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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended December 31, 2011

 

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 organization)   (I.R.S. Employer Identification No.)

 

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 S 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 S 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  S  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes £ No S

 

As of February 10, 2012, there were 7,840,382 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

 

Part I.  Financial Information   Page No.
       
       
Item 1. Financial Statements (Unaudited)    
       
  Consolidated Statements of Financial Condition at December 31, 2011 and June 30, 2011   1
       
  Consolidated Statements of Income for the Three and Six Month Periods Ended December 31, 2011 and 2010   2
       
  Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended December 31, 2011 and 2010   3
       
  Consolidated Statements of Cash Flows for the Six Month Periods Ended December 31, 2011 and 2010   4
       
  Notes to Unaudited Consolidated Financial Statements   5
       
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   23
       
Item 3. Quantitative and Qualitative Disclosures about Market Risk   34
       
Item 4. Controls and Procedures   35
       
Part II.  Other Information    
       
Item 1. Legal Proceedings   36
       
Item 1A. Risk Factors   36
       
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   36
       
Item 3. Defaults Upon Senior Securities   36
       
Item 4. Mine Safety Disclosures  
       
Item 5. Other Information   36
       
Item 6. Exhibits   36
       
Signatures   37

  

 
 

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, 2011   June 30, 2011 
Assets        
Cash and due from banks  $16,644    31,159 
Investment securities:          
Securities available for sale - at estimated market value   26,058    49,230 
Securities held to maturity - at amortized cost   543    564 
Mortgage-backed securities available for sale - at estimated market value   99,768    74,119 
           
Loans receivable, net   285,709    286,173 
Loans available for sale   307    196 
           
Property and equipment, net   7,277    7,396 
Federal Home Loan Bank stock, at cost   6,588    2,507 
Accrued interest receivable:          
Loans   1,245    1,291 
Investments and mortgage-backed securities   601    681 
Other real estate owned, net   645    139 
Cash surrender value of life insurance policies   10,136    7,882 
Deferred income taxes   2,746    2,765 
Prepaid expenses and other assets   5,079    5,060 
Goodwill   2,522    2,522 
Intangible asset   949    1,028 
Total assets  $466,817     472,712 
 Liabilities and Stockholders' Equity          
Deposits  $407,443    413,091 
Advance from FHLB   1,333    1,833 
Accrued interest on deposits   36    44 
Accrued interest on FHLB advance   2    3 
Advances from borrowers for payment of insurance and taxes   302    230 
Accrued expenses and other liabilities   2,925    3,184 
Total liabilities   412,041    418,385 
           
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 7,840,382 shares outstanding at December 31, 2011 and June 30, 2011   36    36 
Additional paid-in capital   37,027    37,089 
Retained earnings   26,959    26,616 
Less shares purchased for stock plans   (2,581)   (2,775)
Treasury Stock, at cost -  623,618 shares at December 31, 2011 and June 30, 2011   (7,091)   (7,091)
Accumulated other comprehensive income:          
Unrealized gain on securities available for sale, net of income taxes   426    452 
           
Total stockholders' equity   54,776    54,327 
           
Total liabilities and stockholders' equity  $466,817      472,712 

 

 See accompanying notes to the consolidated financial statements.

 

1
 

 

UNITED COMMUNITY BANCORP AND SUBSIDIARIES 

 

 Consolidated Statements of Income

 (In thousands, except share amounts)

 

 

   For the three months ended December 31,    For the six months ended
December 31,
 
(In thousands, except per share data)  2011   2010   2011   2010 
Interest income:                
Loans  $3,999   $4,354   $7,897   $8,681 
Investments and mortgage - backed securities   701    679    1,490    1,382 
Total interest income   4,700    5,033    9,387    10,063 
Interest expense:                    
Deposits   1,045    1,413    2,183    3,026 
Borrowed funds   12    20    26    42 
Total interest expense   1,057    1,433    2,209    3,068 
                     
Net interest income   3,643    3,600    7,178    6,995 
                     
Provision for loan losses   977    737    1,875    1,456 
                     
Net interest income after provision for loan losses   2,666    2,863    5,303    5,539 
                     
Other income:                    
Service charges   621    606    1,260    1,207 
Gain on sale of loans   130    215    213    442 
Gain on sale of investments   327    —      563    44 
Gain (loss) on sale of other real estate owned   2    (27)   2    (25)
Income from Bank Owned Life Insurance   64    70    131    139 
Other   61    109    162    161 
Total other income   1,205    973    2,331    1,968 
                     
Other expense:                    
Compensation and employee benefits   1,695    1,687    3,431    3,358 
Premises and occupancy expense   310    336    638    645 
Deposit insurance premium   77    180    214    408 
Advertising expense   114    117    207    218 
Data processing expense   311    281    616    563 
Acquisition expense   —      —      —      38 
Other operating expenses   634    603    1,184    1,225 
Total other expense   3,141    3,204    6,290    6,455 
                     
Income before income taxes   730    632    1,344    1,052 
                     
Income tax provision   199    53    337    202 
                     
Net income  $531   $579   $1,007   $850 
                     
Basic and diluted earnings per share  $0.07   $0.08   $0.13   $0.11 

 

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 
   2011   2010   2011   2010 
Net income  $531   $579   $1,007   $850 
                     
Other comprehensive income (loss), net of tax Unrealized gain (loss) on available for sale securities   (537)   (716)   317    (445)
                     
Reclassification adjustment for gains on available for sale securities included in income   (199)   —      (343)   (27)
                     
Total comprehensive income (loss)  $(205)  $(137)  $981   $378 

 

See accompanying notes to the consolidated financial statements. 

3
 

 

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

 

    (Unaudited) 
    For the six months ended 
    December 31, 
(In thousands)  2011   2010 
Operating activities:          
Net income  $1,007   $850 
Adjustments to reconcile net income to net cash provided by operating activities:          
Depreciation   279    266 
Amortization of intangible asset   79    217 
Provision for loan losses   1,875    1,456 
Deferred loan origination fees costs   (89)   (40)
Amortization of premium (discount) on investments   1,151    509 
Proceeds from sale of loans   7,002    13,835 
Loans disbursed for sale in the secondary market   (6,900)   (14,876)
Gain on sale of loans   (213)   (442)
Amortization of acquisition-related loan yield adjustment   —      (124)
Amortization of acquisition-related credit risk adjustment   —      (102)
Amortization of acquisition-related CD yield adjustment   (15)   (72)
Gain on sale of available for sale investment securities   (563)   (44)
(Gain) loss on sale of other real estate owned   (2)   25 
ESOP shares committed to be released   84    (44)
Stock-based compensation expense   48    109 
Deferred income taxes   36    (252)
Effects of change in operating assets and liabilities:          
Accrued interest receivable   126    153 
Prepaid expenses and other assets   (19)   326 
Accrued interest on deposits   (8)   (40)
Accrued expenses and other   (260)   (226)
           
Net cash provided by operating activities   3,618    1,484 
           
Investing activities:          
Proceeds from maturity of available for sale investment securities   7,500    5,302 
Proceeds from sale of available for sale investment securities   20,572    4,044 
Proceeds from maturity of held to maturity securities   21    20 
Proceeds from repayment of mortgage-backed securities available for sale   11,737    8,729 
Proceeds from sale of mortgage-backed securities available for sale   31,012    —   
Proceeds from sale of other real estate owned   10    180 
Proceeds from sale of Federal Home Loan Bank stock   —      8 
Purchases of mortgage-backed securities available for sale   (69,920)   (25,479)
Purchases of available for sale investment securities   (4,009)   (15,143)
Purchases of Federal Home Loan Bank stock   (4,081)   —   
Net decrease (increase) in loans   (1,836)   10,085 
Increase in cash surrender value of life insurance   (2,254)   (139)
Capital expenditures   (160)   (337)
           
Net cash used in investing activities   (11,408)   (12,730)
           
Financing activities:          
Net decrease in deposits   (5,633)   (300)
Repayments of Federal Home Loan Bank advances   (500)   (500)
Dividends paid to stockholders   (664)   (701)
Net increase in advances from borrowers for payment of insurance and taxes   72    67 
           
Net cash used in financing activities   (6,725)   (1,434)
           
Net decrease in cash and cash equivalents   (14,515)   (12,680)
           
Cash and cash equivalents at beginning of period   31,159    32,023 
           
Cash and cash equivalents at end of period  $16,644   $19,343 

 

See accompanying notes to the 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 (the “MHC”), a Federally-chartered corporation, is the mutual holding company parent of the Company. At December 31, 2011, the MHC owned approximately 59% of the Company and 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. 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.

 

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, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2012. 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, 2011, which are included on the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2011.

 

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. PLAN OF CONVERSION AND REORGANIZATION – The Boards of Directors of the MHC and the Company adopted a Plan of Conversion and Reorganization (the “Plan”) on March 10, 2011 as amended and restated on May 12, 2011. Pursuant to the Plan, the MHC will convert from the mutual holding company form of organization to the fully public form. The MHC will be merged into the Company, and the MHC will no longer exist. The Company will merge into a new Indiana corporation named United Community Bancorp. As part of the conversion, the MHC’s ownership interest of the Company will be offered for sale in a public offering. The existing publicly held shares of the Company, which represents the remaining ownership interest in the Company, will be exchanged for new shares of common stock of United Community Bancorp, the new Indiana corporation. The exchange ratio will ensure that immediately after the conversion and public offering, the public shareholders of the Company will own the same aggregate percentage of United Community Bancorp common stock that they owned immediately prior to that time (excluding shares purchased in the stock offering and cash received in lieu of fractional shares). When the conversion and public offering are completed, all of the capital stock of United Community Bank will be owned by United Community Bancorp, the Indiana corporation.

 

The Plan provides for the establishment, upon the completion of the conversion, of special “liquidation accounts” for the benefit of certain depositors of United Community Bank in an amount equal to the greater of the MHC’s ownership interest in the retained earnings of the Company as of the date of the latest balance sheet contained in the prospectus or the retained earnings of United Community Bank at the time it reorganized into the MHC. Following the completion of the conversion, under the rules of the Office of the Comptroller of the Currency (“OCC”), United Community Bank will not be permitted to pay dividends on its capital stock to United Community Bancorp, its sole shareholder, if United Community Bank’s shareholder’s equity would be reduced below the amount of the liquidation accounts. The liquidation accounts will be reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation accounts.

 

Direct costs of the conversion and public offering will be deferred and reduce the proceeds from the shares sold in the public offering. If the conversion and public offering are not completed, all costs will be charged to expense in the period in which the public offering is terminated. Costs of $557,000 had been incurred and capitalized related to the conversion as of June 30, 2011. Additional costs of $484,000 have been incurred and capitalized related to the conversion during the six months ended December 31, 2011.

 

5
 

 

3. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) – As of December 31, 2011 and June 30, 2011, the ESOP owned 202,061 shares of the Company’s common stock, which were held in a suspense account until released for allocation to participants.

 

4. EARNINGS PER SHARE (EPS) –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 each of the three and six month periods ended December 31, 2011 and 2010, outstanding options to purchase 346,304 shares were excluded from the computations of diluted earnings per share as their effect would have not been dilutive. The following is a reconciliation of the basic and diluted weighted average number of common shares outstanding:

 

   Three Months Ended    Six Months Ended 
   December 31,    December 31, 
   2011   2010   2011   2010 
                 
Basic weighted average outstanding shares   7,638,321    7,631,858    7,638,321    7,631,858 
Effect of dilutive stock options   —      —      —      —   
Diluted weighted average outstanding shares   7,638,321    7,631,858    7,638,321    7,631,858 

 

5. 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. No stock-based compensation awards were granted during the three and six month periods ended December 31, 2011 and 2010.

 

6. DIVIDENDS – On October 27, 2011 and August 11, 2011, the Board of Directors of the Company declared cash dividends on the Company’s outstanding shares of stock of $0.11 per share. The dividends, totaling $664,000 were paid on November 30, 2011 and August 31, 2011, respectively. United Community MHC, which owns 4,655,200 shares of the Company’s common stock, waived receipt of the dividends.

 

6
 

 

7. SUPPLEMENTAL CASH FLOW INFORMATION

 

    Six Months Ended 
    December 31, 
   2011   2010 
   (Dollars in thousands) 
Supplemental disclosure of cash flow information is as follows:        
Cash paid during the period for:        
Income taxes  $—     $682 
Interest  $2,218   $3,109 
           
Supplemental disclosure of non-cash investing and financing
activities is as follows:
          
Unrealized gains on securities designated as available for sale, net of tax  $(26)  $(472)
Transfers of loans to other real estate owned  $514   $60 



8. DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES - 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.

 

7
 

 

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.

 

The estimated fair values of the Company’s financial instruments at December 31, 2011 and June 30, 2011 are as follows:

 

   December 31, 2011    June 30, 2011 
   Carrying Amounts   Fair
Value
   Carrying Amounts    Fair
Value
 
    (In thousands) 
Financial assets:                
Cash and due from banks  $16,644   $16,644   $31,159   $31,159 
Investment securities available for sale   26,058    26,058    49,230    49,230 
Investment securities held to maturity   543    543    564    564 
Mortgage-backed securities available for sale   99,768    99,768    74,119    74,119 
Loans receivable and loans receivable held
for sale
   286,016    288,145    286,369    288,198 
Accrued interest receivable   1,846    1,846    1,972    1,972 
Investment in FHLB stock   6,588    6,588    2,507    2,507 
                     
Financial liabilities:                    
Deposits  $407,443   $409,471   $413,091   $414,794 
Accrued interest payable   38    38    47    47 
FHLB advance   1,333    1,358    1,833    1,874 
                     
Off-balance sheet items  $—     $—     $—     $—   

 

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.  

 

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)
 
December 31, 2011:   (In thousands)  
Mortgage-backed securities  $99,768   $—     $99,768   $—   
U.S. Government corporations and agencies   6,528    —      6,528    —   
Municipal bonds   19,400    —      19,400    —   
Other equity securities   130    130    —      —   
June 30, 2011:                    
Mortgage-backed securities  $74,119   $—     $74,119   $—   
U.S. Government corporations and agencies   28,856    —      28,856    —   
Municipal bonds   20,244    —      20,244    —   
Other equity securities   130    130    —      —   

 

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)
 
December 31, 2011:  (In thousands) 
Other real estate owned  $645   $—     $645   $—   
Loans held for sale   307    —      307    —   
Impaired loans   8,635    —      8,635    —   
                     
June 30, 2011:                    
Other real estate owned  $139   $—     $139   $—   
Loans held for sale   196    —      196    —   
Impaired loans   3,823    —      3,823    —   

 

The adjustments to other real estate owned and impaired loans are based primarily on appraisals of the real estate, cash flow analysis or other observable market prices. The Bank’s policy is that fair values for these assets are based on current appraisals or cash flow analysis.

 

9
 

 

9. INVESTMENT SECURITIES

 

Investment securities available for sale at December 31, 2011 consist of the following:

 

       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gains   Losses   Value 
   (In thousands) 
                 
Mortgage-backed securities  $100,132   $272   $636   $99,768 
U.S. Government corporations and agencies   6,514    14    —      6,528 
Municipal bonds   18,262    1,144    6    19,400 
Other equity securities   210    —      80    130 
   $125,118   $1,430   $722   $125,826 

 

Investment securities held to maturity at December 31, 2011 consist of the following:

 

       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gains   Losses   Value 
   (In thousands) 
                     
Municipal bonds  $543    —      —     $543 

 

Investment securities available for sale at June 30, 2011 consist of the following:

 

       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gains   Losses   Value 
   (In thousands) 
                 
Mortgage-backed securities  $73,827   $364   $72   $74,119 
U.S. Government corporations and agencies   28,817    39    —      28,856 
Municipal bonds   19,744    544    44    20,244 
Other equity securities   210    —      80    130 
   $122,598   $947   $196   $123,349 

 

Investment securities held to maturity at June 30, 2011 consist of the following:

 

       Gross   Gross   Estimated 
   Amortized   Unrealized   Unrealized   Market 
   Cost   Gains   Losses   Value 
   (In thousands) 
                     
Municipal bonds  $564   $—     $—     $564 

 

10
 

 

The mortgage-backed securities, callable bonds and municipal bonds available for sale have the following maturities at December 31, 2011:

 

 

   Amortized cost   Estimated market value 
   (In thousands) 
Due or callable in one year or less  $6,514   $6,528 
Due or callable in 1 - 5 years   75,796    75,655 
Due or callable in 5 - 10 years   29,539    29,712 
Due or callable in greater than 10 years   13,059    13,801 
Total debt securities  $124,908   $125,696 

 

 

All other securities available for sale at December 31, 2011 are saleable within one year. The Bank held $543,000 and $564,000 in investment securities that are being held to maturity at December 31, 2011 and June 30, 2011, 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, 2011 (dollars in thousands):

 

January 1, 2012 through June 30, 2012  $47 
2013   71 
2014   74 
2015   77 
2016   81 
2017 and thereafter   193 
   $543 

 

Gross proceeds on the sale of investment and mortgage-backed securities were $26.0 million and $-0- for the three month periods ended December 31, 2011 and 2010, respectively. Gross proceeds on the sale of investment and mortgage-backed securities were $51.6 million and $4.0 million for the six month periods ended December 31, 2011 and 2010, respectively. Gross realized gains for the three month periods ended December 31, 2011 and 2010 were $327,000 and $-0-, respectively. Gross realized gains for the six month periods ended December 31, 2011 and 2010 were $563,000 and $44,000, respectively. There were no gross realized losses for the three and six month periods ended December 31, 2011 and 2010.

 

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, 2011:

 

   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   74,093    636    —      —      74,093    636 
Municipal bonds   1,636    6    —      —      1,636    6 
Other equity securities   —      —      130    80    130    80 
   $75,729    642   130    80   $75,859    722 
Number of investments    20         1          21      

 

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
 

 

10. 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 U.S. 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.

 

The following table indicates changes to the core deposit intangible asset and goodwill balances for the six month period ended December 31, 2011:

 

 

   Core Deposit Intangible    Goodwill 
    (dollars in thousands) 
Balance at June 30, 2011  $1,028   $2,522 
Amortization   (79)   —   
Balance at December 31, 2011  $949   $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, 2011:

 

January 1, 2012 through June 30, 2012  $80 
2013   179 
2014   142 
2015   118 
2016   118 
2017 and thereafter   312 
   $949 

 

12
 

11. 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 three and six months ended December 31, 2011 (in thousands):

 

   One- to
Four- Family Owner-Occupied Mortgage
   Consumer   One- to
Four-family Non-owner
Occupied
Mortgage
   Multi-
family Non-
owner Occupied Mortgage
   Non-
Residential
Real estate
   Construction   Land   Commercial
and
Agricultural
   Total 
Allowance for Credit Losses:                                             
Balance, October 1, 2011:  $707   $311   $173   $2,952   $1,470   $3   $13   $23   $5,652 
Charge offs   33    (3)   —      1,142    160    —      —      —      1,332 
Recoveries   4    3    —      —      1    —      —      —      8 
Provision   147    —      7    726    91    (1)   (1)   8    977 
Ending Balance:  $825   $317   $180   $2,536   $1,402   $2   $12   $31   $5,305 
                                              
Balance, July 1, 2011:  $800   $310   $112   $2,314   $1,462   $3   $12   $26   $5,039 
                                              
Charge offs   200    36    —      1,233    160    —      —      —      1,629 
Recoveries   6    11    —      1    1    —      —      1    20 
Provision   219    32    68    1,454    99    (1)   —      4    1,875 
Ending Balance:  $825   $317   $180   $2,536   $1,402   $2   $12   $31   $5,305 
                                              
Balance, Individually Evaluated  $18   $—     $8   $1,069   $145   $—     $—     $—     $1,240 
Balance, Collectively Evaluated  $807   $317   $172   $1,467   $1,257   $2   $12   $31   $4,065 
                                              
Financing receivables:                                             
Ending Balance  $118,739   $36,981   $17,673   $43,290   $62,720   $707   $3,727   $6,780   $290,617 
                                         
Ending Balance: individually evaluated for impairment  $4,669   $1,333   $477   $7,535   $4,441   $—     $—     $—     $18,455 
                                         
Ending Balance: collectively evaluated for impairment  $98,547   $29,387   $16,310   $35,270   $51,990   $707   $3,559   $4,782   $240,552 
                                              
Ending Balance: loans acquired with deteriorated credit quality  $15,523   $6,261   $886   $485   $6,289   $—     $168   $1,998   $31,610 

 

13
 

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the year ended June 30, 2011 (in thousands):

   One- to
Four- Family
Owner-
Occupied
Mortgage
   Consumer   One- to
Four-family
Non-owner
Occupied
Mortgage
   Multi-
family Non-
owner
Occupied
Mortgage
   Non-
Residential
Real estate
   Construction   Land   Commercial
and
Agricultural
   Total 
Allowance for Credit Losses:                                              
Balance, July 1, 2010:  $419   $908   $    $2,863   $1,256   $4   $10   $221   $5,681 
Charge offs   803    959    —      2,008    3,065    —      —      38    6,873 
Recoveries   26    15    —      —      7    —      —      1    49 
Provision   1,158    346    112    1,459    3,264    (1)   2    (158)   6,182 
Ending Balance:  $800   $310   $112   $2,314   $1,462   $3   $12   $26   $5,039 
Balance, Individually Evaluated  $18   $—     $—     $1,277   $—     $—     $—     $—     $1,295 
Balance, Collectively Evaluated  $782   $310   $112   $2,314   $1,462   $3   $12   $26   $3,744 
Financing receivables:                                             
Ending Balance  $112,902   $36,639   $18,251   $46,296   $65,156   $1,084   $3,985   $6,521   $290,834 
                                              
Ending Balance: individually evaluated for impairment  $—     $—     $531   $11,223   $4,545   $167   $—     $—     $16,466 
                                              
Ending Balance: collectively evaluated for impairment  $97,258   $29,640   $16,744   $34,568   $53,694   $917   $3,743   $4,183   $240,747 
                                              
Ending Balance: loans acquired with deteriorated credit quality  $15,644   $6,999   $976   $505   $6,917   $—     $242   $2,338   $33,621 

 

14
 

 

 

The following tables illustrate certain disclosures required by ASC 310-10-50-29(b).

 

Credit Risk Profile by Internally Assigned Grade

At December 31, 2011

 

   One- to Four- Family Owner-Occupied Mortgage   Consumer   One- to Four-family Non-owner Occupied Mortgage   Multi-family Non-owner Occupied Mortgage   Non-Residential Real estate   Construction   Land   Commercial and Agricultural    Total 
Grade:                                             
Pass  $105,524   $35,816   $12,444   $17,430   $30,779   $28   $2,681   $5,037   $209,739 
Watch   7,051    789    3,304    9,886    15,372    479    1,007    1,349    39,237 
Special mention   225    13    875    —      8,187    —      39    —      9,339 
Substandard   5,939    363    1,050    15,974    8,382    200    —      394    32,302 
Doubtful   —      —      —      —      —      —      —      —      —   
Total:  $118,739   $36,981   $17,673   $43,290   $62,720   $707   $3,727   $6,780   $290,617 

  

Credit Risk Profile by Internally Assigned Grade

At June 30, 2011

 

   One- to Four- Family Owner-Occupied Mortgage   Consumer   One- to Four-family Non-owner Occupied Mortgage   Multi-family Non-owner Occupied Mortgage   Non-Residential Real estate   Construction   Land   Commercial and Agricultural    Total 
Grade:                                             
Pass  $100,380   $35,893   $13,234   $17,140   $36,307   $273   $2,663   $4,208   $210,098 
Watch   6,805    378    2,865    13,023    11,845    644    1,322    1,911    38,793 
Special mention   1,002    127    1,030    1,593    9,573    —      —      163    13,488 
Substandard   4,715    241    1,122    14,540    7,431    167    —      239    28,455 
Total:  $112,902   $36,639   $18,251   $46,296   $65,156   $1,084   $3,985   $6,521   $290,834 

 

The following tables illustrate certain disclosures required by ASC 310-10-50-7A for gross loans.

 

 Age Analysis of Past Due Loans Receivable

 At December 31, 2011

 

   30-59 days
past due
   60-89 days
past due
   Greater than
90 days
   Total
past due
   Total
current
   Total loans receivable 
                               
Mortgage One- to Four- Family - Owner-Occupied  $2,631   $430   $934   $3,995   $114,744   $118,739 
Consumer   240    14    143    397    36,584    36,981 
One- to Four- Family Non-Owner Occupied Mortgage   511    44    3    558    17,115    17,673 
Multifamily Residential Real Estate Mortgage   —      —      —      —      43,290    43,290 
Non-Residential Real Estate   308    217    984    1,509    61,211    62,720 
Construction   —      —      —      —      707    707 
Land   81    40    —      121    3,606    3,727 
Commercial and Agricultural   97    92    267    456    6,324    6,780 
Total  $3,868   $837   $2,331   $7,036   $283,581   $290,617 

 

15
 

 

Age Analysis of Past Due Loans Receivable 

At June 30, 2011 

 

   30-59 days
past due
   60-89 days
past due
   Greater than
90 days
   Total
past due
   Total
current
   Total loans receivable 
Mortgage One- to Four- Family - Owner-Occupied  $978   $995   $939   $2,912   $109,990   $112,902 
Consumer   425    187    54    666    35,973    36,639 
One- to Four- Family Non-Owner Occupied Mortgage   177    98    301    576    17,675    18,251 
Multifamily Residential Real Estate Mortgage   —      —      —      —      46,296    46,296 
Non-Residential Real Estate   732    307    —      1,039    64,117    65,156 
Construction   —      —      —      —      1,084    1,084 
Land   —      —      —      —      3,985    3,985 
Commercial and Agricultural   240    —      204    444    6,077    6,521 
Total  $2,552   $1,587   $1,498   $5,637   $285,197   $290,834 

 

 

The following table illustrates certain disclosures required by ASC 310-10-50-15.

 

Impaired Loans

 

               For the three months
ended December 31,
2011
   For the six months
ended December 31,
2011
 
   Recorded investment   Unpaid principal balance   Specific allowance   Interest income recognized   Average Recorded investment   Interest income recognized   Average Recorded investment 
With a related allowance recorded:                                   
Mortgage One- to Four- Family - Owner-Occupied  $—     $—     $—     $—     $—     $—     $—   
Consumer   —      —      —      —      —      —      —   
One- to Four- Family Non-Owner Occupied Mortgage   —      —      —      —      —      —      —   
Multifamily Residential Real Estate Mortgage   1,735    2,135    400    36    1,736    85    1,501 
Non-Residential Real Estate   —      —      —      —      —      —      —   
Construction   —      —      —      —      —      —      —   
Land   —      —      —      —      —      —      —   
Commercial and Agricultural   —      —      —      —      —      —      —   
Total  $1,735   $2,135   $400   $36   $1,736   $85   $1,501 

 

Impaired Loans

 

            For the three months
ended December 31,
2011
  For the six months
ended December 31,
2011
   Recorded investment  Unpaid principal balance  Specific allowance  Interest income recognized  Average Recorded investment  Interest income recognized  Average Recorded investment
With no related allowance recorded:                                   
Mortgage One- to Four- Family - Owner-Occupied  $—     $—     $—     $—     $—     $—     $—   
Consumer   —      —      —      —      —      —      —   
One- to Four- Family Non-Owner Occupied Mortgage   —      —      —      —      —      —      —   
Multifamily Residential Real Estate Mortgage   —      —      —      —      —      —      —   
Non-Residential Real Estate   578    711    —      —      578    —      578 
Construction   —      —      —      —      —      —      —   
Land   —      —      —      —      —      —      —   
Commercial and Agricultural   —      —      —      —      —      —      —   
 Total  $578   $711   $—     $—     $578   $—     $578 

 

16
 

  

 Impaired Loans

 

               For the three months
ended December 31,
2011
   For the six months
ended December 31,
2011
 
   Recorded investment   Unpaid principal balance   Specific allowance   Interest income recognized   Average Recorded investment   Interest income recognized   Average Recorded investment 
Total:                              
Mortgage One- to Four- Family - Owner-Occupied  $—     $—     $—     $—     $—     $—     $—   
Consumer   —      —      —      —      —      —      —   
One- to Four- Family Non-Owner Occupied Mortgage   —      —      —      —      —      —      —   
Multifamily Residential Real Estate Mortgage   1,735    2,135    400    36    1,736    85    1,501 
Non-Residential Real Estate   578    711    —      —      578    —      578 
Construction   —      —      —      —      —      —      —   
Land   —      —      —      —      —      —      —   
Commercial and Agricultural   —      —      —      —      —      —      —   
Total  $2,313   $2,846   $400   $36   $2,314   $85   $2,079 

 

 

            For the year ended
June 30, 2011
   Recorded investment  Unpaid principal balance  Specific allowance  Interest income recognized  Average Recorded investment
With a related allowance recorded:                         
Mortgage One- to Four- Family - Owner-Occupied  $26   $44   $18   $1   $26 
Consumer   —      —      —      —      —   
One- to Four- Family Non-Owner Occupied Mortgage   —      —      —      —      —   
Multifamily Residential Real Estate Mortgage   3,797    5,074    1,277    80    1,266 
Non-Residential Real Estate   —      —      —      —      —   
Construction   —      —      —      —      —   
Land   —      —      —      —      —   
Commercial and Agricultural   —      —      —      —      —   
Total  $3,823   $5,118   $1,295   $81   $956 

 

The Bank did not have any investments in subprime loans at December 31, 2011.

 

17
 

 

12. 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 restructured 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. TDRs are accounted for as set forth in ASC 310-40 Troubled Debt Restructurings by Creditors (“ASC 310-40”). 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, the loan is restructured at a market rate and management determines that principal and interest under the new terms are fully collectible. All TDRs are considered to be impaired loans.

 

Existing performing loan customers who request a loan (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 with similar credit risk. 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.

 

During the quarter ended March 31, 2011, we began restructuring loans into a split note or Note A/Note B format. Upon performing a global analysis of the relationship with the borrower, the terms of Note A are calculated using current financial information to determine the amount of payment at which the borrower would have a debt service coverage ratio of 1.5x or better. The resulting payment was calculated based upon a 30 year amortization period, then fixed for two years, with the loan maturing at the end of the two years. The amount for Note B is the difference of Note A and the original amount to be refinanced, plus all other expenses necessary to restructure the loans. It is given the same interest rate and balloon term as Note A, but no principal or interest payments are due until maturity. While no amount of the original indebtedness of the borrower is forgiven through this process, the full amount of Note B is charged-off. Note A is treated as any other troubled debt restructuring and, generally, may return to accrual status after a history of performance in accordance with the restructured terms of at least six consecutive months is established.

 

18
 

 

The following tables summarize TDRs by loan type and accrual status.

 

   At December 31, 2011 
 Loan Status                     
(In thousands)  Accrual   Nonaccrual   Total unpaid principal balance   Related allowance   Recorded investment   Number of loans   Average recorded investment 
                             
One- to Four-Family residential real estate  $2,676   $2,624   $5,300   $27   $5,273    28   $5,527 
One- to Four- Family non-owner   —      —      —      —      —      —      —   
Multifamily residential real estate   5,371    7,192    12,563    669    11,894    12    11,708 
Nonresidential real estate   6,525    615    7,140    145    6,995    7    6,870 
Construction   200    —      200    —      200    1    100 
Commercial & Agricultural   —      —      —      —      —      —      —   
Land   —      —      —      —      —      —      —   
Consumer   —      —      —      —      —      —      —   
Total  $14,772   $10,431   $25,203   $841   $24,362    48   $24,205 

 

 

 

   At June 30, 2011 
   Loan Status                     
(In thousands)  Accrual   Nonaccrual   Total unpaid principal balance   Related allowance   Recorded investment   Number of loans   Average recorded investment 
                             
One- to Four-Family residential real estate  $4,128   $1,653   $5,781   $—     $5,781    34   $3,474 
Multifamily residential real estate   2,041    10,358    12,399    877    11,522    11    7,800 
Nonresidential real estate   2,599    4,146    6,745    —      6,745    7    4,976 
Total  $8,768   $16,157   $24,925   $877   $24,048    52   $16,249 

 

Interest income recognized on TDRs is as follows:

 

   For the three months   For the six months 
   ended December 31, 2011   ended December 31, 2011 
         
One-to-Four Family residential real estate  $36   $71 
Multifamily fresidential real estate   115    232 
Nonresidential real estate   37    79 
Construction   1    2 
Commercial   —      —   
Consumer   —      —   
Total  $189   $384 

 

 

At December 31, 2011, the Bank had 48 loans totaling $25.2 million that qualified as TDRs, and has reserved for losses on these loans of $841,000. At December 31, 2011, TDRs with no related allowance totaled $18.3 million and TDRs with a related allowance totaled $6.9 million. At December 31, 2011, the Bank had no other commitments to lend on its TDRs. At June 30, 2011, the Bank had 52 loans totaling $24.9 million that qualified as TDRs, and has reserved for losses on these loans of $877,000. At June 30, 2011, TDRs with no related allowance totaled $22.0 million and TDRs with a related allowance totaled $2.9 million. Management continues to monitor the performance of loans classified as TDRs.

 

19
 

 

Loans that were included in troubled debt restructuring at December 31, 2011 and June 30, 2011 were generally given concessions of interest rate reductions of between 25 and 300 basis points, and/or structured as interest only payment loans for periods of one to three years. Many of these loans also have balloon payments due at the end of their lowered rate period, requiring the borrower to refinance at market rates at that time. At December 31, 2011, there were 38 loans with required principal and interest payments, 10 loans with required interest only payments. At June 30, 2011, there were 43 loans with required principal and interest payments, 9 loans with required interest only payments.

 

The following table is a roll forward of activity in our TDRs:

 

   Three Months Ended
December 31, 2011
   Six Months Ended
December 31, 2011
 
   Recorded Investment   Number
of Loans
   Recorded Investment   Number
of Loans
 
(Dollar amounts in thousands)    
Beginning balance  $22,689    44   $24,048    52 
Additions to TDR   2,174    4    2,893    5 
Charge-offs   —      —      —      —   
Removal of TDRs(1)   —      —      (1,698)   (9) 
Payments   (501)   —      (881)   —   
Ending balance  $24,362    48   $24,362    48 

 

(1) TDRs that are performing, at a market interest rate and not impaired under restructured terms are removed under ASC 310-40-50-2

 

 

The following table provides a summary of the loans that were restructured as TDRs during the three months ended December 31, 2011:

 

               Allocation of allowance for
loan loss
 
   Number of Modifications   Recorded investment
prior to restructuring
   Recorded investment
after
restructuring
   Prior to restructuring   After restructuring 
(Dollar amount in thousands)                
Mortgage One- to Four- Family - Owner-Occupied   2   $443   $431   $—     $—   
Non-Residential Real Estate   1    722    615    93    —   
Multifamily Residential Real Estate Mortgage
   1    1,543    1,128    —      —   
Totals   4   $2,708   $2,174   $93   $—   

 

The following table provides a summary of the loans that were restructured as TDRs during the six months ended December 31, 2011:

 

               Allocation of allowance for
loan loss
 
   Number of Modifications   Recorded investment
prior to restructuring
   Recorded investment
after
restructuring
   Prior to restructuring   After restructuring 
(Dollar amount in thousands)                
Mortgage One- to Four- Family - Owner-Occupied   3   $1,280   $1,150   $—     $—   
Non-Residential Real Estate   1    722    615    93    —   
Multifamily Residential Real Estate Mortgage
   1    1,543    1,128    —      —   
Totals   5   $3,545   $2,893   $93   $—   

 

20
 

 

The Mortgage One-to Four-Family-Owner-Occupied loan restructurings consisted of an interest rate reduction to a below market interest rate. The Non-Residential Real Estate loan restructuring consisted of a rate reduction to a below market interest rate. The Multifamily Residential Real Estate Mortgage loan was restructured into a Note A/B with a market rate of interest on Note A and a below market rate of interest on Note B.

 

The Company considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. During the period ended December 31, 2011 the Company had one one-to-four family loan subsequently default after modification. The recorded investment in the loan at the time of default was approximately $81,000. The Company does not anticipate any further loss on the property and default of this loan had no impact on the allowance for loan loss for the period.

 

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13. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In September 2011, the FASB issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment, to simplify how entities test goodwill for impairment. This guidance permits an entity to assess qualitative factors to determine whether it is more likely than not (defined as more than fifty percent) that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the current two-step goodwill impairment test. The two-step goodwill impairment test is only required if the entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The adoption of this guidance is not expected to have a material effect on the Company’s financial statements.

In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. This ASU eliminates the option to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments in this ASU do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. The ASU is effective for annual and interim periods beginning after December 15, 2011. The adoption of this ASU will not impact the way the Company currently reports comprehensive income, and will not have a material impact on the Company’s financial statements.

 

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which generally represents clarifications of Topic 820, Fair Value Measurements, but also includes certain instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This ASU is intended to result in common principles and requirements for measuring fair value and for disclosing information about fair value measurements in accordance with U.S. GAAP and International Financial Reporting Standards (IFRS). ASU 2011-04 is effective prospectively for interim and annual periods beginning after December 15, 2011 with earlier application not permitted. This ASU is not expected to have a material impact on the Company’s financial statements.

 

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring, which clarifies which loan modifications constitute troubled debt restructurings. In evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude under the guidance in ASU 2011-02 that the restructuring constitutes a concession and that the debtor is experiencing financial difficulties. The amendments also clarify that a creditor is precluded from using the effective interest rate test in the debtor’s guidance on restructuring of payables when evaluating whether a restructuring constitutes a troubled debt restructuring. ASU 2011-02 is effective for the first interim or annual period beginning on or after June 15, 2011. The adoption of this ASU 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 became effective for the interim period ending September 30, 2011. The adoption of this remaining guidance did not have an impact on the Company’s financial statements.

 

In December 2011, the FASB issued ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. In order to defer only those changes in Update 2011-05 that relate to the presentation of reclassification adjustments, the paragraphs in this Update supersede certain pending paragraphs in Update 2011-05. Entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. This ASU is not expected to have a significant impact on the Company's financial statements.

 

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Item 2.

Management Discussion and Analysis of Financial Condition and Results of Operations

 

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, and changes in the quality or composition of the Company’s loan or investment portfolios. Additionally, other risks and uncertainties may be described in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2011, which is 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: the allowance for loan losses and the valuation of 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; and value of collateral. Inherent loss factors are then applied to the remaining loan 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 Office of the Comptroller of the Currency (“OCC”), 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 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, 2011.

 

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 December 31, 2011 and June 30, 2011. The Company recognized no interest and penalties on the underpayment of income taxes during the three and six month periods ended December 31, 2011 and 2010, and had no accrued interest and penalties on the balance sheet as of December 31, 2011 and June 30, 2011. 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 the fiscal year ended June 30, 2006.

 

23
 

 

Comparison of Financial Condition at December 31, 2011 and June 30, 2011

 

Total assets were $466.8 million at December 31, 2011, compared to $472.7 million at June 30, 2011. Total assets decreased $5.9 million, or 1.2%, as a result of a $14.5 decrease in cash partially offset by increases in investment securities of $2.5 million, Federal Home Loan Bank (“FHLB”) stock of $4.1 million and bank owned life insurance (“BOLI”) of $2.3 million. The increase in investment securities was primarily due to purchases of mortgage-backed securities offset by sales of other available for sale securities. The increase in FHLB stock was attributable to the Bank’s desire to increase its borrowing capacity with the FHLB, which in turn required the increased investment. BOLI was increased to offset and recover existing benefit expenses. The decrease in cash is the result of funding the increases in these other assets in addition to a $5.6 million decrease in deposits.

 

Total liabilities were $412.0 million at December 31, 2011, compared to $418.4 million at June 30, 2011. The decrease was primarily the result of a $9.4 million decrease in municipal deposits partially offset by a $3.8 million increase in deposits other than municipal deposits. The decrease in municipal deposits results from the Bank’s decision to reduce its reliance on municipal deposits and other higher cost deposits, as well as the normal cyclical cash flow needs of the municipalities.

 

Total stockholders’ equity was $54.8 million at December 31, 2011, compared to $54.3 million at June 30, 2011. The increase was primarily the result of net income of $1.0 million, partially offset by dividends paid of $664,000. At December 31, 2011, the Bank was considered “well-capitalized” under applicable regulatory requirements.

 

Comparison of Operating Results for the Three and Six Months Ended December 31, 2011 and 2010

 

General. Net income decreased $48,000 in the quarter ended December 31, 2011, compared to the prior year quarter. Net income for the six months ended December 31, 2011 was $1.0 million compared to $850,000 for the six months ended December 31, 2010.

 

Net Interest Income. The following table summarizes changes in interest income and interest expense for the three and six months ended December 31, 2011 and 2010.

 

   Three Months Ended        Six Months Ended     
   December 31,        December 31,     
   2011   2010   % Change   2011   2010   % Change 
    (Dollars in thousands) 
Interest income:                              
Loans  $3,999   $4,354    (8.2)%  $7,897    $8, 681    (9.0)%
Investment and mortgage backed  securities   698    672    3.9    1,484    1, 370    8.3 
Other interest-earning assets   3    7    (57.1)   6    12    (50.0)
Total interest income   4,700    5,033    (6.6)   9,387    10,063    (6.7)
                               
Interest expense:                              
NOW and money market deposit accounts   130    199    (34.7)   305    483    (36.9)
Passbook accounts   61    71    (14.1)   129    135    (4.4)
Certificates of deposit   854    1,143    (25.3)   1,749    2,408    (27.4)
Total interest-bearing deposits   1,045    1,413    (26.0)   2,183    3,026    (27.9)
FHLB advances   12    20    (40.0)   26    42    (38.1)
Total interest expense   1,057    1,433    (26.2)   2,209    3,068    (28.0)
Net interest income  $3,643   $3,600    1.2   $7,178   $6,995    2.6 

 

24
 

 

Net interest income remained flat at $3.6 million for the quarter ended December 31, 2011 as compared to the quarter ended December 31, 2010. A decrease of $333,000 in interest income was offset by a $376,000 decrease in interest expense. The decrease in interest income was primarily the result of a $17.6 million decrease in average outstanding loans combined with a decrease in the average rate earned on loans from 5.74% to 5.60%. The decrease in interest expense was primarily the result of a $27.2 million decrease in average deposits combined with a decrease in the average interest rate paid on deposits from 1.28% to 1.01%. Changes in interest rates are reflective of decreases in overall market rates. Average deposits decreased primarily due to decreases in municipal deposits.

 

Net interest income increased $183,000, or 2.62%, to $7.2 million for the six months ended December 31, 2011 as compared to $7.0 million for the six months ended December 31, 2010. A decrease of $859,000 in interest expense was partially offset by a $676,000 decrease in interest income. The decrease in interest expense was primarily the result of a $23.0 million decrease in average deposits combined with a decrease in the average interest rate paid on deposits from 1.39% to 1.06%. The decrease in interest income was primarily the result of a $20.0 million decrease in average outstanding loans combined with a decrease in the average rate earned on loans from 5.69% to 5.53%. Changes in interest rates are reflective of decreases in overall market rates.

 

25
 

 

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, 2011 and 2010. 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,  
    2011     2010     2011     2010  
         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 
 (Dollars in thousands)  
Interest-earning assets:                                                            
Loans  $285,702   $3,999    5.60%  $303,304   $4,354    5.74%  $285,470   $7,897    5.53%  $305,231   $8,681    5.69%
Investment and mortgage backed securities   129,101    698    2.16    126,960    672    2.12    129,916    1,484    2.28    125,052    1,370    2.19 
Other interest-earning assets   20,904    3    0.06    42,857    7    0.07    21,913    6    0.05    38,203    12    0.06 
    435,707    4,700    4.31    473,121    5,033    4.26    437,299    9,387    4.29    468,486    10,063    4.30 
Noninterest-earning assets   37,405              29,439              35,735              29,655           
Total assets  $473,112             $502,560             $473,034             $498,141           
                                                             
Liabilities and stockholders' equity:                                                            
                                                             
Interest-bearing liabilities:                                                            
NOW and money market deposit accounts (1)   144,690    130    0.36    157,909    199    0.50    145,263    305    0.42    157,610    483    0.61 
Passbook accounts (1)   70,919    61    0.34    62,994    71    0.45    70,776    129    0.36    59,477    135    0.45 
Certificates of deposit (1)   197,575    854    1.73    219,526    1,143    2.08    196,984    1,749    1.78    218,980    2,408    2.20 
Total interest-bearing deposits   413,184    1,045    1.01    440,429    1,413    1.28    413,023    2,183    1.06    436,067    3,026    1.39 
                                                             
FHLB advances   1,458    12    3.29    2,458    20    3.25    1,583    26    3.28    2,584    42    3.25 
Total interest-bearing liabilities   414,642    1,057    1.02    442,887    1,433    1.29    414,606    2,209    1.07    438,651    3,068    1.40 
Noninterest bearing liabilities   3,741              3,894              3,794              3,919           
Total liabilities   418,383              446,781              418,400              442,570           
                                                             
Stockholders' equity   54,729              55,779              54,634              55,571           
Total liabilities and  stockholders' equity  $473,112             $502,560             $473,034             $498,141           
                                                             
Net interest income       $3,643             $3,600             $7,178             $6,995      
Interest rate spread             3.29%             2.97%             3.22%             2.90%
Net interest margin (annualized)             3.34%             3.04%             3.28%             2.99%
Average interest-earning assets to average interest-bearing liabilities             105.08%             106.83%             105.47%             106.80%

 

1) Includes municipal deposits

  

26
 

 

Provision for Loan Losses. The provision for loan losses was $977,000 for the quarter ended December 31, 2011, compared to $737,000 for the same quarter in the prior year. The provision for loan losses was $1.9 million for the six months ended December 31, 2011, compared to $1.5 million for the same period in the prior year. Management evaluates the Bank’s allowance for loan loss for adequacy on at least a quarterly basis. As part of this evaluation, management considers the amounts and types of loans, concentrations, the value of underlying collateral, current economic conditions, historical charge-offs, and other relevant information, such as the size of the overall portfolio and the financial condition of the borrowers. The increase in the provision for loan losses primarily relates to impairment charges in the multi-family real estate loans.

 

 

For more information on how the Company reviews its allowance for loan losses and determines any necessary provision see, “Critical Accounting Policies – Allowance for Loan Losses.”

 

27
 

 

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,
2011
  At June 30,
2011
  % Change
   (Dollars in thousands)
Nonaccrual loans:               
One- to-four-family residential real estate  $1,619   $1,652    (2.0)%
Multi-family   1,735    1,742    (0.4)
Nonresidential real estate and land   996    566    76.0 
Construction   —      —      —   
Commercial   359    240    50.0 
Consumer   363    240    51.3 
                
Total nonaccrual loans   5,072    4,440    14.2 
                
Nonaccrual restructured loans:               
One- to-four-family residential real estate  $2,624   $1,653    58.7%
Multi-family   7,192    10,358    (30.6)
Nonresidential real estate and land   615    4,146    (85.2)
Construction   —      —      —   
Commercial   —      —      —   
Consumer   —      —      —   
                
Total nonaccrual restructured loans   10,431    16,157    (35.4)
                
Total nonperforming loans   15,503    20,597    (24.7)
Real estate owned   645    139    364.0 
                
Total nonperforming assets  $16,148   $20,736    (22.1)
Accruing restructured loans   14,772    8,768    68.5 
                
Accruing restructured loans and nonperforming assets  $30,920   $29,504    4.8 
                
Total nonperforming loans to total loans   5.33%   7.08%   (24.7)
                
Total nonperforming loans to total assets   3.32%   4.36%   (23.9)
                
Total nonperforming assets to total assets   3.46%   4.39%   (21.2)

 

Nonperforming loans increased $0.3 million, from $15.2 million at September 30, 2011 to $15.5 million at December 31, 2011, compared to an increase in nonperforming loans from $18.7 million at September 30, 2010 to $23.5 million at December 31, 2010. Nonperforming loans decreased $5.1 million, from $20.6 million at June 30, 2011 to $15.5 million at December 31, 2011, compared to an increase in nonperforming loans from $10.6 million at June 30, 2010 to $23.5 million at December 31, 2010. The decrease in nonperforming loans in the current year six month period was primarily the result of troubled debt restructurings that were placed on accrual (performing) status after performing in accordance with their restructured terms for at least six consecutive months, partially offset by additional nonperforming loans in the current year six month period.

As previously disclosed, the Company restructured $13.7 million of loans during the third quarter of the fiscal year ended June 30, 2011. The loans restructured during the third quarter of the fiscal year ended June 30, 2011 included five of our largest loans. All of these loans were restructured using a split note strategy whereby the Bank’s remaining recorded investment in the borrowing reflected the “as is” value of the collateral, based on current cash flow. At December 31, 2011, all of the restructured loans have been performing in accordance with their restructured terms.

 

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Under the split note or Note A/Note B strategy, the Note A was underwritten based on the Company’s normal underwriting standards with the exception that a debt service coverage ratio of 1.5x or higher was required. This is more stringent than the Company’s normal underwriting guidelines which generally require a debt service coverage of 1.2x or better. The Note A payment was based on a thirty year amortization schedule and matures at the end of two years. The amount of Note B under the split note strategy is the difference between the amount of Note A and the principal amount to be refinanced. The interest rate and two year maturity of the Note B loan are identical to the Note A loan, but the Note B loan requires no payments of interest or principal until maturity. While no amount of the original indebtedness was forgiven through this process, the full amount of the borrowers’ Note B indebtedness was charged-off in March, 2011.

A discussion of the most significant troubled debt restructurings, all of which were on nonaccrual status at the beginning of the quarter ended September 30, 2011, follows. The status of each of these troubled debt restructurings at December 31, 2011 is noted below. Management monitors the performance of these loans and reviews all options available to keep the loans current, including further restructuring of the loans. If restructuring efforts ultimately are not successful, management will initiate foreclosure proceedings. A more detailed discussion of these loan relationships is included in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations under the section entitled “Analysis of Nonperforming and Classified Assets” in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2011.

 

 

    Loan Relationship A. This relationship consists of three loans with a total carrying value of $6.4 million prior to its restructuring. One loan is secured by a first mortgage on an apartment complex near a college campus, another is secured by a first mortgage on two mobile home parks, and the last is secured by the first mortgage on another apartment complex. All three loans are included in the above table as “Accruing restructured loans” at December 31, 2011 and “Nonaccrual restructured loans” at June 30, 2011. In the “Credit Risk Profile by Internally Assigned Grade” table, these loans were classified as “Multi-family residential real estate”, “Substandard” at December 31, 2011 and June 30, 2011. The total loan balance at December 31, 2011 for this relationship was $5.2 million. This relationship was performing in accordance with its restructured terms at December 31, 2011 and, because it performed in accordance with its restructured terms for at least six consecutive months, was reported as accrual status.

 

    Loan Relationship B. The loans comprising Loan Relationship B, totaling $2.6 million, are secured by a first mortgage on two separate retail strip shopping centers and a single purpose commercial use property. All the loans are included in the above table as “Accruing restructured loans” at December 31, 2011 and “Nonaccrual restructured loans,” “Nonresidential real estate” at June 30, 2011. In the “Credit Risk Profile by Internally Assigned Grade” table, these loans were classified as “Nonresidential real estate, Substandard” at December 31, 2011 and June 30, 2011. This relationship was performing in accordance with its restructured terms at December 31, 2011 and because the loan has performed in accordance with its restructured terms for at least six consecutive months, the loan has been reported as accrual status.

 

    Loan Relationship C. This loan relationship is secured by a first mortgage on a single-family home, a 24-unit apartment complex, one- to four-family residential properties and several residential building lots. The relationship is included in the above table as “Accrual restructured loans, multi-family real estate” at December 31, 2011 and “Nonaccrual restructured loans, multi-family real estate” at June 30, 2011. In the “Credit Risk Profile by Internally Assigned Grade” table, these loans were classified as “Multi-family real estate, Substandard” at December 31, 2011 and June 30, 2011. The loan balance at December 31, 2011 for this relationship was $1.5 million. This relationship was performing in accordance with its restructured terms at December 31, 2011 and, because the loan has performed in accordance with its restructured terms for at least six consecutive months the loan has been reported as accrual status.

 

    Loan Relationship D. The loan comprising Loan Relationship D is secured by a first mortgage on a 62-unit apartment complex near a college campus. The loan was made in 2008 to an experienced property manager who made major improvements to the property. The loan required interest only payments through December 2011. The borrower has completed renovations to the property and the cash flow of the property has improved, supporting the carrying value of the loan. At December 31, 2011, the carrying value of this loan was $1.3 million. In December 2011, this loan was restructured into a split Note A/Note B. The $1.3 million carrying value was restructured at a market rate of interest on a 30 year amortizing note with a two year balloon. Note B in the amount of $.4 million was restructured at a below market rate of interest with no payments for two years and a balloon payment due after 2 years. Note B was fully reserved prior to the restructuring and was charged off in December 2011. This charge off had no impact to the allowance for loan loss at December 31, 2011. The loan was on nonaccrual status at both December 31, 2011 and June 30, 2011.

 

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    Loan Relationship E. This relationship has an aggregate carrying value of $550,000 at December 31, 2011, and was secured by nonresidential real estate. These loans are included in the above table as “Accruing restructured loans” at December 31, 2011 and “Nonaccrual restructured loans, nonresidential real estate” at June 30, 2011. In the “Credit Risk Profile by Internally Assigned Grade” table, these loans were classified as “Nonresidential real estate, Substandard” at December 31, 2011 and June 30, 2011. This relationship was performing in accordance with its restructured terms at December 31, 2011 and because the loan has performed in accordance with its restructured terms for at least six consecutive months, the loans are reported as accrual status.

 

    Loan Relationship F. This loan relationship had an aggregate carrying value of $465,000 at December 31, 2011. These loans are secured by single-family and multifamily residential real estate. These loans are included in the above table as “Accruing restructured loans” at December 31, 2011 and “Nonaccrual restructured loans, multi-family real estate” at June 30, 2011. In the “Credit Risk Profile by Internally Assigned Grade” table, these loans were classified as “Multi-family real estate, Substandard” at December 31, 2011 and June 30, 2011. This loan relationship was performing in accordance with its restructured terms for at least six consecutive months at December 31, 2011 and, as a result, the loans are reported as accrual status.
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Other Income. The following table summarizes other income for the three and six months ended December 31, 2011 and 2010.

 

   Three Months Ended        Six Months Ended     
   December 31,        December 31,     
   2011   2010   %
Change
   2011   2010    %
Change
 
    (Dollars in thousands) 
     
Service charges  $621   $606    2.5%  $1,260   $1,207    4.4%
Gain on sale of loans   130    215    (39.5)   213    442    (51.8)
Gain on sale of investments   327    —      100.0    563    44    1179.5 
Loss on sale of other real estate owned   2    (27)   (107.4)   2    (25)   (108.0)
Income from Bank Owned Life Insurance   64    70    (8.6)   131    139    (5.8)
Other   61    109    (44.0)   162    161    0.6 
Total  $1,205   $973    23.8   $2,331    $1, 968    18.4 

 

Other income increased $232,000, or 23.8%, from $973,000 in the prior year quarter to $1.2 million in the current year quarter. The increase was primarily due to a $327,000 increase in gain on sale of investments offset by a $85,000 decrease in gain on the sale of loans. The increase in gain on sale of investments was the result of the sale of 19 securities totaling $26.0 million in the current year quarter, with no sales in the prior year quarter. The Company has implemented a strategy where it will sell a portion of its securities to recognize gains and reinvest the proceeds in securities with similar interest rates and terms without significantly affecting the interest rate risk to the Company. The decrease in the gain on sale of loans was the result of fewer loan sales to Freddie Mac in the current year quarter compared to the same quarter in the prior year. The decrease in loan sales was the result of interest rates remaining relatively unchanged over the last year, leading to a decrease in refinancing activity.

 

Other income increased $363,000, or 18.4%, from $2.0 million in the six month prior year period to $2.3 million in the six month current year period. The increase was primarily due to a $519,000 increase in gain on sale of investments offset by a $229,000 decrease in gain on the sale of loans. The increase in gain on sale of investments was the result of the sale of 30 securities totaling $51.6 million in the current year period, compared to the sale of only two securities totaling $4.0 million in the prior year period. The decrease in the gain on sale of loans was the result of fewer loan sales to Freddie Mac in the current year period when compared to the same period in the prior year.

 

Other Expense. The following table summarizes other expense for the three and six months ended December 31, 2011 and 2010.

 

   Three Months Ended        Six Months Ended     
   December 31,        December 31,     
   2011   2010   %
Change
   2011   2010   %
Change
 
    (Dollars in thousands) 
     
Compensation and employee benefits  $1,695   $1,687    0.5%  $3,431   $3,358    2.2%
Premises and occupancy expense   310    336    (7.7)   638    645    (1.1)
Deposit insurance premium   77    180    (57.2)   214    408    (47.5)
Advertising expense   114    117    (2.6)   207    218    (5.0)
Data processing expense   311    281    10.7    616    563    9.4 
Acquisition expense   —      —      —      —      38    (100.0)
Other   634    603    5.1    1,184    1, 225    (3.3)
Total  $3,141   $3,204    (2.0)  $6,290   $6,455    (2.6)

 

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Other expense decreased $63,000, or 2.0%, to $3.1 million for the quarter ended December 31, 2011, from $3.2 million in the prior year quarter. The decrease was primarily the result of a $103,000 decrease in deposit insurance premiums as a result of the aforementioned decrease in average deposits in the current year quarter from the prior year quarter.

 

Other expense decreased $165,000, or 2.6%, to $6.3 million for the six months ended December 31, 2011, from $6.5 million in the prior year period. The decrease was primarily the result of a $194,000 decrease in deposit insurance premiums as a result of the aforementioned decrease in average deposits.

 

Income Taxes. The provision for income taxes was $199,000 for the quarter ended December 31, 2011 compared to $53,000 for the same period in 2010. The provision for income taxes was $337,000 for the six months ended December 31, 2011 compared to $202,000 for the same period in 2010. The increase in expense for the three and six month periods is primarily due to an increase in income before income taxes as well as a receipt of a prior period state tax refund during the 2010 period.

 

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 $16.6 million at December 31, 2011 and $31.2 million at June 30, 2011. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $50.0 million at December 31, 2011. Total securities classified as available-for-sale were $125.8 million at December 31, 2011. In addition, at December 31, 2011, we had the ability to borrow a total of approximately $93.2 million from the Federal Home Loan Bank of Indianapolis.

 

At December 31, 2011, we had $27.7 million in loan commitments outstanding, consisting of $1.7 million in mortgage loan commitments, $21,000 in commercial loan commitments, $21.0 million in unused home equity lines of credit, $4.6 million in commercial lines of credit, and $369,000 in letters of credit outstanding. Certificates of deposit due within one year of December 31, 2011 totaled $109.2 million. This represented 55.7% of certificates of deposit at December 31, 2011. We believe that the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for longer 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 funding, 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, 2011. However, based on past experience, we believe 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. United Community Bank is subject to various regulatory capital requirements administered by the OCC, 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 30, 2011, 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 the Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 28, 2011.

 

32
 

 

The following table summarizes the Bank’s capital amounts and the ratios required at December 31, 2011:

 

                   To be well 
                   capitalized under 
                   prompt corrective 
       For capital   action 
   Actual   adequacy purposes   provisions 
   Amount   Ratio   Amount   Ratio   Amount   Ratio 
December 31, 2011 (unaudited)  (in thousands) 
Tier 1 capital to risk-weighted assets  $47,037    16.95%  $11,102    4.0%  $16,653    6.0%
Total capital to risk-weighted assets   50,506    18.20%   22,204    8.0%   27,755    10.0%
Tier 1 capital to adjusted total assets   47,037    10.12%   18,750    4.0%   23,438    5.0%
Tangible capital to adjusted total assets   47,037    10.12%   7,031    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. We currently have no plans to engage in hedging activities in the future.

 

For the three and six months ended December 31, 2011, 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.

 

33
 

 

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, 2011. 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 OCC 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 200 basis points.

 

The following table presents the change in our net portfolio value at September 30, 2011 that would occur in the event of an immediate change in interest rates based on OCC 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
 
     
Basic Point (“bp”)
Change in Rates
  Amount   Change   % Change   NPV Ratio   Change (bp) 
                     
300  $57,800   $(2,177)   (4)%   12.00%   (24)bps
200   59,870    (108)   0    12.33    9 
100   60,689    712    1    12.42    18 
50   60,345    367    1    12.33    9 
0   59,978    —      —      12.24    —   
(50)   59,179    (799)   (1   12.08    (16)
(100)   58,671    (1,306)   (2   11.98    (26)

 

The OCC 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.

 

34
 

 

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, 2011, 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.

 

35
 

 

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, 2011, 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 three and six month periods ended December 31, 2011.

 

 

Item 3. DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

 

Item 4. MINE SAFETY DISCLOSURES

 

Not applicable

 

 

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
   
Exhibit 101.0* The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2011, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to Unaudited Consolidated Financial Statements, tagged as blocks of text.

_____________________________

* Furnished, not filed.

 

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SIGNATURES

 

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

 

 

  UNITED COMMUNITY BANCORP
   
 Date: February 14, 2012 By:  /s/ William F. Ritzmann
    William F. Ritzmann
President and Chief Executive Officer

 

 

 Date: February 14, 2012 By:  /s/ Vicki A. March
    Vicki A. March
Senior Vice President, Chief Financial Officer
    and Treasurer

 

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