Edgar Filing: United Community Bancorp

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2016

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: 0-54876

United Community Bancorp

(Exact name of registrant as specified in its charter)

Indiana		80-0694246
(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 x 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, 2016, there were 4,198,143 shares of the registrant’s common stock outstanding.

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, 2016 and June 30, 2016	1

	Consolidated Statements of Income for the Three Month Periods Ended September 30, 2016 and 2015	2

	Consolidated Statements of Comprehensive Income for the Three Month Periods Ended September 30, 2016 and 2015	3

	Consolidated Statements of Cash Flows for the Three Month Periods Ended September 30, 2016 and 2015	4

	Notes to Unaudited Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	44

Item 4.	Controls and Procedures	46

Part II. Other Information

Item 1.	Legal Proceedings	47

Item 1A.	Risk Factors	47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3.	Defaults Upon Senior Securities	47

Item 4.	Mine Safety Disclosures	47

Item 5.	Other Information	47

Item 6.	Exhibits	48

Signatures

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, 2016			June 30, 2016

Assets

Cash and due from banks	$	1,749		$	2,253
Interest-earning deposits in other financial institutions		26,424			26,727
Cash and cash equivalents		28,173			28,980

Investment securities:
Securities available for sale - at estimated market value		75,240			77,725
Securities held to maturity - at amortized cost		40,676			40,763
Mortgage-backed securities available for sale - at estimated market value		73,051			74,727
Investment securities		188,967			193,215

Loans receivable, net		273,176			267,138
Loans available for sale		1,642			783

Property and equipment, net		6,786			6,877
Federal Home Loan Bank stock, at cost		3,527			3,527
Accrued interest receivable:
Loans		826			872
Investments and mortgage-backed securities		941			1,010
Other real estate owned, net		70			70
Cash surrender value of life insurance policies		17,361			17,241
Deferred income taxes		2,262			2,073
Prepaid expenses and other assets		1,528			1,469
Goodwill		2,522			2,522
Intangible asset		282			312
Total assets	$	528,063		$	526,089

Liabilities and Stockholders' Equity

Deposits	$	441,974		$	438,885
Advances from FHLB		12,000			12,000
Accrued interest on deposits		11			12
Accrued interest on FHLB advance		9			10
Advances from borrowers for payment of insurance and taxes		818			608
Accrued expenses and other liabilities		2,576			4,120
Total liabilities		457,388			455,635

Commitments and contingencies		-			-

Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued		-			-
Common stock, $0.01 par value; 25,000,000 shares authorized, 5,149,564 shares issued at September 30, 2016 and June 30, 2016; 4,198,143 shares outstanding at September 30, 2016 and June 30, 2016		51			51
Additional paid-in capital		51,407			51,320
Retained earnings		33,014			32,484
Less shares purchased for stock plans		(2,241	)		(2,335	)
Treasury Stock, at cost - 951,421 shares at September 30, 2016 and June 30, 2016		(12,445	)		(12,445	)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net of income taxes		889			1,379

Total stockholders' equity		70,675			70,454

Total liabilities and stockholders' equity	$	528,063		$	526,089

See accompanying notes to the consolidated financial statements.

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except share amounts)

	For the Three Months Ended
	September 30,
(In thousands, except per share data)	2016		2015

Interest income:
Loans	$	2,934	$	2,887
Investments and mortgage-backed securities		1,009		1,071
Total interest income		3,943		3,958
Interest expense:
Deposits		568		541
Borrowed funds		57		60
Total interest expense		625		601

Net interest income		3,318		3,357

Provision for loan losses		17		44

Net interest income after provision for loan losses		3,301		3,313

Noninterest income:
Service charges		789		743
Gain on sale of loans		220		90
Gain on sale of investments		79		6
Provision for loss on real estate owned		-		(24	)
Income from bank owned life insurance		120		186
Other		100		66
Total noninterest income		1,308		1,067

Noninterest expense:
Compensation and employee benefits		2,180		2,160
Premises and occupancy expense		270		262
Deposit insurance premium		71		82
Advertising expense		106		91
Data processing expense		478		319
Intangible amortization		30		30
Professional fees		250		287
Other operating expenses		277		394
Total noninterest expense		3,662		3,625

Income before income taxes		947		755

Income tax provision		165		56

Net income	$	782	$	699

Basic and diluted earnings per share	$	0.19	$	0.16

See accompanying notes to the consolidated financial statements.

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(In thousands)

	For the Three Months Ended September 30,
	2016			2015

Net income	$	782		$	699

Other comprehensive income (loss), net of tax
Net unrealized gain (loss) on available for sale securities net of taxes of $(283) and $299 for the three months ended September 30, 2016 and 2015, respectively.		(442	)		467

Reclassification adjustment for the net realized gain on sale of available for sale securities included in net income, net of taxes of $(31) and $(2) for the three months ended September 30, 2016 and 2015, respectively.		(48	)		(4	)

Comprehensive income	$	292		$	1,162

See accompanying notes to consolidated financial statements.

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

	For the Three Months Ended September 30,
(In thousands)	2016			2015

Operating activities:
Net income	$	782		$	699
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		107			97
Provision for loan losses		17			44
Deferred loan origination costs		(64	)		(10	)
Amortization of premium on investments		495			535
Proceeds from sale of loans		6,188			2,517
Loans disbursed for sale in the secondary market		(6,827	)		(3,065	)
Gain on sale of loans		(220	)		(90	)
Amortization of intangible asset		30			30
Amortization of acquisition-related loan yield adjustment		(33	)		(44	)
Gain on sale of investment securities		(79	)		(6	)
Provision for loss on real estate owned		-			24
Gain recognized from death benefit on bank owned life insurance		-			(68	)
Increase in cash surrender value of life insurance		(120	)		(128	)
Stock-based compensation		63			65
Amortization of ESOP shares		118			112
Deferred income taxes		125			(109	)
Effects of change in operating assets and liabilities:
Accrued interest receivable		115			(74	)
Prepaid expenses and other assets		(59	)		338
Accrued interest payable		(2	)		2
Accrued expenses and other		(1,544	)		(109	)

Net cash provided by (used in) operating activities		(908	)		760

Investing activities:
Proceeds from maturity of available for sale investment securities		280			45
Proceeds from maturity of held to maturity securities		30			27
Proceeds from sale of available for sale investment securities		6,935			-
Proceeds from repayment of mortgage-backed securities and collateralized mortgage obligations available for sale		5,524			6,165
Proceeds from sale of mortgage-backed securities available for sale		11,087			8,645
Purchases of available for sale investment securities		(9,885	)		-
Purchases of held to maturity investment securities		-			(388	)
Purchases of mortgage-backed securities available for sale		(10,943	)		-
Proceeds from bank owned life insurance death benefit		-			446
Net increase in loans		(5,958	)		(9,702	)
Capital expenditures		(16	)		-

Net cash provided by (used in) investing activities		(2,946	)		5,238

Financing activities:
Net increase (decrease) in deposits		3,089			(1,341	)
Dividends paid to stockholders		(252	)		(275	)
Repurchases of common stock		-			(1,128	)
Net increase in advances from borrowers for
payment of insurance and taxes		210			221

Net cash provided by (used in) financing activities		3,047			(2,523	)

Net increase (decrease) in cash and cash equivalents		(807	)		3,475

Cash and cash equivalents at beginning of period		28,980			18,522

Cash and cash equivalents at end of period	$	28,173		$	21,997

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, a federal corporation (“old United Community Bancorp”) completed its previously announced conversion from the mutual holding company form of organization to the stock holding company form on January 9, 2013. As a result of the conversion, United Community Bancorp, an Indiana corporation (“United Community Bancorp” or “Company”), became the holding company for United Community Bank (“Bank”), and United Community MHC and old United Community Bancorp, ceased to exist. As part of the conversion, all outstanding shares of old United Community Bancorp common stock (other than those owned by United Community MHC) were converted into the right to receive 0.6573 of a share of United Community Bancorp common stock.

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. UCB Financial Services, Inc., a wholly-owned subsidiary of the Bank, was formed for a variety of purposes, but was primarily being used for the collection of commissions from a wealth management partner. In addition to the collection of commissions, during the prior fiscal year, the Bank applied for, and received approval from the OCC to allow UCB Financial Services, Inc. to own and manage a portion of the Bank’s municipal bond portfolio.

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 months ended September 30, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2017. 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, 2016, which are included in the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2016.

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, 2016 and June 30, 2016, the ESOP owned 173,894 shares of the Company’s common stock. The shares owned by the ESOP are held in a suspense account until released for allocation to participants.

3. EARNINGS PER SHARE (“EPS”) – Non-vested shares with non-forfeitable dividend rights are considered participating securities and, thus, subject to the two-class method pursuant to ASC 260, Earnings per Share, when computing basic and diluted earnings per share. 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, such as outstanding stock options, were exercised or converted into common stock or resulted in the issuance of common stock. Diluted EPS is calculated by adjusting the weighted average number of shares of common stock outstanding to include the effects of contracts or securities exercisable or which could be converted into common stock, if dilutive, using the treasury stock method. For the three months ended September 30, 2016 outstanding options to purchase 227,626 shares were excluded from the computations of diluted earnings per share as their effect would have been anti-dilutive. The following is a reconciliation of the basic and diluted weighted average number of common shares outstanding:

	Three Months Ended
	September 30,
	2016		2015

Basic weighted average outstanding shares		4,024,249		4,368,527
Effect of dilutive stock options		33,762		38,232
Diluted weighted average outstanding shares		4,058,011		4,406,759

4. STOCK-BASED COMPENSATION – The Company applies the provisions of ASC 718, Compensation – Stock 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 a straight-line basis pursuant to ASC 718. 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. Stock-based compensation expense was $63,000 and $65,000 for the three months ended September 30, 2016 and 2015, respectively. No stock-based compensation awards were granted during the three months ended September 30, 2016 and 2015.

5. DIVIDENDS – On August 11, 2016 the Board of Directors of the Company declared cash dividends on the Company’s outstanding shares of stock of $0.06 per share for each period. The dividend, totaling $252,000, was paid during the three months ended September 30, 2016.

6. STOCK REPURCHASE PLAN – On February 3, 2014 the Company’s board of directors approved the repurchase of up to 514,956 shares of the Company’s outstanding common stock, which represented approximately 10% of the Company’s outstanding shares at that date. Purchases were conducted solely through and based upon the parameters of a Rule 10b5-1 repurchase plan. As of December 31, 2014, all 514,956 shares were repurchased at a total cost of $6.0 million.

Additionally, on May 18, 2015, the Company’s Board of Directors approved the repurchase of up to 231,571 shares of the Company’s outstanding common stock, which was approximately 5% of the Company’s outstanding shares as of May 18, 2015. Purchases were conducted solely through and based upon the parameters of a Rule 10b5-1 repurchase plan. As of June 30, 2016, 231,571 were repurchased at a total cost of $3.4 million.

On November 6, 2015, United Community Bancorp entered into a Stock Repurchase Agreement with Stilwell Activist Fund, L.P., Stilwell Activist Investments, L.P. and Stilwell Partners, L.P. (collectively, the “Sellers”). Pursuant to the Stock Repurchase Agreement, the Company purchased 318,756 shares of its common stock, $0.01 par value, from the Sellers for an aggregate purchase price of $4,781,340, or $15.00 per share. The repurchase was funded with cash on hand and completed the 5% repurchase program mentioned above. Following the repurchase transaction, the Company had 4,201,326 shares of common stock outstanding. On April 26, 2016 the Company purchased 3,183 shares of common stock from participants in the equity incentive plan. There were no other repurchases after this date and therefore at September 30, 2016, there were 4,198,143 shares of common stock outstanding.

Subsequent to the quarter ended September 30, 2016, on November 4, 2016, United Community Bancorp approved the repurchase of up to 209,907 shares of the Company’s outstanding common stock, which was approximately 5% of the Company’s outstanding shares as of November 4, 2016. Purchases will be conducted solely through and based upon the parameters of a Rule 10b5-1 repurchase plan.

7. SUPPLEMENTAL CASH FLOW INFORMATION

	Three Months Ended
	September 30,
	2016		2015
	(Dollars in thousands)
Supplemental disclosure of cash flow information is as follows:
Cash paid during the period for:
Income taxes, net	$	43	$	—
Interest	$	627	$	606

Supplemental disclosure of non-cash investing and financing activities is as follows:
Unrealized gains on securities designated as available for sale, net of tax	$	490	$	463
Transfers of loans to other real estate owned	$	—	$	—

8. DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES - ASC 820, Fair Value Measurements and Disclosures, requires disclosure of the fair value of financial instruments, both assets and liabilities, whether or not recognized in the consolidated balance sheet, for which it is practicable to estimate the value. 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 cash equivalents

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.

Advances 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, 2016 and June 30, 2016 are as follows:

	September 30, 2016				June 30, 2016
	Carrying Amounts		Fair Value		Carrying Amounts		Fair Value
	(In thousands)
Financial assets:
Cash and interest-bearing deposits	$	28,173	$	28,173	$	28,980	$	28,980
Investment securities available for sale		75,240		75,240		77,725		77,725
Investment securities held to maturity		40,676		42,580		40,763		43,201
Mortgage-backed securities		73,051		73,051		74,727		74,727
Loans receivable and loans receivable held for sale		274,818		276,306		267,921		270,595
Accrued interest receivable		1,767		1,767		1,882		1,882
Investment in FHLB stock		3,527		3,527		3,527		3,527

Financial liabilities:
Deposits		441,974		442,855		438,885		439,834
Accrued interest payable		20		20		22		22
FHLB advances		12,000		12,286		12,000		12,322

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

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.

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)
September 30, 2016	(In thousands)

Mortgage-backed securities	$	73,051	$	—	$	73,051	$	—
Municipal bonds		37,061		—		37,061		—
Small Business Administration		7,633		—		7,633		—
Collateralized Mortgage Obligations		27,314		—		27,314		—
Certificates of Deposit		3,070		—		3,070		—
Other equity securities		162		162		—		—
Mortgage servicing rights		694		—		694		—

June 30, 2016
Mortgage-backed securities	$	74,727	$	—	$	74,727	$	—
Municipal bonds		34,790		—		34,790		—
Small Business Administration		7,872		—		7,872		—
Collateralized Mortgage Obligations		31,832		—		31,832		—
Certificatesof Deposit		3,064		—		3,064		—
Other equity securities		167		167		—		—
Mortgage servicing rights		639		—		639		—

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)
September 30, 2016:	(In thousands)
Other real estate owned	$	70	$	—	$	70	$	—
Loans held for sale		1,642		—		1,642		—
Impaired loans		5,315		—		5,315		—

June 30, 2016:
Other real estate owned	$	70	$	—	$	70	$	—
Loans held for sale		783		—		783		—
Impaired loans		5,216		—		5,216		—

The adjustments to other real estate owned and impaired loans are based primarily on appraisals of the real estate, cash flow analysis or other observable market prices. The Bank’s policy is that fair values for these assets are based on current appraisals or cash flow analysis.

The following table presents fair value measurements for the Company’s financial instruments which are not recognized at fair value in the accompanying statements of financial position on a recurring or 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)
September 30, 2016:
Financial assets:
Cash and interest-bearing deposits	$	28,173	$	28,173	$	—	$	—
Investment securities held to maturity		42,580		—		42,580		—
Loans receivable and loans held for sale		276,306		—		276,306		—
Accrued interest receivable		1,767		—		1,767		—
Investment in FHLB stock		3,527		—		3,527		—
Financial liabilities:
Deposits		442,855		—		442,855		—
Accrued interest payable		20		—		20		—
FHLB advances		12,286		—		12,286		—

June 30, 2016:
Financial assets:
Cash and interest-bearing deposits	$	28,980	$	28,980	$	—	$	—
Investment securities held to maturity		43,201		—		43,201		—
Loans receivable and loans held for sale		270,595		—		270,595		—
Accrued interest receivable		1,882		—		1,882		—
Investment in FHLB stock		3,527		—		3,527		—
Financial liabilities:
Deposits		439,834		—		439,834		—
Accrued interest payable		22		—		22		—
FHLB advances		12,322		—		12,322		—

9. INVESTMENT SECURITIES

Investment securities available for sale at September 30, 2016 consisted of the following:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
Mortgage-backed securities	$	72,690	$	529	$	168	$	73,051
Municipal bonds		36,184		995		118		37,061
Small Business Administration		7,503		130		—		7,633
Collateralized Mortgage Obligations		27,276		96		58		27,314
Certificates of Deposit		2,971		99		—		3,070
Other equity securities		210		—		48		162
	$	146,834	$	1,849	$	392	$	148,291

Investment securities held to maturity at September 30, 2016 consisted of the following:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Market Value
Municipal Bonds		$	40,676			$	1,904			$	—			$	42,580

Investment securities available for sale at June 30, 2016 consisted of the following:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
Mortgage-backed securities	$	74,198	$	619	$	90	$	74,727
Municipal bonds		33,512		1,278		—		34,790
Small Business Administration		7,651		221		—		7,872
Collateralized Mortgage Obligations		31,650		182		—		31,832
Certificates of Deposit		2,971		93		—		3,064
Other equity securities		210		—		43		167
	$	150,192	$	2,393	$	133	$	152,452

Investment securities held to maturity at June 30, 2016 consisted of the following:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Estimated Market Value
Municipal Bonds		$	40,763			$	2,438			$	—			$	43,201

The mortgage-backed securities, callable bonds and municipal bonds have the following maturities at September 30, 2016:

	Available for Sale				Held to Maturity
	Amortized cost		Estimated market value		Amortized cost		Estimated market value
Due or callable in one year or less	$	—	$	—	$	63	$	64
Due or callable in 1 - 5 years		82,792		83,079		824		839
Due or callable in 5 - 10 years		44,184		45,210		4,861		5,024
Due or callable in greater than 10 years		19,648		19,840		34,928		36,653
Total debt securities	$	146,624	$	148,129	$	40,676	$	42,580

All other securities available for sale at September 30, 2016 are saleable within one year.

Gross proceeds on the sale of investment and mortgage-backed securities were $18.0 million and $8.6 million for the three months ended September 30, 2016 and 2015, respectively. Gross realized gains for the three months ended September 30, 2016 and 2015 were $110,000 and $78,000 respectively. Gross realized losses for the three months ended September 30, 2016 and 2015 were $31,000 and $72,000, 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, 2016:

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Municipal Bonds	$	9,182	$	118	$	—	$	—	$	9,182	$	118
Mortgage-backed securities		15,972		89		16,135		79		32,107		168
Collateralized Mortgage Obligations		10,663		58		—		—		10,663		58
Other equity securities		—		—		162		48		162		48
	$	35,817	$	265	$	16,297	$	127	$	52,114	$	392
Number of investments				25				7				32

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.

10. GOODWILL AND INTANGIBLE ASSET

In June 2010, old United Community Bancorp 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.

As permitted by current accounting rules, the Company completed its qualitative assessment to determine whether current events or changes in circumstances lead to a determination that it is more likely than not, as defined, that the fair value of the reporting unit is less than its carrying amount. Based upon the Company’s assessment, there was no such determination that the fair value of the reporting unit is less than its carrying amount. Accordingly, the Company did not apply the traditional two-step goodwill impairment test.

The following table indicates changes to the core deposit intangible asset and goodwill balances for the three months ended September 30, 2016:

	Core Deposit Intangible		Goodwill
	(In thousands)

Balance at June 30, 2016	$	312	$	2,522
Amortization		30		—
Balance at September 30, 2016	$	282	$	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, 2016:

October 1, 2016 through June 30, 2017	$	87
2018		117
2019		78
	$	282

11. DISCLOSURES ABOUT THE CREDIT QUALITY OF LOANS RECEIVABLE AND THE ALLOWANCE FOR LOAN LOSSES (IN THOUSANDS)

The following tables illustrate certain disclosures required by ASC 310-10-50-11B(c), (g) and (h), the changes to the allowance for loan losses, for the three months ended September 30, 2016 (in thousands):

Allowance for Credit Losses and Recorded Investment in Loans Receivable

	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
Allowance for Credit Losses:
Balance, July 1, 2016:	$	1,235	$	426		$	108		$	275	$	2,577		$	132		$	10	$	122	$	4,885
Charge offs		—		(36	)		—			—		(425	)		—			—		—		(461	)
Recoveries		23		25			—			3		1			—			—		—		52
Provision (credit)		1		7			(37	)		115		(89	)		(4	)		10		14		17
Ending Balance:	$	1,259	$	422		$	71		$	393	$	2,064		$	128		$	20	$	136	$	4,493

Balance, Individually Evaluated	$	—	$	—		$	—		$	—	$	—		$	—		$	—	$	—	$	—

Balance, Collectively Evaluated	$	1,259	$	422		$	71		$	393	$	2,064		$	128		$	20	$	136	$	4,493

Financing receivables:
Ending balance	$	131,668	$	35,622		$	11,918		$	16,133	$	63,388		$	9,033		$	2,445	$	9,787	$	279,994

Ending Balance: individually evaluated for impairment	$	2,378	$	391		$	407		$	—	$	2,089		$	—		$	50	$	—	$	5,315

Ending Balance: collectively evaluated for impairment	$	124,355	$	32,790		$	11,344		$	16,133	$	61,189		$	9,033		$	2,395	$	9,780	$	267,019

Ending Balance: loans acquired at fair value	$	4,935	$	2,441		$	167		$	—	$	110		$	—		$	—	$	7	$	7,660

For the year ended June 30, 2016 (in thousands):

Allowance for Credit Losses and Recorded Investment in Loans Receivable

	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
Allowance for Credit Losses:
Beginning balance:	$	1,348		$	517		$	130		$	474		$	2,586		$	4	$	16		$	49	$	5,124
Charge offs		(135	)		(157	)		—			(192	)		(561	)		—		—			—		(1,045	)
Recoveries		86			274			27			4			223			—		—			5		619
Provision (credit)		(64	)		(208	)		(49	)		(11	)		329			128		(6	)		68		187
Ending Balance:	$	1,235		$	426		$	108		$	275		$	2,577		$	132	$	10		$	122	$	4,885

Balance, Individually Evaluated	$	—		$	—		$	—		$	—		$	—		$	—	$	—		$	—	$	—

Balance, Collectively Evaluated	$	1,235		$	426		$	108		$	275		$	2,577		$	132	$	10		$	122	$	4,885

Financing receivables:
Ending Balance	$	130,883		$	35,018		$	12,160		$	16,032		$	58,981		$	8,555	$	2,151		$	10,442	$	274,222

Ending Balance: individually evaluated for impairment	$	2,535		$	398		$	408		$	—		$	1,787		$	—	$	88		$	—	$	5,216

Ending Balance: collectively evaluated for impairment	$	123,148		$	32,071		$	11,581		$	16,032		$	57,076		$	8,555	$	2,063		$	10,313	$	260,839

Ending Balance: loans acquired at fair value	$	5,200		$	2,549		$	171		$	—		$	118		$	—	$	—		$	129	$	8,167

Federal regulations require us to review and classify our assets on a regular basis. In addition, the OCC has the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions and values questionable, and there is a high possibility of loss. An asset classified “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. The regulations also provide for a “special mention” category, described as assets which do not currently expose us to a sufficient degree of risk to warrant classification but do possess credit deficiencies or potential weaknesses deserving our close attention. If we classify an asset as substandard, doubtful or loss, we analyze that asset and may establish a specific allocation for the asset at that time.

The following tables illustrate certain disclosures required by ASC 310-10-50-29(b).

Credit Risk Profile by Internally Assigned Grade

At September 30, 2016

(in thousands)

	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
Grade:
Pass	$	126,323	$	34,503	$	6,844	$	14,030	$	52,617	$	6,789	$	1,453	$	8,964	$	251,523
Watch		2,401		577		4,257		2,103		6,585		2,244		52		823		19,042
Special mention		533		151		154		—		2,008		—		890		—		3,736
Substandard		2,411		391		663		—		2,178		—		50		—		5,693
Total:	$	131,668	$	35,622	$	11,918	$	16,133	$	63,388	$	9,033	$	2,445	$	9,787	$	279,994

Credit Risk Profile by Internally Assigned Grade

At June 30, 2016

(in thousands)

	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
Grade:
Pass	$	125,089	$	33,820	$	7,007	$	13,914	$	48,886	$	3,814	$	1,119	$	8,475	$	242,124
Watch		2,545		582		4,298		2,118		5,018		4,741		54		1,967		21,323
Special mention		681		218		160		—		3,201		—		890		—		5,150
Substandard		2,568		398		695		—		1,876		—		88		—		5,625
Total:	$	130,883	$	35,018	$	12,160	$	16,032	$	58,981	$	8,555	$	2,151	$	10,442	$	274,222

The following tables illustrate certain disclosures required by ASC 310-10-50-7A for gross loans.

Age Analysis of Past Due Loans Receivable

At September 30, 2016

(in thousands)

	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total current		Total loans receivable
One- to Four- Family Mortgage - Owner-Occupied	$	337	$	308	$	384	$	1,029	$	130,639	$	131,668
Consumer		124		1		23		148		35,474		35,622
One- to Four- Family Mortgage - Non-Owner Occupied		—		30		235		265		11,653		11,918
Multi-family Mortgage		—		—		—		—		16,133		16,133
Nonresidential Real Estate – commercial and office buildings		—		—		—		—		63,388		63,388
Construction		—		—		—		—		9,033		9,033
Land		—		—		39		39		2,406		2,445
Commercial and Agricultural		—		—		—		—		9,787		9,787
Total	$	461	$	339	$	681	$	1,481	$	278,513	$	279,994

Age Analysis of Past Due Loans Receivable

At June 30, 2016

(in thousands)

	30-59 days past due		60-89 days past due		Greater than 90 days		Total past due		Total current		Total loans receivable
One- to Four- Family Mortgage - Owner-Occupied	$	594	$	552	$	401	$	1,547	$	129,336	$	130,883
Consumer		109		49		23		181		34,837		35,018
One- to Four- Family Mortgage - Non-Owner-Occupied		95		30		235		360		11,800		12,160
Multi-family Mortgage		—		—		—		—		16,032		16,032
Nonresidential Real Estate – commercial and office buildings		—		—		—		—		58,981		58,981
Construction		—		—		—		—		8,555		8,555
Land		14		—		76		90		2,061		2,151
Commercial and Agricultural		—		—		—		—		10,442		10,442
Total	$	812	$	631	$	735	$	2,178	$	272,044	$	274,222

The following table illustrates certain disclosures required by ASC 310-10-50-15.

For the three months
ended September 30, 2016

Recorded
investment

Unpaid
principal
balance

Specific
allowance

Interest
income
recognized

Average
Recorded
investment

With a related allowance recorded:

One- to Four- Family Mortgage - Owner-Occupied

—

Consumer

—

One- to Four- Family Mortgage -Non-Owner Occupied

—

Multi-family Mortgage

—

Nonresidential Real Estate – commercial and office buildings

—

Construction

—

Land

—

Commercial and Agricultural

—

Total

—

							For the three months ended September 30, 2016
	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized		Average Recorded investment
With no related allowance recorded:
One- to Four- Family Mortgage - Owner-Occupied	$	2,378	$	2,759	$	—	$	17	$	2,457
Consumer		391		720		—		1		395
One- to Four- Family Mortgage -Non-Owner Occupied		407		407		—		2		408
Multi-family Mortgage		—		920		—		—		—
Nonresidential Real Estate – commercial and office buildings		2,089		3,922		—		11		1,938
Construction		—		—		—		—		—
Land		50		58		—		—		69
Commercial and Agricultural		—		6		—		—		—
Total	$	5,315	$	8,792	$	—	$	31	$	5,267

Impaired Loans

							For the three months ended September 30, 2016
	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized		Average Recorded investment
Total:
One- to Four- Family Mortgage - Owner-Occupied	$	2,378	$	2,759	$	—	$	17	$	2,457
Consumer		391		720		—		1		395
One- to Four- Family Mortgage -Non-Owner Occupied		407		407		—		2		408
Multi-family Mortgage		—		920		—		—		—
Nonresidential Real Estate – commercial and office buildings		2,089		3,922		—		11		1,938
Construction		—		—		—		—		—
Land		50		58		—		—		69
Commercial and Agricultural		—		6		—		—		—
Total	$	5,315	$	8,792	$	—	$	31	$	5,267

Impaired Loans

							For the year ended June 30, 2016
	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized		Average recorded investment
	(in thousands)
With an allowance recorded:
One- to Four- Family Mortgage - Owner-Occupied	$	—	$	—	$	—	$	—	$	—
Consumer		—		—		—		—		—
One- to Four- Family Mortgage - Non-Owner Occupied		—		—		—		—		—
Multi-family Mortgage		—		—		—		—		—
Nonresidential Real Estate – commercial and office buildings		—		—		—		—		496
Construction		—		—		—		—		—
Land		—		—		—		—		—
Commercial and Agricultural		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	496

Impaired Loans

							For the year ended June 30, 2016
	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized		Average recorded investment
	(in thousands)
Without an allowance recorded:
One- to Four- Family Mortgage - Owner-Occupied	$	2,535	$	2,973	$	—	$	17	$	2,886
Consumer		398		726		—		1		461
One- to Four- Family Mortgage - Non-Owner Occupied		408		408		—		3		647
Multi-family Mortgage		—		920		—		—		481
Nonresidential Real Estate – commercial and office buildings		1,787		3,195		—		11		3,293
Construction		—		—		—		—		—
Land		88		95		—		—		149
Commercial and Agricultural		—		7		—		—		—
Total	$	5,216	$	8,324	$	—	$	32	$	7,917

Impaired Loans

							For the year ended June 30, 2016
	Recorded investment		Unpaid principal balance		Specific allowance		Interest income recognized		Average recorded investment
	(in thousands)
Total:
One- to Four- Family Mortgage - Owner-Occupied	$	2,535	$	2,973	$	—	$	17	$	2,886
Consumer		398		726		—		1		461
One- to Four- Family Mortgage - Non-Owner Occupied		408		408		—		3		647
Multi-family Mortgage		—		920		—		—		481
Nonresidential Real Estate – commercial and office buildings		1,787		3,195		—		11		3,789
Construction		—		—		—		—		—
Land		88		95		—		—		149
Commercial and Agricultural		—		7		—		—		—
Total	$	5,216	$	8,324	$	—	$	32	$	8,413

The Bank did not have any investments in subprime loans at September 30, 2016. Impaired loans at September 30, 2016 included troubled debt restructurings (“TDR”) with an aggregate principal balance of $3.3 million and a recorded investment of $3.3 million. See Note 12 for a discussion on TDRs.

12. TROUBLED DEBT RESTRUCTURINGS - From time to time, as part of our loss mitigation process, loans may be renegotiated in a TDR when we determine that greater economic value will ultimately be recovered under the new restructured 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 loan, 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. TDRs are accounted for as set forth in ASC 310-40 Troubled Debt Restructurings by Creditors (“ASC 310-40”). A TDR may be on nonaccrual or it may accrue interest. A TDR is typically on nonaccrual until the borrower successfully performs under the new terms for at least six consecutive months. However, a TDR may be placed on accrual immediately following the restructuring in those instances where a borrower’s payments are current prior to the modification, the loan is restructured at a market rate and management determines that principal and interest under the new terms are fully collectible. All TDRs are considered to be impaired loans. A TDR will be removed from TDR classification if it is restructured at a market rate, is not impaired under those restructured terms and has been performing under those terms for at least twelve consecutive months.

Existing performing loan customers who request a loan (non-TDR) modification and who meet the Bank’s underwriting standards may, usually for a fee, modify their original loan terms to terms currently offered. The modified terms of these loans are similar to the terms offered to new customers with similar credit risk. The fee assessed for modifying the loan is deferred and amortized over the life of the modified loan using the level-yield method and is reflected as an adjustment to interest income. Each modification is examined on a loan-by-loan basis and if the modification of terms represents more than a minor change to the loan, then the unamortized balance of the pre-modification deferred fees or costs associated with the mortgage loan are recognized in interest income at the time of the modification. If the modification of terms does not represent more than a minor change to the loan, then the unamortized balance of the pre-modification deferred fees or costs continue to be deferred.

The following tables summarize TDRs by loan type and accrual status.

	At September 30, 2016
	Loan Status				Total Unpaid						Number		Average
	Accrual		Nonaccrual		Principal		Related		Recorded		of		Recorded
(In thousands)					Balance		Allowance		Investment		Loans		Investment
One- to Four-Family residential real estate	$	1,535	$	382	$	1,917	$	—	$	1,917		19	$	1,940
Multi-family residential real estate		—		—		—		—		—		—		180
Nonresidential real estate		718		647		1,365		—		1,365		3		2,116
Total	$	2,253	$	1,029	$	3,282	$	—	$	3,282		22	$	4,236

	At June 30, 2016
	Loan Status				Total Unpaid						Number		Average
	Accrual		Nonaccrual		Principal		Related		Recorded		of		Recorded
(In thousands)					Balance		Allowance		Investment		Loans		Investment
One- to Four-Family residential real estate	$	1,609	$	324	$	1,933	$	—	$	1,933		19	$	1,979
Multi-family residential real estate		—		—		—		—		—		—		361
Nonresidential real estate		721		1,066		1,787		—		1,787		3		3,009
Total	$	2,330	$	1,390	$	3,720	$	—	$	3,720		22	$	5,349

Interest income recognized on TDRs is as follows:

	For the three months ended September 30,
	2016		2015

One-to-Four Family residential real estate	$	17	$	11
Multi-family residential real estate		—		11
Nonresidential real estate		11		48
Construction		—		—
Commercial		—		—
Consumer		—		—
Total	$	28	$	70

At September 30, 2016, the Bank had 22 loans totaling $3.3 million that were reported as TDRs, and had established an allowance for losses on these loans of $0. With respect to the $3.3 million in TDRs, the Bank charged-off $1.4 million at the time the loans were restructured into the Note A/B split note format. At June 30, 2016, the Bank had 25 loans totaling $3.7 million that were reported as TDRs, and had an allowance for losses on these loans of $0. With respect to the $3.7 million in TDRs, the Bank charged-off $1.4 million with respect to those loans at the time the loans were restructured into the Note A/B split note format. At September 30, 2016, the Bank had no other commitments to lend on its TDRs. Management continues to monitor the performance of loans reported as TDRs on a monthly basis.

Loans that were included in TDRs at September 30, 2016 and June 30, 2016 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. Some 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 September 30, 2016 and June 30, 2016, all loans classified as TDRs required principal and interest payments.

The following table is a roll forward of activity in our TDRs:

	Three Months Ended September 30, 2016
	Recorded Investment			Number of Loans
(Dollar amounts in thousands)
Beginning balance	$	3,720			22
Additions to TDR		—			—
Charge-offs		—			—
Removal of TDRs		—			—
Payments		(438	)		—
Ending balance	$	3,282			22

13. ACCUMULATED OTHER COMPREHENSIVE INCOME

Reclassification out of accumulated other comprehensive income during the three months ended September 30, 2016 and 2015 and the affected line items in the consolidated statements of income are as follows (in thousands):

	Three Months Ended September30,
	2016		2015		Affected Line Item in the Consolidated Statements of Income
Realized gain (loss) on sale of securities	$	79	$	6	Gain on sale of investments
Less provision (benefit) for income taxes		31		2	Income tax provision
Reclassification adjustment, net of taxes	$	48	$	4

14. EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets. This ASU is intended to improve financial reporting by requiring timelier recording of credit losses on loans and other financial instruments held by financial institutions and other organizations. The underlying premise of the ASU is that financial assets measured at amortized cost should be presented at the net amount expected to be collected, through an allowance for credit losses that is deducted from the amortized cost basis. The allowance for credit losses should reflect management’s current estimate of credit losses that are expected to occur over the remaining life of a financial asset. The income statement will be effected for the measurement of credit losses for newly recognized financial assets, as well as the expected increases or decreases of expected credit losses that have taken place during the period. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. With certain exceptions, transition to the new requirements will be through a cumulative effect adjustment to opening retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company will be evaluating the impact of this ASU over the next several years.

In April 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, and affects the guidance in ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. ASU No. 2016-10 clarifies the following two aspects of Topic 606: evaluating whether promised goods and services are separately identifiable, and determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property, which is satisfied at a point in time, or a right to access the entity’s intellectual property, which is satisfied over time. ASU No. 2016-10 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption of ASU No. 2016-10 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, and affects all entities that issue share-based payment awards to their employees. The new guidance involves several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU No. 2016-09, any excess tax benefits or tax deficiencies should be recognized as income tax expense or benefit in the income statement. Excess tax benefits are to be classified as an operating activity in the statement of cash flows. In accruing compensation cost, an entity can make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest, as required under current guidance, or account for forfeitures when they occur. For an award to qualify for equity classification, an entity cannot partially settle the award in excess of the employer's maximum statutory withholding requirements. Such cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity in the statement of cash flows. The amendments in ASU No. 2016-09 are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2016. Early adoption is permitted. Adoption of ASU No. 2016-07 is not expected to have a material impact on the Company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), and affects the guidance in ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606)," which is not yet effective. When another party is involved in providing goods or services to a customer, ASU No. 2014-09 requires an entity to determine whether the nature of its promise is to provide the specified good or service itself (that is, the entity is a principal) or to arrange for that good or service to be provided by the other party (that is, the entity is an agent). The amendments in ASU No. 2016-08 are intended to improve the operability and understandability of the implementation guidance in ASU No. 2014-09 on principal versus agent considerations by offering additional guidance to be considered in making the determination. ASU No. 2016-08 is effective for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Transitional guidance is included in the update. Earlier adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is currently evaluating the financial statement impact of adopting the new guidance.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), and requires a lessee to recognize in the statement of financial position a liability to make lease payments ("the lease liability") and a right-of-use asset representing its right to use the underlying asset for the lease term, initially measured at the present value of the lease payments. When measuring assets and liabilities arising from a lease, the lessee should include payments to be made in optional periods only if the lessee is reasonably certain, as defined, to exercise an option to the lease or not to exercise an option to terminate the lease. Optional payments to purchase the underlying asset should be included if the lessee is reasonably certain it will exercise the purchase option. Most variable lease payments should be excluded except for those that depend on an index or a rate or are in substance fixed payments. A lessee shall classify a lease as a finance lease if it meets any of five listed criteria: 1) The lease transfers ownership of the underlying asset to the lessee by the end of the lease term. 2) The lease grants the lessee and option to purchase the underlying asset that the lessee is reasonably certain to exercise. 3) The lease term is for the major part of the remaining economic life of the underlying asset. 4) The present value of the sum of the lease payments and any residual value guaranteed by the lessee equals or exceeds substantially all of the fair value of the underlying asset. 5) The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term. For finance leases, a lessee shall recognize in the statement of comprehensive income interest on the lease liability separately from amortization of the right-of-use asset. Amortization of the right-of-use asset shall be on a straight-line basis, unless another basis is more representative of the pattern in which the lessee expects to consume the right-of-use asset’s future economic benefits. If the lease does not meet any of the five criteria, the lessee shall classify it as an operating lease and shall recognize a single lease cost on a straight-line basis over the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities. If a lessee makes this election, it should recognize lease expense for such leases generally on a straight-line basis over the lease term. The amendments in this update are to be applied using a modified retrospective approach, as defined, and are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. Early application is permitted. The Company is currently evaluating the financial statement impact of adopting the new guidance.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10). The amendments in this update affect all entities that hold financial assets or owe financial liabilities. The update’s main provisions applicable to the Company are as follows: 1) Require equity investments with readily available fair values (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) Simplify the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) Eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; 4) Require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; 5) Require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and 6) Clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. Public companies should apply the guidance in Update 2016-01 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Early adoption is generally not permitted. An entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the annual reporting period of adoption. We do not expect the adoption of these provisions to have a significant impact on the Company’s consolidated financial statements.

Item 2. Management’s 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 27, 2016, which is available through the SEC’s website at www.sec.gov and in other reports filed by the Company. 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 affected loans; and the value of collateral. Inherent loss factors based upon environmental and other economic 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 at least quarterly 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 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 1 and 3 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 27, 2016.

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. United Community Bancorp referred to as the Company, accounts for income taxes under 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, 2016 and June 30, 2016. The Company recognized no interest and penalties on the underpayment of income taxes during the three month periods ended September 30, 2016 and 2015, and had no accrued interest and penalties on the balance sheet as of September 30, 2016 and June 30, 2016. The Company has no tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase within the next fiscal year. The Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for tax years ended on or before June 30, 2012.

Comparison of Financial Condition at September 30, 2016 and June 30, 2016

Balance Sheet Analysis

Total assets were $528.1 million at September 30, 2016, compared to $526.1 million at June 30, 2016. Total loans increased by $6.0 million. The increase in loans was partially offset by a $4.3 million decrease in investment securities. The investment balances decreased partially due to normal amortization and maturities during the period and the sale of investment securities. A portion of the proceeds from the sale of investments securities was used to fund new loans, which is expected to enhance the Bank’s net interest margin as well as increase interest income in the future.

Total liabilities increased $1.8 million from $455.6 million at June 30, 2016 to $457.4 million at September 30, 2016 primarily due to a $3.1 million increase in deposits during the quarter, partially offset by the settlement of investments which was included in other liabilities at June 30, 2016.

Stockholders’ equity totaled $70.7 million as of September 30, 2016, which represents an increase of $221,000 when compared to June 30, 2016. Net income of $782,000 for the quarter ended September 30, 2016 was partially offset by a reduction in the unrealized gain on securities available for sale of $490,000 and dividends paid totaling $252,000. The $782,000 net income for the quarter ended September 30, 2016 represented an increase of $83,000, or 11.9% when compared to the quarter ended September 30, 2015. There were 4,198,143 outstanding shares of common stock at both September 30, 2016 and June 30, 2016. For all periods presented, the Bank was considered “well-capitalized” under applicable regulatory requirements.

Loans. At September 30, 2016, one- to four- family residential loans totaled $143.6 million, or 51.3% of total gross loans, compared to $143.0 million, or 52.2% of total gross loans, at June 30, 2016.

Multi-family and nonresidential real estate loans totaled $79.5 million and represented 28.4% of total loans at September 30, 2016, compared to $75.0 million, or 27.3% of total loans, at June 30, 2016. While repayments and charge-offs have recently reduced these portfolios, they remain a substantial segment of our loan portfolio. However, we have reviewed the economic environment in our lending markets, including those in southwestern Ohio and Northern Kentucky, and the level of our nonperforming assets, and beginning in December 2013, we implemented a controlled growth strategy to prudently increase nonresidential real estate and multi-family real estate loan portfolios. Starting in 2014, we hired experienced commercial lenders and credit staff to enhance our capacity to implement this strategy of prudently growing the commercial and commercial real estate loan portfolios.

Construction loans totaled $9.0 million, or 3.2% of total loans, at September 30, 2016, compared to $8.6 million, or 3.1% of total loans, at June 30, 2016.

Commercial business loans totaled $4.9 million, or 1.8% of total loans, at September 30, 2016, compared to $4.5 million, or 1.6% of total loans, at June 30, 2016.

Consumer loans totaled $35.6 million and represented 12.7% of total loans at September 30, 2016, compared to $35.0 million or 12.8% of total loans at June 30, 2016.

Agricultural loans totaled $4.8 million, or 1.7% of total loans, at September 30, 2016, compared to $6.0 million or 2.2% of total loans, at June 30, 2016.

Land loans totaled $2.4 million, or 0.9% of total loans, at September 30, 2016 compared to $2.2 million or 0.8% of total loans at June 30, 2016.

The following table sets forth the composition of our loan portfolio at the dates indicated.

	At September 30, 2016						At June 30, 2016
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Residential real estate:
One- to four-family	$	143,586			51.3	%	$	143,043			52.2	%
Multi-family		16,133			5.8			16,032			5.8
Construction		9,033			3.2			8,555			3.1
Nonresidential real estate		63,388			22.6			58,981			21.5
Land		2,445			0.9			2,151			0.8
Commercial business		4,942			1.8			4,476			1.6
Agricultural		4,845			1.7			5,966			2.2
Consumer:
Home equity		30,977			11.0			30,558			11.2
Auto		2,374			0.8			2,249			0.8
Share loans		982			0.4			932			0.3
Other		1,289			0.5			1,279			0.5
Total consumer loans		35,622			12.7			35,018			12.8
Total loans	$	279,994			100.0	%	$	274,222			100.0	%

Less (plus):
Deferred loan costs, net		(1,177	)					(1,113	)
Undisbursed portion of loans in process		3,502						3,312
Allowance for loan losses		4,493						4,885
Loans, net	$	273,176					$	267,138

Loan Maturity

The following table sets forth certain information at September 30, 2016 regarding the dollar amount of loan principal repayments becoming due during the periods indicated. The table does not include any estimate of prepayments, which can significantly shorten the average life of the loan 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	$	8,408	$	33,000	$	102,178	$	143,586
Multi-family real estate		540		3,501		12,092		16,133
Construction		3,449		932		4,652		9,033
Nonresidential real estate		5,486		20,893		37,009		63,388
Land		1,000		774		671		2,445
Commercial		1,149		2,812		981		4,942
Agricultural		1,625		1,929		1,291		4,845
Consumer		1,981		3,639		30,002		35,622
Total	$	23,638	$	67,480	$	188,876	$	279,994

The following table sets forth the dollar amount of all loans at September 30, 2016 due after September 30, 2017 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	$	38,723	$	96,455	$	135,178
Multi-family real estate		7,455		8,138		15,593
Construction		1,285		4,299		5,584
Nonresidential real estate		10,986		46,916		57,902
Land		178		1,267		1,445
Commercial		2,295		1,498		3,793
Agricultural		2,234		986		3,220
Consumer		2,406		31,235		33,641
Total	$	65,562	$	190,794	$	256,356

Loan Activity

The following table shows loan origination, repayment and sale activity during the periods indicated.

	Three Months Ended September 30,
	2016		2015
	(in thousands)
Total loans at beginning of period	$	274,222	$	259,419
Loans originated (1):
One- to four-family residential real estate		15,750		9,467
Multi-family residential real estate		8,645		310
Construction		3,311		2,846
Nonresidential real estate		4,645		6,778
Land		852		122
Commercial and agricultural		553		2,780
Consumer		2,803		1,508
Total loans originated		36,559		23,811
Deduct:
Loan principal repayments		23,960		10,782
Loans originated for sale		6,827		3,065
Net loan activity		5,772		9,964
Total loans at end of period	$	279,994	$	269,383

(1)

Includes loan renewals, loan refinancings and restructured loans.

Results of Operations for the Three Months Ended September 30, 2016 and 2015

Overview. Net income increased $83,000 to $782,000 for the quarter ended September 30, 2016 from $699,000 for the quarter ended September 30, 2015.

Net Interest Income. The following table summarizes changes in interest income and interest expense for the three months ended September 30, 2016 and 2015.

	Three Months Ended
	September 30,
	2016		2015		% Change
	(Dollars in thousands)
Interest income:
Loans	$	2,934	$	2,887		2	%
Investment and mortgage backed securities		981		1,064		(8	)%
Other interest-earning assets		28		17		65	%
Total interest income		3,943		3,958		0.4	%

Interest expense:
NOW and money market deposit accounts		149		106		41	%
Passbook accounts		76		75		1	%
Certificates of deposit		343		360		(5	)%
Total interest-bearing deposits		568		541		5	%
FHLB advances		57		60		(5	)%
Total interest expense		625		601		4	%
Net interest income	$	3,318	$	3,357		(1	)%

Net interest income totaled $3.3 million for the quarter ended September 30, 2016. This represented a decrease of $39,000, or 1.2% when compared to the quarter ended September 30, 2015. The decrease was caused by a decrease in interest income of $15,000 as well as an increase in interest expense of $24,000. Interest income decreased as a result of a $62,000 decrease in interest income on investments. The decrease in interest income on investments was partially offset by a $47,000 increase in interest income on loans. Interest income on investments decreased due to a decrease in the average balance of approximately $12.8 million as well as a decrease in the average yield on investments from 2.10% to 2.06%. Interest income on loans increased due to an increase in the average balance of approximately $11.7 million. This increase was partially offset by a decrease in the average rate earned on loans from 4.47% to 4.34%. The increase in loan balances was the result of an increase in mortgage loan balances and the controlled growth strategy in commercial lending. The $24,000 increase in interest expense was primarily due to an increase in new deposit accounts resulting from a successful seasonal checking account promotion. In addition, the average balance of deposits increased $11.9 million.

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, 2016 and 2015. 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,
	2016							2015
	Average Balance		Interest and Dividends		Yield/ Cost			Average Balance		Interest and Dividends		Yield/ Cost
	(Dollars in thousands)
Assets:
Interest-earning assets:
Loans	$	270,246	$	2,934		4.34	%	$	258,755	$	2,887		4.46	%
Investment and mortgage-backed securities		190,477		981		2.06			203,275		1,065		2.10
Other interest-earning assets		31,379		28		0.36			15,381		6		0.16
		492,102		3,943		3.21			477,431		3,958		3.32
Noninterest-earning assets		37,362							41,970
Total assets	$	529,464							519,401

Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW and money market deposit accounts (1)		187,066		149		0.32			164,144		106		0.25
Passbook accounts (1)		115,412		76		0.26			112,253		75		0.27
Certificates of deposit (1)		140,578		343		0.98			151,760		360		0.95
Total interest-bearing deposits		443,056		568		0.51			431,157		541		0.50
FHLB advances		12,000		57		1.90			13,000		60		1.85
Total interest-bearing liabilities		455,056		625		0.55			444,157		601		0.54
Noninterest bearing liabilities, commitments and contingencies		3,807							3,783
Total liabilities, commitments and contingencies		458,863							447,940
Stockholders' equity		70,601							71,461
Total liabilities and stockholders' equity	$	529,464						$	519,401
Net interest income			$	3,318						$	3,357
Interest rate spread						2.66	%						2.78	%
Net interest margin (annualized)						2.70	%						2.81	%
Average interest-earning assets to average interest-bearing liabilities						108.14	%						107.49	%

Provision for Loan Losses. The provision for loan losses was $17,000 for the quarter ended September 30, 2016 compared to $44,000 for the quarter ended September 30, 2015.

Nonperforming assets to total assets increased to 0.59% from 0.56% at June 30, 2016, an increase of 5.4%. Nonperforming loans as a percentage of total loans increased from 1.05% at June 30, 2016 to 1.09% at September 30, 2016, and nonperforming loans as a percentage of total assets increased from 0.55% at June 30, 2016 to 0.58% at September 30, 2016.

Noninterest Income. The following table summarizes noninterest income for the three months ended September 30, 2016 and 2015.

	Three Months Ended
	September 30,
	2016		2015		% Change

Service charges	$	789	$	743		6.2	%
Gain on sale of loans		220		90		144.4
Gain on sale of investments		79		6		1,216.7
Income from Bank Owned Life Insurance		120		186		(35.5	)
Other		100		42		138.1
Total	$	1,308	$	1,067		22.6

Noninterest income totaled $1.3 million for the quarter ended September 30, 2016, which represented an increase of $241,000, or 22.6% when compared to the quarter ended September 30, 2015. The increase was primarily due to an increase of $130,000 in gain on the sale of mortgage loans, a $73,000 increase in gain on the sale of investments, and a $46,000 increase in service charge income on deposit accounts. Service charge income increased primarily due to increased activity in deposit accounts and debit card usage. These increases were partially offset by a $66,000 decrease in income from bank owned life insurance. Death benefits totaling $68,000 were received in the prior year quarter with no such amounts received in the current year quarter.

Noninterest Expense. The following table shows the components of noninterest expense and the percentage changes for the three months ended September 30, 2016 and 2015.

	Three Months Ended
	September 30,
	2016		2015		% Change
	(Dollars in thousands)
Compensation and employee benefits	$	2,180	$	2,160		0.9	%
Premises and occupancy expense		270		262		3.1
Deposit insurance premium		71		82		(13.4	)
Advertising expense		106		91		16.5
Data processing expense		478		319		49.8
Intangible amortization		30		30		0.0
Professional fees		250		287		(12.9	)
Other operating expenses		277		394		(29.7	)
Total	$	3,662	$	3,625		1.0

Noninterest expense totaled $3.7 million for the quarter ended September 30, 2016, which represented an increase of $37,000, or 1.0% when compared to the quarter ended September 30, 2015. The increase was primarily due to an increase in data processing expense of $159,000. $111,000 of the increase in data processing expense was primarily due to an increase in users taking advantage of new mobile banking products, increases in debit card usage, and increases in data center service charges. $30,000 of the increase related to the expiration of a monthly implementation credit. The $159,000 increase in data processing expense was partially offset by a $117,000 decrease in other operating expenses, including an $89,000 decrease in loan closing costs incurred and a $26,000 decrease in expenses related to other real estate owned. The decrease in loan closing costs incurred was primarily due to a change in the Company’s accounting method for certain loan closing costs associated with a closing cost promotion. Prior to July 1, 2016, the Company charged certain loan closing costs immediately to expense. Pursuant to ASC 310-20, the Company is deferring a portion of these closing costs associated with new loans and amortizing those costs over the life of the loan. The decrease in other real estate owned related expenses was due to property improvement expenses in the prior year period with no corresponding expenses in the current year period.

Income Taxes. Income tax expense for the three months ended September 30, 2016 was $165,000 compared to $56,000 for the three months ended September 30, 2015. The effective tax rate increased to 17.4% for the three months ended September 30, 2016 from 7.6% for the three months ended September 30, 2015.

Analysis of Nonperforming Assets. We consider foreclosed real estate, repossessed assets and nonaccrual loans, including nonaccrual TDR loans, to be nonperforming assets.

All of the TDRs at September 30, 2016 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 September 30, 2016, 22 loans were considered to be TDRs (with a recorded investment of $3.3 million) of which seven loans (with a recorded investment of $1.0 million) were included in nonperforming assets.

The following table provides information with respect to our nonperforming assets at the dates indicated.

	At September 30, 2016			At June 30, 2016
(Dollars in thousands)	(Unaudited)
Nonaccrual loans:
One- to four-family residential real estate	$	869		$	1,011
Nonresidential real estate and land		773			88
Consumer		391			398

Total nonaccrual loans		2,033			1,497

One- to four-family residential real estate		382			324
Nonresidential real estate and land		647			1,066

Total nonaccrual restructured loans		1,029			1,390

Total nonperforming loans		3,062			2,887
Real estate owned		70			70

Total nonperforming assets	$	3,132		$	2,957
Accruing restructured loans		2,253			2,330
Accruing restructured loans and nonperforming assets	$	5,385		$	5,287

Total nonperforming loans to total loans		1.09	%		1.05	%
Total nonperforming loans to total assets		0.58			0.55
Total nonperforming assets to total assets		0.59			0.56

Interest income that would have been recorded for the three months ended September 30, 2016 had nonaccruing loans been current according to their original terms was $79,000. Interest recognized on the cash basis with regard to nonaccrual restructured loans was $0 for the three months ended September 30, 2016.

Nonperforming assets as a percentage of total assets decreased from 1.21% at September 30, 2015 to 0.59% at September 30, 2016. Nonperforming assets as a percentage of total assets increased slightly from 0.56% at June 30, 2016 to 0.59% at September 30, 2016. Beginning with the disclosure in the Company’s Form 10-Q for the quarter ended March 31, 2011, the Company included “Loan Relationship” narratives regarding its five largest nonaccrual (nonperforming) loans and loans having the five largest charge-offs, all of which were commercial real estate loans. As of March 31, 2011, the amount of nonaccrual (nonperforming) loans totaled $19.5 million, and the amount of accruing TDR loans totaled $7.0 million. As of September 30, 2016, the amount of nonaccrual (nonperforming) loans decreased to $3.1 million and the amount of accruing TDR loans decreased to 2.3 million.

Because of the decrease in nonaccrual (nonperforming) loans and accruing TDR loans over the last five years, the Loan Relationship narratives since December 31, 2015 have focused on commercial Loan Relationships with the following loans:

The largest nonaccruing commercial real estate loans (including nonaccrual TDRs) having a carrying value of at least $250,000, plus any related commercial or retail loans;

The largest commercial real estate loan charge-offs having a charge-off of at least $250,000 that are related to commercial real estate loans in a Loan Relationship, whether accruing or not, plus any related commercial or retail loans; and

The largest accruing TDR commercial loans having a carrying value of at least $250,000 plus any related commercial or retail loans.

If a commercial loan falls into one of the three categories listed above, then a narrative is composed for

that commercial loan and any related commercial or retail loans.

At September 30, 2016:

The largest commercial real estate nonaccrual loans having a carrying value of at least $250,000 are related to loans in Loan Relationships M & Q. There are a total of three loans in these two Loan Relationships.

The largest commercial real estate loan charge-offs of at least $250,000 are related to loans in Loan Relationships F, H, M, O, and Q. There are a total of 11 loans in these five Loan Relationships.

The largest accruing TDRs having a carrying value of at least $250,000 are related to a loan in Loan Relationship O. There are a total of three loans in this Loan Relationship.

As discussed below, some of the Loan Relationships include loans that were restructured using the “Note A/B split note” strategy for which the amount of the Note B loan has been charged-off, with the borrower remaining responsible for that charged-off amount unless otherwise agreed to by the Bank. For purposes of the narratives, loans that have a carrying value are identified by a Loan number within each Loan Relationship, such as “Loan A-1” and “Loan A-2”. However, the Note B loans are identified as a “Note B loan” because these loans have no carrying value because they have been charged-off.

Management monitors the performance of all of these loans and reviews all options available to keep the loans current, including further restructuring of the loans. If restructuring efforts ultimately are not successful, management will initiate foreclosure proceedings.

Loan Relationship F. At September 30, 2016 and June 30, 2016, Loan Relationship F was comprised of two loans, a Note A loan (Loan F-1) and a Note B loan, having an aggregate carrying value of $411,000 and $414,000, respectively. These loans are secured by a multi-family residential real estate property and a single-family real estate property. The borrower is a corporate entity, with three principals, each of whom is a co-borrower of the loan. In the “Credit Risk Profile by Internally Assigned Grade” table, Loan F-1 is classified as “Multi-family real estate, Watch” at September 30, 2016 and June 30, 2016. As of June 30, 2014, Loan F-1was no longer reported as a TDR, or classified as substandard, because the loan was current and there were more than 12 consecutive monthly payments made on time. Additionally, recent appraisals obtained for the properties securing the loan indicated that the loan to value ratio of the loan complied with the Bank’s underwriting standards, and the cash flow analysis performed on the loan from updated financial information indicated that the debt service coverage ratio complied with the Bank’s underwriting standards. Loan F-1 was performing in accordance with its terms at September 30, 2016. A more detailed history of Loan Relationship F follows.

The original loan was initially restructured using the Note A/B split note strategy in June 2010 based on an 80% loan-to-value ratio derived from an April 2010 independent appraisal. The first loan (Note A loan) had a balance of $631,000 with a market interest rate of 5.50%, for a 25-year term, based on a 3/1 ARM. This loan was put on nonaccrual and classified as substandard. The second loan (a Note B loan) had a balance of $216,800 and there was a specific reserve established for the entire amount of the loan. The borrower was a corporate entity, with two principals, each of whom individually was a co-borrower of the loans. At December 31, 2010, the first 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, deposit 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 make payments to bring the loan current. 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 Note A/B split note strategy in March 2011. The terms of the first loan (a Note A loan) were calculated using the borrowers’ then current financial information to yield a payment having a debt service coverage ratio of approximately 1.5x, which was more stringent than the Bank’s normal underwriting standards. A restructuring fee of $7,000 was charged and included in the second loan (a Note B loan) at March 31, 2011. After the restructuring in March 2011, the Note A loan had a balance of $475,000, was put on nonaccrual, classified as substandard and reported as a TDR. The Note B loan had a balance of $405,000. The full amount of the Note B loan was charged-off in the quarter ended March 31, 2011, inclusive of the previous specific reserve of $216,800 from December 31, 2010.

A two-year balloon payment was due in March 31, 2013 on the loans unless the borrower refinanced the loans to 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 with one of the borrowers who had taken control of the two properties in early 2011. The other borrower relinquished all of its interest in the two properties. However, in addition to the one borrower retained on the loan, two other borrowers were added to the loans to provide managerial strength to the relationship and increase the property’s income potential. The Bank had been reviewing the cash flow of the property on a monthly basis and determined that the cash flows had improved due to the borrowers’ enhanced managerial ability. An independent appraisal was ordered to provide the “as is” value of the properties. The Bank obtained the appraisal in December 2012, and the appraised value of the properties had decreased to $730,000 from $774,000 in February 2011. During the quarter ended December 31, 2012, the two loans were modified, again using the Note A/B split note strategy, with both loans having three year balloon payments. The Note A loan was modified to a market interest rate of 5.50%, with no increase in the principal balance ($453,000). The term of the loan was also reduced to 324 months from the remaining term of 339 months. Even with the higher market interest rate and the shorter term of the loan, the debt service coverage ratio was above 1.20x, which complied with the Bank’s current loan underwriting standards. This loan remained on accrual (because of its sufficient payment history since the September 30, 2011 quarter), classified as substandard, and reported as a TDR. There was no increase in the principal balance ($405,000) of the Note B loan from that loan’s prior restructuring in March 2011, and therefore, the charge-off amount ($405,000) remained the same as in March 2011. However, the interest rate was reduced to 0% as the loan had been charged-off.

During the December 2015 quarter, the balloon payment from the December 2012 renewal became due. Due to the upcoming balloon payment, the Bank ordered new appraisals on the two properties. The Bank received the appraisals in October 2015, and the appraised value of the properties increased to $773,000 from $730,000 in December 2012. The Bank also reviewed the cash flow from updated financials of the borrowers and co-borrowers. After this review and based on the increase in value of the properties, the Bank extended the two loans, again using the Note A/B split note strategy, with both loans having three year balloon payments. The Note A Loan was renewed at the market interest rate of 5.50%, with no increase in the principal balance ($421,000). The term of the loan was renewed at 288 months, the remaining term of the loan. This loan remained on accrual (because of its sufficient payment history) and classified as watch. There was no increase in the principal balance ($405,000) of the Note B loan from that loan’s prior restructuring in December 2012, and therefore, the charge-off amount ($405,000) remained the same as in December 2012. The interest rate remained at 0% as the loan had been charged-off.

Loan Relationship H. At September 30, 2016 and June 30, 2016, Loan Relationship H was comprised of three loans having an aggregate carrying value of $891,000 and $901,000, respectively. At September 30, 2016 and June 30, 2016, two of the loans, a Note A loan (Loan H-1) and a Note B loan, had an aggregate carrying value of $692,000 and $696,000, respectively. Loan H-1 is secured by a first lien on an 18-unit apartment complex, a single-family rental dwelling, a 6.3 acre tract of land, and a second lien on a single-family owner occupied dwelling on 11.36 acres. The borrower is a limited liability company and the two co-borrowers are the principals of the limited liability company. At September 30, 2016 and June 30, 2016, Loan H-1 was classified as “Multi-family residential real estate, Watch” in the “Credit Risk Profile by Internally Assigned Grade” table. As of June 30, 2014, Loan H-1 was no longer reported as a TDR loan because the loan was current and there were more than 12 consecutive market rate monthly payments made on time. Also, recent appraisals indicated that the loan to value was adequate and the cash flows from updated financial information of the properties securing the loan indicated that the debt service coverage ratio was adequate.

During the quarter ended June 30, 2013, the Bank refinanced the principal residence of the co-borrowers (the single-family owner occupied dwelling on 11.36 acres mentioned above). This loan, Loan H-2, had an original balance of $280,000 at a market rate of interest for a ten year term. At September 30, 2016 and June 30, 2016, the balance of Loan H-2 was $199,000 and $206,000, respectively. Loan H-2 is secured by a first lien on the single-family owner occupied dwelling on 11.36 acres mentioned above. The borrowers are a husband and wife who are the principals in the limited liability company mentioned above. At September 30, 2016 and June 30, 2016, Loan H-2 was classified as “One- to Four-Family Owner-Occupied Mortgage, Watch” in the “Credit Risk Profile by Internally Assigned Grade” table.

At September 30, 2016, Loan H-1 and Loan H-2 were performing in accordance with their terms. A more detailed history of the Note A loan (Loan H-1) and the Note B loan follows.

During the quarter ended December 31, 2008, the Note A loan (Loan H-1) and the Note B loan were comprised of one loan with a carrying value of $1.3 million and classified as special mention. In the quarter ended June 30, 2009, the co-borrowers approached the Bank and advised that the only co-borrower who was employed had experienced a substantial salary reduction. The borrowers requested an interest rate reduction to 3% and interest only payments for three years. Independent appraisals were ordered and received and reflected that the properties on which the Bank had a first lien position had an aggregate value of $1.0 million. The loan was classified as substandard, placed on nonaccrual, and reported as a TDR. Due to the reduced interest rate, a specific valuation of $123,000 was established for the loan through a charge-off to the general allowance. Under the loan’s modified terms, the interest rate was to reset to 5.75% on June 1, 2012. In June 2012, the co-borrowers approached the Bank and advised that the properties’ cash flow could not service the increase in interest rate. Independent appraisals were ordered and received in June 2012 and reflected that the properties on which the Bank had a first lien position had decreased to $978,000 from $1.0 million in June 2009. As a result, the Bank recorded a charge-off of $481,000, (inclusive of the $123,000 specific allocation established) to reflect the carrying value of the loan at $744,000. The one loan performed in accordance with its restructured terms until the September 30, 2012 quarter, when the co-borrowers again approached the Bank and advised that the properties’ cash flow could not service the loan. Therefore, the one loan was restructured using the Note A/B split note strategy. The Note A loan (Loan H-1) was for $748,000, with a market rate of interest of 5.00%, for a 30-year term and a three year balloon payment. The carrying value of this loan was placed on nonaccrual, classified as substandard, and reported as a TDR. The Note B loan was for $515,000 (inclusive of the $481,000 that was charged-off in the June 30, 2012 quarter) and was charged-off. The interest rate was reduced to 0% as the loan had been charged-off.

During the September 2015 quarter, the balloon payment from the September 2012 renewal became due. As a result of the upcoming balloon payment, the Bank ordered new appraisals on the 18-unit apartment complex and the single-family rental dwelling. The Bank received new appraisals on the 18 unit apartment complex and the single-family rental dwelling in September 2015. In addition, the Bank used the June 2014 value of the 6.3 acre tract of land. The total appraised value of the three properties increased to $1,048,000 as compared to the $978,000 total appraised value in June 2012. The Bank also reviewed the cash flow from updated financials of the borrower and co-borrowers. After this review and based on the increase in value of the properties, the Bank extended the two loans, again using the Note A/B split note strategy, with both loans having three year balloon payments. The Note A loan (Loan H-1) was renewed at the market interest rate of 5.00%, using a 1/1 ARM, with a 5% floor rate, and with no increase in the principal balance ($710,000). The term of the loan was renewed at 324 months. This loan was put on accrual (because of its sufficient payment history) and classified as watch. There was no increase in the principal balance ($515,000) of the Note B loan from that loan’s prior restructuring in September 2012, and therefore, the charge-off amount ($515,000) remained the same as in September 2012. The interest rate remained at 0% as the loan had been charged-off.

Loan Relationship M. At September 30, 2016 and June 30, 2016, Loan Relationship M was comprised of two loans having an aggregate carrying value of $647,000 and $1.1 million, respectively. At September 30, 2016 and June 30, 2016, Loan M-1 had an aggregate carrying value of $194,000 and $571,000, respectively. At September 30, 2016 and June 30, 2016, Loan M-2 had an aggregate carrying value of $453,000 and $495,000, respectively. Originally Loans M-1 and M-2 were both secured by the two golf courses, including a club house on each, in the greater Cincinnati area, an approximately 25 acre tract of land, and a second mortgage on the principal residence of two of the individual co-borrowers. The borrower of Loans M-1 and M-2 is a corporate entity, each of whose principals, a husband and wife, has individually signed as a co-borrower, as have the father and stepmother of one of the co-borrowers. At September 30, 2016 and June 30, 2016, Loans M-1 and M-2 are included in the table in “Nonaccrual, Nonresidential Real Estate” and classified as “Nonresidential Real Estate, Substandard” in the “Credit Risk Profile by Internally Assigned Grade” table. During the June 30, 2015 quarter, the Bank entered into a forbearance agreement with the borrower and co-borrowers pursuant to which full principal, interest and escrow payments will be made for the months of May through October of each year beginning in 2015. The maturity date for these loans is now October 1, 2018. Loans M-1 and M-2 were performing in accordance with their restructured terms at September 30, 2016. A more detailed history of Loan Relationship M follows.

Loan M-1 originated in December 2007 and Loan M-2 originated in July 2009, each with a 20 year term. Under each loan’s terms, payments were due from April through December of each year; no payments were required in January, February and March of each year. Due to reduced cash flows resulting from inclement weather, in December 2013 the co-borrowers advised the Bank that they would pay the amounts due for November and December 2013 in February and March 2014, respectively. Due to the continuation of the severe winter weather and resultant reduced cash flows, the borrowers were unable to make the November and December 2013 payments that the borrowers had stated would be paid in February and March 2014, and were unable to make the real estate tax payment due during the period ended March 31, 2014. As a result of the failure to make the November and December 2013 payments and the borrowers’ failure to pay real estate taxes, the Bank had both properties appraised. The appraisals were received in March 2014 and reflected an aggregate decrease in value of approximately $500,000 as compared to their March 2009 appraised value. Based on the new appraised value, there was no known loss to the Bank. The Bank also performed an impairment analysis on each loan in March 2014 resulting in an aggregate impairment of $41,000. In March 2014, the Bank and the co-borrowers agreed to a revised repayment plan to bring all payments then due, and real estate taxes due, but not paid during the period ended March 31, 2014, current by July 31, 2014. At June 30, 2014, an impairment analysis was performed. The impairment analysis showed that no further impairment was needed on either Loan M-1 or Loan M-2.

At September 30, 2014, the borrowers had successfully complied with the revised payment plan agreement from March 31, 2014 and both loans were current. Additionally, the real estate taxes due during the March 31, 2014 quarter were paid. However, at September 30, 2014, the real estate taxes that were due in July 2014 had not been paid. At December 31, 2014, due to cash flow issues caused by inclement weather during the quarter, the real estate taxes that were due in July 2014 were still not paid, and the loan payments due for October, November, and December 2014 were not paid. The Bank met with the husband and wife co-borrowers during the December 31, 2014 quarter. The co-borrowers advised the Bank that they would not be able to make the past due payments and the past due real estate taxes because of the inclement weather during the quarter until the golf season opened in the spring of 2015. Because of these developments, the Bank performed another impairment analysis of these two loans. While the appraisals of the properties showed no need for an impairment, the Bank further analyzed the cash flow of the golf courses. After this analysis, the Bank determined that an additional impairment of $466,000 was needed for this loan relationship, and an additional charge-off of $233,000 was established for each of the two loans in this loan relationship, through a charge-off to the general allowance. During the quarter ended March 31, 2015, the Bank entered into further discussions with the co-borrowers about another revised payment plan. As stated above, during the June 30, 2015 quarter, the Bank entered into a forbearance agreement with the borrower and co-borrowers. An impairment analysis was performed for the quarter ended June 30, 2015. The impairment analysis showed that no further impairment was needed on either Loan M-1 or M-2. For the quarter ended December 31, 2015, because there was still the partial escrow payment due for the October 2015 escrow payment, the Bank performed another impairment analysis. Even though the partial escrow payment was paid subsequent to the December 31, 2015 quarter and the appraisals of the properties indicated no further impairment was needed, the Bank reviewed the observable market price of the properties and determined that an additional impairment of $250,000 was needed for this loan relationship, and an additional charge-off of $125,000 was established for each of the two loans in this loan relationship through a charge-off to the general allowance.

During the March 31, 2016 quarter, because there had not been an updated appraisal since the March 2014 quarter, the Bank ordered and received new appraisals on all of the collateral securing this Loan Relationship. The new appraisal on one of the golf courses decreased to $1.1 million from $1.2 million. The new appraisal on the other golf course decreased to $1.4 million from $1.6 million. The new appraisal on the approximately 25 acre tract of land increased to $100,000 from $95,000. The new appraisal for the principal residence of two of the individual co-borrowers increased to $165,000 from $150,000. Also during the March 2016 quarter, the husband and wife principals of the two corporate entities informed the Bank that they were not going to open the golf course that appraised for $1.1 million for the 2016 golf season and that they are going to attempt to sell the property as a land development project. Subsequent to the end of the March 2016 quarter, the Bank was informed that one of the co-borrowers had passed. She was the wife of one of the co-borrowers and the stepmother of one of the other co-borrowers who is one of the two principals of the corporate entities.

During the June 30, 2016 quarter, the borrowers entered into a purchase agreement to sell the golf course that was not opened. As part of this purchase, the Bank agreed to release the nonoperational golf course, the 25 acre tract of land, and the co-borrower who was the father of one of the principals. The Bank would have the first mortgage, instead of a second mortgage, on the principal residence of two of the individual co-borrowers. However, based on this purchase agreement, the Bank determined that an additional impairment of $210,000 was needed for this loan relationship, and an additional charge-off of $105,000 was established for each of the two loans in the loan relationship through a charge-off to the general allowance. The nonoperational golf course was sold subsequent to the end of the June 30, 2016 quarter. After the sale and subsequent reduction of the principal balance of Loan M-1, the Bank determined that no further impairment was needed. Also, subsequent to the June 30, 2016 quarter, the Bank entered into an amended forbearance agreement with the borrower and co-borrowers, reflecting the reduced principal balances for Loans M-1 and M-2. The maturity date for these loans remained at October 1, 2018. The Bank will monitor the cash flow of the remaining golf course and determine if any further impairment is necessary.

Loan Relationship O. At September 30, 2016 and June 30, 2016, this Loan Relationship consisted of three loans having an aggregate carrying value of $1.6 million. At September 30, 2016 and June 30, 2016, two of the loans, a Note A loan (Loan O-1) and a Note B loan, had an aggregate carrying value of $718,000 and $721,000, respectively. Loan O-1 is secured by a first lien on a nonresidential retail strip center. The borrower is a limited liability company and the two co-borrowers are the principals of the limited liability company. At September 30, 2016 and June 30, 2016, Loan O-1 is included in the table as “Accruing Restructured Loans”, and classified as “Nonresidential Real Estate, Substandard” in the “Credit Risk Profile by Internally Assigned Grade” table. As of September 30, 2011, Loan O-1 was put on accrual because of its sufficient payment history, but was still considered a TDR and thus continued to be classified as substandard. At September 30, 2016 and June 30, 2016, the balance of Loan O-2 was $875,000 and $890,000, respectively. Loan O-2 is secured by a nonresidential, eight bay, retail strip center. Loan O-2 is not included in the table as “Accruing Restructured Loans” at September 30, 2016 and June 30, 2016. At September 30, 2016 and June 30, 2016, Loan O-2 was classified as “Nonresidential Real Estate, Watch” in the “Credit Risk Profile by Internally Assigned Grade” table. This loan was originated in December 2004, for the purchase of the land (which was an Other Real Estate Owned property of the Bank) and the construction of the eight bay, retail strip center. The original loan amount was $1,080,000 at a market rate of interest, based on a 3/3 ARM, for a 30 year term. In August 2013, the original loan was refinanced for $965,000, at a market rate of interest, based on a 5/1 ARM, for a 22 year term. The borrower, for the original loan and the refinanced loan, is a limited liability company and the four co-borrowers are the principals of the limited liability company. Three of the spouses of the four co-borrowers are also signed on the loan. Two of the co-borrowers of the loan O-2 are principals of the limited liability company for Loan O-1 described above. At September 30, 2016, Loan O-2 has performed in accordance with its originated and refinanced terms. A more detailed history of the Note A loan (Loan O-1) and the Note B loan follows.

In June 2006, Loan O-1 was originated and comprised of one loan for $1.1 million. In the June 2010 quarter, the co-borrowers approached the Bank and advised that the anchor tenant was vacating the retail strip center. Independent appraisals were ordered and received, and reflected the value of the property had decreased to a value of $900,000 from the value of $1.4 million in June 2006. A specific valuation allowance was established for $360,000 to reduce the net carrying value down to $720,000, or 80% loan to value. In the March 2011 quarter, the co-borrowers again approached the Bank and advised that even though they had been able to replace the anchor tenant, the lease amount that they were receiving was 20% less than the previous tenant. A new appraisal was ordered and received in the March 2011 quarter, and reflected the value of the property had decreased to a value of $828,000 from the value of $900,000 in June 2010. The Bank reviewed the present value of future cash flow of this property and the one loan was restructured using the Note A/B split note strategy. Based on the present value of future cash flow of the property, the Note A loan (Loan O-1) was for $810,000, with a below market rate of interest of 2%, for a 30 year term, and a two year balloon payment. The carrying value of the Loan O-1 continued on nonaccrual and a classification of substandard, but was also reported as a TDR. The Note B loan was for $360,000 (inclusive of the $360,000 specific valuation allowance established in June 2010) and was charged-off. In September 2011, because there were six consecutive payments made and the cash flow of the property from updated financial information indicated that the debt service coverage ratio was adequate, the loan was placed on accrual. However, because of the below market interest rate, an impairment of $28,750 was established. During the March 2013 quarter, the balloon payment from the March 2011 loan became due. As a result of the upcoming balloon payment, the Bank ordered and received a new appraisal on the property. The new appraisal dated March 2013 showed a value of $825,000, a decrease of $3,000 from the value of $828,000 in the March 2011 quarter. The Bank reviewed the present value of the future cash flow of this property from updated financial information of the borrower and co-borrowers. After this review, the Bank extended the two loans, again using the Note A/B split note strategy, with both loans having three year balloon payments. The loan amount for the Note A loan (Loan O-1) was decreased to $761,000. The Note A loan (Loan O-1) was renewed at a market rate of interest of 5.5%, for a 30 year term, and a three year balloon payment. This loan was placed on accrual (because of its sufficient payment history). However, the classification remained substandard and the loan was still reported as a TDR. Also, because this loan now had a market rate of interest, the impairment amount of $28,750 was removed. The Note B loan was for $376,000 (inclusive of the $366,000 charge-off from March 2011) and was charged-off. During the March 31, 2016 quarter, the balloon payment from the March 2013 loan became due. As a result of the upcoming balloon payment, the Bank ordered and received a new appraisal on the property. The new appraisal dated February 2016 showed a value of $870,000, an increase of $45,000 from the value of $825,000 in the March 2013 quarter. The Bank reviewed the present value of the future cash flow of this property from updated financial information of the borrower and co-borrowers. After this review, the Bank extended the two loans, again using the Note A/B split note strategy, with both loans having a one year balloon payment. The loan amount for the Note A loan (Loan O-1) was decreased to $723,000. The Note A loan (Loan O-1) was renewed at a market rate of interest of 5.5%, for a 27 year term, and a one year balloon payment. This loan was placed on accrual because of its sufficient payment history. However, the classification remained substandard and the loan was still reported as TDR. There was no increase in the principal balance ($376,000) of the Note B loan from that loan’s prior restructuring in March 2013, and therefore, the charge-off amount ($376,000) remained the same as in March 2013. The interest rate remained at 0%, as the loan had been charged-off. At September 30, 2016, Loan O-1 was performing in accordance with its restructured terms.

Loan Relationship Q. At September 30, 2016 and June 30, 2016, Loan Relationship was comprised of one loan, having a carrying value of $723,000 and $1.2 million, respectively. This loan is secured by two mobile home parks located in southeastern Indiana. The borrowers are two limited liability corporate entities, with four principals (one of whom has passed) of each entity, with each principal signing individually as a co-borrower. At September 30, 2016, the Loan Q carrying value is included in the table for “Nonaccrual, Nonresidential Real Estate”, and at June 30, 2016, the carrying value of Loan Q was not included in the table for “Nonaccrual, Nonresidential Real Estate”. In the “Credit Risk Profile by Internally Assigned Grade” table, Loan Q is classified as substandard at September 30, 2016 and as special mention at June 30, 2016.

Loan Q is performing in accordance with its original terms at September 30, 2016. A more detailed history of Loan Relationship Q follows.

Loan Q originated in July 2004 and the loan has always performed in accordance with its original terms. However, during the September 2016 quarter, the Bank received updated financial information and performed an impairment analysis based on the cash flow of the two mobile home parks. Based on this analysis, it was determined that the two mobile home parks could not support the $1.15 million loan balance. Based on the impairment analysis, the Bank established an impairment in the amount of $425,000 through a charge-off to the general allowance. The Bank also ordered appraisals on the two properties, but the appraisals have not yet been received. The co-borrowers are trying to refinance these properties with another financial institution.

The following table summarizes all Note A/B format loans at September 30, 2016:

(Dollars in thousands)	Loan Balances						Number of Loans
	Note A		Note B		Total		Note A		Note B
One- to four-family residential real estate	$	87	$	20	$	107		1		1
Nonresidential real estate		1,074		482		1,556		2		2
Multi-family residential real estate		1,104		920		2,024		2		2

Total (1)	$	2,265	$	1,422	$	3,687		5		5

(1)

Included in this total are an aggregate of $1.8 million of Note A loans and an aggregate of $1.3 million of Note B loans that are included in the discussion of Loan Relationships F, H and O.

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 September 30, 2016
	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	$	1,535	$	382	$	1,917	$	—	$	1,917		19	$	1,940
Multi-family residential real estate		—		—		—		—		—		—		180
Nonresidential real estate		718		647		1,365		—		1,365		3		2,116

Total	$	2,253	$	1,029	$	3,282	$	—	$	3,282		22	$	4,236

The following table is a roll forward of activity in our TDRs:

	Three Months Ended September 30, 2016
	Recorded Investment			Number of Loans
(Dollar amounts in thousands)
Beginning balance	$	3,720			22
Additions to TDR		—			—
Charge-offs		—			—
Removal of TDRs⁽¹⁾		—			—
Payments		(438	)		-
Ending balance	$	3,282			22

The following table shows the aggregate amounts of our classified loans at the dates indicated.

	At September 30,
	2016		2015
	(In thousands)
Special mention assets	$	3,736	$	3,725
Substandard assets		5,693		11,423

Total classified assets	$	9,429	$	15,148

The following tables illustrate certain disclosures required by ASC 310-10-50-29(b) at September 30, 2016 and at June 30, 2016.

At September 30, 2016:

	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	$	126,323	$	34,503	$	6,844	$	14,030	$	52,617	$	6,789	$	1,453	$	8,964	$	251,523
Watch		2,401		577		4,257		2,103		6,585		2,244		52		823		19,042
Special mention		533		151		154		—		2,008		—		890		—		3,736
Substandard		2,411		391		663		—		2,178		—		50		—		5,693
Total	$	131,668	$	35,622	$	11,918	$	16,133	$	63,388	$	9,033	$	2,445	$	9,787	$	279,994

At June 30, 2016:

	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	$	125,089	$	33,820	$	7,007	$	13,914	$	48,886	$	3,814	$	1,119	$	8,475	$	242,124
Watch		2,545		582		4,298		2,118		5,018		4,741		54		1,967		21,323
Special mention		681		218		160		-		3,201		-		890		-		5,150
Substandard		2,568		398		695		-		1,876		-		88		-		5,625
Total	$	130,883	$	35,018	$	12,160	$	16,032	$	58,981	$	8,555	$	2,151	$	10,442	$	274,222

The following table illustrates certain disclosures required by ASC 310-10-50-7A for gross loans.

	At September 30, 2016				At June 30, 2016
	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	$	337	$	308	$	594	$	552
Consumer		124		1		109		49
One- to four-family mortgage – nonowner-occupied		—		30		95		30
Multi-family mortgage		—		—		—		—
Nonresidential real estate mortgage – commercial and office buildings		—		—		—		—
Construction		—		—		—		—
Land		—		—		14		—
Commercial and agricultural		—		—		—		—
Total	$	461	$	339	$	812	$	631

The following table illustrates the changes to the allowance for loan losses for the three months ended September 30, 2016:

	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
Allowance for Credit Losses:
Balance, July 1, 2016:	$	1,235	$	426		$	108		$	275	$	2,577		$	132		$	10	$	122	$	4,885
Charge offs		—		(36	)		—			—		(425	)		—			—		—		(461	)
Recoveries		23		25			—			3		1			—			—		—		52
Provision (credit)		1		7			(37	)		115		(89	)		(4	)		10		14		17
Ending Balance:	$	1,259	$	422		$	71		$	393	$	2,064		$	128		$	20	$	136	$	4,493

Balance, Individually Evaluated	$	—	$	—		$	—		$	—	$	—		$	—		$	—	$	—	$	—

Balance, Collectively Evaluated	$	1,259	$	422		$	71		$	393	$	2,064		$	128		$	20	$	136	$	4,493

Financing receivables:
Ending balance	$	131,668	$	35,622		$	11,918		$	16,133	$	63,388		$	9,033		$	2,445	$	9,787	$	279,994

Ending Balance: individually evaluated for impairment	$	2,378	$	391		$	407		$	—	$	2,089		$	—		$	50	$	—	$	5,315

Ending Balance: collectively evaluated for impairment	$	124,355	$	32,790		$	11,344		$	16,133	$	61,189		$	9,033		$	2,395	$	9,780	$	267,019

Ending Balance: loans acquired at fair value	$	4,935	$	2,441		$	167		$	—	$	110		$	—		$	—	$	7	$	7,660

The following table sets forth the allocation of the allowance for loan losses by loan category at the dates indicated.

	At September 30,								At June 30,
	2016								2016
	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	$	1,330		29.6	%		51.3	%	$	1,343		27.5	%		52.2	%
Multi-family real estate		393		8.7			5.8			275		5.6			5.8
Nonresidential real estate		2,064		46.0			22.6			2,577		52.8			21.5
Land		20		0.4			0.9			10		0.2			0.8
Agricultural		85		1.9			1.7			95		1.9			2.2
Commercial		51		1.1			1.8			27		0.6			1.6
Consumer		422		9.4			12.7			426		8.7			12.8
Construction		128		2.9			3.2			132		2.7			3.1
Total allowance for loan losses	$	4,493		100.0	%		100.0	%	$	4,885		100.0	%		100.0	%
Total loans	$	279,994							$	274,222

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. 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 demand; (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 $28.2 million at September 30, 2016 and $29.0 million at June 30, 2016. Securities classified as available-for-sale whose market value exceeds our cost, which provide additional sources of liquidity, totaled $95.2 million at September 30, 2016. Total securities classified as available-for-sale were $115.9 million at September 30, 2016.

In addition, at September 30, 2016, we had the ability to borrow a total of approximately $61.4 million from the Federal Home Loan Bank of Indianapolis.

At September 30, 2016, we had $45.9 million in loan commitments outstanding, consisting of $9.3 million in mortgage loan commitments, $26.2 million in unused home equity lines of credit, $7.5 million in commercial lines of credit and $2.9 million in other loan commitments. Certificates of deposit due within one year of September 30, 2016 totaled $80.1 million. This represented 58.0% of certificates of deposit at September 30, 2016. 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 September 30, 2016. 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 investment 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 September 30, 2016, we exceeded all of our regulatory capital requirements and we are considered “well capitalized” under regulatory guidelines. See “Regulation and Supervision—Regulation of Federal Savings Associations—Capital Requirements”, and Note 15 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 27, 2016.

The following table summarizes the Bank’s capital amounts and the ratios required at September 30, 2016:

											To be well
											capitalized under
											prompt corrective
						For capital					action
	Actual					adequacy purposes					provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
September 30, 2016 (unaudited)	(in thousands)
Common equity tier 1 risk-based capital	$	59,231		21.11	%	$	12,627		4.5	%	$	18,240		6.5	%
Tier 1 risk-based capital		59,231		21.11			16,837		6.0			22,449		8.0
Total risk-based capital		62,755		22.36			22,449		8.0			28,061		10.0
Tier 1 leverage		59,231		11.42			20,750		4.0			25,938		5.0

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 months ended September 30, 2016, 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 27, 2016. The main components of market risk for the Company are interest rate risk and liquidity risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: adjusting the maturities of borrowings; adjusting the investment portfolio mix and duration; and generally, selling in the secondary market newly originated conforming fixed-rate 15-, 20- and 30-year one-to four-family residential real estate loans and available-for-sale securities. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

We have an Asset/Liability Committee, comprised of Board members, to communicate, coordinate and control all aspects involving asset/liability management. The committee establishes and monitors 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.

We use an economic value of equity analysis prepared by a consulting firm to review our level of interest rate risk. This analysis measures interest rate risk by computing changes in net economic 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. Economic value of equity 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. These analyses assess the risk of loss in market risk-sensitive instruments in the event of a sudden and sustained 100 to 400 basis point increase or a 100 basis point decrease in market interest rates with no effect given to steps that we might take to counter the effects of that interest rate movement. Because of the low level of market interest rates, these analyses are not performed for decreases of more than 100 basis points.

The following table presents the change in our net economic value of equity at June 30, 2016, the most recently completed date, that would occur in the event of an immediate change in interest rates, with no effect given to any steps that we might take to counteract that change.

	Economic Value of Equity (Dollars in Thousands)								Economic Value of Equity as % of Economic Value of Total Assets
Basis Point (“bp”) Change in Rates	Amount		Change			% Change			Economic Value Ratio
400	$	67,326	$	(16,453	)		(19.64	)		14.33	%
300		76,552		(7,227	)		(8.63	)		15.79
200		80,962		(2,817	)		(3.36	)		16.19
100		83,798		19			.02			16.26
0		83.779		—			—			15.79
(100)		78,193		(5,586	)		(6.67	)		14.38

The interest rate risk management model uses various assumptions in assessing interest rate risk. These most critical assumptions relate to interest rates, deposit decay rates, deposit beta factors, loan prepayment speeds, reinvestment rates, and market interest rates, among others. As with any method of measuring interest rate risk involving forecasting, certain shortcomings are inherent in the calculations. Borrower and depositor behavior in the future is unknown. Historical data has been compiled and analyzed, where available, to allow the Company to see the impact of customer behavior in prior interest rate cycles. However, the future behavior is inherently unknown. For example, although certain assets and liabilities may have similar maturities or repricing dates, 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 volume of loans and mortgage-backed securities we hold, increasing or decreasing interest rates could have a significant impact on the prepayment speeds of our earning assets that in turn could affect the rate sensitivity position. When market interest rates increase, prepayments tend to slow. When market interest rates decrease, prepayments tend to rise. While the Company believes the assumptions used in the model to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan prepayment 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, 2016, 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 risk factors and other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended June 30, 2016, which could materially affect our business, financial condition or future results. The risks described in the Company’s 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, 2016.

Item 3.

Defaults Upon Senior Securities

Not applicable

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

Not applicable

Item 6.

Exhibits

Exhibit 3.1	Articles of Incorporation of United Community Bancorp (1)

Exhibit 3.2	Bylaws of United Community Bancorp (2)

Exhibit 31.1	Certification of Chief Executive Officer

Exhibit 31.2	Certification of Chief Financial Officer

Exhibit 32	Section 1305 Certifications

Exhibit 101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements.

(1)

Incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1, as amended, initially filed on March 15, 2011.

(2)

Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1, as amended, initially filed on March 15, 2011.

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 14, 2016	By:	/s/ Elmer G. McLaughlin
			Elmer G. McLaughlin
			President and Chief Executive Officer

Date:	November 14, 2016	By:	/s/ Vicki A. March
			Vicki A. March
			Senior Vice President, Chief Financial
			Officer and Treasurer