UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark One)

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

 

For the quarterly period ended December 31, 2017

 

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: 0-54876

 

United Community Bancorp

(Exact name of registrant as specified in its charter)

 

Indiana		80-0694246
(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 ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ☒   No ☐

 

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

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☒
		Emerging growth company	☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

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

Yes ☐   No ☒ 

 

As of February 8, 2018, there were 4,201,113 shares of the registrant’s common stock issued and outstanding.

 

 

 

UNITED COMMUNITY BANCORP

 

Table of Contents

 

 

		Page No.
Part I. Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition at December 31, 2017 and June 30, 2017	1
	Consolidated Statements of Income for the Three and Six Month Periods Ended December 31, 2017 and 2016	2
	Consolidated Statements of Comprehensive Income for the Three and Six Month Periods Ended December 31, 2017 and 2016	3
	Consolidated Statements of Cash Flows for the Three Month Periods Ended December 31, 2017 and 2016	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	42
Item 4.	Controls and Procedures	43
Part II. Other Information
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Signatures		45

  

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

  

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

 

Consolidated Statements of Financial Condition

 

		unaudited
(In thousands, except share amounts)		December 31, 2017				June 30, 2017
Assets
Cash and due from banks		$	2,372			$	2,029
Interest-earning deposits in other financial institutions			30,950				24,856
Cash and cash equivalents			33,322				26,885
Investment securities:
Securities available for sale - at estimated market value			80,601				79,188
Securities held to maturity - at amortized cost			41,805				41,954
Mortgage-backed securities available for sale - at estimated market value			62,540				68,374
Investment securities			184,946				189,516
Loans receivable, net			291,563				282,477
Loans available for sale			617				1,005
Property and equipment, net			6,388				6,603
Federal Home Loan Bank stock, at cost			3,527				3,527
Accrued interest receivable:
Loans			928				865
Investments and mortgage-backed securities			1,123				1,137
Other real estate owned, net			-				93
Cash surrender value of life insurance policies			17,252				17,023
Deferred income taxes			2,623				3,266
Prepaid expenses and other assets			1,273				1,817
Goodwill			2,522				2,522
Intangible asset			135				195
Total assets		$	546,219			$	536,931
Liabilities and Stockholders' Equity
Deposits		$	462,040			$	453,655
Advances from FHLB			8,833				8,833
Accrued interest on deposits			15				13
Accrued interest on FHLB advance			9				8
Advances from borrowers for payment of insurance and taxes			849				571
Accrued expenses and other liabilities			2,513				2,560
Total liabilities			474,259				465,640
Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued			-				-
Common stock, $0.01 par value; 25,000,000 shares authorized, 5,149,564 shares issued at December 31, 2017 and June 30, 2017; 4,201,113 and 4,205,980 shares outstanding at December 31, 2017 and June 30, 2017, respectively.			51				51
Additional paid-in capital			51,753				51,517
Retained earnings			35,408				34,839
Less shares purchased for stock plans			(1,657	)			(1,860	)
Treasury Stock, at cost - 948,451 and 943,584  shares at December 31, 2017 and June 30, 2017, respectively.			(12,459	)			(12,397	)
Accumulated other comprehensive income:
Unrealized loss on securities available for sale, net of income taxes			(1,136	)			(859	)
Total stockholders' equity			71,960				71,291
Total liabilities and stockholders' equity		$	546,219			$	536,931

 

See accompanying notes to the consolidated financial statements.

 

 

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

 

Consolidated Statements of Income 

 

		For the Three Months Ended								For the Six Months Ended
		December 31,								December 31,
(In thousands, except per share data)		2017				2016				2017				2016
Interest income:
Loans		$	3,158			$	2,894			$	6,349			$	5,828
Investments and mortgage-backed securities			1,198				1,054				2,372				2,063
Total interest income			4,356				3,948				8,721				7,891
Interest expense:
Deposits			532				494				1,135				1,062
Borrowed funds			49				56				99				113
Total interest expense			581				550				1,234				1,175
Net interest income			3,775				3,398				7,487				6,716
Provision for loan losses			9				15				23				32
Net interest income after provision for loan losses			3,766				3,383				7,464				6,684
Noninterest income:
Service charges			834				794				1,626				1,583
Gain on sale of loans			57				199				154				419
Gain on sale of investments			-				-				9				79
Gain on sale of other real estate owned			56				-				72				-
Loss on sale of fixed assets			(31	)			-				(31	)			-
Income from bank owned life insurance			114				165				230				285
Other			107				119				177				219
Total noninterest income			1,137				1,277				2,237				2,585
Noninterest expense:
Compensation and employee benefits			2,175				2,307				4,380				4,487
Premises and occupancy expense			260				258				555				528
Deposit insurance premium			40				11				83				82
Advertising expense			109				106				214				212
Data processing expense			464				433				934				911
Intangible amortization			30				30				60				60
Professional fees			91				174				366				424
Other operating expenses			323				343				655				620
Total noninterest expense			3,492				3,662				7,247				7,324
Income before income taxes			1,411				998				2,454				1,945
Income tax provision			914				258				1,095				423
Net income		$	497			$	740			$	1,359			$	1,522
Basic earnings per share		$	0.12			$	0.18			$	0.33			$	0.38
Diluted earnings per share		$	0.12			$	0.18			$	0.33			$	0.37

 

See accompanying notes to the consolidated financial statements.

 

 

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

 

Consolidated Statements of Comprehensive Income

   

		For the Three Months Ended December 31,								For the Six Months Ended December 31
(In thousands)		2017				2016				2017				2016
Net income		$	497			$	740			$	1,359			$	1,522
Other comprehensive income, net of tax
Net unrealized gain (loss) on available for sale securities net of benefit of ($213) and ($1,561) for the three months ended December 31, 2017 and 2016, respectively and ($115) and ($1,844) for the six months ended December 31, 2017 and 2016, respectively			(425	)			(2,442	)			(271	)			(2,884	)
Reclassification adjustment for the net realized gain on sale of available for sale securities included in net income, net of taxes of $0 and $0 for the three months ended December 31, 2017 and 2016, respectively and ($3) and ($31) for the six months ended December 31, 2017 and 2016, respectively			-				-				(6	)			(48	)
Comprehensive income		$	72			$	(1,702	)		$	1,082			$	(1,410	)

 

See accompanying notes to the consolidated financial statements.

 

 UNITED COMMUNITY BANCORP AND SUBSIDIARIES

 

Consolidated Statements of Cash Flows

  

		For the Six Months Ended December 31,
(In thousands)		2017				2016
Operating activities:
Net income		$	1,359			$	1,522
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation			184				212
Provision for loan losses			23				32
Deferred loan origination costs			(64	)			(75	)
Amortization of premium on investments			781				941
Proceeds from sale of loans			5,776				15,245
Loans disbursed for sale in the secondary market			(5,234	)			(16,116	)
Gain on sale of loans			(154	)			(419	)
Amortization of intangible asset			60				60
Amortization of acquisition-related loan yield adjustment			(59	)			(64	)
Gain on sale of investment securities			(9	)			(79	)
Loss on sale of fixed assets			31				-
Gain on sale of other real estate owned			(72	)			-
Gain recognized from death benefit on bank owned  life insurance			-				(45	)
Increase in cash surrender value of life insurance			(229	)			(240	)
Stock-based compensation			131				107
Amortization of ESOP shares			243				246
Deferred income taxes			761				286
Effects of change in operating assets and liabilities:
Accrued interest receivable			(49	)			(49	)
Prepaid expenses and other assets			544				133
Accrued interest payable			3				(2	)
Accrued expenses and other			(44	)			(1,949	)
Net cash provided by (used in) operating activities			3,982				(254	)
Investing activities:
Proceeds from maturity of available for sale investment securities			250				530
Proceeds from maturity of held to maturity securities			32				30
Proceeds from sale of available for sale investment securities			596				6,935
Proceeds from repayment of mortgage-backed securities and collateralized mortgage obligations available for sale			9,578				10,755
Proceeds from sale of mortgage-backed securities available for sale			-				11,087
Proceeds from sale of other real estate owned			232				-
Purchases of available for sale investment securities			(7,053	)			(11,163	)
Purchases of mortgage-backed securities available for sale			-				(10,943	)
Proceeds from bank owned life insurance death benefit			-				419
Net increase in loans			(9,053	)			(7,088	)
Capital expenditures			-				(42	)
Net cash provided by (used in) investing activities			(5,418	)			520
Financing activities:
Net increase in deposits			8,385				4,663
Repayments of Federal Home Loan Bank advances			-				(1,667	)
Dividends paid to stockholders			(790	)			(462	)
Repurchases of common stock			-				(100	)
Net increase in advances from borrowers for  payment of insurance and taxes			278				85
Net cash provided by financing activities			7,873				2,519
Net increase in cash and cash equivalents			6,437				2,785
Cash and cash equivalents at beginning of period			26,885				28,980
Cash and cash equivalents at end of period		$	33,322			$	31,765

  

See accompanying notes to the consolidated financial statements. 

 

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

1.       BASIS OF PRESENTATION - United Community Bancorp, a federal corporation (“old United Community Bancorp”) completed its previously announced conversion from the mutual holding company form of organization to the stock holding company form on January 9, 2013. As a result of the conversion, United Community Bancorp, an Indiana corporation (“United Community Bancorp” or “Company”), became the holding company for United Community Bank (“Bank”), and United Community MHC and old United Community Bancorp, ceased to exist. As part of the conversion, all outstanding shares of old United Community Bancorp common stock (other than those owned by United Community MHC) were converted into the right to receive 0.6573 of a share of United Community Bancorp common stock.

 

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 the Bank, was formed for a variety of purposes, but primarily owns and manages a portion of the Bank’s municipal bond portfolio and collects commissions from a wealth management partner.

 

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 months ended December 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2018. 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, 2017, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 26, 2017.

 

The Company evaluates events and transactions occurring subsequent to the date of the financial statements for matters requiring recognition or disclosure in the financial statements.

 

2.       EMPLOYEE STOCK OWNERSHIP PLAN (“ESOP”) – As of December 31, 2017 the ESOP owned 118,771 shares of the Company’s common stock. At June 30, 2017, the ESOP owned 142,371 shares of the Company’s common stock. The shares owned by the ESOP are held in a suspense account until released for allocation to participants.

 

3.        EARNINGS PER SHARE (“EPS”) – Non-vested shares with non-forfeitable dividend rights are considered participating securities and, thus, subject to the two-class method pursuant to ASC 260, Earnings per Share, when computing basic and diluted earnings per share. 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, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effects of contracts or securities exercisable or which could be converted into common stock, if dilutive, using the treasury stock method. For the three months and six months ended December 31, 2017 there were no outstanding options to purchase shares that were excluded from the computations of diluted earnings per share as all existing options are 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,
		2017				2016				2017				2016
Basic weighted average outstanding shares			4,058,999				4,027,410				4,059,717				4,025,829
Effect of dilutive stock options			61,296				41,007				46,324				37,674
Diluted weighted average outstanding shares			4,120,295				4,068,417				4,106,041				4,063,503

 

4.        STOCK-BASED COMPENSATION – The Company applies the provisions of ASC 718, Compensation – Stock Compensation, which requires the Company to measure the cost of employee services received in exchange for awards of equity instruments and to recognize this cost in the financial statements over the period during which the employee is required to provide such services. The Company has elected to recognize compensation cost associated with its outstanding stock-based compensation awards with graded vesting on a straight-line basis pursuant to ASC 718. The expense is calculated for stock options at the date of grant using the Black-Scholes option pricing model. The expense associated with restricted stock awards is calculated based upon the value of the common stock on the date of grant. Stock-based compensation expense was $73,000 and $44,000 for the three months ended December 31, 2017 and 2016, respectively. Stock-based compensation was $130,000 and $107,000 for the six months ended December 31, 2017 and 2016, respectively. No stock-based compensation awards were granted during the three months ended December 31, 2017 and 2016. In September 2017, 18,570 restricted shares and 53,506 stock options were awarded from the United Community Bancorp 2014 Equity Incentive Plan. No stock-based compensation awards were granted during the six months ended December 31, 2016.

 

5.        DIVIDENDS – On August 10, 2017 and November 9, 2017 the Board of Directors of the Company declared cash dividends on the Company’s outstanding shares of stock of $0.10 per share for each period. The dividends, totaling $790,000, were paid during the six months ended December 31, 2017.

 

6.        STOCK REPURCHASE PLAN – On February 3, 2014 the Company’s board of directors approved the repurchase of up to 514,956 shares of the Company’s outstanding common stock, which represented approximately 10% of the Company’s outstanding shares as of February 3, 2014. Purchases were conducted solely through and based upon the parameters of a Rule 10b5-1 repurchase plan. As of December 31, 2014, all 514,956 shares were repurchased at a total cost of $6.0 million.

 

Additionally, on May 18, 2015, the Company’s Board of Directors approved the repurchase of up to 231,571 shares of the Company’s outstanding common stock, which was approximately 5% of the Company’s outstanding shares as of May 18, 2015. Purchases were conducted solely through and based upon the parameters of a Rule 10b5-1 repurchase plan. As of December 31, 2015, all of the 231,571 shares were repurchased.

 

On November 6, 2015, United Community Bancorp entered into a Stock Repurchase Agreement with Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P. and Stilwell Partners, L.P. (collectively, the “Sellers”).  Pursuant to the Stock Repurchase Agreement, the Company purchased 318,756 shares of its common stock, $0.01 par value, from the Sellers for an aggregate purchase price of $4,781,340, or $15.00 per share.  The repurchase was funded with cash on hand and completed the 5% repurchase program mentioned above. Following the repurchase transaction, the Company had 4,201,326 shares of common stock outstanding. On April 26, 2016 the Company purchased 3,183 shares of common stock from participants in the equity incentive plan. Following the repurchase, there were 4,198,143 shares of common stock outstanding as of September 30, 2016.

 

On November 4, 2016, the Company’s Board of Directors approved the repurchase of up to 209,907 shares of the Company’s outstanding common stock, which was approximately 5% of the Company’s outstanding shares as of November 4, 2016. Purchases were being conducted solely through and based upon the parameters of a Rule 10b5-1 repurchase plan. A total of 14,692 shares were purchased at a total cost of $238,000. The repurchase plan terminated pursuant to its terms on August 15, 2017.

 

 

7.        SUPPLEMENTAL CASH FLOW INFORMATION

 

		Six Months Ended
		December 31,
		2017				2016
		(Dollars in thousands)
Supplemental disclosure of cash flow information is as follows:
Cash paid during the period for:
Income taxes, net		$	410			$	43
Interest		$	1,231			$	1,177
Supplemental disclosure of non-cash investing and financing activities is as follows:
Unrealized gains (losses) on securities designated as available for sale, net of tax		$	(395	)		$	(2,932	)
Transfers of loans to other real estate owned		$	67			$	--

 

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.

 

 

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.

 

Advances 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, 2017 and June 30, 2017 are as follows:

 

		December 31, 2017								June 30, 2017
		Carrying Amounts				Fair Value				Carrying Amounts				Fair Value
		(In thousands)
Financial assets:
Cash and interest-bearing deposits		$	33,322			$	33,322			$	26,885			$	26,885
Investment securities available for sale			80,601				80,601				79,188				79,188
Investment securities held to maturity			41,805				42,731				41,954				42,711
Mortgage-backed securities			62,540				62,540				68,374				68,374
Loans receivable and loans receivable held for sale			292,180				292,834				283,482				283,342
Accrued interest receivable			2,051				2,051				2,002				2,002
Investment in FHLB stock			3,527				3,527				3,527				3,527
Financial liabilities:
Deposits			462,040				462,587				453,655				454,302
Accrued interest payable			24				24				21				21
FHLB advances			8,833				8,866				8,833				8,953
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.

 

 

Fair value measurements for certain assets and liabilities measured at fair value on a recurring basis:

 

		Total				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant other unobservable inputs (Level 3)
		(In thousands)
December 31, 2017:
Mortgage-backed securities		$	62,540			$	--			$	62,540			$	--
Municipal bonds			36,992				--				36,992				--
Small Business Administration			9,358				--				9,358				--
Collateralized Mortgage Obligations			31,061				--				31,061				--
Certificates of Deposit			2,975				--				2,975				--
Other equity securities			215				215				--				--
Mortgage servicing rights			769				--				769				--
June 30, 2017
Mortgage-backed securities		$	68,374			$	--			$	68,374			$	--
Municipal bonds			36,941				--				36,941				--
Small Business Administration			9,743				--				9,743				--
Collateralized Mortgage Obligations			29,305				--				29,305				--
Certificates of Deposit			3,000				--				3,000				--
Other equity securities			199				199				--				--
Mortgage servicing rights			766				--				766				--

  

Fair value measurements for certain assets and liabilities measured at fair value on a nonrecurring basis:

 

		Total				Quoted prices in active markets for identical assets (Level 1)				Significant other observable inputs (Level 2)				Significant other unobservable inputs (Level 3)
		(In thousands)
December 31, 2017:
Other real estate owned		$	--			$	--			$	--			$	--
Loans held for sale			617				--				617				--
June 30, 2017:
Other real estate owned		$	93			$	--			$	93			$	--
Loans held for sale			1,005				--				1,005				--

 

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.

 

 

The following table presents fair value measurements for the Company’s financial instruments which are not recognized at fair value in the accompanying statements of financial position on a recurring or 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, 2017:
Financial assets:
Cash and interest-bearing deposits		$	33,322			$	33,322			$	--			$	--
Investment securities held to maturity			42,731				--				42,731				--
Loans receivable and loans held for sale			292,834				--				292,834				--
Accrued interest receivable			2,051				--				2,051				--
Investment in FHLB stock			3,527				--				3,527				--
Financial liabilities:
Deposits			462,587				--				462,587				--
Accrued interest payable			24				--				24				--
FHLB advances			8,866				--				8,866				--
June 30, 2017:
Financial assets:
Cash and interest-bearing deposits		$	26,885			$	26,885			$	--			$	--
Investment securities held to maturity			42,711				--				42,711				--
Loans receivable and loans held for sale			283,342				--				283,342				--
Accrued interest receivable			2,002				--				2,002				--
Investment in FHLB stock			3,527				--				3,527				--
Financial liabilities:
Deposits			454,302				--				454,302				--
Accrued interest payable			21				--				21				--
FHLB advances			8,953				--				8,953				--

 

9.        INVESTMENT SECURITIES

 

Investment securities available for sale at December 31, 2017 consisted of the following:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Market Value
Mortgage-backed securities		$	63,754			$	3			$	1,217			$	62,540
Municipal bonds			36,911				418				337				36,992
Small Business Administration			9,407				--				49				9,358
Collateralized Mortgage Obligations			31,691				--				630				31,061
Certificates of Deposit			2,971				5				1				2,975
Other equity securities			210				5				--				215
		$	144,944			$	431			$	2,234			$	143,141

 

Investment securities held to maturity at December 31, 2017 consisted of the following:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Market Value
Municipal Bonds		$	41,805			$	945			$	19			$	42,731

 

 

Investment securities available for sale at June 30, 2017 consisted of the following:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Market Value
Mortgage-backed securities		$	69,335			$	83			$	1,044			$	68,374
Municipal bonds			36,990				548				597				36,941
Small Business Administration			9,799				--				56				9,743
Collateralized Mortgage Obligations			29,664				1				360				29,305
Certificates of Deposit			2,971				29				--				3,000
Other equity securities			210				--				11				199
		$	148,969			$	661			$	2,068			$	147,562

 

Investment securities held to maturity at June 30, 2017 consisted of the following:

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Market Value
Municipal Bonds		$	41,954			$	792			$	35			$	42,711

 

The mortgage-backed securities, small business administration, collateralized mortgage obligations, certificates of deposit, and municipal bonds have the following maturities at December 31, 2017:

 

		Available for Sale								Held to Maturity
		Amortized cost				Estimated market value				Amortized cost				Estimated market value
Due or callable in one year or less		$	2,820			$	2,821			$	107			$	108
Due or callable in 1 - 5 years			81,992				80,973				4,152				4,167
Due or callable in 5 - 10 years			39,885				39,271				6,654				6,767
Due or callable in greater than 10 years			20,037				19,861				30,892				31,689
Total debt securities		$	144,734			$	142,926			$	41,805			$	42,731

 

All other securities available for sale at December 31, 2017 are saleable within one year.

 

Gross proceeds on the sale of investments and mortgage-backed securities were $0 and $0 for the three months ended December 31, 2017 and 2016, respectively. Gross proceeds on the sale of investments and mortgage-backed securities were $596,000 and $18.0 million for the six months ended December 31, 2017 and 2016, respectively. Gross realized gains for the three month periods ended December 31, 2017 and 2016 were $0 and $0, respectively. Gross realized gains for the six-month periods ended December 31, 2017 and 2016 were $9,000 and $110,000, respectively. Gross realized losses for the three months periods ended December 31, 2017 and 2016 were $0 and $0, respectively. Gross realized losses for the six-month periods ended December 31, 2017 and 2016 were $0 and $31,000, respectively.

 

 

The table below indicates the length of time individual investment securities and mortgage-backed securities have been in a continuous loss position at December 31, 2017 and June 30, 2017:

 

		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
December 31, 2017		(In thousands)
Municipal bonds		$	6,878			$	33			$	12,469			$	304			$	19,347			$	337
Mortgage-backed securities			28,321				185				33,213				1,032				61,534				1,217
Small Business Administration			5,194				35				4,164				14				9,358				49
Collateralized Mortgage Obligations			16,520				258				14,540				372				31,060				630
Certificates of Deposit			990				1				--				--				990				1
		$	57,903			$	512			$	64,386			$	1,722			$	132,788			$	2,234
Number of investments							43								49								92

 

		Less than 12 months								12 months or longer								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
June 30, 2017		(In thousands)
Municipal bonds		$	19,230			$	632			$	--			$	--			$	19,230			$	632
Mortgage-backed securities			38,566				812				13,223				232				51,789				1,044
Small Business Administration			9,743				56				--				--				9,743				56
Collateralized Mortgage Obligations			28,129				360				--				--				28,129				360
Other equity securities			--				--				199				11				199				11
		$	95,668			$	1,860			$	13,422			$	243			$	109,090			$	2,103
Number of investments							73								7								80

 

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.

 

10.        GOODWILL AND INTANGIBLE ASSET

 

In June 2010, old United Community Bancorp 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.

 

As permitted by current accounting rules, the Company completed its qualitative assessment to determine whether current events or changes in circumstances lead to a determination that it is more likely than not, as defined, that the fair value of the reporting unit is less than its carrying amount. Based upon the Company’s assessment, there was no such determination that the fair value of the reporting unit is less than its carrying amount. Accordingly, the Company did not apply the traditional two-step goodwill impairment test.

 

The following table indicates changes to the core deposit intangible asset and goodwill balances for the six months ended December 31, 2017:

 

		Core Deposit Intangible				Goodwill
		(In thousands)
Balance at June 30, 2017		$	195			$	2,522
Amortization			60				--
Balance at December 31, 2017		$	135			$	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, 2017:

 

January 1, 2018 through June 30, 2018		$	57
2019			78
		$	135

 

 

11.        DISCLOSURES ABOUT THE CREDIT QUALITY OF LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)

 

The following tables illustrate certain disclosures required by ASC 310-10-50-11B(c), (g) and (h), the changes to the allowance for loan losses, for the three and six months ended December 31, 2017 (in thousands):

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

		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, 2017:		$	1,105			$	336			$	56			$	278			$	2,163			$	104			$	148			$	85			$	4,275
Charge offs			--				(29	)			--				--				(136	)			--				(181	)			--				(346	)
Recoveries			14				58				--				31				133				--				--				--				236
Provision (credit)			(13	)			(12	)			(2	)			(6	)			(304	)			(77	)			445				(22	)			9
Ending Balance:		$	1,106			$	353			$	54			$	303			$	1,856			$	27			$	412			$	63			$	4,174
Allowance for Credit Losses:
Balance, July 1, 2017:		$	1,093			$	347			$	60			$	289			$	2,171			$	117			$	127			$	90			$	4,294
Charge offs			(70	)			(108	)			--				--				(136	)			--				(181	)			--				(495	)
Recoveries			63				80				--				37				172				--				--				--				352
Provision (credit)			20				34				(6	)			(23	)			(351	)			(90	)			466				(27	)			23
Ending Balance:		$	1,106			$	353			$	54			$	303			$	1,856			$	27			$	412			$	63			$	4,174
Balance, Individually Evaluated		$	--			$	--			$	--			$	--			$	--			$	--			$	--			$	--			$	--
Balance, Collectively Evaluated		$	1,106			$	353			$	54			$	303			$	1,856			$	27			$	412			$	63			$	4,174
Financing receivables:
Ending balance		$	136,079			$	34,037			$	9,948			$	18,762			$	76,068			$	5,040			$	4,514			$	10,042			$	294,490
Ending Balance: individually evaluated for impairment		$	1,408			$	213			$	125			$	--			$	--			$	--			$	381			$	--			$	2,127
Ending Balance: collectively evaluated for impairment		$	131,007			$	31,796			$	9,666			$	18,762			$	75,994			$	5,040			$	4,133			$	10,035			$	286,433
Ending Balance: loans acquired at fair value		$	3,664			$	2,028			$	157			$	--			$	74			$	--			$	--			$	7			$	5,930

 

 

For the year ended June 30, 2017 (in thousands):

 

Allowance for Credit Losses and Recorded Investment in Loans Receivable

 

		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:
Beginning balance:		$	1,235			$	426			$	108			$	275			$	2,577			$	132			$	10			$	122			$	4,885
Charge offs			(83	)			(210	)			(9	)			--				(600	)			--				(255	)			--				(1,157	)
Recoveries			68				177				--				17				248				--				--				1				511
Provision (credit)			(127	)			(46	)			(39	)			(3	)			(54	)			(15	)			372				(33	)			55
Ending Balance:		$	1,093			$	347			$	60			$	289			$	2,171			$	117			$	127			$	90			$	4,294
Balance, Individually Evaluated		$	--			$	--			$	--			$	--			$	--			$	--			$	--			$	--			$	--
Balance, Collectively Evaluated		$	1,093			$	347			$	60			$	289			$	2,171			$	117			$	127			$	90			$	4,294
Financing receivables:
Ending Balance		$	133,667			$	33,633			$	10,667			$	15,401			$	74,791			$	5,145			$	3,026			$	9,257			$	285,587
Ending Balance: individually  evaluated for impairment		$	1,887			$	370			$	235			$	--			$	1,136			$	--			$	594			$	--			$	4,222
Ending Balance: collectively evaluated for impairment		$	127,304			$	31,049			$	10,271			$	15,401			$	73,566			$	5,145			$	2,432			$	9,250			$	274,418
Ending Balance: loans acquired at fair value		$	4,476			$	2,214			$	161			$	--			$	89			$	--			$	--			$	7			$	6,947

 

 

Federal regulations require us to review and classify our assets on a regular basis. In addition, the OCC has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. If we classify an asset as substandard, doubtful or loss, we analyze that asset and may establish a specific allocation for the asset at that time.

 

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

 

Credit Risk Profile by Internally Assigned Grade

At December 31, 2017

(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
Grade:
Pass		$	131,769			$	32,918			$	6,326			$	17,116			$	69,747			$	3,718			$	3,524			$	8,917			$	274,035
Watch			2,629				899				3,497				1,646				5,961				1,322				609				1,125				17,688
Special mention			273				7				--				--				--				--				--				--				280
Substandard			1,408				213				125				--				360				--				381				--				2,487
Total:		$	136,079			$	34,037			$	9,948			$	18,762			$	76,068			$	5,040			$	4,514			$	10,042			$	294,490

 

Credit Risk Profile by Internally Assigned Grade

At June 30, 2017

(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
Grade:
Pass		$	129,053			$	32,547			$	6,404			$	13,355			$	65,031			$	4,817			$	2,379			$	8,495			$	262,081
Watch			2,283				509				3,741				2,046				7,405				328				53				762				17,127
Special mention			444				207				82				--				1,134				--				--				--				1,867
Substandard			1,887				370				440				--				1,221				--				594				--				4,512
Total:		$	133,667			$	33,633			$	10,667			$	15,401			$	74,791			$	5,145			$	3,026			$	9,257			$	285,587

 

 

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, 2017

(in thousands)

 

		30-59 days past due				60-89 days past due				Greater than 90 days				Total past due				Total current				Total loans receivable
One- to Four- Family Mortgage - Owner-Occupied		$	709			$	264			$	80			$	1,053			$	135,026			$	136,079
Consumer			77				7				21				105				33,932				34,037
One- to Four- Family Mortgage - Non-Owner Occupied			--				--				--				--				9,948				9,948
Multi-family Mortgage			--				--				--				--				18,762				18,762
Nonresidential Real Estate – commercial and office buildings			--				--				--				--				76,068				76,068
Construction			--				--				--				--				5,040				5,040
Land			--				--				--				--				4,514				4,514
Commercial and Agricultural			--				--				--				--				10,042				10,042
Total		$	786			$	271			$	101			$	1,158			$	293,332			$	294,490

 

Age Analysis of Past Due Loans Receivable

At June 30, 2017

(in thousands)

 

		30-59 days past due				60-89 days past due				Greater than 90 days				Total past due				Total current				Total loans receivable
One- to Four- Family Mortgage - Owner-Occupied		$	345			$	579			$	382			$	1,306			$	132,361			$	133,667
Consumer			93				57				23				173				33,460				33,633
One- to Four- Family Mortgage - Non-Owner-Occupied			--				--				235				235				10,432				10,667
Multi-family Mortgage			--				--				--				--				15,401				15,401
Nonresidential Real Estate – commercial and office buildings			--				--				535				535				74,256				74,791
Construction			--				--				--				--				5,145				5,145
Land			--				--				--				--				3,026				3,026
Commercial and Agricultural			118				--				--				118				9,139				9,257
Total		$	556			$	636			$	1,175			$	2,367			$	283,220			$	285,587

 

 

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

 

Impaired Loans at December 31, 2017

(in thousands)

 

														For the six months ended December 31, 2017
		Recorded investment				Unpaid principal balance				Specific allowance				Interest income recognized				Average Recorded investment
Mortgage One- to Four- Family - Owner-Occupied		$	1,408			$	1,549			$	--			$	35			$	1,751
Consumer			213				423				--				--				322
One- to Four- Family Non-Owner Occupied Mortgage			125				125				--				--				281
Multifamily Residential Real Estate Mortgage			--				920				--				--				-
Non-Residential Real Estate			--				--				--				--				810
Construction			--				--				--				--				-
Land			381				825				--				--				450
Commercial and Agricultural			--				6				--				--				-
Total		$	2,127			$	3,848			$	--			$	35			$	3,614

 

Impaired Loans at June 30, 2017

(in thousands)

 

														For the year ended June 30, 2017
		Recorded investment				Unpaid principal balance				Specific allowance				Interest income recognized				Average Recorded investment
Mortgage One- to Four- Family - Owner-Occupied		$	1,887			$	2,144			$	-			$	59			$	2,169
Consumer			370				653				-				3				391
One- to Four- Family Non-Owner Occupied Mortgage			235				235				-				4				349
Multifamily Residential Real Estate Mortgage			-				920				-				-				-
Non-Residential Real Estate			1,136				2,719				-				20				1,468
Construction			-				-				-				-				-
Land			594				857				-				-				286
Commercial and Agricultural			-				6				-				-				-
Total		$	4,222			$	7,534			$	-			$	86			$	4,663

 

The Bank did not have any investments in subprime loans at December 31, 2017. Impaired loans at December 31, 2017 included troubled debt restructurings (“TDR”) with an aggregate principal balance of $1.3 million and a recorded investment of $1.3 million. See Note 12 for a discussion on TDRs.

 

12.        TROUBLED DEBT RESTRUCTURINGS - From time to time, as part of our loss mitigation process, loans may be renegotiated in a 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 loan, 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 nonaccrual or it may accrue interest. A TDR is typically on nonaccrual until the borrower successfully performs under the new terms for at least six consecutive months. However, a TDR may be placed on accrual immediately following the restructuring 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. A TDR will be removed from TDR classification if it is restructured at a market rate, is not impaired under those restructured terms and has been performing under those terms for at least twelve consecutive months.

 

 

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.

 

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

 

		At December 31, 2017
(In thousands)		Loan Status Accrual Nonaccrual								Total Unpaid Principal Balance				Related Allowance				Recorded Investment				Number of Loans				Average Recorded Investment
One- to Four-Family residential real estate		$	1,065			$	198			$	1,263			$	--			$	1,263				13			$	1,412
Nonresidential real estate			--				--				--				--				--				--				720
Total		$	1,065			$	198			$	1,263			$	--			$	1,263				13			$	2,132

 

		At June 30, 2017
(In thousands)		Loan Status Accrual Nonaccrual								Total Unpaid Principal Balance				Related Allowance				Recorded Investment				Number of Loans				Average Recorded Investment
One- to Four-Family residential real Estate		$	1,297			$	213			$	1,510			$	--			$	1,510				16			$	1,680
Nonresidential real estate			--				1,136				1,136				--				1,136				3				1,207
Total		$	1,297			$	1,349			$	2,646			$	--			$	2,646				19			$	2,887

 

Interest income recognized on TDRs is as follows:

 

		For the three months ended December 31,								For the six months ended December 31,
		2017				2016				2017				2016
One-to-Four Family residential real estate		$	13			$	14			$	26			$	31
Multi-family residential real estate			--				--				--				--
Nonresidential real estate			--				7				--				18
Commercial			--				--				--				--
Consumer			--				--				--				--
Total		$	13			$	21			$	26			$	49

 

 

At December 31, 2017, the Bank had 13 loans totaling $1.3 million that were reported as TDRs, and had established an allowance for losses on these loans of $0. With respect to the $1.3 million in TDRs, the Bank charged-off $940,000 at the time the loans were restructured into the Note A/B split note format. At June 30, 2017, the Bank had 19 loans totaling $2.6 million that were reported as TDRs, and had an allowance for losses on these loans of $0. With respect to the $2.6 million in TDRs, the Bank charged-off $1.4 million with respect to those loans at the time the loans were restructured into the Note A/B split note format. At December 31, 2017, the Bank had no other commitments to lend on its TDRs. Management continues to monitor the performance of loans reported as TDRs on a monthly basis.

 

Loans that were included in TDRs at December 31, 2017 and June 30, 2017 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. Some 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, 2017 and June 30, 2017, all loans classified as TDRs required principal and interest payments.

 

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

 

		Three Months Ended December 31, 2017								Six Months Ended December 31, 2017
		Recorded Investment				Number of Loans				Recorded Investment				Number of Loans
(Dollar amounts in thousands)
Beginning balance		$	1,942				16			$	2,646				19
Additions to TDR			-				-				-				-
Charge-offs			(136	)			-				(136	)			-
Removal of TDRs			(83	)			(1	)			(83	)			(1	)
Impairment Reversal			-				-				-				-
Payments			(460	)			(2	)			(1,164	)			(5	)
Ending balance		$	1,263				13			$	1,263				13

 

13.        ACCUMULATED OTHER COMPREHENSIVE INCOME

 

Reclassification out of accumulated other comprehensive income during the three and six months ended December 31, 2017 and 2016 and the affected line items in the consolidated statements of income are as follows (in thousands):

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2017				2016				2017				2016				Affected Line Item in the Consolidated Statements of Income
Realized gain on sale of securities		$	--			$	--			$	9			$	79			Gain on sale of investments
Less provision for income taxes			--				--				3				31			Income tax provision
Reclassification adjustment, net of taxes		$	--			$	--			$	6			$	48

 

 

14.        INCOME TAXES

 

The three and six-month periods ended December 31, 2017 were negatively impacted by a one-time adjustment to the net deferred tax asset in the amount of $683,000 due to the effect of the tax law changes established by the Tax Cuts and Jobs Act (the “Act”), which was signed into law by the President on December 22, 2017. The Act reduced the federal corporate tax rate to 21%. This change required the Company to revalue its net deferred tax asset, which represents corporate tax benefits anticipated to be realized in the future. The reduction in the federal corporate tax rate reduces the tax benefits of the net deferred tax asset. While the one-time adjustment caused a reduction in after-tax net income for the three and six-month periods ended December 31, 2017, the reduction of the corporate income tax rate from 34% to 21% is expected to be favorable to the Company in future periods.

 

The rate reconciliation is as follows:

		Three Months Ended December 31, 2017				Six Months Ended December 31, 2017
		(In thousands)
Federal income taxes at statutory rate		$	388			$	676
State taxes, net of federal benefit			13				76
Increase (decrease) in taxes resulting primarily from:
Non-taxable income on bank-owned life insurance			(31	)			(63	)
Tax exempt income			(137	)			(274	)
Federal tax rate change			683				683
Other			(2	)			(3	)
		$	914			$	1,095
Effective tax rate			64.78	%			44.62	%

 

15.        EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

 

In March 2017, the FASB issued ASU No. 2017-08, Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. ASU 2017-08 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Bank amortizes premiums to the earlier of the call date or maturity date, therefore the Bank expects no impact to the financial statements based on the adoption of this standard.

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Because these amendments eliminate Step 2 from the goodwill impairment test, they should reduce the cost and complexity of evaluating goodwill for impairment. Public business entities should adopt the amendments in this Update for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Adoption of ASU 2017-04 is not expected to have a material impact on the Company’s consolidated financial statements.

 

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company will be evaluating the impact of this ASU over the next several years.

 

 

In April 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and affects the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. ASU No. 2016-10 clarifies the following two aspects of Topic 606: evaluating whether promised goods and services are separately identifiable, and determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. ASU No. 2016-10 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption of ASU No. 2016-10 is not expected to have a material impact on the Company's consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, and affects all entities that issue share-based payment awards to their employees. The new guidance involves several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU No. 2016-09, any excess tax benefits or tax deficiencies should be recognized as income tax expense or benefit in the income statement. Excess tax benefits are to be classified as an operating activity in the statement of cash flows. In accruing compensation cost, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as required under current guidance, or account for forfeitures when they occur. For an award to qualify for equity classification, an entity cannot partially settle the award in excess of the employer's maximum statutory withholding requirements. Such cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. The amendments in ASU No. 2016-09 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Adoption of ASU No. 2016-07 is not expected to have a material impact on the Company's consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and affects the guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is not yet effective. When another party is involved in providing goods or services to a customer, ASU No. 2014-09 requires an entity to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). The amendments in ASU No. 2016-08 are intended to improve the operability and understandability of the implementation guidance in ASU No. 2014-09 on principal versus agent considerations by offering additional guidance to be considered in making the determination. ASU No. 2016-08 is effective for public business entities for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the financial statement impact of adopting the new guidance.In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and requires a lessee to recognize in the statement of financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments. A lessee shall classify a lease as a finance lease if it meets any of five listed criteria: 1) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term; 2) The lease grants the lessee and option to purchase the underlying asset that the lessee is reasonably certain to exercise; 3) The lease term is for the major part of the remaining economic life of the underlying asset; 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset; and 5) The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. For finance leases, a lessee shall recognize in the statement of comprehensive income interest on the lease liability separately from amortization of the right-of-use asset. Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight-line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this update are to be applied using a modified retrospective approach, as defined, and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the financial statement impact of adopting the new guidance.

 

 

Item 2. Management’s 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 affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, such as those changes caused by the Tax Cuts and Jobs Act, 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 26, 2017, which is available through the SEC’s website at www.sec.gov and in other reports filed by the Company. 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 affected loans; and the value of collateral. Inherent loss factors based upon environmental and other economic 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 at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the 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 3 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 26, 2017.

 

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. United Community Bancorp, referred to as the Company, accounts for income taxes under the provisions of ASC 275-10-50-8 to account for uncertainty in income taxes. The Company had no unrecognized tax benefits as of December 31, 2017 and June 30, 2017. The Company recognized no interest and penalties on the underpayment of income taxes during the three month periods ended December 31, 2017 and 2016, and had no accrued interest and penalties on the balance sheet as of December 31, 2017 and June 30, 2017. The Company has no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next fiscal year. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years ended on or before June 30, 2013.

 

 

Comparison of Financial Condition at December 31, 2017 and June 30, 2017

 

Balance Sheet Analysis

 

Total assets were $546.2 million at December 31, 2017, compared to $536.9 million at June 30, 2017. Total assets increased during the period primarily due to loan growth of $9.1 million and an increase in cash and cash equivalents of $6.4 million. The increase was partially offset by a $4.6 million decrease in investment securities.

 

In addition to the loan growth achieved during the six months ended December 31, 2017, the Company had approximately $12.0 million in undisbursed construction loans as of December 31, 2017. While these were not on the Company’s balance sheet as of December 31, 2017 and there can be no assurance of disbursement in the future, the loans have closed and management expects the majority of these committed funds to be disbursed.

 

Total liabilities were $474.3 million at December 31, 2017, compared to $465.6 million at June 30, 2017. The increase was primarily due to an $8.4 million increase in deposits during the period.

 

Stockholders’ equity totaled $72.0 million as of December 31, 2017, which represented an increase of $669,000 when compared to June 30, 2017. The increase was primarily due to net income of $1.4 million, partially offset by dividends declared during the period totaling $790,000 and a $277,000 decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income was the result of increasing market interest rates during the period. In connection with the preparation of the financial statements for the quarter ended December 31, 2017, management evaluated the credit quality of the investment portfolio and believes all unrealized losses to be temporary. Management has the intent and the ability to hold these securities until the value recovers or until maturity.

 

Loans. At December 31, 2017, one- to four- family residential loans totaled $146.0 million, or 49.6% of total gross loans at December 31, 2017, compared to $144.3 million, or 50.5% of total gross loans, at June 30, 2017.

 

Multi-family and nonresidential real estate loans totaled $94.8 million, or 32.2% of total loans at December 31, 2017, compared to $90.2 million, or 31.6% of total loans, at June 30, 2017.

 

Construction loans totaled $5.0 million, or 1.7% of total loans, at December 31, 2017, compared to $5.1 million, or 1.8% of total loans, at June 30, 2017.

 

Land loans totaled $4.5 million, or 1.5% of total loans at December 31, 2017, compared to $3.0 million, or 1.1% of total loans at June 30, 2017.

 

Commercial business loans totaled $6.2 million, or 2.1% of total loans at December 31, 2017, compared to $5.4 million, or 1.9% of total loans at June 30, 2017.

 

Agricultural loans totaled $3.8 million, or 1.3% of total loans at December 31, 2017, compared to $3.9 million, or 1.3% of total loans at June 30, 2017.

 

 

Consumer loans totaled $34.0 million, or 11.6% of total loans at December 31, 2017, compared to $33.6 million or 11.8% of total loans at June 30, 2017.

 

		At December 31, 2017								At June 30, 2017
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Residential real estate:
One- to four-family		$	146,027				49.6	%		$	144,334				50.5	%
Multi-family			18,762				6.4				15,401				5.4
Construction			5,040				1.7				5,145				1.8
Nonresidential real estate			76,068				25.8				74,791				26.2
Land			4,514				1.5				3,026				1.1
Commercial business			6,196				2.1				5,383				1.9
Agricultural			3,846				1.3				3,874				1.3
Consumer:
Home equity			28,934				9.9				28,992				10.2
Auto			2,392				0.8				2,208				0.8
Share loans			882				0.3				945				0.3
Other			1,829				0.6				1,488				0.5
Total consumer loans			34,037				11.6				33,633				11.8
Total loans		$	294,490				100.0	%		$	285,587				100.0	%
Less (plus):
Deferred loan costs, net			(1,247	)							(1,184	)
Allowance for loan losses			4,174								4,294
Loans, net		$	291,563							$	282,477

 

The following table sets forth the composition of our loan portfolio at the dates indicated.

 

Loan Maturity

 

The following table sets forth certain information at December 31, 2017 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments, which can significantly shorten the average life of the loan and may cause our actual repayment experience to differ from the contractual requirements shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less.

 

		Less Than One Year				More Than One Year to Five Years				More Than Five Years				Total Loans
		(in thousands)
One- to four-family residential real estate		$	8,543			$	34,093			$	103,391			$	146,027
Multi-family real estate			1,605				2,419				14,738				18,762
Construction			632				43				4,365				5,040
Nonresidential real estate			4,252				18,532				53,284				76,068
Land			1,879				1,574				1,061				4,514
Commercial			1,614				2,679				1,903				6,196
Agricultural			558				1,876				1,412				3,846
Consumer			1,798				3,988				28,251				34,037
Total		$	20,881			$	65,204			$	208,405			$	294,490

 

 

The following table sets forth the dollar amount of all loans at December 31, 2017 due after December 31, 2018 that have either fixed interest rates or adjustable interest rates. The amounts shown below exclude unearned interest on consumer loans and deferred loan fees.

 

		Fixed Rates				Floating or Adjustable Rates				Total
		(in thousands)
One- to four-family residential real estate		$	39,326			$	98,158			$	137,484
Multi-family real estate			6,783				10,374				17,157
Construction			2,083				2,325				4,408
Nonresidential real estate			17,310				54,506				71,816
Land			92				2,543				2,635
Commercial			3,120				1,462				4,582
Agricultural			1,686				1,602				3,288
Consumer			2,801				29,438				32,239
Total		$	73,201			$	200,408			$	273,609

 

Loan Activity

 

The following table shows loan origination, repayment and sale activity during the periods indicated.

 

		Three Months Ended December 31,								Six Months Ended December 31,
		2017				2016				2017				2016
		(in thousands)								(in thousands)
Total loans at beginning of period		$	290,415			$	276,492			$	285,587			$	270,910
Loans originated (1):
One- to four-family residential real estate			9,040				15,297				20,070				31,047
Multi-family residential real estate			4,162				--				4,699				8,645
Construction			217				550				773				1,439
Nonresidential real estate			1,818				4,472				4,703				9,117
Land			1,218				96				1,844				948
Commercial and agricultural			502				553				2,164				1,106
Consumer			2,003				1,691				4,622				4,494
Total loans originated			18,960				22,659				38,875				56,796
Deduct:
Loan principal repayments			12,564				12,133				24,737				33,861
Loans originated for sale			2,321				9,289				5,235				16,116
Net loan activity			4,075				1,237				8,903				6,819
Total loans at end of period		$	294,490			$	277,729			$	294,490			$	277,729

 

(1)	Includes loan renewals, loan refinancings and restructured loans.

 

 

Results of Operations for the Three and Six Months Ended December 31, 2017 and 2016

 

Overview. Net income totaled $497,000 for the quarter ended December 31, 2017, which represented a decrease of $243,000, or 32.8%, when compared to the quarter ended December 31, 2016.

 

The Company’s net income for the three and six-month periods ended December 31, 2017 was impacted negatively by a one-time adjustment to the net deferred tax asset in the amount of $683,000 due to the effect of the tax law changes established by the Tax Cuts and Jobs Act (the “Act”), which was signed into law by the President on December 22, 2017. The Act reduced the federal corporate tax rate to 21%. This change required the Company to revalue its net deferred tax asset, which represents corporate tax benefits anticipated to be realized in the future. The reduction in the federal corporate tax rate reduces the tax benefits of the net deferred tax asset. While the one-time adjustment caused a reduction in after-tax net income for the three and six-month periods ended December 31, 2017, the reduction of the corporate income tax rate from 34% to 21% is expected to be favorable to the Company in future periods.

 

Net Interest Income. The following table summarizes changes in interest income and interest expense for the three months ended December 31, 2017 and 2016.

 

		Three Months Ended December 31,												Six Months Ended December 31,
		2017				2016				% Change				2017				2016				% Change
		(Dollars in thousands)
Interest income:
Loans		$	3,158			$	2,894				9.1	%		$	6,349			$	5,828				8.9	%
Investment and mortgage backed securities			1,133				1,026				10.4				2,242				2,007				11.7
Other interest-earning assets			65				28				132.1				130				56				132.1
Total interest income			4,356				3,948				10.3				8,721				7,891				10.5
Interest expense:
NOW and money market deposit accounts			150				84				78.6	%			371				233				59.2	%
Passbook accounts			86				74				16.2				172				150				14.7
Certificates of deposit			296				336				(11.9	)			592				679				(12.8	)
Total interest-bearing deposits			532				494				7.7				1,135				1,062				6.9
FHLB advances			49				56				(12.5	)			99				113				(12.4	)
Total interest expense			581				550				5.6				1,234				1,175				5.0
Net interest income		$	3,775			$	3,398				11.1			$	7,487				6,716				11.5

 

Net interest income totaled $3.8 million for the quarter ended December 31, 2017, which represents an increase of $377,000, or 11.1%, when compared to the quarter ended December 31, 2016. The growth in the Company’s core business was the result of an increase in interest income of $408,000 partially offset by an increase in interest expense of $31,000. Interest income increased due to a $14.7 million increase in the average balance of loans, a $1.9 million increase in the average balance of investments, an increase in the average rate earned on loans from 4.23% in the prior year quarter to 4.38% in the current year quarter, and an increase in the average rate earned on investment securities from 2.22% in the prior year quarter to 2.43% in the current year quarter. The increase in loan balances is primarily the result of the execution of our continued controlled growth strategy in mortgage and commercial lending. Interest expense increased due to a $19.9 million increase in the average balance of deposits and an increase in the average rate paid on deposits from 0.45% in the prior year quarter to 0.46% in the current year quarter.

 

Net interest income totaled $7.5 million for the six months ended December 31, 2017, which represents an increase of $771,000, or 11.5%, when compared to the prior year period. The growth in the Company’s core business was due to an $830,000 increase in interest income, partially offset by a $59,000 increase in interest expense. Interest income increased primarily due to a $14.7 million increase in the average balance of loans, an increase in the average rate earned on loans from 4.29% in the prior year period to 4.43% in the current year period, and an increase in the average rate earned on investment securities from 2.14% in the prior year period to 2.40% in the current year period. Interest expense increased primarily as a result of a $15.5 million increase in the average balance of deposits and an increase in the average rate paid on deposits from 0.48% in the prior year period to 0.49% in the current year period.

 

 

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, 2017 and 2016. 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,
		2017												2016												2017												2016
						Interest												Interest												Interest												Interest
		Average				and				Yield/				Average				and				Yield/				Average				and				Yield/				Average				and				Yield/
		Balance				Dividends				Cost				Balance				Dividends				Cost				Balance				Dividends				Cost				Balance				Dividends				Cost
Assets:		(Dollars in thousands)
Interest-earning assets:
Loans		$	288,550			$	3,158				4.38	%		$	273,864			$	2,894				4.23	%		$	286,602			$	6,349				4.43	%		$	271,895			$	5,828				4.29	%
Investment and mortgage backed securities			186,499				1,133				2.43				184,640				1,026				2.22				187,145				2,242				2.40				187,357				2,007				2.14
Other interest-earning assets			35,555				65				0.73				30,130				28				0.37				32,210				130				0.81				31,123				56				0.36
			510,604				4,356				3.41				488,634				3,948				3.23				505,957				8,721				3.45				490,375				7,891				3.22
Noninterest-earning assets			36,988												38,563												37,109												37,993
Total assets		$	547,592											$	527,197											$	543,066											$	528,368
Liabilities and stockholders’ equity:
Interest-bearing liabilities:
NOW and money market deposit accounts (1)			215,723				150				0.28				189,638				84				0.18				210,534				371				0.35				188,127				233				0.25
Passbook accounts (1)			126,847				86				0.27				114,699				74				0.26				126,455				172				0.27				115,368				150				0.26
Certificates of deposit (1)			120,693				296				0.98				138,984				336				0.97				121,909				592				0.97				139,866				679				0.97
Total interest-bearing deposits			463,263				532				0.46				443,321				494				0.45				458,898				1,135				0.49				443,361				1,062				0.48
FHLB advances			8,833				49				2.22				10,750				56				2.08				8,833				99				2.24				11,286				113				2.00
Total interest-bearing liabilities			472,096				581				0.49				454,071				550				0.48				467,731				1,234				0.53				454,647				1,175				0.52
Noninterest bearing liabilities, commitments and contingencies			3,248												3,272												3,314												3,557
Total liabilities, commitments and contingencies			475,344												457,343												471,045												428,204
Stockholders’ equity			72,248												69,854												72,021												70,164
Total liabilities and  stockholders’ equity		$	547,592											$	527,197											$	543,066											$	528,368
Net interest income						$	3,775											$	3,398											$	7,487											$	6,716
Interest rate spread											2.92	%											2.75	%											2.92	%											2.70	%
Net interest margin (annualized)											2.96	%											2.78	%											2.96	%											2.74	%
Average interest-earning assets to average interest-bearing liabilities											108.16	%											107.61	%											108.17	%											107.86	%

 

 

Provision for Loan Losses. The provision for loan losses was $9,000 for the quarter ended December 31, 2017, which represents a decrease of $6,000 compared to the quarter ended December 31, 2016. The provision for loan losses was $23,000 for the six months ended December 31, 2017, which represents a decrease of $9,000 compared to the prior year period.

 

Nonperforming assets as a percentage of total assets decreased from 0.56% at June 30, 2017 to 0.19% at December 31, 2017. Nonperforming loans as a percentage of total loans decreased from 1.02% at June 30, 2017 to 0.36% at December 31, 2017. The Company remains focused on improving asset quality and continues to review all available options to decrease nonperforming assets.

 

Noninterest Income. The following table summarizes other income for the three and six months ended December 31, 2017 and 2016.

 

		Three Months Ended												Six Months Ended
		December 31,												December 31,
		2017				2016				% Change				2017				2016				% Change
		(Dollars in thousands)
Service charges		$	834			$	794				5.0	%		$	1,626			$	1,583				2.7	%
Gain on sale of loans			57				199				(71.4	)			154				419				(63.2	)
Gain on sale of investments			--				--				--				9				79				(88.6	)
Gain on sale of other real estate owned			56				--				100.0				72				--				100.0
Loss on sale of fixed assets			(31	)			--				(100.0	)			(31	)			--				(100.0	)
Income from Bank Owned Life Insurance			114				165				(30.9	)			230				285				(19.3	)
Other			107				119				(10.1	)			177				219				(19.2	)
Total		$	1,137			$	1,277				(11.0	)		$	2,237			$	2,585				(13.5	)

 

Noninterest income totaled $1.1 million for the quarter ended December 31, 2017, which represents a decrease of $140,000, or 11.0%, when compared to the prior year quarter. The decrease was primarily due to a $142,000 decrease in gain on the sale of mortgage loans due to a decrease in sales volume and the receipt of Bank-Owned Life Insurance proceeds in the prior year quarter due to the death of a former director, which resulted in a gain of $45,000, with no such corresponding event in the current year quarter. The decrease was partially offset by a $56,000 gain on the sale of other real estate owned and a $40,000 increase in service charge income on deposit accounts.

 

Noninterest income totaled $2.2 million for the six months ended December 31, 2017, which represents a decrease of $348,000, or 13.5%, compared to the prior year period. The decrease was primarily due to a $265,000 decrease in gain on the sale of mortgage loans, resulting from a decrease in sales volume and the aforementioned receipt of Bank-Owned Life Insurance proceeds in the prior year period due to the death of a former director, which resulted in a gain of $45,000, with no such corresponding event in the current year quarter. The decrease was partially offset by a $72,000 gain on the sale of other real estate owned and a $43,000 increase in service charge income on deposit accounts.

 

 

Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes for the three and six months ended December 31, 2017 and 2016.

 

		Three Months Ended												Six Months Ended
		December 31,												December 31,
		2017				2016				% Change				2017				2016				% Change
		(Dollars in thousands)
Compensation and employee benefits		$	2,175			$	2,307				(5.7	%)		$	4,380			$	4,487				(2.4	%)
Premises and occupancy expense			260				258				0.8				555				528				5.1
Deposit insurance premium			40				11				263.6				83				82				1.2
Advertising expense			109				106				2.8				214				212				0.9
Data processing expense			464				433				7.2				934				911				2.5
Intangible amortization			30				30				0.0				60				60				0.0
Professional fees			91				174				(47.7	)			366				424				(13.7	)
Other operating expenses			323				343				(5.8	)			655				620				5.6
Total		$	3,492			$	3,662				(4.6	)		$	7,247			$	7,324				(1.1	)

  

Noninterest expense totaled $3.5 million for the quarter ended December 31, 2017, which represents a decrease of $170,000, or 4.6%, when compared to the prior year quarter. The decrease was primarily due to a decrease in compensation expense of $132,000, which was primarily the result of an accrual of a $196,000 separation payment made in connection with the departure of the Company’s former Chief Financial Officer in the prior year quarter with no such corresponding event in the current year quarter. The decrease in noninterest expense is also partially due to an $83,000 decrease in professional fees. These decreases were partially offset by a $31,000 increase in data processing expense and a $29,000 increase in FDIC insurance expense, which was the result of a one-time favorable adjustment made in the prior year quarter due to a change in the formula.

 

Noninterest expense totaled $7.2 million for the six months ended December 31, 2017, which represented a decrease of $77,000, or 1.1%, compared to the prior year period. The decrease in noninterest expense was primarily the result of a $107,000 decrease in compensation expense and a $58,000 decrease in professional fees. The decrease in compensation expense is primarily the result of an accrual of a $196,000 separation payment made in connection with the departure of the Company’s former Chief Financial Officer in the prior year period, with no such corresponding event in the current year period.

 

Income Taxes. The provision for income taxes totaled $914,000 for the quarter ended December 31, 2017, which represents an increase of $656,000 when compared to the prior year quarter. The increase was primarily due to the aforementioned change in the corporate tax code, which resulted in a one-time adjustment of $683,000 to reduce the net deferred tax asset.

 

The provision for income taxes totaled $1.1 million for the six months ended December 31, 2017, which represented an increase of $672,000 when compared to the prior year period. The increase was primarily due to the aforementioned one-time adjustment of $683,000 to the net deferred tax asset.

 

Analysis of Nonperforming Assets. We consider foreclosed real estate, repossessed assets and nonaccrual loans, including nonaccrual TDR loans, to be nonperforming assets.

 

All of the TDRs at December 31, 2017 represented loan relationships with long-time borrowers. In measuring impairment, management considered the results of independent property appraisals, together with estimated selling expenses, and/or detailed cash flow analyses. At December 31, 2017, 13 loans were considered to be TDRs (with a recorded investment of $1.3 million) of which three loans (with a recorded investment of $198,000) were included in nonperforming assets.

 

 

The following table provides information with respect to our nonperforming assets at the dates indicated.

 

		At December 31, 2017				At June 30, 2017
(Dollars in thousands)
Nonaccrual loans:
One- to four-family residential real estate		$	270			$	612
Nonresidential real estate and land			381				594
Consumer			213				370
Total nonaccrual loans			864				1,576
One- to four-family residential real estate			198				213
Nonresidential real estate and land			--				1,136
Total nonaccrual restructured loans			198				1,349
Total nonperforming loans			1,062				2,925
Real estate owned			--				93
Total nonperforming assets		$	1,062			$	3,018
Accruing restructured loans			1,065				1,297
Accruing restructured loans and nonperforming assets		$	2,127			$	4,315
Total nonperforming loans to total loans			0.36	%			1.02	%
Total nonperforming loans to total assets			0.19				0.54
Total nonperforming assets to total assets			0.19				0.56

 

Interest income that would have been recorded for the three and six months ended December 31, 2017 had nonaccruing loans been current according to their original terms was $25,000, and $84,000, respectively. Interest recognized on the cash basis with regard to nonaccrual restructured loans was $0 for both the three and six month periods ended December 31, 2017.

 

Nonperforming assets as a percentage of total assets decreased to 0.19% at December 31, 2017, from 0.53% at December 31, 2016, and from 0.56% at June 30, 2017. Nonperforming loans as a percentage of total loans decreased to 0.36% at December 31, 2017, from 0.96% at December 31, 2016, and from 1.02% at June 30, 2017. The Company remains focused on improving asset quality and continues to review all available options to decrease nonperforming assets. Beginning with the disclosure in the Company’s Form 10-Q for the quarter ended March 31, 2011, the Company included “Loan Relationship” narratives regarding its five largest nonaccrual (nonperforming) loans and loans having the five largest charge-offs, all of which were commercial real estate loans. As of March 31, 2011, the amount of all nonaccrual (nonperforming) loans totaled $19.5 million, and the amount of all accruing TDR loans totaled $7.0 million. As of December 31, 2017, the amount of all nonaccrual (nonperforming) loans decreased to $1.0 million and the amount of all accruing TDR loans decreased to $1.1 million.

 

Because of the decrease in nonaccrual (nonperforming) loans and accruing TDR loans over the last five years, the Loan Relationship narratives since December 31, 2015 have focused on commercial Loan Relationships with the following loans:

 

●

The largest nonaccruing commercial real estate loans (including nonaccrual TDRs) having a carrying value of at least $250,000, plus any related commercial or retail loans;

 

●

The largest commercial real estate loan charge-offs having a charge-off of at least $250,000 that are related to commercial real estate loans in a Loan Relationship, whether accruing or not, plus any related commercial or retail loans; and

 

●

The largest accruing TDR commercial loans having a carrying value of at least $250,000 plus any related commercial or retail loans.

 

If a commercial loan falls into one of the three categories listed above, then a narrative is composed for that commercial loan and any related commercial or retail loans.

 

At December 31, 2017:

 

●

The largest commercial real estate nonaccrual loan having a carrying value of at least $250,000 is related to the loan in Loan Relationship “R”. There is a total of one loan in this Loan relationship.

 

 

●

The largest commercial real estate loan charge-offs of at least $250,000 are related to loans in Loan Relationships F, H, and R. There are a total of six loans in these three Loan Relationships.

 

●

There are no accruing TDRs having a carrying value of at least $250,000.

 

As discussed below, some of the Loan Relationships include loans that were restructured using the “Note A/B split note” strategy for which the amount of the Note B loan has been charged-off, with the borrower remaining responsible for that charged-off amount unless otherwise agreed to by the Bank. For purposes of the narratives, loans that have a carrying value are identified by a Loan number within each Loan Relationship, such as “Loan A-1” and “Loan A-2”. However, the Note B loans are identified as a “Note B loan” because these loans have no carrying value because they have been charged-off.

 

Management monitors the performance of all 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. 

 

●

Loan Relationship F. At December 31, 2017 and June 30, 2017, Loan Relationship F was comprised of two loans, a Note A loan (Loan F-1) and a Note B loan, having an aggregate carrying value of $397,000 and $402,000, respectively. These loans are secured by a multi-family residential real estate property and a single-family real estate property. The borrower is a corporate entity, with three principals, each of whom is a co-borrower of the loan. Loan F-1 is not included in any nonaccrual table because in the September 30, 2011 quarter, Loan F-1 was put on accrual because of sufficient payment history. At December 31, 2017 and June 30, 2017, Loan F-1 was classified as “Multi-family real estate, Watch” in the “Credit Risk Profile by Internally Assigned Grade” table. As of June 30, 2014, Loan F-1 was no longer reported as a TDR, or classified as substandard, because the loan was current and there were more than 12 consecutive monthly payments made on time.  Appraisals from 2015, totaling $775,000, obtained for the properties securing the loan indicated that the loan to value ratio of the loan complied with the Bank’s underwriting standards, and the cash flow analysis performed on the loan from updated financial information indicated that the debt service coverage ratio complied with the Bank’s underwriting standards. The annual cash flow analysis performed from the 2016 tax returns on this property, showed that the debt service coverage ratio was below 1.00x. However, Loan F-1 was performing in accordance with its terms at December 31, 2017.  Also, the loans mature in December 2018.  A more detailed history of Loan Relationship F follows.

 

The original loan was initially restructured using the Note A/B split note strategy in June 2010 based on an 80% loan-to-value ratio derived from an April 2010 independent appraisal. The first loan (Note A loan) had a balance of $631,000 with a market interest rate of 5.50%, for a 25-year term, based on a 3/1 ARM. This loan was put on nonaccrual and classified as substandard. The second loan (a Note B loan) had a balance of $216,800 and there was a specific reserve established for the entire amount of the loan. The borrower was a corporate entity, with two principals, each of whom individually was a co-borrower of the loans. At December 31, 2010, the first loan was 160 days delinquent. The delinquency was a result of personal problems between the borrowers affecting their ability to manage the multi-family residential real estate and the single-family real estate. The personal problems between the borrowers also resulted in the borrowers’ inability to make the required personal cash infusions. In the latter part of 2010 and into early 2011, one of the borrowers effectively took control of the multi-family residential real estate and the single-family real estate, and brought the business current with respect to property taxes, deposit refunds to former tenants, and made required monthly loan payments in January and February 2011. Other than the January and February 2011 loan payments, the borrowers were unable to make payments to bring the loan current. Based upon those developments, management completed a detailed analysis of the total lending relationship with the borrowers. As a result of this analysis, these loans were again restructured, using the Note A/B split note strategy in March 2011. The terms of the first loan (a Note A loan) were calculated using the borrowers’ then current financial information to yield a payment having a debt service coverage ratio of approximately 1.5x, which was more stringent than the Bank’s normal underwriting standards. A restructuring fee of $7,000 was charged and included in the second loan (a Note B loan) at March 31, 2011. After the restructuring in March 2011, the Note A loan had a balance of $475,000, was put on nonaccrual, classified as substandard and reported as a TDR. The Note B loan had a balance of $405,000. The full amount of the Note B loan was charged-off in the quarter ended March 31, 2011, inclusive of the previous specific reserve of $216,800 from December 31, 2010.

 

 

A two-year balloon payment was due in March 31, 2013 on the loans unless the borrower refinanced the loans to a market rate loan at that time. During the quarter ended December 31, 2012, as a result of the continued personal problems of the co-borrowers, the two loans were modified with one of the borrowers who had taken control of the two properties in early 2011. The other borrower relinquished all of its interest in the two properties. However, in addition to the one borrower retained on the loan, two other borrowers were added to the loans to provide managerial strength to the relationship and increase the property’s income potential. The Bank had been reviewing the cash flow of the property on a monthly basis and determined that the cash flows had improved due to the borrowers’ enhanced managerial ability. An independent appraisal was ordered to provide the “as is” value of the properties. The Bank obtained the appraisal in December 2012, and the appraised value of the properties had decreased to $730,000 from $774,000 in February 2011. During the quarter ended December 31, 2012, the two loans were modified, again using the Note A/B split note strategy, with both loans having three year balloon payments. The Note A loan was modified to a market interest rate of 5.50%, with no increase in the principal balance ($453,000). The term of the loan was also reduced to 324 months from the remaining term of 339 months. Even with the higher market interest rate and the shorter term of the loan, the debt service coverage ratio was above 1.20x, which complied with the Bank’s current loan underwriting standards. This loan remained on accrual (because of its sufficient payment history since the September 30, 2011 quarter), classified as substandard, and reported as a TDR. There was no increase in the principal balance ($405,000) of the Note B loan from that loan’s prior restructuring in March 2011, and therefore, the charge-off amount ($405,000) remained the same as in March 2011. However, the interest rate was reduced to 0% as the loan had been charged-off.

 

During the December 2015 quarter, the balloon payment from the December 2012 renewal became due. Due to the upcoming balloon payment, the Bank ordered new appraisals on the two properties. The Bank received the appraisals in October 2015, and the appraised value of the properties increased to $775,000 from $730,000 in December 2012. The Bank also reviewed the cash flow from updated financials of the borrowers and co-borrowers. After this review and based on the increase in value of the properties, the Bank extended the two loans, again using the Note A/B split note strategy, with both loans having three year balloon payments. The Note A Loan was renewed at the market interest rate of 5.50%, with no increase in the principal balance ($421,000). The term of the loan was renewed at 288 months, the remaining term of the loan. This loan remained on accrual (because of its sufficient payment history) and classified as watch. There was no increase in the principal balance ($405,000) of the Note B loan from that loan’s prior restructuring in December 2012, and therefore, the charge-off amount ($405,000) remained the same as in December 2012. The interest rate remained at 0% as the loan had been charged-off. 

 

●

Loan Relationship H. At December 31, 2017 and June 30, 2017, Loan Relationship H was comprised of three loans having an aggregate carrying value of $839,000 and $860,000, respectively. At December 31, 2017 and June 30, 2017, two of the loans, a Note A loan (Loan H-1) and a Note B loan, had an aggregate carrying value of $673,000 and $681,000, respectively. Loan H-1 is secured by a first lien on an 18-unit apartment complex, a single-family rental dwelling, a 6.3 acre tract of land, and a second lien on a single-family owner occupied dwelling on 11.36 acres. The borrower is a limited liability company and the two co-borrowers are the principals of the limited liability company. Loan H-1 is not included in any nonaccrual table because in the June 30, 2013 quarter, Loan H-1 was put on accrual because of sufficient payment history. At December 31, 2017 and June 30, 2017, Loan H-1 was classified as “Multi-family residential real estate, Watch” in the “Credit Risk Profile by Internally Assigned Grade” table. As of June 30, 2014, Loan H-1 was no longer reported as a TDR loan because the loan was current and there were more than 12 consecutive market rate monthly payments made on time. Appraisals from 2014 and 2015 indicated that the loan to value was adequate and the cash flows from updated financial information of the properties securing the loan indicated that the debt service coverage ratio was adequate. The annual cash flow analysis from the 2016 tax returns on the rental properties showed that the debt service coverage ratio was 1.13x.

  

During the quarter ended June 30, 2013, the Bank refinanced the principal residence of the co-borrowers (the single-family owner occupied dwelling on 11.36 acres mentioned above). This loan, Loan H-2, had an original balance of $280,000 at a market rate of interest for a ten year term. At December 31, 2017 and June 30, 2017, the balance of Loan H-2 was $165,000 and $179,000, respectively. Loan H-2 is secured by a first lien on the single-family owner occupied dwelling on 11.36 acres mentioned above. The borrowers are a husband and wife who are the principals in the limited liability company mentioned above. At December 31, 2017 and June 30, 2017, Loan H-2 was classified as “One- to Four-Family Owner-Occupied Mortgage, Watch” in the “Credit Risk Profile by Internally Assigned Grade” table.

 

 

At December 31, 2017, Loan H-1 and Loan H-2 were performing in accordance with their terms. Also, Loan H-1 and the Note B loan mature in September 2018. A more detailed history of the Note A loan (Loan H-1) and the Note B loan follows.

 

During the quarter ended December 31, 2008, the Note A loan (Loan H-1) and the Note B loan were comprised of one loan with a carrying value of $1.3 million and classified as special mention. In the quarter ended June 30, 2009, the co-borrowers approached the Bank and advised that the only co-borrower who was employed had experienced a substantial salary reduction. The borrowers requested an interest rate reduction to 3% and interest only payments for three years. Independent appraisals were ordered and received and reflected that the properties on which the Bank had a first lien position had an aggregate value of $1.0 million. The loan was classified as substandard, placed on nonaccrual, and reported as a TDR. Due to the reduced interest rate, a specific valuation of $123,000 was established for the loan through a charge-off to the general allowance. Under the loan’s modified terms, the interest rate was to reset to 5.75% on June 1, 2012. In June 2012, the co-borrowers approached the Bank and advised that the properties’ cash flow could not service the increase in interest rate. Independent appraisals were ordered and received in June 2012 and reflected that the properties on which the Bank had a first lien position had decreased to $978,000 from $1.0 million in June 2009. As a result, the Bank recorded a charge-off of $481,000, (inclusive of the $123,000 specific allocation established) to reflect the carrying value of the loan at $744,000. The one loan performed in accordance with its restructured terms until the September 30, 2012 quarter, when the co-borrowers again approached the Bank and advised that the properties’ cash flow could not service the loan. Therefore, the one loan was restructured using the Note A/B split note strategy. The Note A loan (Loan H-1) was for $748,000, with a market rate of interest of 5.00%, for a 30-year term and a three year balloon payment. The carrying value of this loan was placed on nonaccrual, classified as substandard, and reported as a TDR. The Note B loan was for $515,000 (inclusive of the $481,000 that was charged-off in the June 30, 2012 quarter) and was charged-off. The interest rate was reduced to 0% as the loan had been charged-off.

 

During the September 2015 quarter, the balloon payment from the September 2012 renewal became due. As a result of the upcoming balloon payment, the Bank ordered new appraisals on the 18-unit apartment complex and the single-family rental dwelling. The Bank received new appraisals on the 18 unit apartment complex and the single-family rental dwelling in September 2015. In addition, the Bank used the June 2014 value of the 6.3 acre tract of land. The total appraised value of the three properties increased to $1,048,000 as compared to the $978,000 total appraised value in June 2012. The Bank also reviewed the cash flow from updated financials of the borrower and co-borrowers. After this review and based on the increase in value of the properties, the Bank extended the two loans, again using the Note A/B split note strategy, with both loans having three year balloon payments. The Note A loan (Loan H-1) was renewed at the market interest rate of 5.00%, using a 1/1 ARM, with a 5% floor rate, and with no increase in the principal balance ($710,000). The term of the loan was renewed at 324 months. This loan was put on accrual (because of its sufficient payment history) and classified as watch. Also, as stated above, the loan was not reported as a TDR. There was no increase in the principal balance ($515,000) of the Note B loan from that loan’s prior restructuring in September 2012, and therefore, the charge-off amount ($515,000) remained the same as in September 2012. The interest rate remained at 0% as the loan had been charged-off. 

 

●

Loan Relationship M. At December 31, 2017 and June 30, 2017, Loan Relationship M was comprised of two loans having an aggregate carrying value of $0 and $601,000 respectfully. At December 31, 2017 and June 30, 2017, Loan M-1 had an aggregate carrying value of $0 and $176,000 respectfully. At December 31, 2017 and June 30, 2017, Loan M-2 had an aggregate carrying value of $0 and $425,000 respectfully. During the December 31, 2017 quarter, the Bank sold, for cash, the two promissory notes to an investor, incurring an additional charge-off of $136,500.  Originally Loans M-1 and M-2 were both secured by the two golf courses, including a club house on each, in the greater Cincinnati area, an approximately 25 acre tract of land, and a second mortgage on the principal residence of two of the individual co-borrowers. The borrower of Loans M-1 and M-2 is a corporate entity, each of whose principals, a husband and wife, has individually signed as a co-borrower, as had, originally, the father and stepmother of one of the co-borrowers. At December 31, 2017, Loans M-1 and M-2 are not included in the table in “Nonaccrual, Nonresidential Real Estate” and classified as “Nonresidential Real Estate, Substandard” in the “Credit Risk Profile by Internally Assigned Grade” table.  At June 30, 2017, Loans M-1 and M-2 are included in the table in “Nonaccrual, Nonresidential Real Estate” and classified as “Nonresidential Real Estate, Substandard” in the “Credit Risk Profile by Internally Assigned Grade” table. During the June 30, 2015 quarter, the Bank entered into a forbearance agreement with the borrower and co-borrowers pursuant to which full principal, interest and escrow payments will be made for the months of May through October of each year beginning in 2015. The maturity date for these loans is now October 1, 2018. Also, subsequent to the June 30, 2016 quarter, the Bank entered into an amended forbearance agreement with the borrower and co-borrowers, reflecting the reduced principal balances for Loans M-1 and M-2. The maturity date for these loans remained at October 1, 2018. Loans M-1 and M-2 were not performing in accordance with their restructured terms at September 30, 2017, and, subsequent to the quarter ending September 30, 2017, the bank initiated foreclosure proceedings. As stated above, during the December 31, 2017 quarter, the Bank sold, for cash, the two promissory notes to an investor, incurring an additional charge-off of $136,500, and the aggregate carrying values of Loan M-1 and Loan M-2 are both $.00. A more detailed history of Loan Relationship M follows.

 

 

Loan M-1 originated in December 2007 and Loan M-2 originated in July 2009, each with a 20 year term. Under each loan’s terms, payments were due from April through December of each year; no payments were required in January, February and March of each year. Due to reduced cash flows resulting from inclement weather, in December 2013 the co-borrowers advised the Bank that they would pay the amounts due for November and December 2013 in February and March 2014, respectively. Due to the continuation of the severe winter weather and resultant reduced cash flows, the borrowers were unable to make the November and December 2013 payments that the borrowers had stated would be paid in February and March 2014, and were unable to make the real estate tax payment due during the period ended March 31, 2014. As a result of the failure to make the November and December 2013 payments and the borrowers’ failure to pay real estate taxes, the Bank had both properties appraised. The appraisals were received in March 2014 and reflected an aggregate decrease in value of approximately $500,000 as compared to their March 2009 appraised value. Based on the new appraised value, there was no known loss to the Bank. The Bank also performed an impairment analysis on each loan in March 2014 resulting in an aggregate impairment of $41,000. In March 2014, the Bank and the co-borrowers agreed to a revised repayment plan to bring all payments then due, and real estate taxes due, but not paid during the period ended March 31, 2014, current by July 31, 2014. At June 30, 2014, an impairment analysis was performed. The impairment analysis showed that no further impairment was needed on either Loan M-1 or Loan M-2. 

 

At September 30, 2014, the borrowers had successfully complied with the revised payment plan agreement from March 31, 2014 and both loans were current. Additionally, the real estate taxes due during the March 31, 2014 quarter were paid. However, at September 30, 2014, the real estate taxes that were due in July 2014 had not been paid. At December 31, 2014, due to cash flow issues caused by inclement weather during the quarter, the real estate taxes that were due in July 2014 were still not paid, and the loan payments due for October, November, and December 2014 were not paid. The Bank met with the husband and wife co-borrowers during the December 31, 2014 quarter. The co-borrowers advised the Bank that they would not be able to make the past due payments and the past due real estate taxes because of the inclement weather during the quarter until the golf season opened in the spring of 2015. Because of these developments, the Bank performed another impairment analysis of these two loans. While the appraisals of the properties showed no need for an impairment, the Bank further analyzed the cash flow of the golf courses. After this analysis, the Bank determined that an additional impairment of $466,000 was needed for this loan relationship, and an additional charge-off of $233,000 was established for each of the two loans in this loan relationship, through a charge-off to the general allowance. During the quarter ended March 31, 2015, the Bank entered into further discussions with the co-borrowers about another revised payment plan. As stated above, during the June 30, 2015 quarter, the Bank entered into a forbearance agreement with the borrower and co-borrowers. An impairment analysis was performed for the quarter ended June 30, 2015. The impairment analysis showed that no further impairment was needed on either Loan M-1 or M-2. For the quarter ended December 31, 2015, because there was still the partial escrow payment due for the October 2015 escrow payment, the Bank performed another impairment analysis. Even though the partial escrow payment was paid subsequent to the December 31, 2015 quarter and the appraisals of the properties indicated no further impairment was needed, the Bank reviewed the observable market price of the properties and determined that an additional impairment of $250,000 was needed for this loan relationship, and an additional charge-off of $125,000 was established for each of the two loans in this loan relationship through a charge-off to the general allowance.

 

During the March 31, 2016 quarter, because there had not been an updated appraisal since the March 2014 quarter, the Bank ordered and received new appraisals on all of the collateral securing this Loan Relationship. The new appraisal on one of the golf courses decreased to $1.1 million from $1.2 million. The new appraisal on the other golf course decreased to $1.4 million from $1.6 million. The new appraisal on the approximately 25 acre tract of land increased to $100,000 from $95,000. The new appraisal for the principal residence of two of the individual co-borrowers increased to $165,000 from $150,000. Also during the March 2016 quarter, the husband and wife principals of the two corporate entities informed the Bank that they were not going to open the golf course that appraised for $1.1 million for the 2016 golf season and that they are going to attempt to sell the property as a land development project. Subsequent to the end of the March 2016 quarter, the Bank was informed that one of the co-borrowers had passed. She was the wife of one of the co-borrowers and the stepmother of one of the other co-borrowers who is one of the two principals of the corporate entities.

 

 

During the June 30, 2016 quarter, the borrowers entered into a purchase agreement to sell the golf course that was not opened. As part of this purchase, the Bank agreed to release the nonoperational golf course, the 25 acre tract of land, and the co-borrower who was the father of one of the principals. In connection with the transaction, the Bank secured the first mortgage, instead of a second mortgage, on the principal residence of two of the individual co-borrowers. However, based on this purchase agreement, the Bank determined that an additional impairment of $210,000 was needed for this loan relationship, and an additional charge-off of $105,000 was established for each of the two loans in the loan relationship through a charge-off to the general allowance. The nonoperational golf course was sold subsequent to the end of the June 30, 2016 quarter. After the sale and subsequent reduction of the principal balance of Loan M-1, the Bank determined that no further impairment was needed. Also, subsequent to the June 30, 2016 quarter, the Bank entered into an amended forbearance agreement with the borrower and co-borrowers, reflecting the reduced principal balances for Loans M-1 and M-2. The maturity date for these loans remained at October 1, 2018. As stated above, since the Bank sold these promissory notes, and the balance of the loans are $0, this Loan Relationship will no longer be reported in the narrative section.

 

As stated above, since the Bank sold these promissory notes, and the balance of the loans are $0, this Loan Relationship will no longer be reported in the narrative section.

 

●

Loan Relationship R. At December 31, 2017 and June 30, 2017, Loan Relationship R was comprised of one loan, having a carrying value of $375,000 and $586,000, respectively. This loan is, and has always been, an interest only loan. This loan is secured by 48.54 acres of land, of which 12.54 acres is in the right of way of an Ohio highway, and is located in southwestern Ohio. The borrower is a “subchapter S” Corporation. The co-borrowers, who were individually signed, were originally a husband and wife who were 100% owners of the corporation. The husband passed away in 2015; the wife is the only remaining borrower, still individually signed, and owns 100% of the corporation. At December 31, 2017 and June 30, 2017, the Loan R carrying value is included in the table for “Nonaccrual, Land”.  In the “Credit Risk Profile by Internally Assigned Grade” table, Loan R is classified as substandard at December 31, 2017 and June 30, 2017.  An impairment analysis was performed during the December 31, 2017 quarter and it was determined that an additional impairment of $181,000 was needed.  An impairment in the amount of $181,000 was added to the current $255,000 impairment through a charge-off to the general allowance.

 

Loan R is performing in accordance with its renewed terms at December 31, 2017. A more detailed history of Loan Relationship R follows.

 

The land was purchased by the co-borrowers in 1997 as an investment for future development. The Bank originated Loan R on the land in November 2003. Since the Bank made the original loan in 2003, this loan has been renewed three times. The loan was set to renew again in March 2017. The Bank ordered an appraisal during the March 2017 quarter. The Bank also analyzed the cash flow and the liquid assets of the remaining co-borrower. After this analysis, the Bank ordered an appraisal based on the market value and the liquidation value of the property. The market value of the property was $1,940,000 and the liquidation value of the property was $1,070,000. Because of the results of the financial analysis performed on the co-borrower, and the fact that the property had not been sold, the Bank completed an impairment analysis of the property using the liquidation value. After the impairment analysis was completed, it was determined that an impairment of $255,000 was needed. An impairment in the amount of $255,000 was established through a charge-off to the general allowance. The remaining balance of $601,000 was put on nonaccrual as stated above. This loan was renewed in March 2017, but only for one year (new maturity date is March 2018). The borrower has confirmed her intent to have the property sold by the date. If the property is not sold by this date, the Bank will review all of the options available to it, including foreclosure action.

 

 

The following table summarizes customer balances of all Note A/B format loans at December 31, 2017:

 

 

(Dollars in thousands)		Loan Balances												Number of Loans
		Note A				Note B				Total				Note A				Note B
One- to four-family residential real estate		$	82			$	20			$	102				1				1
Multi-family residential real estate			1,070				920				1,990				2				2
Total (1)		$	1,152			$	940			$	2,092				3				3

 

(1)	Included in this total are an aggregate of $1.1 million comprised of Note A loans and $0.9 million comprised of Note B loans that are included in the discussion of Loan Relationships F and H.

 

The following table provides information with respect to all of our loans that are classified as troubled debt restructurings. For additional information regarding troubled debt restructurings on nonaccrual status, see the table of nonperforming assets above.

 

		At December 31, 2017
		Loan Status								Total Unpaid Principal				Related				Recorded				Number of				Average Recorded
(In thousands)		Accrual				Nonaccrual				Balance				Allowance				Investment				Loans				Investment
One- to Four-Family residential real estate		$	1,065			$	198			$	1,263			$	--			$	1,263				13			$	1,412
Nonresidential real estate			--				--				--				--				--				--				720
Total		$	1,065			$	198			$	1,263			$	--			$	1,263				13			$	2,132

 

 

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

 

		Three Months Ended December 31, 2017								Six Months Ended December 31, 2017
		Recorded Investment				Number of Loans				Recorded Investment				Number of Loans
(Dollar amounts in thousands)
Beginning balance		$	1,942				16			$	2,646				19
Additions to TDR			-				-				-				-
Charge-offs			(136	)			-				(136	)			-
Removal of TDRs			(83	)			(1	)			(83	)			(1	)
Impairment Reversal			-				-				-				-
Payments			(460	)			(2	)			(1,164	)			(5	)
Ending balance		$	1,263				13			$	1,263				13

 

Loans that were included in TDRs at December 31, 2017 and June 30, 2017 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. Some 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, 2017 and June 30, 2017, all loans classified as TDRs required principal and interest payments.

 

The following table shows the aggregate amounts of our classified loans at the dates indicated.

 

		At December 31,
		2017				2016
		(In thousands)
Special mention assets		$	280			$	1,556
Substandard assets			2,487				5,385
Total classified assets		$	2,767			$	6,941

 

The following tables illustrate certain disclosures required by ASC 310-10-50-29(b) at December 31, 2017 and at June 30, 2017.

 

At December 31, 2017:

 

		Credit Risk Profile by Internally Assigned Grade
		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
		(In thousands)
Grade:
Pass		$	131,769			$	32,918			$	6,326			$	17,116			$	69,747			$	3,718			$	3,524			$	8,917			$	274,035
Watch			2,629				899				3,497				1,646				5,961				1,322				609				1,125				17,688
Special mention			273				7				--				--				--				--				--				--				280
Substandard			1,408				213				125				--				360				--				381				--				2,487
Total		$	136,079			$	34,037			$	9,948			$	18,762			$	76,068			$	5,040			$	4,514			$	10,042			$	294,490

  

 

At June 30, 2017:

 

		Credit Risk Profile by Internally Assigned Grade
		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
		(In thousands)
Grade:
Pass		$	129,053			$	32,547			$	6,404			$	13,355			$	65,031			$	4,817			$	2,379			$	8,495			$	262,081
Watch			2,283				509				3,741				2,046				7,405				328				53				762				17,127
Special mention			444				207				82				--				1,134				--				--				--				1,867
Substandard			1,887				370				440				--				1,221				--				594				--				4,512
Total		$	133,667			$	33,633			$	10,667			$	15,401			$	74,791			$	5,145			$	3,026			$	9,257			$	285,587

 

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

 

		At December 31, 2017								At June 30, 2017
		30-59 Days Past Due				60-89 Days Past Due				30-59 Days Past Due				60-89 Days Past Due
		(in thousands)
One- to four-family mortgage – owner-occupied		$	709			$	264			$	345			$	579
Consumer			77				7				93				57
One- to four-family mortgage – nonowner-occupied			--				--				--				--
Multi-family mortgage			--				--				--				--
Nonresidential real estate mortgage – commercial and office buildings			--				--				--				--
Construction			--				--				--				--
Land			--				--				--				--
Commercial and agricultural			--				--				118				--
Total		$	786			$	271			$	556			$	636

 

 

The following table illustrates the changes to the allowance for loan losses for the three and six months ended December 31, 2017:

 

		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, 2017:		$	1,105			$	336			$	56			$	278			$	2,163			$	104			$	148			$	85			$	4,275
Charge offs			--				(29	)			--				--				(136	)			--				(181	)			--				(346	)
Recoveries			14				58				--				31				133				--				--				--				236
Provision (credit)			(13	)			(12	)			(2	)			(6	)			(304	)			77				445				(22	)			9
Ending Balance:		$	1,106			$	353			$	54			$	303			$	1,856			$	27			$	412			$	63			$	4,174
Allowance for Credit Losses:
Balance, July 1, 2017:		$	1,093			$	347			$	60			$	289			$	2,171			$	117			$	127			$	90			$	4,294
Charge offs			--				(108	)			--				--				(136	)			--				(181	)			--				(495	)
Recoveries			28				80				--				37				172				--				--				--				352
Provision (credit)			(15	)			34				(6	)			(23	)			(351	)			(90	)			446				(27	)			23
Ending Balance:		$	1,106			$	353			$	54			$	303			$	1,856			$	27			$	412			$	63			$	4,174
Balance, Individually Evaluated		$	--			$	--			$	--			$	--			$	--			$	--			$	--			$	--			$	--
Balance, Collectively Evaluated		$	1,106			$	353			$	54			$	303			$	1,856			$	27			$	412			$	63			$	4,174
Financing receivables:
Ending balance		$	136,079			$	34,037			$	9,948			$	18,762			$	76,068			$	5,040			$	4,514			$	10,042			$	294,490
Ending Balance: individually evaluated for impairment		$	1,408			$	213			$	125			$	--			$	--			$	--			$	381			$	--			$	2,127
Ending Balance: collectively evaluated for impairment		$	131,007			$	31,796			$	9,666			$	18,762			$	75,994			$	5,040			$	4,133			$	10,035			$	286,433
Ending Balance: loans acquired at fair value		$	3,664			$	2,028			$	157			$	--			$	74			$	--			$	--			$	7			$	5,930

 

 

The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.

 

		At December 31,												At June 30,
		2017												2017
		Amount				% of Allowance to Total Allowance				% of Loans in Category to Total Loans				Amount				% of Allowance to Total Allowance				% of Loans in Category to Total Loans
		(Dollars in thousands)
One- to four-family residential real estate		$	1,160				27.8	%			49.6	%		$	1,153				26.9	%			50.5	%
Multi-family real estate			303				7.3				6.4				289				6.7				5.4
Nonresidential real estate			1,856				44.4				25.8				2,171				50.5				26.2
Land			412				9.9				1.5				127				3.0				1.1
Agricultural			28				0.7				1.3				40				0.9				1.3
Commercial			35				0.8				2.1				50				1.2				1.9
Consumer			353				8.5				11.6				347				8.1				11.8
Construction			27				0.6				1.7				117				2.7				1.8
Total allowance for loan losses		$	4,174				100.0	%			100.0	%		$	4,294				100.0	%			100.0	%
Total loans		$	294,490											$	285,587

  

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. 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 demand; (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 $33.3 million at December 31, 2017 and $26.9 million at June 30, 2017. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $20.6 million at December 31, 2017. Total securities classified as available-for-sale were $143.1 million at December 31, 2017.

 

In addition, at December 31, 2017, we had the ability to borrow a total of approximately $64.5 million from the Federal Home Loan Bank of Indianapolis.

 

At December 31, 2017, we had $58.9 million in loan commitments outstanding, consisting of $9.4 million in mortgage loan commitments, $26.7 million in unused home equity lines of credit, $7.6 million in commercial lines of credit and $15.2 million in other loan commitments. Certificates of deposit due within one year of December 31, 2017 totaled $65.1 million. This represented 54.2% of certificates of deposit at December 31, 2017. 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, 2017. However, based on past experience, we believe that a significant portion of our certificates of deposit will remain with us either by rolling the certificates into new maturities or by allowing the funds to be placed into checking or savings accounts. 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 investment 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 several risk-based capital measures. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2017, we exceeded all of our regulatory capital requirements and we are considered “well capitalized” under regulatory guidelines. See “Regulation and Supervision—Regulation of Federal Savings Associations—Capital Requirements,” and Note 15 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 26, 2017.

 

The following table summarizes the Bank’s capital amounts and the ratios required at December 31, 2017:

 

																		To be well
																		capitalized under
																		prompt corrective
										For capital								action
		Actual								adequacy purposes								provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
December 31, 2017 (unaudited)		(dollars in thousands)
Common equity tier 1 risk-based capital		$	59,910				20.12	%		$	13,396				4.5	%		$	19,350				6.5	%
Tier 1 risk-based capital			59,910				20.12				17,862				6.0				23,816				8.0
Total risk-based capital			63,640				21.38				23,816				8.0				29,770				10.0
Tier 1 leverage			59,910				10.98				21,829				4.0				27,287				5.0

 

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, 2017, 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.

 

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 26, 2017. The main components of market risk for the Company are interest rate risk and liquidity risk. We manage the interest rate sensitivity of our interest-earning assets and interest-bearing liabilities in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts generally react more quickly to changes in market interest rates than loans due to the volume of non-maturing deposits in combination with shorter maturities of deposits. As a result, sharp and sustained increases in interest rates may adversely affect our earnings while decreases in interest may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have simulated our earnings and our economic value of equity under a variety of interest rate scenarios in order to quantify an estimate of the effect of various rising rate and declining rate scenarios. These simulations are performed quarterly and involve a detailed review of all loans and deposits at the account level. Critical assumptions including loan prepayment expectations, deposit decay rates and repricing beta factors were derived from historical studies and in some cases may be adjusted based upon management’s expectations involving customer behavior, the competitive and economic environments and other factors. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; and generally, selling in the secondary market newly originated conforming fixed-rate 20- and 30-year one-to four-family residential real estate loans and available-for-sale securities. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

 

 

We have an Asset/Liability Committee, comprised of Board members, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

 

We use an economic value of equity analysis prepared by a consulting firm to review our level of long-term interest rate risk. This analysis measures interest rate risk by computing changes in net economic 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. Economic value of equity represents an estimate of 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, where appropriate. These analyses assess the risk of loss in market risk-sensitive instruments in the event of a sustained 100 to 400 basis increase or a 100 basis point decrease in market interest rates with no effect given to steps that we might take to counter the effects of that interest rate movement. Due to the overall low level of interest rates, an analysis of decreasing market interest rates of more than 100 basis points is not performed.

 

The following table presents the change in our net economic value of equity at September 30, 2017, the most recently completed date, that would occur in the event of an immediate change in interest rates, with no effect given to any steps that we might take to counteract that change.

 

		Economic Value of Equity (Dollars in Thousands)												Economic Value of Equity as % of Economic Value of Total Assets
Basis Point (“bp”) Change in Rates		Amount				Change				% Change				Economic Value Ratio
400		$	97,097			$	(4,467	)			(4.40	)%			20.15	%
300			104,521				2,957				2.91	%			20.94	%
200			105,953				4,389				4.32	%			20.59	%
100			105,573				4,009				3.95	%			19.92	%
0			101,564				--				--	%			18.65	%
(100)			93,511				(8,053	)			(7.93	)%			16.74	%

 

The model uses various assumptions in assessing interest rate risk. The most critical assumptions in the model relate to loan prepayment speeds, deposit decay rates and deposit repricing beta factors. As with any method of measuring interest rate risk involving forecasting, certain shortcomings are inherent in the calculations. Borrower and depositor behavior in the future is unknown. Historical data has been compiled, where available, to allow the Company to see the impact of customer behavior in prior interest rate cycles. However, the future behavior is inherently unknown. For example, although certain assets and liabilities may have similar maturities or repricing dates, 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, increasing or decreasing interest rates could have a significant impact on the prepayment speeds of our earning assets that in turn could affect the rate sensitivity position. When market interest rates increase, prepayments tend to slow. When market interest rates decrease, prepayments tend to rise. While the Company believes the assumptions used in the model to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security or loan prepayment activity.

 

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, 2017, 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.

 

 

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 risk factors and other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2017, which could materially affect our business, financial condition or future results. The risks described in the Company’s 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 quarter ended December 31, 2017.

 

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 3.1	Articles of Incorporation of United Community Bancorp (1)
	Exhibit 3.2	Bylaws of United Community Bancorp (2)
	Exhibit 31.1	Certification of Chief Executive Officer
	Exhibit 31.2	Certification of Chief Financial Officer
	Exhibit 32	Section 1350 Certifications
	Exhibit 101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 31, 2017, 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.

 

(1)

Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended, initially filed on March 15, 2011.

 

(2)

Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended, initially filed on March 15, 2011.

 

 

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 12, 2018	By:	/s/ Elmer G. McLaughlin
		Elmer G. McLaughlin
		President and Chief Executive Officer
Date:  February 12, 2018	By:	/s/ David Z. Rosen
		David Z. Rosen
		Chief Financial Officer

 

 

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