Edgar Filing: United Community Bancorp

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

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

For the transition period from ______________ to _____________

Commission file number: 0-51800

United Community Bancorp

(Exact name of registrant as specified in its charter)

United States of America		36-4587081
(State or other jurisdiction of incorporation or organization)		(I.R.S.Employer Identification No.)

92 Walnut Street, Lawrenceburg, Indiana		47025
(Address of principal executive offices)		(Zip Code)

(812) 537-4822

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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

Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller Reporting Company x

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

Yes ¨ No x

As of November 10, 2010, there were 7,845,554 shares of the registrant’s common stock outstanding, of which 4,655,200 shares were held by United Community MHC.

UNITED COMMUNITY BANCORP

Table of Contents

			Page No.

Part I. Financial Information

	Item 1.	Financial Statements (Unaudited)

		Consolidated Statements of Financial Condition at September 30, 2010 and June 30, 2010	3

		Consolidated Statements of Income for the Three Month Periods Ended September 30, 2010 and 2009	4

		Consolidated Statements of Comprehensive Income for the Three Month Periods Ended September 30, 2010 and 2009	5

		Consolidated Statements of Cash Flows for the Three Month Periods Ended September 30, 2010 and 2009	6

		Notes to Unaudited Consolidated Financial Statements	7

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24

	Item 4.	Controls and Procedures	25

Part II. Other Information

	Item 1.	Legal Proceedings	26

	Item 1A.	Risk Factors	26

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26

	Item 3.	Defaults Upon Senior Securities	26

	Item 4.	[Removed and Reserved]	26

	Item 5.	Other Information	26

	Item 6.	Exhibits	26

Signatures			27

Part I. Financial Information

Item 1. Financial Statements

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(In thousands, except share amounts)	September 30, 2010			June 30, 2010
Assets

Cash and due from banks	$	44,446		$	32,023
Investment securities:
Securities available for sale - at estimated market value		60,494			62,089
Securities held to maturity - at amortized cost		611			631
Mortgage-backed securities available for sale - at estimated market value		58,312			57,238

Loans receivable, net		304,923			309,575
Loans available for sale		872			364

Property and equipment, net		7,625			7,513
Federal Home Loan Bank stock, at cost		2,016			2,016
Accrued interest receivable:
Loans		1,380			1,573
Investments and mortgage-backed securities		593			717
Other real estate owned, net		297			297
Cash surrender value of life insurance policies		7,178			7,109
Deferred income taxes		3,728			3,721
Prepaid expenses and other assets		2,840			3,316
Goodwill and intangible asset		3,818			3,922
Total assets	$	499,133		$	492,104

Liabilities and Stockholders' Equity

Deposits	$	437,179		$	430,180
Advance from FHLB		2,583			2,833
Accrued interest on deposits		93			119
Accrued interest on FHLB advance		6			7
Advances from borrowers for payment of insurance and taxes		358			168
Accrued expenses and other liabilities		3,237			3,317
Total liabilities		443,456			436,624

Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued		-			-
Common stock, $0.01 par value; 19,000,000 shares authorized, 8,464,000 shares issued and 7,845,554 shares outstanding at September 30, 2010 and June 30, 2010.		36			36
Additional paid-in capital		36,955			36,995
Retained earnings		27,968			28,048
Less shares purchased for stock plans		(2,969	)		(3,042	)
Treasury Stock, at cost - 618,446 shares at September 30, 2010
and June 30, 2010, respectively		(7,054	)		(7,054	)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net of income taxes		741			497

Total stockholders' equity		55,677			55,480

Total liabilities and stockholders' equity	$	499,133		$	492,104

See accompanying notes to the consolidated financial statements.

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Income

For the three months ended September 30,

(In thousands, except per share data)	2010		2009
Interest income:
Loans	$	4,327	$	4,161
Investments and mortgage - backed securities		703		660
Total interest income		5,030		4,821
Interest expense:
Deposits		1,613		1,675
Borrowed funds		22		30
Total interest expense		1,635		1,705

Net interest income		3,395		3,116

Provision for loan losses		719		622

Net interest income after provision for loan losses
		2,676		2,494

Other income:
Service charges		601		482
Gain on sale of loans		227		86
Gain (loss) on sale of investments		44		(12	)
Gain on sale of other real estate owned		2		-
Income from Bank Owned Life Insurance		69		57
Other		52		73
Total other income		995		686

Other expense:
Compensation and employee benefits		1,671		1,471
Premises and occupancy expense		309		276
Deposit insurance premium		228		220
Advertising expense		101		91
Data processing expense		84		56
ATM service fees		138		107
Provision for loss on sale of real estate owned		-		100
Acquisition expense		38		-
Other operating expenses		682		554
Total other expense		3,251		2,875

Income before income taxes		420		305

Income tax provision		149		83

Net income	$	271	$	222

Basic and diluted earnings per share	$	0.04	$	0.03

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

For the three months ended September 30,

(In thousands)	2010			2009

Net income	$	271		$	222

Other comprehensive income, net of tax
Unrealized gain on available for sale securities		273			467
Reclassification adjustment for net (gains) losses on available for sale securities included in income		(29	)		8

Total comprehensive income	$	515		$	697

See accompanying notes to the consolidated financial statements.

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	For the three months ended
	September 30,
(In thousands)	2010			2009
Operating activities:
Net income	$	271		$	222
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		131			116
Amortization of intangible asset		104			-
Provision for loan losses		719			622
Provision for loss on sale of real estate acquired through foreclosure		-			100
Deferred loan origination fees costs		(15	)		(19	)
Amortization of premium (discount) on investments		(22	)		(123	)
Proceeds from sale of loans		12,670			4,908
Loans disbursed for sale in the secondary market		(12,951	)		(2,700	)
Gain on sale of loans		(227	)		(86	)
Gain (loss) on sale of available for sale investment securities		(44	)		12
Gain on sale of other real estate owned		(2	)		-
ESOP shares committed to be released		(21	)		49
Stock-based compensation expense		54			95
Deferred income taxes		(135	)		(2	)
Effects of change in operating assets and liabilities:
Accrued interest receivable		317			19
Prepaid expenses and other assets		476			411
Accrued interest on deposits		(26	)		(5	)
Accrued expenses and other		(81	)		(60	)

Net cash provided by operating activities		1,218			3,559

Investing activities:
Proceeds from maturity of available for sale investment securities		4,000			390
Proceeds from sale of available for sale investment securities		4,044			486
Proceeds from maturity of held to maturity securities		20			-
Proceeds from repayment of mortgage-backed securities available for sale		3,949			2,332
Proceeds from sale of other real estate owned		2			-
Purchases of mortgage-backed securities available for sale		(5,139	)		(6,037	)
Purchases of available for sale investment securities		(5,895	)		(2,049	)
Net decrease (increase) in loans		3,948			(1,832	)
Increase in cash surrender value of life insurance		(69	)		(57	)
Capital expenditures		(243	)		(242	)

Net cash provided (used) by investing activities		4,617			(7,009	)

Financing activities:
Net increase in deposits		6,999			1,250
Repayments of Federal Home Loan Bank advances		(250	)		(250	)
Dividends paid to stockholders		(351	)		(321	)
Repurchases of common stock		-			(6	)
Net increase in advances from borrowers for payment of insurance and taxes		190			114

Net cash provided by financing activities		6,588			787

Net increase (decrease) in cash and cash equivalents		12,423			(2,663	)

Cash and cash equivalents at beginning of period		32,023			27,004

Cash and cash equivalents at end of period	$	44,446		$	24,341

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION- United Community Bancorp (the “Company”), a Federally-chartered corporation, is the mid-tier holding company for United Community Bank (the “Bank”), which is a Federally-chartered, FDIC-insured savings bank. The Company was organized in conjunction with the Bank’s reorganization from a mutual savings bank to the mutual holding company structure on March 30, 2006. United Community MHC, a Federally-chartered corporation, is the mutual holding company parent of the Company. United Community MHC owns approximately 59% of the Company’s outstanding common stock and because the Company is in the mutual holding company structure, must always own at least a majority of the voting stock of the Company. The Company, through the Bank, operates in a single business segment providing traditional banking services through its office and branches in southeastern Indiana. UCB Real Estate Management Holding, LLC is a wholly-owned subsidiary of the Bank. The entity was formed for the purpose of holding assets that are acquired by the Bank through, or in lieu of, foreclosure.

The accompanying unaudited consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and therefore do not include all information or footnotes necessary for complete financial statements in conformity with accounting principles generally accepted in the United States of America. However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial statements have been included. No other adjustments have been included. The results for the three month period ended September 30, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes thereto for the year ended June 30, 2010, which are included on the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2010.

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

2. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) – As of September 30, 2010 and June 30, 2010, the ESOP owned 216,239 shares of the Company's common stock, which were held in a suspense account until released for allocation to participants.

3. EARNINGS PER SHARE (EPS) –The Company’s restricted share awards contain non-forfeitable dividend rights but do not contractually obligate the holders to share in the losses of the Company. Accordingly, during periods of net income, unvested restricted shares are included in the determination of both basic and diluted EPS. During periods of net loss, these shares are excluded from both basic and diluted EPS.

Basic EPS is based on the weighted average number of common shares and unvested restricted shares outstanding, adjusted for ESOP shares not yet committed to be released. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. For the three month periods ended September 30, 2010 and 2009, outstanding options to purchase 346,304 shares were excluded from the computations of diluted earnings per share as their effect would have not been dilutive. The following is a reconciliation of the basic and diluted weighted average number of common shares outstanding:

	Three Months Ended
	September 30,
	2010		2009

Basic weighted average outstanding shares		7,631,858		7,612,070
Effect of dilutive stock options		-		-
Diluted weighted average outstanding shares		7,631,858		7,612,070

4. STOCK-BASED COMPENSATION – The Company applies the provisions of ASC 718-10-35-2, Compensation-Stock Compensation, to stock-based compensation, which requires the Company to measure the cost of employee services received in exchange for awards of equity instruments and to recognize this cost in the financial statements over the period during which the employee is required to provide such services. The Company has elected to recognize compensation cost associated with its outstanding stock-based compensation awards with graded vesting on an accelerated basis pursuant to ASC 718-10-35-8. The expense is calculated for stock options at the date of grant using the Black-Scholes option pricing model. The expense associated with restricted stock awards is calculated based upon the value of the common stock on the date of grant. No stock-based compensation awards were granted during the three month periods ended September 30, 2010 and 2009.

5. DIVIDENDS – On July 22, 2010, the Board of Directors of the Company declared cash dividends on the Company’s outstanding shares of stock of $0.11 per share. The dividend was paid on August 31, 2010. Accordingly, cash dividends of $351,000 were paid to shareholders during the three month period ended September 30, 2010. United Community MHC, which owns 4,655,200 shares of the Company’s common stock, waived receipt of the dividends.

6. SUPPLEMENTAL CASH FLOW INFORMATION

	Three Months Ended
	September 30,
	2010		2009
	(Dollars in thousands)
Supplemental disclosure of cash flow information is as follows:
Cash paid during the period for:
Income taxes	$	360	$	-
Interest	$	1,662	$	1,705

Supplemental disclosure of non-cash investing and financing activities is as follows:
Unrealized gains on securities
designated as available for sale, net of tax	$	244	$	475
Transfers of loans to other real estate owned	$	-	$	838

7. TROUBLED DEBT RESTRUCTURINGS - From time to time, as part of our loss mitigation process, loans may be renegotiated in a troubled debt restructuring (TDR) when we determine that greater economic value will ultimately be recovered under the new terms than through foreclosure, liquidation, or bankruptcy. We may consider the borrower’s payment status and history, the borrower’s ability to pay upon a rate reset on an adjustable rate mortgage, size of the payment increase upon a rate reset, period of time remaining prior to the rate reset, and other relevant factors in determining whether a borrower is experiencing financial difficulty. At September 30, 2010, the Bank had 22 loans totaling $14.6 million that qualified as TDRs. At September 30, 2010, the Bank had no other commitments to lend on its TDRs. At June 30, 2010, the Bank had thirteen loans totaling $9.0 million that qualified as TDR’s. Management continues to monitor the performance of loans classified as TDRs, and does not anticipate any additional losses on TDRs at September 30, 2010.

8. DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

In accordance with ASC 825-10-50-10, for financial instruments where quoted market prices are not available, fair values are estimated using present value or other valuation methods.

The following methods and assumptions are used in estimating the fair values of financial instruments:

Cash and due from banks, accrued interest receivable, and accrued interest payable

The carrying values presented in the consolidated statements of position approximate fair value.

Investments and mortgage-backed securities

For investment securities (debt instruments) and mortgage-backed securities, fair values are based on quoted market prices, where available. If a quoted market price is not available, fair value is estimated using quoted market prices of comparable instruments.

Loans receivable

The fair value of the loan portfolio is estimated by evaluating homogeneous categories of loans with similar financial characteristics. Loans are segregated by types, such as residential mortgage, commercial real estate, and consumer. Each loan category is further segmented into fixed and adjustable rate interest, terms, and by performing and non-performing categories. The fair value of performing loans, except residential mortgage loans, is calculated by discounting contractual cash flows using estimated market discount rates which reflect the credit and interest rate risk inherent in the loan. For performing residential mortgage loans, fair value is estimated by discounting contractual cash flows adjusted for prepayment estimates using discount rates based on secondary market sources. The fair value for significant non-performing loans is based on recent internal or external appraisals. Assumptions regarding credit risk, cash flow, and discount rates are judgmentally determined by using available market information.

Federal Home Loan Bank stock

The Bank is a member of the Federal Home Loan Bank system and is required to maintain an investment based upon a pre-determined formula. The carrying values presented in the consolidated statements of position approximate fair value.

Deposits

The fair values of passbook accounts, NOW accounts, and money market savings and demand deposits approximate their carrying values. The fair values of fixed maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently offered for deposits of similar maturities.

Advance from Federal Home Loan Bank

The fair value is calculated using rates available to the Company on advances with similar terms and remaining maturities

Off-balance sheet items

Carrying value is a reasonable estimate of fair value. These instruments are generally variable rate or short-term in nature, with minimal fees charged.

The estimated fair values of the Company's financial instruments at September 30, 2010 and June 30, 2010 are as follows:

	September 30, 2010				June 30, 2010
	Carrying Amounts		Fair Value		Carrying Amounts		Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	44,446	$	44,446	$	32,023	$	32,023
Investment securities available for sale		60,494		60,494		62,089		62,089
Investment securities held to maturity		611		611		631		631
Mortgage-backed securities		58,312		58,312		57, 238		57, 238
Loans receivable and loans receivable held for sale		305,795		301,119		309,939		304,943
Accrued interest receivable		1,973		1,973		2,290		2,290
Investment in FHLB stock		2,016		2,016		2,016		2,016

Financial liabilities:
Deposits	$	437,179	$	439,002	$	430,180	$	432,091
Accrued interest payable		99		99		126		126
FHLB advance		2,583		2,656		2,833		2,904

Off-balance sheet items	$	-	$	-	$	-	$	-

The Company measures fair value under ASC 820-10-50-2, which establishes a framework for measuring fair value and expands disclosures about fair value measurements. ASC 820-10-50-2 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

ASC 820-10-50-2 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1

Quoted prices in active markets for identical assets or liabilities.

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Fair value methods and assumptions are set forth below for each type of financial instrument. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 2 securities include U.S. Government and agency mortgage-backed securities, U.S. Government agency bonds, municipal securities, and other real estate owned. If quoted market prices are not available, the Bank utilizes a third party vendor to calculate the fair value of its available for sale securities. The third party vendor uses quoted prices of securities with similar characteristics when available. If such quotes are not available, the third party vendor uses pricing models or discounted cash flow models with observable inputs to determine the fair value of these securities. For other real estate owned, the Bank utilizes appraisals obtained from independent third parties to determine fair value.

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

	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant other unobservable inputs (Level 3)
	(In thousands)
September 30, 2010:
Mortgage-backed securities	$	58,312	$	-	$	58,312	$	-
U.S. Government corporations and agencies		45,353		-		45,353		-
Municipal bonds		15,021		-		15,021		-
Other equity securities		120		120		-		-
June 30, 2010:
Mortgage-backed securities	$	57,238	$	-	$	57,238	$	-
U.S. Government corporations and agencies		49,369		-		49,369		-
Municipal bonds		12,591		-		12,591		-
Other equity securities		129		129		-		-

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

	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant other unobservable inputs (Level 3)
	(In thousands)
September 30, 2010:
Other real estate owned	$	297	$	-	$	297	$	-
Impaired loans		17,942		-		17,942		-
June 30, 2010:
Other real estate owned	$	297	$	-	$	297	$	-
Impaired loans		13,854		-		13,854		-

The adjustments to other real estate owned and impaired loans are based primarily on appraisals of the real estate or other observable market prices. Our policy is that fair values for these assets are based on current appraisals. In most cases, we maintain current appraisals for these items.

Investment securities available for sale at September 30, 2010 consist of the following:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(In thousands)

Mortgage-backed securities	$	57,966	$	522	$	176	$	58,312
U.S. Government corporations and agencies		45,053		300		-		45,353
Municipal bonds		14,455		567		1		15,021
Other equity securities		210		-		90		120
	$	117,684	$	1,389	$	267	$	118,806

Investment securities held to maturity at September 30, 2010 consist of the following:

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

(In thousands)

Municipal bonds

611

Investment securities available for sale at June 30, 2010 consist of the following:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(In thousands)

Mortgage-backed securities	$	56,669	$	636	$	67	$	57,238
U.S. Government corporations and agencies		49,157		212		-		49,369
Municipal bonds		12,538		137		84		12,591
Other equity securities		211		-		82		129
	$	118,575	$	985	$	233	$	119,327

Investment securities held to maturity at June 30, 2010 consist of the following:

Gross

Estimated

Amortized

Unrealized

Market

Cost

Gains

Losses

Value

(In thousands)

Municipal bonds

631

The mortgage-backed securities, callable bonds and municipal bonds available for sale have the following maturities at September 30, 2010:

	Amortized		Estimated
	cost		market value
	(In thousands)
Due or callable in one year or less	$	33,009	$	33,200
Due or callable in 1 - 5 years		70,009		70,466
Due or callable in 5 - 10 years		270		289
Due or callable in greater than 10 years		14,186		14,731
Total debt securities	$	117,474	$	118,686

All other securities available for sale at September 30, 2010 are saleable within one year. The Bank held $611,000 and $631,000 in investment securities that are being held to maturity at September 30, 2010 and June 30, 2010, respectively. The investment securities held to maturity have annual returns of principal and will be fully matured between 2014 and 2019.

The expected returns of principal of investments held to maturity are as follows as of September 30, 2010 (dollars in thousands):

October 1, 2010 through June 30, 2011	$	45
2012		68
2013		71
2014		74
2015		77
2016 and thereafter		276
	$	611

Gross proceeds on the sale of investment and mortgage-backed securities were $4.0 million and $0.5 million for the three month periods ended September 30, 2010 and 2009, respectively. Gross realized gains for the three month periods ended September 30, 2010 and 2009 were $44,000 and $0, respectively. Gross realized losses for the three month periods ended September 30, 2010 and 2009 were $0 and $12,000, respectively.

The table below indicates the length of time individual investment securities and mortgage-backed securities have been in a continuous loss position at September 30, 2010:

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Mortgage-backed securities		21,110		176		-		-		21,110		176
Municipal bonds		516		1		-		-		516		1
Other equity securities		-		-		120		90		120		90
	$	21,626		177		120		90	$	21,746		267
Number of investments		9				1				10

Securities available for sale are reviewed for possible other-than-temporary impairment on a quarterly basis. During this review, Management considers the severity and duration of the unrealized losses as well as its intent and ability to hold the securities until recovery, taking into account balance sheet management strategies and its market view and outlook. Management also assesses the nature of the unrealized losses taking into consideration factors such as changes in risk-free interest rates, general credit spread widening, market supply and demand, creditworthiness of the issuer or any credit enhancement providers, and the quality of the underlying collateral. Management does not intend to sell these securities in the foreseeable future, and does not believe that it is more likely than not that the Bank will be required to sell a security in an unrealized loss position prior to a recovery in its value. The decline in market value is due to changes in market interest rates. The fair values are expected to recover as the securities approach maturity dates.

9. GOODWILL AND INTANGIBLE ASSET

In June 2010, the Company acquired three branches from Integra Bank National Association (“Integra”), which was accounted for under the purchase method of accounting. Under the purchase method, the Company is required to allocate the cost of an acquired company to the assets acquired, including identified intangible assets, and liabilities assumed based on their estimated fair values at the date of acquisition. The excess cost over the value of net assets acquired represents goodwill, which is not subject to amortization.

Goodwill arising from business combinations represents the value attributable to unidentifiable intangible elements in the business acquired. Goodwill recorded by the Company in connection with its acquisition relates to the inherent value in the business acquired and this value is dependent upon the Company’s ability to provide quality, cost-effective services in a competitive market place. As such, goodwill value is supported ultimately by revenue that is driven by the volume of business transacted. A decline in earnings as a result of a lack of growth or the inability to deliver cost-effective services over sustained periods can lead to impairment of goodwill that could adversely impact earnings in future periods.

Goodwill is not amortized but is tested for impairment when indicators of impairment exist, or at least annually. Potential goodwill impairment exists when the fair value of the reporting unit (as defined by US GAAP) is less than its carrying value. An impairment loss is recognized in earnings only when the carrying amount of goodwill is less than its implied fair value.

As a result of the acquisition, the Company originally recorded a core deposit intangible asset of $1,400,000 and goodwill of $3,130,000. A purchase accounting adjustment was recorded during the three month period ended September 30, 2010 related to deferred tax balances that would have affected the measurement of the amounts recognized at the date of acquisition. This adjustment had the effect of reducing goodwill and increasing deferred taxes by $608,000. As required pursuant to the guidance in FASB ASC 805, Business Combinations, this adjustment has been reflected in the Company’s consolidated statements of financial condition on a retrospective basis.

The following table indicates changes to the core deposit intangible asset and goodwill balances for the three month period ended September 30, 2010:

	Core Deposit Intangible			Goodwill
	(In thousands)

Balance at June 30, 2010	$	1,400		$	2,522
Amortization		(104	)		-
Balance at September 30, 2010	$	1,296		$	2,522

The core deposit intangible is being amortized using the double declining balance method over its estimated useful life of 8.75 years. Remaining amortization of the core deposit intangible is as follows (dollars in thousands) as of September 30, 2010:

October 1, 2010 through June 30, 2011	$	207
2012		226
2013		179
2014		142
2015		118
2016 and thereafter		424
	$	1,296

10. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In July 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The ASU amends FASB Accounting Standards Codification™ (the “Codification” or “ASC”) Topic 310, Receivables, to improve the disclosures about the credit quality of an entity’s financing receivables and the related allowance for credit losses. As a result of these amendments, an entity is required to disaggregate, by portfolio segment or class of financing receivable, certain existing disclosures and provide certain new disclosures about its financing receivables and related allowance for credit losses.

Existing disclosures are amended to require an entity to provide the following disclosures about its financing receivables on a disaggregated basis:

(1) A rollforward schedule of the allowance for credit losses from the beginning of the reporting period to the end of the reporting period on a portfolio segment basis, with the ending balance further disaggregated on the basis of the impairment method;

(2) For each disaggregated ending balance in item (1) above, the related recorded investment in financing receivables;

(3) The nonaccrual status of financing receivables by class of financing receivables;

(4) Impaired financing receivables by class of financing receivables.

The amendments in the ASU also require an entity to provide the following additional disclosures about its financing receivables:

(1) Credit quality indicators of financing receivables at the end of the reporting period by class of financing receivables;

(2) The aging of past due financing receivables at the end of the reporting period by class of financing receivables;

(3) The nature and extent of troubled debt restructurings that occurred during the period by class of financing receivables and their effect on the allowance for credit losses;

(4) The nature and extent of financing receivables modified as troubled debt restructurings within the previous twelve months that defaulted during the reporting period by class of financing receivables and their effect on the allowance for credit losses; and

(5)Significant purchases and sales of financing receivables during the reporting period disaggregated by portfolio segments.

The disclosures as of the end of a reporting period will be effective for interim and annual reporting periods ending on or after December 15, 2010. The disclosures about activity that occurs during a reporting period will be effective for interim and annual reporting periods beginning on or after December 15, 2010. As this ASU is disclosure-related only, we do not expect it to have an impact on our financial condition or results of operations.

In April 2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of Loan Modification when the Loan is Part of a Pool that is Accounted for as a Single Asset (a consensus of the FASB Emerging Issues Task Force). The amendments in this update affect any entity that acquires loans subject to ASC Subtopic 310-30, that accounts for some or all of those loans within pools, and that subsequently modifies one or more of those loans after acquisition. ASU No. 2010-18 is effective for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the interim period ending September 30, 2010, and the amendments are to be applied prospectively. The adoption of this guidance did not have a material impact on the Company’s financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosure about Fair Value Measurements, under Topic 820, Fair value Measurements and Disclosures, to improve and provide new disclosures for recurring and nonrecurring fair value measurements under the three-level hierarchy of inputs for transfers in and out of Levels 1 and 2, and activity in Level 3. This update also clarifies existing disclosures of the level of disaggregation for the classes of assets and liabilities and the disclosure about inputs and valuation techniques. ASU No. 2010-06 became effective during the year ended June 30, 2010, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements, which becomes effective for the interim period ending September 30, 2011. The adoption of this guidance is not expected to have a material impact on the Company’s financial statements.

In October 2010, the FASB issued a proposed Accounting Standards Update (ASU), “Receivables (Topic 310): Clarifications to Accounting for Troubled Debt Restructurings (“TDR”) by Creditors” to assist creditors in determining whether a modification is a TDR. Currently, there is diversity in practice in identifying loan modifications that constitute TDRs, particularly when determining whether a concession has been granted. The clarifications are proposed to be effective for interim and annual periods ending after June 15, 2011, and would be applied retrospectively to restructurings occurring on or after the beginning of the earliest period presented.

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, changes in the quality or composition of the Company’s loan or investment portfolios, and the Company’s ability to successfully integrate assets, liabilities, customers, systems, and personnel of the three branches of Integra Bank it is acquiring into its operations and the Company’s ability to recognize revenue synergies and cost savings within expected time frames. 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 28, 2010, 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: allowance for loan losses, deferred income taxes and investment securities.

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; value of collateral; and determination of loss factors to be applied to the various elements of the 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 collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluation. In addition, the Office of Thrift Supervision (OTS), as an integral part of its examination process, periodically reviews our allowance for loan losses. This agency may require us to recognize adjustments to the allowance based on its judgments about information available to it at the time of its examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would negatively affect earnings. For additional discussion, see notes 1 and 5 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 28, 2010.

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, 2010 and June 30, 2010. The Company recognized no interest and penalties on the underpayment of income taxes during the three month periods ended September 30, 2010 and 2009, and had no accrued interest and penalties on the balance sheet as of September 30, 2010 and June 30, 2010. 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 2007.

Comparison of Financial Condition at September 30, 2010 and June 30, 2010

Total assets were $499.1 million at September 30, 2010, compared to $492.1 million at June 30, 2010. The increase is primarily due to a $12.4 million increase in cash, partially offset by a $4.1 million decrease in loans. The increase in cash is the result of an increase in deposits and in loans sold to Freddie Mac in the current quarter. The decrease in loans is a result of loans sold to Freddie Mac in the current quarter.

Total liabilities were $443.5 million at September 30, 2010, compared to $436.6 million at June 30, 2010. The increase is a result of a $7.0 million increase in deposits. The increase in deposits is attributable to an increase in municipal deposits reflecting the cyclical nature of such deposits, which are affected by the timing of receipt of tax revenues and spending for ongoing civil projects.

Total stockholders’ equity was $55.7 million at September 30, 2010, compared to $55.5 million at June 30, 2010. The increase is primarily the result of an increase of $244,000 in unrealized gains on available for sale securities and net income of $271,000, partially offset by dividends paid of $351,000.

Comparison of Operating Results for the Three Months Ended September 30, 2010 and 2009

General. Net income increased $49,000 in the quarter ended September 30, 2010, compared to the prior year quarter. This increase is primarily due to a $279,000 increase in net interest income and a $309,000 increase in noninterest income, partially offset by a $97,000 increase in the provision for loan loss and a $376,000 increase in noninterest expense.

Net Interest Income. Net interest income increased $279,000, or 9.0%, to $3.4 million for the quarter ended September 30, 2010, as compared to $3.1 million for the prior year quarter. The increase is the result of an increase in total loans and a decrease in the average interest rate paid on interest bearing liabilities from 1.99% to 1.50%, partially offset by an increase in total deposits and a decrease in the average rate earned on interest earning assets from 5.10% to 4.34%. Changes in interest rates are reflective of changes in overall market rates. Increases in loans and deposits are primarily due to the acquisition of three branches from Integra Bank on June 4, 2010.

The following table summarizes changes in interest income and interest expense for the three months ended September 30, 2010 and 2009.

	Three Months Ended
	September 30,
	2010		2009		% Change
	(Dollars in thousands)
Interest income:
Loans	$	4,327	$	4,161		4.0%
Investment and mortgage-backed securities		698		655		6.6
Other interest-earning assets		5		5		-
Total interest income		5,030		4,821		4.3

Interest expense:
NOW and money market deposit accounts		284		256		10.9
Passbook accounts		64		32		100.0
Certificates of deposit		1,265		1,387		(8.8)
Total interest-bearing deposits		1,613		1,675		(3.7)
FHLB advances		22		30		(26.7)
Total interest expense		1,635		1,705		(4.1)
Net interest income	$	3,395	$	3,116		9.0

The following table summarizes average balances and average yields and costs of interest-earning assets and interest-bearing liabilities for the three months ended September 30, 2010 and 2009. 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 September 30,
	2010						2009
			Interest						Interest
	Average		and		Yield/		Average		and		Yield/
	Balance		Dividends		Cost		Balance		Dividends		Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	307,300	$	4,327		5.63%	$	273,363	$	4,161		6.09%
Investment and mortgage-backed securities		121,734		698		2.30		79,437		655		3.30
Other interest-earning assets		35,109		5		0.06		25,295		5		0.08
		464,143		5,030		4.34		378,095		4,821		5.10
Noninterest-earning assets		29,826						23,456
Total assets	$	493,969					$	401,551

Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market deposit accounts (1)	$	157,004	$	284		0.72	$	127,867	$	256		0.80
Passbook accounts (1)		55,989		64		0.46		40,569		32		0.32
Certificates of deposit (1)		218,991		1,265		2.31		170,780		1,387		3.25
Total interest-bearing deposits		431,984		1,613		1.49		339,216		1,675		1.98
FHLB advances		2,708		22		3.25		3,708		30		3.24
Total interest-bearing liabilities		434,692		1,635		1.50		342,924		1,705		1.99
Noninterest-bearing liabilities		3,886						3,433
Total liabilities		438,578						346,357
Stockholders' equity		55,391						55,194
Total liabilities and stockholders' equity	$	493,969					$	401,551
Net interest income			$	3,395					$	3,116
Interest rate spread						2.84%						3.11%
Net interest margin (annualized)						2.93%						3.30%
Average interest-earning assets to average interest-bearing liabilities						106.78%						110.26%

(1) Includes municipal deposits

Provision for Loan Losses. The following table summarizes the activity in the allowance for loan losses and provision for loan losses for the three months ended September 30, 2010 and 2009.

	Three Months Ended
	September 30,
	2010		2009
	(Dollars in thousands)

Allowance at beginning of period	$	5,681	$	4,213
Provision for loan losses		719		622
Charge offs:
One- to four-family residential real estate		155		-
Nonresidential real estate and land		-		-
Multifamily residential real estate		-		831
Consumer and other loans		66		17
Total charge-offs		221		848

Recoveries:
One- to four-family residential real estate		10		2
Nonresidential real estate and land		-		-
Multifamily residential real estate		-		5
Consumer and other loans		5		4
Total recoveries		15		11
Net charge-offs		206		837

Allowance at end of period	$	6,194	$	3,998

The provision for loan losses was $719,000 for the quarter ended September 30, 2010, compared to $622,000 for the same quarter in the prior year. On an ongoing basis, management evaluates the Bank’s allowance for loan loss for adequacy. As part of this evaluation, management considers the amounts and types of loans, concentrations, the value of underlying collateral, current economic conditions, and other relevant information, such as the size of the overall portfolio. Based upon this evaluation, management calculates the provision for loan loss in the current period. The increase in the current year quarter is primarily attributable to an increase in nonperforming loans. Nonperforming loans increased from $10.6 million at June 30, 2010 to $18.7 million at September 30, 2010, compared to a decrease in nonperforming loans from $6.0 million at June 30, 2009 to $4.0 million at September 30, 2009. For further discussion of nonperforming loans see analysis on the following table.

For more information on how the Company reviews its allowance for loan losses and determines any necessary provision see, “Critical Accounting Policies – Allowance for Loan Losses.”

The following table provides information with respect to our nonperforming assets at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.

	At September 30, 2010			At June 30, 2010			% Change
	(Dollars in thousands)
Nonaccrual loans:
Residential real estate:
One- to-four-family	$	3,115		$	2,436			27.9	%
Multi-family		8,219			5,245			56.7
Nonresidential real estate and land		6,763			2,738			147.0
Consumer and other loans		599			155			286.5
Total		18,696			10,574			76.8
Real estate owned		297			297			-
Total nonperforming assets	$	18,993		$	10,871			74.7
Total nonperforming loans to total loans		6.11	%		3.42	%		78.7
Total nonperforming loans to total assets		3.74	%		2.15	%		74.0
Total nonperforming assets to total assets		3.80	%		2.21	%		71.9

Nonperforming loans increased from $10.6 million at June 30, 2010 to $18.7 million at September 30, 2010, compared to a decrease in nonperforming loans from $6.0 million at June 30, 2009 to $4.0 million at September 30, 2009. The increase in the current year is due to the addition of one $3.0 million multifamily real estate loan, ten one- to four- family mortgage loans totaling $798,000, and three commercial real estate loans, totaling $4.1 million. The three commercial real estate loans are classified as troubled debt restructuring. It is Bank policy to include, as nonaccrual loans, TDRs until a payment history of six months has been established. Once a sufficient payment history is established, the loan classified as a TDR is no longer included in nonaccrual loans. For further information on TDRs, see Note 7 to the Unaudited Consolidated Financial Statements above. Management believes there are adequate allowances and collateral securing these loans to cover losses that may result from these nonperforming loans.

Noninterest Income. The following table summarizes other income for the three months ended September 30, 2010 and 2009.

	Three Months Ended
	September 30,
	2010		2009			% Change
	(Dollars in thousands)

Service charges	$	601	$	482			24.7	%
Gain on sale of loans		227		86			164.0
Gain (loss) on sale of investments		44		(12	)		466.7
Gain on sale of other real estate owned		2		-			100.0
Income from bank-owned life insurance		69		57			21.1
Other		52		73			(29.7	)
Total	$	995	$	686			45.0

The increase in service charges is primarily due to an overall increase in deposits. The increase in gain on sale of loans is due to an increase in loans sold to Freddie Mac in the current quarter.

Noninterest Expense. The following table summarizes other expense for the three months ended September 30, 2010 and 2009.

	Three Months Ended
	September 30,
	2010		2009		% Change
	(Dollars in thousands)
Compensation and employee benefits	$	1,671	$	1,471		13.6	%
Premises and occupancy expense		309		276		12.0
Deposit insurance premium		228		220		3.6
Advertising expense		101		91		11.0
Data processing expense		84		56		50.0
ATM service fees		138		107		29.0
Provision for loss on sale of other real estate owned		-		100		(100.0	)
Acquisition related expenses		38		-		100.0
Other operating expenses		682		554		23.1
Total	$	3,251	$	2,875		13.1

Noninterest expense increased $376,000, or 13.1%, to $3.3 million for the quarter ended September 30, 2010, from $2.9 million in the prior year quarter. The increase is primarily the result of higher employee compensation expenses and intangible asset amortization in the current year quarter, partially offset by the absence of a provision for loss on the sale of real estate owned in the current year period compared to a $100,000 provision in the prior year quarter. The increases in employee compensation expenses and intangible asset amortization are due to the Integra branch acquisition.

Income Taxes. The provision for income taxes was $149,000 for the quarter ended September 30, 2010 compared to $83,000 for the same period in 2009. The increase in provision for income taxes is primarily the result of a 115,000 increase in income before income taxes.

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 $44.4 million at September 30, 2010 and $32.0 million at June 30, 2010. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $97.1 million at September 30, 2010 and $104.1 million at June 30, 2010. Total securities classified as available-for-sale were $118.8 million at September 30, 2010 and $119.3 million at June 30, 2010. In addition, at September 30, 2010 and June 30, 2010, we had the ability to borrow a total of approximately $72.5 million and $83.0 million, respectively, from the Federal Home Loan Bank of Indianapolis.

At September 30, 2010, we had $31.3 million in loan commitments outstanding, consisting of $3.5 million in mortgage loan commitments, $1.8 million in commercial loan commitments, $20.1 million in unused home equity lines of credit, $5.9 million in commercial lines of credit, and $743,000 in letters of credit outstanding. At June 30, 2010, we had $38.7 million in loan commitments outstanding, consisting of $1.1 million in mortgage loan commitments, $4.3 million in commercial loan commitments, $26.6 million in unused home equity lines of credit, $5.8 million in commercial lines of credit, and $856,000 in letters of credit outstanding. Certificates of deposit due within one year of September 30, 2010 totaled $149.4 million. This represented 67.6% of certificates of deposit at September 30, 2010. We believe the large percentage of certificates of deposit that mature within one year reflects customers’ hesitancy to invest their funds for long 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 funds, 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 September 30, 2010. We believe, however, based on past experience 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. The Bank is subject to various regulatory capital requirements administered by the Office of Thrift Supervision, 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 September 30, 2010, the Bank exceeded all of its regulatory capital requirements to be considered “well capitalized” under the FDIC’s regulatory framework for prompt corrective action at that date.

The following table summarizes the Bank’s capital amounts and the ratios required at September 30, 2010:

									To be well
									capitalized under
									prompt corrective
					For capital				action
	Actual				adequacy purposes				provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
	(in thousands)
September 30, 2010 (unaudited)
Tier 1 capital to risk-weighted assets	$	45,815		15.40%	$	11,891		4.0%	$	17,836		6.0%
Total capital to risk-weighted assets		48,968		16.46%		23,782		8.0%		29,727		10.0%
Tier 1 capital to adjusted total assets		45,815		9.31%		19,682		4.0%		24,603		5.0%
Tangible capital to adjusted total assets		45,815		9.31%		7,381		1.5%

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. For information about our loan commitments and unused lines of credit, see note 15 of the notes to the consolidated financial statements included in our Annual Report on Form 10-K for the year ended June 30, 2010, as filed with the SEC. We currently have no plans to engage in hedging activities in the future.

For the three months ended September 30, 2010, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

For a discussion of the Company’s asset and liability management policies as well as the potential impact of interest rate changes upon the market value of the Company’s portfolio equity, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on September 28, 2010. The main components of market risk for the Company are interest rate risk and liquidity risk. The Company manages interest rate risk and liquidity risk by establishing and monitoring the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals. Model simulation is used to measure earnings volatility under both rising and falling rate scenarios.

We use a net portfolio value analysis prepared by the Office of Thrift Supervision to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net portfolio value of our cash flows from assets, liabilities and off-balance sheet items in the event of a range of assumed changes in market interest rates. Net portfolio value represents the market value of portfolio equity and is equal to the market value of assets minus the market value of liabilities, with adjustments made for off-balance sheet items. This analysis assesses the risk of loss in market risk-sensitive instruments in the event of a sudden and sustained 50 to 300 basis point increase or 50 and 100 basis point decrease in market interest rates with no effect given to any steps that we might take to counter the effect of that interest rate movement. Because of the low level of market interest rates, this analysis is not performed for decreases of more than 200 basis points.

The following table, which is based on information that we provide to the Office of Thrift Supervision (OTS), presents the change in our net portfolio value at June 30, 2010, which is the most recent date for which data is available, that would occur in the event of an immediate change in interest rates based on Office of Thrift Supervision assumptions, with no effect given to any steps that we might take to counteract that change.

	Net Portfolio Value (Dollars in thousands)							Net Portfolio Value as % of Portfolio Value of Assets

Basic Point (“bp”) Change in Rates	Amount		Change			% Change		NPV Ratio		Change (bp)

300	$	59,161	$	(1,993	)		(3)%		11.86%	(22)bps
200		61,564		409			1%		12.25		16
100		61,698		543			1%		12.23		15
50		61,471		316			1%		12.17		8
0		61,155		-			-		12.08		-
(50)		60,045		(1,110	)		(2)%		11.86		(22)
(100)		60,996		(159	)		1%		12.01		(7)

The OTS uses various assumptions in assessing interest rate risk. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates and the market values of certain assets under differing interest rate scenarios, among others. As with any method of measuring interest rate risk, certain shortcomings are inherent in the methods of analyses presented in the foregoing tables. For example, although certain assets and liabilities may have similar maturities or periods to repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Additionally, certain assets, such as adjustable-rate mortgage loans, have features that restrict changes in interest rates on a short-term basis and over the life of the asset. Further, in the event of a change in interest rates, expected rates of prepayments on loans and early withdrawals from certificates could deviate significantly from those assumed in calculating the table. Prepayment rates can have a significant impact on interest income. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slow and vice versa. While we believe these assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

Item 4. Controls and Procedures.

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. During the quarterly period ended September 30, 2010, there were no changes in the Company’s internal control over financial reporting which materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

PART II OTHER INFORMATION

Item 1.

LEGAL PROCEEDINGS

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens and contracts, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A.

RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended June 30, 2010, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the only risks that we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially affect our business, financial condition and/or operating results.

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no repurchases of the Company’s common stock during the quarter ended September 30, 2010.

Item 3.

DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4.

[REMOVED AND RESERVED]

Item 5.

OTHER INFORMATION

Not applicable

Item 6.

EXHIBITS

Exhibit 31.1

Certification of Chief Executive Officer

Exhibit 31.2

Certification of Chief Financial Officer

Exhibit 32

Section 1305 Certifications

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	UNITED COMMUNITY BANCORP

Date: November 15, 2010	By:	/s/ William F. Ritzmann
		William F. Ritzmann
		President and Chief Executive Officer

Date: November 15, 2010	By:	/s/ Vicki A. March
		Vicki A. March
		Senior Vice President, Chief Financial Officer
		and Treasurer