Attached files
file | filename |
---|---|
EX-32 - United Community Bancorp | v211114_ex32.htm |
EX-31.2 - United Community Bancorp | v211114_ex31-2.htm |
EX-31.1 - United Community Bancorp | v211114_ex31-1.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended December 31,
2010
OR
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from ______________ to _____________
Commission
file number: 0-51800
United Community Bancorp
|
(Exact
name of registrant as specified in its
charter)
|
United States of America
|
36-4587081
|
|
(State
or other jurisdiction of incorporation or
|
(I.R.S.Employer
Identification No.)
|
|
organization)
|
92 Walnut Street, Lawrenceburg,
Indiana
|
47025
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(812) 537-4822
|
(Registrant’s
telephone number, including area
code)
|
N/A
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes x
No ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes ¨
No ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, 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
As of
February 11, 2011, there were 7,845,554 shares of the registrant’s common stock
outstanding, of which 4,655,200 shares were held by United Community
MHC.
UNITED
COMMUNITY BANCORP
Table
of Contents
Page No.
|
||
Part I. Financial Information
|
||
Item 1.
|
Financial Statements (Unaudited)
|
|
Consolidated Statements of Financial Condition at December 31, 2010 and
|
||
June 30, 2010
|
1
|
|
Consolidated Statements of Income for the Three and Six Month Periods Ended
|
||
December 31, 2010 and 2009
|
2
|
|
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month
|
||
Periods Ended December 31, 2010 and 2009
|
3
|
|
Consolidated Statements of Cash Flows for the Six Month Periods Ended
|
||
December 31, 2010 and 2009
|
4
|
|
Notes to Unaudited Consolidated Financial Statements
|
5
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results
|
|
of Operations
|
16
|
|
Item 3.
|
Quantitative and Qualitative Disclosures About Market Risk
|
24
|
Item 4.
|
Controls and Procedures
|
25
|
Part II. Other Information
|
||
Item 1.
|
Legal Proceedings
|
26
|
Item 1A.
|
Risk Factors
|
26
|
Item 2.
|
Unregistered Sales of Equity Securities and Use of Proceeds
|
26
|
Item 3.
|
Defaults Upon Senior Securities
|
26
|
Item 4.
|
Submission of Matters to a Vote of Security Holders
|
26
|
Item 5.
|
Other Information
|
26
|
Item 6.
|
Exhibits
|
26
|
Signatures
|
27
|
Part
I. Financial Information
Item
1. Financial Statements
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Financial Condition
(In thousands, except share amounts)
|
December 31, 2010
|
June 30, 2010
|
||||||
Assets
|
||||||||
Cash
and due from banks
|
$ | 19,343 | $ | 32,023 | ||||
Investment
securities:
|
||||||||
Securities
available for sale - at estimated market value
|
66,034 | 62,089 | ||||||
Securities
held to maturity - at amortized cost
|
611 | 631 | ||||||
Mortgage-backed
securities available for sale - at estimated market value
|
74,660 | 57,238 | ||||||
Loans
receivable, net
|
298,240 | 309,575 | ||||||
Loans
available for sale
|
1,847 | 364 | ||||||
Property
and equipment, net
|
7,584 | 7,513 | ||||||
Federal
Home Loan Bank stock, at cost
|
2,008 | 2,016 | ||||||
Accrued
interest receivable:
|
||||||||
Loans
|
1,327 | 1,573 | ||||||
Investments
and mortgage-backed securities
|
810 | 717 | ||||||
Other
real estate owned, net
|
152 | 297 | ||||||
Cash
surrender value of life insurance policies
|
7,247 | 7,109 | ||||||
Deferred
income taxes
|
4,215 | 3,721 | ||||||
Goodwill
|
2,522 | 2,522 | ||||||
Intangible
asset
|
1,183 | 1,400 | ||||||
Prepaid
expenses and other assets
|
2,990 | 3,316 | ||||||
Total
assets
|
$ | 490,773 | $ | 492,104 | ||||
Liabilities and Stockholders'
Equity
|
||||||||
Deposits
|
$ | 429,808 | $ | 430,180 | ||||
Advance
from FHLB
|
2,333 | 2,833 | ||||||
Accrued
interest on deposits
|
79 | 119 | ||||||
Accrued
interest on FHLB advance
|
6 | 7 | ||||||
Advances
from borrowers for payment of insurance and taxes
|
235 | 168 | ||||||
Accrued
expenses and other liabilities
|
3,092 | 3,317 | ||||||
Total
liabilities
|
435,553 | 436,624 | ||||||
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 December 31,
2010
|
||||||||
and
June 30, 2010.
|
36 | 36 | ||||||
Additional
paid-in capital
|
36,913 | 36,995 | ||||||
Retained
earnings
|
28,195 | 28,048 | ||||||
Less
shares purchased for stock plans
|
(2,895 | ) | (3,042 | ) | ||||
Treasury
Stock, at cost - 618,446 shares at December 31,
2010
|
||||||||
and
June 30, 2010, respectively
|
(7,054 | ) | (7,054 | ) | ||||
Accumulated
other comprehensive income:
|
||||||||
Unrealized
gain on securities available for sale, net of income taxes
|
25 | 497 | ||||||
Total
stockholders' equity
|
55,220 | 55,480 | ||||||
Total
liabilities and stockholders' equity
|
$ | 490,773 | $ | 492,104 |
See
accompanying notes to the consolidated financial statements.
1
Consolidated
Statements of Income
(In
thousands, except share amounts)
For the three months ended
December 31,
|
For the six months ended
December 31
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Interest
income:
|
||||||||||||||||
Loans
|
$ | 4,354 | $ | 3,997 | $ | 8,681 | $ | 8,158 | ||||||||
Investments
and mortgage - backed securities
|
679 | 714 | 1,382 | 1,374 | ||||||||||||
Total
interest income
|
5,033 | 4,711 | 10,063 | 9,532 | ||||||||||||
Interest
expense:
|
||||||||||||||||
Deposits
|
1,413 | 1,560 | 3,026 | 3,235 | ||||||||||||
Borrowed
funds
|
20 | 28 | 42 | 58 | ||||||||||||
Total
interest expense
|
1,433 | 1,588 | 3,068 | 3,293 | ||||||||||||
Net
interest income
|
3,600 | 3,123 | 6,995 | 6,239 | ||||||||||||
Provision
for loan losses
|
737 | 324 | 1,456 | 946 | ||||||||||||
Net
interest income after
|
||||||||||||||||
provision
for loan losses
|
2,863 | 2,799 | 5,539 | 5,293 | ||||||||||||
Other
income:
|
||||||||||||||||
Service
charges
|
606 | 514 | 1,207 | 996 | ||||||||||||
Gain
on sale of loans
|
215 | 110 | 442 | 196 | ||||||||||||
Gain
on sale of investments
|
- | 51 | 44 | 39 | ||||||||||||
Gain
(loss) on sale of other real estate owned
|
(27 | ) | - | (25 | ) | 20 | ||||||||||
Income
from Bank Owned Life Insurance
|
70 | 82 | 139 | 139 | ||||||||||||
Other
|
109 | 185 | 161 | 238 | ||||||||||||
Total
other income
|
973 | 942 | 1,968 | 1,628 | ||||||||||||
Other
expense:
|
||||||||||||||||
Compensation
and employee benefits
|
1,687 | 1,441 | 3,358 | 2,912 | ||||||||||||
Premises
and occupancy expense
|
336 | 278 | 645 | 554 | ||||||||||||
Deposit
insurance premium
|
180 | 193 | 408 | 413 | ||||||||||||
Advertising
expense
|
117 | 85 | 218 | 176 | ||||||||||||
Data
processing expense
|
96 | 64 | 180 | 120 | ||||||||||||
ATM
service fees
|
125 | 110 | 263 | 217 | ||||||||||||
Provision
for loss on sale of real estate owned
|
- | 200 | - | 300 | ||||||||||||
Acquisition
expense
|
- | - | 38 | - | ||||||||||||
Other
operating expenses
|
663 | 698 | 1,345 | 1,252 | ||||||||||||
Total
other expense
|
3,204 | 3,069 | 6,455 | 5,944 | ||||||||||||
Income
before income tax provision
|
632 | 672 | 1,052 | 977 | ||||||||||||
Income
tax provision
|
53 | 196 | 202 | 279 | ||||||||||||
Net
income
|
$ | 579 | $ | 476 | $ | 850 | $ | 698 | ||||||||
Basic
and diluted earnings per share
|
$ | 0.08 | $ | 0.06 | $ | 0.11 | $ | 0.09 |
See
accompanying notes to the consolidated financial
statements.
2
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income (Loss)
(In
thousands)
For the three months
|
For the six months
|
|||||||||||||||
ended December 31,
|
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Net
income
|
$ | 579 | $ | 476 | $ | 850 | $ | 698 | ||||||||
Other
comprehensive loss, net of tax
|
||||||||||||||||
Unrealized
loss on available for sale securities
|
(716 | ) | (528 | ) | (445 | ) | (61 | ) | ||||||||
Reclassification
adjustment for gains on
|
||||||||||||||||
available
for sale securities included in income
|
- | (31 | ) | (27 | ) | (23 | ) | |||||||||
Total
comprehensive income (loss)
|
$ | (137 | ) | $ | (83 | ) | $ | 378 | $ | 614 |
See
accompanying notes to consolidated financial statements.
3
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
(In
thousands)
(Unaudited)
|
||||||||
Six months ended
|
||||||||
December 31,
|
||||||||
(In thousands)
|
2010
|
2009
|
||||||
Operating
activities:
|
||||||||
Net
income
|
$ | 850 | $ | 698 | ||||
Adjustments
to reconcile net income to net cash
|
||||||||
provided
by operating activities:
|
||||||||
Depreciation
|
266 | 231 | ||||||
Provision
for loan losses
|
1,456 | 946 | ||||||
Provision
for loss on sale of real estate acquired through
|
||||||||
foreclosure
|
- | 300 | ||||||
Deferred
loan origination costs
|
(40 | ) | (5 | ) | ||||
Amortization
of premium on investments
|
509 | (24 | ) | |||||
Proceeds
from sale of loans
|
13,835 | 17,376 | ||||||
Loans
disbursed for sale in the secondary market
|
(14,876 | ) | (15,427 | ) | ||||
Gain
on sale of loans
|
(442 | ) | (196 | ) | ||||
Amortization
of intangible asset
|
217 | - | ||||||
Amortization
of acquisition-related loan yield discount
|
(124 | ) | - | |||||
Amortization
of acquisition-related credit risk discount
|
(102 | ) | - | |||||
Amortization
of acquisition-related CD yield adjustment
|
(72 | ) | - | |||||
(Gain)
loss on the sale of available for sale securities
|
(44 | ) | (39 | ) | ||||
ESOP
shares committed to be released
|
(44 | ) | 72 | |||||
Stock-based
compensation expense
|
109 | 189 | ||||||
Deferred
income taxes
|
(252 | ) | 36 | |||||
(Gain)
loss on sale of other real estate owned
|
25 | (20 | ) | |||||
Effects
of change in operating assets and liabilities:
|
||||||||
Accrued
interest receivable
|
153 | 24 | ||||||
Prepaid
expenses and other assets
|
326 | (1,669 | ) | |||||
Accrued
interest on deposits
|
(40 | ) | (3 | ) | ||||
Accrued
expenses and other
|
(226 | ) | (250 | ) | ||||
Net
cash provided by operating activities
|
1,484 | 2,239 | ||||||
Investing
activities:
|
||||||||
Proceeds
from maturity of available for sale investment securities
|
5,302 | 4,890 | ||||||
Proceeds
from the sale of available for sale investment securities
|
4,044 | 3,498 | ||||||
Proceeds
from maturity of held to maturity investment securities
|
20 | - | ||||||
Proceeds
from the sale of mortgage-backed securities
|
- | 5,350 | ||||||
Proceeds
from repayment of mortgage-backed securities
|
||||||||
available
for sale
|
8,729 | 4,554 | ||||||
Proceeds
from sale of other real estate owned
|
180 | 1,759 | ||||||
Proceeds
from sale of Federal Home Loan Bank stock
|
8 | - | ||||||
Purchases
of available for sale investment securities
|
(15,143 | ) | (8,713 | ) | ||||
Purchases
of mortgage-backed securities
|
(25,479 | ) | (17,670 | ) | ||||
Increase
in cash surrender value of life insurance
|
(139 | ) | (140 | ) | ||||
Net
increase (decrease) in loans
|
10,085 | (71 | ) | |||||
Capital
expenditures
|
(337 | ) | (258 | ) | ||||
Net
cash used in investing activities
|
(12,730 | ) | (6,801 | ) | ||||
Financing
activities:
|
||||||||
Net
decrease in deposits
|
(300 | ) | (2,699 | ) | ||||
Repayments
of Federal Home Loan Bank advances
|
(500 | ) | (500 | ) | ||||
Dividends
paid to stockholders
|
(701 | ) | (545 | ) | ||||
Repurchases
of common stock
|
- | (73 | ) | |||||
Net
increase (decrease) in advances from borrowers for payment
|
||||||||
of
insurance and taxes
|
67 | (9 | ) | |||||
Net
cash used in financing activities
|
(1,434 | ) | (3,826 | ) | ||||
Net
decrease in cash and cash equivalents
|
(12,680 | ) | (8,388 | ) | ||||
Cash
and cash equivalents at beginning of period
|
32,023 | 27,004 | ||||||
Cash
and cash equivalents at end of period
|
$ | 19,343 | $ | 18,616 |
See
accompanying notes to consolidated financial statements.
4
UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
NOTES TO
UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS
OF PRESENTATION- United Community Bancorp (the “Company”), a Federally-chartered
corporation, is 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. United Community MHC owns approximately 59% of the Company’s
outstanding common stock and because the Company is in the mutual holding
company structure, must always own at least a majority of the voting stock of
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 Holding,
LLC is a wholly-owned subsidiary of the Bank. The entity was formed
for the purpose of holding assets that are acquired by the Bank through, or in
lieu of, foreclosure.
The
accompanying unaudited consolidated financial statements were prepared in
accordance with the rules and regulations of the Securities and Exchange
Commission, and therefore do not include all information or footnotes necessary
for complete financial statements in conformity with accounting principles
generally accepted in the United States of America. However, all normal
recurring adjustments that, in the opinion of management, are necessary for a
fair presentation of the financial statements have been included. No
other adjustments have been included. The results for the three and
six month periods ended December 31, 2010 are not necessarily indicative of the
results that may be expected for the fiscal year ending June 30,
2011. These financial statements should be read in conjunction with
the Company’s audited consolidated financial statements and the accompanying
notes thereto for the year ended June 30, 2010, which are included on the
Company’s Annual Report on Form 10-K as filed with the Securities and Exchange
Commission on September 28, 2010. The Company evaluates events and
transactions occurring subsequent to the date of the financial statements for
matters requiring recognition or disclosure in the financial
statements.
2.
EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) – As of December 31, 2010 and June 30,
2010, the ESOP owned 202,061 and 230,897 shares, respectively, of the Company's
common stock, which were held in a suspense account until released for
allocation to participants.
3.
EARNINGS PER SHARE (EPS) – In June 2008, the Financial Accounting Standards
Board (FASB) issued Accounting Standards Codification (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. 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 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 were exercised or converted into common
stock or resulted in the issuance of common stock. For the three and six month
periods ended December 31, 2010 and 2009, 346,304 outstanding
stock option awards were excluded from the computation of diluted weighted
average outstanding shares 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:
5
Three Months Ended
|
Six Months Ended
|
|||||||||||||||
December 31,
|
December 31,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Basic
weighted average outstanding shares
|
7,631,858 | 7,608,208 | 7,631,858 | 7,610,139 | ||||||||||||
Effect
of dilutive stock options
|
- | - | - | - | ||||||||||||
Diluted
weighted average outstanding shares
|
7,631,858 | 7,608,208 | 7,631,858 | 7,610,139 |
4. STOCK-BASED
COMPENSATION – The Company applies the provisions of ASC 718-10-35-2, Compensation-Stock
Compensation, to stock-based 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 718-10-35-8. 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.
5.
DIVIDENDS – On July 22, 2010 and October 28, 2010, the Board of Directors of the
Company declared cash dividends on the Company’s outstanding shares of stock of
$0.11 per share. United Community MHC, which owns 4,655,200 shares of
the Company’s common stock, waived receipt of the dividends. The
dividends were paid on August 31, 2010 and November 30, 2010,
respectively. Accordingly, cash dividends, net of unvested shares
held in ESOP, of $701,000 were paid to shareholders during the six month period
ended December 31, 2010.
6.
SUPPLEMENTAL CASH FLOW INFORMATION
Six Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
(In
thousands)
|
||||||||
Supplemental
disclosure of cash flow information is as follows:
|
||||||||
Cash
paid during the period for:
|
||||||||
Income
taxes, net of refunds received
|
$ | 682 | $ | - | ||||
Interest
|
$ | 3,109 | $ | 3,296 | ||||
Supplemental
disclosure of non-cash investing and financing activities is as
follows:
|
||||||||
Unrealized
gains (losses) on securities
|
||||||||
designated
as available for sale, net of tax
|
$ | (472 | ) | $ | (84 | ) | ||
Transfers
of loans to other real estate owned
|
$ | 60 | $ | 888 |
7. TROUBLED
DEBT RESTRUCTURINGS - From time to time, as part of our loss mitigation process,
loans may be renegotiated in a troubled debt restructuring (TDR) 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.
However, TDRs are also considered to be impaired, except for those that have
been performing under the new terms for at least six consecutive
months. TDRs are accounted for as set forth in ASC 310 Receivables (“ASC
310”). A TDR may be on non-accrual or it may accrue
interest. A TDR is typically on non-accrual until the borrower
successfully performs under the new terms for six consecutive
months. However, a TDR may be placed on accrual immediately following
the TDR in those instances where a borrower’s payments are current prior to the
modification and management determines that principal and interest under the new
terms are fully collectible.
6
Existing
performing loan customers who request loan a (non-TDR) modification and who meet
the Bank’s underwriting standards may, usually for a fee, modify their original
loan terms to terms currently offered. The modified terms of these loans are
similar to the terms offered to new customers. The fee assessed for modifying
the loan is deferred and amortized over the life of the modified loan using the
level-yield method and is reflected as an adjustment to interest income. Each
modification is examined on a loan-by-loan basis and if the modification of
terms represents more than a minor change to the loan, then the unamortized
balance of the pre-modification deferred fees or costs associated with the
mortgage loan are recognized in interest income at the time of the modification.
If the modification of terms does not represent more than a minor change to the
loan, then the unamortized balance of the pre-modification deferred fees or
costs continue to be deferred.
At
December 31, 2010, the Bank had nineteen loans totaling $20.1 million that
qualified as TDRs, and has reserved for losses on these loans for $2.0 million.
At December 31, 2010, the Bank had no other commitments to lend on its
TDRs. At June 30, 2010, the Bank had thirteen loans totaling $9.0 million
that qualified as TDRs, and has reserved for losses on these loans for $1.8
million. Management continues to monitor the performance of loans
classified as TDRs, and does not anticipate any additional losses on TDRs at
December 31, 2010.
8.
DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES
In
accordance with ASC 825-10-50-10, 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 due from banks,
accrued interest receivable, and accrued interest payable
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.
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.
7
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. Off-balance sheet items at December 31, 2010 are comprised
solely of loan commitments.
Fair value of financial
instruments
The
estimated fair values of the Company's financial instruments at December 31,
2010 and June 30, 2010 are as follows:
December 31, 2010
|
June 30, 2010
|
|||||||||||||||
Carrying
Amounts
|
Fair
Value
|
Carrying
Amounts
|
Fair
Value
|
|||||||||||||
(In thousands)
|
||||||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and due from banks
|
$ | 19,343 | $ | 19,343 | $ | 32,023 | $ | 32,023 | ||||||||
Investment
securities available for sale
|
66,034 | 66,034 | 62,089 | 62,089 | ||||||||||||
Investment
securities held to maturity
|
611 | 611 | 631 | 631 | ||||||||||||
Mortgage-backed
securities
|
74,660 | 74,660 | 57,238 | 57,238 | ||||||||||||
Loans
receivable and loans receivable held for sale
|
300,087 | 294,234 | 309,939 | 304,943 | ||||||||||||
Accrued
interest receivable
|
2,137 | 2,137 | 2,290 | 2,290 | ||||||||||||
Investment
in FHLB stock
|
2,008 | 2,008 | 2,016 | 2,016 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Deposits
|
$ | 429,808 | $ | 431,508 | $ | 430,180 | 432,091 | |||||||||
Accrued
interest payable
|
85 | 85 | 126 | 126 | ||||||||||||
FHLB
advance
|
2,333 | 2,387 | 2,833 | 2,904 | ||||||||||||
Off
balance-sheet items
|
$ | - | $ | - | $ | - | $ | - |
The
Company measures fair value under ASC 820-10-50-2, which establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. ASC 820-10-50-2 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
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.
|
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.
8
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)
|
||||||||||||||||
December
31, 2010:
|
||||||||||||||||
Mortgage-backed
securities
|
$ | 74,660 | $ | - | $ | 74,660 | $ | - | ||||||||
U.S.
Government corporations and agencies
|
50,608 | - | 50,608 | - | ||||||||||||
Municipal
bonds
|
15,302 | - | 15,302 | - | ||||||||||||
Other
equity securities
|
124 | 124 | - | - | ||||||||||||
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 | - | - |
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)
|
||||||||||||||||
December
31, 2010:
|
|
|||||||||||||||
Other
real estate owned
|
$ | 152 | $ | - | $ | 152 | $ | - | ||||||||
Loans
available for sale
|
1,847 | - | 1,847 | - | ||||||||||||
Impaired
loans
|
24,455 | - | 24,455 | - | ||||||||||||
June
30, 2010:
|
||||||||||||||||
Other
real estate owned
|
$ | 297 | - | $ | 297 | - | ||||||||||
Loans
available for sale
|
364 | - | 364 | - | ||||||||||||
Impaired
loans
|
13,854 | - | 13,854 | - |
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. We generally
maintain current appraisals for these items.
9
Investment
securities available for sale at December 31, 2010 consist of the
following:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Mortgage-backed
securities
|
$ | 74,257 | $ | 631 | $ | 228 | $ | 74,660 | ||||||||
U.S.
Government corporations and agencies
|
50,454 | 172 | 18 | 50,608 | ||||||||||||
Municipal
bonds
|
15,736 | 16 | 450 | 15,302 | ||||||||||||
Other
equity securities
|
211 | - | 87 | 124 | ||||||||||||
$ | 140,658 | $ | 819 | $ | 783 | $ | 140,694 |
Investment
securities held to maturity at December 31, 2010 consist of the
following:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Municipal
bonds
|
$ | 611 | - | - | $ | 611 |
Investment
securities available for sale at June 30, 2010 consist of the
following:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Mortgage-backed
securities
|
$ | 56,669 | $ | 636 | $ | 67 | $ | 57,238 | ||||||||
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 | ||||||||||||
$ | 118,575 | $ | 985 | $ | 233 | $ | 119,327 |
Investment
securities held to maturity at June 30, 2010 consist of the
following:
Gross
|
Gross
|
Estimated
|
||||||||||||||
Amortized
|
Unrealized
|
Unrealized
|
Market
|
|||||||||||||
Cost
|
Gains
|
Losses
|
Value
|
|||||||||||||
(In
thousands)
|
||||||||||||||||
Municipal
bonds
|
$ | 631 | - | - | $ | 631 |
10
The
mortgage-backed securities, U.S. Government agency bonds and municipal bonds
available for sale have the following maturities at December 31,
2010:
Amortized
|
Estimated
|
|||||||
cost
|
market value
|
|||||||
(In
thousands)
|
||||||||
Due
or callable in one year or less
|
$ | 38,150 | $ | 38,282 | ||||
Due
or callable in 1 - 5 years
|
86,560 | 86,986 | ||||||
Due
or callable in 5 - 10 years
|
1,039 | 1,025 | ||||||
Due
or callable in greater than 10 years
|
14,698 | 14,277 | ||||||
Total
debt securities
|
$ | 140,447 | $ | 140,570 |
All other
securities available for sale at December 31, 2010 are saleable within one
year. The Bank held $611,000 and $631,000 in investment securities that
are being held to maturity at December 31, 2010 and June 30, 2010,
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 December 31, 2010 (in thousands):
January
1, 2011 through June 30, 2011
|
$ | 45 | ||
2012
|
68 | |||
2013
|
71 | |||
2014
|
74 | |||
2015
|
77 | |||
2016
and thereafter
|
276 | |||
$ | 611 |
Gross
proceeds on the sale of investment and mortgage-backed securities were $0 and
$8.3 million for the three month periods ended December 31, 2010 and 2009,
respectively. Gross realized gains for the three month periods ended
December 31, 2010 and 2009 were $0 and $129,000, respectively. Gross
realized losses for the three month periods ended December 31, 2010 and 2009
were $0 and $77,000, respectively.
Gross
proceeds on the sale of investment and mortgage-backed securities were $4.0
million and $8.8 million for the six month periods ended December 31, 2010 and
2009, respectively. Gross realized gains for the six month periods ended
December 31, 2010 and 2009 were $44,000 and $129,000, respectively. Gross
realized losses for the six month periods ended December 31, 2010 and 2009 were
$0 and $90,000, respectively.
The table
below indicates the length of time individual investment securities and
mortgage-backed securities have been in a continuous loss position at December
31, 2010:
Less
than 12 months
|
12
months or longer
|
Total
|
||||||||||||||||||||||
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
Fair
Value
|
Unrealized
Losses
|
|||||||||||||||||||
(In
thousands)
|
||||||||||||||||||||||||
Mortgage-backed
securities
|
$ | 35,687 | $ | 228 | $ | - | $ | - | $ | 35,687 | $ | 228 | ||||||||||||
U.S.
Government corporations and agencies
|
3,680 | 18 | - | - | 3,680 | 18 | ||||||||||||||||||
Municipal
bonds
|
12,833 | 450 | - | - | 12,833 | 450 | ||||||||||||||||||
Other
equity securities
|
- | - | 124 | 87 | 124 | 87 | ||||||||||||||||||
$ | 52,200 | $ | 696 | $ | 124 | $ | 87 | $ | 52,324 | $ | 783 | |||||||||||||
Number
of investments
|
44
|
1
|
45
|
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.
11
9.
GOODWILL AND INTANGIBLE ASSET
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.
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.
As a
result of the acquisition, the Company originally recorded a core deposit
intangible asset of $1,400,000 and goodwill of $3,130,000. A purchase
accounting adjustment was recorded during the three month period ended September
30, 2010 related to deferred tax balances that would have affected the
measurement of the amounts recognized at the date of acquisition. This
adjustment had the effect of reducing goodwill and increasing deferred taxes by
$608,000. As required pursuant to the guidance in FASB ASC 805, Business Combinations, this
adjustment has been reflected in the Company’s consolidated statements of
financial condition on a retrospective basis.
The
following table indicates changes to the core deposit intangible asset and
goodwill balances for the six month period ended December 31,
2010:
Core
Deposit
Intangible
|
Goodwill
|
|||||||
(dollars in thousands)
|
||||||||
Balance
at June 30, 2010
|
$ | 1,400 | $ | 2,522 | ||||
Amortization
|
(217 | ) | - | |||||
Balance
at December 31, 2010
|
$ | 1,183 | $ | 2,522 |
The core
deposit intangible is being amortized using the double declining balance method
over its estimated useful life of 8.75 years. Remaining amortization
of the core deposit intangible is as follows (dollars in thousands) as of
December 31, 2010:
January
1, 2011 through June 30, 2011
|
$ | 94 | ||
2012
|
226 | |||
2013
|
179 | |||
2014
|
142 | |||
2015
|
118 | |||
2016
and thereafter
|
424 | |||
$ | 1,183 |
12
10. DISCLOSURES
ABOUT THE CREDIT QUALITY OF LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES
(IN THOUSANDS)
The
following table illustrates certain disclosures required by ASC
310-10-50-11B(c), (g) and (h).
Allowance
for Credit Losses and Recorded Investment in Loans Receivable
For the
six months ended December 31, 2010
Mortgage
|
Consumer
|
One- to
four-family
nonowner
occupied
|
Multi-
family
nonowner
occupied
|
Non-
residential
real estate
|
Construction
|
Land
|
Commercial
|
Total
|
||||||||||||||||||||||||||||
Allowance
for Credit Losses:
|
||||||||||||||||||||||||||||||||||||
Beginning
Balance:
|
$ | 439 | $ | 908 | $ | (20 | ) | $ | 2,863 | $ | 1,256 | $ | 4 | $ | 10 | $ | 221 | $ | 5,681 | |||||||||||||||||
Charge
offs
|
(188 | ) | (105 | ) | - | - | (206 | ) | - | - | (38 | ) | $ | (537 | ) | |||||||||||||||||||||
Recoveries
|
17 | 11 | - | - | 1 | - | - | - | $ | 29 | ||||||||||||||||||||||||||
Provision
|
547 | 184 | 73 | 259 | 345 | 9 | 22 | 17 | $ | 1,456 | ||||||||||||||||||||||||||
Reclassified
from credit risk allowance on acquired loans
|
55 | - | - | - | - | - | - | - | $ | 55 | ||||||||||||||||||||||||||
Ending
Balance:
|
$ | 870 | $ | 998 | $ | 53 | $ | 3,122 | $ | 1,396 | $ | 13 | $ | 32 | $ | 200 | $ | 6,684 | ||||||||||||||||||
Balance,
Individually Evaluated
|
$ | 217 | $ | 706 | $ | - | $ | 2,658 | $ | - | $ | - | $ | - | $ | - | $ | 3,581 | ||||||||||||||||||
Balance,
Collectively Evaluated
|
$ | 653 | $ | 199 | $ | 53 | $ | 464 | $ | 1,396 | $ | 13 | $ | 32 | $ | 200 | $ | 3,010 | ||||||||||||||||||
Balance,
Loans acquired with deteriorated credit quality
|
$ | - | $ | 93 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | $ | 93 | ||||||||||||||||||
Financing
receivables:
|
||||||||||||||||||||||||||||||||||||
Ending Balance
|
$ | 116,038 | $ | 43,651 | $ | 14,264 | $ | 48,215 | $ | 71,806 | $ | 1,549 | $ | 3,901 | $ | 6,729 | $ | 306,153 | ||||||||||||||||||
Ending
Balance: individually evaluated for impairment
|
$ | 1,348 | $ | 776 | $ | 980 | $ | 13,614 | $ | 9,033 | $ | - | $ | - | $ | - | $ | 25,751 | ||||||||||||||||||
Ending
Balance: collectively evaluated for impairment
|
$ | 100,096 | $ | 33,502 | $ | 12,371 | $ | 34,018 | $ | 54,190 | $ | 1,549 | $ | 3,901 | $ | 3,303 | $ | 242,930 | ||||||||||||||||||
Ending
Balance: loans acquired with deteriorated credit quality
|
$ | 14,594 | $ | 9,373 | $ | 913 | $ | 583 | $ | 8,583 | $ | - | $ | - | $ | 3,426 | $ | 37,472 |
13
The
following table illustrates certain disclosures required by ASC
310-10-50-29(b).
Credit
Risk Profile by Internally Assigned Grade
Mortgage
|
Consumer
|
One- to
four-family
nonowner
occupied
|
Multi-family
nonowner
occupied
|
Non-
residential
real
estate
|
Construction
|
Land
|
Commercial
|
Total
|
||||||||||||||||||||||||||||
Grade:
|
||||||||||||||||||||||||||||||||||||
Pass
|
$ | 111,533 | $ | 42,121 | $ | 11,976 | $ | 33,917 | $ | 56,109 | $ | 1,549 | $ | 1,173 | $ | 6,454 | $ | 264,832 | ||||||||||||||||||
Special
mention
|
853 | 89 | 979 | 2,973 | 7,291 | - | - | 241 | 12,426 | |||||||||||||||||||||||||||
Substandard
|
3,435 | 819 | 1,100 | 9,975 | 8,129 | - | 2,698 | 34 | 26,190 | |||||||||||||||||||||||||||
Doubtful
|
- | - | - | - | - | - | - | - | - | |||||||||||||||||||||||||||
Loss
|
217 | 622 | 209 | 1,350 | 277 | - | 30 | - | 2,705 | |||||||||||||||||||||||||||
Total:
|
$ | 116,038 | $ | 43,651 | $ | 14,264 | $ | 48,215 | $ | 71,806 | $ | 1,549 | $ | 3,901 | $ | 6,729 | $ | 306,153 |
The
following table illustrates certain disclosures required by ASC 310-10-50-7A for
gross loans.
Age Analysis of Past Due Loans Receivable
30-59 days
past due
|
60-89 days
past due
|
Greater than
90 days
|
Total past
due
|
Total
current
|
Total loans
receivable
|
|||||||||||||||||||
Mortgage
|
$ | 2,370 | $ | 1,276 | $ | 1,628 | $ | 5,274 | $ | 110,764 | $ | 116,038 | ||||||||||||
Consumer
|
260 | 43 | 724 | 1,027 | 42,624 | 43,651 | ||||||||||||||||||
One-
to four-family nonowner occupied
|
328 | - | 302 | 630 | 13,634 | 14,264 | ||||||||||||||||||
Multi-family
nonowner occupied
|
1,983 | 681 | 12,233 | 14,897 | 33,318 | 48,215 | ||||||||||||||||||
Non-residential
real estate
|
2,808 | 546 | 5,207 | 8,561 | 63,245 | 71,806 | ||||||||||||||||||
Construction
|
- | - | - | - | 1,549 | 1,549 | ||||||||||||||||||
Land
|
- | - | - | - | 3,901 | 3,901 | ||||||||||||||||||
Commercial
|
22 | - | - | 22 | 6,707 | 6,729 | ||||||||||||||||||
Total
|
$ | 7,771 | $ | 2,546 | $ | 20,094 | $ | 30,411 | $ | 275,742 | $ | 306,153 |
The
following table illustrates certain disclosures required by ASC
310-10-50-15.
Impaired Loans
For the six months ended December 31, 2010
Recorded
investment
|
Unpaid
principal
balance
|
Specific
allowance
|
Interest
income
recognized
|
|||||||||||||
With
an allowance recorded:
|
||||||||||||||||
Mortgage
|
$ | 1,132 | $ | 1,349 | $ | (217 | ) | $ | 10 | |||||||
Consumer
|
230 | 936 | (706 | ) | - | |||||||||||
One-
to four-family nonowner occupied
|
771 | 980 | (209 | ) | 9 | |||||||||||
Multi-family
nonowner occupied
|
10,777 | 12,157 | (1,380 | ) | 135 | |||||||||||
Non-residential
real estate
|
7,964 | 9,033 | (1,069 | ) | 173 | |||||||||||
Construction
|
- | - | - | - | ||||||||||||
Land
|
- | - | - | - | ||||||||||||
Commercial
|
- | - | - | - | ||||||||||||
Total
|
$ | 20,874 | $ | 24,455 | $ | (3,581 | ) | $ | 327 |
The Bank
did not have any impaired loans with no specific allowance or any investment in
subprime loans at December 31, 2010.
14
11.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
In
January 2011, the FASB issued ASU 2011-1, “Receivables (Topic 310): Deferral of
the Effective Date of Disclosures about Troubled Debt Restructurings in Update
No. 2010-20”, which delays the effective date of the disclosures about troubled
debt restructurings in ASU 2010-20 in order to allow the FASB time to complete
its deliberations on what constitutes a troubled debt restructuring. The
effective date of the new disclosures about troubled debt restructurings and the
guidance for determining what constitutes a troubled debt restructuring will
then be coordinated. Currently, that guidance is anticipated to be effective for
interim and annual periods ending after June 15, 2011. Management is currently
evaluating the impact, if any, that the adoption of the remaining amendments
will have on its consolidated financial statements.
In
December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro
Forma Information for Business Combinations. The amendments in this
update specify that if a public entity presents comparative financial
statements, the entity should disclose revenue and earnings of the combined
entity as though the business combination(s) that occurred during the current
year had occurred as of the beginning of the comparable prior annual reporting
period only. The amendments also expand the supplemental pro forma disclosures
under Topic 805 to include a description of the nature and amount of material,
nonrecurring pro forma adjustments directly attributable to the business
combination included in the reported pro forma revenue and earnings. The
amendments in this Update are effective prospectively for business combinations
for which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2010. Early adoption is
permitted. This ASU is not expected to have a significant impact on the
Company’s financial statements.
In
December 2010, the FASB issued ASU 2010-28, When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying
Amounts. This ASU modifies Step 1 of the goodwill impairment test for
reporting units with zero or negative carrying amounts. For those reporting
units, an entity is required to perform Step 2 of the goodwill impairment test
if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity
should consider whether there are any adverse qualitative factors indicating an
impairment may exist. The qualitative factors are consistent with the existing
guidance, which requires that goodwill of a reporting unit be tested for
impairment between annual tests if an event occurs or circumstances change that
would more likely than not reduce the fair value of a reporting unit below its
carrying amount. For public entities, the amendments in this Update are
effective for fiscal year, and interim periods within those years, beginning
after December 15, 2010. Early adoption is not permitted. This ASU is not
expected to have a significant impact on the Company’s financial
statements.
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." The 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 became effective during the three
month period ended December 31, 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 became 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. The adoption of
this guidance did not have a material impact on the Company’s financial
statements.
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 during the year ended
June 30, 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 this guidance did not have a material impact on
the Company’s financial statements.
15
Item
2. Management Discussion and Analysis
Forward-Looking
Statements
This
report contains forward-looking statements that are based on assumptions and may
describe future plans, strategies and expectations of the
Company. These forward-looking statements are generally identified by
use of the words “believe,” “expect,” “intend,” “anticipate,” “estimate,”
“project” or similar expressions. The Company’s ability to predict
results or the actual effect of future plans or strategies is inherently
uncertain. Factors which could have a material adverse effect on the operations
of the Company and its subsidiaries include, but are not limited to, general
economic conditions, changes in the interest rate environment, legislative or
regulatory changes that may adversely affect our business, changes in accounting
policies and practices, changes in competition and demand for financial
services, adverse changes in the securities markets, changes in deposit flows,
changes in the quality or composition of the Company’s loan or investment
portfolios, and the Company’s ability to successfully integrate assets,
liabilities, customers, systems, and personnel of the three branches of Integra
Bank it is acquiring into its operations and the Company’s ability to recognize
revenue synergies and cost savings within expected time
frames. Additionally, other risks and uncertainties may be described
in the reports the Company files with the SEC, including the Company’s Annual
Report on Form 10-K as filed with the Securities and Exchange Commission on
September 28, 2010, which are available through the SEC’s website at www.sec.gov. These
risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such
statements. Except as required by applicable law or regulation, the
Company does not undertake the responsibility, and specifically disclaims any
obligation, to release publicly the result of any revisions that may be made to
any forward-looking statements to reflect events or circumstances after the date
of the statements or to reflect the occurrence of anticipated or unanticipated
events.
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.
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 collectability 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 Office of Thrift Supervision (OTS), as an integral
part of its examination process, periodically reviews our allowance for loan
losses. This 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 Note 10 included in this Form 10-Q and Notes 1
and 5 of the notes to the consolidated financial statements included in Item 8
of the Annual Report on Form 10-K filed with the Securities and Exchange
Commission on September 28, 2010.
16
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 applies the provisions of
ASC 275-10-50-8 to account for uncertainty in income taxes. The Company had no
unrecognized tax benefits as of December 31, 2010 and June 30, 2010. The
Company recognized no interest and penalties on the underpayment of income taxes
during the three or six month periods ended December 31, 2010 and 2009, and
had no accrued interest and penalties on the balance sheet as of December 31,
2010 and June 30, 2010. 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 2007.
INVESTMENT SECURITIES -
Investments are reviewed quarterly for indicators of other-than-temporary
impairment. This determination requires significant judgment. In making this
judgment, Management evaluates, among other factors, the expected cash flows of
the security, the duration and extent to which the fair value of an investment
is less than its cost, the historical and implicit volatility of the security
and intent and ability to hold the investment until recovery, which may be
maturity. Investments with an indicator of impairment are further evaluated to
determine the likelihood of a significant adverse effect on the fair value and
amount of the impairment as necessary. Once the other-than-temporary impairment
is recorded, when future cash flows can be reasonable estimated, future cash
flows are re-allocated between interest and principal cash flows to provide for
a level-yield on the security.
Comparison
of Financial Condition at December 31, 2010 and June 30, 2010
Total
assets were $490.8 million at December 31, 2010, compared to $492.1 million at
June 30, 2010. The decrease is primarily due to a $12.7 million
decrease in cash, an $11.3 million decrease in loans receivable, partially
offset by a $21.3 million increase in investment securities. The
decrease in loans receivable is primarily the result of more loans being sold to
Freddie Mac in the current period. The increase in investments in the
current period was funded by proceeds from the sales of loans and
cash.
Total
liabilities were $435.6 million at December 31, 2010, compared to $436.6 million
at June 30, 2010.
Total
stockholders’ equity was $55.2 million at December 31, 2010, compared to $55.5
million at June 30, 2010. The decrease is primarily the result of a
$472,000 unrealized loss on available for sale securities and dividends paid of
$701,000, partially offset by net income during the six month period ended
December 31, 2010 of $850,000.
17
Comparison
of Operating Results for the Three and Six Months Ended December 31, 2010 and
2009
General.
Net income was $579,000 for the three months ended December 31, 2010,
compared to net income of $476,000 for the three months ended December 31,
2009. Net income was $850,000 for the six months ended December 31,
2010, compared to net income of $698,000 for the six months ended December 31,
2009.
The
following table summarizes changes in interest income and interest expense for
the three and six months ended December 31, 2010 and 2009.
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||
December 31,
|
%
|
December 31,
|
%
|
|||||||||||||||||||||
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||
(Dollars
in thousands)
|
||||||||||||||||||||||||
Interest
income:
|
||||||||||||||||||||||||
Loans
|
$ | 4,354 | $ | 3,997 | 8.9 | % | $ | 8,681 | $ | 8,158 | 6.4 | % | ||||||||||||
Investment
and mortgage backed securities
|
672 | 711 | (5.5 | ) | 1,370 | 1,368 | 0.1 | |||||||||||||||||
Other
interest-earning assets
|
7 | 3 | 133.3 | 12 | 6 | 100.0 | ||||||||||||||||||
Total
interest income
|
5,033 | 4,711 | 6.8 | 10,063 | 9,532 | 5.6 | ||||||||||||||||||
Interest
expense:
|
||||||||||||||||||||||||
NOW
and money market deposit accounts
|
199 | 197 | 1.0 | 483 | 454 | 6.4 | ||||||||||||||||||
Passbook
accounts
|
71 | 33 | 115.2 | 135 | 65 | 107.7 | ||||||||||||||||||
Certificates
of deposit
|
1,143 | 1,330 | (14.1 | ) | 2,408 | 2,716 | (11.3 | ) | ||||||||||||||||
Total
interest-bearing deposits
|
1,413 | 1,560 | (9.4 | ) | 3,026 | 3,235 | (6.5 | ) | ||||||||||||||||
FHLB
advances
|
20 | 28 | (28.6 | ) | 42 | 58 | (27.6 | ) | ||||||||||||||||
Total
interest expense
|
1,433 | 1,588 | (9.8 | ) | 3,068 | 3,293 | (6.8 | ) | ||||||||||||||||
Net
interest income
|
$ | 3,600 | $ | 3,123 | 15.3 | $ | 6,995 | $ | 6,239 | 12.1 |
Net Interest
Income. Net
interest income increased $477,000, or 15.3%, in the quarter ended December 31,
2010, as compared to the prior year quarter. The increase in net
interest income is primarily the result of an increase in interest-earning
assets, partially offset by the increase in interest-bearing liabilities
resulting from the acquisition of three branches from Integra Bank in June,
2010.
Net
interest income increased $756,000, or 12.1%, in the six months ended December
31, 2010, as compared to the same period in the prior year. The
increase in net interest income is also primarily attributable to the previously
mentioned acquisition of three branches.
18
The
following table summarizes average balances and average yields and costs of
interest-earning assets and interest-bearing liabilities for the three and six
months ended December 31, 2010 and 2009. For the purposes of this
table, average balances have been calculated using month-end balances, and
nonaccrual loans are included in average balances only. Yields are
not presented on a tax equivalent basis.
Three Months Ended December 31,
|
Six Months Ended December 31,
|
|||||||||||||||||||||||||||||||||||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||||||||||||||||||||||||||||||||||
Interest
|
Interest
|
Interest
|
Interest
|
|||||||||||||||||||||||||||||||||||||||||||||
Average
|
and
|
Yield/
|
Average
|
and
|
Yield/
|
Average
|
and
|
Yield/
|
Average
|
and
|
Yield/
|
|||||||||||||||||||||||||||||||||||||
Balance
|
Dividends
|
Cost
|
Balance
|
Dividends
|
Cost
|
Balance
|
Dividends
|
Cost
|
Balance
|
Dividends
|
Cost
|
|||||||||||||||||||||||||||||||||||||
Assets:
|
(Dollars
in thousands)
|
|||||||||||||||||||||||||||||||||||||||||||||||
Interest-earning
assets:
|
||||||||||||||||||||||||||||||||||||||||||||||||
Loans
|
$ | 303,304 | $ | 4,354 | 5.74 | % | $ | 271,979 | $ | 3,997 | 5.88 | % | $ | 305,231 | $ | 8,681 | 5.69 | % | $ | 272,664 | $ | 8,158 | 5.98 | % | ||||||||||||||||||||||||
Investment
and mortgage backed securities
|
126,960 | 672 | 2.12 | 82,727 | 711 | 3.44 | 125,052 | 1,370 | 2.19 | 80,888 | 1,368 | 3.38 | ||||||||||||||||||||||||||||||||||||
Other
interest-earning assets
|
42,857 | 7 | 0.07 | 28,814 | 3 | 0.04 | 38,203 | 12 | 0.06 | 27,442 | 6 | 0.04 | ||||||||||||||||||||||||||||||||||||
473,121 | 5,033 | 4.26 | 383,520 | 4,711 | 4.91 | 468,486 | 10,063 | 4.30 | 380,994 | 9,532 | 5.00 | |||||||||||||||||||||||||||||||||||||
Noninterest-earning
assets
|
29,439 | 23,658 | 29,655 | 23,545 | ||||||||||||||||||||||||||||||||||||||||||||
Total
assets
|
$ | 502,560 | $ | 407,178 | 498,141 | $ | 404,539 | |||||||||||||||||||||||||||||||||||||||||
Liabilities
and stockholders' equity:
|
||||||||||||||||||||||||||||||||||||||||||||||||
Interest-bearing
liabilities:
|
||||||||||||||||||||||||||||||||||||||||||||||||
NOW
and money market deposit accounts (1)
|
157,909 | 199 | 0.50 | 122,260 | 197 | 0.64 | 157,610 | 483 | 0.61 | 125,723 | 454 | 0.72 | ||||||||||||||||||||||||||||||||||||
Passbook
accounts (1)
|
62,994 | 71 | 0.45 | 41,095 | 33 | 0.32 | 59,477 | 135 | 0.45 | 40,881 | 65 | 0.32 | ||||||||||||||||||||||||||||||||||||
Certificates
of deposit (1)
|
219,526 | 1,143 | 2.08 | 181,580 | 1,330 | 2.93 | 218,980 | 2,408 | 2.20 | 175,645 | 2,716 | 3.09 | ||||||||||||||||||||||||||||||||||||
Total
interest-bearing deposits
|
440,429 | 1,413 | 1.28 | 344,935 | 1,560 | 1.81 | 436,067 | 3,026 | 1.39 | 342,249 | 3,235 | 1.89 | ||||||||||||||||||||||||||||||||||||
FHLB
advances
|
2,458 | 20 | 3.25 | 3,458 | 28 | 3.24 | 2,584 | 42 | 3.25 | 3,583 | 58 | 3.24 | ||||||||||||||||||||||||||||||||||||
Total
interest-bearing liabilities
|
442,887 | 1,433 | 1.29 | 348,393 | 1,588 | 1.82 | 438,651 | 3,068 | 1.40 | 345,832 | 3,293 | 1.90 | ||||||||||||||||||||||||||||||||||||
Noninterest
bearing liabilities
|
3,894 | 3,233 | 3,919 | 3,366 | ||||||||||||||||||||||||||||||||||||||||||||
Total
liabilities
|
446,781 | 351,626 | 442,570 | 349,198 | ||||||||||||||||||||||||||||||||||||||||||||
Stockholders'
equity
|
55,779 | 55,552 | 55,571 | 55,341 | ||||||||||||||||||||||||||||||||||||||||||||
Total
liabilities and stockholders' equity
|
$ | 502,560 | $ | 407,178 | $ | 498,141 | $ | 404,539 | ||||||||||||||||||||||||||||||||||||||||
Net
interest income
|
$ | 3,600 | $ | 3,123 | $ | 6,995 | $ | 6,239 | ||||||||||||||||||||||||||||||||||||||||
Interest
rate spread
|
2.97 | % | 3.09 | % | 2.90 | % | 3.10 | % | ||||||||||||||||||||||||||||||||||||||||
Net
interest margin (annualized)
|
3.04 | % | 3.26 | % | 2.99 | % | 3.28 | % | ||||||||||||||||||||||||||||||||||||||||
Average
interest-earning assets to average interest-bearing
liabilities
|
|
106.83 | % | 110.08 | % | 106.80 | % | 110.17 | % |
1)
Includes municipal deposits
19
Provision for
Loan Losses. The
provision for loan losses was $737,000 for the three months ended December 31,
2010 compared to $324,000 for the three months ended December 31, 2009. The
provision for loan loss for the six months ended December 31, 2010 was $1.5
million, compared to $946,000 for the same period in the prior
year. The increase in the provision for loan losses is the result of
Management’s assessment of the potential impact of a weak economy on the loan
portfolio.
The
following table provides information with respect to our nonperforming assets at
the dates indicated. We did not have any accruing loans past due 90 days or more
at the dates presented.
At December
31,
2010
|
At June
30,
2010
|
% Change
|
||||||||||
(Dollars
in thousands)
|
||||||||||||
Nonaccrual
loans:
|
||||||||||||
Residential
real estate:
|
||||||||||||
One-
to four-family
|
$ | 3,178 | $ | 2,436 | 30.5 | % | ||||||
Multifamily
|
13,614 | 5,245 | 159.6 | |||||||||
Nonresidential
real estate and land
|
6,076 | 2,738 | 121.9 | |||||||||
Consumer
and other loans
|
585 | 155 | 277.4 | |||||||||
Total
|
23,453 | 10,574 | 121.8 | |||||||||
Real
estate and other assets owned
|
152 | 297 | (48.8 | ) | ||||||||
Total
nonperforming assets
|
$ | 23,605 | $ | 10,871 | 117.1 | |||||||
Total
nonperforming loans to total loans
|
7.87 | % | 3.42 | % | 130.1 | |||||||
Total
nonperforming loans to total assets
|
4.78 | % | 2.15 | % | 122.3 | |||||||
Total
nonperforming assets to total assets
|
4.81 | % | 2.21 | % | 117.6 |
On an
ongoing basis, Management evaluates the Bank’s allowance for loan loss for
adequacy. As part of this evaluation, Management considers the amounts and
types of loans, concentrations, the value of underlying collateral, current
economic conditions, and other relevant information, such as the size of the
overall portfolio. Based upon this evaluation, Management calculates the
provision for loan loss in the current period. The increase in the current
year is primarily the result of the increase in balances in nonperforming loans
from June 30, 2010 to December 31, 2010. During this period,
nonperforming loans increased from $10.6 million to $23.5 million, compared to a
decrease of $2.0 million in nonperforming loans from $6.0 million to $4.0
million for the same period in the prior year. However, nonperforming
loans as a percentage of total loans increased by 28.8% for the quarter ended
December 31, 2010, compared to 78.7% for the quarter ended September 30,
2010. The increase in nonperforming loans is primarily the result of
an increase in troubled debt restructurings from $9.0 million at June 30, 2010
to $20.1 million at December 31, 2010. The increase is due to the
addition of six loans covering two loan relationships. For one
relationship, two of the loans are for apartment buildings and one loan is for a
mobile home park. For the other relationship, all three loans are for
retail shopping centers. As of December 31, 2010, Management believes
there is collateral securing these loans as well as adequate reserves
established for these loans to cover any losses that may result from these
nonperforming loans. Once a sufficient payment history is
established, the loan continues to be classified as a TDR and is no longer
included in nonaccrual loans.
20
Other
Income. The
following table summarizes other income for the three and six months ended
December 31, 2010 and 2009.
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||
December 31,
|
%
|
December 31,
|
%
|
|||||||||||||||||||||
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
Service
charges
|
$ | 606 | $ | 514 | 17.9 | % | $ | 1,207 | $ | 996 | 21.2 | % | ||||||||||||
Gain
on sale of loans
|
215 | 110 | 95.5 | 442 | 196 | 125.5 | ||||||||||||||||||
Gain
on sale of investments
|
- | 51 | (100.0 | ) | 44 | 39 | 12.8 | |||||||||||||||||
Gain
(loss) on other real estate owned
|
(27 | ) | - | (100.0 | ) | (25 | ) | 20 | (225.0 | ) | ||||||||||||||
Income
from Bank Owned Life Insurance
|
70 | 82 | (14.6 | ) | 139 | 139 | - | |||||||||||||||||
Other
|
109 | 185 | (41.1 | ) | 161 | 238 | (32.4 | ) | ||||||||||||||||
Total
|
$ | 973 | $ | 942 | 3.3 | $ | 1,968 | $ | 1,628 | 20.9 |
The
increase in noninterest income is primarily the result of the previously
mentioned acquisition of three branches and an increase in loans sold to Freddie
Mac.
Other
Expense. The
following table summarizes other expense for the three and six months ended
December 31, 2010 and 2009.
Three Months Ended
|
Six Months Ended
|
|||||||||||||||||||||||
December 31,
|
%
|
December 31,
|
%
|
|||||||||||||||||||||
2010
|
2009
|
Change
|
2010
|
2009
|
Change
|
|||||||||||||||||||
(Dollars in thousands)
|
||||||||||||||||||||||||
Compensation
and employee benefits
|
$ | 1,687 | $ | 1,441 | 17.1 | % | $ | 3,358 | $ | 2,912 | 15.3 | % | ||||||||||||
Premises
and occupancy expense
|
336 | 278 | 20.9 | 645 | 554 | 16.4 | ||||||||||||||||||
Deposit
insurance premium
|
180 | 193 | (6.7 | ) | 408 | 413 | (1.2 | ) | ||||||||||||||||
Advertising
expense
|
117 | 85 | 37.6 | 218 | 176 | 23.9 | ||||||||||||||||||
Data
processing expense
|
96 | 64 | 50.0 | 180 | 120 | 50.0 | ||||||||||||||||||
ATM
Service fees
|
125 | 110 | 13.6 | 263 | 217 | 21.2 | ||||||||||||||||||
Provision
for loss on the sale of other real estate owned
|
- | 200 | (100.0 | ) | - | 300 | (100.0 | ) | ||||||||||||||||
Acquisition
expense
|
- | - | - | 38 | - | 100.0 | ||||||||||||||||||
Other
|
663 | 698 | (5.0 | ) | 1,345 | 1,252 | 7.4 | |||||||||||||||||
Total
|
$ | 3,204 | $ | 3,069 | 4.4 | $ | 6,455 | $ | 5,944 | 8.6 |
The
increase in noninterest expenses is primarily the result of the previously
mentioned acquisition of three branches.
Income
Taxes. Income tax
expense decreased to $53,000 for the three months ended December 31, 2010 from
$196,000 for the three months ended December 31, 2009. Income tax
expense decreased to $202,000 for the six months ended December 31, 2010,
compared to $279,000 for the same period in 2009. The decrease in
expense for the three and six month periods is primarily due to the receipt of a
prior period state tax refund during the current period.
21
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.
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 $19.3 million at December 31, 2010 and
$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 $88.4 million at December 31, 2010 and $104.1 million at June
30, 2010. Total securities classified as available-for-sale were $140.7 million
at December 31, 2010 and $119.3 million at June 30, 2010. In addition, at
December 30, 2010 and June 30, 2010, we had the ability to borrow a total of
approximately $72.5 million and $83.0 million, respectively, from the Federal
Home Loan Bank of Indianapolis.
At
December 31, 2010, we had $27.9 million in loan commitments outstanding,
consisting of $1.9 million in mortgage loan commitments, $162,000 in commercial
loan commitments, $19.5 million in unused home equity lines of credit, $5.5
million in commercial lines of credit, $171,000 in undisbursed balances on
construction loans, and $713,000 in letters of credit outstanding. 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 December
31, 2010 totaled $147.5 million. This represented 67.9% of certificates of
deposit at December 31, 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 December 31, 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.
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.
Capital
Management. The Bank is subject to various regulatory capital
requirements administered by the Office of Thrift Supervision, 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 December 31, 2010, the Bank exceeded all of its regulatory
capital requirements to be considered “well capitalized” under the FDIC’s
regulatory framework for prompt corrective action at that date.
22
The
following table summarizes the Bank’s capital amounts and the ratios required at
December 31, 2010:
To be well
|
||||||||||||||||||||||||
capitalized under
|
||||||||||||||||||||||||
prompt corrective
|
||||||||||||||||||||||||
For capital
|
action
|
|||||||||||||||||||||||
Actual
|
adequacy purposes
|
provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(in thousands)
|
||||||||||||||||||||||||
Tier
1 capital to risk-weighted assets
|
46,518 | 15.75 | % | 11,815 | 4 | % | 17,723 | 6 | % | |||||||||||||||
Total
capital to risk-weighted assets
|
49,621 | 16.80 | % | 23,631 | 8 | % | 29,538 | 10 | % | |||||||||||||||
Tier
1 capital to adjusted total assets
|
46,518 | 9.61 | % | 19,369 | 4 | % | 24,211 | 5 | % | |||||||||||||||
Tangible
capital to adjusted total assets
|
46,518 | 9.61 | % | 7,263 | 1.5 | % |
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
included in our Annual Report on Form 10-K for the year ended June 30, 2010, as
filed with the SEC. We currently have no plans to engage in hedging activities
in the future.
For the
six months ended December 31, 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.
23
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
For a
discussion of the Company’s asset and liability management policies as well as
the potential impact of interest rate changes upon the market value of the
Company’s portfolio equity, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in the Company’s Annual Report on
Form 10-K, filed with the Securities and Exchange Commission on September 28,
2010. The main components of market risk for the Company are interest rate risk
and liquidity risk. The Company manages interest rate risk and liquidity risk by
establishing and monitoring 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. Model simulation is used to measure earnings volatility
under both rising and falling rate scenarios.
We use a
net portfolio value analysis prepared by the Office of Thrift Supervision 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. This analysis assesses 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, this
analysis is not performed for decreases of more than 100 basis
points.
The
following table, which is based on information that we provide to the Office of
Thrift Supervision (OTS), presents the change in our net portfolio value at
September 30, 2010, which is the most recent date for which data is available,
that would occur in the event of an immediate change in interest rates based on
Office of Thrift Supervision assumptions, with no effect given to any steps that
we might take to counteract that change:
Basic Point (“bp”)
|
Net Portfolio Value
(Dollars in thousands)
|
Net Portfolio Value as % of
Portfolio Value of Assets
|
||||||||||||||||||
Change in Rates
|
Amount
|
Change
|
% Change
|
NPV Ratio
|
Change (bp)
|
|||||||||||||||
300
|
$ | 49,223 | $ | (5,226 | ) | (10 | )% | 9.93 | % |
(81
|
)bps | |||||||||
200
|
52,842 | (1,607 | ) | (3 | )% | 10.55 | % | (19 | ) | |||||||||||
100
|
53,952 | (498 | ) | (1 | )% | 10.70 | % | (4 | ) | |||||||||||
50
|
54,133 | (317 | ) | (1 | )% | 10.71 | % | (3 | ) | |||||||||||
0
|
54,449 | - | - | 10.74 | % | - | ||||||||||||||
(50)
|
55,051 | 601 | 1 | % | 10.82 | % | 8 | |||||||||||||
(100)
|
55,150 | 700 | 1 | % | 10.83 | % | 9 |
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.
24
Item
4. 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. During the quarterly period ended December 31, 2010, there were
no changes in the Company’s internal control over financial reporting which
materially affected, or are reasonably likely to materially affect, the
Company’s internal controls over financial reporting.
25
PART
II OTHER INFORMATION
Item
1. 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.
Item 1A.
RISK FACTORS
In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended June 30, 2010, which could materially
affect our business, financial condition or future results. The risks
described in our Annual Report on Form 10-K are not the only risks that we
face. Additional risks and uncertainties not currently known to us or
that we currently deem to be immaterial also may materially affect our business,
financial condition and/or operating results.
Item
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
There
were no repurchases of the Company’s common stock during the six month period
ended December 31, 2010.
Item
3. DEFAULTS UPON SENIOR SECURITIES
Not
applicable
Item
4. [Removed and Reserved]
Item
5. OTHER INFORMATION
Not
applicable
Item
6. EXHIBITS
Exhibit
31.1 Certification of Chief Executive Officer
Exhibit
31.2 Certification of Chief Financial Officer
Exhibit
32 Section 1305 Certifications
26
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
UNITED
COMMUNITY BANCORP
|
||
Date: February
14, 2011
|
By:
|
/s/
William F. Ritzmann
|
William
F. Ritzmann
|
||
President
and Chief Executive Officer
|
||
Date: February
14, 2011
|
By:
|
/s/
Vicki A. March
|
Vicki
A. March
|
||
Senior
Vice President, Chief Financial Officer
|
||
and
Treasurer
|
27