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EX-23 - United Community Bancorp | v197465_ex23.htm |
EX-21 - United Community Bancorp | v197465_ex21.htm |
EX-32 - United Community Bancorp | v197465_ex32.htm |
EX-31.2 - United Community Bancorp | v197465_ex31-2.htm |
EX-31.1 - United Community Bancorp | v197465_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-K
(Mark
One)
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
fiscal year ended June 30, 2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from to
________
Commission
file number: 0-51800
UNITED COMMUNITY
BANCORP
(Exact
name of registrant as specified in its charter)
United States
|
36-4587081
|
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
|
incorporation
or organization)
|
Identification
No.)
|
|
92 Walnut Street, Lawrenceburg,
Indiana
|
47025
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (812)
537-4822
Securities
registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per
share
|
Nasdaq Global Market
|
|
Title
of Class
|
|
Name
of each exchange on which
registered
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES ¨ NO x
Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. YES ¨ NO x
Indicate by check mark whether the
registrant (l) 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 (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files. YES ¨ NO ¨
Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the
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
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of December 31, 2009 was $17.6 million. The number of
shares outstanding of the registrant’s common stock as of September 1, 2010 was
7,845,554, of which 4,655,200 shares were held by United Community
MHC.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
INDEX
Page
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||
Part
I
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||
Item
1.
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Business
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3
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Item
1A.
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Risk
Factors
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21
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Item
1B.
|
Unresolved
Staff Comments
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28
|
Item
2.
|
Properties
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29
|
Item
3.
|
Legal
Proceedings
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29
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Item
4.
|
[Removed
and Reserved]
|
30
|
Part
II
|
||
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
|
30
|
Item
6.
|
Selected
Financial Data
|
31
|
Item
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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33
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Item
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
56
|
Item
8.
|
Financial
Statements and Supplementary Data
|
57
|
Item
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
99
|
Item
9A(T).
|
Controls
and Procedures
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99
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Item
9B.
|
Other
Information
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99
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Part
III
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||
Item
10.
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Directors,
Executive Officers and Corporate Governance
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99
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Item
11.
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Executive
Compensation
|
100
|
Item
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
100
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Item
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
101
|
Item
14.
|
Principal
Accountant Fees and Services
|
101
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Part
IV
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||
Item
15.
|
Exhibits
and Financial Statement Schedules
|
101
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SIGNATURES
|
103
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|
EXHIBITS
|
i
Note
on Forward-Looking Statements
This
report, like many written and oral communications presented by United Community
Bancorp and our authorized officers, may contain certain forward-looking
statements regarding our prospective performance and strategies within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We intend
such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and are including this statement for purposes of said safe harbor
provisions.
Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of the Company, are generally identified by use of
the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,”
“project,” “seek,” “strive,” “try,” or future or conditional verbs such as
“will,” “would,” “should,” “could,” “may,” or similar expressions. Our ability
to predict results or the actual effects of our plans or strategies is
inherently uncertain. Accordingly, actual results may differ materially from
anticipated results.
There
are a number of factors, many of which are beyond our control, that could cause
actual conditions, events, or results to differ significantly from those
described in our forward-looking statements. These factors include, but are not
limited to:
|
•
|
general
economic conditions, either nationally or in some or all of the areas in
which we and our customers conduct our respective
businesses;
|
|
•
|
conditions
in the securities markets and real estate markets or the banking
industry;
|
|
•
|
changes
in interest rates, which may affect our net income, prepayment penalty
income, and other future cash flows, or the market value of our assets,
including our investment
securities;
|
|
•
|
changes
in deposit flows and wholesale borrowing
facilities;
|
|
•
|
changes
in the demand for deposit, loan, and investment products and other
financial services in the markets we
serve;
|
|
•
|
changes
in our credit ratings or in our ability to access the capital
markets;
|
|
•
|
changes
in our customer base or in the financial or operating performances of our
customers’ businesses;
|
|
•
|
changes
in real estate values, which could impact the quality of the assets
securing the loans in our
portfolio;
|
|
•
|
changes
in the quality or composition of our loan or securities
portfolios;
|
|
•
|
changes
in competitive pressures among financial institutions or from
non-financial institutions;
|
|
•
|
the
ability to successfully integrate any assets, liabilities, customers,
systems, and management personnel, including those of the three Integra
Bank branch offices we acquired on June 4, 2010, and any other banks we
may acquire, into our operations, and our ability to realize related
revenue synergies and cost savings within expected time
frames;
|
|
•
|
our
ability to retain key members of
management;
|
|
•
|
our
timely development of new lines of business and competitive products or
services in a changing environment, and the acceptance of such products or
services by our customers;
|
1
|
•
|
any
interruption or breach of security resulting in failures or disruptions in
customer account management, general ledger, deposit, loan, or other
systems;
|
|
•
|
any
interruption in customer service due to circumstances beyond our
control;
|
|
•
|
potential
exposure to unknown or contingent liabilities of companies we have
acquired or target for acquisition;
|
|
•
|
the
outcome of pending or threatened litigation, or of other matters before
regulatory agencies, whether currently existing or commencing in the
future;
|
|
•
|
environmental
conditions that exist or may exist on properties owned by, leased by, or
mortgaged to the Company;
|
|
•
|
operational
issues stemming from, and/or capital spending necessitated by, the
potential need to adapt to industry changes in information technology
systems, on which we are highly
dependent;
|
|
•
|
changes
in our estimates of future reserves based upon the periodic review thereof
under relevant regulatory and accounting
requirements;
|
|
•
|
changes
in our capital management policies, including those regarding business
combinations, dividends, and share repurchases, among
others;
|
|
•
|
changes
in legislation, regulation, policies, or administrative practices, whether
by judicial, governmental, or legislative action, including, but not
limited to, the effect of final rules amending Regulation E that prohibit
financial institutions from assessing overdraft fees on ATM and one-time
debit card transactions without a consumer’s affirmative consent, the
impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
and other changes pertaining to banking, securities, taxation, rent
regulation and housing, environmental protection, and insurance; and the
ability to comply with such changes in a timely
manner;
|
|
•
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additional
FDIC special assessments or required assessment
prepayments;
|
|
•
|
changes
in accounting principles, policies, practices or
guidelines;
|
|
•
|
the
ability to keep pace with, and implement on a timely basis, technological
changes;
|
|
•
|
changes
in the monetary and fiscal policies of the U.S. Government, including
policies of the U.S. Department of the Treasury and the Board of Governors
of the Federal Reserve System;
|
|
•
|
war
or terrorist activities; and
|
|
•
|
other
economic, competitive, governmental, regulatory, and geopolitical factors
affecting our operations, pricing, and
services.
|
Additional
factors that may affect our results are discussed in this annual report on Form
10-K under “Item 1A. Risk Factors.” The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made. The Company wishes to advise readers
that the factors listed above could affect the Company’s financial performance
and could cause the Company’s actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
The Company does not undertake the
responsibility, and specifically disclaims any obligation, to publicly release
the result of any revisions, which may be made to any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
2
PART
I
Item
1.
Business
United Community
Bancorp. United Community Bancorp was organized as a federal
corporation upon completion of United Community Bank’s reorganization into the
mutual holding company form of organization (the “Reorganization”) on March 30,
2006. As a result of the Reorganization, United Community Bank became a
wholly-owned subsidiary of United Community Bancorp and United Community Bancorp
became a majority-owned subsidiary of United Community MHC, a federally
chartered mutual holding company. United Community Bancorp’s business
activities are the ownership of the outstanding capital stock of United
Community Bank and management of the investment of offering proceeds
retained from the Reorganization. United Community Bancorp neither owns nor
leases any property, but instead, uses the premises, equipment and other
property of United Community Bank with the payment of appropriate rental fees,
as required by applicable law and regulations. In the future, United Community
Bancorp may acquire or organize other operating subsidiaries; however, there are
no current plans, arrangements, agreements or understandings, written or oral,
to do so.
United Community
MHC. United Community MHC is our federally chartered mutual holding
company parent. As a mutual holding company, United Community MHC is a
non-stock company that has as its members depositors of United Community
Bank. United Community MHC does not engage in any business activity other
than owning a majority of the common stock of United Community Bancorp. So
long as we remain in the mutual holding company form of organization, United
Community MHC will own a majority of the outstanding shares of United Community
Bancorp.
United Community
Bank. United Community Bank is a federally chartered savings bank
and was created on April 12, 1999 through the merger of Perpetual Federal
Savings and Loan Association and Progressive Federal Savings Bank, both located
in Lawrenceburg, Indiana. On June 4, 2010, United Community Bank acquired
three branches from Integra Bank National Association all of which are located
in Ripley County, Indiana. In connection with the acquisition, the Bank
acquired $45.9 million in loans and assumed $53.0 million in deposits. At
June 30, 2010, we had approximately $492.1 million in assets and $430.2 million
in deposits. We operate as a community-oriented financial institution
offering a full menu of banking services and products to consumers and
businesses in our market areas. Recent years have seen the expansion of
services we offer from a traditional savings and loan product mix to one of a
full-service financial institution servicing the needs of consumer and
commercial customers.
UCB Real Estate
Management Holding, LLC. UCB Real Estate Management Holding, LLC is a
wholly-owned subsidiary of United Community Bank. The entity was formed
for the purpose of holding real estate assets that are acquired by the Bank
through, or in lieu of, foreclosure.
We
attract deposits from the general public and local municipalities and use those
funds to originate one- to four-family real estate, multi-family and
nonresidential real estate and land, construction, commercial and consumer
loans, which, with the exception of long-term fixed-rate one-to four-family real
estate loans, we primarily hold for investment. We also maintain an investment
portfolio. We offer non-deposit investment products through a third-party
network arrangement with a registered broker-dealer.
Market
Areas
We are
headquartered in Lawrenceburg, Indiana, which is in the eastern part of Dearborn
County, Indiana, along the Ohio River. We currently have six branches located in
Dearborn County and three branches located in adjacent Ripley County. The
economy of the region in which our current offices are located, and planned
future offices will be located, has historically been a mixture of light
industrial enterprises and services. The economy in Lawrenceburg has been strong
in recent years as a result of the opening of a riverboat casino in Lawrenceburg
whose presence has led to new retail centers, job growth and an increase in
housing development. Located 20 miles from Cincinnati, Ohio, Dearborn and Ripley
Counties have also benefited from the growth in and around Cincinnati and
Northern Kentucky, as many residents commute to these areas for
employment.
3
Dearborn
and Ripley Counties’ road system includes eight state highways and three U.S.
highways. Interstate 275 enters Indiana near Lawrenceburg and offers easy
connection to Interstate 71 and Interstate 75. Interstate 74 connects us
with Indianapolis to the northwest and Cincinnati to the east. The counties are
30 minutes from the Greater Cincinnati/Northern Kentucky International Airport
by way of Interstate 275. The counties have two rail lines and port facilities
due to the proximity of the Ohio River.
Competition
We face
significant competition for the attraction of deposits and origination of loans.
Our most direct competition for deposits has historically come from the several
financial institutions operating in our market areas and, to a lesser extent,
from other financial service companies such as brokerage firms, credit unions
and insurance companies. We also face competition for investors’ funds from
money market funds, mutual funds and other corporate and government securities.
At June 30, 2009, which is the most recent date for which data is available from
the Federal Deposit Insurance Corporation, we held approximately 37.48% of the
deposits in Dearborn County, which was the largest market share out of the nine
financial institutions with offices in Dearborn County. In addition, banks owned
by large out-of-state bank holding companies such as Fifth Third Bancorp and
U.S. Bancorp also operate in our market areas. These institutions are
significantly larger than us and, therefore, have significantly greater
resources.
Our
competition for loans comes primarily from financial institutions in our market
areas, and, to a lesser extent, from other financial service providers such as
mortgage companies and mortgage brokers. Competition for loans also comes from
the increasing number of non-depository financial service companies entering the
mortgage market such as insurance companies, securities companies and
specialty finance companies.
We expect
competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry. Technological advances, for example, have lowered the
barriers to market entry, allowed banks and other lenders to expand their
geographic reach by providing services over the Internet and made it possible
for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services industry.
Competition for deposits and the origination of loans could limit our future
growth.
Lending
Activities
General.
We originate loans primarily for investment purposes. Significant segments of
our loan portfolio are one- to four- family residential real estate loans,
nonresidential real estate and land loans, multi-family residential real estate
loans and consumer loans.
4
One- to
Four-Family Residential Real Estate Loans. We offer mortgage loans
to enable borrowers to purchase or refinance existing homes, most of which
serve as the primary residence of the owner. We offer fixed-rate and
adjustable-rate loans with terms up to 30 years. Borrower demand for
adjustable-rate loans versus fixed-rate loans is a function of the level of
interest rates, the expectations of changes in the level of interest rates, and
the difference between the interest rates and loan fees offered for fixed-rate
mortgage loans and the initial period interest rates and loan fees for
adjustable-rate loans. The relative amount of fixed-rate mortgage loans and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. The loan fees,
interest rates and other provisions of mortgage loans are determined by us
on the basis of our own pricing criteria and competitive market conditions.
Most of our loan originations result from relationships with existing or past
customers, members of our local community and referrals from realtors, attorneys
and builders.
While
one- to four-family residential real estate loans are normally originated with
up to 30-year terms, such loans typically remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan.
Therefore, average loan maturity is a function of, among other factors, the
level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans.
Additionally, our current practice is generally to (i) sell in the secondary
market newly originated conforming fixed-rate 15-, 20- and 30-year one- to
four-family residential real estate loans, and (ii) to hold in our portfolio
fixed-rate loans with 10-year terms or less and adjustable-rate loans.
Occasionally, we have purchased loans and purchased participation interests in
loans originated by other institutions to supplement our origination
efforts.
Interest
rates and payments on our adjustable-rate mortgage loans generally adjust
annually after an initial fixed period that ranges from one to 10 years.
Interest rates and payments on these adjustable-rate loans generally are based
on the one-year constant maturity Treasury index (three-year constant maturity
Treasury index in the case of three-year adjustable-rate loans) as published by
the Federal Reserve in Statistical Release H.15. The maximum amount by which the
interest rate may be increased is generally two percentage points per adjustment
period and the lifetime interest rate cap ranges from five to six percentage
points over the initial interest rate of the loan. Our adjustable-rate
residential mortgage loans generally do not provide for a decrease in the rate
paid below the initial contract rate. The inability of our residential real
estate loans to adjust downward below the initial contract rate can contribute
to increased income in periods of declining interest rates, and also assists us
in our efforts to limit the risks to earnings and equity value resulting from
changes in interest rates, subject to the risk that borrowers may refinance
these loans during periods of declining interest rates.
We
generally do not make conventional loans with loan-to-value ratios exceeding 95%
at the time the loan is originated. Private mortgage insurance is generally
required for all fixed-rate loans with loan-to-value ratios in excess of 80%,
and all adjustable-rate loans with loan-to-value ratios exceeding 85%. We
require all properties securing mortgage loans to be appraised by a
board-approved independent appraiser. We generally require title insurance on
all first mortgage loans. Borrowers must obtain hazard insurance, and flood
insurance for loans on properties located in a flood zone, before closing the
loan.
In an
effort to provide financing for low- and moderate-income and first-time buyers,
we offer a special home buyers program. We offer residential mortgage loans
through this program to qualified individuals and originate the loans using
reduced interest rates, fees and loan conditions.
Multi-Family Real
Estate Loans. We
offer adjustable-rate mortgage loans secured by multi-family real estate. Our
multi-family real estate loans are generally secured by apartment buildings. We
also make multi-family real estate loans secured by apartment buildings outside
of our primary market area to existing customers. We intend to continue to
grow this segment of our loan portfolio.
5
These
loans are typically repaid or the term is extended before maturity, in which
case a new rate is negotiated to meet market conditions and an extension of the
loan is executed for a new term with a new amortization schedule. We originate
adjustable-rate multi-family real estate loans with terms up to 30
years. Interest rates and payments on most of these loans typically adjust
annually after an initial fixed term of one to seven years. Interest rates and
payments on our adjustable-rate loans generally are based on the prime interest
rate. The maximum amount by which the interest rate may be increased is
generally two percentage points per adjustment period and the lifetime interest
rate cap is six percentage points over the initial interest rate of the loan.
Loans are secured by first mortgages that generally do not exceed 80% of
the property’s appraised value. When the borrower is a corporation, partnership
or other entity, we generally require that significant equity holders serve as
co-borrowers on the loan, or, to a lesser extent, serve as a personal guarantor
of the loan. Environmental surveys and inspections are generally required
for loans over $500,000.
Loans
secured by multi-family real estate generally have larger balances and involve a
greater degree of risk than one- to four-family residential mortgage loans. Of
primary concern in multi-family real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project.
Payments on loans secured by income properties often depend on successful
operation and management of the properties. As a result, repayment of such loans
may be subject to a greater extent than one- to four-family residential real
estate loans to adverse conditions in the real estate market or the economy. To
monitor cash flows on income properties, we require borrowers and loan
guarantors of loan relationships totaling more than $1.0 million, in the
aggregate, to provide annual financial statements and/or tax returns. In
reaching a decision on whether to make a multi-family real estate loan, we
consider the net operating income of the property, the borrower’s character and
expertise, credit history and profitability and the value of the underlying
property. In addition, with respect to rental properties, we will also consider
the term of the lease and the credit quality of the tenants. We have generally
required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of
at least 1.20x.
At June
30, 2010, the largest outstanding multi-family real estate loan had an
outstanding balance of $5.1 million and is secured by apartment buildings in
Cincinnati, Ohio. This loan was performing
according to its original terms at June 30, 2010.
Nonresidential
Real Estate and Land
Loans. We offer
adjustable-rate mortgage loans secured by nonresidential real estate. Our
nonresidential real estate loans are generally secured by commercial buildings.
These loans are typically repaid or the term is extended before maturity,
in which case a new rate is negotiated to meet market conditions and an
extension of the loan is executed for a new term with a new amortization
schedule. We originate adjustable-rate nonresidential real estate loans with
terms up to 30 years. Interest rates and payments on most of these loans
typically adjust annually after an initial fixed term of three to seven years.
Interest rates and payments on these loans generally are based on the prime
interest rate. The maximum amount by which the interest rate may be
increased is generally two percentage points per adjustment period and the
lifetime interest rate cap is six percentage points over the initial interest
rate of the loan. Loans are secured by first mortgages that generally do not
exceed 80% of the property’s appraised value (75% for land only loans), the
maximum amount of which is limited by our in-house loans to one borrower limit.
When the borrower is a corporation, partnership or other entity, we generally
require that significant equity holders serve as co-borrowers or as personal
guarantors of the loan.
Loans
secured by nonresidential real estate generally have larger balances and involve
a greater degree of risk than one- to four-family residential mortgage loans.
Our primary concern in nonresidential real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project.
Payments on loans secured by income properties often depend on successful
operation and management of the properties. As a result, repayment of such loans
may be subject to a greater extent than one- to four-family residential real
estate loans to adverse conditions in the real estate market or the economy. To
monitor cash flows on income properties, we require borrowers and loan
guarantors of loan relationships totaling more than $1.0 million, in the
aggregate, to provide annual financial statements and/or tax returns. In
reaching a decision on whether to make a nonresidential real estate loan, we
consider the net operating income of the property, the borrower’s expertise
and character, credit history and profitability and the value of the underlying
property. In addition, with respect to rental properties, we will also consider
the term of the lease and the credit quality of the tenants. We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.20x. Environmental surveys and inspections are
generally required for loans over $500,000.
6
We also
originate loans secured by unimproved property, including lots for single family
homes and for mobile homes, raw land, commercial property and agricultural
property. The terms and rates of our land loans are the same as our
nonresidential and multi-family real estate loans. Loans secured by undeveloped
land or improved lots generally involve greater risks than residential mortgage
lending because land loans are more difficult to evaluate. If the estimate of
value proves to be inaccurate, in the event of default and foreclosure, we may
be confronted with a property the value of which is insufficient to assure full
repayment. Loan amounts generally do not exceed 80% of the lesser of the
appraised value or the purchase price.
At June
30, 2010, we had $74.8 million in nonresidential real estate loans outstanding,
or 23.7% of total loans, and $5.4 million in land loans outstanding, or 1.7% of
total loans.
At June
30, 2010, the largest outstanding nonresidential real estate loan had an
outstanding balance of $3.2 million. This loan is secured by a hotel and was
performing according to its original terms at June 30, 2010. At June 30,
2010, our largest land loan, which was performing according to its original
terms at that date, had an outstanding balance of $894,000 and was secured by
land held for commercial real estate development.
Construction
Loans. We originate fixed-rate and adjustable-rate loans to individuals
and, to a lesser extent, builders to finance the construction of residential
dwellings. We also make construction loans for commercial development projects,
including apartment buildings, restaurants, shopping centers and owner-occupied
properties used for businesses. Our construction loans generally provide for the
payment of interest only during the construction phase, which is usually nine
months for residential properties and 12 months for commercial properties. At
the end of the construction phase, the loan generally converts to a permanent
mortgage loan. Loans generally can be made with a maximum loan to value
ratio of 95% on residential construction and 80% on commercial construction at
the time the loan is originated. Before making a commitment to fund a
construction loan, we require an appraisal of the property by an
independent licensed appraiser. We also will require an inspection of the
property before disbursement of funds during the term of the construction
loan.
At June
30, 2010, our largest outstanding residential construction loan was for
$440,000, of which $267,000 was outstanding. At June 30, 2010, our largest
outstanding commercial construction loan was for $500,000, of which $468,000 was
outstanding, and is secured by a commercial office building. These loans
were performing in accordance with their original terms at June 30,
2010.
Commercial
Loans. We occasionally make commercial business loans to professionals,
sole proprietorships and small businesses in our market area. We extend
commercial business loans on an unsecured basis and secured basis, the maximum
amount of which is limited by our in-house loans to one borrower
limit.
We
originate secured and unsecured commercial lines of credit to finance the
working capital needs of businesses to be repaid by seasonal cash flows.
Commercial lines of credit secured by nonresidential real estate are
adjustable-rate loans whose rates are based on the prime interest rate and
adjust monthly. Commercial lines of credit secured by nonresidential real estate
have a maximum term of five years and a maximum loan-to-value ratio of 80% of
the pledged collateral when the collateral is commercial real estate. We also
originate commercial lines of credit secured by marketable securities and
unsecured lines of credit. These lines of credit, as well as certain
commercial lines of credit secured by nonresidential real estate, require that
only interest be paid on a monthly or quarterly basis and have a maximum term of
five years.
We also
originate secured and unsecured commercial loans. Secured commercial loans are
generally collateralized by nonresidential real estate, marketable securities,
accounts receivable, inventory, industrial/commercial machinery and equipment
and furniture and fixtures. We originate both fixed-rate and adjustable-rate
commercial loans with terms up to 20 years for secured loans and up to five
years for unsecured loans. Adjustable-rate loans are based on prime and adjust
either monthly or annually. Where the borrower is a corporation, partnership or
other entity, we generally require significant equity holders to be
co-borrowers, and in cases where they are not co-borrowers, we generally require
personal guarantees from significant equity holders.
7
When
making commercial business loans, we consider the financial statements and/or
tax returns of the borrower, the borrower’s payment history of both corporate
and personal debt, the debt service capabilities of the borrower, the projected
cash flows of the business, the viability of the industry in which the customer
operates and the value of the collateral.
At June
30, 2010, our largest commercial loan was a $2,474,000 loan secured by the
accounts receivable of a public utilities company. This loan was performing
in accordance with its original terms at June 30, 2010.
Consumer
Loans. We offer a
variety of consumer loans, primarily home equity loans and lines of credit, and,
to a much lesser extent, loans secured by savings accounts or certificates of
deposit (share loans), new farm and garden equipment, automobile and
recreational vehicle loans and secured and unsecured personal
loans.
The
procedures for underwriting consumer loans include an assessment of the
applicant’s payment history on other debts and ability to meet existing
obligations and payments on the proposed loan. Although the applicant’s
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral, if any, to the proposed
loan amount.
We
generally offer home equity loans and lines of credit with a maximum combined
loan to value ratio of 90%. Our lowest interest rates are generally
offered to customers with a maximum combined loan to value ratio of 80% or
less. Home equity lines of credit have adjustable-rates of interest that
are based on the prime interest rate. Home equity lines of credit generally
require that only interest be paid on a monthly basis and have terms up to 20
years. Interest rates on these loans typically adjust monthly. We offer
fixed-rate and adjustable-rate home equity loans. Home equity loans with
fixed-rates have terms that range from one to 15 years. Home equity loans with
adjustable-rates have terms that range from 1 to 30 years. Interest rates on
these loans are based on the prime interest rate. We hold a first mortgage
position on most of the homes that secure our home equity loans and home equity
lines of credit.
We offer
loans secured by new and used vehicles. These loans have fixed interest rates
and generally have terms up to five years.
We offer
loans secured by new and used boats, motor homes, campers and motorcycles. We
offer fixed and adjustable-rate loans for new motor homes and boats with terms
up to 20 years for adjustable-rate loans and up to 10 years for fixed-rate
loans. We offer fixed-rate loans for all other new and used recreational
vehicles with terms up to 10 years for campers and five years for
motorcycles.
We offer
secured consumer loans with fixed interest rates and terms up to 10 years and
secured lines of credit with adjustable-rates based on the prime rate with terms
up to five years. We also offer fixed-rate unsecured consumer loans and lines of
credit with terms up to five years. For more information on our loan
commitments, see “Management’s Discussion and Analysis of
Financial Condition and
Results of Operations—Risk Management—Liquidity
Management.”
Loan
Underwriting Risks
Adjustable-Rate
Loans. While we
anticipate that adjustable-rate loans will better offset the adverse effects of
an increase in interest rates as compared to fixed-rate mortgages, the increased
mortgage payments required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and defaults.
The marketability of the underlying property also may be adversely affected in a
high interest rate environment. In addition, although adjustable-rate mortgage
loans help make our loan portfolio more responsive to changes in interest rates,
the extent of this interest sensitivity is limited by the annual and lifetime
interest rate adjustment limits.
8
Multi-Family and
Nonresidential Real Estate and Land Loans. Loans secured by
multi-family and nonresidential real estate generally have larger balances and
involve a greater degree of risk than one- to four-family residential mortgage
loans. Of primary concern in multi-family and nonresidential real estate lending
is the borrower’s creditworthiness and the feasibility and cash flow potential
of the project. Payments on loans secured by income properties often depend on
successful operation and management of the properties. As a result, repayment of
such loans may be subject to a greater extent than residential real estate loans
to adverse conditions in the real estate market or the economy. To monitor cash
flows on income properties, we require borrowers and loan guarantors of
loan relationships totaling more than $1.0 million, in the aggregate, to provide
annual financial statements and/or tax returns. In reaching a decision on
whether to make a multi-family and nonresidential real estate loan, we consider
the net operating income of the property, the borrower’s expertise, credit
history and profitability and the value of the underlying property. We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.20x. Environmental surveys and inspections are obtained
when circumstances suggest the possibility of the presence of hazardous
materials.
We underwrite all loan participations
to our own underwriting standards and will not participate in a loan unless each
participant has at least a 10% interest in the loan. In addition, we also
consider the financial strength and reputation of the lead lender. To monitor
cash flows on loan participations, we require the lead lender to provide us with
annual financial statements from the borrower. Generally, we also conduct an
annual internal loan review for loan participations.
Construction
Loans.
Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated
cost (including interest) of construction. During the construction phase, a
number of factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, we may be required to advance
funds beyond the amount originally committed to permit completion of the
building. If the estimate of value proves to be inaccurate, we may be
confronted, at or before the maturity of the loan, with a building having a
value which is insufficient to assure full repayment. If we are forced to
foreclose on a building before or at completion due to a default, there can be
no assurance that we will be able to recover all of the unpaid balance of, and
accrued interest on, the loan as well as related foreclosure and holding
costs.
Commercial
Loans. Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property the value of which tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower’s ability to make repayment from the cash flow of
the borrower’s business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over
time, may be difficult to appraise and may fluctuate in value.
Consumer
Loans. Consumer loans may entail
greater risk than do residential mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by assets that depreciate rapidly.
In such cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan collections depend on
the borrower’s continuing financial stability, and therefore are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.
Loan
Originations, Purchases and Sales. Loan originations come from
a number of sources. The primary source of loan originations are existing
customers, walk-in traffic, advertising and referrals from customers. We
advertise on television and on radio and in newspapers that are widely
circulated in Dearborn County, Indiana. Accordingly, when our rates are
competitive, we attract loans from throughout Dearborn County. We occasionally
purchase loans and participation interests in loans to supplement our
origination efforts.
9
We generally originate loans for our
portfolio, but our current practice is to sell to the secondary market almost
all newly originated conforming fixed-rate, 15-, 20- and 30-year one- to
four-family residential real estate loans and to hold in our portfolio
fixed-rate loans with 10-year terms or less and adjustable-rate loans. Our
decision to sell loans is based on prevailing market interest rate conditions
and interest rate risk management. Generally, loans are sold to Freddie Mac with
servicing retained.
Loan Approval
Procedures and Authority. Our lending activities
follow written, non-discriminatory underwriting standards and loan origination
procedures established by our board of directors and management. The board has
granted the Management Mortgage Loan Committee (comprised of the President,
Executive Vice President and the Senior Vice President, Lending) with loan
approval authority for mortgage loans up to $200,000 and to the Board Loan
Committee up to $1.0 million.
The board
has granted authority to approve consumer loans to certain employees up to
prescribed limits, depending on the officer’s experience and tenure. The board
also granted loan approval authority to the Management Consumer Loan Committee,
consisting of the President and the Executive Vice President, the Senior Vice
President, Lending and two other experienced lenders. Any two members of the
Committee may approve consumer loans secured by real estate up to
$250,000, and consumer loans secured by assets other than real estate up to
$100,000. The board of directors has also granted loan approval authority to the
Management Commercial Loan Committee, consisting of the President, the Executive
Vice President, the Senior Vice President, Lending. Any two members of the
Committee may approve commercial loans secured by real estate up to $250,000,
commercial loans secured by assets other than real estate up to $50,000 and
unsecured commercial loans up to $25,000. The Management Commercial Loan
Committee may approve commercial loans secured by real estate up to $500,000,
commercial loans secured by assets other than real estate up to $100,000 and
unsecured commercial loans up to $50,000 with unanimous approval by the
Committee.
The Board
Loan Committee, consisting of the President, the Executive Vice President and
three to four other members of the board, may approve consumer and commercial
loans secured by real estate up to $1,000,000, consumer and commercial loans
secured by assets other than real estate up to $300,000 and unsecured consumer
commercial loans up to $100,000.
All loans
in excess of these limits must be approved by the full Board of
Directors.
Loans to One
Borrower. The maximum amount that we may lend to one borrower and the
borrower’s related entities generally is limited, by regulation, to 15% of our
unimpaired capital and surplus. At June 30, 2010, our general regulatory limit
on loans to one borrower was $7.8 million. On June 30, 2010, our largest lending
relationship was a $7.2 million multifamily real estate loan relationship.
The loans that comprise this relationship were performing according to their
original terms at June 30, 2010. In 2007, to reduce the risk of loss to
any one borrower, the Board established a loans to one borrower limit of 7.5% of
unimpaired capital and surplus. Any relationship in excess of 7.5% at the
time of implementation would have been grandfathered in and allowed to
continue.
Loan
Commitments. We issue commitments for fixed- and adjustable-rate mortgage
loans conditioned upon the occurrence of certain events. Commitments to
originate mortgage loans are legally binding agreements to lend to our
customers. Generally, our mortgage loan commitments expire after 30
days.
Investment
Activities
We have
legal authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies and municipal
governments, deposits at the Federal Home Loan Bank of Indianapolis and
certificates of deposit of federally insured institutions. Within certain
regulatory limits, we also may invest a portion of our assets in mutual funds.
We also are required to maintain an investment in Federal Home Loan Bank of
Indianapolis stock. While we have the authority under applicable law to invest
in derivative securities, our investment policy does not permit this investment.
We had no investments in derivative securities at June 30,
2010.
10
At June
30, 2010, our investment portfolio totaled $120.0 million and consisted
primarily of U.S. Government-sponsored entity securities, municipal bonds and
mortgage-backed securities issued primarily by Fannie Mae and Freddie Mac, and
securities of municipal governments.
At June
30, 2010, $62.1 million of our investment portfolio consisted of callable
securities. These securities were included in U.S. Government agency bonds and
municipal bonds. These securities contain either a one-time call option or
may be called anytime after the first call date. We face reinvestment risk with
callable securities, particularly during periods of falling market interest
rates when issuers of callable securities tend to call or redeem their
securities. Reinvestment risk is the risk that we may have to reinvest the
proceeds from called securities at lower rates of return than the rates paid on
the called securities.
Our
investment objectives are to provide and maintain liquidity, to establish an
acceptable level of interest rate and credit risk, to provide an alternate
source of low-risk investments when demand for loans is weak and to generate a
favorable return. The Investment Committee is responsible for the implementation
of the investment policy. The Management Investment Committee, consisting of the
Chief Executive Officer, the Chief Operating Officer, and the Chief
Financial Officer, is responsible for monitoring our investment performance.
Individual investment transactions, portfolio composition and performance are
reviewed by our board of directors monthly.
Deposit
Activities and Other Sources of Funds
General. Deposits, borrowings and
loan repayments are the major sources of our funds for lending and other
investment purposes. Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and money market conditions.
Deposit
Accounts.
Substantially all of our depositors are residents of the State of Indiana. We
attract deposits in our market area through advertising and through our website.
We offer a broad selection of deposit instruments, including noninterest-bearing
demand accounts (such as checking accounts), interest-bearing accounts (such as
NOW and money market accounts), regular savings accounts and certificates of
deposit. Municipal deposits comprise a substantial portion of our total
deposits. At June 30, 2010, $121.6 million, or 28.3% of our total deposits, were
municipal deposits. At June 30, 2010, we did not utilize brokered deposits.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of our deposit accounts, we consider the rates
offered by our competition, our liquidity needs, profitability to us, matching
deposit and loan products and customer preferences and concerns. We generally
review our deposit mix and pricing weekly. Our current strategy is to offer
competitive rates and to be in the middle of the market for rates on all types
of deposit products.
Borrowings. We may utilize advances from
the Federal Home Loan Bank of Indianapolis to supplement our supply of
investable funds. The Federal Home Loan Bank functions as a central reserve bank
providing credit for its member financial institutions. As a member, we are
required to own capital stock in the Federal Home Loan Bank of Indianapolis and
are authorized to apply for advances on the security of such stock and certain
of our whole first mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made under
several different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution’s net worth or on the
Federal Home Loan Bank’s assessment of the institution’s creditworthiness.
At June 30, 2010, $2.8 million was advanced from the Federal Home Loan
Bank at an interest rate of 3.2%.
Personnel
As of
June 30, 2010, we had 95 full-time employees and 14 part-time employees, none of
which are represented by a collective bargaining unit. We believe our
relationship with our employees is good.
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Subsidiaries
United
Community Bank has two subsidiaries: United Community Bank Financial Services,
Inc. and UCB Real Estate Management Holdings, LLC. United Community Bank
Financial Services, Inc. receives commissions from the sale of non-deposit
investment and insurance products. UCB Real Estate Management Holdings,
LLC owns and operates real estate that has been acquired through, or in lieu of,
foreclosure.
Regulation
and Supervision
General
As a federal mutual holding company,
United Community MHC is required by federal law to report to, and otherwise
comply with the rules and regulations of, the Office of Thrift Supervision
(“OTS”). United Community Bancorp, as a federally chartered corporation, is also
subject to reporting to and regulation by the OTS. United Community Bank
is subject to extensive regulation, examination and supervision by the OTS, as
its primary federal regulator, and the Federal Deposit Insurance Corporation
(“FDIC”), as the deposit insurer. United Community Bank is a member of the
Federal Home Loan Bank System and, with respect to deposit insurance, of the
Deposit Insurance Fund managed by the FDIC. United Community Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions. The OTS and/or the FDIC conduct periodic examinations to
test United Community Bank’s safety and soundness and compliance with various
regulatory requirements.
This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors. The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes. Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on United Community MHC, United Community Bancorp, United
Community Bank and their operations.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
“Dodd-Frank Act’) makes extensive changes in the regulation of federal savings
banks such as United Community Bank. Under the Dodd-Frank Act, the OTS
will be eliminated. Responsibility for the supervision and regulation of
federal savings banks will be transferred to the Office of the Comptroller of
the Currency, which is the agency that is currently primarily responsible for
the regulation and supervision of national banks. The Office of the
Comptroller of the Currency will assume responsibility for implementing and
enforcing many of the laws and regulations applicable to federal savings banks.
The transfer of regulatory functions will take place over a transition period of
up to one year from the enactment date of July 21, 2010 (subject to a possible
six month extension). Over the same transition period, responsibility for
the regulation and supervision of savings and loan holding companies will be
transferred to the Federal Reserve Board, which currently supervises bank
holding companies. Additionally, the Dodd-Frank Act creates a new Consumer
Financial Protection Bureau as an independent bureau of the Federal Reserve
Board. The Consumer Financial Protection Bureau will assume responsibility
for the implementation of the federal financial consumer protection and fair
lending laws and regulations, a function currently assigned to prudential
regulators, and will have authority to impose new requirements. However,
institutions of less than $10 billion in assets, such as United Community Bank,
will continue to be examined for compliance with consumer protection and fair
lending laws and regulations by, and be subject to the enforcement authority of,
their prudential regulator.
As part
of the Dodd-Frank Act regulatory restructuring, the Office of Thrift
Supervision’s authority over savings and loan holding companies, such as United
Community MHC and United Community Bancorp, will be transferred to the Federal
Reserve Board, which is the agency that regulates and supervises bank holding
companies.
12
Certain
regulatory requirements currently applicable to United Community Bank and to
United Community MHC are referred to below or elsewhere herein. The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth below and elsewhere in this
document does not purport to be a complete description of such statutes and
regulations and their effects on United Community Bank and United Community MHC
and is qualified in its entirety by reference to the actual statutes and
regulations.
Holding
Company Regulation
General. United Community MHC
is a savings and loan holding company within the meaning of federal law.
As such, United Community MHC is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements. In
addition, the OTS has enforcement authority over United Community MHC and its
non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to United Community Bank.
The Dodd-Frank Act regulatory
restructuring will transfer the responsibility for regulating and supervising
savings and loan holding companies to the Federal Reserve Board.
Activities
Restrictions Applicable to Mutual Holding Companies. Pursuant to federal
law and OTS regulations, a mutual holding company, such as United Community MHC,
may engage in the following activities: (i) investing in the stock of a
savings association; (ii) acquiring a mutual association through the merger of
such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Association Holding Company Act, unless the
OTS, by regulation, prohibits or limits any such activity for savings and loan
holding companies; or (B) in which multiple savings and loan holding companies
were authorized (by regulation) to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the OTS.
The Gramm-Leach Bliley Act of 1999 was
designed to modernize the regulation of the financial services industry by
expanding the ability of bank holding companies to affiliate with other types of
financial services companies such as insurance companies and investment banking
companies. The legislation also expanded the activities permitted for
mutual savings and loan holding companies to also include any activity permitted
a “financial holding company” under the legislation, including a broad array of
insurance and securities activities.
Federal law prohibits a savings and
loan holding company, including a federal mutual holding company, from, directly
or indirectly or through one or more subsidiaries, acquiring more than 5% of the
voting stock of another savings institution, or holding company thereof, without
prior written approval of the OTS or from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company or savings
association. A savings and loan holding company is also prohibited from
acquiring more than 5% of a company engaged in activities other than those
authorized by federal law; or acquiring or retaining control of a depository
institution that is not insured by the FDIC. In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of United
Community MHC and the institution involved, the effect of the acquisition on the
risk to the insurance funds, the convenience and needs of the community and
competitive factors.
The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, except: (i) the approval of interstate supervisory acquisitions
by savings and loan holding companies; and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions. The states vary
in the extent to which they permit interstate savings and loan holding company
acquisitions.
13
Although savings and loan holding
companies are not currently subject to regulatory capital requirements or
specific restrictions on the payment of dividends or other capital
distributions, federal regulations do prescribe such restrictions on subsidiary
savings institutions as described below. United Community Bank must notify
the OTS 30 days before declaring any dividend. In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
Capital
Requirements.
Savings and loan holding companies are not currently subject to specific
regulatory capital requirements. The Dodd-Frank Act, however, requires the
Federal Reserve Board to promulgate consolidated capital requirements for
depository institution holding companies that are no less stringent, both
quantitatively and in terms of components of capital, than those applicable to
institutions themselves. There is a five year transition period from the
July 21, 2010 date of enactment of the Dodd-Frank Act before the capital
requirements will apply to savings and loan holding companies. The
Dodd-Frank Act also requires the Federal Reserve Board to promulgate regulations
implementing the “source of strength” policy that holding companies act as a
source of strength to their subsidiary depository institutions by providing
capital liquidity and other support in times of financial stress.
Stock Holding
Company Subsidiary Regulation. The OTS has adopted
regulations governing the two-tier mutual holding company form of organization
and mid-tier stock holding companies that are controlled by mutual holding
companies. Under these rules, the stock holding company subsidiary holds
all the shares of the mutual holding company’s savings association subsidiary
and issues the majority of its own shares to the mutual holding company
parent. In addition, the stock holding company subsidiary is permitted to
engage in activities that are permitted for its mutual holding company parent
subject to the same terms and conditions. Finally, OTS regulations
maintain that the stock holding company subsidiary must be federally chartered
for supervisory reasons.
Acquisition of
United Community MHC. Under the Federal
Change in Control Act, a notice must be submitted to the OTS if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company or savings institution. Under certain
circumstances, a change of control may occur, and prior notice is required, upon
the acquisition of 10% or more of the outstanding voting stock of United
Community MHC or the institution, unless the OTS has found that the acquisition
will not result in a change of control of United Community MHC. Under
the Change in Control Act, the OTS generally has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition. Any company that acquires
control would then be subject to regulation as a savings and loan holding
company.
Waivers of
Dividends. OTS regulations require
United Community MHC to notify the OTS if it proposes to waive receipt of
dividends from United Community Bancorp. The OTS reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the waiver would not be detrimental to the safe and sound
operation of the savings association; and (ii) the mutual holding company’s
board of directors determines that such waiver is consistent with such
directors’ fiduciary duties to the mutual holding company’s members. The OTS
will not consider the amount of dividends waived by the mutual holding company
in determining an appropriate exchange ratio in the event of a full conversion
to stock form. Dividends paid to shareholders on May 10, 2010; February 4,
2010; November 5, 2009; and August 6, 2009 were waived by United Community
MHC.
The Dodd-Frank Act addressed the issue
of dividend waivers in the context of the transfer of the supervision of savings
and loan holding companies to the Federal Reserve Board. The Dodd-Frank
Act specified that dividends may be waived if certain conditions are met,
including that the Federal Reserve Board does not object after being given
written notice of the dividend and proposed waiver. The Dodd-Frank
Act indicates that the Federal Reserve Board may not object to such a waiver (i)
if the mutual holding company involved has, prior to December 1, 2009,
reorganized into a mutual holding company structure, engaged in a minority stock
offering and waived dividends; (ii) the board of directors of the mutual holding
company expressly determines that a waiver of the dividend is consistent with
its fiduciary duties to members and (iii) the waiver would not be detrimental to
the safe and sound operation of the savings association subsidiaries of the
holding company. The Federal Reserve has not previously permitted dividend
waivers by mutual bank holding companies and may object to dividend waivers
involving mutual savings and loan holding companies, notwithstanding the
referenced language in the Dodd-Frank Act.
14
Conversion of
United Community MHC to Stock Form. OTS regulations permit
United Community MHC to convert from the mutual form of organization to the
capital stock form of organization. There can be no assurance when, if
ever, a conversion transaction will occur, and the Board of Directors has no
present intention or plan to undertake a conversion transaction. In a
conversion transaction, a new holding company would be formed as the successor
to United Community Bancorp, United Community MHC’s corporate existence would
end and certain depositors of United Community Bank would receive the right to
subscribe for additional shares of the new holding company. In a
conversion transaction, each share of common stock held by stockholders other
than United Community MHC would be automatically converted into a number of
shares of common stock of the new holding company based on an exchange ratio
determined at the time of conversion that ensures that stockholders other than
United Community MHC own the same percentage of common stock in the new holding
company as they owned in United Community Bancorp immediately before
conversion. The total number of shares held by stockholders other than
United Community MHC after a conversion transaction would be increased by any
purchases by such stockholders in the stock offering conducted as part of the
conversion transaction.
The Dodd-Frank Act provides that waived
dividends will also not be considered in determining the appropriate exchange
ratio after the transfer of responsibilities to the Federal Reserve Board for
provided that the mutual holding company involved was formed, engaged in a
minority offering and waived dividends prior to December 1, 2009. United
Community MHC was formed, engaged in a minority stock offering and waived
dividends prior to December 1, 2009.
Federal
Savings Institution Regulation
Business
Activities.
The activities of federal savings associations are governed by federal
law and regulations. These laws and regulations delineate the nature and
extent of the activities in which federal savings banks may engage. In
particular, certain lending authority for federal savings institutions, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution’s capital or assets.
Capital
Requirements.
The OTS capital regulations require savings institutions to meet three
minimum capital standards: a 1.5% tangible capital to total assets ratio;
a 4% Tier 1 capital to total assets leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system); and an 8%
risk-based capital ratio. In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS system) and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard. The OTS regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
The risk-based capital standard for
savings institutions requires the maintenance of Tier 1 (core) and total capital
(which is defined as core capital and supplementary capital) to risk-weighted
assets of at least 4% and 8%, respectively. In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet
activities, recourse obligations, residual interests and direct credit
substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by
the OTS capital regulation based on the risks believed inherent in the type of
asset. Core (Tier 1) capital is generally defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus, and minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain mortgage servicing
rights and credit card relationships. The components of supplementary
capital (Tier 2 capital) currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses,
limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values. Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core
capital.
15
The OTS also has authority to establish
individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is or may become inadequate in
light of the particular circumstances. At June 30, 2010, United Community
Bank met each of its capital requirements.
Prompt Corrective
Regulatory Action.
The OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution’s degree of undercapitalization. Generally, a savings
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
“undercapitalized.” A savings institution that has a total risk-based
capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be “significantly undercapitalized”
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be “critically undercapitalized.” Subject to
a narrow exception, the OTS is required to appoint a receiver or conservator
within specified time frames for an institution that is “critically
undercapitalized.” The regulation also provides that a capital restoration
plan must be filed with the OTS within 45 days of the date a savings
institution is deemed to have received notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.”
Compliance with the plan must be guaranteed by any parent holding company in an
amount of up to the lesser of 5% of the savings association’s total assets
when it was deemed to be undercapitalized or the amount necessary to achieve
compliance with applicable capital regulations. In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion. The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors. Significantly and
undercapitalized institutions are subject to additional mandatory and
discretionary restrictions.
Insurance of
Deposit Accounts.
The Bank’s deposits are insured up to applicable limits by the Deposit
Insurance Fund of the FDIC. The Deposit Insurance Fund is the successor to
the Bank Insurance Fund and the Savings Association Insurance Fund, which were
merged in 2006. Under the FDIC’s risk-based assessment system, insured
institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors, with less
risky institutions paying lower assessments. An institution’s assessment
rate depends upon the category to which it is assigned. For 2010, the
Federal Deposit Insurance Corporation first establishes an institution’s initial
base assessment rate. This initial base assessment rate ranges, depending
on the risk category of the institution, from 12 to 45 basis points. The
Federal Deposit Insurance Corporation then adjusts the initial base assessment
(higher or lower) to obtain the total base assessment rate. The
adjustments to the initial base assessment rate are based upon an institution’s
levels of unsecured debt, secured liabilities, and brokered deposits. The
total base assessment rate ranges from 7 to 77.5 basis points of the
institution’s deposits. No institution may pay a dividend if in default of the
federal deposit insurance assessment.
The
Dodd-Frank Act requires the FDIC to amend its procedures to base assessments on
total assets less tangible equity rather than deposits. It is uncertain
how quickly that will occur.
The FDIC
imposed on all insured institutions a special emergency assessment of five basis
points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at
ten basis points of an institution’s deposit assessment base), in order to cover
losses to the Deposit Insurance Fund. That special assessment was collected on
September 30, 2009. The FDIC provided for similar assessments during
the final two quarters of 2009, if deemed necessary.
In lieu
of further special assessments, however, the Federal Deposit Insurance
Corporation required insured institutions to prepay estimated quarterly
risk-based assessments for the fourth quarter of 2009 through the fourth quarter
of 2012. This pre-payment was due on December 30, 2009. The
assessment rate for the fourth quarter of 2009 and for 2010 was based on each
institution’s total base assessment rate for the third quarter of 2009, modified
to assume that the assessment rate in effect on September 30, 2009 had been in
effect for the entire third quarter, and the assessment rate for 2011 and 2012
will be equal to the modified third quarter assessment rate plus an additional 3
basis points. In addition, each institution’s base assessment rate for
each period was calculated using its third quarter assessment base, adjusted
quarterly for an estimated 5% annual growth rate in the assessment base through
the end of 2012. Our prepayment amount was approximately $1.9
million. The prepayment was recorded as a prepaid expense asset as of
December 30, 2009. As of December 31, 2009 and each quarter thereafter, a
change to earnings will be recorded for each regular assessment with an
offsetting credit to the prepaid asset.
16
Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts. That level of coverage was made permanent by the
Dodd-Frank Act.
In addition, the FDIC adopted an
optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest
bearing transaction accounts would receive unlimited insurance coverage until
June 30, 2010, subsequently extended to December 31, 2010, and certain
senior unsecured debt issued by institutions and their holding companies between
October 13, 2008 and December 31, 2009 would be guaranteed by the FDIC
through June 30, 2012, or in some cases, December 31, 2012.
United Community Bank and its parent companies made the business decision to
participate in both programs. The Dodd-Frank Act adopted unlimited coverage for
certain non-interest bearing transactions accounts for January 1, 2011 through
December 31, 2012, with no apparent opt out option.
In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund. That payment is established quarterly and during
the four quarters ending June 30, 2010 averaged 1.05 basis points of assessable
deposits.
The FDIC has authority to increase
insurance assessments. A significant increase in insurance premiums would
likely have an adverse effect on the operating expenses and results of
operations of United Community Bank. Management cannot predict what
insurance assessment rates will be in the future.
Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the OTS (or the Office of the Comptroller of the Currency, after the
Dodd-Frank Act regulatory restructuring). The management of United
Community Bank does not know of any practice, condition or violation that might
lead to termination of deposit insurance.
Loans to One
Borrower.
Federal law provides that savings institutions are generally subject to
the limits on loans to one borrower applicable to national banks.
Generally, subject to certain exceptions, a savings institution may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of its unimpaired capital and surplus. An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral.
QTL
Test.
Federal law requires savings institutions to meet a qualified thrift
lender test. Under the test, a savings association is required to either
qualify as a “domestic building and loan association” under the Internal Revenue
Code or maintain at least 65% of its “portfolio assets” (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
“qualified thrift investments” (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period. Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered “qualified thrift investments.”
A savings institution that fails the
qualified thrift lender test is subject to certain operating restrictions.
The Dodd-Frank Act subjects violations of the qualified thrift lender test to
possible enforcement action for violation of law and imposes dividend
restrictions on violating institutions.
As of June 30, 2010, United Community
Bank met the qualified thrift lender test.
17
Limitation on
Capital Distributions. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger. Under the regulations, an
application to and prior approval of the OTS is required prior to any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under OTS regulations (i.e., generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS.
If an application is not required, the institution must still provide prior
notice to the OTS of the capital distribution if, like United Community Bank, it
is a subsidiary of a holding company. In the event United Community Bank’s
capital fell below its regulatory requirements or the OTS notified it that it
was in need of increased supervision, United Community Bank’s ability to make
capital distributions could be restricted. In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice. Federal law
further provides that no insured depository institution may pay a dividend that
causes it to fall below any applicable regulatory capital requirement or if it
is in default of its FDIC deposit insurance assessment.
Standards for
Safety and Soundness. The federal banking agencies
have adopted Interagency Guidelines prescribing Standards for Safety and
Soundness. The guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired. If the
OTS determines that a savings institution fails to meet any standard prescribed
by the guidelines, the OTS may require the institution to submit an acceptable
plan to achieve compliance with the standard.
Transactions with
Related Parties.
United Community Bank’s authority to engage in transactions with
“affiliates” (e.g., any entity that controls or is under common control with an
institution, including United Community MHC, United Community Bancorp and any
non-savings institution subsidiaries) is limited by federal law. The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution. The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution’s capital and surplus. Certain transactions
with affiliates are required to be secured by collateral in an amount and of a
type specified by federal law. The purchase of low quality assets from
affiliates is generally prohibited. The transactions with affiliates must
be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a
subsidiary.
The Sarbanes-Oxley Act of 2002
generally prohibits loans by a company to its executive officers and
directors. However, the law contains a specific exception for loans by
United Community Bank to its executive officers and directors in compliance with
federal banking laws. Under such laws, United Community Bank’s authority
to extend credit to executive officers, directors and 10% shareholders
(“insiders”), as well as entities such persons control, is limited. The
law limits both the individual and aggregate amount of loans United Community
Bank may make to insiders based, in part, on United Community Bank’s capital
position and requires certain board approval procedures to be followed.
Such loans are required to be made on terms substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment. There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees.
Additional restrictions apply to loans by United Community Bank to its executive
officers.
Enforcement.
The OTS has primary enforcement responsibility over savings institutions
and has the authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution. Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases. The FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution. If action is not
taken by the Director, the FDIC has authority to take such action under certain
circumstances. Federal law also establishes criminal penalties for certain
violations. The Office of the Comptroller of the Currency will assume the
OTS’ enforcement authority over federal savings banks as part of the Dodd-Frank
Act regulatory restructuring.
18
Assessments.
Savings institutions are required to pay assessments to the OTS to fund
the agency’s operations. The general assessments, paid on a semi-annual
basis, are computed based upon the savings institution’s (including consolidated
subsidiaries) total assets, condition and complexity of portfolio. The OTS
assessments paid by United Community Bancorp and United Community Bank for the
fiscal year ended June 30, 2010 totaled $115,000. The Office of the
Comptroller of the Currency, which will be assuming the regulatory
responsibilities of the OTS as to federal savings banks, similarly supports its
operations through assessments on regulated institutions.
Federal
Home Loan Bank System
United
Community Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank
provides a central credit facility primarily for member institutions.
United Community Bank, as a member of the Federal Home Loan Bank, is required to
acquire and hold shares of capital stock in that Federal Home Loan Bank.
United Community Bank was in compliance with this requirement with an investment
in Federal Home Loan Bank stock at June 30, 2010 of $2.0 million.
The Federal Home Loan Banks are
required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs. These requirements, and
general adverse operating results, could reduce the amount of dividends that the
Federal Home Loan Banks pay to their members also result in the Federal Home
Loan Banks imposing a higher rate of interest on advances to their
members. If dividends were reduced, or interest on future Federal Home
Loan Bank advances increased, United Community Bank’s net interest income would
likely also be reduced.
Federal
Reserve System
The Federal Reserve Board regulations
require savings institutions to maintain non-interest earning reserves against
their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and
regular checking accounts). The regulations generally provide that
reserves be maintained against aggregate transaction accounts as follows:
a 3% reserve ratio is assessed on net transaction accounts up to and including
$55.2 million; a 10% reserve ratio is applied above $55.2 million. The
first $6.7 million of otherwise reservable balances (subject to adjustment by
the Federal Reserve Board) are exempted from the reserve requirements. The
amounts are adjusted annually. United Community Bank complies with the
foregoing requirements.
Financial Reform
Legislation
On July 21, 2010, President Obama
signed the Dodd-Frank Act. In addition to eliminating the OTS and creating
the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other
things, requires changes in the way that institutions are assessed for deposit
insurance, mandates the imposition of consolidated capital requirements on
savings and loan holding companies, requires that originators of securitized
loans retain a percentage of the risk for the transferred loans, reduces the
federal preemption afforded to federal savings associations and contains a
number of reforms related to mortgage origination. Many of the provisions
of the Dodd-Frank Act require the issuance of regulations before their impact on
operations can be fully assessed by management. However, there is a
significant possibility that the Dodd-Frank Act will, at a minimum, result in
increased regulatory burden and compliance costs for United Community Bank,
United Community Bancorp and United Community MHC.
19
Federal
and State Taxation
Federal
Income Taxation
General.
United Community Bank reports its income on a fiscal year basis using the
accrual method of accounting. The federal income tax laws apply to United
Community Bank in the same manner as to other corporations with some exceptions,
including the reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to United Community Bank.
United Community Bank’s federal income tax returns have been either audited
or closed under the statute of limitations through June 30, 2006. For its 2010
tax year, United Community Bank’s maximum federal income tax rate was
34%.
Bad Debt
Reserves. For fiscal years beginning before June 30, 1996, thrift
institutions that qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans, generally secured by interests in real
property improved or to be improved, under the percentage of taxable income
method or the experience method. The reserve for nonqualifying loans was
computed using the experience method. Federal legislation enacted in 1996
repealed the reserve method of accounting for bad debts and the percentage of
taxable income method for tax years beginning after 1995 and require savings
institutions to recapture or take into income certain portions of their
accumulated bad debt reserves. Approximately $748,000 of United Community Bank’s
accumulated bad debt reserves would not be recaptured into taxable income unless
United Community Bank makes a “non-dividend distribution” to United Community
Bancorp as described below.
Distributions.
If United Community Bank makes “non-dividend distributions” to United Community
Bancorp, the distributions will be considered to have been made from United
Community Bank’s unrecaptured tax bad debt reserves, including the balance of
its reserves as of December 31, 1987, to the extent of the “non-dividend
distributions,” and then from United Community Bank’s supplemental reserve for
losses on loans, to the extent of those reserves, and an amount based on the
amount distributed, but not more than the amount of those reserves, will be
included in United Community Bank’s taxable income. Non-dividend distributions
include distributions in excess of United Community Bank’s current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock and distributions in partial or complete
liquidation. Dividends paid out of United Community Bank’s current or
accumulated earnings and profits will not be so included in United Community
Bank’s taxable income.
The
amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Therefore, if United Community Bank makes a non-dividend
distribution to United Community Bancorp, approximately one and one-half times
the amount of the distribution not in excess of the amount of the reserves would
be includable in income for federal income tax purposes, assuming a 34.0%
federal corporate income tax rate. United Community Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserves.
State
Taxation
Indiana
Taxation. Indiana imposes an 8.5% franchise tax based on a financial
institution’s adjusted gross income as defined by statute. In computing adjusted
gross income, deductions for municipal interest, U.S. Government interest, the
bad debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. United Community Bank’s state franchise tax returns have
not been audited for the past five tax years.
20
Executive
Officers of United Community Bancorp and United Community Bank
Age
at
|
||||
Name
|
June 30,
2010
|
Principal Position
|
||
William
F. Ritzmann
|
62
|
President
and Chief Executive Officer
|
||
Elmer
G. McLaughlin
|
58
|
Executive
Vice President, Chief Operating Officer and Corporate
Secretary
|
||
James
W. Kittle
|
52
|
Senior
Vice President, Lending
|
||
Vicki
A. March, CPA
|
54
|
Senior
Vice President, Chief Financial Officer and Treasurer
|
||
W.
Michael McLaughlin
|
|
51
|
|
Senior
Vice President, Operations
|
Unless
otherwise noted, all officers have held the position described below for at
least the past five years.
William F. Ritzmann has served
as President and Chief Executive Officer of United Community Bank since the
merger of Perpetual Federal Savings and Loan Association and Progressive Federal
Savings Bank to form United Community Bank on April 12, 1999, and for United
Community Bancorp since its inception in March 2006. Before the merger,
Mr. Ritzmann served for 23 years as director, President and Managing Officer of
Progressive Federal Savings Bank. Mr. Ritzmann also serves on United
Community Bancorp’s Board of Directors and has served as a Director of the Bank
since 1975, which includes his term as a director of Progressive Federal Savings
Bank.
Elmer G. McLaughlin has served
as Executive Vice President and Chief Operating Officer of United Community Bank
since the merger of Perpetual Federal Savings and Loan Association and
Progressive Federal Savings Bank to form United Community Bank in April 1999,
and in the same positions with United Community Bancorp since its inception in
March 2006. Before the merger, Mr. McLaughlin served for nine years as
President, and 19 years as director of Perpetual Federal Savings and Loan
Association, and was Executive Vice President and head of operations and senior
loan officer of Perpetual Federal from 1978 until 1990. Mr. McLaughlin is
the brother of W. Michael McLaughlin, a Senior Vice President of United
Community Bank. Mr. McLaughlin is a Director of United Company Bancorp and
has served as a Director of United Community Bank since 1980, which includes his
term as a director of Perpetual Federal.
James W. Kittle has served as
Senior Vice President, Lending of the Bank since 1980.
Vicki A. March has served as
Chief Financial Officer, Treasurer and Senior Vice President, Finance of the
Bank, since 1999 and for United Community Bancorp since its inception in March
2006. Ms. March previously served as Treasurer of the Bank from 1980 to
1999.
W. Michael McLaughlin has
served as Senior Vice President, Operations of the Bank since 1983.
Item
1A. Risk Factors
An
investment in shares of our common stock involves various risks. Before
deciding to invest in our common stock, you should carefully consider the risks
described below in conjunction with the other information in this Annual Report
on Form 10-K, including the items included as exhibits. Our business,
financial condition and results of operations could be harmed by any of the
following risks or by other risks that have not been identified or that we may
believe are immaterial or unlikely. The value or market price of our
common stock could decline due to any of these risks. The risks discussed
below also include forward-looking statements, and our actual results may differ
substantially from those discussed in these forward-looking
statements.
21
Our
primary market area depends substantially on the gaming industry, and a downturn
in that industry could hurt our business and our prospects.
Our
business is concentrated in the Lawrenceburg, Indiana area. Lawrenceburg is the
site of a riverboat casino that opened in 1996. The economy of the Lawrenceburg
metropolitan area significantly depends on services and industries related to
gaming and tourism. Any event that negatively and materially impacts the gaming
and tourism industry will adversely impact the Lawrenceburg
economy.
Gaming
revenue is vulnerable to fluctuations in the national economy. There has been a
prolonged downturn in the national economy, however, its impact on Lawrenceburg
and its gaming industry has not been as significant as in other parts of the
country. Tax revenue from the gaming industry has decreased over the last
year, but not to the extent that it has affected civil services or other
areas.
A
continued deterioration in economic conditions generally, and a slowdown in
gaming and tourism activities in particular, could result in the following
consequences, any of which could adversely affect our business, financial
condition, results of operations and prospects and expose us to a greater risk
of loss:
|
•
|
Loan
delinquencies may increase;
|
|
•
|
Problem
assets and foreclosures may
increase;
|
|
•
|
Demand
for our products and services may decline;
and
|
|
•
|
Collateral
for loans made by us may decline in value, reducing the amount of money
that our customers may borrow against the collateral, and reducing the
value of assets and collateral associated with our
loans.
|
An
expansion of permissible gaming activities in other states, particularly in
Kentucky and/or Ohio, may lead to a decline in gaming revenue in Lawrenceburg,
Indiana, which could hurt our business and our prospects.
Lawrenceburg,
Indiana competes with other areas of the country for gaming revenue, and it is
possible that the expansion of gaming operations in other states, as a result of
changes in laws or otherwise, could significantly reduce gaming revenue in the
Lawrenceburg area. In 2009, a vote in the State of Ohio approved casino gaming
in several cities in the state, and the casinos are expected to open in
2012. The establishment of casino gaming in Ohio could have a substantial
adverse effect on gaming revenue in Lawrenceburg which would adversely affect
the Lawrenceburg economy and our business.
We
rely heavily on municipal deposits as a source of funds and a reduced level of
those deposits may hurt our profits.
Historically,
municipal deposits, consisting primarily of tax revenues from the local river
boat casino operations, have been a significant source of funds for our lending
and investment activities. At June 30, 2010, $121.6 million, or 28.3% of
our total deposits, consisted of municipal deposits. Municipal deposits are
generally short-term deposits and are generally considered rate-sensitive
instruments. Consequently, if our municipal deposits decrease to a level where
we would need to resort to other sources of funds for our lending and investment
activities, such as borrowings from the Federal Home Loan Bank of Indianapolis,
the interest expense associated with these other funding sources may be higher
than the rates we pay on the municipal deposits, which would hurt our
profits.
Our
income is subject to inherent risk.
Our
primary source of income is net interest income, which is the difference between
the interest income generated by our interest-earning assets (consisting
primarily of loans and, to a lesser extent, securities) and the interest expense
generated by our interest-bearing liabilities (consisting primarily of deposits
and, to a lesser extent, wholesale borrowings).
22
The level of net interest income is a
function of the average balance of our interest-earning assets, the average
balance of our interest-bearing liabilities, and the spread between the yield on
such assets and the cost of such liabilities. These factors are influenced by
both the pricing and mix of our interest-earning assets and our interest-bearing
liabilities which, in turn, are affected by such external factors as the local
economy, competition for loans and deposits, the monetary policy of the Federal
Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”) and
market interest rates.
The cost
of our deposits and short-term wholesale borrowings is largely based on
short-term interest rates, the level of which is driven by the FOMC. However,
the yields on our loans and securities are typically based on intermediate-term
or long-term interest rates, which are set by the market and generally vary
daily. The level of net interest income is therefore influenced by movements in
such interest rates, and the pace at which such movements occur. If the interest
rates on our interest-bearing liabilities increase at a faster pace than the
interest rates on our interest-earning assets, the result could be a reduction
in net interest income and with it, a reduction in our earnings. Our net
interest income and earnings would be similarly impacted were the interest rates
on its interest-earning assets to decline more quickly than the interest rates
on our interest-bearing liabilities.
In
addition, such changes in interest rates could affect our ability to originate
loans and attract and retain deposits, the fair value of our financial assets
and liabilities, and the average life of our loan and securities
portfolios.
Changes
in interest rates could also have an effect on the slope of the yield curve. A
flat to inverted yield curve could cause our net interest income and net
interest margin to contract, which could have a material adverse effect on our
net income and cash flows and the value of our assets.
Changes
in interest rates particularly affect the value of our securities portfolio.
Generally, the value of fixed-rate securities fluctuates inversely with changes
in interest rates. Unrealized gains and losses on securities available for sale
are reported as a separate component of equity, net of tax. Decreases in the
fair value of securities available for sale resulting from increases in interest
rates could have an adverse effect on stockholders’ equity. In addition, we
invest in callable securities that expose us to reinvestment risk,
particularly during periods of falling market interest rates when issuers
of callable securities tend to call or redeem their securities. Reinvestment
risk is the risk that we may have to reinvest the proceeds from called
securities at lower rates of return than the rates earned on the called
securities.
Our
increased emphasis on multi-family residential and nonresidential real estate
and land lending may expose us to increased lending risks.
At June
30, 2010, $129.7 million, or 41.2%, of our loan portfolio consisted of
multi-family residential and nonresidential real estate and land loans, compared
to $119.1 million or 43.0% of our loan portfolio at June 30, 2009. We have grown
our loan portfolio in recent years, particularly with respect to multi-family
residential and nonresidential real estate and land loans and intend to continue
to emphasize these types of lending. These types of loans generally expose a
lender to greater risk of non-payment and loss than one- to four-family
residential mortgage loans because repayment of the loans often depends on the
successful operation of the property and the income stream of the borrowers.
Such loans typically involve larger loan balances to single borrowers or groups
of related borrowers compared to one- to four-family residential mortgage loans.
In addition, since such loans generally entail greater credit risk than one- to
four-family residential mortgage loans, we may need to increase our allowance
for loan losses in the future to account for the likely increase in probable
incurred credit losses associated with the growth of such loans. Also, many of
our multi-family residential and nonresidential real estate and land borrowers
have more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan. At June 30,
2010, our largest multi-family residential, nonresidential real estate, or
land lending relationship was a $7.2 million multi-family residential real
estate loan relationship. This loan relationship was within our maximum
lending limit to one borrower at June 30, 2010.
23
Strong competition within our
market areas could hurt
our profits and slow growth.
We face
intense competition both in making loans and attracting deposits. This
competition has made it more difficult for us to make new loans and at times has
forced us to offer higher deposit rates. Price competition for loans and
deposits might result in us earning less on our loans and paying more on our
deposits, which would reduce net interest income. Competition also makes it more
difficult to grow loans and deposits. As of June 30, 2009, the most recent date
for which information is available, we held 37.48% of the deposits in Dearborn
County. Competition also makes it more difficult to hire and retain
experienced employees. Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in the future
as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry. Our
profitability depends upon our continued ability to compete successfully in our
market areas.
Recently
enacted legislative reforms and future regulatory reforms required by such
legislation could have a significant impact on our business, financial condition
and results of operations.
On July 21, 2010, President Obama
signed the Dodd-Frank Act into law. The Dodd-Frank Act will have a broad impact
on the financial services industry, including significant regulatory and
compliance changes. Many of the requirements called for in the Dodd-Frank Act
will be implemented over time and most will be subject to implementing
regulations over the course of several years. Given the uncertainty associated
with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full
extent of the impact such requirements will have on our operations is unclear.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact
on us. For example, the Dodd-Frank Act:
|
·
|
eliminates,
effective one year after the date of enactment, the federal prohibitions
on paying interest on demand deposits, thus allowing businesses to have
interest bearing checking accounts. Depending on competitive responses,
this significant change to existing law could have an adverse impact on
our interest expense;
|
|
·
|
broadens
the base for FDIC insurance assessments. Assessments will now be based on
the average consolidated total assets less tangible equity capital of a
financial institution;
|
|
·
|
permanently
increases the maximum amount of deposit insurance for banks, savings
institutions and credit unions to $250,000 per depositor, retroactive to
January 1, 2009, and non-interest bearing transaction accounts have
unlimited deposit insurance through December 31,
2013;
|
|
·
|
requires
publicly traded companies like us to give shareholders a non-binding vote
on executive compensation and so-called ‘‘golden parachute’’ payments in
certain circumstances;
|
|
·
|
authorizes
the SEC to promulgate rules that would allow stockholders to nominate
their own candidates using a company’s proxy materials, and the SEC has
recently promulgated such rules;
|
|
·
|
directs
the Federal Reserve Board to promulgate rules prohibiting excessive
compensation paid to bank holding company executives (regardless of
whether a company is publicly traded or
not);
|
|
·
|
creates
a new Consumer Financial Protection Bureau with broad powers to supervise
and enforce consumer protection laws. The Consumer Financial Protection
Bureau has broad rule-making authority for a wide range of consumer
protection laws that apply to all banks and savings institutions,
including the authority to prohibit ‘‘unfair, deceptive or abusive’’ acts
and practices. The Consumer Financial Protection Bureau has examination
and enforcement authority over all banks and savings institutions with
more than $10 billion in assets. Institutions with $10 billion or less in
assets, such as the Bank, will continued to be examined for compliance
with the consumer laws by their primary bank regulators;
and
|
|
·
|
weakens
the federal preemption rules that have been applicable for national banks
and federal savings associations, and gives state attorneys general the
ability to enforce federal consumer protection
laws.
|
24
In addition, the Dodd-Frank Act
restructures the existing regulatory regime for FDIC-insured depository
institutions. The Office of Thrift Supervision (the “OTS”) will be merged into
the Office of the Comptroller of the Currency (the “OCC”) over a one year
transition period (subject to a possible six month extension by the Secretary of
the Treasury). While our federal savings association charter is preserved,
federal thrifts will be regulated by the OCC, along with national banks and
federal branches and agencies of foreign banks. The Federal Reserve Board
will continue to supervise all bank holding companies and will assume
jurisdiction over savings and loan holding companies. The Dodd-Frank Act
codifies the Federal Reserve Board’s existing “source of strength” policy that
holding companies act as a source of strength to their insured institution
subsidiaries by providing capital, liquidity and other support in times of
distress.
Pursuant to the Dodd-Frank Act, the
Federal Reserve Board “may not” object to dividend waivers by mutual savings and
loan holding companies (i) if it would not be detrimental to safety and
soundness, (ii) the board of directors of the mutual holding company determines
that the waiver is consistent with its fiduciary duties and (iii) the mutual
holding company had been formed, engaged in a minority stock offering and waived
dividends prior to December 1, 2009. Nevertheless, it remains to be seen whether
the Federal Reserve Board objects to dividend waivers as it has done in the
past. If United Community MHC could not waive the payment of dividends by
United Community Bancorp (as it has done in the past), United Community Bancorp
may have toe reduce the rate of the dividends it pays to its
shareholders.
While it is difficult to predict at
this time what specific impact the Dodd-Frank Act and the related yet to be
written implementing rules and regulations will have on us, we expect that, at a
minimum, our operating and compliance costs will increase, and our interest
expense could increase, as a result of these new rules and
regulations.
We
are subject to certain risks in connection with growth strategy that included
the recent acquisition of three branch offices of Integra Bank.
On June
4, 2010, we acquired certain assets and liabilities of three branch offices of
Integra Bank, which contributed significantly to our growth over the past year.
It is possible that we could acquire other financial institutions, financial
service providers, or branches of banks in the future. However, our ability to
engage in future mergers and acquisitions depends on our ability to identify
suitable merger partners and acquisition opportunities, our ability to finance
and complete such transactions on acceptable terms and at acceptable prices, and
our ability to receive the necessary regulatory and, where required, shareholder
approvals.
Acquisitions,
such as our recent Integra Bank branch acquisition, involve a number of risks
and challenges, including:
|
•
|
Our
ability to integrate the branches and operations we acquire, and the
internal controls and regulatory functions into our current
operations;
|
|
•
|
The
diversion of management’s attention from existing
operations;
|
|
•
|
Our
ability to limit the outflow of deposits held by our new customers in the
acquired branches and to successfully retain and manage the loans we
acquire;
|
|
•
|
Our
ability to attract new deposits, and to generate new interest-earning
assets, in geographic areas we have not previously
served;
|
|
•
|
Our
success in deploying any cash received in a transaction into assets
bearing sufficiently high yields without incurring unacceptable credit or
interest rate risk;
|
|
•
|
Our
ability to control the incremental non-interest expense from the acquired
branches in a manner that enables us to maintain a favorable overall
efficiency ratio;
|
|
•
|
Our
ability to retain and attract the appropriate personnel to staff the
acquired branches and conduct any acquired
operations;
|
25
|
•
|
Our
ability to earn acceptable levels of interest and non-interest income,
including fee income, from the acquired branches;
and
|
|
•
|
Our
ability to address an increase in working capital requirements;
and
|
As with
any acquisition involving a financial institution, particularly one involving
the transfer of a large number of bank branches as in our Integra acquisition,
there may be business and service changes and disruptions that result in the
loss of customers or cause customers to close their accounts and move their
business to competing financial institutions. Integrating acquired branches is
an operation of substantial size and expense, and may be affected by general
market and economic conditions or government actions affecting the financial
industry
The
recent economic recession could result in increases in our level of
non-performing loans and/or reduce demand for our products and services, which
could have an adverse effect on our results of operations.
In recent
periods, there has been a decline in the housing and real estate markets and the
national economy has recently experienced a recession. Housing market conditions
have deteriorated nationally as evidenced by reduced levels of sales, increasing
inventories of houses on the market, declining house prices and an increase in
the length of time houses remain on the market. No assurance can be given that
these conditions will improve or will not worsen in the near term. Concerns over
inflation, energy costs, geopolitical issues, the availability and cost of
credit, the mortgage market and a declining real estate market have contributed
to increased volatility and diminished expectations for the economy and markets
going forward. This turbulence in the markets also has been largely attributable
to the fallout associated with a deteriorating market for subprime mortgage
loans and securities backed by such loans.
Dramatic
declines in the housing market, with falling home prices and increasing
foreclosures and unemployment, resulted in significant asset write-downs by
financial institutions, which have caused many financial institutions to seek
additional capital, to merge with other institutions and, in some cases, to
fail. These developments also have contributed to a substantial decrease in both
lending activities by banks and other financial institutions and activity in the
secondary residential mortgage loan market. If these conditions do not improve
or worsen, they could adversely affect our results of operations.
United
Community MHC’s majority control of United Community Bancorp’s common stock
enables it to exercise voting control over most matters put to a vote of
stockholders including preventing sale or merger transactions or a second-step
conversion transaction you may find advantageous.
United
Community MHC owns a majority of United Community Bancorp’s common stock and,
through its board of directors, exercises voting control over most matters put
to a vote of stockholders. The same directors and officers who manage United
Community Bancorp and United Community Bank also manage United Community MHC. As
a federally chartered mutual holding company, the board of directors of United
Community MHC must ensure that the interests of depositors of United Community
Bank are represented and considered in matters put to a vote of stockholders of
United Community Bancorp. Therefore, the votes cast by United Community MHC may
not be in your personal best interests as a stockholder. For example, United
Community MHC may exercise its voting control to defeat a stockholder nominee
for election to the board of directors of United Community Bancorp. In addition,
stockholders are not able to force a merger or second-step conversion
transaction without the consent of United Community MHC. Some stockholders may
desire a sale or merger transaction, since stockholders typically receive a
premium for their shares, or a second-step conversion transaction, since fully
converted institutions tend to trade at higher multiples than mutual holding
companies.
OTS
policy on remutualization transactions could prohibit acquisition of United
Community Bancorp, which may adversely affect our stock price.
Current
OTS regulations permit a mutual holding company to be acquired by a mutual
institution in a remutualization transaction. The possibility of a
remutualization transaction has resulted in a degree of takeover speculation for
mutual holding companies that is reflected in the per share price of mutual
holding companies’ common stock. However, the OTS has issued a policy statement
indicating that it views remutualization transactions as raising significant
issues concerning disparate treatment of minority stockholders and mutual
members of the target entity and raising issues concerning the effect on the
mutual members of the acquiring entity. Under certain circumstances, the OTS
intends to give these issues special scrutiny and reject applications providing
for the remutualization of a mutual holding company unless the applicant can
clearly demonstrate that the OTS’s concerns are not warranted in the particular
case. Should the OTS prohibit or otherwise restrict these transactions in the
future, our per share stock price may be adversely affected.
26
Anti-takeover provisions in our
charter restrict the accumulation of United Community Bancorp’s common stock,
which may adversely affect our stock price.
United
Community Bancorp’s charter provides that, for a period of five years from the
date of the reorganization, no person, other than United Community MHC, may
acquire directly or indirectly the beneficial ownership of more than 10.0% of
any class of any equity security of United Community Bancorp. In the event a
person acquires shares in violation of this charter provision, all shares
beneficially owned by such person in excess of 10.0% will be considered “excess
shares” and will not be counted as shares entitled to vote or counted as voting
shares in connection with any matters submitted to the stockholders for a vote.
This provision makes it more difficult and less attractive for stockholders to
acquire a significant amount of our common stock, which may adversely affect our
stock price.
OTS
regulations may restrict United Community Bank’s ability to make capital
distributions, which could limit our ability to pay dividends to our
shareholders.
United
Community Bank, our wholly-owned subsidiary, is the primary source of cash with
which we pay the cash dividend on our common stock. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends. Under the regulations, an application to and prior approval of
the OTS is required prior to any capital distribution if the institution does
not meet the criteria for “expedited treatment” of applications under OTS
regulations (i.e., generally, examination and Community Reinvestment Act ratings
in the two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with the OTS. If an application is not required, the
institution must still provide prior notice to the OTS of the capital
distribution if, like United Community Bank, it is a subsidiary of a holding
company. In the event United Community Bank’s capital falls below its regulatory
requirements or the OTS notifies it that it is in need of increased supervision,
United Community Bank’s ability to make capital distributions, including cash
dividends, could be restricted, thereby eliminating the primary source of cash
with which we pay our dividend to our shareholders.
Our
mutual holding company structure limits our ability to raise additional equity
capital.
Even
though we are already well capitalized, our mutual holding company structure
limits our ability to raise additional equity capital without undertaking a
second-step conversion transaction because we cannot issue stock in an amount
that would cause United Community MHC to own less than a majority of our
outstanding shares. Currently, United Community MHC owns
approximately 59% of our outstanding shares. In addition, any stock
issuance by us must be approved by the OTS and must be structured in a manner
similar to a mutual to stock conversion, including the stock purchase priorities
accorded to members of the mutual holding company, unless otherwise approved by
the Office of Thrift Supervision. These requirements limit our
ability to control the timing and structure of a stock offering.
Our
asset valuation may include methodologies, estimations and assumptions that are
subject to differing interpretations and could result in changes to asset
valuations that may materially adversely affect our results of operations or
financial condition.
We must
use estimates, assumptions, and judgments when financial assets and liabilities
are measured and reported at fair value. Assets and liabilities carried at fair
value inherently result in a higher degree of financial statement volatility.
Fair values and the information used to record valuation adjustments for certain
assets and liabilities are based on quoted market prices and/or other observable
inputs provided by independent third-party sources, when available. When such
third-party information is not available, we estimate fair value primarily by
using cash flows and other financial modeling techniques utilizing assumptions
such as credit quality, liquidity, interest rates and other relevant inputs.
Changes in underlying factors, assumptions, or estimates in any of these areas
could materially impact our future financial condition and results of
operations.
27
During
periods of market disruption, including periods of significantly rising or high
interest rates, rapidly widening credit spreads or illiquidity, it may be
difficult to value certain of our assets if trading becomes less frequent and/or
market data becomes less observable. There may be certain asset classes that
were in active markets with significant observable data that become illiquid due
to the current financial environment. In such cases, certain asset valuations
may require more subjectivity and management judgment. As such, valuations may
include inputs and assumptions that are less observable or require greater
estimation. Further, rapidly changing and unprecedented credit and equity market
conditions could materially impact the valuation of assets as reported within
our consolidated financial statements, and the period-to-period changes in value
could vary significantly. Decreases in value may have a material adverse effect
on our results of operations or financial condition.
UCB
relies on other companies to provide key components of its business
infrastructure.
Third
party vendors provide key components of United Community Bancorp’s business
infrastructure such as internet connections, network access and fund
distribution. While United Community Bancorp has selected these third party
vendors carefully, its does not control their actions. Any problems caused by
these third parties, including those which result from their failure to provide
services for any reason or their poor performance of services, could adversely
affect United Community Bancorp’s ability to deliver products and services to
its customers and otherwise to conduct its business. Replacing these third party
vendors could also entail significant delay and expense.
Item
1B. Unresolved Staff Comments
Not
applicable.
28
Item 2. Properties
The following table sets forth the
location of the Company’s office facilities at June 30, 2010, and certain other
information relating to these properties at that date.
Location
|
Year
Opened
|
Owned/
Leased
|
Date of Lease
Expiration
|
Net Book
Value
as of
June 30, 2010
|
||||||||
Main
Office:
|
||||||||||||
92
Walnut Street
|
2004
|
Owned
|
__
|
$ | 1,324,000 | |||||||
Lawrenceburg,
Indiana 47025
|
||||||||||||
Full-Service
Branches:
|
||||||||||||
215
W. Eads Parkway
|
1914
|
Owned
|
__
|
359,000 | ||||||||
Lawrenceburg,
Indiana 47025
|
||||||||||||
19710
Stateline Road
|
2000
|
Owned
|
__
|
689,000 | ||||||||
Lawrenceburg,
Indiana 47025
|
||||||||||||
447
Bielby Road
|
1999
|
Leased
|
2/2011
|
__
|
||||||||
Lawrenceburg,
Indiana 47025
|
||||||||||||
500
Green Boulevard
|
2006
|
Owned
|
__
|
1,106,000 | ||||||||
Aurora,
Indiana 47001
|
||||||||||||
7600
Frey Road
|
2006
|
Owned
|
__
|
1,227,000 | ||||||||
St.
Leon, Indiana 47012
|
||||||||||||
106
Mill Street
|
2010
|
Owned
|
__
|
365,000 | ||||||||
Milan,
Indiana 47031 (1)
|
||||||||||||
420
South Buckeye
|
2010
|
Owned
|
__
|
395,000 | ||||||||
Osgood,
Indiana 47037 (1)
|
||||||||||||
111
East U.S. 50
|
2010
|
Owned
|
__
|
387,000 | ||||||||
Versailles,
Indiana 47042 (1)
|
||||||||||||
Other
Properties:
|
||||||||||||
Corner
of State Route 350 & State Route 101
|
Future
|
Owned(2)
|
__
|
135,000 | ||||||||
Milan,
Indiana 47031
|
(1)
|
Acquired
from Integra Bank National Association on June 4, 2010.
|
(2)
|
Land
only.
|
Item 3. Legal Proceedings
Periodically,
there have been various claims and lawsuits against us, such as claims to
enforce liens and contracts, condemnation proceedings on properties in which we
hold security interests, claims involving the making and servicing of real
property loans and other issues incident to our business. We are not party
to any pending legal proceedings that we believe would have a material adverse
effect on our financial condition, results of operations or cash
flows.
29
Item 4. [Removed and
Reserved]
PART
II
Item 5.
|
Market for the
Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchasers of
Equity Securities
|
The
Company’s common stock, par value $0.01 per share, is traded on the Nasdaq
Global Market under
the symbol “UCBA.” On June 30, 2009, there were 707 holders of record of the
Company’s common stock. The Company began paying quarterly dividends during the
fourth quarter of fiscal year 2006. The Company’s ability to pay dividends is
dependent on dividends received from the Bank. See “Business—Regulation and
Supervision—Limitation on Capital Distributions” and Note 15 to the
consolidated financial statements, included in Item 8 of this Annual Report on
Form 10-K, for a discussion of the restrictions on the payment of cash dividends
by the Company.
The
following table sets forth the high and low sales prices for the common stock as
reported on the Nasdaq Global Market and the cash dividends declared on the
common stock.
Fiscal year 2010:
|
High
|
Low
|
Dividends
Declared
|
|||||||||
First
Quarter
|
$ | 7.55 | $ | 5.01 | $ | 0.10 | ||||||
Second
Quarter
|
$ | 7.03 | $ | 6.15 | $ | 0.10 | ||||||
Third
Quarter
|
$ | 6.95 | $ | 6.15 | $ | 0.10 | ||||||
Fourth
Quarter
|
$ | 7.75 | $ | 6.06 | $ | 0.11 |
Fiscal Year 2009:
|
High
|
Low
|
Dividends
Declared
|
|||||||||
First
Quarter
|
$ | 9.99 | $ | 5.01 | $ | 0.09 | ||||||
Second
Quarter
|
$ | 9.95 | $ | 4.64 | $ | 0.09 | ||||||
Third
Quarter
|
$ | 6.96 | $ | 3.70 | $ | 0.09 | ||||||
Fourth
Quarter
|
$ | 7.20 | $ | 5.40 | $ | 0.10 |
Purchases
of Equity Securities
The following table presents
information regarding the Company’s stock repurchases during the three months
ended June 30, 2010.
|
(a)
|
(b)
|
(c)
|
(d)
|
||||||||||||
Total Number of
|
Maximum Number
|
|||||||||||||||
Total
|
Shares Purchased
|
of Shares that May
|
||||||||||||||
Number of
|
Average
|
as Part of Publicly
|
Yet Be Purchased
|
|||||||||||||
Shares
|
Price Paid
|
Announced Plans
|
Under the Plans or
|
|||||||||||||
Period
|
Purchased
|
per Share
|
or Programs
|
Programs
|
||||||||||||
Month
#1: April
|
||||||||||||||||
April
1 to April 30
|
- | $ | - | - | - | |||||||||||
Month
#2: May
|
||||||||||||||||
May
1 to May 31
|
- | - | - | - | ||||||||||||
Month
#3: June
|
||||||||||||||||
June
1 to June 30
|
- | - | - | - | ||||||||||||
Total
|
- | $ | - | - | - |
On August 14, 2008, the Board of
Directors of the Company approved the repurchase of up to 162,371 shares of its
outstanding common stock, or 5% of outstanding shares not held by United
Community MHC.
30
Item
6. Selected Financial Data
At June 30,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
Financial
Condition Data:
|
||||||||||||||||||||
Total
assets
|
$ | 492,104 | $ | 401,579 | $ | 382,726 | $ | 381,061 | $ | 354,707 | ||||||||||
Cash
and cash equivalents
|
32,023 | 27,004 | 35,710 | 43,025 | 15,010 | |||||||||||||||
Securities
held-to-maturity
|
631 | 175 | 200 | 223 | 245 | |||||||||||||||
Securities
available-for-sale
|
62,089 | 46,769 | 13,816 | 17,231 | 42,083 | |||||||||||||||
Mortgage-backed
securities available-for-sale
|
57,238 | 29,713 | 24,211 | 26,701 | 34,263 | |||||||||||||||
Loans
receivable, net
|
309,575 | 272,270 | 284,352 | 273,605 | 244,537 | |||||||||||||||
Deposits
|
430,180 | 339,616 | 320,774 | 316,051 | 289,807 | |||||||||||||||
Advances
from Federal Home Loan Bank
|
2,833 | 3,833 | 4,833 | — | — | |||||||||||||||
Stockholders’
equity
|
55,480 | 55,079 | 54,489 | 62,461 | 62,485 |
For the Years Ended June 30,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||
Operating
Data:
|
||||||||||||||||||||
Interest
income
|
$ | 18,936 | $ | 19,912 | $ | 21,615 | $ | 21,687 | $ | 17,878 | ||||||||||
Interest
expense
|
6,429 | 7,906 | 11,353 | 10,576 | 7,762 | |||||||||||||||
Net
interest income
|
12,507 | 12,006 | 10,262 | 11,111 | 10,116 | |||||||||||||||
Provision
for loan losses
|
2,509 | 2,447 | 4,718 | 730 | 120 | |||||||||||||||
Net
interest income after provision for loan losses
|
9,998 | 9,559 | 5,544 | 10,381 | 9,996 | |||||||||||||||
Other
income
|
3,557 | 2,787 | 2,197 | 2,848 | 1,189 | |||||||||||||||
Other
expense
|
12,198 | 11,450 | 9,850 | 9,250 | 9,572 | |||||||||||||||
Income
(loss) before income taxes
|
1,357 | 896 | (2,109 | ) | 3,979 | 1,613 | ||||||||||||||
Provision
(benefit) for income taxes
|
343 | 177 | (653 | ) | 1,485 | 575 | ||||||||||||||
Net
income (loss)
|
$ | 1,014 | $ | 719 | $ | (1,456 | ) | $ | 2,494 | $ | 1,038 |
31
At or for the Years Ended June 30,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
Performance
Ratios:
|
||||||||||||||||||||
Return
on average assets
|
0.24 | % | 0.18 | % | (0.38 | )% | 0.67 | % | 0.31 | % | ||||||||||
Return
on average equity
|
1.83 | 1.31 | (2.48 | ) | 3.96 | 2.53 | ||||||||||||||
Interest
rate spread (1)
|
2.96 | 3.04 | 2.43 | 2.68 | 2.94 | |||||||||||||||
Net
interest margin (2)
|
3.12 | 3.25 | 2.85 | 3.15 | 3.15 | |||||||||||||||
Noninterest
expense to average assets
|
2.87 | 2.92 | 2.58 | 2.48 | 2.82 | |||||||||||||||
Efficiency
ratio (3)
|
75.93 | 77.40 | 79.06 | 66.27 | 84.67 | |||||||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
109.51 | 110.34 | 112.97 | 115.40 | 108.42 | |||||||||||||||
Average
equity to average assets
|
13.06 | 14.02 | 15.41 | 16.92 | 12.07 | |||||||||||||||
Dividend
payout ratio (4)
|
115.38 | 152.43 |
NM
|
41.46 | 38.09 | |||||||||||||||
United
Community Bank Capital Ratios:
|
||||||||||||||||||||
Tangible
capital
|
9.17 | 12.08 | 13.00 | 13.42 | 13.23 | |||||||||||||||
Core
capital
|
9.26 | 12.08 | 13.00 | 13.42 | 13.23 | |||||||||||||||
Total
risk-based capital
|
14.27 | 18.40 | 20.51 | 21.24 | 19.66 | |||||||||||||||
Asset
Quality Ratios:
|
||||||||||||||||||||
Nonperforming
loans as a percent of total loans
|
3.42 | 3.40 | 2.62 | 1.14 | 0.33 | |||||||||||||||
Allowance
for loan losses as a percent of total loans
|
0.78 | 1.53 | 1.59 | 0.97 | 0.85 | |||||||||||||||
Allowance
for loan losses as a percent of nonperforming loans
|
22.91 | 45.10 | 61.98 | 84.55 | 256.39 | |||||||||||||||
Net
charge-offs to average outstanding loans during the
period
|
0.04 | 1.00 | 1.06 | 0.06 | 0.12 | |||||||||||||||
Other
Data:
|
||||||||||||||||||||
Number
of:
|
||||||||||||||||||||
Real
estate loans outstanding
|
1,685 | 1,463 | 1,396 | 1,456 | 2,146 | |||||||||||||||
Deposit
accounts
|
27,595 | 24,572 | 22,175 | 21,655 | 19,380 | |||||||||||||||
Offices
|
9 | 6 | 6 | 6 | 5 |
|
NM
|
Not
meaningful.
|
|
(1)
|
Represents
the difference between the weighted average yield on average
interest-earning assets and the weighted average cost on average
interest-bearing liabilities.
|
|
(2)
|
Represents
net interest income as a percent of average interest-earning
assets.
|
|
(3)
|
Represents
other expense divided by the sum of net interest income and other
income.
|
|
(4)
|
Due
to the timing of the Bank’s reorganization into the mutual holding company
structure and the completion of the Company’s minority stock offering on
March 30, 2006, the 2006 calculation is based solely on earnings
subsequent to that date.
|
32
Item 7. Management’s Discussion and Analysis of
Financial Condition and
Results of Operations
Overview
Income.
Our primary source of pre-tax income is net interest income. Net interest
income is the difference between interest income, which is the income that we
earn on our loans and securities, and interest expense, which is the interest
that we pay on our deposits and Federal Home Loan Bank borrowings. Other
significant sources of pre-tax income are service charges on deposit accounts
and other loan fees. We also recognize income or losses from the sale of
investments in years that we have such sales.
Allowance for
Loan Losses. The allowance for loan losses is a valuation allowance for
probable credit losses inherent in the loan portfolio. The allowance is
established through the provision for loan losses, which is charged to income.
Charge-offs, if any, are charged to the allowance. Subsequent recoveries, if
any, are credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and value of the portfolio,
information about specific borrower situations, and estimated collateral values,
economic conditions, and other factors. Allocation of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management’s judgment, should be charged-off.
Expenses.
The noninterest expenses we incur in operating our business consist of salaries
and employee benefits expenses, occupancy and equipment expenses, advertising
and public relations expenses, regulatory fees and deposit insurance premiums
and various other miscellaneous expenses.
Salaries
and employee benefits consist primarily of salaries and wages paid to our
employees, payroll taxes and expenses for health insurance and other employee
benefits, and stock-based compensation.
Occupancy
and equipment expenses, which are the fixed and variable costs of buildings and
equipment, consist primarily of depreciation charges, furniture and equipment
expenses, maintenance, real estate taxes, insurance and costs of utilities.
Depreciation of premises and equipment is computed using the straight-line
method based on the useful lives of the related assets, which range from three
to 40 years.
Advertising
and public relations expenses include expenses for print, radio and television
advertisements, promotions, third-party marketing services and premium
items.
Regulatory
fees and deposit insurance premiums are primarily payments we make to the FDIC
for insurance of our deposit accounts.
Other
expenses include expenses for supplies, telephone and postage, data processing,
expenses related to other real estate owned by the Bank, director and committee
fees, professional fees, insurance and surety bond premiums and other fees and
expenses.
Noninterest
expenses have also increased as a result of our strategy to expand our branch
network. These additional expenses consist of salaries and employee benefits and
occupancy and equipment expenses. Over time, we anticipate that we will generate
sufficient income to offset the expenses related to our new facilities and new
employees, but we cannot assure you that our branch expansion will increase our
earnings or that it will increase our earnings within a reasonable period of
time.
Critical
Accounting Policies
We
consider accounting policies involving significant judgments and assumptions by
management that have, or could have, a material impact on the carrying value of
certain assets or on income to be critical accounting policies. We consider the
following to be our critical accounting policies: allowance for loan losses and
deferred income taxes.
33
Allowance for
Loan Losses. The allowance for loan losses is the amount estimated by
management as necessary to cover probable credit losses in the loan portfolio at
the statement of financial condition date. The allowance is established through
the provision for loan losses, which is charged to income. Determining the
amount of the allowance for loan losses necessarily involves a high degree of
judgment. Among the material estimates required to establish the allowance are:
loss exposure at default; the amount and timing of future cash flows on impacted
loans; value of collateral; and determination of loss factors to be applied to
the various elements of the portfolio. All of these estimates are susceptible to
significant change. Management reviews the level of the allowance on a quarterly
basis and establishes the provision for loan losses based upon an evaluation of
the portfolio, past loss experience, current economic conditions and other
factors related to the collectibility of the loan portfolio. Although we believe
that we use the best information available to establish the allowance for loan
losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, the OTS, as an integral part of its examination
process, periodically reviews our allowance for loan losses. Such agency may
require us to recognize adjustments to the allowance based on its judgments
about information available to it at the time of its examination. A large loss
could deplete the allowance and require increased provisions to replenish the
allowance, which would negatively affect earnings. For additional discussion,
see notes 1 and 3 of the notes to the consolidated financial statements included
in Item 8 of this Annual Report on Form 10-K.
Deferred Income
Taxes. We use the asset and liability method of accounting for income
taxes as prescribed in Accounting Standards Codification (ASC) 740-10-50. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. If current available information raises doubt as to the realization of
the deferred tax assets, a valuation allowance is established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. We exercise significant judgment in evaluating the
amount and timing of recognition of the resulting tax liabilities and assets.
These judgments require us to make projections of future taxable income. The
judgments and estimates we make in determining our deferred tax assets, which
are inherently subjective, are reviewed on a continual basis as regulatory and
business factors change. Any reduction in estimated future taxable income may
require us to record a valuation allowance against our deferred tax assets. A
valuation allowance would result in additional income tax expense in the period,
which would negatively affect earnings. The Company adopted the
provisions of ASC 275-10-50-8 to account for uncertainty in income taxes
effective July 1, 2007. Implementation resulted in no cumulative effect
adjustment to retained earnings as of the date of adoption. The Company had no
unrecognized tax benefits as of June 30, 2010 and 2009. The Company
recognized no interest and penalties on the underpayment of income taxes during
fiscal years June 30, 2010 and 2009, and had no accrued interest and
penalties on the balance sheet as of June 30, 2010 and 2009. The Company
has no tax positions for which it is reasonably possible that the total amounts
of unrecognized tax benefits will significantly increase with the next twelve
months. The Company is no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for tax years before
2006.
Operating
Strategy
Our
mission is to operate and grow a profitable, independent community-oriented
financial institution serving primarily retail customers and small businesses in
our market areas. We plan to continue our strategy of:
• increasing
core deposits through the expansion of our branch network and new deposit
products;
• expanding
our branch network and upgrading our existing branches;
• pursuing
opportunities to increase and diversify our loan portfolio in our expanding
market areas;
• applying
disciplined underwriting practices to maintain a high quality loan portfolio;
and
• continuing
to increase our sale of non-deposit investment products and
services.
Increasing
core deposits through the expansion of our branch network and new deposit
products
Historically,
retail deposits are our primary source of funds for investing and lending.
However, in recent years, we have increased our reliance on municipal deposits
significantly. These municipal deposits represent tax and other revenues from
the local gaming industry. Currently, our core deposits include all deposit
account types except certificates of deposit and municipal deposits. Core
deposits are generally lower in cost to us than certificate of deposit accounts,
and they are generally less sensitive to withdrawal when interest rates
fluctuate. At June 30, 2010, core deposits represented 31.8% of our total
deposits.
34
Expanding
our branch network and upgrading our existing
branches
On June
4, 2010, United Community Bank completed the purchase of three branches from
Integra Bank National Association. The purchase of the three branches has
expanded the Bank’s footprint to include Ripley County, Indiana.
The new
branches continue to be funded by cash generated by our business. Consequently,
we did not need to borrow funds for these expansion projects. We may
continue to upgrade our current branch facilities and may pursue further
expansion in Southeastern Indiana, Northern Kentucky or Southwest Ohio in future
years through de novo branching, branch acquisitions and acquisitions of other
financial institutions.
Pursuing
opportunities to increase and diversify our lending portfolio in our expanding
market areas
In recent
years we have sought to diversify our loan portfolio beyond residential mortgage
loans. At June 30, 2010 our multi-family and nonresidential real estate,
land, consumer, commercial business, and construction loan portfolio was 57.0%
of our total loan portfolio. During this period, we have taken advantage of the
significant growth in both residential and nonresidential real estate
development in our market and have originated loans in other market
areas. We expect to continue to expand all of our lending activities. We
expect that our loan portfolio, including our multi-family and nonresidential
real estate, commercial business and construction loan portfolio, will continue
to increase.
Applying
disciplined underwriting practices to maintain the high quality of our loan
portfolio
We
believe that high asset quality is a key to long-term financial success. We have
sought to grow and diversify the loan portfolio, while maintaining a high level
of asset quality and moderate credit risk, using underwriting standards that we
believe are conservative and diligent monitoring and collection efforts. The
recession in the local and national economy during the year ended June 30, 2010
has had a negative impact on the ability of some of our borrowers to repay their
loans. Our nonperforming loans totaled $10.6 million or 3.42% of our total
loans at June 30, 2010, compared to $6.0 million or 2.19% at June 30, 2009, and
$7.5 or 2.62% at June 30, 2008. Management does not believe that the recent
increase in nonperforming loans is indicative of our current lending
policies. Management is continuing to work with these borrowers to minimize
the risk of loss to the Bank, and has continued to implement more stringent
lending standards in an effort to reduce nonperforming loans in the
future.
Continuing
to increase noninterest income
Our
profits rely heavily on the spread between the interest earned on loans and
securities and interest paid on deposits and Federal Home Loan Bank borrowings.
In order to decrease our reliance on interest rate spread income, we have
pursued initiatives to increase noninterest income. Our primary recurring source
of noninterest income has been services charges on deposit products and other
services. Recent regulatory changes have restricted our ability to charge
for other services. We are continuing to review programs to enhance our
service fee structure within the new regulatory environment.
Balance
Sheet Analysis
Loans. Our
primary lending activity is the origination of loans secured by real estate. We
originate one- to four-family residential loans, multi-family and nonresidential
real estate loans and construction loans. To a lesser extent, we originate
commercial and consumer loans. From time to time, as part of our loss
mitigation process, loans may be renegotiated in a troubled debt restructuring
when we determine that greater economic value will ultimately be recovered under
the new terms than through foreclosure, liquidation, or bankruptcy. We may
consider the borrower’s payment status and history, the borrower’s ability to
pay upon a rate reset on an adjustable rate mortgage, size of the payment
increase upon a rate reset, period of time remaining prior to the rate reset,
and other relevant factors in determining whether a borrower is experiencing
financial difficulty. We do not offer, and have not previously offered,
subprime, Alt-A, low-doc, no-doc loans or loans with negative amortization and
generally do not offer interest-only loans.
35
The
largest segment of our loan portfolio is one- to four-family residential loans.
At June 30, 2010, these loans totaled $137.5 million, or 43.6% of total gross
loans, compared to $124.4 million, or 44.8% of total loans, at June 30, 2009. As
a percentage of the total loan portfolio, one- to four-family residential loans
have decreased over the last two years, due to customers refinancing into lower
fixed rate loans that are being sold to Freddie Mac.
Multi-family
and nonresidential real estate and land loans totaled $129.7 million and
represented 41.2% of total loans at June 30, 2010, compared to $119.1 million,
or 42.7% of total loans, at June 30, 2009. Our multi-family and nonresidential
real estate loan portfolio growth as a percentage of the overall portfolio in
recent years is the result of one- to four-family loans being refinanced into
lower fixed rates and sold to Freddie Mac.
Construction
loans totaled $1.6 million, or 0.5% of total loans, at June 30, 2010, compared
to $1.6 million, or 0.6% of total loans, at June 30, 2009. The increase in
construction loans is the result of having seven loans outstanding at June 30,
2010 compared to only five at June 30, 2009.
Commercial
business loans totaled $7.3 million, or 2.3% of total loans, at June 30, 2010,
compared to $4.4 million, or 1.6% of total loans, at June 30, 2009 and $6.1
million, or 2.1% of total loans, at June 30, 2008.
Consumer
loans totaled $39.1 million, or 12.4% of total loans, at June 30, 2010, compared
to $27.8 million, or 10.0% of total loans, at June 30, 2009. The increase in the
consumer loan portfolio for the year ended June 30, 2010 is attributable to the
previously mentioned acquisition of three branches from Integra
Bank.
36
The
following table sets forth the composition of our loan portfolio at the dates
indicated.
At
June 30,
|
||||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||||||||||||||||||||||
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Residential
real estate:
|
||||||||||||||||||||||||||||||||||||||||
One-
to four-family
|
$ | 137,473 | 43.6 | % | $ | 124,391 | 44.8 | % | $ | 134,965 | 46.5 | % | $ | 126,398 | 45.4 | % | $ | 117,060 | 47.2 | % | ||||||||||||||||||||
Multi-family
|
46,777 | 14.9 | 47,060 | 22.3 | 43,671 | 15.1 | 37,500 | 13.5 | 20,250 | 8.2 | ||||||||||||||||||||||||||||||
Total
residential real estate loans
|
184,250 | 58.4 | 171,451 | 67.1 | 178,636 | 61.6 | 163,898 | 58.9 | 137,310 | 55.4 | ||||||||||||||||||||||||||||||
Construction
|
1,566 | 0.5 | 1,609 | 0.6 | 2,493 | 0.9 | 9,507 | 3.4 | 11,228 | 4.5 | ||||||||||||||||||||||||||||||
Nonresidential
real estate and land
|
82,969 | 26.3 | 72,029 | 20.7 | 73,238 | 25.3 | 76,333 | 27.5 | 73,419 | 29.6 | ||||||||||||||||||||||||||||||
Commercial
business
|
7,344 | 2.3 | 4,439 | 1.6 | 6,062 | 2.1 | 5,937 | 2.1 | 5,005 | 2.0 | ||||||||||||||||||||||||||||||
Consumer:
|
||||||||||||||||||||||||||||||||||||||||
Home
equity
|
29,301 | 9.3 | 21,591 | 7.8 | 19,608 | 6.7 | 16,580 | 6.0 | 15,872 | 6.4 | ||||||||||||||||||||||||||||||
Auto
|
1,617 | 0.5 | 1,761 | 0.6 | 1,960 | 0.7 | 2,049 | 0.7 | 2,587 | 1.1 | ||||||||||||||||||||||||||||||
Share
loans
|
1,369 | 0.4 | 1,272 | 0.5 | 1,382 | 0.5 | 1,250 | 0.4 | 1,258 | 0.5 | ||||||||||||||||||||||||||||||
Other
|
6,838 | 2.2 | 3,150 | 1.1 | 6,547 | 2.2 | 2,716 | 1.0 | 1,127 | 0.5 | ||||||||||||||||||||||||||||||
Total
consumer loans
|
39,125 | 12.4 | 27,774 | 10.0 | 29,497 | 10.1 | 22,595 | 8.1 | 20,844 | 8.5 | ||||||||||||||||||||||||||||||
Total
loans
|
$ | 315,254 | 100.0 | % | $ | 277,302 | 100.0 | % | $ | 289,926 | 100.0 | % | $ | 278,270 | 100.0 | % | $ | 247,806 | 100.0 | % | ||||||||||||||||||||
Less
(Plus):
|
||||||||||||||||||||||||||||||||||||||||
Deferred
loan costs, net
|
(496 | ) | (412 | ) | (381 | ) | (300 | ) | (279 | ) | ||||||||||||||||||||||||||||||
Undisbursed
portion of loans in process
|
494 | 1,231 | 1,184 | 2,294 | 1,443 | |||||||||||||||||||||||||||||||||||
Allowance
for loan losses
|
5,681 | 4,213 | 4,619 | 2,671 | 2,105 | |||||||||||||||||||||||||||||||||||
Loans,
net
|
$ | 309,575 | $ | 272,270 | $ | 284,504 | $ | 273,605 | $ | 244,537 |
37
Loan
Maturity
The
following table sets forth certain information at June 30, 2010 regarding the
dollar amount of loan principal repayments becoming due during the periods
indicated. The table does not include any estimate of prepayments, which
significantly shorten the average life of all loans and may cause our actual
repayment experience to differ from that shown below. Demand loans having no
stated schedule of repayments and no stated maturity are reported as due in one
year or less.
One- to
Four-
Family
Real Estate
Loans
|
Multi-
family
Real Estate
Loans
|
Construction
Loans
|
Non-
residential
Real
Estate and
Land
Loans
|
Consumer
and
Commercial
Business
Loans
|
Total
Loans
|
|||||||||||||||||||
(In thousands)
|
||||||||||||||||||||||||
At
June 30, 2010
|
||||||||||||||||||||||||
Amounts
due in:
|
||||||||||||||||||||||||
One
year or less
|
$ | 60,013 | $ | 18,926 | $ | 905 | $ | 37,092 | $ | 38,264 | $ | 155,200 | ||||||||||||
More
than one to five years
|
51,630 | 21,570 | 529 | 39,675 | 5,660 | 119,064 | ||||||||||||||||||
More
than five years
|
25,830 | 6,281 | 132 | 6,202 | 2,545 | 40,990 | ||||||||||||||||||
Total
|
$ | 137,473 | $ | 46,777 | $ | 1,566 | $ | 82,969 | $ | 46,469 | $ | 315,254 |
The
following table sets forth the dollar amount of all loans at June 30, 2010 that
have either fixed interest rates or adjustable interest rates. The amounts shown
below exclude unearned interest on consumer loans and deferred loan
fees.
Fixed Rates
|
Floating or
Adjustable Rates
|
Total
|
||||||||||
(In thousands)
|
||||||||||||
At
June 30, 2010
|
||||||||||||
Residential
real estate:
|
||||||||||||
One-
to four-family
|
$ | 28,807 | $ | 108,666 | $ | 137,473 | ||||||
Multi-family
|
3,788 | 42,989 | 46,777 | |||||||||
Construction
|
1,022 | 544 | 1,566 | |||||||||
Nonresidential
real estate and
land
|
19,446 | 63,523 | 82,969 | |||||||||
Consumer
and commercial
business
|
9,186 | 37,283 | 46,469 | |||||||||
Total
|
$ | 62,249 | $ | 253,005 | $ | 315,254 |
38
Loans
Originated
The
following table shows loan origination, participation, purchase and sale
activity during the periods indicated.
Year
Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Total
loans at beginning of period
|
$ | 277,302 | $ | 289,774 | ||||
Loans
originated:
|
||||||||
Real
estate mortgages
|
51,647 | 42,602 | ||||||
Land
|
3,975 | 589 | ||||||
Construction
|
1,446 | 2,616 | ||||||
Commercial
business
|
923 | 837 | ||||||
Consumer
|
4,170 | 2,631 | ||||||
Total
loans originated
|
62,161 | 49,275 | ||||||
Loans
purchased at fair value
|
43,913 | — | ||||||
Deduct:
|
||||||||
Loan
principal repayments
|
42,991 | 33,524 | ||||||
Loan
sales
|
25,131 | 28,375 | ||||||
Other
repayments
|
— | — | ||||||
Net
loan activity, net of acquisition
|
37,952 | (12,624 | ) | |||||
Total
loans at end of period
|
$ | 315,254 | $ | 277,302 |
Securities.
Our securities portfolio consists primarily of callable U.S. government
agency bonds, U.S. government agency mortgage-backed securities, and municipal
bonds. As of June 30, 2010, our securities totaled $120.0 million, an increase
of $43.3 million from $76.7 at June 30, 2009, and an increase of $81.8 million
from $38.2 million at June 30, 2008. The increases in 2009 and 2010
were primarily the result of redeploying the proceeds from the sales of loans
into higher yielding investment securities. Our callable securities consist
of U.S. government agency bonds and municipal bonds which contain either a
one-time call option or may be callable anytime after the first call
date.
39
The
following table sets forth the amortized cost and fair values of our securities
portfolio at the dates indicated.
At
June 30,
|
||||||||||||||||||||||||
2010
|
2009
|
2008
|
||||||||||||||||||||||
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
Amortized
Cost
|
Fair
Value
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Securities
available-for-sale:
|
||||||||||||||||||||||||
U.S.
League intermediate-term portfolio
|
$ | - | $ | - | $ | 60 | $ | 47 | $ | 1,785 | $ | 1,718 | ||||||||||||
Callable
agency bonds
|
49,157 | 49,369 | 39,515 | 39,641 | 8,943 | 8,864 | ||||||||||||||||||
Freddie
Mac common stock
|
- | - | - | - | 9 | 155 | ||||||||||||||||||
Municipal
bonds
|
12,538 | 12,591 | 7,091 | 6,952 | 3,040 | 2,929 | ||||||||||||||||||
Other
equity securities
|
211 | 129 | 211 | 129 | 211 | 150 | ||||||||||||||||||
Mortgage-backed
securities
|
56,669 | 57,238 | 29,144 | 29,713 | 24,683 | 24,211 | ||||||||||||||||||
Total
|
$ | 118,575 | $ | 119,327 | $ | 76,021 | $ | 76,482 | $ | 38,671 | $ | 38,027 | ||||||||||||
Securities
held-to-maturity:
|
||||||||||||||||||||||||
Municipal
bonds
|
$ | 631 | $ | 631 | $ | 175 | $ | 175 | $ | 200 | $ | 200 |
At June
30, 2010, we had no investments in a single company or entity (other than U.S.
Government-sponsored entity securities) that had an aggregate book value in
excess of 10% of our stockholders’ equity.
40
The
following table sets forth the stated maturities and weighted average yields of
investment securities at June 30, 2010. Weighted average yields on tax-exempt
securities are not presented on a tax equivalent basis as the amount would be
immaterial. Certain mortgage-backed securities have adjustable interest rates
and will reprice annually within the various maturity ranges. These repricing
schedules are not reflected in the table below.
One
Year
or
Less
|
More
than
One
Year to
Five
Years
|
More
than
Five
Years to
Ten
Years
|
More
than
Ten
Years
|
Total
|
||||||||||||||||||||||||||||||||||||
Carrying
Value
|
Weighted
Average
|
Carrying
Value
|
Weighted
Average
|
Carrying
Value
|
Weighted
Average
|
Carrying
Value
|
Weighted
Average
|
Carrying
Value
|
Weighted
Average
|
|||||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
Securities
available-for-sale:
|
||||||||||||||||||||||||||||||||||||||||
Callable
agency bonds
|
$ | 31,093 | 1.53 | $ | 18,276 | 1.29 | $ | — | — | $ | — | — | $ | 49,369 | 1.44 | % | ||||||||||||||||||||||||
Municipal
bonds
|
— | — | — | — | 279 | 5.01 | 12,312 | 5.75 | 12,591 | 5.73 | ||||||||||||||||||||||||||||||
Other
equity securities
|
129 | 5.92 | — | — | — | — | — | — | 129 | 5.92 | ||||||||||||||||||||||||||||||
Mortgage-backed
securities
|
— | — | 1,443 | 4.50 | 7,402 | 5.38 | 48,393 | 5.68 | 57,238 | 5.61 | ||||||||||||||||||||||||||||||
Total
|
$ | 31,222 | $ | 19,719 | $ | 7,681 | $ | 60,705 | $ | 119,327 | 3.90 | |||||||||||||||||||||||||||||
Securities
held-to-maturity:
|
||||||||||||||||||||||||||||||||||||||||
Municipal
bonds
|
$ | — | — | % | $ | — | — | % | $ | 631 | 3.79 | % | $ | — | — | % | $ | 631 | 3.79 | % |
41
Deposits. Our primary source of funds
is our deposit accounts, which are comprised of noninterest-bearing accounts,
interest-bearing NOW accounts, money market accounts, passbook accounts and
certificates of deposit. These deposits are provided primarily by individuals
within our market areas. During the year ended June 30, 2010, our deposits
increased $90.6 million, or 26.7%, as a result of increases in NOW accounts and
the previously mentioned acquisition of three branches from Integra Bank
National Association. During fiscal 2009, the increase of $18.8 million in
certificates of deposit was a result of increased marketing and advertising
efforts in our local market.
The
following table sets forth the balances of our deposit products at the dates
indicated.
At
June 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
(In
thousands)
|
||||||||||||
NOW
accounts
|
$ | 103,216 | $ | 71,854 | $ | 64,206 | ||||||
Passbook
accounts
|
53,989 | 40,980 | 41,787 | |||||||||
Money
market deposit accounts
|
55,062 | 61,933 | 68,621 | |||||||||
Certificates
of deposit
|
217,913 | 164,849 | 146,160 | |||||||||
Total
|
$ | 430,180 |
(1)(4)
|
$ | 339,616 |
(2)(4)
|
$ | 320,774 |
(3)(4)
|
(1)
|
Includes
$121.6 million in municipal
deposits.
|
(2)
|
Includes
$124.3 million in municipal
deposits.
|
(3)
|
Includes
$127.5 million in municipal
deposits.
|
(4)
|
No
investments are pledged to secure the municipal deposits. The municipal
deposits are insured by the Public Deposit Insurance Fund
administered by the Indiana Board for
Depositories.
|
The
following table indicates the amount of jumbo certificates of deposit by time
remaining until maturity as of June 30, 2010. Jumbo certificates of deposit
require minimum deposits of $100,000. We did not have any brokered deposits as
of June 30, 2010.
Maturity Period
|
Certificates
of Deposit
|
|||
(In
thousands)
|
||||
At
June 30, 2010
|
||||
Three
months or less
|
$ | 28,781 | ||
Over
three through six months
|
13,559 | |||
Over
six through twelve months
|
47,927 | |||
Over
twelve months
|
23,104 | |||
Total
|
$ | 113,371 |
42
The
following table sets forth the time deposits classified by rates at the dates
indicated.
At
June 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
(In
thousands)
|
||||||||||||
0.00
- 1.00%
|
$ | 7,171 | $ | 3,636 | $ | 2,379 | ||||||
1.01
- 2.00%
|
75,517 | 5,502 | 362 | |||||||||
2.01
- 3.00%
|
91,166 | 51,885 | 18,193 | |||||||||
3.01
- 4.00%
|
26,436 | 62,733 | 27,195 | |||||||||
4.01
- 5.00%
|
12,036 | 26,483 | 58,694 | |||||||||
5.01
- 6.00%
|
5,452 | 14,478 | 39,198 | |||||||||
6.01
- 7.00%
|
135 | 132 | 139 | |||||||||
Total
|
$ | 217,913 | $ | 164,849 | $ | 146,160 |
The
following table sets forth the amount and maturities of time deposits classified
by rates at June 30, 2010.
Amount
Due
|
Percent
of
|
|||||||||||||||||||||||||||
Less
Than
One
Year
|
More
Than
One
Year to
Two
Years
|
More
Than
Two
Years to
Three
Years
|
More
Than
Three
Years
to
Four
Years
|
More
Than
Four
Years
|
Total
|
Total
Certificate
of
Deposit
Accounts
|
||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||
0.00
– 1.00%
|
$ | 6,618 | $ | 495 | $ | 18 | $ | 20 | $ | 20 | $ | 7,171 |
3.3%
|
|||||||||||||||
1.01
– 2.00%
|
64,783 | 10,552 | 68 | 114 | - | 75,517 |
34.7
|
|||||||||||||||||||||
2.01
– 3.00%
|
65,266 | 14,376 | 9,234 | 1,203 | 1,087 | 91,166 |
41.9
|
|||||||||||||||||||||
3.01
– 4.00%
|
14,321 | 5,715 | 2,347 | 1,214 | 2,839 | 26,436 |
12.1
|
|||||||||||||||||||||
4.01
– 5.00%
|
6,082 | 3,523 | 1,976 | 408 | 47 | 12,036 |
5.5
|
|||||||||||||||||||||
5.01
– 6.00%
|
5,260 | 164 | 28 | - | - | 5,452 |
2.5
|
|||||||||||||||||||||
6.01
– 7.00%
|
135 | - | - | - | - | 135 |
0.0
|
|||||||||||||||||||||
Total
|
$ | 162,465 | $ | 34,825 | $ | 13,671 | $ | 2,959 | $ | 3,993 | $ | 217,913 |
100.0%
|
The following table sets forth deposit
activity for the periods indicated.
Year
Ended June 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
(In
thousands)
|
||||||||||||
Beginning
balance
|
$ | 339,616 | $ | 320,774 | $ | 316,051 | ||||||
Deposits
assumed
|
53,277 | - | - | |||||||||
Increase
(decrease) before interest credited
|
30,966 | 11,014 | (6,593 | ) | ||||||||
Interest
credited
|
6,321 | 7,828 | 11,316 | |||||||||
Net
increase in deposits
|
90,564 | 18,842 | 4,723 | |||||||||
Ending
balance
|
$ | 430,180 | $ | 339,616 | $ | 320,774 |
43
Borrowings. We utilize borrowings from
the Federal Home Loan Bank of Indianapolis to supplement our supply of funds for
loans and investments.
Year
Ended June 30,
|
||||||||||||
2010
|
2009
|
2008
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Maximum
amount of advances outstanding at any month end during the
period:
|
||||||||||||
FHLB
advances
|
$ | 3,833 | $ | 4,833 | $ | 5,000 | ||||||
Average
advances outstanding during the period:
|
||||||||||||
FHLB
advances
|
$ | 3,333 | $ | 4,333 | $ | 4,916 | ||||||
Weighted
average interest rate during the period:
|
||||||||||||
FHLB
advances
|
3.20 | % | 3.20 | % | 3.20 | % | ||||||
Balance
outstanding at end of period:
|
||||||||||||
FHLB
advances
|
$ | 2,833 | $ | 3,833 | $ | 4,833 | ||||||
Weighted
average interest rate at end of period:
|
||||||||||||
FHLB
advances
|
3.20 | % | 3.20 | % | 3.20 | % |
Results
of Operations for the Years Ended June 30, 2010 and 2009
Overview.
2010
|
2009
|
%
Change
2010/2009
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Net
income
|
$ | 1,014 | $ | 719 | 41.0 | % | ||||||
Return
on average assets
|
0.24 | % | 0.18 | % | 33.3 | |||||||
Return
on average equity
|
1.83 | % | 1.31 | % | 39.7 | |||||||
Average
equity to average assets
|
13.06 | % | 14.02 | % | (6.8 | ) |
Net income for the year ended June 30,
2010 was $1.0 million, compared to $719,000 for the year ended June 30, 2009.
The increase is primarily the result of an increase in net interest income of
$501,000, or 4.2%, an increase in noninterest income of $770,000, or 27.6%,
partially offset by an increase in noninterest expense of $748,000, or 6.5%, and
an increase in the provision for income taxes of $166,000, or
93.7%.
Net
Interest Income.
The
increase in net interest income is the result of a decrease in the average
interest rate paid on interest-bearing liabilities from 2.36% for the prior year
end to 1.76% for the year ended June 30, 2010, partially offset by a decrease in
the average rate earned on interest-earning assets from 5.40% for the prior year
end to 4.72% for the year ended June 30, 2010. The decrease in rates has been
driven by decreases in market interest rates in the year ended June 30,
2010.
44
Average Balances
and Yields. The following table
presents information regarding average balances of assets and liabilities, the
total dollar amounts of interest income and dividends from average
interest-earning assets, the total dollar amounts of interest expense on average
interest-bearing liabilities, and the resulting annualized average yields and
costs. The yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. For purposes of this table, average
balances have been calculated using month-end balances, and nonaccrual loans are
included in average balances only. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
differences in the information presented. Loan fees are included in interest
income on loans and are insignificant. Yields are not presented on a
tax-equivalent basis. Any adjustments necessary to present yields on a
tax-equivalent basis are insignificant.
Year
Ended June 30,
|
||||||||||||||||||||||||
2010
|
2009
|
|||||||||||||||||||||||
|
||||||||||||||||||||||||
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
Average
Balance
|
Interest
and
Dividends
|
Yield/
Cost
|
|||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
Assets:
|
||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||
Loans
|
$ | 274,628 | $ | 16,334 | 5.95 | % | $ | 282,978 | $ | 17,784 | 6.28 | % | ||||||||||||
Investment
securities
|
91,122 | 2,587 | 2.84 | 50,462 | 1,971 | 3.91 | ||||||||||||||||||
Other
interest-earning assets
|
35,191 | 15 | 0.04 | 35,439 | 157 | 0.44 | ||||||||||||||||||
Total
interest-earning assets
|
400,941 | 18,936 | 4.72 | 368,879 | 19,912 | 5.40 | ||||||||||||||||||
Noninterest-earning
assets
|
24,067 | 23,607 | ||||||||||||||||||||||
Total
assets
|
$ | 425,008 | $ | 392,486 | ||||||||||||||||||||
Liabilities
and equity:
|
||||||||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||
NOW
and money market deposit accounts
|
$ | 135,614 | 871 | 0.64 | $ | 136,417 | 1,609 | 1.18 | ||||||||||||||||
Passbook
accounts
|
42,480 | 136 | 0.32 | 40,358 | 285 | 0.71 | ||||||||||||||||||
Certificates
of deposit
|
184,680 | 5,314 | 2.88 | 153,208 | 5,872 | 3.83 | ||||||||||||||||||
Total
interest-bearing deposits
|
362,774 | 6,321 | 1.74 | 329,983 | 7,766 | 2.35 | ||||||||||||||||||
FHLB
advances
|
3,333 | 108 | 3.24 | 4,333 | 140 | 3.23 | ||||||||||||||||||
Total
interest-bearing liabilities
|
366,107 | 6,429 | 1.76 | 334,316 | 7,906 | 2.36 | ||||||||||||||||||
Noninterest-bearing
liabilities
|
3,413 | 3,132 | ||||||||||||||||||||||
Total
liabilities
|
369,520 | 337,448 | ||||||||||||||||||||||
Total
stockholders’ equity
|
$ | 55,488 | $ | 55,038 | ||||||||||||||||||||
Total
liabilities and stockholders’ equity
|
$ | 425,008 | $ | 392,486 | ||||||||||||||||||||
Net
interest income
|
$ | 12,507 | $ | 12,006 | ||||||||||||||||||||
Interest
rate spread
|
2.96 | % | 3.04 | % | ||||||||||||||||||||
Net
interest margin
|
3.12 | % | 3.25 | % | ||||||||||||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
109.51 | % | 110.34 | % |
45
Rate/Volume
Analysis. The
following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the
effects attributable to changes in volume (changes in volume multiplied by
prior rate). The net column represents the sum of the prior columns. For
purposes of this table, changes attributable to changes in both rate and volume
that cannot be segregated have been allocated proportionally based on the
changes due to rate and the changes due to volume.
Year Ended
June 30,
2010 Compared to 2009
|
||||||||||||
Increase (Decrease)
Due to
|
||||||||||||
Volume
|
Rate
|
Net
|
||||||||||
(In thousands)
|
||||||||||||
Interest
and dividend income:
|
||||||||||||
Loans
|
$ | (525 | ) | $ | (925 | ) | $ | (1,450 | ) | |||
Investment
securities
|
1,588 | (972 | ) | 616 | ||||||||
Other
interest-earning assets
|
(1 | ) | (141 | ) | (142 | ) | ||||||
Total
interest-earning assets
|
1,062 | (2,038 | ) | (976 | ) | |||||||
Interest
expense:
|
||||||||||||
Deposits
|
772 | (2,217 | ) | (1,445 | ) | |||||||
FHLB
advances
|
(33 | ) | (0 | ) | (33 | ) | ||||||
Total
interest-bearing liabilities
|
739 | (2,217 | ) | (1,478 | ) | |||||||
Net
change in net interest income
|
$ | 323 | $ | 179 | $ | 502 |
Provision for
Loan Losses.
The
provision for loan losses was $2.5 million for the year ended June 30, 2010,
compared to $2.4 million for the prior year. The provision remained steady as
the local and national economy continue to struggle. Nonperforming loans
increased at June 30, 2010, compared to 2009, from $9.4 million at June 30, 2009
to $10.6 million at June 30, 2010.
An
analysis of the changes in the allowance for loan losses is presented under
“Risk Management—Analysis and Determination of the
Allowance for Loan Losses.”
Noninterest Income.
The following table shows the components of other income for the years ended
June 30, 2010 and 2009.
2010
|
2009
|
%
Change
2010/2009
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Service
charges
|
$ | 1,988 | $ | 1,776 | 11.9 | % | ||||||
Gain
on sale loans
|
278 | 526 | (47.1 | ) | ||||||||
Gain
(loss) on sale of investments
|
311 | (183 | ) | 269.9 | ||||||||
Gain
on sale of other real estate owned
|
34 | - | 100.0 | |||||||||
Income
from Bank Owned Life Insurance
|
282 | 256 | 10.2 | |||||||||
Other
|
664 | 412 | 61.2 | |||||||||
Total
|
$ | 3,557 | $ | 2,787 | 27.6 |
46
The
increase in noninterest income is attributable to the increase in service
charges of $212,000, an increase in gain on sale of investments of $494,000, an
increase of $252,000 in other income, partially offset by a decrease of $248,000
in gain on sale of loans. The increase in service charges is due to an increased
customer base. The growth in the customer base is attributable to additional
marketing and advertising efforts as well as the acquisition of three branches
from Integra Bank in June, 2010. The increase in gain on sale of investments is
the result of the Bank purchasing additional securities in an effort to better
diversify its investment portfolio in both type and duration of investments. The
increase in other income is attributable to the settlement of a claim in the
current year. The decrease in sale of loans is due to rates remaining relatively
flat in the current year, while they decreased significantly in the prior year
causing a significant increase of refinancing into longer term fixed rate loans
that were sold to Freddie Mac.
Noninterest Expense.
The following table shows the components of other expense and the
percentage changes for the years ended June 30, 2010 and 2009.
2010
|
2009
|
%
Change
2010/2009
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Compensation
and employee benefits
|
$ | 6,040 | $ | 5,659 | 6.7 | % | ||||||
Premises
and occupancy expense
|
1,101 | 1,074 | 2.5 | |||||||||
Deposit
insurance premium
|
740 | 457 | 61.9 | |||||||||
Advertising
expense
|
378 | 296 | 27.7 | |||||||||
Data
processing expense
|
296 | 241 | 22.8 | |||||||||
ATM
service fees
|
423 | 430 | (1.6 | ) | ||||||||
Provision
for loss on sale of other real estate owned
|
510 | 770 | (33.8 | ) | ||||||||
Acquisition
related expenses
|
439 | - | 100.0 | |||||||||
Other
operating expenses
|
2,271 | 2,523 | 10.0 | |||||||||
Total
|
$ | 12,198 | $ | 11,450 | 6.5 | % |
The
increase in noninterest expense is attributable to increases in acquisition
expenses, deposit insurance premiums, and employee compensation, partially
offset by a decrease in the provision for loss on the sale of real estate owned.
The acquisition related expenses in the current year relate to the expenses
incurred with the acquisition of three branches from Integra. The increase in
deposit insurance premiums is a result of increased deposit balances during the
year, along with increased assessment rates due to the impact of the current
economic environment on the deposit insurance fund. The increase in employee
compensation is the result of adding staff as our customer base has grown over
the last year including the branch acquisition at the end of the year. The
decrease in provision for loss on the sale of other real estate owned is a
result of the Bank holding less real estate owned (REO) for sale in the current
year than in the prior year. During the year ended June 30, 2010 the REO balance
decreased from $1.9 million to $297,000.
Income
Taxes.
Income
tax expense increased $166,000 to a provision of $343,000 for the year ended
June 30, 2010, compared to the year ended June 30, 2009. The increase in
expense was primarily due to an increase of $461,000 in income before
taxes. The effective tax rate for 2010 was 25.0% compared to 19.8% in
2009. The increase in the effective rate was attributable to tax exempt
municipal bond income being a smaller portion of income before taxes in the
current year.
Risk
Management
Overview.
Managing risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk, interest rate
risk and market risk. Credit risk is the risk of not collecting the interest
and/or the principal balance of a loan or investment when it is due. Interest
rate risk is the potential reduction of net interest income as a result of
changes in interest rates. Market risk arises from fluctuations in interest
rates that may result in changes in the values of financial instruments, such as
available-for-sale securities, that are accounted for on a mark-to-market basis.
Other risks that we face are operational risks, liquidity risks and reputation
risk. Operational risks include risks related to fraud, regulatory compliance,
processing errors, technology and disaster recovery. Liquidity risk is the
possible inability to fund obligations to depositors, lenders or borrowers.
Reputation risk is the risk that negative publicity or press, whether true or
not, could cause a decline in our customer base or revenue.
47
Credit Risk
Management. Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria and providing
prompt attention to potential problem loans. This strategy also emphasizes the
origination of one- to four-family mortgage loans, which typically have lower
default rates than other types of loans and are secured by collateral that
generally tends to appreciate in value.
When a
borrower fails to make a required loan payment, we take a number of steps to
attempt to have the borrower cure the delinquency and restore the loan to
current status. When the loan becomes 15 days past due, a late charge notice is
generated and sent to the borrower and phone calls are made. If payment is not
then received by the 30th day of delinquency, a further notification is sent to
the borrower. If no successful workout can be achieved, after a loan becomes 90
days delinquent, we may commence foreclosure or other legal proceedings. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the real property securing the
loan generally is sold at foreclosure. We may consider loan workout arrangements
with certain borrowers under certain circumstances.
Management
reports to the Board of Directors monthly regarding the amount of loans
delinquent more than 30 days, all loans in foreclosure, all foreclosed and
repossessed property that we own.
Analysis of
Nonperforming and Classified Assets. We consider repossessed assets and
loans that are 90 days or more past due to be nonperforming assets. Loans are
generally placed on nonaccrual status when they become 90 days delinquent at
which time the accrual of interest ceases and the allowance for any
uncollectible accrued interest is established and charged against operations.
Typically, payments received on a nonaccrual loan are applied to the outstanding
principal and interest as determined at the time of collection of the
loan.
Real
estate that we acquire as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as foreclosed assets until it is sold. When property
is acquired, it is initially recorded at the lower of its cost, or market, less
estimate selling expenses. Holding costs and declines in fair value after
acquisition of the property result in charges against income.
48
The
following table provides information with respect to our nonperforming assets at
the dates indicated.
At
June 30,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
Nonaccrual
loans:
|
||||||||||||||||||||
Residential
real estate:
|
||||||||||||||||||||
One-
to four-family
|
$ | 2,436 | $ | 1,943 | $ | 853 | $ | 810 | $ | 602 | ||||||||||
Multi-family
|
5,245 | 2,492 | 3,072 | — | — | |||||||||||||||
Nonresidential
real estate and land
|
2,738 | 1,455 | 2,885 | 2,264 | 183 | |||||||||||||||
Consumer
and other loans
|
155 | 84 | 642 | 85 | 36 | |||||||||||||||
Total
|
$ | 10,574 | $ | 5,974 | $ | 7,452 | $ | 3,159 | $ | 821 | ||||||||||
Accruing
loans past due 90 days or more:
|
||||||||||||||||||||
Residential
real estate:
|
||||||||||||||||||||
One-
to four-family
|
— | — | — | — | — | |||||||||||||||
Nonresidential
real estate and land
|
— | — | — | — | — | |||||||||||||||
Total
|
— | — | — | — | — | |||||||||||||||
Total
of nonaccrual loans and accruing loans 90 days or more past
due
|
10,574 | 5,974 | 7,452 | 3,159 | 821 | |||||||||||||||
Real
estate owned
|
297 | 1,940 | 2,895 | 111 | 151 | |||||||||||||||
Other
nonperforming assets
|
— | — | — | — | — | |||||||||||||||
Total
nonperforming assets
|
$ | 10,871 | $ | 7,914 | $ | 10,347 | $ | 3,270 | $ | 972 | ||||||||||
Total
nonperforming loans to total loans
|
3.42 | % | 2.18 | % | 2.56 | % | 1.14 | % | 0.33 | % | ||||||||||
Total
nonperforming loans to total assets
|
2.15 | 1.49 | 1.95 | 0.83 | 0.23 | |||||||||||||||
Total
nonperforming assets to total assets
|
2.21 | 1.97 | 2.70 | 0.86 | 0.27 |
Interest
income that would have been recorded for the year ended June 30, 2010 had
nonaccruing loans been current according to their original terms was, in each
case, not material. No interest related to nonaccrual loans was included in
interest income for the year ended June 30, 2010.
Federal
regulations require us to review and classify our assets on a regular basis. In
addition, the OTS has the authority to identify problem assets and, if
appropriate, require them to be classified. There are three classifications for
problem assets: substandard, doubtful and loss. “Substandard assets” must have
one or more defined weaknesses and are characterized by the distinct possibility
that we will sustain some loss if the deficiencies are not corrected. “Doubtful
assets” have the weaknesses of substandard assets with the additional
characteristic that the weaknesses make collection or liquidation in full on the
basis of currently existing facts, conditions and values questionable, and there
is a high possibility of loss. An asset classified “loss” is considered
uncollectible and of such little value that continuance as an asset of the
institution is not warranted. The regulations also provide for a “special
mention” category, described as assets which do not currently expose us to a
sufficient degree of risk to warrant classification but do possess credit
deficiencies or potential weaknesses deserving our close attention. When we
classify an asset as special mention or substandard, we account for those
classifications when establishing a general allowance for loan losses. If we
classify an asset as doubtful or loss, we establish a specific allowance for the
asset at that time.
49
The
following table shows the aggregate amounts of our classified assets at the
dates indicated.
At
June 30,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Special
mention assets
|
$ | 20,061 | $ | 16,942 | ||||
Substandard
assets
|
14,395 | 12,624 | ||||||
Doubtful
assets
|
- | - | ||||||
Loss
assets
|
3,259 |
-
|
||||||
Total
classified assets
|
$ | 37,715 | $ | 29,566 |
Other
than disclosed in the above tables, there are no other loans at June 30, 2010
that management has serious doubts about the ability of the borrowers to comply
with the present loan repayment terms. The increase in classified assets is due
to the continued economic recession. Management believes there are adequate
allowances and collateral securing these loans to cover losses that may result
from these nonperforming loans. All of the loans were more than 90 days
delinquent at June 30, 2010.
Troubled Debt
Restructurings. At June 30, 2010, the Bank had thirteen loans categorized
as troubled debt restructurings, totaling $9.0 million. At June 30, 2009, the
Bank had five loans categorized as troubled debt restructurings, totaling $4.5
million. At June 30, 2010 and 2009, the Bank had one loan for $1.1 million that
was categorized as both a nonperforming loan and a troubled debt restructuring.
There are no other commitments to lend additional amounts to these borrowers.
Management has reduced the carrying value of all troubled debt restructurings to
their fair market values, based upon differences between their agreed upon rates
of interest and available market rates at the time of the loan.
Delinquencies. The following table provides
information about delinquencies in our loan portfolio at the dates
indicated.
At June 30,
|
||||||||||||||||||||||||
2010
|
2009
|
2008
|
||||||||||||||||||||||
30-59
Days
Past Due
|
60-89
Days
Past Due
|
30-59
Days
Past Due
|
60-89
Days
Past Due
|
30-59
Days
Past Due
|
60-89
Days
Past Due
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Residential
real estate:
|
||||||||||||||||||||||||
One-
to four-family
|
$ | 1,083 | $ | 515 | $ | 1,539 | $ | 1,754 | $ | 1,561 | $ | 742 | ||||||||||||
Multi-family
|
— | — | — | — | — | 1,208 | ||||||||||||||||||
Nonresidential
real estate and land
|
648 | 3,598 | 383 | 1,080 | 324 | 535 | ||||||||||||||||||
Consumer
and other loans
|
728 | 337 | 104 | 62 | 73 | 22 | ||||||||||||||||||
Total
|
$ | 2,459 | $ | 4,450 | $ | 2,026 | $ | 2,896 | $ | 1,958 | $ | 2,507 |
Analysis and
Determination of the Allowance for Loan Losses. The allowance for loan
losses is a valuation allowance for probable credit losses in the loan
portfolio. We evaluate the need to establish allowances against losses on loans
on a quarterly basis. When additional allowances are necessary, a provision for
loan losses is charged to earnings. The recommendations for increases or
decreases to the allowance are presented by management to the Board of
Directors.
Our
methodology for assessing the appropriateness of the allowance for loan losses
consists of: (1) a specific allowance on identified problem loans; and (2) a
general valuation allowance on the remainder of the loan portfolio. Although we
determine the amount of each element of the allowance separately, the entire
allowance for loan losses is available for the entire portfolio.
50
Specific Allowance
Required for Identified Problem Loans.
We establish an allowance on certain identified problem loans based on such
factors as: (1) the strength of the customer’s personal or business cash flows;
(2) the availability of other sources of repayment; (3) the amount due or past
due; (4) the type and value of collateral; (5) the strength of our collateral
position; (6) the estimated cost to sell the collateral; and (7) the borrower’s
effort to cure the delinquency.
General Valuation
Allowance on the Remainder of the Loan Portfolio. We establish a general
allowance for loans that are not delinquent to recognize the inherent losses
associated with lending activities. This general valuation allowance is
determined by segregating the loans by loan category and assigning percentages
to each category. The percentages are adjusted for significant factors that, in
management’s judgment, affect the collectibility of the portfolio as of the
evaluation date. These significant factors may include changes in existing
general economic and business conditions affecting our primary lending areas and
the national economy, staff lending experience, recent loss experience in
particular segments of the portfolio, specific reserve and classified asset
trends, delinquency trends and risk rating trends. These loss factors are
subject to ongoing evaluation to ensure their relevance in the current economic
environment.
As a
result of our systematic analysis of the adequacy of the allowance for loan
losses, the loss factors we presently use to determine the reserve level were
updated in 2008 based on various risk factors such as trends in underperforming
loans, trends and concentrations in loans and loan volume, economic trends in
our market area, particularly the impact of the gaming and tourism industry on
the economy of our market area, the effect of which has become significant in
recent periods. In order to reflect trends in the composition of our loan
portfolio and in our recent historical loan loss experience, we increased the
allowance percentage on certain loan categories which demonstrated a higher risk
of loss and decreased the allowance percentage on certain loan categories which
demonstrated a lower risk of loss. The update to the allowance percentages
resulted in a decrease in the amount of the allowance allocated to loans secured
by one- to four-family residential properties and an increase in the amount of
the allowance allocated to loans secured by multi-family real estate,
nonresidential real estate and loans, commercial business loans and consumer
loans.
We also
identify loans that may need to be charged-off as a loss by reviewing all
delinquent loans, classified loans and other loans that management may have
concerns about collectability. For individually reviewed loans, the borrower’s
inability to make payments under the terms of the loan or a shortfall in
collateral value would result in our allocating a portion of the allowance to
the loan that was impaired.
At June
30, 2010, our allowance for loan losses represented 1.83% of total loans and
53.7% of nonperforming loans. At June 30, 2009, our allowance for loan
losses represented 1.6% of total loans and 70.5% of nonperforming loans. The
allowance for loan losses increased to $5.7 million at June 30, 2010 from $4.2
million at June 30, 2009.
51
The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
At June 30,
|
||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2008
|
||||||||||||||||||||||||||||||||||
Amount
|
% of
Allowance
to Total
Allowance
|
% of
Loans in
Category
to Total
Loans
|
Amount
|
% of
Allowance
to Total
Allowance
|
% of
Loans in
Category
to Total
Loans
|
Amount
|
% of
Allowance
to Total
Allowance
|
% of
Loans in
Category
to Total
Loans
|
||||||||||||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
Residential
real estate
|
$ | 1,529 | 26.9 | % | 58.4 | % | $ | 537 | 12.7 | % | 67.1 | % | $ | 524 | 11.3 | % | 61.6 | % | ||||||||||||||||||
Nonresidential
real estate and land
|
3,187 | 56.1 | 25.3 | 3,297 | 78.3 | 20.7 | 3,823 | 82.8 | 25.2 | |||||||||||||||||||||||||||
Commercial
|
58 | 1.0 | 2.4 | 54 | 1.3 | 1.6 | 7 | 0.2 | 2.1 | |||||||||||||||||||||||||||
Consumer
|
907 | 16.0 | 13.3 | 325 | 7.7 | 10.0 | 265 | 5.7 | 10.2 | |||||||||||||||||||||||||||
Construction
|
— | — | 0.6 | — | — | 0.6 | — | — | 0.9 | |||||||||||||||||||||||||||
Total
allowance for loan lossesTotal allowance for loan losses
|
$ | 5,681 | 100.0 | % | 100.0 | % | $ | 4,213 | 100.0 | % | 100.0 | % | $ | 4,619 | 100.0 | % | 100.0 | % | ||||||||||||||||||
Total
loansTotal loans
|
$ | 309,575 | $ | 272,270 | $ | 289,926 |
At June 30,
|
||||||||||||||||||||||||
2007
|
2006
|
|||||||||||||||||||||||
Amount
|
% of
Allowance
to Total
Allowance
|
% of
Loans in
Category
to Total
Loans
|
Amount
|
% of
Allowance
to Total
Allowance
|
% of
Loans in
Category
to Total
Loans
|
|||||||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||||||
Residential
real estate
|
$ | 331 | 12.4 | % | 58.9 | % | $ | 484 | 23.0 | % | 55.4 | % | ||||||||||||
Nonresidential
real estate and land
|
1,949 | 73.0 | 27.5 | 1,361 | 64.6 | 29.6 | ||||||||||||||||||
Commercial
|
10 | 0.4 | 2.1 | 14 | 0.7 | 2.0 | ||||||||||||||||||
Consumer
|
381 | 14.2 | 8.1 | 246 | 11.7 | 8.5 | ||||||||||||||||||
Construction
|
— | — | 3.4 | — | — | 4.5 | ||||||||||||||||||
Total
allowance for loan losses
|
$ | 2,671 | 100.0 | % | 100.0 | % | $ | 2,105 | 100.0 | % | 100.0 | % | ||||||||||||
Total
loans
|
$ | 278,270 | $ | 247,806 |
Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established our allowance
for loan losses in conformity with U.S. generally accepted accounting
principles, there can be no assurance that the OTS, in reviewing our loan
portfolio, will not request us to increase our allowance for loan losses. The
OTS may require us to increase our allowance for loan losses based on judgments
different from ours. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the allowance
for loan losses may adversely affect our financial condition and results of
operations.
52
Analysis of Loan
Loss Experience. The following table sets forth an analysis of the
allowance for loan losses for the periods indicated.
Year
Ended June 30,
|
||||||||||||||||||||
2010
|
2009
|
2008
|
2007
|
2006
|
||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||
Allowance
at beginning of period
|
$ | 4,213 | $ | 4,619 | $ | 2,671 | $ | 2,105 | $ | 2,266 | ||||||||||
Provision
for loan losses
|
2,509 | 2,447 | 4,718 | 730 | 120 | |||||||||||||||
Charge-offs:
|
||||||||||||||||||||
Real
estate
|
124 | 101 | 343 | 82 | 18 | |||||||||||||||
Nonresidential
real estate and land
|
34 | 2,537 | 2,440 | — | — | |||||||||||||||
Multi-family
residential real estate
|
831 | — | — | — | — | |||||||||||||||
Consumer
and other loans
|
96 | 182 | — | 129 | 271 | |||||||||||||||
Total
charge-offs
|
1,087 | 2,820 | 2,783 | 211 | 289 | |||||||||||||||
Recoveries:
|
||||||||||||||||||||
Real
estate
|
2 | 5 | — | — | — | |||||||||||||||
Nonresidential
real estate and land
|
19 | — | — | — | — | |||||||||||||||
Multi-family
residential real estate
|
5 | — | — | — | — | |||||||||||||||
Consumer
and other loans
|
20 | 13 | 13 | 47 | 8 | |||||||||||||||
Total
recoveries
|
46 | 18 | 13 | 47 | 8 | |||||||||||||||
Net
charge-offs
|
(1,041 | ) | (2,802 | ) | (2,770 | ) | (164 | ) | (281 | ) | ||||||||||
Loss
on restructuring of loan
|
3 | 51 | — | — | — | |||||||||||||||
Allowance
at end of period
|
$ | 5,681 | $ | 4,213 | $ | 4,619 | $ | 2,671 | $ | 2,105 | ||||||||||
Allowance
to nonperforming loans
|
53.73 | % | 70.51 | % | 62.00 | % | 84.55 | % | 256.39 | % | ||||||||||
Allowance
to total loans outstanding at the end of the period
|
1.84 | % | 1.53 | % | 1.59 | % | 0.97 | % | 0.85 | % | ||||||||||
Net
charge-offs to average loans outstanding during the
period
|
0.04 | % | 1.00 | % | 1.06 | % | 0.06 | % | 0.12 | % |
Interest Rate
Risk Management. We manage the interest rate sensitivity of our
interest-bearing liabilities and interest-earning assets in an effort to
minimize the adverse effects of changes in the interest rate environment.
Deposit accounts typically react more quickly to changes in market interest
rates than mortgage loans because of the shorter maturities of deposits. As a
result, sharp increases in interest rates may adversely affect our earnings
while decreases in interest rates may beneficially affect our earnings. To
reduce the potential volatility of our earnings, we have sought to improve the
match between asset and liability maturities and rates, while maintaining an
acceptable interest rate spread. Our strategy for managing interest rate risk
emphasizes: adjusting the maturities of borrowings; adjusting the investment
portfolio mix and duration; and generally selling in the secondary market newly
originated conforming fixed-rate 15-, 20- and 30-year one- to four-family
residential real estate loans and available-for-sale securities. We currently do
not participate in hedging programs, interest rate swaps or other activities
involving the use of derivative financial instruments.
We have
an Asset/Liability Committee, which includes members of management and Board
members, to communicate, coordinate and control all aspects involving
asset/liability management. The committee establishes and monitors the volume,
maturities, pricing and mix of assets and funding sources with the objective of
managing assets and funding sources to provide results that are consistent with
liquidity, growth, risk limits and profitability goals.
Our goal
is to manage asset and liability positions to moderate the effects of interest
rate fluctuations on net interest income and net income.
53
Net Portfolio
Value Analysis. We use
a net portfolio value analysis prepared by the OTS to review our level of
interest rate risk. This analysis measures interest rate risk by computing
changes in net portfolio value of our cash flows from assets, liabilities and
off-balance sheet items in the event of a range of assumed changes in market
interest rates. Net portfolio value represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. These analyses
assess the risk of loss in market risk-sensitive instruments in the event of a
sudden and sustained 50 to 300 basis point increase or 50 and 100 basis point
decrease in market interest rates with no effect given to any steps that we
might take to counter the effect of that interest rate movement. Because of the
low level of market interest rates, these analyses are not performed for
decreases of more than 100 basis points.
The
following table, which is based on information that we provide to the OTS,
presents the change in our net portfolio value at June 30, 2010 that would occur
in the event of an immediate change in interest rates based on OTS assumptions,
with no effect given to any steps that we might take to counteract that
change.
Net Portfolio Value
(Dollars in Thousands)
|
Net Portfolio Value as % of
Portfolio Value of Assets
|
|||||||||||||||||||||
Basis Point (“bp”)
Change in Rates
|
Amount
|
Change
|
% Change
|
NPV Ratio
|
Change (bp)
|
|||||||||||||||||
300
|
$
|
59,161 | $ | (1,993) | (3)% | 11.86% | (22)bp | |||||||||||||||
200
|
61,564 | 409 | 1 | 12.25 | 16 | |||||||||||||||||
100
|
61,698 | 543 | 1 | 12.23 | 15 | |||||||||||||||||
50
|
61,471 | 316 | 1 | 12.17 | 8 | |||||||||||||||||
0
|
61,155 | - | - | 12.08 | - | |||||||||||||||||
(50) | 60,045 | (1,110) | (2) | 11.86 | (22) | |||||||||||||||||
(100) | 60,996 | (159) | - | 12.01 | (7) |
The OTS
uses various assumptions in assessing interest rate risk. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analyses presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
Prepayment rates can have a significant impact on interest income. Because of
the large percentage of loans and mortgage-backed securities we hold, rising or
falling interest rates have a significant impact on the prepayment speeds of our
earning assets that in turn affect the rate sensitivity position. When interest
rates rise, prepayments tend to slow. When interest rates fall, prepayments tend
to rise. Our asset sensitivity would be reduced if prepayments slow and vice
versa. While we believe these assumptions to be reasonable, there can be no
assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity.
Liquidity
Management.
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of securities and borrowings from the Federal
Home Loan Bank of Indianapolis. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition.
We
regularly adjust our investments in liquid assets based upon our assessment of:
(1) expected loan demands; (2) expected deposit flows, in particular municipal
deposit flows; (3) yields available on interest-earning deposits and securities;
and (4) the objectives of our asset/liability management
policy.
54
Our most
liquid assets are cash and cash equivalents. The levels of these assets depend
on our operating, financing, lending and investing activities during any given
period. Cash and cash equivalents totaled $32.0 million at June 30, 2010.
Securities classified as available-for-sale whose market value exceeds our cost,
which provide additional sources of liquidity, totaled $104.1 million at June
30, 2010. Total securities classified as available-for-sale were $119.3 million
at June 30, 2010. In addition, at June 30, 2010, we had the ability to borrow a
total of approximately $83.0 million from the Federal Home Loan Bank of
Indianapolis.
At June
30, 2010, we had $38.7 million in loan commitments outstanding, consisting of
$1.1 million in mortgage loan commitments, $4.3 million in commercial loan
commitments, $26.6 million in unused home equity lines of credit, $5.8 million
in commercial lines of credit, and $856,000 in letters of credit
outstanding. Certificates of deposit due within one year of June 30,
2010 totaled $162.5 million. This represented 74.6% of certificates of deposit
at June 30, 2010. We believe the large percentage of certificates of deposit
that mature within one year reflects customers’ hesitancy to invest their funds
for long periods in the current low interest rate environment. If these maturing
deposits do not remain with us, we will be required to seek other sources of
funds, including other certificates of deposit and borrowings. Depending on
market conditions, we may be required to pay higher rates on such deposits or
other borrowings than we currently pay on the certificates of deposit due on or
before June 30, 2010. We believe, however, based on past experience that a
significant portion of our certificates of deposit will remain with us. We have
the ability to attract and retain deposits by adjusting the interest rates
offered.
The
following table presents certain of our contractual obligations as of June 30,
2010.
Payments Due by Period
|
||||||||||||||||||||
Contractual Obligations
|
Total
|
Less than
One Year
|
One to
Three
Years
|
Three to
Five Years
|
More Than
5 Years
|
|||||||||||||||
(Dollars
in Thousands)
|
||||||||||||||||||||
At
June 30, 2010
|
||||||||||||||||||||
Long-term
debt obligations
|
$ | 2,833 | $ | 1,000 | $ | 1,833 | $ | — | $ | — | ||||||||||
Operating
lease obligations
|
74 | 31 | 32 | 11 | — | |||||||||||||||
Other
long-term liabilities reflected on the balance sheet
|
— | — | — | — | — | |||||||||||||||
Total
|
$ | 2,907 | $ | 1,031 | $ | 1,865 | $ | 11 | $ | — |
Our
primary investing activities are the origination and purchase of loans and the
purchase of securities. Our primary financing activities consist of activity in
deposit accounts and Federal Home Loan Bank advances. Deposit flows are affected
by the overall level of interest rates, the interest rates and products offered
by us and our local competitors and other factors. We generally manage the
pricing of our deposits to be competitive and to increase core deposit
relationships. Occasionally, we offer promotional rates on certain deposit
products to attract deposits.
The
following table presents our primary investing and financing activities during
the periods indicated.
Year Ended June 30,
|
||||||||
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Investing
activities:
|
||||||||
Loans
disbursed or closed, net of acquisition
|
$ | (62,161 | ) | $ | (46,378 | ) | ||
Loan
principal repayments
|
41,597 | 31,153 | ||||||
Proceeds
from maturities and principal repayments of securities
|
28,334 | 12,138 | ||||||
Proceeds
from sales of securities available-for-sale
|
20,557 | 1,550 | ||||||
Purchases
of securities
|
(91,931 | ) | (51,349 | ) | ||||
Capital
expenditures, net of acquisition
|
(796 | ) | (163 | ) |
55
Financing
activities:
|
||||||||
Increase
in deposits, net of acquisition
|
37,258 | 18,842 | ||||||
Proceeds
from Federal Home Loan Bank advances
|
— | — | ||||||
Repayments
of Federal Home Loan Bank advances
|
(1,000 | ) | (1,000 | ) | ||||
Dividends
paid to stockholders
|
(1,170 | ) | (1,096 | ) | ||||
Repurchases
of common stock
|
(80 | ) | (325 | ) |
Capital
Management. United Community Bank is subject to various regulatory
capital requirements administered by the OTS, including a risk-based capital
measure. The risk-based capital guidelines include both a definition of capital
and a framework for calculating risk-weighted assets by assigning balance sheet
assets and off-balance sheet items to broad risk categories. At June 30, 2010,
we exceeded all of our regulatory capital requirements. We are considered “well
capitalized” under regulatory guidelines. See “Regulation and
Supervision—Regulation of Federal Savings
Associations—Capital Requirements,” and Note 17 to the
consolidated financial statements included in Item 8 to this Annual Report on
Form 10-K.
Off-Balance Sheet
Arrangements. In the normal course of operations, we engage in a variety
of financial transactions that, in accordance with U.S. generally accepted
accounting principles, are not recorded in our financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate and
liquidity risk. Such transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments, letters of credit
and lines of credit. For information about our loan commitments and unused lines
of credit, see Note 15 of the notes to the consolidated financial statements. We
currently have no plans to engage in hedging activities in the
future.
For the
year ended June 30, 2010, we engaged in no off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results
of operations or cash flows.
Effect
of Inflation and Changing Prices
The
financial statements and related financial data presented in this report have
been prepared in accordance with U.S. generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on our operations is reflected in increased operating costs. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
Item
7A. Quantitative and Qualitative Disclosures about Market
Risk
The
information required by this item is incorporated herein by reference to the
section captioned “Risk
Management” in Item 7 of this Annual Report on Form 10-K.
56
Item 8. Financial Statements and
Supplementary Data
Management’s
Report on Internal Control over Financial Reporting
Company’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of June 30, 2010, utilizing the framework
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Based on
this assessment, management has determined that the Company’s internal control
over financial reporting as of June 30, 2010 is effective.
Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America; (2) receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and (3) unauthorized acquisitions, use, or
disposition of the Company’s assets that could have a material effect on the
Company’s financial statements are prevented or timely detected.
All
internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparations and presentations. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting. Management’s report was not subject to attestation by
the Company’s independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.
September
28, 2010
57
[LETTERHEAD
OF CLARK, SCHAEFER, HACKETT & CO.]
Report
of Independent Registered
Public Accounting
Firm
To the
Board of Directors of
United
Community Bancorp and Subsidiaries:
We have
audited the consolidated statements of financial condition of United Community
Bancorp and Subsidiaries as of June 30, 2010 and 2009, and the related
consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the years then ended. The Company’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of United Community Bancorp and
Subsidiaries as of June 30, 2010 and 2009, and the results of its operations and
its cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.
/s/
Clark, Schaefer, Hackett & Co.
|
Cincinnati,
Ohio
|
September
28, 2010
|
58
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Financial Condition
(In thousands, except share amounts)
|
June 30, 2010
|
June 30, 2009
|
||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 32,023 | $ | 27,004 | ||||
Investment
securities:
|
||||||||
Securities
available for sale - at estimated market value
|
62,089 | 46,769 | ||||||
Securities
held to maturity - at amortized cost
|
631 | 175 | ||||||
Mortgage-backed
securities available for sale - at estimated market value
|
57,238 | 29,713 | ||||||
Loans
receivable, net
|
309,575 | 272,270 | ||||||
Loans
available for sale
|
364 | 2,193 | ||||||
Property
and equipment, net
|
7,513 | 6,011 | ||||||
Federal
Home Loan Bank stock, at cost
|
2,016 | 2,016 | ||||||
Accrued
interest receivable:
|
||||||||
Loans
|
1,573 | 1,259 | ||||||
Investments
and mortgage-backed securities
|
717 | 486 | ||||||
Other
real estate owned, net
|
297 | 1,940 | ||||||
Cash
surrender value of life insurance policies
|
7,109 | 6,826 | ||||||
Deferred
income taxes
|
3,113 | 2,700 | ||||||
Prepaid
expenses and other assets
|
3,316 | 2,217 | ||||||
Goodwill
|
3,130 | - | ||||||
Intangible
asset
|
1,400 | - | ||||||
Total
assets
|
$ | 492,104 | $ | 401,579 | ||||
Liabilities and Stockholders'
Equity
|
||||||||
Deposits
|
$ | 430,180 | $ | 339,616 | ||||
Advance
from FHLB
|
2,833 | 3,833 | ||||||
Accrued
interest on deposits
|
119 | 15 | ||||||
Accrued
interest on FHLB advance
|
7 | 8 | ||||||
Advances
from borrowers for payment of insurance and taxes
|
168 | 179 | ||||||
Accrued
expenses and other liabilities
|
3,317 | 2,849 | ||||||
Total
liabilities
|
436,624 | 346,500 | ||||||
Stockholders'
equity
|
||||||||
Preferred
stock, $0.01 par value; 1,000,000 shares authorized, none
issued
|
- | - | ||||||
Common
stock, $0.01 par value; 19,000,000 shares authorized, 8,464,000 shares
issued and 7,845,554 shares outstanding at June 30, 2010 and 8,464,000
shares issued, and 7,857,974 shares outstanding at June 30,
2009
|
36 | 36 | ||||||
Additional
paid-in capital
|
36,995 | 36,791 | ||||||
Retained
earnings
|
28,048 | 28,204 | ||||||
Less
shares purchased for stock plans
|
(3,042 | ) | (3,254 | ) | ||||
Treasury
Stock, at cost - 618,446 and 606,026 shares at June 30, 2010
and June 30, 2009, respectively
|
(7,054 | ) | (6,974 | ) | ||||
Accumulated
other comprehensive income:
|
||||||||
Unrealized
gain on securities available for sale, net of income taxes
|
497 | 276 | ||||||
Total
stockholders' equity
|
55,480 | 55,079 | ||||||
Total
liabilities and stockholders' equity
|
$ | 492,104 | $ | 401,579 |
See
accompanying notes to the consolidated financial statements.
59
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Income
(In
thousands, except share amounts)
For the year ended
June 30,
|
||||||||
2010
|
2009
|
|||||||
Interest
income:
|
||||||||
Loans
|
$ | 16,334 | $ | 17,784 | ||||
Investments
and mortgage - backed securities
|
2,602 | 2,128 | ||||||
Total
interest income
|
18,936 | 19,912 | ||||||
Interest
expense:
|
||||||||
Deposits
|
6,321 | 7,766 | ||||||
Borrowed
funds
|
108 | 140 | ||||||
Total
interest expense
|
6,429 | 7,906 | ||||||
Net
interest income
|
12,507 | 12,006 | ||||||
Provision
for loan losses
|
2,509 | 2,447 | ||||||
Net
interest income after provision for loan losses
|
9,998 | 9,559 | ||||||
Noninterest
income:
|
||||||||
Service
charges
|
1,988 | 1,776 | ||||||
Gain
on sale of loans
|
278 | 526 | ||||||
Gain
(loss) on sale of investments
|
311 | (183 | ) | |||||
Gain
on sale of other real estate owned
|
34 | - | ||||||
Income
from Bank Owned Life Insurance
|
282 | 256 | ||||||
Other
|
664 | 412 | ||||||
Total
noninterest income
|
3,557 | 2,787 | ||||||
Noninterest
expense:
|
||||||||
Compensation
and employee benefits
|
6,040 | 5,659 | ||||||
Premises
and occupancy expense
|
1,101 | 1,074 | ||||||
Deposit
insurance premium
|
740 | 457 | ||||||
Advertising
expense
|
378 | 296 | ||||||
Data
processing expense
|
296 | 241 | ||||||
ATM
service fees
|
423 | 430 | ||||||
Provision
for loss on sale of real estate owned
|
510 | 770 | ||||||
Acquisition
related expenses
|
439 | - | ||||||
Other
operating expenses
|
2,271 | 2,523 | ||||||
Total
noninterest expense
|
12,198 | 11,450 | ||||||
Income
before income taxes
|
1,357 | 896 | ||||||
Provision
for income taxes
|
343 | 177 | ||||||
Net
income
|
$ | 1,014 | $ | 719 | ||||
Basic
and diluted earnings per share
|
$ | 0.13 | $ | 0.09 |
See
accompanying notes to the consolidated financial statements.
60
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
(In
thousands)
For the year ended
|
||||||||
June 30,
|
||||||||
2010
|
2009
|
|||||||
Net
income
|
$ | 1,014 | $ | 719 | ||||
Other
comprehensive income, net of tax Unrealized gain on available for sale
securities
|
411 | 551 | ||||||
Reclassification
adjustment for (gains) losses on available for sale securities included in
income
|
(190 | ) | 112 | |||||
Total
comprehensive income
|
$ | 1,235 | $ | 1,382 |
See
accompanying notes to consolidated financial statements.
61
UNITED
COMMUNITY BANCORP AND SUBSIDIARY
Consolidated
Statements of Stockholders' Equity
Unrealized
|
||||||||||||||||||||||||||||
Additional
|
Shares
|
Gain (Loss)
|
||||||||||||||||||||||||||
Common
|
Paid-In
|
Retained
|
Purchased for
|
Treasury
|
on Securities
|
|||||||||||||||||||||||
(In thousands, except per share data)
|
Stock
|
Capital
|
Earnings
|
Stock plans
|
Stock
|
Available for Sale
|
Total
|
|||||||||||||||||||||
Balance
at June 30, 2008
|
$ | 36 | $ | 37,965 | $ | 28,581 | $ | (5,057 | ) | $ | (6,649 | ) | $ | (387 | ) | $ | 54,489 | |||||||||||
Net
income
|
- | - | 719 | - | - | - | 719 | |||||||||||||||||||||
Cash
dividends of $0.37 per share*
|
- | - | (1,096 | ) | - | - | - | (1,096 | ) | |||||||||||||||||||
Stock-based
compensation expense
|
- | 500 | - | - | - | - | 500 | |||||||||||||||||||||
Amortization
of ESOP shares
|
- | (94 | ) | - | 223 | - | - | 129 | ||||||||||||||||||||
Reclassification
of shares already earned
|
- | (1,580 | ) | - | 1,580 | - | - | - | ||||||||||||||||||||
Shares
repurchased
|
- | - | - | - | (325 | ) | - | (325 | ) | |||||||||||||||||||
Unrealized
loss on investments:
|
||||||||||||||||||||||||||||
Net
change during the period, net of deferred taxes of $442
|
- | - | - | - | - | 663 | 663 | |||||||||||||||||||||
Balance
at June 30, 2009
|
$ | 36 | $ | 36,791 | $ | 28,204 | $ | (3,254 | ) | $ | (6,974 | ) | $ | 276 | $ | 55,079 | ||||||||||||
Net
income
|
- | - | 1,014 | - | - | - | 1,014 | |||||||||||||||||||||
Cash
dividends of $0.41 per share*
|
- | - | (1,170 | ) | - | - | - | (1,170 | ) | |||||||||||||||||||
Stock-based
compensation expense
|
- | 298 | - | - | - | - | 298 | |||||||||||||||||||||
Amortization
of ESOP shares
|
- | (94 | ) | - | 212 | - | - | 118 | ||||||||||||||||||||
Shares
repurchased
|
- | - | - | - | (80 | ) | - | (80 | ) | |||||||||||||||||||
Unrealized
loss on investments:
|
||||||||||||||||||||||||||||
Net
change during the period, net of deferred taxes of $72
|
- | - | - | - | - | 221 | 221 | |||||||||||||||||||||
Balance
at June 30, 2010
|
$ | 36 | $ | 36,995 | $ | 28,048 | $ | (3,042 | ) | $ | (7,054 | ) | $ | 497 | $ | 55,480 |
* paid on
all shares other than MHC
See
accompanying notes to consolidated financial statements.
62
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
For the year ended
|
||||||||
June 30,
|
||||||||
(In
thousands)
|
2010
|
2009
|
||||||
Operating
activities:
|
||||||||
Net
income
|
$ | 1,014 | $ | 719 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Depreciation
|
454 | 472 | ||||||
Provision
for loan losses
|
2,509 | 2,447 | ||||||
Provision
for losses on real estate acquired through foreclosure
|
510 | 770 | ||||||
Deferred
loan origination costs
|
(84 | ) | (31 | ) | ||||
Amortization
of premium on investments
|
341 | 153 | ||||||
Proceeds
from sale of loans
|
25,409 | 28,901 | ||||||
Loans
disbursed for sale in the secondary market
|
(23,302 | ) | (30,416 | ) | ||||
Gain
on sale of loans
|
(278 | ) | (526 | ) | ||||
Loss
(gain) on the sale of investments
|
(311 | ) | 183 | |||||
ESOP
shares committed to be released
|
212 | 129 | ||||||
Stock-based
compensation expense
|
204 | 500 | ||||||
Deferred
income taxes
|
(503 | ) | (50 | ) | ||||
Gain
on sale of other real estate owned
|
(34 | ) | (50 | ) | ||||
Effects
of change in operating assets and liabilities:
|
||||||||
Accrued
interest receivable
|
(545 | ) | (394 | ) | ||||
Prepaid
expenses and other assets
|
(1,099 | ) | (87 | ) | ||||
Accrued
interest on deposits
|
104 | (62 | ) | |||||
Accrued
expenses and other
|
468 | 591 | ||||||
Net
cash provided by operating activities
|
5,069 | 3,249 | ||||||
Investing
activities:
|
||||||||
Proceeds
from maturity of available for sale investment securities
|
16,640 | 6,250 | ||||||
Proceeds
from the sale of available for sale investment securities
|
9,639 | 1,550 | ||||||
Proceeds
from the maturity of held to maturity investment
securities
|
44 | 25 | ||||||
Proceeds
from repayment of mortgage-backed securities available for
sale
|
11,650 | 5,863 | ||||||
Proceeds
from sale of mortgage-backed securities
|
10,918 | - | ||||||
Proceeds
from sale of other real estate owned
|
2,276 | 1,088 | ||||||
Purchases
of available for sale investment securities
|
(42,118 | ) | (41,003 | ) | ||||
Purchases
of mortgage-backed securities
|
(49,813 | ) | (10,346 | ) | ||||
Purchases
of Federal Home Loan Bank stock
|
- | (90 | ) | |||||
Net
decrease in loans, net of acquisition
|
3,420 | 8,814 | ||||||
Increase
in cash surrender value of life insurance
|
(283 | ) | (256 | ) | ||||
Cash
received for acquisition of branches
|
3,376 | - | ||||||
Capital
expenditures, net of acquisition
|
(796 | ) | (163 | ) | ||||
Net
cash used in investing activities
|
(35,047 | ) | (28,268 | ) | ||||
Financing
activities:
|
||||||||
Net
increase in deposits, net of acquisition
|
37,258 | 18,842 | ||||||
Dividends
paid to stockholders
|
(1,170 | ) | (1,096 | ) | ||||
Repurchases
of common stock
|
(80 | ) | (325 | ) | ||||
Repayments
of Federal Home Loan Bank advances
|
(1,000 | ) | (1,000 | ) | ||||
Net
decrease in advances from borrowers for payment of insurance and
taxes
|
(11 | ) | (108 | ) | ||||
Net
cash provided by financing activities
|
34,997 | 16,313 | ||||||
Net
increase (decrease) in cash and cash equivalents
|
5,019 | (8,706 | ) | |||||
Cash
and cash equivalents at beginning of period
|
27,004 | 35,710 | ||||||
Cash
and cash equivalents at end of period
|
$ | 32,023 | $ | 27,004 |
See
accompanying notes to the consolidated financial statements.
63
UNITED
COMMUNITY BANCORP
Notes to
Consolidated Financial Statements
NOTE 1 –
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
United
Community Bancorp (the “Company”) is a Federally-chartered corporation, which
was organized to be the mid-tier holding company for United Community Bank (the
“Bank”), which is a Federally-chartered, FDIC-insured savings bank. The
Company was organized in conjunction with the Bank’s reorganization from a
mutual savings bank to the mutual holding company structure on March 30,
2006. United Community MHC, a Federally-chartered corporation, is the
mutual holding company parent of the Company. At June 30, 2010, United Community
MHC owned 59% of the Company’s outstanding common stock and must always own at
least a majority of the voting stock of the Company. In addition to the
shares of the Company, United Community MHC was capitalized with $100,000 in
cash from the Company. The Company, through the Bank, operates in a single
business segment providing traditional banking services through its office and
branches in Southeastern Indiana. UCB Real Estate Management Holdings,
LLC, a wholly-owned subsidiary of United Community Bank, was formed for the
purpose of holding and operating real estate assets that are acquired by the
Bank through, or in lieu of, foreclosure. UCB Financial Services, Inc, a
wholly-owned subsidiary of United Community Bank, was formed for the purpose of
collecting commissions on investments referred to Lincoln Financial
Group.
PRINCIPLES
OF CONSOLIDATION – The consolidated financial statements include the accounts of
the Company and the Bank. All significant intercompany balances and
transactions have been eliminated.
USE OF
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”). In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates and
assumptions in the Company’s financial statements are recorded in the allowances
for loan and other real estate losses and deferred income taxes. Actual
results could differ significantly from those estimates.
CASH AND
CASH EQUIVALENTS – For purposes of reporting cash flows, cash and cash
equivalents include cash and interest-bearing deposits in other financial
institutions with original maturities of less than ninety days.
64
INVESTMENT
SECURITIES – Investment and mortgage-backed securities are classified upon
acquisition into one of three categories: held to maturity, trading, and
available for sale, in accordance with FASB Accounting Standards Codification
(ASC) Topic 320, Investments. Debt
securities that the Bank has the positive intent and ability to hold to maturity
are classified as held to maturity securities and reported at amortized
cost. Debt and equity securities that are bought and held principally for
the purpose of selling in the near-term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in
earnings. The Bank had no trading securities at June 30, 2010 or
2009. Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders’ equity, net of
deferred taxes.
Securities
are recorded net of applicable premium or discount with the premium or discount
being amortized on the interest method over the estimated average life of the
investment.
The Bank
designates its investments in U. S. League Intermediate-Term Portfolio, certain
municipal bonds, and mortgage-backed securities as available for
sale.
Gains and
losses realized on the sale of investment securities are accounted for on the
trade date using the specific identification method.
LOANS
RECEIVABLE - Loans receivable that management has the intent and ability to hold
until maturity or payoff are reported at their outstanding unpaid principal
balances reduced by any charge-offs or specific valuation accounts and net of
any deferred fees or costs on originated loans, or unamortized premiums or
discounts on purchased loans. Interest on loans is calculated by using the
simple interest method on daily balances of the principal amount
outstanding. Loans held for sale are recorded at lower of cost or market
determined in the aggregate. Loans are designated for sale as a part of
the Bank’s asset/liability management strategy. Market value is determined
based on expected volatility in interest rates and the anticipated holding
period before the loan is sold. Due to the holding period being short
term, the market value and cost of the loan are approximately the same.
The Bank had $364,000 and $2,193,000 in loans held for sale at June 30, 2010 and
2009, respectively.
The Bank
defers all loan origination fees, net of certain direct loan origination costs,
and amortizes them over the contractual life of the loan as an adjustment of
yield in accordance with ASC 310-20, Receivables – Nonrefundable Fees and
Other.
The Bank
retains the servicing on loans sold and agrees to remit to the investor loan
principal and interest at agreed-upon rates. These rates can differ from
the loan’s contractual interest rate resulting in a “yield
differential.” In addition to previously deferred loan origination
fees and cash gains, gains on the sale of loans can represent the present value
of the future yield differential less normal servicing fees, capitalized over
the estimated life of the loans sold. Normal servicing fees are determined
by reference to the stipulated minimum servicing fee set forth by the government
agencies to which the loans are sold. Such servicing fees are amortized to
operations over the life of the loans using the interest method. If
prepayments are higher than expected, an immediate charge to operations is made.
If prepayments are lower than original estimates, then the related adjustments
are made prospectively.
The
mortgage servicing rights recorded by the Bank are segregated into pools for
valuation purposes using as pooling criteria the loan term and coupon rate in
accordance with ASC 860-50-30. Once pooled, each
grouping of loans is evaluated on a discounted earnings basis to determine the
present value of the future earnings that a purchaser could expect to realize
from each portfolio. Earnings are projected from a variety of sources
including loan-servicing fees, interest earned on float, net interest earned on
escrows, miscellaneous income and costs to service the loans. The present
value of future earnings is the “economic” value for the pool. The Company
has selected the amortized cost method for valuation under guidance of ASC
860-50, Transfers and
Servicing – Servicing Assets and Liabilities.
65
The
allowance for loan and real estate losses is increased by charges to income and
decreased by charge-offs (net of recoveries). Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks such as amount of loan, type of loan,
concentrations, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions. In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of Management.
Although
Management uses the best information available to make these estimates, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's
control.
The
Bank’s internal asset review committee reviews each loan with three or more
delinquent payments, and each loan ninety days or more past due, and decides on
whether the circumstances involved give reason to place the loan on non-accrual
status. The Board of Directors reviews this information as determined by
the internal asset review committee each month. Loans may be returned to
accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and
principal. While a loan is classified as non-accrual, interest income is
generally recognized on a cash basis.
A loan is
defined as impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement. The Bank considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Bank's investment in
multi-family and nonresidential loans, such loans are collateral-dependent and,
as a practical expedient, are carried at the lower of cost or fair value based
upon the most recent real estate appraisals. Collateral-dependent loans
which are more than ninety days delinquent and are considered to constitute more
than a minimum delay in repayment are evaluated for impairment at that
time.
Cash
receipts on a nonaccrual loan are applied to principal and interest in
accordance with its contractual terms unless full payment of principal is not
expected, in which case cash receipts, whether designated as principal or
interest, are applied as a reduction of the carrying value of the loan. A
nonaccrual loan is generally returned to accrual status when principal and
interest payments are current, full collectibility of principal and interest is
reasonably assured and a consistent record of performance has been
demonstrated.
66
It is the
Savings Bank’s policy to charge off unsecured credits that are more than one
hundred and twenty days delinquent. Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment at that
time. Impaired loans would be charged off in the same manner as all loans
are subject to charge off.
From time
to time, as part of our loss mitigation process, loans may be renegotiated in a
troubled debt restructuring when we determine that greater economic value will
ultimately be recovered under the new terms than through foreclosure,
liquidation, or bankruptcy. We may consider the borrower’s payment status
and history, the borrower’s ability to pay upon a rate reset on an adjustable
rate mortgage, size of the payment increase upon a rate reset, period of time
remaining prior to the rate reset, and other relevant factors in determining
whether a borrower is experiencing financial difficulty. The restructured
loan is measured for impairment under the new terms.
CONCENTRATION
OF CREDIT RISK - The Bank grants residential and commercial loans to customers
in local counties in Southeastern Indiana, Northern Kentucky, and Southwestern
Ohio. Although the Bank has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon the
local economy.
Management
maintains deposit accounts with financial institutions in excess of federal
deposit insurance limits. The Company has not experienced any losses in
such accounts. The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
OTHER
REAL ESTATE OWNED - Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure, and
are transferred to the Bank’s wholly-owned subsidiary, UCB Real Estate
Management Holdings, LLC. Holding costs, including losses from operations,
are expensed when incurred. Valuations are periodically performed, and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
PROPERTY
AND EQUIPMENT - Property and equipment is carried at cost. Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets. The estimated useful lives are as follows:
Land
improvements
|
7 –
15 years
|
Buildings
|
15
– 39 years
|
Furniture
and equipment
|
3 –
10 years
|
Significant
renewals and betterments are charged to the property and equipment
account. Maintenance and repairs are charged to operations in the period
incurred.
INCOME
TAXES – The Company accounts for income taxes in accordance with ASC
740-10-50. Pursuant to the provisions of ASC 740-10-50, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible differences between the tax basis of an
asset or liability and its reported amount in the consolidated financial
statements that will result in taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the
amount of net deductible or taxable temporary differences or carry forward
attributes may be utilized against current period earnings, carried back against
prior years' earnings, offset against taxable temporary differences reversing in
future periods, or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets
to the extent that the value of net deductible temporary differences and carry
forward attributes exceeds management’s estimates of taxes payable on future
taxable income. Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future. The Company applies a
more likely than not recognition threshold for all tax
uncertainties.
67
The
Company's principal temporary differences between pretax financial income and
taxable income result primarily from timing differences for certain components
of compensation and post-retirement expense, book and tax bad debt deductions,
and amortization of goodwill and other intangible assets. Additional
temporary differences result from depreciation expense computed utilizing
accelerated methods for tax purposes, and for limitations on annual deductions
related to charitable contributions to the UCB Charitable
Foundation.
The
determination of current and deferred income taxes is an accounting estimate
which is based on the analyses of many factors including interpretation of
federal and state income tax laws, the evaluation of uncertain tax positions,
differences between the tax and financial reporting basis of assets and
liabilities (temporary differences), estimates of amounts due or owed such as
the timing of reversal of temporary differences and current financial accounting
standards. Actual results could differ from the estimates and tax law
interpretations used in determining the current and deferred income tax
liabilities.
EMPLOYEE
STOCK OWNERSHIP PLAN - The Company accounts for the United Community Bank
Employee Stock Ownership Plan (“ESOP”) in accordance with ASC 718-40, Compensation – Stock Compensation –
Employee Stock Ownership Plans. ESOP shares pledged as collateral
are reported as unearned ESOP shares in stockholders’ equity. As shares
are committed to be released from collateral, the Bank will record compensation
expense equal to the current market price of the shares. To the extent
that the fair value of the ESOP shares differs from the cost of such charges,
the difference is recorded to stockholders’ equity as additional paid-in
capital. Additionally, the shares become outstanding for basic net income
per share computations.
STOCK-BASED
COMPENSATION - The Company applies the provisions of ASC 718, Compensation – Stock
Compensation, which requires the Company to measure the cost of employee
services received in exchange for awards of equity instruments and to recognize
this cost in the financial statements over the period during which the employee
is required to provide such services. The Company has elected to recognize
compensation cost associated with its outstanding stock-based compensation
awards with graded vesting on an accelerated basis pursuant to ASC 718.
The expense is calculated for stock options at the date of grant using the
Black-Scholes option pricing model. The expense associated with restricted
stock awards is calculated based upon the value of the common stock on the date
of grant.
68
EARNINGS
PER SHARE – In June 2008, the Financial Accounting Standards Board (FASB) issued
ASC 260-10-65-2, Transition Related to FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This guidance concludes that non-vested shares with non-forfeitable dividend
rights are considered participating securities and, thus, subject to the
two-class method pursuant to ASC 260, Earnings per Share, when
computing basic and diluted EPS. This guidance became effective for the Company
on July 1, 2009 and has been applied retrospectively as required. The
Company’s restricted share awards contain non-forfeitable dividend rights but do
not contractually obligate the holders to share in the losses of the Company.
Accordingly, during periods of net income, unvested restricted shares are
included in the determination of both basic and diluted EPS. During periods of
net loss, these shares are excluded from both basic and diluted
EPS.
Basic
earnings per share (“EPS”) is based on the weighted average number of common
shares and unvested restricted shares outstanding, adjusted for ESOP shares not
yet committed to be released. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock, such as
outstanding stock options, were exercised or converted into common stock or
resulted in the issuance of common stock. Diluted EPS is calculated by
adjusting the weighted average number of shares of common stock outstanding to
include the effects of contracts or securities exercisable or which could be
converted into common stock, if dilutive, using the treasury stock
method.
For each
of the years ended June 30, 2010 and 2009, outstanding options to purchase
346,304 shares were excluded from the computations of diluted earnings per share
as their effect would have been anti-dilutive. The following is a
reconciliation of the basic and diluted weighted average number of common shares
outstanding:
June 30,
|
||||||||
2010
|
2009
|
|||||||
Basic
weighted average outstanding shares
|
7,616,623 | 7,589,898 | ||||||
Effect
of dilutive stock options
|
- | - | ||||||
Diluted
weighted average outstanding shares
|
7,616,623 | 7,589,898 |
COMPREHENSIVE
INCOME (LOSS) – The Company presents in the consolidated statement of
comprehensive income (loss) those amounts from transactions and other events
which currently are excluded from the consolidated statement of operations and
are recorded directly to stockholders’ equity.
GOODWILL
– In June 2010, the Company acquired three branches from Integra Bank National
Association (“Integra”), which was accounted for under the purchase method of
accounting. Under the purchase method, the Company is required to allocate the
cost of an acquired company to the assets acquired, including identified
intangible assets, and liabilities assumed based on their estimated fair values
at the date of acquisition. The excess cost over the value of net assets
acquired represents goodwill, which is not subject to amortization.
Goodwill
arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by the Company in connection with its acquisition relates to the inherent value
in the business acquired and this value is dependent upon the Company’s ability
to provide quality, cost-effective services in a competitive market place. As
such, goodwill value is supported ultimately by revenue that is driven by the
volume of business transacted. A decline in earnings as a result of a lack of
growth or the inability to deliver cost-effective services over sustained
periods can lead to impairment of goodwill that could adversely impact earnings
in future periods.
69
Goodwill
is not amortized but is tested for impairment when indicators of impairment
exist, or at least annually. Potential goodwill impairment exists when the fair
value of the reporting unit (as defined by US GAAP) is less than its carrying
value. An impairment loss is recognized in earnings only when the carrying
amount of goodwill is less than its implied fair value.
FAIR
VALUE OF FINANCIAL INSTRUMENTS – ASC 820, Fair Value Measurements and
Disclosures, requires disclosure of the fair value of financial
instruments, both assets and liabilities, whether or not recognized in the
consolidated balance sheet, for which it is practicable to estimate the
value. For financial instruments where quoted market prices are not
available, fair values are estimated using present value or other valuation
methods.
The
following methods and assumptions are used in estimating the fair values of
financial instruments:
Cash and cash
equivalents
The
carrying values presented in the consolidated statements of position approximate
fair value.
Investments and
mortgage-backed securities
For
investment securities (debt instruments) and mortgage-backed securities, fair
values are based on quoted market prices, where available. If a
quoted market price is not available, fair value is estimated using quoted
market prices of comparable instruments.
Loans
receivable
The fair
value of the loan portfolio is estimated by evaluating homogeneous categories of
loans with similar financial characteristics. Loans are segregated by
types, such as residential mortgage, commercial real estate, and
consumer. Each loan category is further segmented into fixed and
adjustable rate interest, terms, and by performing and non-performing
categories. The fair value of performing loans, except residential
mortgage loans, is calculated by discounting contractual cash flows using
estimated market discount rates which reflect the credit and interest rate risk
inherent in the loan. For performing residential mortgage loans, fair
value is estimated by discounting contractual cash flows adjusted for prepayment
estimates using discount rates based on secondary market sources. The
fair value for significant non-performing loans is based on recent internal or
external appraisals. Assumptions regarding credit risk, cash flow,
and discount rates are judgmentally determined by using available market
information.
Federal Home Loan Bank
stock
The Bank
is a member of the Federal Home Loan Bank system and is required to maintain an
investment based upon a pre-determined formula. The carrying values
presented in the consolidated statements of position approximate fair
value.
70
Deposits
The fair
values of passbook accounts, NOW accounts, and money market savings and demand
deposits approximate their carrying values. The fair values of fixed
maturity certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently offered for deposits of
similar maturities.
Advance from Federal Home
Loan Bank
The fair
value is calculated using rates available to the Company on advances with
similar terms and remaining maturities.
Off-balance sheet
items
Carrying
value is a reasonable estimate of fair value. These instruments are
generally variable rate or short-term in nature, with minimal fees
charged.
ADVERTISING
- The Bank expenses advertising costs as incurred. Advertising costs
consist primarily of television, radio, newspaper and billboard
advertising.
EFFECT OF
RECENT ACCOUNTING PRONOUNCEMENTS
In July
2010, the FASB issued Accounting Standards Update (ASU) 2010-20, "Disclosures
About the Credit Quality of Financing Receivables and the Allowance for Credit
Losses." This purpose of this Update is to improve transparency by
companies that hold financing receivables, including loans, leases and other
long-term receivables. The Update requires such companies to disclose more
information about the credit quality of their financing receivables and the
credit reserves against them. This guidance is effective for the first interim
or annual reporting period ending after December 15, 2010, with the exception of
certain disclosures which include information for activity that occurs during a
reporting period (activity in the allowance for credit losses and modifications
of financing receivables) which will be effective for the first interim or
annual period beginning after December 15, 2010.
In April
2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of Loan
Modification when the Loan is Part of a Pool that is Accounted for as a Single
Asset (a consensus of the FASB Emerging Issues Task Force). The amendments
in this update affect any entity that acquires loans subject to ASC Subtopic
310-30, that accounts for some or all of those loans within pools, and that
subsequently modifies one or more of those loans after acquisition. ASU
No. 2010-18 is effective for modifications of loans accounted for within pools
under Subtopic 310-30 occurring in the interim period ending September 30, 2010,
and the amendments are to be applied prospectively. Management is
currently evaluating the impact, if any, that the adoption of this amendment
will have on its consolidated financial statements.
71
In
January 2010, the FASB issued ASU No. 2010-06, Improving Disclosure about Fair
Value Measurements, under Topic 820, Fair value Measurements and
Disclosures, to improve and provide new disclosures for recurring and
nonrecurring fair value measurements under the three-level hierarchy of inputs
for transfers in and out of Levels 1 and 2, and activity in Level 3. This
update also clarifies existing disclosures of the level of disaggregation for
the classes of assets and liabilities and the disclosure about inputs and
valuation techniques. ASU No. 2010-06 became effective for the interim period
March 31, 2010, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, which becomes effective for the interim period ending September
30, 2011. The adoption of ASU No. 2010-06 did not have a material
impact on our consolidated financial statements.
In
January 2010 the FASB issued ASU 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash, under Topic 505, which
amends the Codification to clarify that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in
earnings per share prospectively and is not a stock dividend. ASU 2010-01
codifies the consensus reached in EITF Issue No. 09-E, “Accounting for Stock Dividends,
Including Distributions to Shareholders with Components of Stock and
Cash.” ASU 2010-01 became effective for the interim period ending
December 31, 2009 for the Company. There was no material impact on the
Company’s financial statements as a result of the adoption of ASU 2010-01 for
per share or dividends paid amounts disclosed.
In
June 2009, the FASB issued guidance now codified as FASB ASC Topic 105,
Generally Accepted Accounting
Principles, as the single source of authoritative nongovernmental U.S.
GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by providing all
authoritative literature related to a particular topic in one place. All
existing accounting standard documents will be superseded and all other
accounting literature not included in the FASB Codification will be considered
non-authoritative. These provisions of FASB ASC Topic 105 were effective for
interim and annual periods ending after September 15, 2009 and,
accordingly, were effective for the Company for the quarter ended September 30,
2009. The adoption of this pronouncement did not have an impact on the Company’s
financial condition or results of operations, but will impact the Company’s
financial reporting process by eliminating all references to pre-codification
standards. On the effective date of this Statement, the Codification superseded
all then-existing non-SEC accounting and reporting standards, and all other
non-grandfathered, non-SEC accounting literature not included in the
Codification became non-authoritative.
In June
2008, the FASB issued ASC 260-10-65-2, Transition Related to FSP EITF 03-6-1,
Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance concludes that non-vested shares with
non-forfeitable dividend rights are considered participating securities and,
thus, subject to the two-class method pursuant to ASC 260, Earnings per Share, when
computing basic and diluted EPS. This guidance became effective for the Company
on July 1, 2009. Because the Company’s restricted share awards contain
non-forfeitable dividend rights, the provisions of this guidance must be
applied. Upon adoption, the Company was required to adjust all prior period EPS
data on a retrospective basis to conform with the provisions of this
guidance.
72
In June
2009, the FASB issued ASU 2009-16, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140. This
Statement modifies the accounting for transfers of financial assets and the
determination of what entities must be consolidated, and will have a significant
effect on securitizations and special-purpose entities. We adopted these
provisions effective July 1, 2009, as required. The adoption of these
provisions did not have a material impact on the Company’s financial
statements.
NOTE 2 –
ACQUISITION
On June
4, 2010 the Bank completed the purchase of three banking offices of Integra Bank
Corporation’s wholly-owned bank subsidiary, Integra Bank N.A., located in Milan,
Versailles, and Osgood, Indiana and a portfolio of selected loans originated by
other offices of Integra Bank. This acquisition was consistent with the Bank’s
strategy to strengthen and expand its Southeast Indiana market share. This
transaction added $53.3 million in deposits and $45.9 million in loans. The
deposits were purchased at a premium of 4.50%. As a result of the acquisition,
the Company recorded a core deposit intangible asset of $1,400,000 and goodwill
of $3,100,000. The results of operations for this acquisition have been included
since the transaction date of June 4, 1010. None of these purchased loans have
shown evidence of credit deterioration since origination. Expenses associated
with this transaction of $439,000 were included in the other non-interest
expense in the consolidated statement of income for the year ended June 30,
2010.
73
NOTE 3 –
INVESTMENT SECURITIES
Investment
securities available for sale at June 30, 2010 consist of the
following:
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
U.S
Government corporations and agencies
|
$ | 49,157 | $ | 212 | $ | - | $ | 49,369 | ||||||||
Municipal
bonds
|
12,538 | 137 | 84 | 12,591 | ||||||||||||
Other
equity securities
|
211 | - | 82 | 129 | ||||||||||||
$ | 61,906 | $ | 349 | $ | 166 | $ | 62,089 |
Investment
securities held to maturity at June 30, 2010 consist of the
following:
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Municipal
bonds
|
$ | 631 | $ | - | $ | - | $ | 631 |
Investment
securities available for sale at June 30, 2009 consist of the
following:
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
U.S.
League Intermediate - Term Portfolio
|
$ | 60 | $ | - | $ | 13 | $ | 47 | ||||||||
U.S.
Government corporations and agencies
|
39,515 | 218 | 92 | 39,641 | ||||||||||||
Municipal
bonds
|
7,091 | - | 139 | 6,952 | ||||||||||||
Other
equity securities
|
211 | - | 82 | 129 | ||||||||||||
$ | 46,877 | $ | 218 | $ | 326 | $ | 46,769 |
74
Investment
securities held to maturity at June 30, 2009 consist of the
following:
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Municipal
bonds
|
$ | 175 | - | - | $ | 175 |
The
callable bonds and municipal bonds available for sale have the following
maturities at June 30, 2010:
Amortized
|
Estimated
|
|||||||
cost
|
market value
|
|||||||
(Dollars
in thousands)
|
||||||||
Due
or callable in one year or less
|
$ | 30,964 | $ | 31,093 | ||||
Due
or callable in 1 - 5 years
|
18,193 | 18,276 | ||||||
Due
or callable in 5 - 10 years
|
269 | 279 | ||||||
Due
or callable in greater than 10 years
|
12,269 | 12,312 | ||||||
Total
debt securities
|
$ | 61,695 | $ | 61,960 |
All other
securities available for sale at June 30, 2010 are saleable within one
year. The Bank held $631,000 and $175,000 in investment securities that
are being held to maturity at June 30, 2010 and 2009, respectively. The
investment securities held to maturity have annual returns of principal and will
be fully matured between 2014 and 2019.
The
expected returns of principal of investments held to maturity are as follows as
of June 30, 2010 (dollars in thousands):
2011
|
$ | 65 | ||
2012
|
68 | |||
2013
|
71 | |||
2014
|
74 | |||
2015
|
77 | |||
2016
and thereafter
|
276 | |||
$ | 631 |
Gross
proceeds on the sale of investment and mortgage-backed securities were $20.5
million and $1.6 million for the years ended June 30, 2010 and 2009,
respectively. Realized gains for the years ended June 30, 2010 and 2009
were $437,000 and $93,000, respectively. Gross realized losses for the
years ended June 30, 2010 and 2009 were $126,000 and $276,000,
respectively.
75
The table
below indicates the length of time individual investment securities and
mortgage-backed securities have been in a continuous loss position at June 30,
2010 and 2009:
Less than 12 Months
|
12 Months or Longer
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
Value
|
Losses
|
Value
|
Losses
|
Value
|
Losses
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
June 30, 2010
|
||||||||||||||||||||||||
Municipal
bonds
|
$ | 6,703 | $ | 84 | - | - | $ | 6,703 | $ | 84 | ||||||||||||||
Mortgage-backed
securities
|
8,888 | 67 | - | - | 8,888 | 67 | ||||||||||||||||||
Other
equity securities
|
- | - | 129 | 82 | 129 | 82 | ||||||||||||||||||
$ | 15,591 | 151 | 129 | 82 | 15,720 | 233 | ||||||||||||||||||
Number
of investments
|
19
|
1
|
20
|
June 30, 2009
|
||||||||||||||||||||||||
U.S.
League Intermediate - Term Portfolio & Callable Government
agencies
|
$ | 9,624 | 92 | 60 | 13 | 9,684 | 105 | |||||||||||||||||
Municipal
bonds
|
2,533 | 63 | 2,568 | 76 | 5,101 | 139 | ||||||||||||||||||
Mortgage-backed
securities
|
- | - | 1,427 | 50 | 1,427 | 50 | ||||||||||||||||||
Other
equity securities
|
- | - | 129 | 82 | 129 | 82 | ||||||||||||||||||
$ | 12,157 | 155 | 4,184 | 221 | 16,341 | 376 | ||||||||||||||||||
Number
of investments
|
12
|
18
|
30
|
Securities
available for sale are reviewed for possible other-than-temporary impairment on
a quarterly basis. During this review, Management considers the severity
and duration of the unrealized losses as well as its intent and ability to hold
the securities until recovery, taking into account balance sheet management
strategies and its market view and outlook. Management also assesses the
nature of the unrealized losses taking into consideration factors such as
changes in risk-free interest rates, general credit spread widening, market
supply and demand, creditworthiness of the issuer or any credit enhancement
providers, and the quality of the underlying collateral. Management does
not intend to sell these securities in the foreseeable future, and does not
believe that it is more likely than not that the Bank will be required to sell a
security in an unrealized loss position prior to a recovery in its value.
The decline in market value is due to changes in market interest rates.
The fair values are expected to recover as the securities approach maturity
dates.
76
The
detail of interest and dividends on investment securities is as follows for June
30:
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Taxable
interest income
|
$ | 2,212 | $ | 1,924 | ||||
Nontaxable
interest income
|
382 | 196 | ||||||
Dividends
|
8 | 8 | ||||||
$ | 2,602 | $ | 2,128 |
NOTE 4 –
MORTGAGE-BACKED SECURITIES
Mortgage-backed
securities available for sale at June 30, 2010 consist of the
following:
|
Gross
|
Gross
|
Estimated
|
|||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
FNMA
|
$ | 40,237 | 345 | 11 | 40,571 | |||||||||||
FHLMC
|
16,432 | 291 | 56 | 16,667 | ||||||||||||
$ | 56,669 | 636 | 67 | 57,238 |
Mortgage-backed
securities available for sale at June 30, 2009 consist of the
following:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
FNMA
|
$ | 13,154 | 254 | 25 | 13,383 | |||||||||||
FHLMC
|
15,705 | 353 | 25 | 16,033 | ||||||||||||
GNMA
|
285 | 12 | - | 297 | ||||||||||||
$ | 29,144 | 619 | 50 | 29,713 |
The
maturity of the mortgage-backed securities is based on the repayment of the
underlying mortgages and is as follows at June 30, 2010:
Amortized
cost
|
Estimated
market value
|
|||||||
(Dollars in thousands)
|
||||||||
Due
in 2 – 5 years
|
$ | 1,402 | $ | 1,443 | ||||
Due
in 5 – 10 years
|
7,250 | 7,402 | ||||||
Due
in greater than 10 years
|
48,017 | 48,393 | ||||||
$ | 56,669 | $ | 57,238 |
77
NOTE 5 –
LOANS RECEIVABLE
Loans
receivable consist of the following at June 30,
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Residential
real estate
|
||||||||
One-to-four
family
|
$ | 137,473 | 124,391 | |||||
Multi-family
|
46,777 | 61,791 | ||||||
Construction
|
1,566 | 1,609 | ||||||
Nonresidential
real estate and land
|
82,969 | 57,298 | ||||||
Consumer
and other loans
|
46,469 | 32,213 | ||||||
315,254 | 277,302 | |||||||
Less:
|
||||||||
Allowance
for losses
|
5,681 | 4,213 | ||||||
Undisbursed
portion of loans in process
|
494 | 1,231 | ||||||
Deferred
loan costs, net
|
(496 | ) | (412 | ) | ||||
$ | 309,575 | 272,270 |
As of
June 30, 2010 and 2009, the Bank was servicing loans for the benefit of others
in the amount of $52,341,000 and $45,108,000, respectively. The Bank
recognized $278,000 and $526,000, of pre-tax gains on sale of loans during the
years ended June 30, 2010 and 2009, respectively. The carrying value of
mortgage servicing rights approximated $471,000 and $405,000 as of June 30, 2010
and 2009, respectively. No impairment has been recognized on the mortgage
service assets and correspondingly, no valuation allowance has been recognized
as of June 30, 2010 and 2009.
The
Company sells loans in the secondary market. Proceeds from the sales of
mortgage loan totaled $25,409,000 and $28,901,000 during the years ended June
30, 2010 and 2009, respectively. The Bank had $364,000 and $2,193,000 in 1-4
family fixed rate loans designated as held for sale at June 30, 2010 and 2009,
respectively. It is generally management's intention to hold all other loans
originated to maturity or earlier repayment.
Changes
in the allowance for losses on loans for the year ended June 30 are as
follows:
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Balance
at beginning of year
|
$ | 4,213 | $ | 4,619 | ||||
Provisions
charged to income
|
2,509 | 2,447 | ||||||
Charge-offs
|
(1,087 | ) | (2,820 | ) | ||||
Recoveries
|
49 | 18 | ||||||
Loss
on loan restructuring
|
(3 | ) | (51 | ) | ||||
Balance
at end of year
|
$ | 5,681 | $ | 4,213 |
78
The
amount of loans classified as nonaccrual totaled approximately $10,574,000 and
$5,975,000 June 30, 2010 and 2009, respectively. Interest income from
these nonaccrual loans during the years ended June 30, 2010 and 2009 was
immaterial. All loans classified as nonaccrual had allowances determined
in accordance with ASC 320-35-2 Receivables – Loan
Impairment. At June 30, 2010 and 2009, the recorded investment in
loans for which impairment has been recognized was approximately $13,854,000 and
$7,512,000, respectively, with related reserves of $3,258,000 and $1,337,000,
respectively. The average recorded investment in impaired loans for the
years ended June 30, 2010 and 2009 was $11,083,000 and $5,840,000,
respectively. The amount of loans over 90 days past due totaled
$10,574,000 and $5,975,000 at June 30, 2010 and 2009, respectively. No
loans over 90 past due were still accruing at June 30, 2010 and
2009.
At June
30, 2010, the Bank had thirteen loans categorized as troubled debt
restructurings, totaling $9.0 million. At June 30, 2009, the Bank had five
loans categorized as troubled debt restructurings, totaling $4.5 million.
At June 30, 2010, the Bank had one loan for $1.1 million that was categorized as
both a nonperforming loan and a troubled debt restructuring. There are no
commitments to lend additional amounts to these borrowers. Management has
reduced the carrying value of all troubled debt restructurings to their fair
market values, based upon differences between their agreed upon rates of
interest and available market rates at the time of the loan.
ASC
310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality, requires acquired
loans to be recorded at fair value and prohibits carrying over valuation
allowances when initially accounting for acquired impaired loans. Loans carried
at fair value, mortgage loans held for sale, and loans to borrowers in good
standing under revolving credit agreements are excluded from the scope of this
pronouncement. It limits the yield that may be accreted to the excess of the
undiscounted expected cash flows over the investor’s initial investment in the
loan. The excess of the contractual cash flows over expected cash flows may not
be recognized as an adjustment of yield. Subsequent increases in cash flows
expected to be collected are recognized prospectively through an adjustment of
the loan’s yield over its remaining life. Decreases in expected cash flows are
recognized as impairments.
The
Company acquired loans pursuant to the acquisition of Integra branches in June
2010. The Company reviewed the loan portfolio at acquisition to determine
whether there was evidence of deterioration of credit quality since origination
and if it was probable that it will be unable to collect
all amounts due according to the loan’s contractual terms. When both conditions
existed, the Company accounted for each loan individually, considered expected
prepayments, and estimated the amount and timing of discounted expected
principal, interest, and other cash flows (expected at acquisition) for each
loan. The Company determined the excess of the loan’s scheduled contractual
principal and contractual interest payments over all cash flows expected at
acquisition as an amount that should not be accreted into interest income
(nonaccretable difference).
The remaining amount, representing the excess of the loan’s cash flows expected
to be collected over the amount paid, is accreted into interest income over the
remaining life of the loan (accretable yield).
79
Over the
life of the loan, the Company continues to estimate cash flows expected to be
collected. The Company evaluates at the balance sheet date whether the present
value of its loans determined using the effective interest rates has decreased,
and if so, the Company establishes avaluation allowance for the loan. Valuation
allowances for acquired loans reflect only those losses incurred after
acquisition; that is, the present value of cash flows expected at acquisition
that are not expected to be collected. Valuation allowances are established only
subsequent to our acquisition of the loans. For loans that are not accounted for
as debt securities, the present value of any subsequent increase in the loan’s
or pool’s actual cash flows or cash flows expected to be collected is used first
to reverse any existing valuation allowance for that loan. For any remaining
increases in cash flows expected to be collected, the Company adjusts the amount
of accretable yield recognized on a prospective basis over the loan’s remaining
life. The Company does not have any such loans that were accounted for as debt
securities.
Loans
that were acquired in the Integra branch acquisition for which there was
evidence of deterioration of credit quality since origination and for which it
was probable that all contractually required payments would not be made as
scheduled had an outstanding balance of $45.7 million and a carrying amount of
$45.1 million at June 30, 2010. The carrying amount of these loans is included
in the balance sheet amount of loans receivable at June 30, 2010. No loans
have experienced further deterioration since the acquisition date.
The
following table depicts the accretable yield (in thousands) at the beginning and
end of the period.
Balance,
June 30, 2009
|
$ | - | ||
Accretion
|
- | |||
Disposals
|
- | |||
Additions
|
1,400 | |||
Balance,
June 30, 2010
|
$ | 1,400 |
NOTE 6 –
OTHER REAL ESTATE OWNED
Other
real estate owned consists of the following at June 30:
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
One
to four family
|
$ | 169 | $ | - | ||||
Land
|
340 | 340 | ||||||
Commercial
real estate
|
- | 2,304 | ||||||
Provision
for losses on real estate owned
|
(212 | ) | (704 | ) | ||||
$ | 297 | $ | 1,940 |
80
Activity
in the allowance for losses on real estate owned is as follows for years ended
June 30,
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Balance,
beginning of period
|
$ | 704 | $ | 111 | ||||
Allowance
for losses on real estate owned
|
510 | 770 | ||||||
Charged
off upon sale of property
|
(1,002 | ) | (177 | ) | ||||
Balance,
end of period
|
$ | 212 | $ | 704 |
NOTE 7 –
PROPERTY AND EQUIPMENT
Property
and equipment is summarized as follows:
June 30,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Land
and land improvements
|
$ | 2,977 | $ | 1,830 | ||||
Buildings
and building improvements
|
4,898 | 4,538 | ||||||
Furniture
and equipment
|
3,337 | 2,884 | ||||||
11,212 | 9,252 | |||||||
Less: accumulated
depreciation
|
3,699 | 3,241 | ||||||
$ | 7,513 | $ | 6,011 |
81
NOTE 8 -
DEPOSITS
Deposits
at June 30, 2010 and 2009 consist of the following:
2010
|
2009
|
|||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||
Weighted
|
Weighted
|
|
||||||||||||||
Average
|
Average
|
|
||||||||||||||
Rate
|
Balance
|
Rate
|
Balance
|
|||||||||||||
Demand
deposit accounts
|
0.48 | % | $ | 103,216 | 0.50 | % | $ | 71,854 | ||||||||
Passbook
|
0.43 | % | 53,989 | 0.31 | % | 40,980 | ||||||||||
Money
market deposit accounts
|
0.61 | % | 55,062 | 0.61 | % | 61,933 | ||||||||||
Total
demand and passbook deposits
|
212,267 | 174,767 | ||||||||||||||
Certificates
of deposit:
|
||||||||||||||||
Less
than 12 months
|
1.75 | % | 73,467 | 2.32 | % | 95,081 | ||||||||||
12
months to 24 months
|
2.59 | % | 93,114 | 3.63 | % | 38,241 | ||||||||||
24
months to 36 months
|
3.13 | % | 6,313 | 3.59 | % | 2,484 | ||||||||||
More
than 36 months
|
4.27 | % | 9,647 | 3.65 | % | 2,228 | ||||||||||
Individual
retirement accounts
|
3.24 | % | 35,372 | 4.38 | % | 26,815 | ||||||||||
Total
certificates of deposit
|
217,913 | 164,849 | ||||||||||||||
Total
deposit accounts
|
$ | 430,180 | $ | 339,616 |
Interest
expense on deposits is as follows:
For the years ended June 30
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
NOW
and money market accounts
|
$ | 871 | $ | 1,609 | ||||
Savings
|
136 | 285 | ||||||
Certificates
of deposit
|
5,314 | 5,872 | ||||||
$ | 6,321 | $ | 7,766 |
The
aggregate amount of time deposits with a minimum denomination of $100,000 was
approximately $113,371,000 and $89,805,000 at June 30, 2010 and 2009,
respectively. Individual deposits with denominations of more than $250,000
are not federally insured.
Total
non-interest bearing deposits were $28,627,000 and $16,531,000 at June 30, 2010
and 2009, respectively. Municipal deposits totaled $121,607,000 and
$124,282,000 at June 30, 2010 and 2009, respectively.
82
Maturities
of certificate accounts at June 30, 2010 and 2009 are approximately as
follows:
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
One
year or less
|
$ | 162,465 | $ | 108,551 | ||||
1 -
2 years
|
34,825 | 44,132 | ||||||
2 -
3 years
|
13,671 | 9,244 | ||||||
3 -
4 years
|
2,959 | 2,035 | ||||||
4 -
5 years
|
3,943 | 747 | ||||||
Over
5 years
|
50 | 140 | ||||||
$ | 217,913 | $ | 164,849 |
NOTE 9 –
GOODWILL AND ACQUISITION INTANGIBLES
Goodwill
The
Integra acquisition included $3,130,000 in goodwill. Further details of
this transaction are included in Note 2.
Intangible
Assets
The
Integra acquisition included a core deposit intangible asset of
$1,400,000. Amortization of the core deposit intangible is as follows
(dollars in thousands):
Amount
|
||||
2011
|
$ | 158 | ||
2012
|
158 | |||
2013
|
158 | |||
2014
|
158 | |||
2015
|
158 | |||
2016
and thereafter
|
610 | |||
$ | 1,400 |
83
NOTE 10 –
FAIR VALUES OF ASSETS AND LIABILITIES
The
estimated fair values of the Company's financial instruments at June 30, 2010
and 2009 are as follows:
2010
|
2009
|
|||||||||||||||
Carrying
Amounts
|
Fair
Value
|
Carrying
Amounts
|
Fair
Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and interest bearing deposits
|
$ | 32,023 | 32,023 | $ | 27,004 | 27,004 | ||||||||||
Investment
securities available for sale
|
62,089 | 62,089 | 46,769 | 46,769 | ||||||||||||
Investment
securities held to maturity
|
631 | 631 | 175 | 175 | ||||||||||||
Mortgage-backed
securities
|
57, 238 | 57,238 | 29,713 | 29,713 | ||||||||||||
Loans
receivable and loans held for sale
|
309,939 | 304,943 | 274,463 | 270,760 | ||||||||||||
Accrued
interest receivable
|
2,290 | 2,290 | 1,745 | 1,745 | ||||||||||||
Investment
in FHLB stock
|
2,016 | 2,016 | 2,016 | 2,016 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
$ | 430,180 | 432,091 | $ | 339,616 | 341,322 | ||||||||||
Accrued
interest payable
|
126 | 126 | 23 | 23 | ||||||||||||
FHLB
advances
|
2,833 | 2,904 | 3,833 | 3,856 | ||||||||||||
Off-balance
sheet items
|
- | - | - | - |
As
discussed in Note 1, Basis of
Presentation and Summary of Significant Accounting Pronouncements, ASC
820-10-50-2 also establishes a fair value hierarchy which requires an entity to
maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of
inputs that may be used to measure fair value:
Level
1
|
Quoted
prices in active markets for identical assets or
liabilities.
|
Level
2
|
Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market
data for substantially the full term of the assets or
liabilities.
|
Level
3
|
Unobservable
inputs that are supported by little or no market activity and that are
significant to the fair value of the assets or
liabilities.
|
84
Fair
value methods and assumptions are set forth below for each type of financial
instrument. Where quoted prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. Level 2
securities include U.S. Government and agency mortgage-backed securities, U.S.
Government agency bonds, municipal securities, and other real estate owned. If
quoted market prices are not available, the Bank utilizes a third party vendor
to calculate the fair value of its available for sale securities. The third
party vendor uses quoted prices of securities with similar characteristics when
available. If such quotes are not available, the third party vendor
uses pricing models or discounted cash flow models with observable inputs to
determine the fair value of these securities. For other real estate
owned, the Bank utilizes appraisals obtained from independent third parties to
determine fair value.
Fair
value measurements for certain assets and liabilities measured at fair value on
a recurring basis:
Total
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
other
unobservable
inputs
(Level 3)
|
|||||||||||||
(In thousands)
|
||||||||||||||||
June 30, 2010:
|
|
|||||||||||||||
Mortgage-backed
securities
|
$ | 57,238 | $ | - | $ | 57,238 | $ | - | ||||||||
U.S.
Government corporations and agencies
|
49,369 | - | 49,369 | - | ||||||||||||
Municipal
bonds
|
12,591 | - | 12,591 | - | ||||||||||||
Other
equity securities
|
129 | 129 | - | - | ||||||||||||
June
30, 2009:
|
||||||||||||||||
Mortgage-backed
securities
|
$ | 29,713 | $ | - | $ | 29,713 | $ | - | ||||||||
U.S.
League intermediate-term portfolio
|
47 | - | 47 | - | ||||||||||||
U.S.
Government corporations and agencies
|
39,641 | - | 39,641 | - | ||||||||||||
Municipal
bonds
|
6,952 | - | 6,952 | - | ||||||||||||
Other
equity securities
|
129 | 129 | - | - |
Fair
value measurements for certain assets and liabilities measured at fair value on
a nonrecurring basis:
Total
|
Quoted prices
in active
markets for
identical assets
(Level 1)
|
Significant
other
observable
inputs
(Level 2)
|
Significant
other
unobservable
inputs
(Level 3)
|
|||||||||||||
(In thousands)
|
||||||||||||||||
June 30, 2010:
|
|
|||||||||||||||
Other
real estate owned
|
$ | 297 | $ | - | $ | 297 | $ | - | ||||||||
Loans
held for sale
|
364 | - | 364 | - | ||||||||||||
Impaired
loans
|
13,854 | - | 13,854 | - | ||||||||||||
June
30, 2009:
|
||||||||||||||||
Other
real estate owned
|
$ | 1,940 | $ | - | $ | 1,940 | $ | - | ||||||||
Loans
held for sale
|
2,193 | - | 2,193 | - | ||||||||||||
Impaired
loans
|
7,512 | - | 7,512 | - |
The
adjustments to other real estate owned and impaired loans are based primarily on
appraisals of the real estate or other observable market prices. Our policy is
that fair values for these assets are based on current appraisals. In most
cases, we maintain current appraisals for these items.
85
NOTE 11 –
BORROWED FUNDS
Pursuant
to collateral agreements with the FHLB, advances are secured by all stock in the
FHLB and a blanket pledge agreement for qualifying first mortgage
loans. The Bank had $2,833,000 and $3,833,000 in outstanding FHLB
advances at June 30, 2010 and 2009, respectively. At June 30, 2010
and 2009, the Bank had only one advance from the FHLB. The original
amount of the advance was $5,000,000 at a fixed interest rate of
3.2%. Principal payments of $83,000 are due on a monthly basis until
the loan is paid in full in April 2013. Interest payments are also
due at the time that the principal payment is made.
NOTE 12 –
EMPLOYEE BENEFIT PLANS
401(k) Profit Sharing
Plan
The Bank
has a standard 401(k) profit sharing plan. Eligible participants must
be at least 18 years of age and have one year of service. The Bank
makes matching contributions based on each employee's deferral
contribution. Total expense under the plan for the years ended June
30, 2010 and 2009 totaled $125,000 and $118,000, respectively.
ESOP
As of
June 30, 2010 and 2009, the ESOP owned 216,239 and 245,262 shares, respectively,
of the Company's common stock, which were held in a suspense account until
released for allocation to the participants. Additionally, as of June
30, 2010, the Company has committed to release 14,658 shares. The
Company recognized compensation expense of $118,000 and $130,000 during the
years ended June 30, 2010 and 2009, respectively, which equals the fair value of
the ESOP shares during the periods in which they became committed to be
released. The fair value of the unearned ESOP shares approximated
$1,574,000 at June 30, 2010.
Contributions
to the ESOP and shares released from the suspense account will be allocated to
each eligible participant based on the ratio of each such participant's
compensation, as defined in the ESOP, to the total compensation of all eligible
plan participants. Participants become 100% vested in their accounts
upon three years of service. Participants with less than three years
of service are 0% vested in their accounts.
The term
loan, which bears interest at 7.75%, is payable in fifteen annual installments
of $370,000 through December 31, 2020. Shares purchased with the loan
proceeds are initially pledged as collateral for the term loan and are held in a
suspense account for future allocation to the ESOP participants. Each
plan year, in addition to any discretionary contributions, the Company shall
contribute cash to the ESOP to enable the ESOP to make its principal and
interest payments under the term loan. Company contributions may be
increased by any investment earnings attributable to such contributions and any
cash dividends paid with respect to Company stock held by the ESOP.
Deferred
Compensation
In March
2002, the Bank adopted a supplemental retirement income program with selected
officers and board members. To fund this plan, the Bank purchased
single-premium life insurance policies on each officer and director, at a
cumulative total cost of $5,100,000. The cash surrender value of
these policies was $7,109,000 and $6,826,000 at June 30, 2010 and 2009,
respectively. The directors' liability is accrued based on life
expectancies, return on investment and a discount rate. For the
officers, an annual contribution based on actuarial assumptions is made to a
secular trust with the employee as the beneficiary. Deferred
compensation payments are funded by available assets in the secular
trust. No further funding is required by the Bank, with the exception
that upon a change in control of the Bank, the plan provides for full
supplemental benefits which would have occurred at age 65.
86
Future
expected contributions for the funding of officers’ deferred compensation are as
follows:
2011
|
$ | 197,000 | ||
2012
|
197,000 | |||
2013
|
197,000 | |||
2014
|
197,000 | |||
2015
|
197,000 | |||
2016
and thereafter
|
374,000 | |||
$ | 1,359,000 |
At June
30, 2010 and 2009, the Bank had accrued directors' supplemental retirement
expense of $1,315,000 and $1,270,000, respectively. Officers and
directors supplemental retirement expense totaled $417,000 and $402,000 for the
years ended June 30, 2010 and 2009, respectively.
Supplemental Executive
Retirement Plan
A
Supplemental Executive Retirement Plan (SERP) was established to provide
participating executives (as determined by the Company's Board of Directors)
with benefits that cannot be provided under the 401(k) Profit Sharing Plan or
ESOP as a result of limitations imposed by the Internal Revenue
Code. The SERP will also provide benefits to eligible employees if
they retire or are terminated following a change in control before the complete
allocation of shares under the ESOP. SERP expense totaled $7,000 and
$7,000 for the years ended June 30, 2010 and 2009, respectively.
Employee Severance
Compensation Plan
An
Employee Severance Compensation Plan (Severance Plan) was established to provide
eligible employees with severance benefits if a change in control of the Bank
occurs causing involuntary termination of employment in a comparable
position. Employees are eligible upon the completion of one year of
service. Under the Severance Plan, eligible employees will be
entitled to severance benefits ranging from one month of compensation, as
defined in the plan, up to 199% of compensation. Such benefits are
payable within five business days from termination of employment.
NOTE 13 –
STOCK-BASED COMPENSATION
In
November 2006, the Company adopted the United Community Bancorp 2006 Equity
Incentive Plan (Equity Incentive Plan) for the issuance of restricted stock,
incentive stock options and non-statutory stock options to employees, officers
and directors of the Company. The aggregate number of shares of
common stock reserved and available for issuance pursuant to awards granted
under the Equity Incentive Plan is 580,630. Of the total shares
available, 414,736 may be issued in connection with the exercise of stock
options and 165,894 may be issued as restricted stock. The maximum
number of shares of common stock that may be covered by options granted under
the Equity Incentive Plan to any one person during any one calendar year is
103,684.
In
December 2006, the Board of Directors of the Company authorized the funding of a
trust that purchased 165,894 shares of the Company's outstanding common stock to
be used to fund restricted stock awards under the Equity Incentive
Plan.
87
In
December 2006, the Company granted restricted stock awards for a total of
149,297 shares of common stock, incentive stock option awards for a total of
219,446 shares of common stock and non-statutory stock option awards for a total
of 153,815 shares of common stock. These awards vest at 20% annually
from January 2008 through January 2012. The restricted stock awards
were valued at the stock price on the date of grant, or $11.53 per
share. The stock options were valued using the following
assumptions: expected volatility of 11.49%, risk-free interest rate
of 4.6%, expected term of ten years and expected dividend yield of
2.3%.
During
each of the years ended June 30, 2010 and 2009, 27,703 restricted share awards
and 69,261 stock options became fully vested. Total recognized
compensation expense for the years ended June 30, 2010 and 2009 was $298,000 and
$500,000, respectively. The remaining unvested expense as of June 30,
2010 that will be recorded as expense in future periods is
$206,000. The weighted average time over which this expense will be
recorded is 18 months.
Information
related to stock options for the years ended June 30, 2010 and 2009 is as
follows:
Weighted
|
||||||||||
Weighted
|
Average
|
|||||||||
Average
|
Remaining
|
|||||||||
Exercise
|
Contractual
|
|||||||||
Shares
|
Price
|
Term
|
||||||||
Outstanding at June 30, 2008
|
346,304 | $ | 11.53 | |||||||
Granted
|
- | - | ||||||||
Forfeited
|
- | - | ||||||||
Exercised
|
- | - | ||||||||
Outstanding
at June 30, 2009
|
346,304 | 11.53 | ||||||||
Granted
|
- | - | ||||||||
Forfeited
|
- | - | ||||||||
Exercised
|
- | - | ||||||||
Outstanding
at June 30, 2010
|
346,304 | 11.53 |
6.5 years
|
|||||||
Exercisable
at June 30, 2010
|
207,783 | 11.53 |
6.5 years
|
|||||||
Fair
value of options
|
$ | 2.37 |
88
A summary
of the status of unvested stock options for the year ended June 30, 2010 is as
follows:
Weighted
|
||||||||
Average
|
||||||||
Grant Date
|
||||||||
Shares
|
Fair Value
|
|||||||
Outstanding
at June 30, 2009
|
207,782 | $ | 2.37 | |||||
Granted
|
- | - | ||||||
Vested
|
(69,261 | ) | 2.37 | |||||
Forfeited
|
- | - | ||||||
Outstanding
at June 30, 2010
|
138,521 | 2.37 |
Information
related to restricted stock grants for the years ended June 30, 2010 and 2009 is
as follows:
Weighted
|
||||||||
Average
|
||||||||
Grant Date
|
||||||||
Fair
|
||||||||
Shares
|
Value
|
|||||||
Outstanding
at June 30, 2008
|
110,811 | $ | 11.53 | |||||
Granted
|
- | - | ||||||
Vested
|
(27,703 | ) | (11.53 | ) | ||||
Forfeited
|
- | - | ||||||
Outstanding
at June 30, 2009
|
83,108 | 11.53 | ||||||
Granted
|
- | - | ||||||
Vested
|
(27,703 | ) | (11.53 | ) | ||||
Forfeited
|
- | - | ||||||
Outstanding
at June 30, 2010
|
55,405 | $ | 11.53 |
89
NOTE
14 – SUPPLEMENTAL CASH FLOW INFORMATION
For the years ended June 30
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in Thousands)
|
||||||||
Supplemental
disclosure of cash flow information is as follows:
|
||||||||
Cash
paid during the year for:
|
||||||||
Income
taxes
|
$ | - | $ | 10 | ||||
Interest
|
$ | 6,327 | $ | 7,970 | ||||
Supplemental
disclosure of non-cash investing and financing activities is as
follows:
|
||||||||
Unrealized
gains on securities designated as available for sale, net of
taxes
|
$ | 221 | $ | 663 | ||||
Transfers
of loans to other real estate owned
|
$ | 1,109 | $ | 787 |
NOTE 15 –
COMMITMENTS
Leases
The Bank
is party to various operating leases for property and equipment. Lease expense
for the years ended June 30, 2010 and 2009 was $43,000 and $41,000,
respectively.
Future
minimum lease payments under these lease agreements are as follows as of June
30, 2010:
2011
|
$ | 31,000 | ||
2012
|
16,000 | |||
2013
|
16,000 | |||
2014
|
11,000 | |||
$ | 74,000 |
The Bank
entered into lease agreements with various tenants who lease space from the Bank
in certain locations where the Bank has a branch office. Revenue from
these leases for the years ended June 30, 2010 and 2009 was $37,000 and $42,000,
respectively.
90
Future
minimum lease payments under these lease agreements are as follows as of June
30, 2010:
2011
|
$ | 24,000 |
Loans
In the
ordinary course of business, the Bank has various outstanding commitments to
extend credit that are not reflected in the accompanying consolidated financial
statements. These commitments involve elements of credit risk in
excess of the amounts recognized in the balance sheet.
The Bank
uses the same credit policies in making commitments for loans as it does for
loans that have been disbursed and recorded in the consolidated balance
sheet. The Bank generally requires collateral when it makes loan
commitments, which generally consists of the right to receive first mortgages on
improved or unimproved real estate when performance under the contract
occurs.
Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some portions of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. Certain of these
commitments are for fixed rate loans, and, therefore, their values are subject
to market risk as well as credit risk. Generally, these commitments
do not extend beyond 90 days.
At June
30, 2010, the Bank’s total commitment to extend credit at variable rates was
$38,981,000. The amount of fixed rate commitments was approximately $826,000 at
June 30, 2010. The fixed rate loan commitments at June 30, 2010 have interest
rates ranging from 4.25% to 5.00%. In addition, the Bank had $856,000 of letters
of credit outstanding at June 30, 2010.
91
NOTE 16 –
RELATED PARTY TRANSACTIONS
Loans to
executive officers, directors and their affiliated companies, totaled $3,517,000
and $3,508,000 at June 30, 2010 and 2009, respectively. All loans
were current at June 30, 2010 and 2009, respectively.
The
activity in loans to executive officer, directors and their affiliated companies
for the years ended June 30, 2010 and 2009 is as follows:
June 30,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Beginning
balance
|
$ | 3,508 | $ | 3,393 | ||||
New
loans
|
138 | 169 | ||||||
Payments
on loans
|
(129 | ) | (54 | ) | ||||
Ending
balance
|
$ | 3,517 | $ | 3,508 |
Deposits
from officers and directors and affiliates totaled $1,975,000 and $2,078,000 at
June 30, 2010 and 2009, respectively.
NOTE 17 –
REGULATORY CAPITAL
The Bank
is subject to regulatory capital requirements administered by federal banking
agencies. Capital adequacy guidelines and prompt corrective action regulation
involve quantitative measures of assets, liabilities, and certain off balance
sheet items calculated under regulatory accounting practices. Capital
amounts and classifications are also subject to qualitative judgments by
regulators. Failure to meet capital requirements can initiate
regulatory action that, if undertaken, could have a direct material effect on
the consolidated financial statements.
Prompt
corrective action regulations provide five classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory approval is
required to accept broker deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital
restoration plans are required. At November 17, 2008, the most recent
regulatory notifications categorized the Bank as well
capitalized. There are no conditions or events since that
notification that management believes have changed the institution’s
category. Management believes that, under current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements in
the foreseeable future. Actual and required capital amounts and
ratios are presented below:
92
The
following tables summarize the Bank's capital amounts and the ratios
required:
To be well
|
||||||||||||||||||||||||
capitalized under
|
||||||||||||||||||||||||
prompt corrective
|
||||||||||||||||||||||||
For capital
|
action
|
|||||||||||||||||||||||
Actual
|
adequacy purposes
|
provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
June 30, 2010
|
||||||||||||||||||||||||
Tier
1 capital to risk-weighted assets
|
$ | 44,811 | 13.54 | % | 13,240 | 4.0 | % | 19,860 | 6.0 | % | ||||||||||||||
Total
capital to risk-weighted assets
|
47,233 | 14.27 | % | 26,479 | 8.0 | % | 33,099 | 10.0 | % | |||||||||||||||
Tier
1 capital to adjustedtotal assets
|
44,811 | 9.26 | % | 19,548 | 4.0 | % | 24,435 | 5.0 | % | |||||||||||||||
Tangible
capital to adjustedtotal assets
|
44,811 | 9.17 | % | 7,331 | 1.5 | % | - | - | ||||||||||||||||
June 30, 2009
|
||||||||||||||||||||||||
Tier
1 capital to risk-weighted assets
|
$ | 48,216 | 17.50 | % | 11,022 | 4.0 | % | 16,533 | 6.0 | % | ||||||||||||||
Total
capital to risk-weighted assets
|
50,689 | 18.40 | % | 22,044 | 8.0 | % | 27,555 | 10.0 | % | |||||||||||||||
Tier
1 capital to adjusted total assets
|
48,216 | 12.08 | % | 15,972 | 4.0 | % | 19,965 | 5.0 | % | |||||||||||||||
Tangible
capital to adjusted total assets
|
48,216 | 12.08 | % | 5,989 | 1.5 | % | - | - |
Dividends
from the Bank are one of the major sources of funds for the
Bancorp. These funds aid the parent company in payment of dividends
to shareholders, expenses, and other obligations. Payment of
dividends to the parent company is subject to various legal and regulatory
limitations. Regulatory approval is required prior to the declaration
of any dividends in excess of available retained earnings. The amount
of dividends that may be declared without regulatory approval is further limited
to the sum of net income for the current year and retained net income for the
preceding two years, less any required transfers to surplus or common
stock. As of June 30, 2010, the Bank has never paid dividends income
to the Bancorp in excess of regulatory limits.
93
NOTE 18 –
INCOME TAXES
The
components of the provision for income taxes are summarized as
follows:
2010
|
2009
|
|||||||
(Dollars in thousands)
|
||||||||
Current
tax expense:
|
||||||||
Federal
|
$ | 695 | $ | 174 | ||||
State
|
134 | 53 | ||||||
829 | 227 | |||||||
Deferred
tax benefit:
|
||||||||
Federal
|
(414 | ) | (32 | ) | ||||
State
|
(72 | ) | (18 | ) | ||||
(486 | ) | (50 | ) | |||||
$ | 343 | $ | 177 |
The tax
effect of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities at June 30, 2010 and 2009 are
as follows:
June 30,
|
||||||||
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Deferred
tax assets arising from:
|
||||||||
Loan
loss reserve
|
$ | 2,250 | $ | 1,667 | ||||
Reserve
for loss on real estate owned
|
84 | 278 | ||||||
Vacation
and bonus accrual
|
285 | 223 | ||||||
Supplemental
retirement
|
435 | 416 | ||||||
Stock-based
compensation
|
331 | 361 | ||||||
Contribution
to UCB Charitable Foundation
|
274 | 347 | ||||||
Acquisition-related
expenses
|
174 | - | ||||||
State
depreciation differences
|
87 | 95 | ||||||
Other-than-temporary
impairment
|
- | 1 | ||||||
Reserve
for loss on deposit accounts
|
59 | 40 | ||||||
AMT
credit carryforward
|
135 | 135 | ||||||
Post-retirement
health care benefits
|
50 | 50 | ||||||
Total
deferred tax assets
|
4,164 | 3,613 | ||||||
Deferred
tax liabilities arising from:
|
||||||||
Mortgage
servicing rights
|
(186 | ) | (161 | ) | ||||
Depreciation
|
(223 | ) | (223 | ) | ||||
Deferred
loan fees
|
(196 | ) | (159 | ) | ||||
Unrealized
gain in market value of investments
|
(256 | ) | (180 | ) | ||||
Total
deferred tax liabilities
|
(861 | ) | (723 | ) | ||||
Valuation
allowance
|
(190 | ) | (190 | ) | ||||
Net
deferred tax asset
|
$ | 3,113 | $ | 2,700 |
94
During
the year ended June 30, 2006, the Company contributed $1,858,000 to fund the UCB
Charitable Foundation. The deduction for federal income tax purposes
is limited to ten percent of federal taxable income. The
non-deductible portion, which approximates $805,000 at June 30, 2010, is
available for future deductions through the year ended June 30,
2011. At June 30, 2010, the Company has recorded a valuation
allowance against $560,000 of this amount, based on the level of anticipated
future taxable income. Net deferred tax liabilities and federal income tax
expense in future years can be significantly affected by changes in enacted tax
rates.
The rate
reconciliation for years ended June 30, 2010 and 2009 is as
follows:
2010
|
2009
|
|||||||
(Dollars
in thousands)
|
||||||||
Federal
income taxes at statutory rate
|
$ | 461 | $ | 305 | ||||
State
taxes, net of federal benefit
|
62 | 35 | ||||||
Increase
(decrease) in taxes resulting primarily from :
|
||||||||
Non-taxable
income on Bank-owned life insurance
|
(96 | ) | (87 | ) | ||||
Non-deductible
stock-based compensation
|
19 | 106 | ||||||
Tax
exempt income
|
(137 | ) | (67 | ) | ||||
Other
|
34 | (115 | ) | |||||
$ | 343 | $ | 177 |
Retained
earnings at June 30, 2010, and 2009, include approximately $749,000 related to
the pre-1987 allowance for loan losses for which no deferred federal income tax
liability has been recognized. These amounts represent an allocation of income
to bad debt deductions for tax purposes only. If the Bank no longer qualifies as
a bank, or in the event of a liquidation of the Bank, income would be created
for tax purposes only, which would be subject to the then-current corporate
income tax rate. The unrecorded deferred income tax liability on the above
amount for financial statement purposes was approximately $255,000.
The
Company adopted the provisions of ASC 275-10-50-8 to account for uncertainty in
income taxes effective July 1, 2007. Implementation resulted in no
cumulative effect adjustment to retained earnings as of the date of adoption.
The Company had no unrecognized tax benefits as of June 30, 2010 and 2009.
The Company recognized no interest and penalties on the underpayment of income
taxes during fiscal years June 30, 2010 and 2009, and had no accrued
interest and penalties on the balance sheet as of June 30, 2010 and 2009.
The Company has no tax positions for which it is reasonably possible that the
total amounts of unrecognized tax benefits will significantly increase with the
next twelve months. The Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for tax years before
2006.
95
NOTE 19 –
PARENT ONLY FINANCIAL STATEMENTS
The
following condensed financial statements summarize the financial position of
United Community Bancorp (parent company only) as of June 30, 2010 and 2009, and
the results of its operations and cash flows for the fiscal years ended June 30,
2010 and 2009 (all amounts in thousands):
UNITED
COMMUNITY BANCORP
STATEMENTS
OF FINANCIAL CONDITION
June 30,
2010 and 2009
2010
|
2009
|
|||||||
ASSETS
|
||||||||
Cash
and cash equivalents
|
$ | 2,797 | $ | 1,292 | ||||
Securities
available for sale – at estimated market value
|
128 | 128 | ||||||
Accrued
interest receivable
|
89 | 100 | ||||||
Deferred
income taxes
|
247 | 327 | ||||||
Prepaid
expenses and other assets
|
2,376 | 4,600 | ||||||
Investment
in United Community Bank
|
49,940 | 48,636 | ||||||
55,577 | 55,083 | |||||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
||||||||
Other
liabilities
|
97 | 4 | ||||||
Stockholders’
equity
|
55,480 | 55,079 | ||||||
$ | 55,577 | $ | 55,083 |
UNITED
COMMUNITY BANCORP
STATEMENTS
OF OPERATIONS
June 30,
2010 and 2009
2010
|
2009
|
|||||||
Interest
income:
|
||||||||
ESOP
loan
|
$ | 189 | $ | 205 | ||||
Securities
|
9 | 22 | ||||||
Other
income:
|
||||||||
Equity
in earnings of
|
||||||||
United
Community Bank
|
1,080 | 1,025 | ||||||
Net
revenue
|
1,278 | 1,252 | ||||||
Operating
expenses:
|
||||||||
Other
operating expenses
|
295 | 306 | ||||||
Income
before income taxes
|
983 | 946 | ||||||
Income
tax expense (benefit)
|
(31 | ) | 227 | |||||
Net
income
|
$ | 1,014 | $ | 719 |
96
UNITED
COMMUNITY BANCORP
STATEMENTS
OF CASH FLOWS
June 30,
2010 and 2009
2010
|
2009
|
|||||||
Operating
activities:
|
||||||||
Net
earnings
|
$ | 1,014 | $ | 719 | ||||
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
||||||||
Equity
in earnings of United Community Bank
|
(1,080 | ) | (1,235 | ) | ||||
Shares
committed to be released
|
212 | 129 | ||||||
Amortization
and expense of stock-based compensation plans
|
204 | 500 | ||||||
Deferred
income taxes (benefits)
|
80 | (108 | ) | |||||
Effects
of change in assets and liabilities
|
2,325 | 96 | ||||||
2,755 | 101 | |||||||
Financing
activities:
|
||||||||
Purchase
of treasury stock
|
(80 | ) | (325 | ) | ||||
Dividends
paid to stockholders
|
(1,170 | ) | (1,097 | ) | ||||
(1,250 | ) | (1,422 | ) | |||||
Net
increase (decrease) in cash and cash equivalents
|
1,505 | (1,321 | ) | |||||
Cash
and cash equivalents at beginning of year
|
1,292 | 2,613 | ||||||
Cash
and cash equivalents at end of year
|
$ | 2,797 | $ | 1,292 |
97
NOTE 20 –
QUARTERLY FINANCIAL DATA (UNAUDITED)
The
following tables present quarterly financial information for the Company for
2010 and 2009:
For
the year ended June 30, 2010
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
quarter
|
quarter
|
quarter
|
quarter
|
|||||||||||||
Interest
income
|
$ | 4,688 | $ | 4,716 | $ | 4,711 | $ | 4,821 | ||||||||
Interest
expense
|
1,594 | 1,542 | 1,588 | 1,705 | ||||||||||||
Net
interest income
|
3,094 | 3,174 | 3,123 | 3,116 | ||||||||||||
Provision
for loan losses
|
1,112 | 451 | 324 | 622 | ||||||||||||
Net
interest income after provision for loan losses
|
1,982 | 2,723 | 2,799 | 2,494 | ||||||||||||
Other
income
|
1,180 | 749 | 942 | 686 | ||||||||||||
Other
expense
|
3,346 | 2,908 | 3,069 | 2,875 | ||||||||||||
Income
(loss) before income taxes
|
(184 | ) | 564 | 672 | 305 | |||||||||||
Provision
(benefit) for income taxes
|
(150 | ) | 214 | 196 | 83 | |||||||||||
Net
income (loss)
|
$ | (34 | ) | $ | 350 | $ | 476 | $ | 222 |
For
the year ended June 30, 2009
|
||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||
Fourth
|
Third
|
Second
|
First
|
|||||||||||||
quarter
|
quarter
|
quarter
|
quarter
|
|||||||||||||
Interest
income
|
$ | 4,689 | $ | 5,049 | $ | 5,030 | $ | 5,144 | ||||||||
Interest
expense
|
1,733 | 1,774 | 2,091 | 2,308 | ||||||||||||
Net
interest income
|
2,956 | 3,275 | 2,939 | 2,836 | ||||||||||||
Provision
for loan losses
|
1,052 | 664 | 396 | 335 | ||||||||||||
Net
interest income after provision for loan losses
|
1,904 | 2,611 | 2,543 | 2,501 | ||||||||||||
Other
income
|
854 | 735 | 502 | 696 | ||||||||||||
Other
expense
|
3,480 | 2,738 | 2,639 | 2,593 | ||||||||||||
Income
(loss) before income taxes
|
(722 | ) | 608 | 406 | 604 | |||||||||||
Provision
(benefit) for income taxes
|
(443 | ) | 259 | 144 | 217 | |||||||||||
Net
income (loss)
|
$ | (279 | ) | $ | 349 | $ | 262 | $ | 387 |
98
Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
Not applicable.
Item
9A(T). Controls and Procedures
The Company’s management, including the
Company’s principal executive officer and principal financial officer, have
evaluated the effectiveness of the Company’s “disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) promulgated under the
Securities Exchange Act of 1934, as amended, (the “Exchange
Act”). Based upon their evaluation, the principal executive officer
and principal financial officer concluded that, as of the end of the period
covered by this report, the Company’s disclosure controls and procedures were
effective for the purpose of ensuring that the information required to be
disclosed in the reports that the Company files or submits under the Exchange
Act with the Securities and Exchange Commission (the “SEC”): (1) is
recorded, processed, summarized and reported within the time periods specified
in the SEC’s rules and forms, and (2) is accumulated and communicated to the
Company’s management, including its principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required
disclosure.
Management’s annual report on internal
control over financial reporting is incorporated herein by reference to Item 8
in this Annual Report on Form 10-K. This annual report does not
include an attestation report of the Company’s independent registered public
accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only Management’s report in this report.
There was
no change in the Company's internal control over financial reporting that
occurred during the Company's fiscal quarter ended June 30, 2010 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
Item
9B. Other Information
Not
applicable.
PART
III
Item 10. Directors,
Executive Officers and Corporate Governance
Directors
The
information contained under the section captioned “Proposal I — Election of
Directors” in the Company’s definitive proxy statement for the Company’s
2009 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated
herein by reference.
Executive
Officers
The
information required regarding executive officers is incorporated herein by
reference to the section captioned, “Executive Officers of United
Community Bancorp and United Community Bank,” in Item 1 of this Annual
Report on Form 10-K.
Compliance
with Section 16(a) of the Exchange Act
The
information contained under the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance” in the Proxy Statement is incorporated herein by
reference.
99
Code
of Ethics
The
Company has adopted a Code of Ethics that applies to the Company’s officers,
directors and employees. For information concerning the Company’s
code of ethics, the information contained under the section captioned “Code of Ethics and Business
Conduct” in the Proxy Statement is incorporated by
reference. A copy of the code of ethics is available, without charge,
upon written request to c/o Corporate Secretary, 92 Walnut Street, Lawrenceburg,
Indiana 47025.
Corporate
Governance
For
information regarding the audit committee and its composition and the audit
committee financial expert, the section captioned “Corporate Governance and Board
Matters – Audit Committee” in the Proxy Statement are incorporated herein
by reference.
Item
11. Executive
Compensation
Executive
Compensation
The
information required by this item is incorporated herein by reference to the
sections titled “Executive
Compensation” and
“Directors’ Compensation” in the Proxy Statement.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
(a)
|
Security
Ownership of Certain Beneficial
Owners
|
The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
(b)
|
Security
Ownership of Management
|
The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
(c)
|
Changes
in Control
|
Management
of the Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
(d)
|
Equity
Compensation Plans
|
The
Company has adopted the 2006 Equity Incentive Plan, pursuant to which equity may
be awarded to participants. The plan was approved by
stockholders.
100
The
following table sets forth certain information with respect to the Company’s
equity compensation plan as of June 30, 2010.
(a)
|
(b)
|
(c)
|
||||||||||
Plan Category
|
Number of securities to be issued
upon exercise of outstanding
options, warrants and rights
|
Weighted-average exercise
price of outstanding
options, warrants and rights
|
Number of securities remaining
available for future issuance
under equity compensation
plan (excluding securities
reflected in column (a))
|
|||||||||
Equity
compensation plan approved by security holders
|
522,558 | $ | 8.24 | (1) | 58,072 | |||||||
Equity
compensation plans not approved by security holders
|
—
|
—
|
—
|
|||||||||
Total
(2)
|
522,558 | $ | 8.24 | (1) | 58,072 |
(1)
|
The
weighted-average exercise price of outstanding stock options is
$11.53. Restricted stock grants do not have an exercise price
and are subject to vesting provisions
only.
|
(2)
|
The
2006 Equity Incentive Plan provides for a proportionate adjustment to the
number of shares reserved thereunder in the event of a stock split, stock
dividend, reclassification or similar
event.
|
Item
13. Certain
Relationships and Related Transactions, and Director
Independence
Certain
Relationships and Related Transactions
The
information required by this item is incorporated herein by reference to the
sections titled “Policies and
Procedures for Approval of Related Persons Transactions,” and, “Transactions
with Related Persons” in the Proxy Statement.
Director
Independence
The information related to director
independence required by this item is incorporated herein by reference to the
section titled “Corporate
Governance and Board Matters – Director Independence” in the Proxy
Statement.
Item 14. Principal
Accounting Fees and Services
The
information required by this item is incorporated herein by reference to the
sections captioned “Proposal 2
– Ratification of Independent Registered Public Accountants,” and, “Audit Related Matters,” in
the Proxy Statement.
PART
IV
Item
15. Exhibits
and Financial Statement Schedules
List
of Documents Filed as Part of This Report
(1) Financial
Statements. The following consolidated financial statements
are filed under Item 8 hereof:
Report of
Independent Registered Public Accounting Firm
Consolidated
Statements of Financial Condition as of June 30, 2010 and 2009
Consolidated
Statements of Income for the Years Ended June 30, 2010 and 2009
Consolidated
Statements of Comprehensive Income for the Years Ended June 30, 2010 and
2009
Consolidated
Statements of Stockholders’ Equity for the Years Ended June 30, 2010 and
2009
101
Consolidated Statements of Cash Flows
for the Years Ended June 30, 2010 and 2009Notes to Consolidated Financial
Statements
(2) Financial Statement
Schedules. All schedules for which provision is made in the
applicable accounting regulations are either not required under the related
instructions or are inapplicable, and therefore have been omitted.
(3) Exhibits. The
following is a list of exhibits as part of this Annual Report on Form 10-K and
is also the Exhibit Index.
No.
|
Description
|
|
2.1
|
Branch
Purchase Agreement by and between Integra National Bank Association, a
national banking association, and United Community Bank, a
federally-chartered savings association (1)
|
|
3.1
|
Charter
of United Community Bancorp (2)
|
|
3.2
|
Amended
and Restated Bylaws of United Community Bancorp (3)
|
|
4.1
|
Specimen
Stock Certificate of United Community Bancorp (2)
|
|
10.1
|
United
Community Bank Employee Stock Ownership Plan and Trust
Agreement*(2)
|
|
10.2
|
Form
of ESOP Loan Documents*(2)
|
|
10.3
|
United
Community Bank 401(k) Profit Sharing Plan and Trust and Adoption
Agreement*(2)
|
|
10.4
|
Amended
and Restated United Community Bank Employee Severance Compensation
Plan*(4)
|
|
10.5
|
Amended
and Restated United Community Bank Supplemental Executive Retirement
Plan*(4)
|
|
10.6
|
Amended
and Restated Employment Agreement between United Community Bancorp and
certain executive officers*(4)
|
|
10.7
|
Employment
Agreement between United Community Bank and certain executive
officers*(4)
|
|
10.8
|
United
Community Bank Directors Retirement Plan*(2)
|
|
10.9
|
First
Amendment to the United Community Bank Directors’ Retirement Plan
(4)
|
|
10.10
|
Executive
Supplemental Retirement Income Agreements between United Community Bank
and William F. Ritzmann, Elmer G. McLaughlin and James W. Kittle and
Grantor Trust Agreements thereto*(2)
|
|
10.11
|
First
Amendment to the United Community Bank Executive Supplemental Retirement
Income Agreement (4)
|
|
10.12
|
Rabbi
Trust related to Directors Retirement Plan and Executive Supplemental
Retirement Income Agreements*(2)
|
|
10.13
|
United
Community Bancorp 2006 Equity Incentive Plan (5)
|
|
21
|
Subsidiaries
|
|
23
|
Consent
of Clark, Schaefer, Hackett & Co.
|
|
31.1
|
Rule
13(a)-14(a) Certification of Chief Executive Officer
|
|
31.2
|
Rule
13(a)-14(a) Certification of Chief Financial Officer
|
|
32
|
Certifications
Pursuant to 18 U.S.C. Section
1350
|
*
|
Management
contract or compensation plan or
arrangement.
|
(1)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K filed with
the SEC on February 1, 2010.
|
(2)
|
Incorporated
herein by reference to the Company’s Registration Statement on Form S-1,
as amended, as initially filed with the SEC on December 14,
2005 (File No. 333-130302).
|
(3)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K filed with
the SEC on October 3, 2007 (File No.
0-51800).
|
(4)
|
Incorporated
herein by reference to the Company’s Current Report on Form 8-K filed with
the SEC on February 2, 2009 (File No.
0-51800).
|
(5)
|
Incorporated
herein by reference to Appendix C to the Company’s Proxy Statement filed
with the SEC on October 5,
2006.
|
102
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
UNITED
COMMUNITY BANCORP
|
||||
Date: September
28, 2010
|
By:
|
/s/
William F. Ritzmann
|
||
William
F. Ritzmann
|
||||
President
and Chief Executive Officer
|
||||
(Duly
Authorized Representative)
|
||||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
|
||||
By:
|
/s/
William F. Ritzmann
|
September
28, 2010
|
||
William
F. Ritzmann
|
||||
President,
Chief Executive Officer and Director
|
||||
(Principal
Executive Officer)
|
||||
By:
|
/s/
Vicki A. March
|
September
28, 2010
|
||
Vicki
A. March
|
||||
Senior
Vice President, Chief Financial Officer and
|
||||
Treasurer
|
||||
(Principal
Financial and Accounting Officer)
|
||||
By:
|
/s/
Ralph B. Sprecher
|
September
28, 2010
|
||
Ralph
B. Sprecher
|
||||
Chairman
of the Board
|
||||
By:
|
/s/
Robert J. Ewbank
|
September
28, 2010
|
||
Robert
J. Ewbank
|
||||
Director
|
||||
By:
|
/s/
Jerry W. Hacker
|
September
28, 2010
|
||
Jerry
W. Hacker
|
||||
Director
|
||||
By:
|
/s/
Elmer G. McLaughlin
|
September
28, 2010
|
||
Elmer
G. McLaughlin
|
||||
Chief
Operating Officer and Director
|
||||
By:
|
/s/
George M. Seitz
|
September
28, 2010
|
||
George
M. Seitz
|
||||
Director
|
||||
By:
|
/s/
Eugene B. Seitz
|
September
28, 2010
|
||
Eugene
B. Seitz
|
||||
Director
|
||||
By:
|
/s/
Richard C. Strzynski
|
September
28, 2010
|
||
Richard
C. Strzynski
|
||||
Director
|
103