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 December 31, 2012 and June 30, 2012. The Company recognized no interest
and penalties on the underpayment of income taxes during the three and six month periods ended December 31, 2012 and 2011, and
had no accrued interest and penalties on the balance sheet as of December 31, 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 December 31, 2012 and
June 30, 2012
Balance Sheet Analysis
Total assets were $516.7 million at December
31, 2012, compared to $495.9 million at June 30, 2012. Total assets increased $20.8 million, or 4.2%, primarily as a result of
a $10.3 million increase in cash and a $26.9 million increase in investment securities, partially offset by a $16.5 million decrease
in loans. The increase in cash is primarily due to subscription funds held in escrow at the Bank at December 31, 2012 in connection
with our previously announced conversion from the mutual holding company form of organization to the stock holding company form
on January 9, 2013. The increase in our investment securities was the result of purchases of mortgage-backed securities. The decrease
in loans was primarily the result of payoffs aggregating $8.0 million for performing commercial real estate loans in addition to
transfers to REO totaling $2.3 million during the six month period ending December 31, 2012.
Total liabilities were $438.5 million at
December 31, 2012, compared to $440.9 million at June 30, 2012. Additionally, commitments and contingencies totaled $22.9 million
at December 31, 2012 as a result of subscription funds received in conjunction with the aforementioned conversion. There was no
recorded balance in commitments and contingencies at June 30, 2012.
Total stockholders’ equity was $55.3
million at December 31, 2012, compared to $55.0 million at June 30, 2012. The increase was primarily the result of net income of
$1.2 million for the six months ended December 31, partially offset by dividends paid of $812,000 during the six month period.
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 $812,000, including $512,000 paid to United Community MHC.
Loans.
At December 31,
2012, one- to four- family residential loans totaled $135.0 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
loans totaled $89.0 million and represented 32.8% of total loans at December 31, 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 December 31,
2012
|
|
|
At June 30,
2012
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
135,049
|
|
|
|
49.7
|
%
|
|
$
|
139,522
|
|
|
|
48.4
|
%
|
Multi-family
|
|
|
34,641
|
|
|
|
12.8
|
|
|
|
42,325
|
|
|
|
14.7
|
|
Construction
|
|
|
771
|
|
|
|
0.3
|
|
|
|
1,189
|
|
|
|
0.4
|
|
Nonresidential real estate
|
|
|
54,357
|
|
|
|
20.0
|
|
|
|
59,123
|
|
|
|
20.5
|
|
Land
|
|
|
3,589
|
|
|
|
1.3
|
|
|
|
3,441
|
|
|
|
1.2
|
|
Commercial business
|
|
|
3,858
|
|
|
|
1.4
|
|
|
|
3,854
|
|
|
|
1.3
|
|
Agricultural
|
|
|
3,263
|
|
|
|
1.2
|
|
|
|
3,150
|
|
|
|
1.1
|
|
Consumer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity
|
|
|
31,610
|
|
|
|
11.6
|
|
|
|
31,242
|
|
|
|
10.9
|
|
Auto
|
|
|
1,703
|
|
|
|
0.7
|
|
|
|
1,820
|
|
|
|
0.6
|
|
Share loans
|
|
|
1,546
|
|
|
|
0.6
|
|
|
|
1,200
|
|
|
|
0.4
|
|
Other
|
|
|
1,181
|
|
|
|
0.4
|
|
|
|
1,333
|
|
|
|
0.5
|
|
Total consumer loans
|
|
|
36,040
|
|
|
|
13.3
|
|
|
|
35,595
|
|
|
|
12.4
|
|
Total loans
|
|
$
|
271,568
|
|
|
|
100.0
|
%
|
|
$
|
288,199
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less (plus):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred loan costs, net
|
|
|
(998
|
)
|
|
|
|
|
|
|
(924
|
)
|
|
|
|
|
Undisbursed portion of loans in process
|
|
|
172
|
|
|
|
|
|
|
|
355
|
|
|
|
|
|
Allowance for loan losses
|
|
|
5,710
|
|
|
|
|
|
|
|
5,614
|
|
|
|
|
|
Loans, net
|
|
|
266,684
|
|
|
|
|
|
|
$
|
283,154
|
|
|
|
|
|
Loan Maturity
The following table sets forth certain
information at December 31, 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.
|
|
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
|
|
$
|
7,943
|
|
|
$
|
31,028
|
|
|
$
|
96,078
|
|
|
$
|
135,049
|
|
Multi-family real estate
|
|
|
4,733
|
|
|
|
4,674
|
|
|
|
25,234
|
|
|
|
34,641
|
|
Construction
|
|
|
771
|
|
|
|
-
|
|
|
|
-
|
|
|
|
771
|
|
Nonresidential real estate
|
|
|
6,965
|
|
|
|
17,442
|
|
|
|
29,950
|
|
|
|
54,357
|
|
Land
|
|
|
991
|
|
|
|
1,400
|
|
|
|
1,198
|
|
|
|
3,589
|
|
Commercial
|
|
|
1,400
|
|
|
|
1,359
|
|
|
|
1,099
|
|
|
|
3,858
|
|
Agricultural
|
|
|
306
|
|
|
|
1,117
|
|
|
|
1,840
|
|
|
|
3,263
|
|
Consumer
|
|
|
5,970
|
|
|
|
1,921
|
|
|
|
28,149
|
|
|
|
36,040
|
|
Total
|
|
$
|
29,079
|
|
|
$
|
58,941
|
|
|
$
|
183,548
|
|
|
$
|
271,568
|
|
The following table sets forth the dollar
amount of all loans at December 31, 2012 due after December 31, 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
Rates
|
|
|
Floating or
Adjustable Rates
|
|
|
Total
|
|
|
|
(in thousands)
|
|
One- to four-family residential real estate
|
|
$
|
39,330
|
|
|
$
|
87,776
|
|
|
$
|
127,106
|
|
Multi-family real estate
|
|
|
1,738
|
|
|
|
28,170
|
|
|
|
29,908
|
|
Construction
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Nonresidential real estate
|
|
|
9,119
|
|
|
|
38,273
|
|
|
|
47,392
|
|
Land
|
|
|
343
|
|
|
|
2,255
|
|
|
|
2,598
|
|
Commercial
|
|
|
563
|
|
|
|
1,895
|
|
|
|
2,458
|
|
Agricultural
|
|
|
455
|
|
|
|
2,502
|
|
|
|
2,957
|
|
Consumer
|
|
|
1,842
|
|
|
|
28,228
|
|
|
|
30,070
|
|
Total
|
|
$
|
53,390
|
|
|
$
|
189,099
|
|
|
$
|
242,489
|
|
Loan Activity
The following table shows loan origination,
repayment and sale activity during the periods indicated.
|
|
Six Months Ended
December 31,
|
|
|
Three Months Ended
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Total loans at beginning of period
|
|
$
|
288,199
|
|
|
$
|
290,834
|
|
|
$
|
277,169
|
|
|
$
|
288,199
|
|
Loans originated (1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate
|
|
|
18,522
|
|
|
|
12,882
|
|
|
|
8,886
|
|
|
|
10,276
|
|
Multi-family residential real estate
|
|
|
88
|
|
|
|
138
|
|
|
|
88
|
|
|
|
138
|
|
Construction
|
|
|
471
|
|
|
|
351
|
|
|
|
—
|
|
|
|
—
|
|
Nonresidential real estate
|
|
|
3,482
|
|
|
|
—
|
|
|
|
3,430
|
|
|
|
—
|
|
Land
|
|
|
640
|
|
|
|
58
|
|
|
|
640
|
|
|
|
—
|
|
Commercial business
|
|
|
524
|
|
|
|
25
|
|
|
|
133
|
|
|
|
—
|
|
Consumer
|
|
|
4,602
|
|
|
|
985
|
|
|
|
1,470
|
|
|
|
436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans originated
|
|
|
28,329
|
|
|
|
14,439
|
|
|
|
14,647
|
|
|
|
10,850
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan principal repayments
|
|
|
31,583
|
|
|
|
7,756
|
|
|
|
2,075
|
|
|
|
4,991
|
|
Loans originated for sale
|
|
|
13,377
|
|
|
|
6,900
|
|
|
|
6,838
|
|
|
|
3,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loan activity
|
|
|
(16,631
|
)
|
|
|
(217
|
)
|
|
|
(5,601
|
)
|
|
|
2,418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans at end of period
|
|
$
|
271,568
|
|
|
$
|
290,617
|
|
|
$
|
271,568
|
|
|
$
|
290,617
|
|
(1) Includes loan renewals,
loan refinancings and restructured loans.
Results of Operations for the Three Months and Six Months
Ended December 31, 2012 and 2011
Overview.
Net income decreased
$16,000 to $696,000 for the quarter ended December 31, 2012, compared to net income of $712,000 for the quarter ended December
31, 2011. Net income stayed flat at $1.2 million for the six months ended December 31, 2012 and 2011.
Net Interest Income.
The
following table summarizes changes in interest income and interest expense for the three and six months ended December 31, 2012
and 2011.
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
%
|
|
|
December 31,
|
|
|
%
|
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
2012
|
|
|
2011
|
|
|
Change
|
|
|
|
(Dollars in thousands)
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
3,323
|
|
|
$
|
3,999
|
|
|
|
(16.9
|
)%
|
|
$
|
6,773
|
|
|
$
|
7,897
|
|
|
|
(14.2
|
)%
|
Investment and mortgage backed securities
|
|
|
776
|
|
|
|
698
|
|
|
|
11.2
|
|
|
|
1,548
|
|
|
|
1,484
|
|
|
|
4.3
|
|
Other interest-earning assets
|
|
|
4
|
|
|
|
3
|
|
|
|
33.3
|
|
|
|
7
|
|
|
|
6
|
|
|
|
16.7
|
|
Total interest income
|
|
|
4,103
|
|
|
|
4,700
|
|
|
|
(12.7
|
)
|
|
|
8,328
|
|
|
|
9,387
|
|
|
|
(11.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW and money market deposit accounts
|
|
|
70
|
|
|
|
130
|
|
|
|
(46.2
|
)
|
|
|
197
|
|
|
|
305
|
|
|
|
(35.4
|
)
|
Passbook accounts
|
|
|
98
|
|
|
|
61
|
|
|
|
60.7
|
|
|
|
202
|
|
|
|
129
|
|
|
|
56.6
|
|
Certificates of deposit
|
|
|
676
|
|
|
|
854
|
|
|
|
(20.8
|
)
|
|
|
1,401
|
|
|
|
1,749
|
|
|
|
(19.9
|
)
|
Total interest-bearing deposits
|
|
|
844
|
|
|
|
1,045
|
|
|
|
(19.2
|
)
|
|
|
1,800
|
|
|
|
2,183
|
|
|
|
(17.5
|
)
|
FHLB advances
|
|
|
45
|
|
|
|
12
|
|
|
|
275.0
|
|
|
|
92
|
|
|
|
26
|
|
|
|
253.8
|
|
Total interest expense
|
|
|
889
|
|
|
|
1,057
|
|
|
|
(15.9
|
)
|
|
|
1,892
|
|
|
|
2,209
|
|
|
|
(14.4
|
)
|
Net interest income
|
|
$
|
3,214
|
|
|
$
|
3,643
|
|
|
|
(11.8
|
)
|
|
$
|
6,436
|
|
|
$
|
7,178
|
|
|
|
(10.3
|
)
|
Net interest income decreased $429,000,
or 11.8%, to $3.2 million for the quarter ended December 31, 2012 as compared to $3.6 million for the quarter ended December 31,
2011. The decrease of $597,000 in interest income was partially offset by a $168,000 decrease in interest expense. The decrease
in interest income was the result of a decrease in the average interest rate earned on loans from 5.60% to 4.94%, a $16.4 million
decrease in the average balance of loans and a decrease in the average rate earned on investments from 2.16% to 1.81%, partially
offset by a $42.2 million increase in the average balance of investments. The decrease in interest expense was primarily the result
of a decrease in the average interest rate paid on deposits from 1.01% to 0.78%, partially offset by a $17.0 million increase
in the average balance of outstanding deposits and a $9.0 million increase in the average balance of outstanding advances from
the Federal Home Loan Bank.
Net interest income decreased $742,000,
or 10.3%, to $6.4 million for the six months ended December 31, 2012 as compared to $7.2 million for the six months ended December
31, 2011. The decrease of $1.1 million in interest income was partially offset by a $317,000 decrease in interest expense. The
decrease in interest income was the result of a decrease in the average interest rate earned on loans from 5.54% to 4.96%, a $12.3
million decrease in the average balance of loans and a decrease in the average rate earned on investments from 2.28% to 1.90%,
partially offset by a $32.9 million increase in the average balance of investments. The decrease in interest expense was primarily
the result of a decrease in the average interest rate paid on deposits from 1.06% to 0.84%, partially offset by a $16.0 million
increase in the average balance of outstanding deposits and a $9.0 million increase in the average balance of outstanding advances
from the Federal Home Loan Bank. 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 six months ended December 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 December 31,
|
|
|
Six
Months Ended December 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
|
|
|
|
(Dollars
in thousands)
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-earning
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
|
|
$
|
269,073
|
|
|
$
|
3,323
|
|
|
|
4.94
|
%
|
|
$
|
285,480
|
|
|
$
|
3,999
|
|
|
|
5.60
|
%
|
|
$
|
272,961
|
|
|
$
|
6,773
|
|
|
|
4.96
|
%
|
|
$
|
285,216
|
|
|
$
|
7,897
|
|
|
|
5.54
|
%
|
Investment
and mortgage backed securities
|
|
|
171,270
|
|
|
|
776
|
|
|
|
1.81
|
|
|
|
129,101
|
|
|
|
698
|
|
|
|
2.16
|
|
|
|
162,811
|
|
|
|
1,548
|
|
|
|
1.90
|
|
|
|
129,916
|
|
|
|
1,484
|
|
|
|
2.28
|
|
Other
interest-earning assets
|
|
|
27,502
|
|
|
|
4
|
|
|
|
0.06
|
|
|
|
20,904
|
|
|
|
3
|
|
|
|
0.06
|
|
|
|
28,946
|
|
|
|
7
|
|
|
|
0.05
|
|
|
|
21,913
|
|
|
|
6
|
|
|
|
0.05
|
|
|
|
|
467,845
|
|
|
|
4,103
|
|
|
|
3.51
|
|
|
|
435,485
|
|
|
|
4,700
|
|
|
|
4.32
|
|
|
|
464,718
|
|
|
|
8,328
|
|
|
|
3.58
|
|
|
|
437,045
|
|
|
|
9,387
|
|
|
|
4.30
|
|
Noninterest-earning
assets
|
|
|
37,078
|
|
|
|
|
|
|
|
|
|
|
|
37,491
|
|
|
|
|
|
|
|
|
|
|
|
36,791
|
|
|
|
|
|
|
|
|
|
|
|
35,833
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
504,923
|
|
|
|
|
|
|
|
|
|
|
$
|
472,976
|
|
|
|
|
|
|
|
|
|
|
$
|
501,509
|
|
|
|
|
|
|
|
|
|
|
$
|
472,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOW
and money market deposit accounts (1)
|
|
|
160,754
|
|
|
|
70
|
|
|
|
0.17
|
|
|
|
144,690
|
|
|
|
130
|
|
|
|
0.36
|
|
|
|
158,477
|
|
|
|
197
|
|
|
|
0.25
|
|
|
|
145,263
|
|
|
|
305
|
|
|
|
0.42
|
|
Passbook
accounts (1)
|
|
|
81,994
|
|
|
|
98
|
|
|
|
0.48
|
|
|
|
70,919
|
|
|
|
61
|
|
|
|
0.34
|
|
|
|
81,611
|
|
|
|
202
|
|
|
|
0.50
|
|
|
|
70,776
|
|
|
|
129
|
|
|
|
0.36
|
|
Certificates
of deposit (1)
|
|
|
187,456
|
|
|
|
676
|
|
|
|
1.44
|
|
|
|
197,575
|
|
|
|
854
|
|
|
|
1.73
|
|
|
|
188,942
|
|
|
|
1,401
|
|
|
|
1.48
|
|
|
|
196,984
|
|
|
|
1,749
|
|
|
|
1.78
|
|
Total
interest-bearing deposits
|
|
|
430,204
|
|
|
|
844
|
|
|
|
0.78
|
|
|
|
413,184
|
|
|
|
1,045
|
|
|
|
1.01
|
|
|
|
429,030
|
|
|
|
1,800
|
|
|
|
0.84
|
|
|
|
413,023
|
|
|
|
2,183
|
|
|
|
1.06
|
|
FHLB
advances
|
|
|
10,458
|
|
|
|
45
|
|
|
|
1.72
|
|
|
|
1,458
|
|
|
|
12
|
|
|
|
3.29
|
|
|
|
10,583
|
|
|
|
92
|
|
|
|
1.74
|
|
|
|
1,583
|
|
|
|
26
|
|
|
|
3.28
|
|
Total
interest-bearing liabilities
|
|
|
440,662
|
|
|
|
889
|
|
|
|
0.81
|
|
|
|
414,642
|
|
|
|
1,057
|
|
|
|
1.02
|
|
|
|
439,613
|
|
|
|
1,892
|
|
|
|
0.86
|
|
|
|
414,606
|
|
|
|
2,209
|
|
|
|
1.07
|
|
Noninterest
bearing liabilities, commitments and contingencies
|
|
|
8,818
|
|
|
|
|
|
|
|
|
|
|
|
3,741
|
|
|
|
|
|
|
|
|
|
|
|
6,585
|
|
|
|
|
|
|
|
|
|
|
|
3,794
|
|
|
|
|
|
|
|
|
|
Total
liabilities, commitments and contingencies
|
|
|
449,480
|
|
|
|
|
|
|
|
|
|
|
|
418,383
|
|
|
|
|
|
|
|
|
|
|
|
446,198
|
|
|
|
|
|
|
|
|
|
|
|
418,400
|
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
55,443
|
|
|
|
|
|
|
|
|
|
|
|
54,593
|
|
|
|
|
|
|
|
|
|
|
|
55,311
|
|
|
|
|
|
|
|
|
|
|
|
54,478
|
|
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
504,923
|
|
|
|
|
|
|
|
|
|
|
$
|
472,976
|
|
|
|
|
|
|
|
|
|
|
$
|
501,509
|
|
|
|
|
|
|
|
|
|
|
$
|
472,878
|
|
|
|
|
|
|
|
|
|
Net
interest income
|
|
|
|
|
|
$
|
3,214
|
|
|
|
|
|
|
|
|
|
|
$
|
3,643
|
|
|
|
|
|
|
|
|
|
|
$
|
6,436
|
|
|
|
|
|
|
|
|
|
|
$
|
7,178
|
|
|
|
|
|
Interest
rate spread
|
|
|
|
|
|
|
|
|
|
|
2.70
|
%
|
|
|
|
|
|
|
|
|
|
|
3.30
|
%
|
|
|
|
|
|
|
|
|
|
|
2.72
|
%
|
|
|
|
|
|
|
|
|
|
|
3.23
|
%
|
Net
interest margin (annualized)
|
|
|
|
|
|
|
|
|
|
|
2.75
|
%
|
|
|
|
|
|
|
|
|
|
|
3.35
|
%
|
|
|
|
|
|
|
|
|
|
|
2.77
|
%
|
|
|
|
|
|
|
|
|
|
|
3.28
|
%
|
Average
interest-earning assets to average interest-bearing liabilities
|
|
|
|
|
|
|
|
|
|
|
106.17
|
%
|
|
|
|
|
|
|
|
|
|
|
105.03
|
%
|
|
|
|
|
|
|
|
|
|
|
105.71
|
%
|
|
|
|
|
|
|
|
|
|
|
105.41
|
%
|
1) Includes municipal deposits
Provision for Loan Losses.
The provision for loan losses was $225,000 for the quarter ended December 31, 2012, compared to $681,000 for the same quarter in
the prior year, representing a decrease of $456,000 or 67.0%. The provision for loan losses was $475,000 for the six months ended
December 31, 2012, compared to $1.6 million for the same period in the prior year, a decrease of $1.1 million or 69.9%. The decreases
in the loan loss provision was primarily due to a decrease in impairment charges in multi-family real estate loans in the three
and six months ended December 31, 2012 as compared to the three and six months ended December 31, 2011.
Other Income.
The following
table summarizes other income for the three and six months ended December 31, 2012 and 2011.
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service charges
|
|
$
|
629
|
|
|
$
|
621
|
|
|
|
1.3
|
%
|
|
$
|
1,250
|
|
|
$
|
1,260
|
|
|
|
(0.8
|
)%
|
Gain on sale of loans
|
|
|
284
|
|
|
|
130
|
|
|
|
118.5
|
|
|
|
532
|
|
|
|
213
|
|
|
|
149.8
|
|
Gain on sale of investments
|
|
|
263
|
|
|
|
327
|
|
|
|
(19.6
|
)
|
|
|
263
|
|
|
|
563
|
|
|
|
(53.3
|
)
|
Loss on sale of other real estate owned
|
|
|
40
|
|
|
|
2
|
|
|
|
1,900.0
|
|
|
|
47
|
|
|
|
2
|
|
|
|
2,250.0
|
|
Income from Bank Owned Life Insurance
|
|
|
82
|
|
|
|
64
|
|
|
|
28.1
|
|
|
|
217
|
|
|
|
131
|
|
|
|
65.6
|
|
Other
|
|
|
69
|
|
|
|
61
|
|
|
|
13.1
|
|
|
|
125
|
|
|
|
162
|
|
|
|
(22.8
|
)
|
Total
|
|
$
|
1,367
|
|
|
$
|
1,205
|
|
|
|
13.4
|
|
|
$
|
2,434
|
|
|
$
|
2,331
|
|
|
|
4.4
|
|
Other income increased $162,000, or 13.4%,
to $1.4 million for the quarter ended December 31, 2012 from $1.2 million for the quarter ended December 31, 2011. The increase
in other income was primarily due to a $154,000 increase in gain on sale of loans and a $38,000 increase in gain on sale of other
real estate owned, partially offset by a $64,000 decrease in gain on sale of investments. The increase in gain on sale of loans
was the result of an increase in loan sales to Freddie Mac in the December 31, 2012 quarter 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 gain on sale of other real estate owned was primarily due to the sale of other real estate owned generating proceeds
of $1.5 million during the quarter ended December 31, 2012 resulting in a gain of $40,000 compared to $10,000 in proceeds resulting
in a gain of $2,000 during the quarter ended December 31, 2011. The decrease in gain on sale of investments was the result of fewer
sales of mortgage-backed securities and no sales of other available for sale securities during the current quarter as compared
to the prior year quarter.
Other income increased $103,000, or 4.4%,
to $2.4 million for the six months ended December 31, 2012 from $2.3 million for the six months ended December 31, 2011. The increase
in other income was primarily due to a $319,000 increase in gain on sale of loans and an $86,000 increase in income from bank
owned life insurance, partially offset by a $300,000 decrease in gain on sale of investments. The increase in loan sales to Freddie
Mac in the December 31, 2012 period when compared to the same period in the prior year is 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 fewer sales of mortgage-backed securities and no sales of other
available for sale securities during the current period as compared to the prior year period.
Noninterest Expense.
The
following table shows the components of noninterest expense and the percentage changes for the three and six months ended December 31,
2012 and 2011.
|
|
Three Months Ended
|
|
|
|
|
|
Six Months Ended
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
December 31,
|
|
|
|
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
2012
|
|
|
2011
|
|
|
% Change
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and employee benefits
|
|
$
|
1,785
|
|
|
$
|
1,695
|
|
|
|
5.3
|
%
|
|
$
|
3,594
|
|
|
$
|
3,431
|
|
|
|
4.8
|
%
|
Premises and occupancy expense
|
|
|
372
|
|
|
|
310
|
|
|
|
20.0
|
|
|
|
711
|
|
|
|
638
|
|
|
|
11.4
|
|
Deposit insurance premium
|
|
|
104
|
|
|
|
77
|
|
|
|
35.1
|
|
|
|
281
|
|
|
|
214
|
|
|
|
31.3
|
|
Advertising expense
|
|
|
85
|
|
|
|
114
|
|
|
|
(25.4
|
)
|
|
|
181
|
|
|
|
207
|
|
|
|
(12.6
|
)
|
Data processing expense
|
|
|
346
|
|
|
|
311
|
|
|
|
11.3
|
|
|
|
719
|
|
|
|
616
|
|
|
|
16.7
|
|
Provision for loss on real estate owned
|
|
|
105
|
|
|
|
-
|
|
|
|
100.0
|
|
|
|
105
|
|
|
|
-
|
|
|
|
100.0
|
|
Intangible amortization
|
|
|
40
|
|
|
|
40
|
|
|
|
-
|
|
|
|
80
|
|
|
|
79
|
|
|
|
1.3
|
|
Professional fees
|
|
|
100
|
|
|
|
247
|
|
|
|
(59.5
|
)
|
|
|
402
|
|
|
|
445
|
|
|
|
(9.7
|
)
|
Other operating expenses
|
|
|
433
|
|
|
|
347
|
|
|
|
24.8
|
|
|
|
714
|
|
|
|
660
|
|
|
|
8.2
|
|
Total
|
|
$
|
3,370
|
|
|
$
|
3,141
|
|
|
|
7.3
|
|
|
$
|
6,787
|
|
|
$
|
6,290
|
|
|
|
7.9
|
|
Noninterest expense increased $229,000,
or 7.3%, from $3.1 million for the quarter ended December 31, 2011 to $3.4 million for the quarter ended December 31, 2012. The
increase was primarily due to increases of $90,000 in compensation and employee benefits and a $105,000 provision for loss on
real estate owned in the quarter ended December 31, 2012 compared to no such provision in the prior year quarter.
Noninterest expense increased $497,000,
or 7.9%, from $6.3 million for the six months ended December 31, 2011 to $6.8 million for the six months ended December 31, 2012.
The increase was primarily due to increases of $163,000 in compensation and employee benefits and $103,000 in data processing
expense, as well as a $105,000 provision for loss on real estate owned in the six months ended December 31, 2012 compared to no
such provision in the prior year six month period.
The increase in compensation and employee
benefits expense was primarily due to the addition of employees in the accounting and collections departments, additional payroll
expense associated with the implementation of a new branch network communication system, and annual wage increases. The increase
in data processing expense was primarily due to the implementation of a new branch network communication system. The provision
for loss on real estate owned was due to additional write-downs on two commercial REO properties.
Income Taxes.
Income
tax expense for the three months ended December 31, 2012 was $290,000, compared to $314,000 for the three months ended December 31,
2011. Income tax expense for the six months ended December 31, 2012 was $418,000, compared to $452,000 for the six months ended
December 31, 2011.
Analysis of Nonperforming Assets.
We consider foreclosed real estate, repossessed assets, nonaccrual loans, and TDRs that are delinquent or have not been
performing in accordance with their restructured terms for a specified period of time to be nonperforming assets.
All of the TDRs at December 31, 2012
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, 2012,
46 loans were considered to be TDRs (with an aggregate balance of $21.5 million) of which 24 loans (with an aggregate balance
of $9.9 million) were included in nonperforming assets.
The following table provides information
with respect to our nonperforming assets at the dates indicated.
|
|
At
December 31,
2012
|
|
|
At
June 30,
2012
|
|
(Dollars in thousands)
|
|
(Unaudited)
|
|
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate
|
|
$
|
1,932
|
|
|
$
|
2,412
|
|
Multi-family real estate
|
|
|
1,948
|
|
|
|
2,034
|
|
Nonresidential real estate and land
|
|
|
36
|
|
|
|
1,106
|
|
Commercial
|
|
|
154
|
|
|
|
240
|
|
Consumer
|
|
|
517
|
|
|
|
508
|
|
Total nonaccrual loans
|
|
|
4,587
|
|
|
|
6,300
|
|
Nonaccrual restructured loans:
|
|
|
|
|
|
|
|
|
One- to four-family residential real estate
|
|
|
2,937
|
|
|
|
2,601
|
|
Multi-family real estate
|
|
|
4,115
|
|
|
|
4,251
|
|
Nonresidential real estate and land
|
|
|
2,866
|
|
|
|
2,987
|
|
Total nonaccrual restructured loans
|
|
|
9,918
|
|
|
|
9,839
|
|
Total nonperforming loans
|
|
|
14,505
|
|
|
|
16,139
|
|
Real estate owned
|
|
|
885
|
|
|
|
197
|
|
Total nonperforming assets
|
|
|
15,390
|
|
|
|
16,336
|
|
Accruing restructured loans
|
|
|
11,561
|
|
|
|
13,211
|
|
Accruing restructured loans and
nonperforming assets
|
|
$
|
26,951
|
|
|
$
|
29,547
|
|
Total nonperforming loans to total loans
|
|
|
5.34
|
%
|
|
|
5.60
|
%
|
Total nonperforming loans to total assets
|
|
|
2.81
|
%
|
|
|
3.26
|
%
|
Total nonperforming assets to total assets
|
|
|
2.98
|
%
|
|
|
3.30
|
%
|
Total number of nonperforming loans
|
|
|
76
|
|
|
|
74
|
|
The decrease in nonperforming loans is primarily due to the payoff of a nonresidential real estate loan
with a carrying value of approximately $300,000, and the acquisition through foreclosure of two one- to four-family loans, one
multi-family loan and one nonresidential real estate loan with carrying values of $572,000, $1.2 million & $600,000 respectively,
partially offset by additions of $681,000 in nonresidential real estate and multi-family.
Interest income that would have been recorded
for the three and six months ended December 31, 2012 had nonaccruing loans been current according to their original terms
was $94,000 and $174,000, respectively. Interest recognized on the cash basis with regard to nonaccrual restructured loans was
$64,000 and $85,000 for the three and six months ended December 31, 2012, respectively.
A discussion of our most significant nonaccrual loans follows
.
At December 31, 2012, these loans comprised $11.9 million. The five largest nonaccrual loans at December 31, 2012 were comprised
of: loans A-1 and A-3 of Loan Relationship A, and the loans in Loan Relationships B, G, H and I. Loan A-2 (within Loan Relationship
A), and the loans in Loan Relationships C, E and F, which were reported as “accruing restructured loans” at June 30,
2012, have been performing in accordance with their restructured terms for a sufficiently long period of time and are reported
as “accruing restructured loans” at December 31, 2012.
|
-
|
Loan Relationship A
. The loans comprising this loan relationship (with Loan A-3 using the split note strategy) had a
net carrying value of $4.9 million at December 31, 2012. Three loans, all included in one loan relationship, with a carrying value
of $6.4 million prior to its restructuring in the third quarter of the year ended June 30, 2011. One loan (A-1) is secured by a
first mortgage on an apartment complex near a college campus, another (A-2) is secured by a first mortgage on two mobile home parks,
and the last (A-3) is secured by the first mortgage on another apartment complex. At December 31, 2012 and June 30, 2012, Loan
A-1 and Loan A-3 are included in the above table in “Nonaccrual restructured loans, Multi-family real estate.” Loan
A-2 is included in “Accruing restructured loans.” In the “Credit Risk Profile by Internally Assigned Grade”
table on page 14, Loans A-1, A-2, and A-3 were classified as Multi-Family Residential Real Estate, Substandard, at December 31,
2012 and June 30, 2012. The loans comprising Loan Relationship A were originally restructured in October and November, 2010. At
the time of the first restructuring in 2010, Loan A-1, with a carrying value of $3.0 million, was 180 days delinquent, and Loans
A-2 and A-3 were performing. Management performed a global analysis of the borrowers and restructured each of the three loans by
reducing the original loan rates by 125 to 225 basis points to a rate that was 25 basis points below market rate. Foregone interest
income amounted to $51,000 on the two performing loans that were restructured. The borrowers paid a loan modification fee of $3,000
for this restructuring. At June 30, 2010, after the effect of restating the June 30, 2010 financial statements, management established
a specific allocation on these three loans through a charge-off to the general allowance for loan losses of $1.1 million. On each
of the three loans, one of the borrowers is a corporate entity. Also, on the three loans, each of the principals of the corporate
borrowers individually signed as co-borrowers. At the time of the restructuring, the Bank analyzed the personal net worth, liquid
net worth, debt to income ratios and credit scores of the co-borrowers. While the co-borrowers were not expected to cover a total
loss on the loans, management believed the co-borrowers would mitigate the amount of the potential future losses. In March 2011,
Loan A-3 was again restructured through a troubled debt restructuring as a result of the borrower experiencing cash flow problems
during the quarter ended March 31, 2011. The cash flow problems experienced were the combined effect of decreased rental income
and the failure to pay real estate property taxes. However, due to certain financial difficulties experienced by the co-borrowers,
including the cash flow problems of the subject properties and a decrease in other outside sources of income, the co-borrowers
were unable to mitigate the losses on the loan. Based upon a cash flow analysis of the properties performed by management, $651,000
of the $6.4 million in loans was charged-off during the restructuring using the split note strategy. This split was done for one
loan that had a balance of $1.6 million before the split. After the split, Note A had a balance of $994,000 and Note B had a balance
of $651,000. Prior to the loan being restructured in March, 2011, the restructured loan carried a $650,000 specific reserve as
restated on the Company’s Form 10-K, as amended, for the year ended June 30, 2011 filed with the SEC on March 28, 2012 that
was included in Note B and charged-off. The split note loans have an interest rate that is 275 basis points below their original
restructured rate for a period of two years, and 475 basis points below their original rates. At the end of the two year period,
balloon payments are due, unless the borrower refinances into a market rate loan at that time. This relationship was performing
in accordance with its restructured terms at December 31, 2012. The property securing Loan A-3 was sold in April 2012 for $2.2
million. The buyer made a down payment of $50,000 and pays a monthly principal and interest payment, based on a 5% interest rate
and a 30-year term. This land contract has a balloon payment in April 2014. The buyer has made all scheduled payments as of December
31, 2012. Also, during the quarter ended December 31, 2012 the interest rate of Loan A-2, with a net carrying value of $1.6 million
at December 31, 2012, increased to the original interest rate. The original interest rate is greater than the current market interest
rate.
|
|
-
|
Loan Relationship B
. The loans comprising Loan
Relationship B, using the split note strategy, had a net carrying value of $1.3 million at December 31, 2012. The loans comprising
Loan Relationship B were originally restructured in June, 2010, with an aggregate carrying value of $4.1 million until their restructuring
in the quarter ended March 31, 2011. These loans are secured by a first mortgage on two separate retail strip shopping centers
and a single purpose commercial use property. The loans are included in the above table as “Nonaccrual restructured loans,
Nonresidential real estate” at December 31, 2012 and June 30, 2012. In the “Credit Risk Profile by Internally Assigned
Grade” table on page 14, these loans were classified as “Nonresidential real estate, Substandard” at December
31, 2012 and June 30, 2012. At the time of the original restructuring, the property value was based primarily on the collateral’s
cash flow, including required personal cash infusions from the co-borrowers. Management believed that the lower debt service would
improve the borrowers’ cash flow, and in turn, the performance of the loans. One of the borrowers is a corporate entity.
The principals of the corporate borrower are also co-borrowers on the note. At the time of the restructuring, the Bank analyzed
the personal net worth, liquid net worth, debt to income ratios and credit scores of the co-borrowers. While the co-borrowers were
not expected to cover a total loss on the loans, management believed the co-borrowers would mitigate the amount of potential future
losses. The restructured loans were considered impaired at June 30, 2010 with an allowance for loan loss of $600,000 to reflect
the reduction in carrying value resulting from the exclusion of the required personal cash infusions from the co-borrowers from
the calculation of the carrying value. In March, 2011, the loans comprising Loan Relationship B again were experiencing cash flow
problems. The cash flow problems experienced were the combined effect of the level of the required monthly loan payments, decreases
in rental revenue from the properties, and failure to pay real estate property taxes. Due to certain financial difficulties experienced
by the co-borrowers, including the cash flow problems of the subject properties and a decrease in other outside sources of income,
the co-borrowers were unable to mitigate the losses on the loan. Therefore, in March 2011, the two loans secured by the two separate
retail strip shopping centers were combined and refinanced into two loans, using the split note strategy. The first loan was for
$2.4 million and was classified as substandard and was a troubled debt restructuring because of a below market interest rate. The
second loan was for $1.3 million and was charged-off. In March 2011, the loan secured by the single purpose commercial use property
was also refinanced into two loans, using the split note strategy. The first loan was for $238,000 and was classified as substandard
and was a troubled debt restructuring because of a below market interest rate. The second loan was for $169,000 and was charged-off.
The restructured loans have an interest rate that is 275 basis points lower than the 2010 restructured rate for a period of two
years, and 500 basis points below their original rates. The loan secured by the two retail strip shopping centers was classified
as substandard and the loan secured by the single purpose commercial use property was classified as substandard, were both included
in “Nonaccrual restructured loans, Nonresidential real estate” as of June 30, 2012. At the end of the two year period,
balloon payments are due, unless the borrower refinances the loans into a market rate loan at that time. In May 2012, the loan
secured by the two retail strip shopping centers experienced the loss of a major tenant. As a result of the decrease in cash flow,
the Bank had the two retail strip shopping centers appraised in June 2012. The appraisal reflected that the value of the properties
declined to $1.45 million from the previous appraisal of $2.95 million in February 2011. Management has determined that this loan
will ultimately be settled through the sale of the property. A charge-off in the amount of $956,000 was established in the quarter
ended June 30, 2012 based on the most recent appraisal indicating a known loss, and an additional impairment of $189,000 was established
based on the Bank’s experience in settling foreclosed property. The carrying value of this loan is classified as substandard,
and this loan is a troubled debt restructuring. The Bank also appraised the single purpose commercial use property in June 2012.
The value of this property declined to $225,000 from $325,000 in February 2011 due to decreased cash flow from the current tenant.
Management decided that this loan would also be settled from the sale of the property. A charge-off in the amount of $22,000 was
established based on the most recent appraisal indicating a known loss, and an additional impairment of $29,000 was established
based on the Bank’s experience in settling foreclosed property. The carrying value of this loan is classified as substandard,
and this loan is a troubled debt restructuring. The loans were performing in accordance with their restructured terms at December
31, 2012.
|
|
-
|
Loan Relationship C
. The loans comprising this
relationship, using the split note strategy, had a net carrying value of $280,000 at December 31, 2012. The original two loans
included in this relationship had an aggregate value of $2.1 million prior to being restructured in the quarter ended March 31,
2011. One of the original loans was secured by a first mortgage on a single-family home. The other original loan was secured by
a 24-unit apartment complex, six one- to four-family residential properties and ten residential building lots. In March 2011, these
two loans were restructured into two loans, using the split note strategy. The two loans using the split note strategy had an aggregate
carrying value of $280,000 at December 31, 2012 and $ 1.5 million at June 30, 2012. The Note A loan is included in the above table
in “Nonaccrual restructured loans” at December 31, 2012 and as “Accruing restructured loans” at June 30,
2012. In the “Credit Risk Profile by Internally Assigned Grade” table on page 14, the Note A loan is classified as
“Multi-family real estate, Substandard” at December 31, 2012 and June 30, 2012, respectively. The loans comprising
Loan Relationship C were originally restructured in August 2009. At the time of the first restructuring, management established
a specific reserve through a charge-off to the general allowance for loan losses of $29,000. In August 2009, the loans were originally
restructured by reducing the interest rates on the loans by a range of 400 to 600 basis points to a rate that was 300 basis points
below market rate. These loans were performing at the initial time of the restructuring in August 2009, but the borrowers were
beginning to experience cash flow difficulties. Management believed that the lower debt service would improve the borrowers’
cash flow, and in turn, the performance of the loans. At the time the loans were initially restructured, independent appraisals
were performed on each piece of underlying collateral. These appraisals supported the aggregate $2.1 million carrying value of
the two loans. One of the borrowers is a corporate entity, with one principal who has personally signed on the loan. At the time
of the restructuring, we analyzed the personal net worth, liquid net worth, debt to income ratios and credit scores of the co-borrower
and determined that the co-borrower was not expected to cover a total loss, but would mitigate the amount of potential future losses.
Based on the restatement of the June 30, 2010 audited consolidated financial statements, these loans were considered impaired at
June 30, 2010, with an allowance for loan losses of $675,000 established to reflect the reduction in the carrying value resulting
from the exclusion of the required personal cash infusions from the calculation of the carrying value. During the quarter ended
March 2011, the borrower again began to experience cash flow difficulties and these loans were refinanced through a troubled debt
restructuring. The cash flow problems contributed to the combined effect of the failure to pay required monthly loan payments,
the failure to pay association dues, and the failure to pay real estate property taxes. Due to certain financial difficulties experienced
by the co-borrower, including the cash flow problems of the subject properties and a decrease in other outside sources of income,
the co-borrower was unable to mitigate the losses on the loan. As stated above, based upon a cash flow analysis of the properties
performed by management, the loans were restructured during the quarter ended March 31, 2011, utilizing the split note strategy.
After the restructuring, the previous aggregate balance of $2.1 million was split into two notes with Note A having a balance of
$1.5 million which was classified as substandard, and Note B having a balance of $626,000 which was charged-off. A restructuring
fee of $14,000 was charged and included in Note B at March 31, 2011. The restructured loans have an interest rate that is 275 basis
points lower than the 2010 restructured rate for a period of two years, and 675 to 875 basis points below the original rates. At
the end of the two year period, balloon payments are due, unless the borrower refinances into a market rate loan at that time.
As stated in the September 30, 2012 Form 10-Q, the Bank was in negotiations with this borrower to repossess these properties. These
negotiations were completed in the quarter ended December 31, 2012. The results of these negotiations were that the borrower would
deed back to the Bank the 24-unit apartment complex, five of the seven one- to four-family residential properties, and the ten
residential building lots. The other two one- to four-family residential properties were retained by the borrower with the agreement
that the borrower would either sell, refinance with another financial institution, or deed back to the Bank these two properties
during the quarter ending March 31, 2013. The properties deeded back to the Bank were put in to Other Real Estate Owned in the
amount of $1.2 million. The two properties retained by the borrower have a net carrying value of $280,000 based on appraisals in
the total amount of $350,000 completed in the quarter ended December 31, 2012. During the quarter ended December 31, 2012, the
Bank sold the 24-unit apartment complex, three of the one- to four-family residential properties and four residential building
lots, generating total proceeds of $1.0 million. Based on the appraisals of the remaining properties, the Bank does not expect
any additional losses with this relationship.
|
|
-
|
Loan Relationship D
. The loan comprising this loan relationship
had a net carrying value of $1.3 million at December 31, 2012. The
loan comprising Loan Relationship D was originally restructured
in December 2008. The loan is secured by a first mortgage on a 62-unit
apartment complex near a college campus. The loan was made in 2008
to a seasoned property manager who made major improvements to the
property. The property was purchased in December 2008 from a Bank
borrower who was delinquent at the time of acquisition. At the time
the loan was acquired from the delinquent borrower in 2008, it was
restructured with a new borrower, in lieu of foreclosure, pursuant
to which the Bank loaned the borrower funds to purchase and renovate
the property. At the time of the restructuring, management established
a specific reserve through a charge-off to the general allowance
for loan losses of $113,000. We have no personal guarantee or co-borrower
on this loan. The loan required interest only payments through December
2011. In January, 2012, the interest rate on the loan was adjusted
to the prime interest rate as published by
The Wall Street Journal
,
plus a spread. At the time of the acquisition, management believed
that the new borrower would be able to renovate the property with
a view toward improving the property’s cash flow, and in turn,
the performance of the loan. After the closing of the loan, the
borrower completed renovations to the property and the cash flow
of the property has improved. At the time the loan was made, an
independent appraisal was performed on the collateral underlying
the loan. This appraisal supported the $1.6 million carrying value
of the loan. In November 2011, the borrower approached the Bank
and expressed concern about being able to pay the principal and
interest payment that would go into effect in January 2012. The
internal cash flow analysis completed by the Bank indicated that
the payment could be made based on the higher monthly occupancy
rates after the renovations were completed. An appraisal was ordered
to provide the “as is” value of the property. The Bank
obtained the appraisal in December 2011, and the appraised value
of the property had decreased to $1.4 million. Therefore, this loan
was restructured into two loans using the split note strategy. Based
on the cash flows supported by the property, the first loan was
originated for $1.3 million at a market interest rate. This loan
was put on nonaccrual, classified as substandard, and reported as
a troubled debt restructuring. The second loan was originated for
$393,000 and was charged-off in December 2011. At December 31, 2012,
the carrying value of the first loan was $1.3 million. At June 30,
2012, this loan had performed in accordance with its restructured
terms for six months. Therefore, as of December 31, 2012 and June
30, 2012 this loan is included in “Accruing restructured loans”
in the above table. In the “Credit Risk Profile by Internally
Assigned Grade” table on page 15, the carrying value of Loan
A was classified as “Multi-family residential real estate,
Substandard,” at December 31, 2012 and at June 30 2012. At
December 31, 2012, this loan was performing in accordance with its
restructured terms.
|
|
-
|
Loan Relationship E
. Two loans (which consisted
of one note prior to the use of the split note strategy) with an aggregate carrying value of $525,000 at December 31, 2012, secured
by nonresidential real estate. Note A is included in the above table in “Accruing restructured loans” at December 31,
2012 and at June 30, 2012. In the “Credit Risk Profile by Internally Assigned Grade” table on page 14, Note A was classified
in “Nonresidential real estate, Substandard” at December 31, 2012 and at June 30, 2012, respectively. The loan was
restructured in April, 2010, and a new appraisal was obtained. At June 30, 2010, the charge-off to the general allowance for loan
losses, based upon the appraisal, was $308,000. The restructured loan had payments deferred for one year, while accruing interest
at a market rate. This loan was scheduled to undergo an interest rate and payment reset in February, 2011, pursuant to the terms
of the note. We have no personal guarantee or co-borrower on this loan. During the loan adjustment period, it became apparent the
borrower was going to struggle to make the required monthly payments beginning in February, 2011. As a result, management completed
a detailed analysis of this loan and determined to again restructure the loan utilizing the split note strategy in March, 2011.
The terms of Note A were calculated using current financial information to determine the amount of the payment at which the borrower
would have a debt service coverage ratio of approximately 1.5x, which is more stringent than our normal underwriting standards.
A restructuring fee of $9,000 was charged and included in Note B at March 31, 2011. After the restructuring in March, 2011, Note
A was in the amount of $569,000 and Note B was in the amount of $508,000, all of which was charged-off in the quarter ended March
31, 2011 inclusive of the previous specific reserve of $308,000. At the end of the two year period, balloon payments are due, unless
the borrower refinances into a market rate loan at that time. At December 31, 2012, no further impairments have been recorded since
the most recent restructuring. This relationship was performing in accordance with its restructured terms at December 30, 2012.
|
|
-
|
Loan Relationship F
. This relationship consists
of two loans (based on the split note strategy) with an aggregate carrying value of $450,000 at December 31, 2012. These loans
are secured by single-family and multi-family residential real estate. Note A is included in the above table as “Accruing
restructured loans, at December 31, 2012 and at June 30, 2012. In the “Credit Risk Profile by Internally Assigned Grade”
table on page 14, the A loan was classified as “Multi-family real estate, Substandard” at December 31 and June 30,
2012, respectively. The original loan was initially restructured using the split note strategy in June, 2010 based on an 80% loan-to-value
ratio derived from an April, 2010 appraisal. The loans were considered impaired at June 30, 2010 with an additional increase in
the allowance for loan losses of $117,000 to reflect the reduction in carrying value resulting from the exclusion of the required
personal cash infusions from the co-borrower from the calculation of the carrying value. At December 31, 2010, the 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, 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 bring the loan
current under their current cash flow. 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 split note strategy
in March, 2011. The terms of Note A were calculated using current financial information to determine the amount of the payment
at which the borrowers would have a debt service coverage ratio of approximately 1.5x, which is more stringent than our current
underwriting standards. A restructuring fee of $7,000 was charged and included in Note B at March 31, 2011. The borrower is a corporate
entity, with two principals, who also individually signed the loan as co-borrowers. After the restructuring in March, 2011, Note
A was for $475,000 and Note B in the amount of $405,000 was charged-off in the quarter ended March 31, 2011, including $188,000
that was charged-off against the general allowance for loan losses. At the end of the two year period, a balloon payment is due,
unless the borrower refinances into 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 and only the borrower that had taken control of
the two properties in early 2011 was left on the loan. The other borrower relinquished all of their interest in the two properties.
However, in addition to the one borrower retained on the loan, two other borrowers were added, who will give managerial strength
to the relationship. Additionally, the “A” loan was modified to a market rate of interest with no increase in the principal
balance of the loan. Even with the higher market rate of interest, the debt service coverage ratio is above 1.20, which is in compliance
with the current loan underwriting standards. Also, during the quarter ended December 31, 2012, new appraisals were completed on
the two properties. The total amount of the two appraisals was $730,000. There was also no increase in the principal balance of
Loan “B”. The interest rate on this loan was reduced to 0% and the loan remained charged off. Both Loan “A”
and Loan “B” have a balloon payment in the quarter ending December 31, 2015. No additional loss was incurred when these
two loans were modified. Loan “A” was peroforming in accordance with its restructured terms at December 31, 2012.
|
|
-
|
Loan Relationship G
.
A loan which is secured by a 93-pad mobile home park, and an 87-pad mobile home park, is included in the above table in “Nonaccrual
Loans, Multi-family real estate” as of December 31, 2012 and as of June 30, 2012. In the “Credit Risk Profile by Internally
Assigned Grade” table on page 14, this is classified as Multi-family residential real estate, Substandard, at December 31,
2012 and at June 30, 2012. The borrowers are two limited liability corporations and the two co-borrowers are the principals of
the corporations. This loan is a participation loan with another financial institution. The Bank is the lead lender and has a 79%
interest in the loan. The borrowers approached the Bank in May, 2011 and stated they were having cash flow problems even though
the loan was current. The Bank received updated financial information following this conversation. The financial information showed
there were cash flow problems, but that the co-borrowers had been infusing their personal funds. Based on the cash flow of the
properties, the Bank established an impairment in the amount of $400,000, effective June 30, 2011, based on the information available
when the June 30, 2011, financial statements were issued. At June 30, 2011, the Bank’s portion of the loan balance was $2.14
million, and the carrying value of the Bank’s portion of the loan was $1.74 million. At January 31, 2012, the loan was 39
days delinquent. The Bank was still not receiving current financial information; therefore, new appraisals were ordered. The appraisals
were received in March 2012, in the total amount of $2.8 million. The borrower was able to bring the loan current by June 30, 2012.
At December 31, 2012, United Community Bancorp’s portion of the loan balance was $2.0 million and the carrying value of the
Bank’s portion of the loan was $1.7 million. At December 31, 2012, the loan was performing in accordance with its restructured
terms.
|
|
•
|
Loan Relationship H.
As of December 31, 2012, this
loan relationship consists of two loans with a net carrying value of $741,000. As stated in the June 30, 2012 narrative, this relationship
was restructured using the split note strategy in the September 30, 2012 quarter. Both of the loans in the “Split Note Strategy”
have the same security and priority as the one loan discussed in the June 30, 2012 narrative. The collateral value is $978,000
on properties for which United Community Bank has a first lien. No additional loss was incurred when the loan was restructured
using the split note strategy in the September, 2012 quarter. As of June 30, 2012, this relationship consisted of one loan which
was secured by a first lien on an 18-unit apartment complex, a single-family dwelling and a 6.3 acre tract of land, and a second
lien on a single-family owner occupied dwelling on 11.36 acres. This loan is included in the above table, as “Nonaccrual
Loans, Multi-family Real Estate” as of June 30, 2012, and in the “Credit Risk Profile by Internally Assigned Grade”
table on page 14, this relationship is classified as “Multi-family Residential Real Estate, Substandard” at June 30,
2012. The “A” loan of the split note strategy is included in the above table as “Nonaccrual Loans, Multi-family
Real Estate” as of December 31, 2012. Also, in the “Credit Risk Profile by Internally Assigned Grade” table on
page 14, the “A” loan is classified as “Multi-Family Residential Real Estate, Substandard” at December
31, 2012. The “B” loan of the split note strategy was charged off. At December 31, 2012, the loan was performing in
accordance with its restructured terms.
|
|
•
|
Loan Relationship I
. This relationship is comprised
of one loan which is secured by an industrial/office nonresidential property and is included in the above table, in “Nonaccrual
loans nonresidential real estate” as of December 31, 2012 and as of June 30, 2012. In the “Credit Risk Profile by Internally
Assigned Grade” table on page 14, this is classified as “Nonresidential real estate, Substandard” at December
31, 2012 and at June 30, 2012. The borrower is a limited liability corporation and the two co-borrowers are principals of the limited
liability corporation. The borrower approached United Community Bank in March 2012, indicating that a major tenant was not going
to renew its lease in November 2012. However, the tenant would remain in the property until its lease expired. United Community
Bank ordered an appraisal based on this information. The appraisal was received in March 2012 and reflected a value of $900,000.
At March 31, 2012, the carrying value of the loan was reduced by $177,000 to $819,000. After the 2011 tax returns were received
late in the second quarter of 2012, United Community Bank conducted further cash flow analyses and determined that the only way
the loan would be paid off would be to sell the property. United Community Bank recorded a charge-off of $146,000 based on the
most recent appraisal. An impairment in the amount of $120,000 was also established as an estimate to impair the loan further based
on United Community Bank’s experience in settling foreclosed properties. The carrying value of the loan was $711,000 at December
31, 2012. The Bank is in negotiations to take over this property. At this time, the Bank does not expect any additional losses
as a result of repossessing this property.
|
The following table summarizes
all Note A/B format loans at December 31, 2012:
(Dollars in thousands)
|
|
Loan Balances
|
|
|
Number of Loans
|
|
|
|
Note A
|
|
|
Note B
|
|
|
Total
|
|
|
Note A
|
|
|
Note B
|
|
Nonresidential real estate
|
|
$
|
4,153
|
|
|
$
|
2,489
|
|
|
$
|
6,642
|
|
|
|
5
|
|
|
|
5
|
|
Multi-family residential real estate
|
|
|
4,717
|
|
|
|
2,705
|
|
|
|
7,422
|
|
|
|
6
|
|
|
|
6
|
|
One- to four-family residential
real estate
|
|
|
517
|
|
|
|
61
|
|
|
|
578
|
|
|
|
1
|
|
|
|
1
|
|
Total (1)
|
|
$
|
9,387
|
|
|
$
|
5,255
|
|
|
$
|
14,642
|
|
|
|
12
|
|
|
|
12
|
|
|
(1)
|
Included in this total are an aggregate of $5.8 million comprised of Note As and $1.5 million comprised
of Note Bs that are included in the discussion of Loan Relationships A, B, D, E, F and H.
|
Based on the fact that our loans receivable greater than 30 days past due and accruing in the multi-family
residential real estate and nonresidential real estate portfolios totaled $350,000, which represents 0.4% of these loans at December 31,
2012, management does not believe there are any other large concentrations of credit risk that are not performing under the original
terms or modified terms, as applicable.
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,
2012
|
|
|
|
Loan Status
|
|
|
Total
Unpaid
Principal
|
|
|
Related
|
|
|
Recorded
|
|
|
Number
|
|
|
Average
Recorded
|
|
(in thousands)
|
|
Accrual
|
|
|
Nonaccrual
|
|
|
Balance
|
|
|
Allowance
|
|
|
Investment
|
|
|
of Loans
|
|
|
Investment
|
|
One- to four-family residential real estate
|
|
$
|
2,084
|
|
|
$
|
2,936
|
|
|
$
|
5,020
|
|
|
$
|
23
|
|
|
$
|
4,997
|
|
|
|
27
|
|
|
$
|
4,904
|
|
Multi-family residential real estate
|
|
|
5,832
|
|
|
|
4,116
|
|
|
|
9,948
|
|
|
|
154
|
|
|
|
9,794
|
|
|
|
11
|
|
|
|
10,997
|
|
Nonresidential real estate
|
|
|
3,645
|
|
|
|
2,866
|
|
|
|
6,511
|
|
|
|
431
|
|
|
|
6,080
|
|
|
|
8
|
|
|
|
5,776
|
|
Total
|
|
$
|
11,561
|
|
|
$
|
9,918
|
|
|
$
|
21,479
|
|
|
$
|
608
|
|
|
$
|
20,871
|
|
|
|
46
|
|
|
$
|
21,676
|
|
The following table is a roll forward
of activity in our TDRs:
|
|
Three Months Ended December
31, 2012
|
|
|
Six Months Ended December 31,
2012
|
|
|
|
Recorded
Investment
|
|
|
Number of
Loans
|
|
|
Recorded
Investment
|
|
|
Number of
Loans
|
|
(Dollar amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
21,763
|
|
|
|
46
|
|
|
$
|
22,394
|
|
|
|
48
|
|
Additions to TDRs
|
|
|
525
|
|
|
|
1
|
|
|
|
681
|
|
|
|
1
|
|
Removal of TDRs
(1)
|
|
|
(1,228
|
)
|
|
|
(1
|
)
|
|
|
(1,374
|
)
|
|
|
(3
|
)
|
Payments
|
|
|
(189
|
)
|
|
|
-
|
|
|
|
(830
|
)
|
|
|
-
|
|
Ending balance
|
|
$
|
20,871
|
|
|
|
46
|
|
|
$
|
20,871
|
|
|
|
46
|
|
|
(1)
|
One TDR was foreclosed on during the period and transferred
to REO in the amount of $146,000. At June 30, 2012,
one customer had two TDRs that were restructured during
the quarter ended September 30, 2012 into one loan.
|
Two loans that were recorded as TDRs at
June 30, 2012 were restructured during the quarter ended September 30, 2012 upon the end of the original restructured
terms. The restructuring increased the recorded investment in these loans by $156,000 and the loans continue to be carried as
TDRs.
One loan was recorded as a TDR during the quarter ended December 31, 2012. The borrowers approached the
Bank in the quarter ending December 31, 2012, and told the Bank, after they had consulted with their accountant and financial planner,
that they were unsure whether or not they could continue to make payments on their $479,000 loan that was secured by a nonresidential
property. After negotiations, it was agreed that a split note strategy would be used with a balloon payment in the quarter
ending December 31, 2015. The “A” note would be for $375,000 and the “B” note would be for $106,000.
The fees associated with these restructurings were included in the “B” note. Both of these notes are considered
trouble debt restructurings. Also, both of these notes are secured by the nonresidential property and also by the owner-occupied,
single family residence of the borrowers. The properties securing these notes were appraised within the previous six
months. The total of these appraisals was $706,000. The owner-occupied, single family residence had a loan with a principal
balance of $180,000 as of December 31, 2012. The interest rate of the “A” note was the same interest rate that
the borrowers had before the restructuring. This interest rate was above the market interest rate for a nonresidential property.
With a debt service coverage ratio at 1.20, which is in compliance with current loan underwriting guidelines, and a loan to value
less than 80%, this loan was included in “Accruing restructured loans” as of December 31, 2012 and in the “Credit
Risk Profile by Internally Assigned Grade” table, Note “A” is classified as “Nonresidential real estate,
Substandard” as of December 31, 2012. Note “B” has a 0% interest rate and the full amount of this loan
was charged off.
Loans that were included in TDRs at December 31, 2012 were generally given concessions of interest
rate reductions of between 25 and 300 basis points, and/or structured as interest only payment loans for periods of one to three
years. Many of these loans also have balloon payments due at the end of their lowered rate period, requiring the borrower to refinance
at market rates at that time. At December 31, 2012, there were 41 loans that required payments of principal and interest,
and five loans that required interest payments only.
The following table shows the aggregate
amounts of our classified assets at the dates indicated.
|
|
At December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
(In thousands)
|
|
|
|
|
|
Special mention assets
|
|
$
|
4,641
|
|
|
$
|
9,339
|
|
Substandard assets
|
|
|
28,793
|
|
|
|
32,302
|
|
Total classified assets
|
|
$
|
33,434
|
|
|
$
|
41,641
|
|
The following tables illustrate certain
disclosures required by ASC 310-10-50-29(b) at December 31, 2012 and at June 30, 2012.
At December 31, 2012:
|
|
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
|
|
$
|
104,043
|
|
|
$
|
34,625
|
|
|
$
|
11,323
|
|
|
$
|
17,556
|
|
|
$
|
28,785
|
|
|
$
|
771
|
|
|
$
|
2,473
|
|
|
$
|
5,917
|
|
|
$
|
205,493
|
|
Watch
|
|
|
7,662
|
|
|
|
867
|
|
|
|
4,708
|
|
|
|
2,232
|
|
|
|
15,519
|
|
|
|
—
|
|
|
|
900
|
|
|
|
753
|
|
|
|
32,641
|
|
Special
mention
|
|
|
641
|
|
|
|
31
|
|
|
|
—
|
|
|
|
361
|
|
|
|
3,419
|
|
|
|
—
|
|
|
|
189
|
|
|
|
—
|
|
|
|
4,641
|
|
Substandard
|
|
|
5,253
|
|
|
|
517
|
|
|
|
1,419
|
|
|
|
14,492
|
|
|
|
6,634
|
|
|
|
—
|
|
|
|
27
|
|
|
|
451
|
|
|
|
28,793
|
|
Total
|
|
$
|
117,599
|
|
|
$
|
36,040
|
|
|
$
|
17,450
|
|
|
$
|
34,641
|
|
|
$
|
54,357
|
|
|
$
|
771
|
|
|
$
|
3,589
|
|
|
$
|
7,121
|
|
|
$
|
271,568
|
|
At June 30, 2012:
|
|
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
|
|
$
|
108,642
|
|
|
$
|
34,380
|
|
|
$
|
11,836
|
|
|
$
|
15,423
|
|
|
$
|
30,379
|
|
|
$
|
510
|
|
|
$
|
2,577
|
|
|
$
|
6,015
|
|
|
$
|
209,762
|
|
Watch
|
|
|
6,503
|
|
|
|
683
|
|
|
|
4,059
|
|
|
|
10,223
|
|
|
|
11,250
|
|
|
|
479
|
|
|
|
836
|
|
|
|
615
|
|
|
|
34,648
|
|
Special mention
|
|
|
268
|
|
|
|
24
|
|
|
|
827
|
|
|
|
347
|
|
|
|
10,249
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
11,715
|
|
Substandard
|
|
|
6,288
|
|
|
|
508
|
|
|
|
1,099
|
|
|
|
16,332
|
|
|
|
7,245
|
|
|
|
200
|
|
|
|
28
|
|
|
|
374
|
|
|
|
32,074
|
|
Total
|
|
$
|
121,701
|
|
|
$
|
35,595
|
|
|
$
|
17,821
|
|
|
$
|
42,325
|
|
|
$
|
59,123
|
|
|
$
|
1,189
|
|
|
$
|
3,441
|
|
|
$
|
7,004
|
|
|
$
|
288,199
|
|
The following table illustrates certain
disclosures required by ASC 310-10-50-7A for gross loans.
|
|
At December 31, 2012
|
|
|
At June 30, 2012
|
|
|
|
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
|
|
$
|
1,302
|
|
|
$
|
504
|
|
|
$
|
1,764
|
|
|
$
|
355
|
|
Consumer
|
|
|
56
|
|
|
|
42
|
|
|
|
195
|
|
|
|
15
|
|
One- to four-family mortgage – nonowner-occupied
|
|
|
802
|
|
|
|
—
|
|
|
|
947
|
|
|
|
—
|
|
Multi-family mortgage
|
|
|
—
|
|
|
|
—
|
|
|
|
489
|
|
|
|
—
|
|
Nonresidential real estate mortgage – commercial and office buildings
|
|
|
360
|
|
|
|
—
|
|
|
|
207
|
|
|
|
306
|
|
Construction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Land
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Commercial and agricultural
|
|
|
13
|
|
|
|
—
|
|
|
|
246
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,533
|
|
|
$
|
546
|
|
|
$
|
3,848
|
|
|
$
|
676
|
|
The following table illustrates the changes
to the allowance for loan losses for the three and six months ended December 31, 2012:
|
|
One-
to
Four-
Family
Mortgage
Owner-
Occupied
|
|
|
Consumer
|
|
|
One-
to
Four-
Family
Mortgage
Nonowner-
Occupied
|
|
|
Multi-
Family
Mortgage
Nonowner-
Occupied
|
|
|
Non-
Residential
Real Estate
|
|
|
Construction
|
|
|
Land
|
|
|
Commercial
and
Agricultural
|
|
|
Total
|
|
|
|
(In
thousands)
|
|
Allowance for Loan
Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
October 1, 2012:
|
|
$
|
935
|
|
|
$
|
551
|
|
|
$
|
257
|
|
|
$
|
1,671
|
|
|
$
|
2,221
|
|
|
$
|
6
|
|
|
$
|
19
|
|
|
$
|
23
|
|
|
$
|
5,683
|
|
Charge offs
|
|
|
(73
|
)
|
|
|
(41
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(106
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(220
|
)
|
Recoveries
|
|
|
8
|
|
|
|
12
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
22
|
|
Provision
|
|
|
57
|
|
|
|
15
|
|
|
|
(7
|
)
|
|
|
111
|
|
|
|
51
|
|
|
|
(3
|
)
|
|
|
3
|
|
|
|
(2
|
)
|
|
|
225
|
|
Ending Balance:
|
|
$
|
927
|
|
|
$
|
537
|
|
|
$
|
250
|
|
|
$
|
1,782
|
|
|
$
|
2,167
|
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
5,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for Loan
Losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 1,
2012:
|
|
$
|
666
|
|
|
$
|
477
|
|
|
$
|
236
|
|
|
$
|
1,915
|
|
|
$
|
2,282
|
|
|
$
|
3
|
|
|
$
|
11
|
|
|
$
|
24
|
|
|
$
|
5,614
|
|
Charge offs
|
|
|
(132
|
)
|
|
|
(91
|
)
|
|
|
(61
|
)
|
|
|
—
|
|
|
|
(206
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(490
|
)
|
Recoveries
|
|
|
13
|
|
|
|
25
|
|
|
|
60
|
|
|
|
9
|
|
|
|
2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1
|
|
|
|
111
|
|
Provision
|
|
|
380
|
|
|
|
126
|
|
|
|
15
|
|
|
|
(142
|
)
|
|
|
89
|
|
|
|
—
|
|
|
|
11
|
|
|
|
(4
|
)
|
|
|
475
|
|
Ending Balance:
|
|
$
|
927
|
|
|
$
|
537
|
|
|
$
|
250
|
|
|
$
|
1,782
|
|
|
$
|
2,167
|
|
|
$
|
3
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
5,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Individually
Evaluated
|
|
$
|
16
|
|
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
410
|
|
|
$
|
431
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
864
|
|
Balance, Collectively
Evaluated
|
|
|
911
|
|
|
|
537
|
|
|
|
243
|
|
|
|
1,372
|
|
|
|
1,736
|
|
|
|
3
|
|
|
|
22
|
|
|
|
22
|
|
|
|
4,846
|
|
Financing receivables:
ending balance
|
|
|
117,599
|
|
|
|
36,040
|
|
|
|
17,450
|
|
|
|
34,641
|
|
|
|
54,357
|
|
|
|
771
|
|
|
|
3,589
|
|
|
|
7,121
|
|
|
|
271,568
|
|
Ending Balance:
individually evaluated for impairment
|
|
|
4,350
|
|
|
|
1,624
|
|
|
|
1,376
|
|
|
|
11,894
|
|
|
|
6,248
|
|
|
|
—
|
|
|
|
21
|
|
|
|
100
|
|
|
|
25,613
|
|
Ending Balance:
collectively evaluated for impairment
|
|
|
100,877
|
|
|
|
29,013
|
|
|
|
15,354
|
|
|
|
22,720
|
|
|
|
43,671
|
|
|
|
771
|
|
|
|
3,482
|
|
|
|
6,128
|
|
|
|
222,016
|
|
Ending Balance:
loans acquired at fair value
|
|
|
12,372
|
|
|
|
5,403
|
|
|
|
720
|
|
|
|
27
|
|
|
|
4,438
|
|
|
|
—
|
|
|
|
86
|
|
|
|
893
|
|
|
|
23,939
|
|
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,
|
|
|
|
2012
|
|
|
2012
|
|
|
|
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
|
|
$
|
1,177
|
|
|
|
20.6
|
%
|
|
|
49.7
|
%
|
|
$
|
902
|
|
|
|
16.1
|
%
|
|
|
48.4
|
%
|
Multi-family real estate
|
|
|
1,782
|
|
|
|
31.2
|
|
|
|
12.8
|
|
|
|
1,915
|
|
|
|
34.1
|
|
|
|
14.7
|
|
Nonresidential real estate
|
|
|
2,167
|
|
|
|
38.0
|
|
|
|
20.0
|
|
|
|
2,282
|
|
|
|
40.6
|
|
|
|
20.5
|
|
Land
|
|
|
22
|
|
|
|
0.4
|
|
|
|
1.3
|
|
|
|
11
|
|
|
|
0.2
|
|
|
|
1.2
|
|
Agricultural
|
|
|
—
|
|
|
|
—
|
|
|
|
1.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.1
|
|
Commercial
|
|
|
22
|
|
|
|
0.4
|
|
|
|
1.4
|
|
|
|
24
|
|
|
|
0.4
|
|
|
|
1.3
|
|
Consumer
|
|
|
537
|
|
|
|
9.4
|
|
|
|
13.3
|
|
|
|
477
|
|
|
|
8.5
|
|
|
|
12.4
|
|
Construction
|
|
|
3
|
|
|
|
—
|
|
|
|
0.3
|
|
|
|
3
|
|
|
|
0.1
|
|
|
|
0.4
|
|
Total allowance for loan losses
|
|
$
|
5,710
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
$
|
5,614
|
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
Total loans
|
|
$
|
271,568
|
|
|
|
|
|
|
|
|
|
|
$
|
288,199
|
|
|
|
|
|
|
|
|
|
Liquidity Management
.
Liquidity
is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of
deposit inflows, loan repayments, maturities and sales of securities and borrowings from the Federal Home Loan Bank of Indianapolis.
While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and loan prepayments
are greatly influenced by general interest rates, economic conditions and competition.
We regularly adjust our investments in liquid
assets based upon our assessment of: (1) expected loan demands; (2) expected deposit flows, in particular municipal deposit flows;
(3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management policy.
Our most liquid assets are cash and cash
equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period.
Cash and cash equivalents totaled $39.4 million at December 31, 2012 and $29.1 million at June 30, 2012. Securities classified
as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $78.7 million
at December 31, 2012. Total securities classified as available-for-sale were $172.8 million at December 31, 2012. In addition,
at December 31, 2012, we had the ability to borrow a total of approximately $106.4 million from the Federal Home Loan Bank of Indianapolis.
At December 31, 2012, we had $30.4 million in loan commitments outstanding, consisting of $1.4 million
in mortgage loan commitments, $595,000 in commercial loan commitments, $23.5 million in unused home equity lines of credit, $4.7
million in commercial lines of credit, and $220,000 in letters of credit outstanding. Certificates of deposit due within one year
of December 31, 2012 totaled $108.4 million. This represented 58.7% of certificates of deposit at December 31, 2012. 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, 2012. However, based on past experience, we believe that a significant portion of our
certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates
offered.
Our primary investing activities are the
origination and purchase of loans and the purchase of securities. Our primary financing activities consist of activity in deposit
accounts and Federal Home Loan Bank advances. Deposit flows are affected by the overall level of interest rates, the interest rates
and products offered by us and our local competitors and other factors. We generally manage the pricing of our deposits to be competitive
and to increase core deposit relationships. Occasionally, we offer promotional rates on certain deposit products to attract deposits.
Capital Management.
United
Community Bank is subject to various regulatory capital requirements administered by the OCC, including a risk-based capital measure.
The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk categories. At December 31, 2012, we exceeded all of our
regulatory capital requirements. We are considered “well capitalized” under regulatory guidelines. See
“Regulation
and Supervision—Regulation of Federal Savings Associations—Capital Requirements,”
and Note 16 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 7, 2012.
The following table summarizes the Bank’s
capital amounts and the ratios required at December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To be well
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
capitalized under
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
prompt corrective
|
|
|
|
|
|
|
|
|
|
For capital
|
|
|
action
|
|
|
|
Actual
|
|
|
adequacy purposes
|
|
|
provisions
|
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
Amount
|
|
|
Ratio
|
|
|
|
(in thousands)
|
|
December 31, 2012 (unaudited)
|
|
|
|
Tier 1 capital to risk-weighted assets
|
|
$
|
46,610
|
|
|
|
19.10
|
%
|
|
$
|
9,761
|
|
|
|
4
|
%
|
|
$
|
14,642
|
|
|
|
6
|
%
|
Total capital to risk-weighted assets
|
|
|
49,694
|
|
|
|
20.36
|
%
|
|
|
19,526
|
|
|
|
8
|
%
|
|
|
24,408
|
|
|
|
10
|
%
|
Tier 1 capital to adjusted total assets
|
|
|
46,610
|
|
|
|
9.37
|
%
|
|
|
19,898
|
|
|
|
4
|
%
|
|
|
24,872
|
|
|
|
5
|
%
|
Tangible capital to adjusted total assets
|
|
|
46,610
|
|
|
|
9.37
|
%
|
|
|
7,462
|
|
|
|
1.5
|
%
|
|
|
NA
|
|
|
|
NA
|
|
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, 2012, 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.