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| UCBA > SEC Filings for UCBA > Form 10-Q on 15-Nov-2012 | All Recent SEC Filings |
15-Nov-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 as filed with the Securities and Exchange Commission on September 7, 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 11 and 12 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 7, 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 applies the provisions of ASC 275-10-50-8 to account for uncertainty in income taxes. The Company had no unrecognized tax benefits as of September 30, 2012 and June 30, 2012. The Company recognized no interest and penalties on the underpayment of income taxes during the three month periods ended September 30, 2012 and 2011, and had no accrued interest and penalties on the balance sheet as of September 30, 2012 and June 30, 2012. 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, 2009.
Comparison of Financial Condition at September 30, 2012 and June 30, 2012
Balance Sheet Analysis
Total assets were $502.2 million at September 30, 2012, compared to $495.9 million at June 30, 2012. Total assets increased $6.3 million, or 1.3%, primarily as a result of a $15.0 million increase in investment securities, partially offset by an $11.1 million decrease in loans. Our investment securities increased as a result of an increase in deposits and a decrease in loans. The increase in investment securities was primarily related to purchases of both mortgage-backed securities and municipal bonds. The decrease in loans was primarily the result of payoffs aggregating $5.8 million for three performing commercial real estate loans as described below.
Total liabilities were $446.9 million at September 30, 2012, compared to $440.9 million at June 30, 2012. The increase of $6.0 million was primarily the result of a $6.1 million increase in deposits which reflected a $3.8 million net increase in municipal deposits and a $2.3 million increase in retail customer deposits. The increase in municipal deposits consisted of an increase in demand deposits totaling $5.0 million, partially offset by a decrease in savings accounts totaling $1.2 million. The increase in retail deposits consisted of increases in demand deposit accounts of $1.0 million and savings accounts of $2.7 million, partially offset by declines in certificate of deposit of $1.4 million.
Total stockholders' equity was $55.3 million at September 30, 2012, compared to $55.0 million at June 30, 2012. The increase was primarily the result of net income of $494,000 and a $633,000 increase in net unrealized gains on investments, partially offset by dividends paid of $862,000. As previously announced, the Company suspended the payment of dividends as a result of the cost and uncertainty associated with United Community MHC's ability to waive receipt of the Company's dividends. This cost and uncertainty was due to the Federal Reserve Board requirement that a "grandfathered" mutual holding company, like United Community MHC, obtain member (depositor) approval and comply with other procedural requirements prior to waiving dividends, which would make dividend waivers impracticable. Accordingly, on August 31, 2012, the Company paid a cash dividend to all stockholders, including United Community MHC, for the quarter ended June 30, 2012, which totalled $862,000, including $512,000 paid to United Community MHC.
Loans. At September 30, 2012, one- to four- family residential loans totaled $137.9 million, or 49.7% of total gross loans, compared to $139.5 million, or 48.4% of total gross loans, at June 30, 2012. The reduction in the one- to four-family residential portfolio during the 2012 period was primarily due principal repayments coupled with our strategy of selling in the secondary market newly-originated fixed-rate loans with terms longer than 10 years.
Multi-family and nonresidential real estate and land loans totaled $91.0 million and represented 32.8% of total loans at September 30, 2012, compared to $101.4 million, or 35.2% of total loans, at June 30, 2012. The decrease was primarily attributable to the repayment of one nonresidential real estate loan totaling $1.8 million and two multi-family real estate loans totaling $4.0 million.
The following table sets forth the composition of our loan portfolio at the dates indicated.
At September 30, At June 30,
2012 2012
Amount Percent Amount Percent
(Dollars in thousands)
Residential real estate:
One- to four-family $ 137,853 49.7 % $ 139,522 48.4 %
Multi-family 35,424 12.8 42,325 14.7
Construction 1,386 0.5 1,189 0.4
Nonresidential real estate 55,547 20.0 59,123 20.5
Land 3,665 1.3 3,441 1.2
Commercial business 4,278 1.6 3,854 1.3
Agricultural 3,497 1.3 3,150 1.1
Consumer:
Home equity 31,338 11.3 31,242 10.9
Auto 1,991 0.7 1,820 0.6
Share loans 1,143 0.4 1,200 0.4
Other 1,047 0.4 1,333 0.5
Total consumer loans 35,519 12.8 35,595 12.4
Total loans $ 277,169 100.0 % $ 288,199 100.0 %
Less (plus):
Deferred loan costs, net (960 ) (924 )
Undisbursed portion of loans in process 370 355
Allowance for loan losses 5,683 5,614
Loans, net 272,076 $ 283,154
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Loan Maturity
The following table sets forth certain information at September 30, 2012 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from 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.
More Than
Less Than One Year to More Than Total
One Year Five Years Five Years Loans
(in thousands)
One- to four-family residential real
estate $ 2,253 $ 31,905 $ 103,695 $ 137,853
Multi-family real estate 231 11,212 23,981 35,424
Construction 884 244 258 1,386
Nonresidential real estate 2,527 20,745 32,275 55,547
Land 231 2,153 1,281 3,665
Commercial 156 2,651 1,471 4,278
Agricultural 78 1,306 2,113 3,497
Consumer 5,424 2,755 27,340 35,519
Total $ 11,784 $ 72,971 $ 192,414 $ 277,169
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The following table sets forth the dollar amount of all loans at September 30, 2012 due after September 30, 2013 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 Floating or
Rates Adjustable Rates Total
(in thousands)
One- to four-family residential real estate $ 42,933 $ 92,667 $ 135,600
Multi-family real estate 4,248 30,945 35,193
Construction 225 277 502
Nonresidential real estate 7,381 45,639 53,020
Land 1,235 2,199 3,434
Commercial 1,404 2,718 4,122
Agricultural 728 2,691 3,419
Consumer 2,281 27,814 30,095
Total $ 60,435 $ 204,950 $ 265,385
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Loan Activity
The following table shows loan origination, repayment and sale activity during
the periods indicated.
Three Months Ended
September 30,
2012 2011
(in thousands)
Total loans at beginning of period $ 288,199 $ 290,834
Loans originated (1):
One- to four-family residential real estate 9,636 2,606
Multi-family residential real estate - -
Construction 471 351
Nonresidential real estate 52 -
Land - 58
Commercial business 391 25
Consumer 3,132 549
Total loans originated 13,682 3,589
Deduct:
Loan principal repayments 18,173 2,765
Loans originated for sale 6,539 3,459
Net loan activity (11,030 ) (2,635 )
Total loans at end of period $ 277,169 $ 288,199
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(1) Includes loan renewals, loan refinancings and restructured loans.
Results of Operations for the Three Months Ended September 30, 2012 and 2011
Overview. Net income for the three months ended September 30, 2012 was $494,000, compared to net income of $476,000 for the three months ended September 30, 2011. A $648,000 decrease in the provision for loan losses was partially offset by a $313,000 decrease in net interest income and $268,000 increase in noninterest expense.
Net Interest Income. Net interest income decreased $313,000, or 8.9%, to $3.2 million for the quarter ended September 30, 2012 as compared to $3.5 million for the quarter ended September 30, 2011. A decrease of $462,000 in interest income was partially offset by a $149,000 decrease in interest expense. The decrease in interest income was principally the result of a decrease in the average rate earned on loans from 5.48% to 4.99%, and a decrease in the average interest rate earned on investments from 2.40% to 2.01%. The impact of a $7.8 million decrease in average loans was largely offset by a $23.0 million increase in average investments. The decrease in interest expense was primarily the result of a decrease in the average interest rate paid on deposits from 1.10% to 0.89%, partially offset by a $15.4 million increase in average outstanding deposits. Changes in interest rates are reflective of decreases in overall market rates. Net interest margin for the quarter ended September 30, 2012 was 2.79%, a decrease of 17 basis points from the quarter ended June 30, 2012 and a decrease of 43 basis points from the quarter ended September 30, 2011.
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. For purposes of this table, average balances have been calculated using month-end balances, and nonaccrual loans are included in average balances only. Management does not believe that the use of month-end balances instead of daily average balances has caused any material differences in the information presented. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
Three Months Ended September 30,
2012 2011
Interest Interest
Average and Yield/ Average and Yield/
Balance Dividends Cost Balance Dividends Cost
(Dollars in thousands)
Assets:
Interest-earning assets:
Loans $ 276,830 $ 3,450 4.99 % $ 284,642 $ 3,898 5.48 %
Investment securities 154,006 772 2.01 131,011 786 2.40
Other interest-earning
assets 30,972 3 0.04 23,413 3 0.05
Total interest-earning
assets 461,808 4,225 3.66 439,066 4,687 4.27
Noninterest-earning assets 36,451 34,375
Total assets $ 498,259 $ 473,441
Liabilities and equity:
Interest-bearing
liabilities:
NOW and money market
deposit accounts $ 156,988 127 0.32 % 146,058 175 0.48
Passbook accounts 81,200 104 0.51 70,557 68 0.39
Certificates of deposit 190,678 725 1.52 196,827 895 1.82
Total interest-bearing
deposits 428,866 956 0.89 413,442 1,138 1.10
FHLB advances 10,708 47 1.76 1,708 14 3.28
Total interest-bearing
liabilities 439,574 1,003 0.91 415,150 1,152 1.11
Noninterest-bearing
liabilities 3,509 3,790
Total liabilities 443,083 418,940
Total stockholders' equity 55,176 54,501
Total liabilities and
stockholders' equity $ 498,259 $ 473,441
Net interest income $ 3,222 $ 3,535
Interest rate spread 2.75 % 3.16 %
Net interest margin 2.79 % 3.22 %
Average interest-earning
assets to average
interest-bearing
liabilities 105.06 % 105.76 %
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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
Three Months Ended
September 30,
2012 Compared to 2011
Increase
(Decrease)
Due to
Volume Rate Net
(In thousands)
Interest and dividend income:
Loans $ (107 ) $ (341 ) $ (448 )
Investment securities 138 (152 ) (14 )
Other interest-earning assets 1 (1 ) -
Total interest-earning assets 32 (494 ) (462 )
Interest expense:
Deposits 42 (224 ) (182 )
FHLB advances 74 (41 ) 33
Total interest-bearing liabilities 116 (265 ) (149 )
Net change in net interest income $ (84 ) $ (229 ) $ (313 )
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Provision for Loan Losses.The provision for loan losses was $250,000 for the quarter ended September 30, 2012, compared to $898,000 for the same quarter in the prior year. The decrease in the loan loss provision was primarily due to a decrease in the loan portfolio of approximately $11.1 million combined with a decrease in nonperforming loans from June 30, 2012 of approximately $1.0 million.
Other Income. The following table summarizes other income for the three months ended September 30, 2012 and 2011.
Three Months
Ended September 30, %
2012 2011 Change
(Dollars in thousands)
Service charges $ 621 $ 639 (2.8 )
Gain on sale of loans 248 83 198.8
Gain on sale of investments - 236 (100.0 )
Gain on sale of other real estate owned 7 - 100.0
Income from bank-owned life insurance 135 67 101.5
Other 56 101 (44.6 )
Total other income $ 1,067 $ 1,126 (5.2 )
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Other income remained flat at $1.1 million in the quarters ended September 30, 2012 and 2011. Increases of $165,000 in gain on sale of loans and $68,000 in income from bank owned life insurance during the quarter ended September 30, 2012 were offset by a $236,000 decrease in gain on sale of investments. The increase in the gain on sale of loans was the result of an increase in loan sales to Freddie Mac in the September 30, 2012 quarter when compared to the same quarter in the prior year, primarily due to an increase in refinancing activity as a result of the continued low interest rate environment. The increase in income from bank owned life insurance was the result of the purchase of additional bank owned life insurance during the latter part of the fiscal year ended June 30, 2012. The decrease in gain on sale of investments was the result of no sales of mortgage-backed securities and other available for sale investment securities during the current year quarter as compared to the prior year quarter.
Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes for the three months ended September 30, 2012 and 2011.
Three Months
Ended September 30, %
2012 2011 Change
(Dollars in thousands)
Compensation and employee benefits $ 1,809 $ 1,736 4.2 %
Premises and occupancy expense 339 328 3.4
Deposit insurance premium 177 137 29.2
Advertising expense 96 93 3.2
Data processing expense 373 305 22.3
Intangible amortization 40 39 2.6
Professional fees 302 198 52.5
Other operating expenses 281 313 (10.2 )
Total noninterest expense $ 3,417 $ 3,149 8.5 %
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Noninterest expense increased $268,000, or 8.5%, from $3.1 million for the quarter ended September 30, 2011 to $3.4 million for the quarter ended September 30, 2012. The increase is primarily due to increases of $104,000 in professional fees, $73,000 in compensation and employee benefits, and $68,000 in data processing expenses. The increase in professional fees was primarily due to an increase in audit, legal and consulting expenses related to annual reporting requirements. The increase in compensation and employee benefits expense was primarily due to the addition of employees in the accounting and collections departments and annual wage increases. The increase in data processing expense was primarily due to the implementation of a new branch network communication system.
Income Taxes. Income tax expense for the three months ended September 30, 2012 was $128,000, compared to an expense of $138,000 for the three months ended September 30, 2011.
Analysis of Nonperforming Assets. We consider foreclosed real estate, repossessed assets, nonaccrual loans, and TDRs that are delinquent or have not . . .
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