value hierarchy.

Securities Available for Sale (Carried at Fair Value)

The fair values of securities available for sale, excluding trust preferred securities, are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other pieces of information.

The market for pooled trust preferred securities is inactive. A significant widening of the bid/ask spreads in the markets in which these securities trade was followed by a significant decrease in the volume of trades relative to historical levels. The new issue market is also inactive and no new pooled trust preferred securities have been issued since 2007. Since there were limited observable market-based Level 1 and Level 2 inputs for trust preferred securities, the fair value of these securities was estimated using primarily unobservable Level 3 inputs. Fair value estimates for trust preferred securities were based on discounting expected cash flows using a risk-adjusted discount rate. The Company develops the risk-adjusted discount rate by considering the time value of money (risk-free rate) adjusted for an estimated risk premium for bearing the uncertainty in future cash flows and, given current adverse market conditions, a liquidity adjustment based on an estimate of the premium that a market participant would require assuming an orderly transaction. Management determined that sensitivity to inputs are not significant due to the immaterial nature of trust preferred securities as a level 3 asset.

23

Securities Held to Maturity (Carried at Amortized Cost)

The fair values of securities held to maturity are determined by matrix pricing (Level 2), which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted market prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices. Level 2 debt securities are valued by a third-party pricing service commonly used in the banking industry. Level 2 fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution date, market consensus prepayment speeds, credit information, and the security’s terms and conditions, among other pieces of information.

Federal Home Loan Bank Stock (Carried at Cost)

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

Loans Receivable (Carried at Cost)

The fair values of loans (except impaired loans) are estimated using discounted cash flow analyses which use market rates at the statement of condition date that reflect the credit and interest rate-risk inherent in the loans. Projected future cash flows are calculated based upon contractual maturity or call dates, projected repayments, and prepayments of principal. Generally, for variable rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying amounts. Loans are classified within level 3 of the fair value hierarchy.

Impaired Loans (Generally Carried at Fair Value)

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

Real Estate Owned (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 from 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. The appraisals generally include various level 3 inputs which are not identifiable. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the real estate owned as a level 3 asset.

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

At origination, the Company estimates the fair value of mortgage servicing rights at 1% of the principal balances of loans sold. The Company amortizes that amount over the estimated period of servicing revenues or charges the entire amount to income upon prepayment of the related loan. Due to the immaterial balance of mortgage servicing rights, the Company did not perform any further analysis or estimate their fair values. Therefore, the Company has disclosed that the carrying amounts of mortgage servicing rights approximate fair value. Mortgage servicing rights are classified within level 3 of the fair value hierarchy. Management determined that sensitivity to inputs are not significant due to the immaterial nature of the mortgage servicing rights as a level 3 asset.

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). Demand deposits are classified within level 1 of the fair value hierarchy. 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. Certificates of deposit are classified within level 2 of the fair value hierarchy.

Federal Home Loan Bank Advances (Carried at Cost)

Fair values of FHLB advances are estimated using discounted cash flow analysis, based on quoted prices for new FHLB advances with similar credit risk characteristics, terms, and remaining maturity. These prices obtained from this active market represent a market value that is deemed to represent the transfer price if the liability were assumed by a third party. Federal Home Loan Bank Advances are classified within level 2 of the fair value hierarchy.

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Securities Sold Under Agreement to Repurchase (Carried at Cost)

The carrying amounts of securities sold under agreements to repurchase approximate fair value for short-term obligations. The fair values for longer term repurchase agreements are based on current market interest rates for similar transactions. Securities sold under agreement to repurchase are classified within level 2 of the fair value hierarchy.

Accrued Interest Receivable and Payable (Carried at Cost)

The carrying amounts of accrued interest approximate fair value. Accrued Interest Receivable and Payable are classified within level 1 of the fair value hierarchy.

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

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

Quantitative information about Level 3 Fair Value Measurement is included in the tables below:

(In thousands)	Quantitative Information about Level 3 Fair Value Measurements
December 31, 2012	Fair Value Estimate		Valuation Techniques		Unobservable Inputs		Estimated Range
Impaired loans	$	821		Appraisal of collateral		Appraisal adjustments		0.0% to -25.0%
						Liquidation expenses		-3.0% to -5.0%
Real estate owned		—		—		—		—
(In thousands)	Quantitative Information about Level 3 Fair Value Measurements
June 30, 2012	Fair Value Estimate		Valuation Techniques		Unobservable Inputs		Estimated Range
Impaired loans	$	826		Appraisal of collateral		Appraisal adjustments		0.0% to -25.0%
						Liquidation expenses		-3.0% to -5.0%
Real estate owned		40		Appraisal of property		Appraisal adjustments		0.0% to -25.0%
						Liquidation expenses		-3.0% to -5.0%

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

	December 31, 2012				Fair Value Hierarchy at December 31, 2012
					Quoted Prices in Active Markets For Identical		Significant Other Observable		Significant Unobservable
(In thousands)	Carrying Amount		Fair Value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	11,962	$	11,962	$	11,962	$	—	$	—
Interest bearing deposits with other banks		8,533		8,533		8,533		—		—
Securities available for sale		43,307		43,307		—		43,259		48
Securities held to maturity		1,862		1,992		—		1,992		—
Federal Home Loan Bank stock		1,785		1,785		1,785		—		—
Loans held for sale		415		415		—		—		415
Loans receivable, net		294,439		299,806		—		—		299,806
Accrued interest receivable		1,150		1,150		1,150		—		—
Mortgage servicing rights		72		72		—		—		72
Financial liabilities:
Deposits		266,653		267,414		208,595		58,819		—
Securities sold under agreements to repurchase		9,791		9,824		—		9,824		—
Federal Home Loan Bank Advances		26,936		29,521		—		29,521		—
Accrued interest payable		114		114		114		—		—
Off-Balance sheet financial instruments		—		—		—		—		—

	June 30, 2012				Fair Value Hierarchy at June 30, 2012
					Quoted Prices in Active Markets For Identical		Significant Other Observable		Significant Unobservable
(In thousands)	Carrying Amount		Fair Value		Assets (Level 1)		Inputs (Level 2)		Inputs (Level 3)
Financial assets:
Cash and cash equivalents	$	31,525	$	31,525	$	31,525	$	—	$	—
Interest bearing deposits with other banks		9,490		9,490		9,490		—		—
Securities available for sale		34,454		34,454		—		34,400		54
Securities held to maturity		2,396		2,549		—		2,549		—
Federal Home Loan Bank stock		2,169		2,169		2,169		—		—
Loans held for sale		—		—		—		—		—
Loans receivable, net		293,206		299,307		—		—		299,307
Accrued interest receivable		1,039		1,039		1,039		—		—
Mortgage servicing rights		78		78		—		—		78
Financial liabilities:
Deposits		269,572		269,459		208,271		61,188		—
Securities sold under agreements to repurchase		16,434		16,543		—		16,543		—
Federal Home Loan Bank Advances		26,997		29,758		—		29,758		—
Accrued interest payable		154		154		154		—		—
Off-Balance sheet financial instruments		—		—		—		—		—

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NOTE 6 — GUARANTEES

The Company has not issued any guarantees that would require liability recognition or disclosure other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Generally, letters of credit, when issued, have expiration dates within one year. The credit risks involved in issuing letters of credit are essentially the same as those that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As of December 31, 2012, the Company had $548 thousand of outstanding letters of credit. Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. Management believes the current amount of the liability as of December 31, 2012 for guarantees under letters of credit issued is not material.

NOTE 7 — EMPLOYEE STOCK OWNERSHIP PLAN

Effective January 1, 2010, the Company adopted an Employee Stock Ownership Plan (“ESOP”) for eligible employees. The ESOP borrowed $3.7 million from the Company and used those funds to acquire 370,300 shares, or 8.0%, of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share.

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

Shares purchased by the ESOP are held by a trustee in an unallocated suspense account and shares are released annually from the suspense account on a pro-rata basis as principal and interest payments are made by the ESOP to the Company. The trustee allocates the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. Total ESOP shares may be reduced as a result of employees leaving the Company; shares that have previously been released to those exiting employees may be removed from the plan and transferred to that employee. As shares are committed to be released from the suspense account, the Bank reports compensation expense based on the average fair value of shares committed to be released with a corresponding credit to stockholders’ equity. Compensation expense recognized for the six months ended December 31, 2012 and 2011 amounted to $146 thousand and $133 thousand, respectively. Compensation expense recognized for the three months ended December 31, 2012 and 2011 amounted to $77 thousand and $67 thousand, respectively.

Shares held by the ESOP trust at the periods listed were as follows:

	December 31,
	2012		2011
Allocated shares		53,945		36,076
Unallocated shares		314,755		333,270
Total ESOP shares		368,700		369,346
Fair value of unallocated shares, in thousands	$	5,537	$	4,779

NOTE 8 — SHARE BASED COMPENSATION

In May 2011, the Company’s stockholders approved the OBA Financial Services, Inc. 2011 Equity Incentive Plan (“Plan”) which provides for awards of stock options and restricted stock to key officers and outside directors. The cost of the Plan is based on the fair value of the awards on the grant date. The fair value of restricted stock awards is based on the closing price of the Company’s stock on the grant date. The fair value of stock options is estimated using a Black-Scholes option pricing model using assumptions for dividend yield, stock price volatility, risk-free interest rate, and option term. These assumptions are based on management’s judgments regarding future events, are subjective in nature, and contain uncertainties inherent in an estimate. The cost of the awards are being recognized on a straight-line basis over the five-year vesting period during which participants are required to provide services in exchange for the awards. A portion of the restricted stock award vesting is contingent upon meeting certain company-wide performance goals.

Until such time as awards of stock are granted and vest or options are exercised, shares of the Company’s common stock under the Plan shall be authorized but unissued shares. The maximum number of shares authorized under the plan is 648,025. Total share-based compensation expense for the six months ended December 31, 2012 and 2011 was $469 thousand and $395 thousand, respectively. Total share-based compensation expense for the three months ended December 31, 2012 and 2011 was $234 thousand and $222 thousand, respectively.

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Stock Options

The table below presents the stock option activity for the period shown:

	Options		Weighted average exercise price		Remaining contractual life (years)
Options outstanding at June 30, 2012		272,150	$	14.79
Granted		—		—
Exercised		—		—
Forfeited		—		—
Expired		—		—
Options outstanding at December 31, 2012		272,150	$	14.79		8.6

As of December 31, 2012, the Company had $699 thousand of unrecognized compensation costs related to stock options. The cost of stock options will be amortized in equal annual installments over the five-year vesting period. There were 54,430 options vested during the six months ended December 31, 2012. Stock option expense for the six months ended December 31, 2012 and 2011 was $99 thousand and $80 thousand, respectively. Stock option expense for the three months ended December 31, 2012 and 2011 was $49 thousand and $45 thousand, respectively.

Restricted Stock Awards

Restricted stock awards are accounted for as fixed grants using the fair value of the Company’s stock at the time of grant. Unvested restricted stock awards may not be disposed of or transferred during the vesting period. Restricted stock awards carry with them the right to receive dividends.

The table below presents the restricted stock award activity for the period shown:

	Service- Based Restricted stock awards		Weighted average grant date fair value		Performance-Based Restricted stock awards		Weighted average grant date fair value		Total Restricted stock awards		Weighted average grant date fair value
Non-vested at June 30, 2012		136,363	$	14.77		111,090	$	14.81		247,453	$	14.79
Granted				—		—		—		—		—
Vested		27,267		14.77		22,218		14.81		49,485		14.79
Forfeited		—		—		—		—		—		—
Non-vested at December 31, 2012		109,096	$	14.77		88,872	$	14.81		197,968	$	14.79

As of December 31, 2012, the Company had $2.5 million of unrecognized compensation cost related to restricted stock awards. The cost of the restricted stock awards will be amortized in equal annual installments over the five-year vesting period. The vesting of the performance-based stock awards is contingent upon meeting certain company-wide performance goals. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. Restricted stock expense for the six months ended December 31, 2012 and 2011 was $370 thousand and $315 thousand, respectively. Restricted stock expense for the three months ended December 31, 2012 and 2011 was $185 thousand and $177 thousand, respectively.

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NOTE 9 — EARNINGS PER SHARE

Basic earnings per share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding for the period exclusive of unallocated ESOP shares and unvested restricted stock. Stock options and unvested restricted stock are regarded as potential common stock and are considered in the diluted earnings per share calculations to the extent they would have a dilutive effect if converted to common stock, computed using the Treasury Stock method. The table below sets forth the dilutive effect of the stock options and unvested restricted shares.

	Three Months Ended				Six Months Ended
	December 31,				December 31,
(Dollars in thousands, except share data)	2012		2011		2012		2011
Net income	$	397	$	82	$	657	$	170
Weighted average number of shares used in:
Basic earnings per share		3,799,778		3,924,869		3,812,501		4,059,359
Diluted common stock equivalents:
Stock options and restricted stock units		71,761		8,218		50,024		5,010
Diluted earnings per share		3,871,539		3,933,087		3,862,525		4,064,369
Net income per common share, basic	$	0.10	$	0.02	$	0.17	$	0.04
Net income per common share, diluted	$	0.10	$	0.02	$	0.17	$	0.04

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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 and non-interest income. Net interest income is the difference between interest income, which is the income the Company earns on its loans and investments, and interest expense, which is the interest the Company pays on its deposits and borrowings.

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

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

Expenses

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

Salaries and employee benefits expense consists primarily of the salaries and wages paid to employees and payroll tax, healthcare, retirement, ESOP, Equity Incentive Plan, and other employee benefit expenses.

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

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

Data processing fees are paid to third party vendors primarily for various data processing services.

Other expenses include expenses for professional services, including, but not limited to, attorney, accountant and consultant fees, advertising and marketing, charitable contributions, insurance, office supplies, postage, telephone, and other miscellaneous operating expenses.

Critical Accounting Policies and Estimates

There are no material changes to the critical accounting policies disclosed in OBA Financial Services, Inc.’s Annual Report on Form 10-K for the fiscal year ended June 30, 2012.

Comparison of Financial Condition at December 31, 2012 and June 30, 2012

Assets. Total assets decreased $11.1 million to $381.0 million at December 31, 2012 from $392.1 million at June 30, 2012. The decrease was primarily due to a decrease in cash and cash equivalents partially offset by increases in loans and securities.

Cash and Cash Equivalents. At December 31, 2012, cash and cash equivalents decreased $19.6 million, to $12.0 million, from $31.5 million at June 30, 2012 as loans and securities available for sale increased $1.3 million and $8.9 million, respectively, while deposits decreased $2.9 million and customer repurchase agreements decreased $6.6 million.

Loans. At December 31, 2012, total gross loans were $297.6 million, an increase of $1.3 million, as compared to $296.2 million at June 30, 2012. The commercial loan portfolio increased $9.3 million to $179.4 million at December 31, 2012 from $170.1 million at June 30, 2012 as the Company continued its focus on originating commercial loans. This increase was offset by decreases of $5.5 million, to $87.8 million, and $2.4 million, to $30.3 million, in the residential mortgage loan and home equity loan and line of credit portfolios, respectively. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying consolidated financial statements.

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Allowance for Loan Losses.

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

	Three Months Ended December 31,						Six Months Ended December 31,
(in thousands)	2012			2011			2012			2011
Balance at beginning of period	$	3,140		$	2,408		$	3,035		$	2,246
Provision for loan losses		(17	)		229			95			376
Charge-offs		—			(18	)		(8	)		(18	)
Recoveries		2			—			3			15
Balance at end of period	$	3,125		$	2,619		$	3,125		$	2,619
Ratios:
Net charge-offs to average loans		—	%		0.03	%		—	%		—	%
Allowance for loan losses to loans		1.05			0.93			1.05			0.93

At December 31, 2012, the allowance for loan losses was $3.1 million compared with $2.6 million at December 31, 2011 and $3.0 million at June 30, 2012. The allowance for loan losses as a percentage of total loans at December 31, 2012 was 1.05% compared to 1.05% at September 30, 2012, 1.02% at June 30, 2012 and 0.93% at December 31, 2011. There were effectively no net recoveries and charge-offs as a percentage of average loans for the three months and six months ended December 31, 2012 compared to net charge-offs of 0.03% for the three months ended December 31, 2011 and effectively none for the six months ended December 31, 2011. The Bank had $7.3 million in impaired loans at December 31, 2012 as compared to $7.9 million at June 30, 2012. Total impaired loans are primarily made up of two loan relationships with not-for-profit entities that have collateral values well in excess of the loan values. Based on the value of the collateral, no specific allowances are required for these two loans. For further detail, see “Note 4 – Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Non-performing Assets. Loans are generally placed on non-accrual status when payment of principal or interest is 90 days or more delinquent unless well secured and in the process of collection. Loans can also be placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest payments are brought current, there has been a period of sustained performance (generally, six months), and full payment of principal and interest is expected. At December 31, 2012, the Company had $5.9 million in total non-performing assets as compared to $6.1 million at June 30, 2012. Primarily, these totals represent commercial real estate and residential mortgage loans. Of the $5.9 million in non-performing assets at December 31, 2012, $3.2 million were also troubled debt restructurings.

The following table summarizes non-performing assets:

(dollars in thousands)	December 31, 2012			June 30, 2012
Non-performing assets
Non-accrual loans:
Commercial real estate	$	5,079		$	5,080
Residential mortgages		650			891
Home equity loans and lines of credit		210			75
Total non-accrual loans		5,939			6,046
Other real estate owned		—			40
Total non-performing assets	$	5,939		$	6,086
Asset quality ratios:
Non-performing loans to total loans		2.00	%		2.04	%
Non-performing assets to total assets		1.56			1.55

The non-performing loans to total loans ratio decreased slightly to 2.00% at December 31, 2012 from 2.04% at June 30, 2012 and the non-performing assets to total assets ratio increased one basis point from 1.55% at June 30, 2012 to 1.56% at December 31, 2012. For further detail, see “Note 4 — Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

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Troubled Debt Restructurings. At December 31, 2012 and June 30, 2012, the Company had $5.9 million and $5.8 million of loans, respectively, which were considered troubled debt restructurings. At December 31, 2012, the Bank had $1.0 million in residential mortgage loans that were considered troubled debt restructurings and $4.8 million in commercial real estate loans that were considered troubled debt restructurings. At June 30, 2012, the Bank had $1.1 million in residential mortgage loans that were considered troubled debt restructurings and $4.7 million in commercial real estate loans that were considered troubled debt restructurings. Of the $5.9 million in loans considered troubled debt restructurings, $3.3 million were also non-performing loans. For further detail, see “Note 4 — Credit Quality of Loans and Allowance for Loan Losses” in the accompanying financial statements.

Securities. At December 31, 2012, the securities portfolio totaled $45.2 million, or 11.9% of total assets, as compared to $36.9 million, or 9.4% of total assets, at June 30, 2012.

Deposits. At December 31, 2012, deposits decreased $2.9 million to $266.7 million from $269.6 million at June 30, 2012. Total money market and savings accounts decreased $4.0 million and certificates of deposit decreased $2.4 million and were offset by an increase in checking accounts of $3.5 million.

Borrowings. At December 31, 2012, total borrowings decreased $6.7 million, or 15.4%, to $36.7 million from $43.4 million at June 30, 2012. Customer repurchase agreements decreased $6.6 million to $9.8 million at December 31, 2012 from $16.4 million at June 30, 2012. At December 31, 2012, Federal Home Loan Bank advances totaled $26.9 million, a slight decrease from June 30, 2012. The Bank continues its strategy of reducing its reliance on higher costing borrowings.

At December 31, 2012, the Company had access to additional Federal Home Loan Bank advances of up to $39.5 million.

Equity. Equity totaled $75.7 million at December 31, 2012 and June 30, 2012, respectively. At December 31, 2012, the Company had repurchased 111,878 shares of its common stock of the 208,294 shares approved in its second share repurchase program. The Company’s Board of Directors adopted the second stock repurchase program as previously disclosed in the Company’s 8-K filed on March 21, 2012.

Capital and Liquidity. The Bank intends to maintain a strong capital position that supports its strategic goals while exceeding regulatory standards. At December 31, 2012, the Bank met the definition of a “well-capitalized” institution by exceeding all regulatory minimum capital requirements. The following tables summarize the consolidated and Bank capital ratios:

	Ratios at
	December 31,			June 30,			“Well-Capitalized”
	2012			2012			Minimums
Consolidated Capital Ratios:
Total Capital to risk-weighted assets		27.56	%		29.06	%		—
Tier 1 Capital to risk-weighted assets		26.46	%		27.93	%		—
Tier 1 Leverage		19.72	%		19.17	%		—
Bank Capital Ratios:
Total Capital to risk-weighted assets		22.69	%		23.42	%		10.00	%
Tier 1 Capital to risk-weighted assets		21.58	%		22.29	%		6.00	%
Tier 1 Leverage		16.09	%		15.30	%		5.00	%

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

The Company is a member of the Federal Home Loan Bank of Atlanta, whose competitive advance programs provide the Company with a safe, reliable, and convenient source of funds. A significant decrease in liquidity could result in the Company seeking other sources of funds, including, but not limited to, additional borrowings, brokered deposits, negotiated time deposits, the sale of available-for-sale investment securities, and the sale of loans or other assets.

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Comparison of Operating Results for the Three Months Ended December 31, 2012 and 2011

General. Net income increased $315 thousand, to $397 thousand, for the three months ended December 31, 2012 from net income of $82 thousand for the three months ended December 31, 2011. The increase in net income was primarily a result of an increase in net interest income of $362 thousand and a decrease in the provision for loan losses of $246 thousand, partially offset by an increase in tax expense of $242 thousand.

Net Interest Income. Net interest income increased by $362 thousand to $3.4 million for the three months ended December 31, 2012 as compared to $3.0 million for the three months ended December 31, 2011. Total interest expense decreased $380 thousand, or 39.6%, to $580 thousand for the three months ended December 31, 2012 as compared to $960 thousand for the three months ended December 31, 2011. The decrease in interest expense was primarily the result of the Bank decreasing deposit rates while maintaining its competitive position within the local market, paying off all matured higher costing brokered certificates of deposit exclusive of the core customer-based Certificate of Deposit Account Registry Service (“CDARS”) program and several matured higher costing term Federal Home Loan Bank advances, and reducing the rate on customer repurchase agreements. Interest and dividend income was effectively unchanged at $4.0 million for the three months ended December 31, 2012 as compared to the three months ended December 31, 2011.

The net interest margin was 3.80% for the three months ended December 31, 2012 compared to 3.59% for the three months ended December 31, 2011. The increase in the net interest margin was primarily a result of an increase in average net interest-earning assets and a 53 basis point decrease in the average yield of interest-bearing liabilities as compared to a 26 basis point decrease in the average yield of interest-earning asset. Net interest-earning assets increased $24.3 million as average interest-earning assets increased $19.3 million to $355.9 million for the period ended December 31, 2012 compared to $336.6 million for the period ended December 31, 2011. Average interest-bearing liabilities decreased $5.0 million to $269.4 million for the period ended December 31, 2012 as compared to $274.5 million for the period ended December 31, 2011.

Interest and Dividend Income. Interest and dividend income was effectively unchanged at $4.0 million for the three months ended December 31, 2012 and 2011. Interest income on investments increased slightly to $277 thousand for the period ended December 31, 2012. Interest income on loans decreased slightly to $3.7 million for the period ended December 31, 2012.

The average yield on loans decreased 36 basis points, to 4.93%, for the three months ended December 31, 2012 from 5.29% for the three months ended December 31, 2011. Total average loans increased $17.7 million to $296.8 million, reflecting an increase in the average balance of commercial loans of $28.9 million to $176.1 million for the three months ended December 31, 2012. The increase in average commercial loans was offset by a decrease in average residential mortgage loans of $5.8 million to $89.3 million and a decrease in average consumer loans of $5.3 million to $31.4 million for the three months ended December 31, 2012 as compared to $95.1 million and $36.7 million, respectively, for the three months ended December 31, 2011.

The average yield on securities decreased five basis points to 2.05% for the three months ended December 31, 2012 from 2.10% for the three months ended December 31, 2011, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $380 thousand to $580 thousand from $960 thousand for the three months ended December 31, 2012 and 2011, respectively. Deposit expense decreased $314 thousand from $628 thousand for the three months ended December 31, 2012 as the average rate paid on deposits decreased 54 basis points to 0.53% for the three months ended December 31, 2012 from 1.08% for three months ended December 31, 2011.

Interest expense on borrowings decreased $66 thousand to $266 thousand for the three months ended December 31, 2012 as compared to $332 thousand for the three months ended December 31, 2011. The average cost of borrowings decreased 15 basis points to 2.64% for the three months ended December 31, 2012 as compared to December 31, 2011 as a result of paying off matured higher costing term Federal Home Loan Bank advances.

Provision for Loan Losses. The Company’s provision for loan losses for the three months ended December 31, 2012 was a credit of $17 thousand, or a decrease of $246 thousand from $229 thousand for the three months ended December 31, 2011. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses” in the “Comparison of Financial Condition at December 31, 2012 and June 30, 2012.” For further discussions related to loan portfolio performance, see “Non-performing Assets” in the “Comparison of Financial Condition at December 31, 2012 and June 30, 2012” and Note 4 of the notes to the consolidated financial statements.

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

	Three Months Ended December 31,						Change
	2012			2011			$			%
	(In thousands)
Customer service fees	$	93		$	92		$	1			1.1	%
Loan servicing fees		5			7			(2	)		(28.6	)
Bank owned life insurance income		71			75			(4	)		(5.3	)
Other non-interest income		30			29			1			3.4
Non-interest income before net gains (losses)		199			203			(4	)		(2.0	)
Net gain on sale of loans		16			—			16			—
Write-down of other real estate owned		(40	)		(31	)		(9	)		29.0
Net losses		(24	)		(31	)		7			(22.6	)
Total non-interest income	$	175		$	172		$	3			1.7

Total non-interest income was effectively unchanged for the three months ended December 31, 2012 as compared to the three months ended December 31, 2011. The Bank wrote-down to zero its sole other real estate owned which was partially offset by an increase in net gains on the sale of loans.

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

	Three Months Ended December 31,				Change
	2012		2011		$			%
	(In thousands)
Salaries and employee benefits	$	1,734	$	1,667	$	67			4.0	%
Occupancy and equipment		380		399		(19	)		(4.8	)
Data processing		189		173		16			9.2
Directors’ fees		89		89		—			—
FDIC assessments		69		69		—			—
Other non-interest expense		447		457		(10	)		(2.2	)
Total non-interest expense	$	2,908	$	2,854	$	54			1.9

Total non-interest expense increased slightly to $2.9 million, up $54 thousand for the three months ended December 31, 2012 compared to the three months ended December 31, 2011. Data processing expenses increased $16 thousand, or 9.2%, to $189 thousand for the three months ended December 31, 2012 as compared to $173 thousand for the three months ended December 31, 2011 due to increased licensing fees and processing costs.

Income Taxes. The Company recorded income tax expense of $291 thousand for the three months ended December 31, 2012, reflecting an effective tax rate of 42.3%, compared to income tax expense of $49 thousand for the three months ended December 31, 2011, reflecting an effective tax rate of 37.4%. The lower effective tax rate for the three months ended December 31, 2011 as compared to December 31, 2012 is primarily the result of tax-exempt BOLI income representing a larger portion of pre-tax income. The difference from the effective tax rate to the statutory tax rate reflects the amount of income received from bank-owned life insurance, which is tax-exempt for federal and state tax purposes, relative to total pre-tax income for each period.

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Comparison of Operating Results for the Six Months Ended December 31, 2012 and 2011

General. Net income increased $487 thousand to $657 thousand for the six months ended December 31, 2012 from net income of $170 thousand for the six months ended December 31, 2011. The increase in net income was primarily a result of an increase in net interest income of $643 thousand and a decrease in the provision for loan losses of $281 thousand partially offset by an increase in tax expense of $390 thousand.

Net Interest Income. Net interest income increased by $643 thousand, to $6.7 million for the six months ended December 31, 2012 as compared to $6.0 million for the six months ended December 31, 2011. Total interest expense decreased $853 thousand, or 41.2%, to $1.2 million for the six months ended December 31, 2012 as compared to $2.1 million for the six months ended December 31, 2011. The decrease in interest expense was primarily the result of the Bank decreasing deposit rates while maintaining its competitive position within the local market, paying off all matured higher costing brokered certificates of deposit exclusive of the core customer-based Certificate of Deposit Account Registry Service (“CDARS”) program and several matured higher costing term Federal Home Loan Bank advances, and reducing the rate on customer repurchase agreements. Interest and dividend income decreased by $210 thousand to $7.9 million for the six months ended December 31, 2012 as compared to $8.1 million for the six months ended December 31, 2011. This decrease is primarily due to lower yields in the loan portfolios.

The net interest margin was 3.71% for the six months ended December 31, 2012 compared to 3.55% for the six months ended December 31, 2011. The increase in the net interest margin was primarily a result of an increase in average net interest-earning assets and a 58 basis point decrease in the average yield of interest-bearing liabilities as compared to a 38 basis point decrease in the average yield interest-earning assets. Net interest-earning assets increased $29.6 million as average interest-earning assets increased $20.7 million to $356.8 million for the period ended December 31, 2012 compared to $336.0 million for the period ended December 31, 2011. Average interest-bearing liabilities decreased $8.9 million to $269.2 million for the period ended December 31, 2012 as compared to $278.0 million for the period ended December 31, 2011.

Interest and Dividend Income. Interest and dividend income decreased $210 thousand to $7.9 million from $8.1 million for the six months ended December 31, 2012 and 2011, respectively, as continued low market interest rates caused lower yields on new loan production. The decrease in interest and dividend income was primarily the result of a decrease in interest income on loans of $206 thousand to $7.3 million from $7.5 million for the periods ended December 31, 2012 and 2011, respectively, as low market interest rates produced continued pressure on loan yields.

The average yield on loans decreased 42 basis points, to 4.89%, for the six months ended December 31, 2012 from 5.31% for the six months ended December 31, 2011. Total average loans increased $16.2 million to $295.9 million, reflecting an increase in the average balance of commercial loans of $26.8 million to $173.4 million for the six months ended December 31, 2012. The increase in average commercial loans was offset by a decrease in average residential mortgage loans of $5.0 million to $90.8 million and a decrease in average consumer loans of $5.6 million to $31.8 million for the six months ended December 31, 2012 as compared to $95.8 million and $37.4 million, respectively, for the six months ended December 31, 2011.

The average yield on securities decreased 14 basis points to 2.10% for the six months ended December 31, 2012 from 2.24% for the six months ended December 31, 2011, reflecting continued low market interest rates and repayments of higher yielding securities within the mortgage backed securities portfolio.

Interest Expense. Interest expense decreased $853 thousand to $1.2 million from $2.1 million for the six months ended December 31, 2012 and 2011, respectively. Deposit expense decreased by $718 thousand to $666 thousand for the six months ended December 31, 2012 as the average rate paid on deposits decreased 60 basis points to 0.57% for the six months ended December 31, 2012 from 1.17% for six months ended December 31, 2011.

Interest expense on borrowings decreased $135 thousand to $551 thousand for the six months ended December 31, 2012 from $686 thousand for the six months ended December 31, 2011. The average cost of borrowings decreased 15 basis points to 2.73% for the six months ended December 31, 2012 as a result of paying off higher costing term Federal Home Loan Bank advances and reducing the rate on customer repurchase agreements.

Provision for Loan Losses. The Company’s provision for loan losses for the six months ended December 31, 2012 was $95 thousand, a decrease of $281 thousand from $376 thousand, for the six months ended December 31, 2011. For further discussion related to the provision for loan losses, see “Allowance for Loan Losses” in the “Comparison of Financial Condition at December 31, 2012 and June 30, 2012.” For further discussions related to loan portfolio performance, see “Non-performing Assets” in the “Comparison of Financial Condition at December 31, 2012 and June 30, 2012” and Note 4 of the notes to the consolidated financial statements.

35

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

	Six Months Ended
	December 31,						Change
	2012			2011			$			%
	(In thousands)
Customer service fees	$	183		$	183		$	—			—	%
Loan servicing fees		10			16			(6	)		(37.5	)
Bank owned life insurance income		144			150			(6	)		(4.0	)
Other non-interest income		62			59			3			5.1
Non-interest income before net gains (losses)		399			408			(9	)		(2.2	)
Net gain on sale of loans		16			6			10			166.7
Write-down of other real estate owned		(40	)		(31	)		(9	)		29.0
Net losses		(24	)		(25	)		1			(4.0	)
Total non-interest income	$	375		$	383		$	(8	)		(2.1	)

Total non-interest income decreased $8 thousand to $375 thousand for the six months ended December 31, 2012 as compared to $383 thousand for the six months ended December 31, 2011. The Bank wrote-down to zero its sole other real estate owned which was partially offset by an increase in net gains on the sale of loans.

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

	Six Months Ended
	December 31,				Change
	2012		2011		$			%
	(In thousands)
Salaries and employee benefits	$	3,504	$	3,405	$	99			2.9	%
Occupancy and equipment		768		785		(17	)		(2.2	)
Data processing		386		350		36			10.3
Directors’ fees		183		169		14			8.3
FDIC assessments		138		136		2			1.5
Other non-interest expense		850		945		(95	)		(10.1	)
Total non-interest expense	$	5,829	$	5,790	$	39			0.7

Total non-interest expense remained relatively unchanged at $5.8 million for the six months ended December 31, 2012 and 2011. Data processing expenses increased $36 thousand, or 10.3%, to $386 thousand for the six months ended December 31, 2012 as compared to $350 thousand for the six months ended December 31, 2011. The increase is primarily the result of increased licensing fees and processing costs. Other non-interest expense decreased $95 thousand to $850 thousand from $945 thousand for the six month periods ended December 31, 2012 and 2011, respectively. The decrease in other non-interest expense is primarily due to lower advertising, deposit services, legal, regulatory, and accounting, and other operating expenses partially offset by an increase in facilities expense as the Bank’s Anne Arundel County branch was open for the full six month period ended December 31, 2012.

Income Taxes. The Company recorded income tax expense of $453 thousand for the six months ended December 31, 2012, reflecting an effective tax rate of 40.8%, compared to income tax expense of $63 thousand for the six months ended December 31, 2011, reflecting an effective tax rate of 27.0%. The lower effective tax rate for the six months ended December 31, 2011 as compared to December 31, 2012 was primarily the result of tax-exempt BOLI income representing a larger portion of pre-tax income. The difference from the effective tax rate to the statutory tax rate reflects the amount of income received from bank-owned life insurance, which is tax-exempt 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, 2012. 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, 2012, 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, 2012, the Company was not subject to any legal actions, the outcome of which was expected to have a material effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

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

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following table sets forth information in connection with repurchases of the Company’s shares of common stock for the period of October 1, 2012 through December 31, 2012. All shares repurchased during the three months ended December 31, 2012 have been retired. On March 16, 2012, the Board of Directors authorized the repurchase of up to 208,294 shares, or 5% of the Company’s common stock outstanding at the completion of the Company’s initial repurchase program approved on May 19, 2011. The repurchase authorization has no expiration date.

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares That May yet be Purchased Under the Plans or Programs
October 1, 2012 through October 31, 2012		—	$	—		—		127,600
November 1, 2012 through Novemer 30, 2012		29,987		16.31		29,987		97,613
December 1, 2012 through December 31, 2012		1,197		17.50		1,197		96,416
Total		31,184		16.36		31,184		96,416

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

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

37

SIGNATURES

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

Date: February 13, 2013	OBA FINANCIAL SERVICES, INC. (Registrant)
		/S/ CHARLES E. WELLER
		Charles E. Weller
		President and Chief Executive Officer
Date: February 13, 2013		/S/ DAVID A. MILLER
		David A. Miller
		Senior Vice President and Chief Financial Officer

38

EXHIBIT INDEX

Exhibit Number	Description
31.1	Certification of Charles E. Weller, President and Chief Executive Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
31.2	Certification of David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to Rule 13a-14(a) and Rule 15d-14(a).
32	Certification of Charles E. Weller, President and Chief Executive Officer, and David A. Miller, Senior Vice President and Chief Financial Officer, Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income (Loss), (iii) Consolidated Statements of Comprehensive Income (Loss), (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Consolidated Financial Statements.

39