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UCBA > SEC Filings for UCBA > Form 10-Q on 15-Nov-2012All Recent SEC Filings

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Form 10-Q for UNITED COMMUNITY BANCORP


15-Nov-2012

Quarterly Report


Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of the Company and its subsidiaries include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets, changes in deposit flows, and changes in the quality or composition of the Company's loan or investment portfolios. Additionally, other risks and uncertainties may be described in the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 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

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

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

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

(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 %

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 )

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 )

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 %

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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