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| UCBA > SEC Filings for UCBA > Form 10-Q on 15-May-2012 | All Recent SEC Filings |
15-May-2012
Quarterly Report
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets, changes in deposit flows, and changes in the quality or composition of the Company's loan or investment portfolios. Additionally, other risks and uncertainties may be described in the Company's Annual Report on Form 10-K/A as filed with the Securities and Exchange Commission on April 26, 2012, which is available through the SEC's website at www.sec.gov. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company does not undertake the responsibility, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies. We consider the following to be our critical accounting policies: the allowance for loan losses and the valuation of deferred income taxes.
ALLOWANCE FOR LOAN LOSSES - The allowance for loan losses is the amount estimated by management as necessary to cover probable credit losses in the loan portfolio at the statement of financial condition date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; and value of collateral. Inherent loss factors are then applied to the remaining loan portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance on a quarterly basis and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of the Comptroller of the Currency ("OCC"), as an integral part of its examination process, periodically reviews our allowance for loan losses. Such agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see notes 2 and 6 of the Notes to the Consolidated Financial Statements included in Item 8 of the Annual Report on Form 10-K/A filed with the Securities and Exchange Commission on April 26, 2012.
DEFERRED INCOME TAXES - We use the asset and liability method of accounting for income taxes as prescribed in Accounting Standards Codification ("ASC") 740-10-50. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. If current available information raises doubt as to the realization of the deferred tax assets, a valuation allowance is established. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets. A valuation allowance would result in additional income tax expense in the period, which would negatively affect earnings. The Company adopted the provisions of ASC 275-10-50-8 to account for uncertainty in income taxes effective July 1, 2007. Implementation resulted in no cumulative effect adjustment to retained earnings as of the date of adoption. The Company had no unrecognized tax benefits as of March 31, 2012 and June 30, 2011. The Company recognized no interest and penalties on the underpayment of income taxes during the three and nine month periods ended March 31, 2012 and 2011, and had no accrued interest and penalties on the balance sheet as of March 31, 2012 and June 30, 2011. The Company has no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase with the next twelve months. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years before the fiscal year ended June 30, 2006.
Comparison of Financial Condition at March 31, 2012 and June 30, 2011
Total assets were $503.6 million at March 31, 2012, compared to $472.5 million at June 30, 2011. Total assets increased $31.1 million, or 6.6%, primarily as a result of a $26.2 million increase in investment securities, a $4.1 million increase in Federal Home Loan Bank ("FHLB") stock and a $2.2 million increase bank owned life insurance ("BOLI"). The increase in investment securities was primarily due to purchases of mortgage-backed securities offset by sales of other available for sale securities. The increase in FHLB stock was attributable to the Bank's desire to increase its borrowing capacity. BOLI was increased to offset and recover existing benefit expenses.
Total liabilities were $448.3 million at March 31, 2012, compared to $418.4 million at June 30, 2011. The increase of $29.9 million was primarily the result of a $20.6 million increase in deposits and a $9.3 million increase in FHLB advances. The increase in deposits was primarily the result of an increase in retail customer deposits. The increase in FHLB stock was attributable to the Bank's desire to increase its borrowing capacity. BOLI was increased to offset and recover existing benefit expenses.
Total stockholders' equity was $55.4 million at March 31, 2012, compared to $54.1 million at June 30, 2011. The increase was primarily the result of net income of $1.6 million, partially offset by dividends paid of $1.0 million. At March 31, 2012, the Bank was considered "well-capitalized" under applicable regulatory requirements.
Comparison of Operating Results for the Three and Nine Months Ended March 31, 2012 and 2011
General. Net income was $457,000 for the quarter ended March 31, 2012 compared to a loss of $643,000 for the same period in the prior year. Net income for the nine months ended March 31, 2012 was $1.6 million compared to $374,000 for the nine months ended March 31, 2011.
Net Interest Income. The following table summarizes changes in interest income and interest expense for the three and nine months ended March 31, 2012 and 2011.
Three Months Ended Nine Months Ended
March 31, March 31,
2012 2011 % Change 2012 2011 % Change
(Dollars in thousands)
Interest income:
Loans $ 3,575 $ 4,140 (13.6 )% $ 11,472 $ 12,821 (10.5 )%
Investment and
mortgage
backed securities 712 732 (2.7 ) 2,196 2,102 4.5
Other
interest-earning
assets 3 4 (25.0 ) 9 16 (43.8 )
Total interest income 4,290 4,876 (12.0 ) 13,677 14,939 (8.4 )
Interest expense:
NOW and money market
deposit accounts 129 148 (12.8 ) 434 631 (31.2 )
Passbook accounts 64 70 (8.6 ) 194 205 (5.4 )
Certificates of
deposit 803 1,055 (23.9 ) 2,551 3,463 (26.3 )
Total
interest-bearing
deposits 996 1,273 (21.8 ) 3,179 4,299 (26.1 )
FHLB advances 29 13 123.1 55 55 -
Total interest
expense 1,025 1,286 (20.3 ) 3,234 4,354 (25.7 )
Net interest income $ 3,265 $ 3,590 (9.1 ) $ 10,443 $ 10,585 (1.3 )
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Net interest income decreased $325,000, or 9.1%, to $3.3 million for the quarter ended March 31, 2012 as compared to $3.6 million for the quarter ended March 31, 2011. A decrease of $586,000 in interest income was partially offset by a $261,000 decrease in interest expense. The decrease in interest income was primarily the result of a $8.8 million decrease in average outstanding loans combined with a decrease in the average rate earned on loans from 5.65% to 5.03%. The decrease in interest expense was primarily the result of a decrease in the average interest rate paid on deposits from 1.21% to 0.95%. Changes in interest rates are reflective of decreases in overall market rates.
Net interest income decreased $142,000, or 1.3%, to $10.4 million for the nine months ended March 31, 2012 as compared to $10.6 million for the nine months ended March 31, 2011. A decrease of $1.3 million in interest income was partially offset by a $1.1 million decrease in interest expense. The decrease in interest income was primarily the result of a $14.8 million decrease in average outstanding loans combined with a decrease in the average rate earned on loans from 5.71% to 5.37%. The decrease in interest expense was primarily the result of a $15.5 million decrease in average deposits combined with a decrease in the average interest rate paid on deposits from 1.33% to 1.02%. Changes in interest rates are reflective of decreases in overall market rates.
The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three and nine months ended March 31, 2012 and 2011. 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 March 31, Nine Months Ended March 31,
2012 2011 2012 2011
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 $ 284,350 $ 3,575 5.03 % $ 293,199 $ 4,140 5.65 % $ 284,789 $ 11,472 5.37 % $ 299,553 $ 12,821 5.71 %
Investment and
mortgage backed
securities 133,035 712 2.14 133,321 732 2.20 131,518 2,196 2.23 126,734 2,102 2.21
Other interest-earning
assets 31,085 3 0.04 24,462 4 0.07 26,109 9 0.05 34,592 16 0.06
448,470 4,290 3.83 450,982 4,876 4.32 442,416 13,677 4.12 460,879 14,939 4.32
Noninterest-earning
assets 37,094 30,574 36,144 30,544
Total assets $ 485,564 $ 481,556 $ 478,560 $ 491,423
Liabilities and
stockholders' equity:
Interest-bearing
liabilities:
NOW and money market
deposit accounts (1) 148,298 129 0.35 146,365 148 0.40 147,041 434 0.39 154,282 631 0.55
Passbook accounts (1) 74,694 64 0.34 70,299 70 0.40 72,260 194 0.36 63,083 205 0.43
Certificates of
deposit (1) 195,077 803 1.65 205,367 1,055 2.05 196,299 2,551 1.73 213,716 3,463 2.16
Total interest-bearing
deposits 418,069 996 0.95 422,031 1,273 1.21 415,600 3,179 1.02 431,081 4,299 1.33
FHLB advances 8,708 29 1.33 2,208 13 2.36 4,458 55 1.64 2,458 55 2.98
Total interest-bearing
liabilities 426,777 1,025 0.96 424,239 1,286 1.21 420,058 3,234 1.03 433,539 4,354 1.34
Noninterest bearing
liabilities 3,558 3,720 3,753 3,915
Total liabilities 430,335 427,959 423,811 437,454
Stockholders' equity 55,229 53,597 54,749 53,969
Total liabilities and
stockholders' equity $ 485,564 $ 481,556 $ 478,560 $ 491,423
Net interest income $ 3,265 $ 3,590 $ 10,443 $ 10,585
Interest rate spread 2.87 % 3.11 % 3.09 % 2.98 %
Net interest margin
(annualized) 2.91 % 3.18 % 3.15 % 3.06 %
Average
interest-earning
assets to average
interest-bearing
liabilities 105.08 % 106.30 % 105.32 % 106.31 %
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1) Includes municipal deposits
Provision for Loan Losses. The provision for loan losses was $333,000 for the quarter ended March 31, 2012, compared to $2.2 million for the same quarter in the prior year. The provision for loan losses was $1.9 million for the nine months ended March 31, 2012, compared to $3.4 million for the same period in the prior year. Management evaluates the Bank's allowance for loan loss for adequacy on at least a quarterly basis. As part of this evaluation, management considers the amounts and types of loans, concentrations, the value of underlying collateral, current economic conditions, historical charge-offs, and other relevant information, such as the size of the overall portfolio and the financial condition of the borrowers. The decrease in the loan loss was primarily due to the restructuring of certain commercial and multi-family loans into a Note A/B format, and the resultant additional reserves recorded in the March 2011 quarter. No such restructuring occurred in the March 2012 quarter. For more information on the provision for loan losses for the quarter and nine months ended March 31, 2011, see Note 1, "Restatement", to the unaudited consolidated financial statements.
For more information on how the Company reviews its allowance for loan losses and determines any necessary provision see, "Critical Accounting Policies - Allowance for Loan Losses."
The following table provides information with respect to our recorded investment in nonperforming assets at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.
At March 31, At June 30,
2012 2011 % Change
(Dollars in thousands)
Nonaccrual loans:
One- to-four-family residential real estate $ 1,830 $ 1,652 10.8 %
Multi-family 2,081 1,742 19.5
Nonresidential real estate and land 1,002 566 77.0
Construction - - -
Commercial 287 240 19.6
Consumer 323 240 61.3
Total nonaccrual loans 5,523 4,440 24.4
Nonaccrual restructured loans:
One- to-four-family residential real estate $ 2,680 $ 1,653 62.1 %
Multi-family 7,225 10,358 (30.2 )
Nonresidential real estate and land 3,772 4,146 (9.0 )
Total nonaccrual restructured loans 13,677 16,157 (15.3 )
Total nonperforming loans 19,200 20,597 (6.8 )
Real estate owned 328 139 136.0
Total nonperforming assets $ 19,528 $ 20,736 (5.8 )
Accruing restructured loans 11,084 8,768 26.4
Accruing restructured loans and
nonperforming assets $ 30,612 $ 29,504 3.8
Total nonperforming loans to total loans 6.64 % 7.08 % (6.2 )
Total nonperforming loans to total assets 3.81 % 4.36 % (12.6 )
Total nonperforming assets to total assets 3.88 % 4.39 % (11.6 )
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Nonperforming loans decreased $1.4 million, from $20.6 million at June 30, 2011 to $19.2 million at March 31, 2012. The decrease in nonperforming loans in the current year period was primarily the result of troubled debt restructurings that were placed on accrual (performing) status after performing in accordance with their restructured terms for at least six consecutive months, partially offset by additional nonperforming loans in the current year period.
As previously disclosed, the Company restructured $13.7 million of loans during the third quarter of the fiscal year ended June 30, 2011. The loans restructured during the third quarter of the fiscal year ended June 30, 2011 included five of our largest loans. All of these loans were restructured using a split note strategy whereby the Bank's remaining recorded investment in the borrowing reflected the "as is" value of the collateral, based on current cash flow. At March 31, 2012, all of the restructured loans have been performing in accordance with their restructured terms.
Under the split note or Note A/Note B strategy, the Note A was underwritten based on the Company's normal underwriting standards with the exception that a debt service coverage ratio of 1.5x or higher was required. This is more stringent than the Company's normal underwriting guidelines which generally require a debt service coverage of 1.2x or better. The Note A payment was based on a thirty year amortization schedule and matures at the end of two years. The amount of Note B under the split note strategy is the difference between the amount of Note A and the principal amount to be refinanced. The interest rate and two year maturity of the Note B loan are identical to the Note A loan, but the Note B loan requires no payments of interest or principal until maturity. While no amount of the original indebtedness was forgiven through this process, the full amount of the borrowers' Note B indebtedness was charged-off in March, 2011.
A discussion of the most significant troubled debt restructurings at March 31, 2012 are noted below. Management monitors the performance of these loans and reviews all options available to keep the loans current, including further restructuring of the loans. If restructuring efforts ultimately are not successful, management will initiate foreclosure proceedings. A more detailed discussion of these loan relationships is included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations under the section entitled "Analysis of Nonperforming and Classified Assets" in the Company's Annual Report on Form 10-K/A as filed with the Securities and Exchange Commission on April 26, 2012.
• Loan Relationship A. This relationship consists of three loans with a total carrying value of $6.4 million prior to its restructuring. One loan is secured by a first mortgage on an apartment complex near a college campus, another is secured by a first mortgage on two mobile home parks, and the last is secured by the first mortgage on another apartment complex. All three loans are included in the above table as "Accruing restructured loans" at March 31, 2012 and "Nonaccrual restructured loans" at June 30, 2011. In the "Credit Risk Profile by Internally Assigned Grade" table, these loans were classified as "Multi-family residential real estate", "Substandard" at March 31, 2012 and June 30, 2011. The recorded investment at March 31, 2012 for this relationship was $5.1 million. One loan for $1.7 million was on the accrual status as it has been performing for more than six months. Two loans for $3.4 million have been performing according to restructured terms since the restructuring but are on non-accrual status as all doubt about future payments has not been removed.
• Loan Relationship B. The loans comprising Loan Relationship B, totaling $2.5 million, are secured by a first mortgage on two separate retail strip shopping centers and a single purpose commercial use property. All the loans are included in the above table as "Accruing restructured loans" at March 31, 2012 and "Nonaccrual restructured loans," "Nonresidential real estate" at June 30, 2011. In the "Credit Risk Profile by Internally Assigned Grade" table, these loans were classified as "Nonresidential real estate, Substandard" at March 31, 2012 and June 30, 2011. This relationship was performing in accordance with its restructured terms at March 31, 2012 and because the loan has performed in accordance with its restructured terms for at least six consecutive months, the loan had been previously reported as accrual status. In March 2012, the Company was informed that one of the tenants is leaving. Based on the revised cash flows, the Company recorded an impairment of $195,000 and placed the loan on non-accrual status. The loan has continued to perform according to the restructured terms.
• Loan Relationship C. This loan relationship is secured by a first mortgage on a single-family home, a 24-unit apartment complex, one- to four-family residential properties and several residential building lots. The relationship is included in the above table as "Accrual restructured loans, multi-family real estate" at March 31, 2012 and "Nonaccrual restructured loans, multi-family real estate" at June 30, 2011. In the "Credit Risk Profile by Internally Assigned Grade" table, these loans were classified as "Multi-family real estate, Substandard" at March 31, 2012 and June 30, 2011. The loan balance at March 31, 2012 for this relationship was $1.5 million. This relationship was performing in accordance with its restructured terms at March 31, 2012 and, because the loan has performed in accordance with its restructured terms for at least six consecutive months the loan has been reported as accrual status.
• Loan Relationship D. The loan comprising Loan Relationship D is secured by a first mortgage on a 62-unit apartment complex near a college campus. The loan was made in 2008 to an experienced property manager who made major improvements to the property. The loan required interest only payments through December 2011. The borrower has completed renovations to the property and the cash flow of the property has improved, supporting the carrying value of the loan. At March 31, 2012, the carrying value of this loan was $1.3 million. In December 2011, this loan was restructured into a split Note A/Note B. The $1.3 million carrying value was restructured at a market rate of interest on a 30 year amortizing note with a two year balloon. Note B in the amount of $.4 million was restructured at a below market rate of interest with no payments for two years and a balloon payment due after 2 years. Note B was fully reserved prior to the restructuring and was charged off in December 2011. This charge off had no impact to the allowance for loan loss as of March 31, 2012. The loan was on nonaccrual status at both March 31, 2012 and June 30, 2011.
• Loan Relationship E. This relationship has an aggregate carrying value of $544,000 at March 31, 2012, and was secured by nonresidential real estate. These loans are included in the above table as "Accruing restructured loans" at March 31, 2012 and "Nonaccrual restructured loans, nonresidential real estate" at June 30, 2011. In the "Credit Risk Profile by Internally Assigned Grade" table, these loans were classified as "Nonresidential real estate, Substandard" at March 31, 2012 and June 30, 2011. This relationship was performing in accordance with its restructured terms at March 31, 2012 and because the loan has performed in accordance with its restructured terms for . . .
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