UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC  20549
 
 FORM
10-K
 (Mark
One)
 x
              ANNUAL
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
fiscal year ended June 30, 2010
 OR
   ̈
              TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
transition period from  to
________
  Commission
file number: 0-51800
  UNITED COMMUNITY
BANCORP
 (Exact
name of registrant as specified in its charter)
  United States
                  
                  36-4587081(State
      or other jurisdiction of
                  
                  (I.R.S.
      Employerincorporation
      or organization)
                  
                  Identification
      No.)92 Walnut Street, Lawrenceburg,
      Indiana
                  
                  47025(Address
      of principal executive offices)
                  
                  (Zip
      Code)
 
 Registrant’s
telephone number, including area code: (812)
537-4822
 
 Securities
registered pursuant to Section 12(b) of the Act:
 
 Common Stock, par value $0.01 per
      share
                
                Nasdaq Global MarketTitle
      of Class
                
                Name
      of each exchange on which
registered
 
 Securities
registered pursuant to Section 12(g) of the Act:  None
 
 Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. YES  ̈ NO x
 
 Indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or Section
15(d) of  the Act.  YES ̈NOx
 
 Indicate by check mark whether the
registrant (l) 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.  YESxNO ̈
 
 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 (§ 232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files. YES ̈NO ̈
 
 Indicate by check mark if disclosure of
delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.x
 
 Indicate
by check mark whether the registrant is a large accelerated, 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
 
 The
aggregate market value of the voting and non-voting common equity held by
non-affiliates as of December 31, 2009 was $17.6 million.  The number of
shares outstanding of the registrant’s common stock as of September 1, 2010 was
7,845,554, of which 4,655,200 shares were held by United Community
MHC.
 
 DOCUMENTS
INCORPORATED BY REFERENCE
 Portions
of the Proxy Statement for the 2010 Annual Meeting of Stockholders are
incorporated by reference in Part III of this Form 10-K.
  
  INDEX
 
 PagePart
      IItem
      1.
                        Business
                        3Item
      1A.
                        Risk
      Factors
                        21Item
      1B.
                        Unresolved
      Staff Comments
                        28Item
      2.
                        Properties
                        29Item
      3.
                        Legal
      Proceedings
                        29Item
      4.
                        [Removed
      and Reserved]
                        30Part
      IIItem
      5.
                        Market
      for Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                        30Item
      6.
                        Selected
      Financial Data
                        31Item
      7.
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation
                        33Item
      7A.
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        56Item
      8.
                        Financial
      Statements and Supplementary Data
                        57Item
      9.
                        Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
                        99Item
      9A(T).
                        Controls
      and Procedures
                        99Item
      9B.
                        Other
      Information
                        99Part
      IIIItem
      10.
                        Directors,
      Executive Officers and Corporate Governance
                        99Item
      11.
                        Executive
      Compensation
                        100Item
      12.
                        Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                        100Item
      13.
                        Certain
      Relationships and Related Transactions, and Director
      Independence
                        101Item
      14.
                        Principal
      Accountant Fees and Services
                        101Part
      IVItem
      15.
                        Exhibits
      and Financial Statement Schedules
                        101SIGNATURES
                        103EXHIBITS
  i
  Note
on Forward-Looking Statements
  This
report, like many written and oral communications presented by United Community
Bancorp and our authorized officers, may contain certain forward-looking
statements regarding our prospective performance and strategies within the
meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. We intend
such forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Litigation Reform
Act of 1995, and are including this statement for purposes of said safe harbor
provisions.
  Forward-looking
statements, which are based on certain assumptions and describe future plans,
strategies, and expectations of the Company, are generally identified by use of
the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,”
“project,” “seek,” “strive,” “try,” or future or conditional verbs such as
“will,” “would,” “should,” “could,” “may,” or similar expressions. Our ability
to predict results or the actual effects of our plans or strategies is
inherently uncertain. Accordingly, actual results may differ materially from
anticipated results.
  There
are a number of factors, many of which are beyond our control, that could cause
actual conditions, events, or results to differ significantly from those
described in our forward-looking statements. These factors include, but are not
limited to:
  •
              general
      economic conditions, either nationally or in some or all of the areas in
      which we and our customers conduct our respective
    businesses;
  •
              conditions
      in the securities markets and real estate markets or the banking
      industry;
  •
              changes
      in interest rates, which may affect our net income, prepayment penalty
      income, and other future cash flows, or the market value of our assets,
      including our investment
securities;
  •
              changes
      in deposit flows and wholesale borrowing
  facilities;
  •
              changes
      in the demand for deposit, loan, and investment products and other
      financial services in the markets we
serve;
  •
              changes
      in our credit ratings or in our ability to access the capital
      markets;
  •
              changes
      in our customer base or in the financial or operating performances of our
      customers’ businesses;
  •
              changes
      in real estate values, which could impact the quality of the assets
      securing the loans in our
portfolio;
  •
              changes
      in the quality or composition of our loan or securities
      portfolios;
  •
              changes
      in competitive pressures among financial institutions or from
      non-financial institutions;
  •
              the
      ability to successfully integrate any assets, liabilities, customers,
      systems, and management personnel, including those of the three Integra
      Bank branch offices we acquired on June 4, 2010, and any other banks we
      may acquire, into our operations, and our ability to realize related
      revenue synergies and cost savings within expected time
      frames;
  •
              our
      ability to retain key members of
management;
  •
              our
      timely development of new lines of business and competitive products or
      services in a changing environment, and the acceptance of such products or
      services by our customers;
  1
 
 •
              any
      interruption or breach of security resulting in failures or disruptions in
      customer account management, general ledger, deposit, loan, or other
      systems;
  •
              any
      interruption in customer service due to circumstances beyond our
      control;
  •
              potential
      exposure to unknown or contingent liabilities of companies we have
      acquired or target for acquisition;
  •
              the
      outcome of pending or threatened litigation, or of other matters before
      regulatory agencies, whether currently existing or commencing in the
      future;
  •
              environmental
      conditions that exist or may exist on properties owned by, leased by, or
      mortgaged to the Company;
  •
              operational
      issues stemming from, and/or capital spending necessitated by, the
      potential need to adapt to industry changes in information technology
      systems, on which we are highly
dependent;
  •
              changes
      in our estimates of future reserves based upon the periodic review thereof
      under relevant regulatory and accounting
  requirements;
  •
              changes
      in our capital management policies, including those regarding business
      combinations, dividends, and share repurchases, among
    others;
  •
              changes
      in legislation, regulation, policies, or administrative practices, whether
      by judicial, governmental, or legislative action, including, but not
      limited to, the effect of final rules amending Regulation E that prohibit
      financial institutions from assessing overdraft fees on ATM and one-time
      debit card transactions without a consumer’s affirmative consent, the
      impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act,
      and other changes pertaining to banking, securities, taxation, rent
      regulation and housing, environmental protection, and insurance; and the
      ability to comply with such changes in a timely
  manner;
  •
              additional
      FDIC special assessments or required assessment
    prepayments;
  •
              changes
      in accounting principles, policies, practices or
    guidelines;
  •
              the
      ability to keep pace with, and implement on a timely basis, technological
      changes;
  •
              changes
      in the monetary and fiscal policies of the U.S. Government, including
      policies of the U.S. Department of the Treasury and the Board of Governors
      of the Federal Reserve System;
  •
              war
      or terrorist activities; and
  •
              other
      economic, competitive, governmental, regulatory, and geopolitical factors
      affecting our operations, pricing, and
services.
 
 Additional
factors that may affect our results are discussed in this annual report on Form
10-K under “Item 1A.  Risk Factors.”  The Company wishes to caution
readers not to place undue reliance on any such forward-looking statements,
which speak only as of the date made.  The Company wishes to advise readers
that the factors listed above could affect the Company’s financial performance
and could cause the Company’s actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
 
 The Company does not undertake the
responsibility, and specifically disclaims any obligation, to publicly release
the result of any revisions, which may be made to any forward-looking statements
to reflect events or circumstances after the date of such statements or to
reflect the occurrence of anticipated or unanticipated events.
  2
  PART
I
  Item
1.Business
  United Community
Bancorp.United Community Bancorp was organized as a federal
corporation upon completion of United Community Bank’s reorganization into the
mutual holding company form of organization (the “Reorganization”) on March 30,
2006.  As a result of the Reorganization, United Community Bank became a
wholly-owned subsidiary of United Community Bancorp and United Community Bancorp
became a majority-owned subsidiary of United Community MHC, a federally
chartered mutual holding company.  United Community Bancorp’s business
activities are the ownership of the outstanding capital stock of United
Community Bank and management of the investment of offering proceeds
retained from the Reorganization. United Community Bancorp neither owns nor
leases any property, but instead, uses the premises, equipment and other
property of United Community Bank with the payment of appropriate rental fees,
as required by applicable law and regulations. In the future, United Community
Bancorp may acquire or organize other operating subsidiaries; however, there are
no current plans, arrangements, agreements or understandings, written or oral,
to do so.
 
 United Community
MHC.United Community MHC is our federally chartered mutual holding
company parent.  As a mutual holding company, United Community MHC is a
non-stock company that has as its members depositors of United Community
Bank.  United Community MHC does not engage in any business activity other
than owning a majority of the common stock of United Community Bancorp.  So
long as we remain in the mutual holding company form of organization, United
Community MHC will own a majority of the outstanding shares of United Community
Bancorp.
 
 United Community
Bank.United Community Bank is a federally chartered savings bank
and was created on April 12, 1999 through the merger of Perpetual Federal
Savings and Loan Association and Progressive Federal Savings Bank, both located
in Lawrenceburg, Indiana.  On June 4, 2010, United Community Bank acquired
three branches from Integra Bank National Association all of which are located
in Ripley County, Indiana.  In connection with the acquisition, the Bank
acquired $45.9 million in loans and assumed $53.0 million in deposits.  At
June 30, 2010, we had approximately $492.1 million in assets and $430.2 million
in deposits.  We operate as a community-oriented financial institution
offering a full menu of banking services and products to consumers and
businesses in our market areas.  Recent years have seen the expansion of
services we offer from a traditional savings and loan product mix to one of a
full-service financial institution servicing the needs of consumer and
commercial customers.
 
 UCB Real Estate
Management Holding, LLC.UCB Real Estate Management Holding, LLC is a
wholly-owned subsidiary of United Community Bank.  The entity was formed
for the purpose of holding real estate assets that are acquired by the Bank
through, or in lieu of, foreclosure.
 
 We
attract deposits from the general public and local municipalities and use those
funds to originate one- to four-family real estate, multi-family and
nonresidential real estate and land, construction, commercial and consumer
loans, which, with the exception of long-term fixed-rate one-to four-family real
estate loans, we primarily hold for investment. We also maintain an investment
portfolio. We offer non-deposit investment products through a third-party
network arrangement with a registered broker-dealer.
 
 Market
Areas
 
 We are
headquartered in Lawrenceburg, Indiana, which is in the eastern part of Dearborn
County, Indiana, along the Ohio River. We currently have six branches located in
Dearborn County and three branches located in adjacent Ripley County.  The
economy of the region in which our current offices are located, and planned
future offices will be located, has historically been a mixture of light
industrial enterprises and services. The economy in Lawrenceburg has been strong
in recent years as a result of the opening of a riverboat casino in Lawrenceburg
whose presence has led to new retail centers, job growth and an increase in
housing development. Located 20 miles from Cincinnati, Ohio, Dearborn and Ripley
Counties have also benefited from the growth in and around Cincinnati and
Northern Kentucky, as many residents commute to these areas for
employment.
  3
  Dearborn
and Ripley Counties’ road system includes eight state highways and three U.S.
highways. Interstate 275 enters Indiana near Lawrenceburg and offers easy
connection to Interstate 71 and Interstate 75.  Interstate 74 connects us
with Indianapolis to the northwest and Cincinnati to the east. The counties are
30 minutes from the Greater Cincinnati/Northern Kentucky International Airport
by way of Interstate 275. The counties have two rail lines and port facilities
due to the proximity of the Ohio River.
 
 Competition
 
 We face
significant competition for the attraction of deposits and origination of loans.
Our most direct competition for deposits has historically come from the several
financial institutions operating in our market areas and, to a lesser extent,
from other financial service companies such as brokerage firms, credit unions
and insurance companies. We also face competition for investors’ funds from
money market funds, mutual funds and other corporate and government securities.
At June 30, 2009, which is the most recent date for which data is available from
the Federal Deposit Insurance Corporation, we held approximately 37.48% of the
deposits in Dearborn County, which was the largest market share out of the nine
financial institutions with offices in Dearborn County. In addition, banks owned
by large out-of-state bank holding companies such as Fifth Third Bancorp and
U.S. Bancorp also operate in our market areas. These institutions are
significantly larger than us and, therefore, have significantly greater
resources.
 
 Our
competition for loans comes primarily from financial institutions in our market
areas, and, to a lesser extent, from other financial service providers such as
mortgage companies and mortgage brokers. Competition for loans also comes from
the increasing number of non-depository financial service companies entering the
mortgage market such as insurance companies, securities companies and
specialty finance companies.
 
 We expect
competition to increase in the future as a result of legislative, regulatory and
technological changes and the continuing trend of consolidation in the financial
services industry. Technological advances, for example, have lowered the
barriers to market entry, allowed banks and other lenders to expand their
geographic reach by providing services over the Internet and made it possible
for non-depository institutions to offer products and services that
traditionally have been provided by banks. Changes in federal law permit
affiliation among banks, securities firms and insurance companies, which
promotes a competitive environment in the financial services industry.
Competition for deposits and the origination of loans could limit our future
growth.
 
 Lending
Activities
 
 General.
We originate loans primarily for investment purposes. Significant segments of
our loan portfolio are one- to four- family residential real estate loans,
nonresidential real estate and land loans, multi-family residential real estate
loans and consumer loans.
  4
  One- to
Four-Family Residential Real Estate Loans. We offer mortgage loans
to enable borrowers to purchase or refinance existing homes, most of which
serve as the primary residence of the owner. We offer fixed-rate and
adjustable-rate loans with terms up to 30 years. Borrower demand for
adjustable-rate loans versus fixed-rate loans is a function of the level of
interest rates, the expectations of changes in the level of interest rates, and
the difference between the interest rates and loan fees offered for fixed-rate
mortgage loans and the initial period interest rates and loan fees for
adjustable-rate loans. The relative amount of fixed-rate mortgage loans and
adjustable-rate mortgage loans that can be originated at any time is largely
determined by the demand for each in a competitive environment. The loan fees,
interest rates and other provisions of mortgage loans are determined by us
on the basis of our own pricing criteria and competitive market conditions.
Most of our loan originations result from relationships with existing or past
customers, members of our local community and referrals from realtors, attorneys
and builders.
 
 While
one- to four-family residential real estate loans are normally originated with
up to 30-year terms, such loans typically remain outstanding for substantially
shorter periods because borrowers often prepay their loans in full upon sale of
the property pledged as security or upon refinancing the original loan.
Therefore, average loan maturity is a function of, among other factors, the
level of purchase and sale activity in the real estate market, prevailing
interest rates and the interest rates payable on outstanding loans.
Additionally, our current practice is generally to (i) sell in the secondary
market newly originated conforming fixed-rate 15-, 20- and 30-year one- to
four-family residential real estate loans, and (ii) to hold in our portfolio
fixed-rate loans with 10-year terms or less and adjustable-rate loans.
Occasionally, we have purchased loans and purchased participation interests in
loans originated by other institutions to supplement our origination
efforts.
 
 Interest
rates and payments on our adjustable-rate mortgage loans generally adjust
annually after an initial fixed period that ranges from one to 10 years.
Interest rates and payments on these adjustable-rate loans generally are based
on the one-year constant maturity Treasury index (three-year constant maturity
Treasury index in the case of three-year adjustable-rate loans) as published by
the Federal Reserve in Statistical Release H.15. The maximum amount by which the
interest rate may be increased is generally two percentage points per adjustment
period and the lifetime interest rate cap ranges from five to six percentage
points over the initial interest rate of the loan. Our adjustable-rate
residential mortgage loans generally do not provide for a decrease in the rate
paid below the initial contract rate. The inability of our residential real
estate loans to adjust downward below the initial contract rate can contribute
to increased income in periods of declining interest rates, and also assists us
in our efforts to limit the risks to earnings and equity value resulting from
changes in interest rates, subject to the risk that borrowers may refinance
these loans during periods of declining interest rates.
 
 We
generally do not make conventional loans with loan-to-value ratios exceeding 95%
at the time the loan is originated. Private mortgage insurance is generally
required for all fixed-rate loans with loan-to-value ratios in excess of 80%,
and all adjustable-rate loans with loan-to-value ratios exceeding 85%. We
require all properties securing mortgage loans to be appraised by a
board-approved independent appraiser. We generally require title insurance on
all first mortgage loans. Borrowers must obtain hazard insurance, and flood
insurance for loans on properties located in a flood zone, before closing the
loan.
 
 In an
effort to provide financing for low- and moderate-income and first-time buyers,
we offer a special home buyers program. We offer residential mortgage loans
through this program to qualified individuals and originate the loans using
reduced interest rates, fees and loan conditions.
 
 Multi-Family Real
Estate Loans. We
offer adjustable-rate mortgage loans secured by multi-family real estate. Our
multi-family real estate loans are generally secured by apartment buildings. We
also make multi-family real estate loans secured by apartment buildings outside
of our primary market area to existing customers.  We intend to continue to
grow this segment of our loan portfolio.
  5
  These
loans are typically repaid or the term is extended before maturity, in which
case a new rate is negotiated to meet market conditions and an extension of the
loan is executed for a new term with a new amortization schedule. We originate
adjustable-rate multi-family real estate loans with terms up to 30
years. Interest rates and payments on most of these loans typically adjust
annually after an initial fixed term of one to seven years. Interest rates and
payments on our adjustable-rate loans generally are based on the prime interest
rate. The maximum amount by which the interest rate may be increased is
generally two percentage points per adjustment period and the lifetime interest
rate cap is six percentage points over the initial interest rate of the loan.
Loans are secured by first mortgages that generally do not exceed 80% of
the property’s appraised value. When the borrower is a corporation, partnership
or other entity, we generally require that significant equity holders serve as
co-borrowers on the loan, or, to a lesser extent, serve as a personal guarantor
of the loan.  Environmental surveys and inspections are generally required
for loans over $500,000.
 
 Loans
secured by multi-family real estate generally have larger balances and involve a
greater degree of risk than one- to four-family residential mortgage loans. Of
primary concern in multi-family real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project.
Payments on loans secured by income properties often depend on successful
operation and management of the properties. As a result, repayment of such loans
may be subject to a greater extent than one- to four-family residential real
estate loans to adverse conditions in the real estate market or the economy. To
monitor cash flows on income properties, we require borrowers and loan
guarantors of loan relationships totaling more than $1.0 million, in the
aggregate, to provide annual financial statements and/or tax returns. In
reaching a decision on whether to make a multi-family real estate loan, we
consider the net operating income of the property, the borrower’s character and
expertise, credit history and profitability and the value of the underlying
property. In addition, with respect to rental properties, we will also consider
the term of the lease and the credit quality of the tenants. We have generally
required that the properties securing these real estate loans have debt service
coverage ratios (the ratio of earnings before debt service to debt service) of
at least 1.20x.
 
 At June
30, 2010, the largest outstanding multi-family real estate loan had an
outstanding balance of $5.1 million and is secured by apartment buildings in
Cincinnati, Ohio. This loan was performing
according to its original terms at June 30, 2010.
 
 Nonresidential
Real Estateand Land
Loans. We offer
adjustable-rate mortgage loans secured by nonresidential real estate. Our
nonresidential real estate loans are generally secured by commercial buildings.
These loans are typically repaid or the term is extended before maturity,
in which case a new rate is negotiated to meet market conditions and an
extension of the loan is executed for a new term with a new amortization
schedule. We originate adjustable-rate nonresidential real estate loans with
terms up to 30 years. Interest rates and payments on most of these loans
typically adjust annually after an initial fixed term of three to seven years.
Interest rates and payments on these loans generally are based on the prime
interest rate. The maximum amount by which the interest rate may be
increased is generally two percentage points per adjustment period and the
lifetime interest rate cap is six percentage points over the initial interest
rate of the loan. Loans are secured by first mortgages that generally do not
exceed 80% of the property’s appraised value (75% for land only loans), the
maximum amount of which is limited by our in-house loans to one borrower limit.
When the borrower is a corporation, partnership or other entity, we generally
require that significant equity holders serve as co-borrowers or as personal
guarantors of the loan.
 
 Loans
secured by nonresidential real estate generally have larger balances and involve
a greater degree of risk than one- to four-family residential mortgage loans.
Our primary concern in nonresidential real estate lending is the borrower’s
creditworthiness and the feasibility and cash flow potential of the project.
Payments on loans secured by income properties often depend on successful
operation and management of the properties. As a result, repayment of such loans
may be subject to a greater extent than one- to four-family residential real
estate loans to adverse conditions in the real estate market or the economy. To
monitor cash flows on income properties, we require borrowers and loan
guarantors of loan relationships totaling more than $1.0 million, in the
aggregate, to provide annual financial statements and/or tax returns. In
reaching a decision on whether to make a nonresidential real estate loan, we
consider the net operating income of the property, the borrower’s expertise
and character, credit history and profitability and the value of the underlying
property. In addition, with respect to rental properties, we will also consider
the term of the lease and the credit quality of the tenants. We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.20x.  Environmental surveys and inspections are
generally required for loans over $500,000.
  6
 
 We also
originate loans secured by unimproved property, including lots for single family
homes and for mobile homes, raw land, commercial property and agricultural
property. The terms and rates of our land loans are the same as our
nonresidential and multi-family real estate loans. Loans secured by undeveloped
land or improved lots generally involve greater risks than residential mortgage
lending because land loans are more difficult to evaluate. If the estimate of
value proves to be inaccurate, in the event of default and foreclosure, we may
be confronted with a property the value of which is insufficient to assure full
repayment. Loan amounts generally do not exceed 80% of the lesser of the
appraised value or the purchase price.
 
 At June
30, 2010, we had $74.8 million in nonresidential real estate loans outstanding,
or 23.7% of total loans, and $5.4 million in land loans outstanding, or 1.7% of
total loans.
 
 At June
30, 2010, the largest outstanding nonresidential real estate loan had an
outstanding balance of $3.2 million. This loan is secured by a hotel and was
performing according to its original terms at June 30, 2010.  At June 30,
2010, our largest land loan, which was performing according to its original
terms at that date, had an outstanding balance of $894,000 and was secured by
land held for commercial real estate development.
 
 Construction
Loans. We originate fixed-rate and adjustable-rate loans to individuals
and, to a lesser extent, builders to finance the construction of residential
dwellings. We also make construction loans for commercial development projects,
including apartment buildings, restaurants, shopping centers and owner-occupied
properties used for businesses. Our construction loans generally provide for the
payment of interest only during the construction phase, which is usually nine
months for residential properties and 12 months for commercial properties. At
the end of the construction phase, the loan generally converts to a permanent
mortgage loan. Loans generally can be made with a maximum loan to value
ratio of 95% on residential construction and 80% on commercial construction at
the time the loan is originated. Before making a commitment to fund a
construction loan, we require an appraisal of the property by an
independent licensed appraiser. We also will require an inspection of the
property before disbursement of funds during the term of the construction
loan.
 
 At June
30, 2010, our largest outstanding residential construction loan was for
$440,000, of which $267,000 was outstanding.  At June 30, 2010, our largest
outstanding commercial construction loan was for $500,000, of which $468,000 was
outstanding, and is secured by a commercial office building.  These loans
were performing in accordance with their original terms at June 30,
2010.
 
 Commercial
Loans. We occasionally make commercial business loans to professionals,
sole proprietorships and small businesses in our market area. We extend
commercial business loans on an unsecured basis and secured basis, the maximum
amount of which is limited by our in-house loans to one borrower
limit.
 
 We
originate secured and unsecured commercial lines of credit to finance the
working capital needs of businesses to be repaid by seasonal cash flows.
Commercial lines of credit secured by nonresidential real estate are
adjustable-rate loans whose rates are based on the prime interest rate and
adjust monthly. Commercial lines of credit secured by nonresidential real estate
have a maximum term of five years and a maximum loan-to-value ratio of 80% of
the pledged collateral when the collateral is commercial real estate. We also
originate commercial lines of credit secured by marketable securities and
unsecured lines of credit. These lines of credit, as well as certain
commercial lines of credit secured by nonresidential real estate, require that
only interest be paid on a monthly or quarterly basis and have a maximum term of
five years.
 
 We also
originate secured and unsecured commercial loans. Secured commercial loans are
generally collateralized by nonresidential real estate, marketable securities,
accounts receivable, inventory, industrial/commercial machinery and equipment
and furniture and fixtures. We originate both fixed-rate and adjustable-rate
commercial loans with terms up to 20 years for secured loans and up to five
years for unsecured loans. Adjustable-rate loans are based on prime and adjust
either monthly or annually. Where the borrower is a corporation, partnership or
other entity, we generally require significant equity holders to be
co-borrowers, and in cases where they are not co-borrowers, we generally require
personal guarantees from significant equity holders.
  7
 
 When
making commercial business loans, we consider the financial statements and/or
tax returns of the borrower, the borrower’s payment history of both corporate
and personal debt, the debt service capabilities of the borrower, the projected
cash flows of the business, the viability of the industry in which the customer
operates and the value of the collateral.
 
 At June
30, 2010, our largest commercial loan was a $2,474,000 loan secured by the
accounts receivable of a public utilities company. This loan was performing
in accordance with its original terms at June 30, 2010.
 
 Consumer
Loans. We offer a
variety of consumer loans, primarily home equity loans and lines of credit, and,
to a much lesser extent, loans secured by savings accounts or certificates of
deposit (share loans), new farm and garden equipment, automobile and
recreational vehicle loans and secured and unsecured personal
loans.
 
 The
procedures for underwriting consumer loans include an assessment of the
applicant’s payment history on other debts and ability to meet existing
obligations and payments on the proposed loan. Although the applicant’s
creditworthiness is a primary consideration, the underwriting process also
includes a comparison of the value of the collateral, if any, to the proposed
loan amount.
 
 We
generally offer home equity loans and lines of credit with a maximum combined
loan to value ratio of 90%.  Our lowest interest rates are generally
offered to customers with a maximum combined loan to value ratio of 80% or
less.  Home equity lines of credit have adjustable-rates of interest that
are based on the prime interest rate. Home equity lines of credit generally
require that only interest be paid on a monthly basis and have terms up to 20
years. Interest rates on these loans typically adjust monthly. We offer
fixed-rate and adjustable-rate home equity loans. Home equity loans with
fixed-rates have terms that range from one to 15 years. Home equity loans with
adjustable-rates have terms that range from 1 to 30 years. Interest rates on
these loans are based on the prime interest rate. We hold a first mortgage
position on most of the homes that secure our home equity loans and home equity
lines of credit.
 
 We offer
loans secured by new and used vehicles. These loans have fixed interest rates
and generally have terms up to five years.
 
 We offer
loans secured by new and used boats, motor homes, campers and motorcycles. We
offer fixed and adjustable-rate loans for new motor homes and boats with terms
up to 20 years for adjustable-rate loans and up to 10 years for fixed-rate
loans. We offer fixed-rate loans for all other new and used recreational
vehicles with terms up to 10 years for campers and five years for
motorcycles.
 
 We offer
secured consumer loans with fixed interest rates and terms up to 10 years and
secured lines of credit with adjustable-rates based on the prime rate with terms
up to five years. We also offer fixed-rate unsecured consumer loans and lines of
credit with terms up to five years. For more information on our loan
commitments, see “Management’s Discussion and Analysis of
Financial Condition and
Results of Operations—Risk Management—Liquidity
Management.”
 
 Loan
Underwriting Risks
 
 Adjustable-Rate
Loans.While we
anticipate that adjustable-rate loans will better offset the adverse effects of
an increase in interest rates as compared to fixed-rate mortgages, the increased
mortgage payments required of adjustable-rate loan borrowers in a rising
interest rate environment could cause an increase in delinquencies and defaults.
The marketability of the underlying property also may be adversely affected in a
high interest rate environment. In addition, although adjustable-rate mortgage
loans help make our loan portfolio more responsive to changes in interest rates,
the extent of this interest sensitivity is limited by the annual and lifetime
interest rate adjustment limits.
  8
  Multi-Family and
Nonresidential Real Estate and Land Loans.Loans secured by
multi-family and nonresidential real estate generally have larger balances and
involve a greater degree of risk than one- to four-family residential mortgage
loans. Of primary concern in multi-family and nonresidential real estate lending
is the borrower’s creditworthiness and the feasibility and cash flow potential
of the project. Payments on loans secured by income properties often depend on
successful operation and management of the properties. As a result, repayment of
such loans may be subject to a greater extent than residential real estate loans
to adverse conditions in the real estate market or the economy. To monitor cash
flows on income properties, we require borrowers and loan guarantors of
loan relationships totaling more than $1.0 million, in the aggregate, to provide
annual financial statements and/or tax returns. In reaching a decision on
whether to make a multi-family and nonresidential real estate loan, we consider
the net operating income of the property, the borrower’s expertise, credit
history and profitability and the value of the underlying property. We have
generally required that the properties securing these real estate loans have
debt service coverage ratios (the ratio of earnings before debt service to debt
service) of at least 1.20x. Environmental surveys and inspections are obtained
when circumstances suggest the possibility of the presence of hazardous
materials.
 
 We underwrite all loan participations
to our own underwriting standards and will not participate in a loan unless each
participant has at least a 10% interest in the loan. In addition, we also
consider the financial strength and reputation of the lead lender. To monitor
cash flows on loan participations, we require the lead lender to provide us with
annual financial statements from the borrower. Generally, we also conduct an
annual internal loan review for loan participations.
 
 Construction
Loans.Construction financing is generally considered to involve a higher degree
of risk of loss than long-term financing on improved, occupied real estate. Risk
of loss on a construction loan depends largely upon the accuracy of the initial
estimate of the property’s value at completion of construction and the estimated
cost (including interest) of construction. During the construction phase, a
number of factors could result in delays and cost overruns. If the estimate of
construction costs proves to be inaccurate, we may be required to advance
funds beyond the amount originally committed to permit completion of the
building. If the estimate of value proves to be inaccurate, we may be
confronted, at or before the maturity of the loan, with a building having a
value which is insufficient to assure full repayment. If we are forced to
foreclose on a building before or at completion due to a default, there can be
no assurance that we will be able to recover all of the unpaid balance of, and
accrued interest on, the loan as well as related foreclosure and holding
costs.
 
 Commercial
Loans.Unlike
residential mortgage loans, which generally are made on the basis of the
borrower’s ability to make repayment from his or her employment or other income,
and which are secured by real property the value of which tends to be more
easily ascertainable, commercial loans are of higher risk and typically are made
on the basis of the borrower’s ability to make repayment from the cash flow of
the borrower’s business. As a result, the availability of funds for the
repayment of commercial loans may depend substantially on the success of the
business itself. Further, any collateral securing such loans may depreciate over
time, may be difficult to appraise and may fluctuate in value.
 
 Consumer
Loans.Consumer loans may entail
greater risk than do residential mortgage loans, particularly in the case of
consumer loans that are unsecured or secured by assets that depreciate rapidly.
In such cases, repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment for the outstanding loan and the
remaining deficiency often does not warrant further substantial collection
efforts against the borrower. In addition, consumer loan collections depend on
the borrower’s continuing financial stability, and therefore are more likely to
be adversely affected by job loss, divorce, illness or personal bankruptcy.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount that can be recovered on
such loans.
 
 Loan
Originations, Purchases and Sales.Loan originations come from
a number of sources. The primary source of loan originations are existing
customers, walk-in traffic, advertising and referrals from customers. We
advertise on television and on radio and in newspapers that are widely
circulated in Dearborn County, Indiana. Accordingly, when our rates are
competitive, we attract loans from throughout Dearborn County. We occasionally
purchase loans and participation interests in loans to supplement our
origination efforts.
  9
  We generally originate loans for our
portfolio, but our current practice is to sell to the secondary market almost
all newly originated conforming fixed-rate, 15-, 20- and 30-year one- to
four-family residential real estate loans and to hold in our portfolio
fixed-rate loans with 10-year terms or less and adjustable-rate loans. Our
decision to sell loans is based on prevailing market interest rate conditions
and interest rate risk management. Generally, loans are sold to Freddie Mac with
servicing retained.
 
 Loan Approval
Procedures and Authority.Our lending activities
follow written, non-discriminatory underwriting standards and loan origination
procedures established by our board of directors and management. The board has
granted the Management Mortgage Loan Committee (comprised of the President,
Executive Vice President and the Senior Vice President, Lending) with loan
approval authority for mortgage loans up to $200,000 and to the Board Loan
Committee up to $1.0 million.
 
 The board
has granted authority to approve consumer loans to certain employees up to
prescribed limits, depending on the officer’s experience and tenure. The board
also granted loan approval authority to the Management Consumer Loan Committee,
consisting of the President and the Executive Vice President, the Senior Vice
President, Lending and two other experienced lenders. Any two members of the
Committee may approve consumer loans secured by real estate up to
$250,000, and consumer loans secured by assets other than real estate up to
$100,000. The board of directors has also granted loan approval authority to the
Management Commercial Loan Committee, consisting of the President, the Executive
Vice President, the Senior Vice President, Lending. Any two members of the
Committee may approve commercial loans secured by real estate up to $250,000,
commercial loans secured by assets other than real estate up to $50,000 and
unsecured commercial loans up to $25,000. The Management Commercial Loan
Committee may approve commercial loans secured by real estate up to $500,000,
commercial loans secured by assets other than real estate up to $100,000 and
unsecured commercial loans up to $50,000 with unanimous approval by the
Committee.
 
 The Board
Loan Committee, consisting of the President, the Executive Vice President and
three to four other members of the board, may approve consumer and commercial
loans secured by real estate up to $1,000,000, consumer and commercial loans
secured by assets other than real estate up to $300,000 and unsecured consumer
commercial loans up to $100,000.
 
 All loans
in excess of these limits must be approved by the full Board of
Directors.
 
 Loans to One
Borrower. The maximum amount that we may lend to one borrower and the
borrower’s related entities generally is limited, by regulation, to 15% of our
unimpaired capital and surplus. At June 30, 2010, our general regulatory limit
on loans to one borrower was $7.8 million. On June 30, 2010, our largest lending
relationship was a $7.2 million multifamily real estate loan relationship. 
The loans that comprise this relationship were performing according to their
original terms at June 30, 2010.  In 2007, to reduce the risk of loss to
any one borrower, the Board established a loans to one borrower limit of 7.5% of
unimpaired capital and surplus.  Any relationship in excess of 7.5% at the
time of implementation would have been grandfathered in and allowed to
continue.
 
 Loan
Commitments. We issue commitments for fixed- and adjustable-rate mortgage
loans conditioned upon the occurrence of certain events. Commitments to
originate mortgage loans are legally binding agreements to lend to our
customers. Generally, our mortgage loan commitments expire after 30
days.
 
 Investment
Activities
 
 We have
legal authority to invest in various types of liquid assets, including U.S.
Treasury obligations, securities of various federal agencies and municipal
governments, deposits at the Federal Home Loan Bank of Indianapolis and
certificates of deposit of federally insured institutions. Within certain
regulatory limits, we also may invest a portion of our assets in mutual funds.
We also are required to maintain an investment in Federal Home Loan Bank of
Indianapolis stock. While we have the authority under applicable law to invest
in derivative securities, our investment policy does not permit this investment.
We had no investments in derivative securities at June 30,
2010.
  10
 
 At June
30, 2010, our investment portfolio totaled $120.0 million and consisted
primarily of U.S. Government-sponsored entity securities, municipal bonds and
mortgage-backed securities issued primarily by Fannie Mae and Freddie Mac, and
securities of municipal governments.
 
 At June
30, 2010, $62.1 million of our investment portfolio consisted of callable
securities. These securities were included in U.S. Government agency bonds and
municipal bonds.  These securities contain either a one-time call option or
may be called anytime after the first call date. We face reinvestment risk with
callable securities, particularly during periods of falling market interest
rates when issuers of callable securities tend to call or redeem their
securities. Reinvestment risk is the risk that we may have to reinvest the
proceeds from called securities at lower rates of return than the rates paid on
the called securities.
 
 Our
investment objectives are to provide and maintain liquidity, to establish an
acceptable level of interest rate and credit risk, to provide an alternate
source of low-risk investments when demand for loans is weak and to generate a
favorable return. The Investment Committee is responsible for the implementation
of the investment policy. The Management Investment Committee, consisting of the
Chief Executive Officer, the Chief Operating Officer, and the Chief
Financial Officer, is responsible for monitoring our investment performance.
Individual investment transactions, portfolio composition and performance are
reviewed by our board of directors monthly.
 
 Deposit
Activities and Other Sources of Funds
 
 General. Deposits, borrowings and
loan repayments are the major sources of our funds for lending and other
investment purposes. Loan repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are significantly
influenced by general interest rates and money market conditions.
 
 Deposit
Accounts.
Substantially all of our depositors are residents of the State of Indiana. We
attract deposits in our market area through advertising and through our website.
We offer a broad selection of deposit instruments, including noninterest-bearing
demand accounts (such as checking accounts), interest-bearing accounts (such as
NOW and money market accounts), regular savings accounts and certificates of
deposit. Municipal deposits comprise a substantial portion of our total
deposits. At June 30, 2010, $121.6 million, or 28.3% of our total deposits, were
municipal deposits. At June 30, 2010, we did not utilize brokered deposits.
Deposit account terms vary according to the minimum balance required, the time
periods the funds must remain on deposit and the interest rate, among other
factors. In determining the terms of our deposit accounts, we consider the rates
offered by our competition, our liquidity needs, profitability to us, matching
deposit and loan products and customer preferences and concerns. We generally
review our deposit mix and pricing weekly. Our current strategy is to offer
competitive rates and to be in the middle of the market for rates on all types
of deposit products.
 
 Borrowings. We may utilize advances from
the Federal Home Loan Bank of Indianapolis to supplement our supply of
investable funds. The Federal Home Loan Bank functions as a central reserve bank
providing credit for its member financial institutions. As a member, we are
required to own capital stock in the Federal Home Loan Bank of Indianapolis and
are authorized to apply for advances on the security of such stock and certain
of our whole first mortgage loans and other assets (principally securities
which are obligations of, or guaranteed by, the United States), provided certain
standards related to creditworthiness have been met. Advances are made under
several different programs, each having its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of an institution’s net worth or on the
Federal Home Loan Bank’s assessment of the institution’s creditworthiness.
 At June 30, 2010, $2.8 million was advanced from the Federal Home Loan
Bank at an interest rate of 3.2%.
 
 Personnel
 
 As of
June 30, 2010, we had 95 full-time employees and 14 part-time employees, none of
which are represented by a collective bargaining unit.  We believe our
relationship with our employees is good.
  11
 
 Subsidiaries
 
 United
Community Bank has two subsidiaries: United Community Bank Financial Services,
Inc. and UCB Real Estate Management Holdings, LLC.  United Community Bank
Financial Services, Inc. receives commissions from the sale of non-deposit
investment and insurance products.  UCB Real Estate Management Holdings,
LLC owns and operates real estate that has been acquired through, or in lieu of,
foreclosure.
 
 Regulation
and Supervision
 
 General
 
 As a federal mutual holding company,
United Community MHC is required by federal law to report to, and otherwise
comply with the rules and regulations of, the Office of Thrift Supervision
(“OTS”). United Community Bancorp, as a federally chartered corporation, is also
subject to reporting to and regulation by the OTS.  United Community Bank
is subject to extensive regulation, examination and supervision by the OTS, as
its primary federal regulator, and the Federal Deposit Insurance Corporation
(“FDIC”), as the deposit insurer.  United Community Bank is a member of the
Federal Home Loan Bank System and, with respect to deposit insurance, of the
Deposit Insurance Fund managed by the FDIC.  United Community Bank must
file reports with the OTS and the FDIC concerning its activities and financial
condition in addition to obtaining regulatory approvals prior to entering into
certain transactions such as mergers with, or acquisitions of, other savings
institutions.  The OTS and/or the FDIC conduct periodic examinations to
test United Community Bank’s safety and soundness and compliance with various
regulatory requirements.
 
 This regulation and supervision
establishes a comprehensive framework of activities in which an institution can
engage and is intended primarily for the protection of the insurance fund and
depositors.  The regulatory structure also gives the regulatory authorities
extensive discretion in connection with their supervisory and enforcement
activities and examination policies, including policies with respect to the
classification of assets and the establishment of adequate loan loss reserves
for regulatory purposes.  Any change in such regulatory requirements and
policies, whether by the OTS, the FDIC or Congress, could have a material
adverse impact on United Community MHC, United Community Bancorp, United
Community Bank and their operations.
 
 The
Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the
“Dodd-Frank Act’) makes extensive changes in the regulation of federal savings
banks such as United Community Bank.  Under the Dodd-Frank Act, the OTS
will be eliminated.  Responsibility for the supervision and regulation of
federal savings banks will be transferred to the Office of the Comptroller of
the Currency, which is the agency that is currently primarily responsible for
the regulation and supervision of national banks.  The Office of the
Comptroller of the Currency will assume responsibility for implementing and
enforcing many of the laws and regulations applicable to federal savings banks.
The transfer of regulatory functions will take place over a transition period of
up to one year from the enactment date of July 21, 2010 (subject to a possible
six month extension).  Over the same transition period, responsibility for
the regulation and supervision of savings and loan holding companies will be
transferred to the Federal Reserve Board, which currently supervises bank
holding companies.  Additionally, the Dodd-Frank Act creates a new Consumer
Financial Protection Bureau as an independent bureau of the Federal Reserve
Board.  The Consumer Financial Protection Bureau will assume responsibility
for the implementation of the federal financial consumer protection and fair
lending laws and regulations, a function currently assigned to prudential
regulators, and will have authority to impose new requirements.  However,
institutions of less than $10 billion in assets, such as United Community Bank,
will continue to be examined for compliance with consumer protection and fair
lending laws and regulations by, and be subject to the enforcement authority of,
their prudential regulator.
 
 As part
of the Dodd-Frank Act regulatory restructuring, the Office of Thrift
Supervision’s authority over savings and loan holding companies, such as United
Community MHC and United Community Bancorp, will be transferred to the Federal
Reserve Board, which is the agency that regulates and supervises bank holding
companies.
  12
  Certain
regulatory requirements currently applicable to United Community Bank and to
United Community MHC are referred to below or elsewhere herein.  The
description of statutory provisions and regulations applicable to savings
institutions and their holding companies set forth below and elsewhere in this
document does not purport to be a complete description of such statutes and
regulations and their effects on United Community Bank and United Community MHC
and is qualified in its entirety by reference to the actual statutes and
regulations.
 
 Holding
Company Regulation
 
 General.United Community MHC
is a savings and loan holding company within the meaning of federal law. 
As such, United Community MHC is registered with the OTS and is subject to OTS
regulations, examinations, supervision and reporting requirements.  In
addition, the OTS has enforcement authority over United Community MHC and its
non-savings institution subsidiaries.  Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to United Community Bank.
 
 The Dodd-Frank Act regulatory
restructuring will transfer the responsibility for regulating and supervising
savings and loan holding companies to the Federal Reserve Board.
 
 Activities
Restrictions Applicable to Mutual Holding Companies.Pursuant to federal
law and OTS regulations, a mutual holding company, such as United Community MHC,
may engage in the following activities:  (i) investing in the stock of a
savings association; (ii) acquiring a mutual association through the merger of
such association into a savings association subsidiary of such holding
company or an interim savings association subsidiary of such holding company;
(iii) merging with or acquiring another holding company, one of whose
subsidiaries is a savings association; (iv) investing in a corporation, the
capital stock of which is available for purchase by a savings association under
federal law or under the law of any state where the subsidiary savings
association or associations share their home offices; (v) furnishing or
performing management services for a savings association subsidiary of such
company; (vi) holding, managing or liquidating assets owned or acquired from a
savings subsidiary of such company; (vii) holding or managing properties used or
occupied by a savings association subsidiary of such company; (viii) acting as
trustee under deeds of trust; (ix) any other activity (A) that the Federal
Reserve Board, by regulation, has determined to be permissible for bank holding
companies under Section 4(c) of the Association Holding Company Act, unless the
OTS, by regulation, prohibits or limits any such activity for savings and loan
holding companies; or (B) in which multiple savings and loan holding companies
were authorized (by regulation) to directly engage on March 5, 1987; and (x)
purchasing, holding, or disposing of stock acquired in connection with a
qualified stock issuance if the purchase of such stock by such savings and loan
holding company is approved by the OTS.
 
 The Gramm-Leach Bliley Act of 1999 was
designed to modernize the regulation of the financial services industry by
expanding the ability of bank holding companies to affiliate with other types of
financial services companies such as insurance companies and investment banking
companies.  The legislation also expanded the activities permitted for
mutual savings and loan holding companies to also include any activity permitted
a “financial holding company” under the legislation, including a broad array of
insurance and securities activities.
 
 Federal law prohibits a savings and
loan holding company, including a federal mutual holding company, from, directly
or indirectly or through one or more subsidiaries, acquiring more than 5% of the
voting stock of another savings institution, or holding company thereof, without
prior written approval of the OTS or from acquiring or retaining, with certain
exceptions, more than 5% of a non-subsidiary holding company or savings
association.  A savings and loan holding company is also prohibited from
acquiring more than 5% of a company engaged in activities other than those
authorized by federal law; or acquiring or retaining control of a depository
institution that is not insured by the FDIC.   In evaluating
applications by holding companies to acquire savings institutions, the OTS must
consider the financial and managerial resources and future prospects of United
Community MHC and the institution involved, the effect of the acquisition on the
risk to the insurance funds, the convenience and needs of the community and
competitive factors.
 
 The OTS
is prohibited from approving any acquisition that would result in a multiple
savings and loan holding company controlling savings institutions in more than
one state, except:  (i) the approval of interstate supervisory acquisitions
by savings and loan holding companies; and (ii) the acquisition of a
savings institution in another state if the laws of the state of the target
savings institution specifically permit such acquisitions.  The states vary
in the extent to which they permit interstate savings and loan holding company
acquisitions.
  13
 
 Although savings and loan holding
companies are not currently subject to regulatory capital requirements or
specific restrictions on the payment of dividends or other capital
distributions, federal regulations do prescribe such restrictions on subsidiary
savings institutions as described below.  United Community Bank must notify
the OTS 30 days before declaring any dividend.  In addition, the financial
impact of a holding company on its subsidiary institution is a matter that is
evaluated by the OTS and the agency has authority to order cessation of
activities or divestiture of subsidiaries deemed to pose a threat to the safety
and soundness of the institution.
 
 Capital
Requirements.Savings and loan holding companies are not currently subject to specific
regulatory capital requirements.  The Dodd-Frank Act, however, requires the
Federal Reserve Board to promulgate consolidated capital requirements for
depository institution holding companies that are no less stringent, both
quantitatively and in terms of components of capital, than those applicable to
institutions themselves.  There is a five year transition period from the
July 21, 2010 date of enactment of the Dodd-Frank Act before the capital
requirements will apply to savings and loan holding companies.  The
Dodd-Frank Act also requires the Federal Reserve Board to promulgate regulations
implementing the “source of strength” policy that holding companies act as a
source of strength to their subsidiary depository institutions by providing
capital liquidity and other support in times of financial stress.
 
 Stock Holding
Company Subsidiary Regulation.The OTS has adopted
regulations governing the two-tier mutual holding company form of organization
and mid-tier stock holding companies that are controlled by mutual holding
companies.  Under these rules, the stock holding company subsidiary holds
all the shares of the mutual holding company’s savings association subsidiary
and issues the majority of its own shares to the mutual holding company
parent.  In addition, the stock holding company subsidiary is permitted to
engage in activities that are permitted for its mutual holding company parent
subject to the same terms and conditions.  Finally, OTS regulations
maintain that the stock holding company subsidiary must be federally chartered
for supervisory reasons.
 
 Acquisition of
United Community MHC.Under the Federal
Change in Control Act, a notice must be submitted to the OTS if any person
(including a company), or group acting in concert, seeks to acquire “control” of
a savings and loan holding company or savings institution.  Under certain
circumstances, a change of control may occur, and prior notice is required, upon
the acquisition of 10% or more of the outstanding voting stock of United
Community MHC or the institution, unless the OTS has found that the acquisition
will not result in a change of control of United Community MHC.  Under
the  Change in Control Act, the OTS generally has 60 days from
the filing of a complete notice to act, taking into consideration certain
factors, including the financial and managerial resources of the acquirer and
the anti-trust effects of the acquisition.  Any company that acquires
control would then be subject to regulation as a savings and loan holding
company.
 
 Waivers of
Dividends.OTS regulations require
United Community MHC to notify the OTS if it proposes to waive receipt of
dividends from United Community Bancorp.  The OTS reviews dividend waiver
notices on a case-by-case basis, and, in general, does not object to any such
waiver if: (i) the waiver would not be detrimental to the safe and sound
operation of the savings association; and (ii) the mutual holding company’s
board of directors determines that such waiver is consistent with such
directors’ fiduciary duties to the mutual holding company’s members. The OTS
will not consider the amount of dividends waived by the mutual holding company
in determining an appropriate exchange ratio in the event of a full conversion
to stock form.  Dividends paid to shareholders on May 10, 2010; February 4,
2010; November 5, 2009; and August 6, 2009 were waived by United Community
MHC.
 
 The Dodd-Frank Act addressed the issue
of dividend waivers in the context of the transfer of the supervision of savings
and loan holding companies to the Federal Reserve Board.  The Dodd-Frank
Act specified that dividends may be waived if certain conditions are met,
including that the Federal Reserve Board does not object after being given
written notice of  the dividend and proposed waiver.  The Dodd-Frank
Act indicates that the Federal Reserve Board may not object to such a waiver (i)
if the mutual holding company involved has, prior to December 1, 2009,
reorganized into a mutual holding company structure, engaged in a minority stock
offering and waived dividends; (ii) the board of directors of the mutual holding
company expressly determines that a waiver of the dividend is consistent with
its fiduciary duties to members and (iii) the waiver would not be detrimental to
the safe and sound operation of the savings association subsidiaries of the
holding company.  The Federal Reserve has not previously permitted dividend
waivers by mutual bank holding companies and may object to dividend waivers
involving mutual savings and loan holding companies, notwithstanding the
referenced language in the Dodd-Frank Act.
  14
 
 Conversion of
United Community MHC to Stock Form.OTS regulations permit
United Community MHC to convert from the mutual form of organization to the
capital stock form of organization.  There can be no assurance when, if
ever, a conversion transaction will occur, and the Board of Directors has no
present intention or plan to undertake a conversion transaction.  In a
conversion transaction, a new holding company would be formed as the successor
to United Community Bancorp, United Community MHC’s corporate existence would
end and certain depositors of United Community Bank would receive the right to
subscribe for additional shares of the new holding company.  In a
conversion transaction, each share of common stock held by stockholders other
than United Community MHC would be automatically converted into a number of
shares of common stock of the new holding company based on an exchange ratio
determined at the time of conversion that ensures that stockholders other than
United Community MHC own the same percentage of common stock in the new holding
company as they owned in United Community Bancorp immediately before
conversion.  The total number of shares held by stockholders other than
United Community MHC after a conversion transaction would be increased by any
purchases by such stockholders in the stock offering conducted as part of the
conversion transaction.
 
 The Dodd-Frank Act provides that waived
dividends will also not be considered in determining the appropriate exchange
ratio after the transfer of responsibilities to the Federal Reserve Board for
provided that the mutual holding company involved was formed, engaged in a
minority offering and waived dividends prior to December 1, 2009.  United
Community MHC was formed, engaged in a minority stock offering and waived
dividends prior to December 1, 2009.
 
 Federal
Savings Institution Regulation
 
 Business
Activities.The activities of federal savings associations are governed by federal
law and regulations.  These laws and regulations delineate the nature and
extent of the activities in which federal savings banks may engage.  In
particular, certain lending authority for federal savings institutions, e.g.,
commercial, non-residential real property loans and consumer loans, is limited
to a specified percentage of the institution’s capital or assets.
 
 Capital
Requirements.The OTS capital regulations require savings institutions to meet three
minimum capital standards:  a 1.5% tangible capital to total assets ratio;
a 4% Tier 1 capital to total assets leverage ratio (3% for institutions
receiving the highest rating on the CAMELS examination rating system); and an 8%
risk-based capital ratio.  In addition, the prompt corrective action
standards discussed below also establish, in effect, a minimum 2% tangible
capital standard, a 4% leverage ratio (3% for institutions receiving the highest
rating on the CAMELS system) and, together with the risk-based capital standard
itself, a 4% Tier 1 risk-based capital standard.  The OTS regulations also
require that, in meeting the tangible, leverage and risk-based capital
standards, institutions must generally deduct investments in and loans to
subsidiaries engaged in activities as principal that are not permissible for a
national bank.
 
 The risk-based capital standard for
savings institutions requires the maintenance of Tier 1 (core) and total capital
(which is defined as core capital and supplementary capital) to risk-weighted
assets of at least 4% and 8%, respectively.  In determining the amount of
risk-weighted assets, all assets, including certain off-balance sheet
activities, recourse obligations, residual interests and direct credit
substitutes, are multiplied by a risk-weight factor of 0% to 100%, assigned by
the OTS capital regulation based on the risks believed inherent in the type of
asset.  Core (Tier 1) capital is generally defined as common stockholders’
equity (including retained earnings), certain noncumulative perpetual preferred
stock and related surplus, and minority interests in equity accounts of
consolidated subsidiaries less intangibles other than certain mortgage servicing
rights and credit card relationships.  The components of supplementary
capital (Tier 2 capital) currently include cumulative preferred stock, long-term
perpetual preferred stock, mandatory convertible securities, subordinated debt
and intermediate preferred stock, the allowance for loan and lease losses,
limited to a maximum of 1.25% of risk-weighted assets, and up to 45% of
unrealized gains on available-for-sale equity securities with readily
determinable fair market values.  Overall, the amount of supplementary
capital included as part of total capital cannot exceed 100% of core
capital.
  15
 
 The OTS also has authority to establish
individual minimum capital requirements in appropriate cases upon a
determination that an institution’s capital level is or may become inadequate in
light of the particular circumstances.  At June 30, 2010, United Community
Bank met each of its capital requirements.
 
 Prompt Corrective
Regulatory Action.The OTS is required to take certain supervisory actions against
undercapitalized institutions, the severity of which depends upon the
institution’s degree of undercapitalization.  Generally, a savings
institution that has a ratio of total capital to risk weighted assets of less
than 8%, a ratio of Tier 1 (core) capital to risk-weighted assets of less than
4% or a ratio of core capital to total assets of less than 4% (3% or less for
institutions with the highest examination rating) is considered to be
“undercapitalized.”  A savings institution that has a total risk-based
capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage
ratio that is less than 3% is considered to be “significantly undercapitalized”
and a savings institution that has a tangible capital to assets ratio equal to
or less than 2% is deemed to be “critically undercapitalized.”  Subject to
a narrow exception, the OTS is required to appoint a receiver or conservator
within specified time frames for an institution that is “critically
undercapitalized.”  The regulation also provides that a capital restoration
plan must be filed with the OTS within 45 days of the date a savings
institution is deemed to have received notice that it is “undercapitalized,”
“significantly undercapitalized” or “critically undercapitalized.” 
Compliance with the plan must be guaranteed by any parent holding company in an
amount of up to the lesser of 5% of the savings association’s total assets
when it was deemed to be undercapitalized or the amount necessary to achieve
compliance with applicable capital regulations.  In addition, numerous
mandatory supervisory actions become immediately applicable to an
undercapitalized institution, including, but not limited to, increased
monitoring by regulators and restrictions on growth, capital distributions and
expansion.  The OTS could also take any one of a number of discretionary
supervisory actions, including the issuance of a capital directive and the
replacement of senior executive officers and directors.  Significantly and
undercapitalized institutions are subject to additional mandatory and
discretionary restrictions.
 
 Insurance of
Deposit Accounts.The Bank’s deposits are insured up to applicable limits by the Deposit
Insurance Fund of the FDIC.  The Deposit Insurance Fund is the successor to
the Bank Insurance Fund and the Savings Association Insurance Fund, which were
merged in 2006.  Under the FDIC’s risk-based assessment system, insured
institutions are assigned to one of four risk categories based on supervisory
evaluations, regulatory capital levels and certain other factors, with less
risky institutions paying lower assessments.  An institution’s assessment
rate depends upon the category to which it is assigned.  For 2010, the
Federal Deposit Insurance Corporation first establishes an institution’s initial
base assessment rate.  This initial base assessment rate ranges, depending
on the risk category of the institution, from 12 to 45 basis points.  The
Federal Deposit Insurance Corporation then adjusts the initial base assessment
(higher or lower) to obtain the total base assessment rate.  The
adjustments to the initial base assessment rate are based upon an institution’s
levels of unsecured debt, secured liabilities, and brokered deposits.  The
total base assessment rate ranges from 7 to 77.5 basis points of the
institution’s deposits. No institution may pay a dividend if in default of the
federal deposit insurance assessment.
 
 The
Dodd-Frank Act requires the FDIC to amend its procedures to base assessments on
total assets less tangible equity rather than deposits.  It is uncertain
how quickly that will occur.
 
 The FDIC
imposed on all insured institutions a special emergency assessment of five basis
points of total assets minus Tier 1 capital, as of June 30, 2009 (capped at
ten basis points of an institution’s deposit assessment base), in order to cover
losses to the Deposit Insurance Fund. That special assessment was collected on
September 30, 2009.  The FDIC provided for similar assessments during
the final two quarters of 2009, if deemed necessary.
 
 In lieu
of further special assessments, however, the Federal Deposit Insurance
Corporation required insured institutions to prepay estimated quarterly
risk-based assessments for the fourth quarter of 2009 through the fourth quarter
of 2012.  This pre-payment was due on December 30, 2009.  The
assessment rate for the fourth quarter of 2009 and for 2010 was based on each
institution’s total base assessment rate for the third quarter of 2009, modified
to assume that the assessment rate in effect on September 30, 2009 had been in
effect for the entire third quarter, and the assessment rate for 2011 and 2012
will be equal to the modified third quarter assessment rate plus an additional 3
basis points.  In addition, each institution’s base assessment rate for
each period was calculated using its third quarter assessment base, adjusted
quarterly for an estimated 5% annual growth rate in the assessment base through
the end of 2012.  Our prepayment amount was approximately $1.9
million.  The prepayment was recorded as a prepaid expense asset as of
December 30, 2009.  As of December 31, 2009 and each quarter thereafter, a
change to earnings will be recorded for each regular assessment with an
offsetting credit to the prepaid asset.
  16
 
 Due to the recent difficult economic
conditions, deposit insurance per account owner has been raised to $250,000 for
all types of accounts.  That level of coverage was made permanent by the
Dodd-Frank Act.
 
 In addition, the FDIC adopted an
optional Temporary Liquidity Guarantee Program by which, for a fee, noninterest
bearing transaction accounts would receive unlimited insurance coverage until
June 30, 2010, subsequently extended to December 31, 2010, and certain
senior unsecured debt issued by institutions and their holding companies between
October 13, 2008 and December 31, 2009 would be guaranteed by the FDIC
through June 30, 2012, or in some cases, December 31, 2012. 
United Community Bank and its parent companies made the business decision to
participate in both programs. The Dodd-Frank Act adopted unlimited coverage for
certain non-interest bearing transactions accounts for January 1, 2011 through
December 31, 2012, with no apparent opt out option.
 
 In addition to the assessment for
deposit insurance, institutions are required to make payments on bonds issued in
the late 1980s by the Financing Corporation to recapitalize a predecessor
deposit insurance fund.  That payment is established quarterly and during
the four quarters ending June 30, 2010 averaged 1.05 basis points of assessable
deposits.
 
 The FDIC has authority to increase
insurance assessments.  A significant increase in insurance premiums would
likely have an adverse effect on the operating expenses and results of
operations of United Community Bank.  Management cannot predict what
insurance assessment rates will be in the future.
 
 Insurance of deposits may be terminated
by the FDIC upon a finding that the institution has engaged in unsafe or unsound
practices, is in an unsafe or unsound condition to continue operations or has
violated any applicable law, regulation, rule, order or condition imposed by the
FDIC or the OTS (or the Office of the Comptroller of the Currency, after the
Dodd-Frank Act regulatory restructuring).  The management of United
Community Bank does not know of any practice, condition or violation that might
lead to termination of deposit insurance.
 
 Loans to One
Borrower.Federal law provides that savings institutions are generally subject to
the limits on loans to one borrower applicable to national banks. 
Generally, subject to certain exceptions, a savings institution may not make a
loan or extend credit to a single or related group of borrowers in excess of 15%
of its unimpaired capital and surplus.  An additional amount may be lent,
equal to 10% of unimpaired capital and surplus, if secured by specified
readily-marketable collateral.
 
 QTL
Test.Federal law requires savings institutions to meet a qualified thrift
lender test.  Under the test, a savings association is required to either
qualify as a “domestic building and loan association” under the Internal Revenue
Code or maintain at least 65% of its “portfolio assets” (total assets less: (i)
specified liquid assets up to 20% of total assets; (ii) intangibles, including
goodwill; and (iii) the value of property used to conduct business) in certain
“qualified thrift investments” (primarily residential mortgages and related
investments, including certain mortgage-backed securities) in at least 9 months
out of each 12 month period.  Recent legislation has expanded the extent to
which education loans, credit card loans and small business loans may be
considered “qualified thrift investments.”
 
 A savings institution that fails the
qualified thrift lender test is subject to certain operating restrictions. 
The Dodd-Frank Act subjects violations of the qualified thrift lender test to
possible enforcement action for violation of law and imposes dividend
restrictions on violating institutions.
 
 As of June 30, 2010, United Community
Bank met the qualified thrift lender test.
  17
  Limitation on
Capital Distributions.OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends, payments to repurchase its shares and payments to shareholders
of another institution in a cash-out merger.  Under the regulations, an
application to and prior approval of the OTS is required prior to any capital
distribution if the institution does not meet the criteria for “expedited
treatment” of applications under OTS regulations (i.e., generally, examination
and Community Reinvestment Act ratings in the two top categories), the total
capital distributions for the calendar year exceed net income for that year plus
the amount of retained net income for the preceding two years, the institution
would be undercapitalized following the distribution or the distribution would
otherwise be contrary to a statute, regulation or agreement with the OTS. 
If an application is not required, the institution must still provide prior
notice to the OTS of the capital distribution if, like United Community Bank, it
is a subsidiary of a holding company.  In the event United Community Bank’s
capital fell below its regulatory requirements or the OTS notified it that it
was in need of increased supervision, United Community Bank’s ability to make
capital distributions could be restricted.  In addition, the OTS could
prohibit a proposed capital distribution by any institution, which would
otherwise be permitted by the regulation, if the OTS determines that such
distribution would constitute an unsafe or unsound practice.  Federal law
further provides that no insured depository institution may pay a dividend that
causes it to fall below any applicable regulatory capital requirement or if it
is in default of its FDIC deposit insurance assessment.
 
 Standards for
Safety and Soundness. The federal banking agencies
have adopted Interagency Guidelines prescribing Standards for Safety and
Soundness.  The guidelines set forth the safety and soundness standards
that the federal banking agencies use to identify and address problems at
insured depository institutions before capital becomes impaired.  If the
OTS determines that a savings institution fails to meet any standard prescribed
by the guidelines, the OTS may require the institution to submit an acceptable
plan to achieve compliance with the standard.
 
 Transactions with
Related Parties.United Community Bank’s authority to engage in transactions with
“affiliates” (e.g., any entity that controls or is under common control with an
institution, including United Community MHC, United Community Bancorp and any
non-savings institution subsidiaries) is limited by federal law.  The
aggregate amount of covered transactions with any individual affiliate is
limited to 10% of the capital and surplus of the savings institution.  The
aggregate amount of covered transactions with all affiliates is limited to 20%
of the savings institution’s capital and surplus.  Certain transactions
with affiliates are required to be secured by collateral in an amount and of a
type specified by federal law.  The purchase of low quality assets from
affiliates is generally prohibited.  The transactions with affiliates must
be on terms and under circumstances that are at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies.  In addition, savings institutions are
prohibited from lending to any affiliate that is engaged in activities that are
not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a
subsidiary.
 
 The Sarbanes-Oxley Act of 2002
generally prohibits loans by a company to its executive officers and
directors.  However, the law contains a specific exception for loans by
United Community Bank to its executive officers and directors in compliance with
federal banking laws.  Under such laws, United Community Bank’s authority
to extend credit to executive officers, directors and 10% shareholders
(“insiders”), as well as entities such persons control, is limited.  The
law limits both the individual and aggregate amount of loans United Community
Bank may make to insiders based, in part, on United Community Bank’s capital
position and requires certain board approval procedures to be followed. 
Such loans are required to be made on terms substantially the same as those
offered to unaffiliated individuals and not involve more than the normal risk of
repayment.  There is an exception for loans made pursuant to a benefit or
compensation program that is widely available to all employees of the
institution and does not give preference to insiders over other employees. 
Additional restrictions apply to loans by United Community Bank to its executive
officers.
 
 Enforcement.The OTS has primary enforcement responsibility over savings institutions
and has the authority to bring actions against the institution and all
institution-affiliated parties, including stockholders, and any attorneys,
appraisers and accountants who knowingly or recklessly participate in wrongful
action likely to have an adverse effect on an insured institution.  Formal
enforcement action may range from the issuance of a capital directive or cease
and desist order to removal of officers and/or directors to institution of
receivership, conservatorship or termination of deposit insurance.  Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
even $1 million per day in especially egregious cases.  The FDIC has the
authority to recommend to the Director of the OTS that enforcement action be
taken with respect to a particular savings institution.  If action is not
taken by the Director, the FDIC has authority to take such action under certain
circumstances.  Federal law also establishes criminal penalties for certain
violations.  The Office of the Comptroller of the Currency will assume the
OTS’ enforcement authority over federal savings banks as part of the Dodd-Frank
Act regulatory restructuring.
  18
 
 Assessments.Savings institutions are required to pay assessments to the OTS to fund
the agency’s operations.  The general assessments, paid on a semi-annual
basis, are computed based upon the savings institution’s (including consolidated
subsidiaries) total assets, condition and complexity of portfolio.  The OTS
assessments paid by United Community Bancorp and United Community Bank for the
fiscal year ended June 30, 2010 totaled $115,000.  The Office of the
Comptroller of the Currency, which will be assuming the regulatory
responsibilities of the OTS as to federal savings banks, similarly supports its
operations through assessments on regulated institutions.
 
 Federal
Home Loan Bank System
 
 United
Community Bank is a member of the Federal Home Loan Bank System, which consists
of 12 regional Federal Home Loan Banks.  The Federal Home Loan Bank
provides a central credit facility primarily for member institutions. 
United Community Bank, as a member of the Federal Home Loan Bank, is required to
acquire and hold shares of capital stock in that Federal Home Loan Bank. 
United Community Bank was in compliance with this requirement with an investment
in Federal Home Loan Bank stock at June 30, 2010 of $2.0 million.
 
 The Federal Home Loan Banks are
required to provide funds for the resolution of insolvent thrifts and to
contribute funds for affordable housing programs.  These requirements, and
general adverse operating results, could reduce the amount of dividends that the
Federal Home Loan Banks pay to their members also result in the Federal Home
Loan Banks imposing a higher rate of interest on advances to their
members.  If dividends were reduced, or interest on future Federal Home
Loan Bank advances increased, United Community Bank’s net interest income would
likely also be reduced.
 
 Federal
Reserve System
 
 The Federal Reserve Board regulations
require savings institutions to maintain non-interest earning reserves against
their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and
regular checking accounts).  The regulations generally provide that
reserves be maintained against aggregate transaction accounts as follows: 
a 3% reserve ratio is assessed on net transaction accounts up to and including
$55.2 million; a 10% reserve ratio is applied above $55.2 million.  The
first $6.7 million of otherwise reservable balances (subject to adjustment by
the Federal Reserve Board) are exempted from the reserve requirements.  The
amounts are adjusted annually.  United Community Bank complies with the
foregoing requirements.
 
 Financial Reform
Legislation
  On July 21, 2010, President Obama
signed the Dodd-Frank Act.  In addition to eliminating the OTS and creating
the Consumer Financial Protection Bureau, the Dodd-Frank Act, among other
things, requires changes in the way that institutions are assessed for deposit
insurance, mandates the imposition of consolidated capital requirements on
savings and loan holding companies, requires that originators of securitized
loans retain a percentage of the risk for the transferred loans, reduces the
federal preemption afforded to federal savings associations and contains a
number of reforms related to mortgage origination.  Many of the provisions
of the Dodd-Frank Act require the issuance of regulations before their impact on
operations can be fully assessed by management.  However, there is a
significant possibility that the Dodd-Frank Act will, at a minimum, result in
increased regulatory burden and compliance costs for United Community Bank,
United Community Bancorp and United Community MHC.
  19
 
 Federal
and State Taxation
 
 Federal
Income Taxation
 
 General.
United Community Bank reports its income on a fiscal year basis using the
accrual method of accounting. The federal income tax laws apply to United
Community Bank in the same manner as to other corporations with some exceptions,
including the reserve for bad debts discussed below. The following discussion of
tax matters is intended only as a summary and does not purport to be a
comprehensive description of the tax rules applicable to United Community Bank.
United Community Bank’s federal income tax returns have been either audited
or closed under the statute of limitations through June 30, 2006. For its 2010
tax year, United Community Bank’s maximum federal income tax rate was
34%.
 
 Bad Debt
Reserves. For fiscal years beginning before June 30, 1996, thrift
institutions that qualified under certain definitional tests and other
conditions of the Internal Revenue Code were permitted to use certain favorable
provisions to calculate their deductions from taxable income for annual
additions to their bad debt reserve. A reserve could be established for bad
debts on qualifying real property loans, generally secured by interests in real
property improved or to be improved, under the percentage of taxable income
method or the experience method. The reserve for nonqualifying loans was
computed using the experience method. Federal legislation enacted in 1996
repealed the reserve method of accounting for bad debts and the percentage of
taxable income method for tax years beginning after 1995 and require savings
institutions to recapture or take into income certain portions of their
accumulated bad debt reserves. Approximately $748,000 of United Community Bank’s
accumulated bad debt reserves would not be recaptured into taxable income unless
United Community Bank makes a “non-dividend distribution” to United Community
Bancorp as described below.
 
 Distributions.
If United Community Bank makes “non-dividend distributions” to United Community
Bancorp, the distributions will be considered to have been made from United
Community Bank’s unrecaptured tax bad debt reserves, including the balance of
its reserves as of December 31, 1987, to the extent of the “non-dividend
distributions,” and then from United Community Bank’s supplemental reserve for
losses on loans, to the extent of those reserves, and an amount based on the
amount distributed, but not more than the amount of those reserves, will be
included in United Community Bank’s taxable income. Non-dividend distributions
include distributions in excess of United Community Bank’s current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock and distributions in partial or complete
liquidation. Dividends paid out of United Community Bank’s current or
accumulated earnings and profits will not be so included in United Community
Bank’s taxable income.
 
 The
amount of additional taxable income triggered by a non-dividend is an amount
that, when reduced by the tax attributable to the income, is equal to the amount
of the distribution. Therefore, if United Community Bank makes a non-dividend
distribution to United Community Bancorp, approximately one and one-half times
the amount of the distribution not in excess of the amount of the reserves would
be includable in income for federal income tax purposes, assuming a 34.0%
federal corporate income tax rate. United Community Bank does not intend to pay
dividends that would result in a recapture of any portion of its bad debt
reserves.
 
 State
Taxation
 
 Indiana
Taxation. Indiana imposes an 8.5% franchise tax based on a financial
institution’s adjusted gross income as defined by statute. In computing adjusted
gross income, deductions for municipal interest, U.S. Government interest, the
bad debt deduction computed using the reserve method and pre-1990 net operating
losses are disallowed. United Community Bank’s state franchise tax returns have
not been audited for the past five tax years.
  20
 
 Executive
Officers of United Community Bancorp and United Community Bank
 
 Age
      atName
                
                June 30,2010
                
                Principal PositionWilliam
      F. Ritzmann
                
                62
                
                President
      and Chief Executive OfficerElmer
      G. McLaughlin
                
                58
                
                Executive
      Vice President, Chief Operating Officer and Corporate
      SecretaryJames
      W. Kittle
                
                52
                
                Senior
      Vice President, LendingVicki
      A. March, CPA
                
                54
                
                Senior
      Vice President, Chief Financial Officer and TreasurerW.
      Michael McLaughlin
                
                51
                
                Senior
      Vice President, Operations
 
 Unless
otherwise noted, all officers have held the position described below for at
least the past five years.
 
 William F. Ritzmann has served
as President and Chief Executive Officer of United Community Bank since the
merger of Perpetual Federal Savings and Loan Association and Progressive Federal
Savings Bank to form United Community Bank on April 12, 1999, and for United
Community Bancorp since its inception in March 2006.  Before the merger,
Mr. Ritzmann served for 23 years as director, President and Managing Officer of
Progressive Federal Savings Bank.  Mr. Ritzmann also serves on United
Community Bancorp’s Board of Directors and has served as a Director of the Bank
since 1975, which includes his term as a director of Progressive Federal Savings
Bank.
 
 Elmer G. McLaughlin has served
as Executive Vice President and Chief Operating Officer of United Community Bank
since the merger of Perpetual Federal Savings and Loan Association and
Progressive Federal Savings Bank to form United Community Bank in April 1999,
and in the same positions with United Community Bancorp since its inception in
March 2006.  Before the merger, Mr. McLaughlin served for nine years as
President, and 19 years as director of Perpetual Federal Savings and Loan
Association, and was Executive Vice President and head of operations and senior
loan officer of Perpetual Federal from 1978 until 1990.  Mr. McLaughlin is
the brother of W. Michael McLaughlin, a Senior Vice President of United
Community Bank.  Mr. McLaughlin is a Director of United Company Bancorp and
has served as a Director of United Community Bank since 1980, which includes his
term as a director of Perpetual Federal.
 
 James W. Kittle has served as
Senior Vice President, Lending of the Bank since 1980.
 
 Vicki A. March has served as
Chief Financial Officer, Treasurer and Senior Vice President, Finance of the
Bank, since 1999 and for United Community Bancorp since its inception in March
2006.  Ms. March previously served as Treasurer of the Bank from 1980 to
1999.
 
 W. Michael McLaughlin has
served as Senior Vice President, Operations of the Bank since 1983.
 
 Item
1A. Risk Factors
 
 An
investment in shares of our common stock involves various risks.  Before
deciding to invest in our common stock, you should carefully consider the risks
described below in conjunction with the other information in this Annual Report
on Form 10-K, including the items included as exhibits.  Our business,
financial condition and results of operations could be harmed by any of the
following risks or by other risks that have not been identified or that we may
believe are immaterial or unlikely.  The value or market price of our
common stock could decline due to any of these risks.  The risks discussed
below also include forward-looking statements, and our actual results may differ
substantially from those discussed in these forward-looking
statements.
  21
 
 Our
primary market area depends substantially on the gaming industry, and a downturn
in that industry could hurt our business and our prospects.
 
 Our
business is concentrated in the Lawrenceburg, Indiana area. Lawrenceburg is the
site of a riverboat casino that opened in 1996. The economy of the Lawrenceburg
metropolitan area significantly depends on services and industries related to
gaming and tourism. Any event that negatively and materially impacts the gaming
and tourism industry will adversely impact the Lawrenceburg
economy.
 
 Gaming
revenue is vulnerable to fluctuations in the national economy. There has been a
prolonged downturn in the national economy, however, its impact on Lawrenceburg
and its gaming industry has not been as significant as in other parts of the
country.  Tax revenue from the gaming industry has decreased over the last
year, but not to the extent that it has affected civil services or other
areas.
 
 A
continued deterioration in economic conditions generally, and a slowdown in
gaming and tourism activities in particular, could result in the following
consequences, any of which could adversely affect our business, financial
condition, results of operations and prospects and expose us to a greater risk
of loss:
 
 •
              Loan
      delinquencies may increase;
 
 •
              Problem
      assets and foreclosures may
increase;
 
 •
              Demand
      for our products and services may decline;
and
 
 •
              Collateral
      for loans made by us may decline in value, reducing the amount of money
      that our customers may borrow against the collateral, and reducing the
      value of assets and collateral associated with our
  loans.
 
 An
expansion of permissible gaming activities in other states, particularly in
Kentucky and/or Ohio, may lead to a decline in gaming revenue in Lawrenceburg,
Indiana, which could hurt our business and our prospects.
 
 Lawrenceburg,
Indiana competes with other areas of the country for gaming revenue, and it is
possible that the expansion of gaming operations in other states, as a result of
changes in laws or otherwise, could significantly reduce gaming revenue in the
Lawrenceburg area. In 2009, a vote in the State of Ohio approved casino gaming
in several cities in the state, and the casinos are expected to open in
2012.  The establishment of casino gaming in Ohio could have a substantial
adverse effect on gaming revenue in Lawrenceburg which would adversely affect
the Lawrenceburg economy and our business.
 
 We
rely heavily on municipal deposits as a source of funds and a reduced level of
those deposits may hurt our profits.
 
 Historically,
municipal deposits, consisting primarily of tax revenues from the local river
boat casino operations, have been a significant source of funds for our lending
and investment activities. At June 30, 2010, $121.6 million, or 28.3% of
our total deposits, consisted of municipal deposits. Municipal deposits are
generally short-term deposits and are generally considered rate-sensitive
instruments. Consequently, if our municipal deposits decrease to a level where
we would need to resort to other sources of funds for our lending and investment
activities, such as borrowings from the Federal Home Loan Bank of Indianapolis,
the interest expense associated with these other funding sources may be higher
than the rates we pay on the municipal deposits, which would hurt our
profits.
 
 Our
income is subject to inherent risk.
 
 Our
primary source of income is net interest income, which is the difference between
the interest income generated by our interest-earning assets (consisting
primarily of loans and, to a lesser extent, securities) and the interest expense
generated by our interest-bearing liabilities (consisting primarily of deposits
and, to a lesser extent, wholesale borrowings).
  22
  The level of net interest income is a
function of the average balance of our interest-earning assets, the average
balance of our interest-bearing liabilities, and the spread between the yield on
such assets and the cost of such liabilities. These factors are influenced by
both the pricing and mix of our interest-earning assets and our interest-bearing
liabilities which, in turn, are affected by such external factors as the local
economy, competition for loans and deposits, the monetary policy of the Federal
Open Market Committee of the Federal Reserve Board of Governors (the “FOMC”) and
market interest rates.
  The cost
of our deposits and short-term wholesale borrowings is largely based on
short-term interest rates, the level of which is driven by the FOMC. However,
the yields on our loans and securities are typically based on intermediate-term
or long-term interest rates, which are set by the market and generally vary
daily. The level of net interest income is therefore influenced by movements in
such interest rates, and the pace at which such movements occur. If the interest
rates on our interest-bearing liabilities increase at a faster pace than the
interest rates on our interest-earning assets, the result could be a reduction
in net interest income and with it, a reduction in our earnings. Our net
interest income and earnings would be similarly impacted were the interest rates
on its interest-earning assets to decline more quickly than the interest rates
on our interest-bearing liabilities.
  In
addition, such changes in interest rates could affect our ability to originate
loans and attract and retain deposits, the fair value of our financial assets
and liabilities, and the average life of our loan and securities
portfolios.
  Changes
in interest rates could also have an effect on the slope of the yield curve. A
flat to inverted yield curve could cause our net interest income and net
interest margin to contract, which could have a material adverse effect on our
net income and cash flows and the value of our assets.
  Changes
in interest rates particularly affect the value of our securities portfolio.
Generally, the value of fixed-rate securities fluctuates inversely with changes
in interest rates. Unrealized gains and losses on securities available for sale
are reported as a separate component of equity, net of tax. Decreases in the
fair value of securities available for sale resulting from increases in interest
rates could have an adverse effect on stockholders’ equity. In addition, we
invest in callable securities that expose us to reinvestment risk,
particularly during periods of falling market interest rates when issuers
of callable securities tend to call or redeem their securities. Reinvestment
risk is the risk that we may have to reinvest the proceeds from called
securities at lower rates of return than the rates earned on the called
securities.
 
 Our
increased emphasis on multi-family residential and nonresidential real estate
and land lending may expose us to increased lending risks.
 
 At June
30, 2010, $129.7 million, or 41.2%, of our loan portfolio consisted of
multi-family residential and nonresidential real estate and land loans, compared
to $119.1 million or 43.0% of our loan portfolio at June 30, 2009. We have grown
our loan portfolio in recent years, particularly with respect to multi-family
residential and nonresidential real estate and land loans and intend to continue
to emphasize these types of lending. These types of loans generally expose a
lender to greater risk of non-payment and loss than one- to four-family
residential mortgage loans because repayment of the loans often depends on the
successful operation of the property and the income stream of the borrowers.
Such loans typically involve larger loan balances to single borrowers or groups
of related borrowers compared to one- to four-family residential mortgage loans.
In addition, since such loans generally entail greater credit risk than one- to
four-family residential mortgage loans, we may need to increase our allowance
for loan losses in the future to account for the likely increase in probable
incurred credit losses associated with the growth of such loans. Also, many of
our multi-family residential and nonresidential real estate and land borrowers
have more than one loan outstanding with us. Consequently, an adverse
development with respect to one loan or one credit relationship can expose us to
a significantly greater risk of loss compared to an adverse development with
respect to a one- to four-family residential mortgage loan.  At June 30,
2010, our largest multi-family residential, nonresidential real estate, or
land lending relationship was a $7.2 million multi-family residential real
estate loan relationship.  This loan relationship was within our maximum
lending limit to one borrower at June 30, 2010.
  23
 
 Strong competition within our
market areas could hurt
our profits and slow growth.
 
 We face
intense competition both in making loans and attracting deposits. This
competition has made it more difficult for us to make new loans and at times has
forced us to offer higher deposit rates. Price competition for loans and
deposits might result in us earning less on our loans and paying more on our
deposits, which would reduce net interest income. Competition also makes it more
difficult to grow loans and deposits. As of June 30, 2009, the most recent date
for which information is available, we held 37.48% of the deposits in Dearborn
County.  Competition also makes it more difficult to hire and retain
experienced employees. Some of the institutions with which we compete have
substantially greater resources and lending limits than we have and may offer
services that we do not provide. We expect competition to increase in the future
as a result of legislative, regulatory and technological changes and the
continuing trend of consolidation in the financial services industry. Our
profitability depends upon our continued ability to compete successfully in our
market areas.
 
 Recently
enacted legislative reforms and future regulatory reforms required by such
legislation could have a significant impact on our business, financial condition
and results of operations.
 
 On July 21, 2010, President Obama
signed the Dodd-Frank Act into law. The Dodd-Frank Act will have a broad impact
on the financial services industry, including significant regulatory and
compliance changes. Many of the requirements called for in the Dodd-Frank Act
will be implemented over time and most will be subject to implementing
regulations over the course of several years. Given the uncertainty associated
with the manner in which the provisions of the Dodd-Frank Act will be
implemented by the various regulatory agencies and through regulations, the full
extent of the impact such requirements will have on our operations is unclear.
Certain provisions of the Dodd-Frank Act are expected to have a near term impact
on us. For example, the Dodd-Frank Act:
 
 ·
              eliminates,
      effective one year after the date of enactment, the federal prohibitions
      on paying interest on demand deposits, thus allowing businesses to have
      interest bearing checking accounts. Depending on competitive responses,
      this significant change to existing law could have an adverse impact on
      our interest expense;
 
 ·
              broadens
      the base for FDIC insurance assessments. Assessments will now be based on
      the average consolidated total assets less tangible equity capital of a
      financial institution;
 
 ·
              permanently
      increases the maximum amount of deposit insurance for banks, savings
      institutions and credit unions to $250,000 per depositor, retroactive to
      January 1, 2009, and non-interest bearing transaction accounts have
      unlimited deposit insurance through December 31,
  2013;
 
 ·
              requires
      publicly traded companies like us to give shareholders a non-binding vote
      on executive compensation and so-called ‘‘golden parachute’’ payments in
      certain circumstances;
 
 ·
              authorizes
      the SEC to promulgate rules that would allow stockholders to nominate
      their own candidates using a company’s proxy materials, and the SEC has
      recently promulgated such rules;
 
 ·
              directs
      the Federal Reserve Board to promulgate rules prohibiting excessive
      compensation paid to bank holding company executives (regardless of
      whether a company is publicly traded or
not);
 
 ·
              creates
      a new Consumer Financial Protection Bureau with broad powers to supervise
      and enforce consumer protection laws. The Consumer Financial Protection
      Bureau has broad rule-making authority for a wide range of consumer
      protection laws that apply to all banks and savings institutions,
      including the authority to prohibit ‘‘unfair, deceptive or abusive’’ acts
      and practices. The Consumer Financial Protection Bureau has examination
      and enforcement authority over all banks and savings institutions with
      more than $10 billion in assets. Institutions with $10 billion or less in
      assets, such as the Bank, will continued to be examined for compliance
      with the consumer laws by their primary bank regulators;
    and
 
 ·
              weakens
      the federal preemption rules that have been applicable for national banks
      and federal savings associations, and gives state attorneys general the
      ability to enforce federal consumer protection
  laws.
  24
 
 In addition, the Dodd-Frank Act
restructures the existing regulatory regime for FDIC-insured depository
institutions. The Office of Thrift Supervision (the “OTS”) will be merged into
the Office of the Comptroller of the Currency (the “OCC”) over a one year
transition period (subject to a possible six month extension by the Secretary of
the Treasury). While our  federal savings association charter is preserved,
federal thrifts will be regulated by the OCC, along with national banks and
federal branches and agencies of foreign banks.  The Federal Reserve Board
will continue to supervise all bank holding companies and will assume
jurisdiction over savings and loan holding companies. The Dodd-Frank Act
codifies the Federal Reserve Board’s existing “source of strength” policy that
holding companies act as a source of strength to their insured institution
subsidiaries by providing capital, liquidity and other support in times of
distress.
 
 Pursuant to the Dodd-Frank Act, the
Federal Reserve Board “may not” object to dividend waivers by mutual savings and
loan holding companies (i) if it would not be detrimental to safety and
soundness, (ii) the board of directors of the mutual holding company determines
that the waiver is consistent with its fiduciary duties and (iii) the mutual
holding company had been formed, engaged in a minority stock offering and waived
dividends prior to December 1, 2009. Nevertheless, it remains to be seen whether
the Federal Reserve Board objects to dividend waivers as it has done in the
past.  If United Community MHC could not waive the payment of dividends by
United Community Bancorp (as it has done in the past), United Community Bancorp
may have toe reduce the rate of the dividends it pays to its
shareholders.
 
 While it is difficult to predict at
this time what specific impact the Dodd-Frank Act and the related yet to be
written implementing rules and regulations will have on us, we expect that, at a
minimum, our operating and compliance costs will increase, and our interest
expense could increase, as a result of these new rules and
regulations.
  We
are subject to certain risks in connection with growth strategy that included
the recent acquisition of three branch offices of Integra Bank.
  On June
4, 2010, we acquired certain assets and liabilities of three branch offices of
Integra Bank, which contributed significantly to our growth over the past year.
It is possible that we could acquire other financial institutions, financial
service providers, or branches of banks in the future. However, our ability to
engage in future mergers and acquisitions depends on our ability to identify
suitable merger partners and acquisition opportunities, our ability to finance
and complete such transactions on acceptable terms and at acceptable prices, and
our ability to receive the necessary regulatory and, where required, shareholder
approvals.
  Acquisitions,
such as our recent Integra Bank branch acquisition, involve a number of risks
and challenges, including:
  •
              Our
      ability to integrate the branches and operations we acquire, and the
      internal controls and regulatory functions into our current
      operations;
  •
              The
      diversion of management’s attention from existing
    operations;
  •
              Our
      ability to limit the outflow of deposits held by our new customers in the
      acquired branches and to successfully retain and manage the loans we
      acquire;
  •
              Our
      ability to attract new deposits, and to generate new interest-earning
      assets, in geographic areas we have not previously
  served;
  •
              Our
      success in deploying any cash received in a transaction into assets
      bearing sufficiently high yields without incurring unacceptable credit or
      interest rate risk;
  •
              Our
      ability to control the incremental non-interest expense from the acquired
      branches in a manner that enables us to maintain a favorable overall
      efficiency ratio;
  •
              Our
      ability to retain and attract the appropriate personnel to staff the
      acquired branches and conduct any acquired
  operations;
  25
 •
                Our
      ability to earn acceptable levels of interest and non-interest income,
      including fee income, from the acquired branches;
  and
  
 •
                Our
      ability to address an increase in working capital requirements;
      and
  As with
any acquisition involving a financial institution, particularly one involving
the transfer of a large number of bank branches as in our Integra acquisition,
there may be business and service changes and disruptions that result in the
loss of customers or cause customers to close their accounts and move their
business to competing financial institutions. Integrating acquired branches is
an operation of substantial size and expense, and may be affected by general
market and economic conditions or government actions affecting the financial
industry
  The
recent economic recession could result in increases in our level of
non-performing loans and/or reduce demand for our products and services, which
could have an adverse effect on our results of operations.
 
 In recent
periods, there has been a decline in the housing and real estate markets and the
national economy has recently experienced a recession. Housing market conditions
have deteriorated nationally as evidenced by reduced levels of sales, increasing
inventories of houses on the market, declining house prices and an increase in
the length of time houses remain on the market. No assurance can be given that
these conditions will improve or will not worsen in the near term. Concerns over
inflation, energy costs, geopolitical issues, the availability and cost of
credit, the mortgage market and a declining real estate market have contributed
to increased volatility and diminished expectations for the economy and markets
going forward. This turbulence in the markets also has been largely attributable
to the fallout associated with a deteriorating market for subprime mortgage
loans and securities backed by such loans.
 
 Dramatic
declines in the housing market, with falling home prices and increasing
foreclosures and unemployment, resulted in significant asset write-downs by
financial institutions, which have caused many financial institutions to seek
additional capital, to merge with other institutions and, in some cases, to
fail. These developments also have contributed to a substantial decrease in both
lending activities by banks and other financial institutions and activity in the
secondary residential mortgage loan market. If these conditions do not improve
or worsen, they could adversely affect our results of operations.
  United
Community MHC’s majority control of United Community Bancorp’s common stock
enables it to exercise voting control over most matters put to a vote of
stockholders including preventing sale or merger transactions or a second-step
conversion transaction you may find advantageous.
 
 United
Community MHC owns a majority of United Community Bancorp’s common stock and,
through its board of directors, exercises voting control over most matters put
to a vote of stockholders. The same directors and officers who manage United
Community Bancorp and United Community Bank also manage United Community MHC. As
a federally chartered mutual holding company, the board of directors of United
Community MHC must ensure that the interests of depositors of United Community
Bank are represented and considered in matters put to a vote of stockholders of
United Community Bancorp. Therefore, the votes cast by United Community MHC may
not be in your personal best interests as a stockholder. For example, United
Community MHC may exercise its voting control to defeat a stockholder nominee
for election to the board of directors of United Community Bancorp. In addition,
stockholders are not able to force a merger or second-step conversion
transaction without the consent of United Community MHC. Some stockholders may
desire a sale or merger transaction, since stockholders typically receive a
premium for their shares, or a second-step conversion transaction, since fully
converted institutions tend to trade at higher multiples than mutual holding
companies.
  OTS
policy on remutualization transactions could prohibit acquisition of United
Community Bancorp, which may adversely affect our stock price.
 
 Current
OTS regulations permit a mutual holding company to be acquired by a mutual
institution in a remutualization transaction. The possibility of a
remutualization transaction has resulted in a degree of takeover speculation for
mutual holding companies that is reflected in the per share price of mutual
holding companies’ common stock. However, the OTS has issued a policy statement
indicating that it views remutualization transactions as raising significant
issues concerning disparate treatment of minority stockholders and mutual
members of the target entity and raising issues concerning the effect on the
mutual members of the acquiring entity. Under certain circumstances, the OTS
intends to give these issues special scrutiny and reject applications providing
for the remutualization of a mutual holding company unless the applicant can
clearly demonstrate that the OTS’s concerns are not warranted in the particular
case. Should the OTS prohibit or otherwise restrict these transactions in the
future, our per share stock price may be adversely affected.
  26
 
 Anti-takeover provisions in our
charter restrict the accumulation of United Community Bancorp’s common stock,
which may adversely affect our stock price.
  United
Community Bancorp’s charter provides that, for a period of five years from the
date of the reorganization, no person, other than United Community MHC, may
acquire directly or indirectly the beneficial ownership of more than 10.0% of
any class of any equity security of United Community Bancorp. In the event a
person acquires shares in violation of this charter provision, all shares
beneficially owned by such person in excess of 10.0% will be considered “excess
shares” and will not be counted as shares entitled to vote or counted as voting
shares in connection with any matters submitted to the stockholders for a vote.
This provision makes it more difficult and less attractive for stockholders to
acquire a significant amount of our common stock, which may adversely affect our
stock price.
  OTS
regulations may restrict United Community Bank’s ability to make capital
distributions, which could limit our ability to pay dividends to our
shareholders.
 
 United
Community Bank, our wholly-owned subsidiary, is the primary source of cash with
which we pay the cash dividend on our common stock. OTS regulations impose
limitations upon all capital distributions by a savings institution, including
cash dividends. Under the regulations, an application to and prior approval of
the OTS is required prior to any capital distribution if the institution does
not meet the criteria for “expedited treatment” of applications under OTS
regulations (i.e., generally, examination and Community Reinvestment Act ratings
in the two top categories), the total capital distributions for the calendar
year exceed net income for that year plus the amount of retained net income for
the preceding two years, the institution would be undercapitalized following the
distribution or the distribution would otherwise be contrary to a statute,
regulation or agreement with the OTS. If an application is not required, the
institution must still provide prior notice to the OTS of the capital
distribution if, like United Community Bank, it is a subsidiary of a holding
company. In the event United Community Bank’s capital falls below its regulatory
requirements or the OTS notifies it that it is in need of increased supervision,
United Community Bank’s ability to make capital distributions, including cash
dividends, could be restricted, thereby eliminating the primary source of cash
with which we pay our dividend to our shareholders.
  Our
mutual holding company structure limits our ability to raise additional equity
capital.
 
 Even
though we are already well capitalized, our mutual holding company structure
limits our ability to raise additional equity capital without undertaking a
second-step conversion transaction because we cannot issue stock in an amount
that would cause United Community MHC to own less than a majority of our
outstanding shares.  Currently, United Community MHC owns
approximately 59% of our outstanding shares.  In addition, any stock
issuance by us must be approved by the OTS and must be structured in a manner
similar to a mutual to stock conversion, including the stock purchase priorities
accorded to members of the mutual holding company, unless otherwise approved by
the Office of Thrift Supervision.  These requirements limit our
ability to control the timing and structure of a stock offering.
  Our
asset valuation may include methodologies, estimations and assumptions that are
subject to differing interpretations and could result in changes to asset
valuations that may materially adversely affect our results of operations or
financial condition.
  We must
use estimates, assumptions, and judgments when financial assets and liabilities
are measured and reported at fair value. Assets and liabilities carried at fair
value inherently result in a higher degree of financial statement volatility.
Fair values and the information used to record valuation adjustments for certain
assets and liabilities are based on quoted market prices and/or other observable
inputs provided by independent third-party sources, when available. When such
third-party information is not available, we estimate fair value primarily by
using cash flows and other financial modeling techniques utilizing assumptions
such as credit quality, liquidity, interest rates and other relevant inputs.
Changes in underlying factors, assumptions, or estimates in any of these areas
could materially impact our future financial condition and results of
operations.
  27
  During
periods of market disruption, including periods of significantly rising or high
interest rates, rapidly widening credit spreads or illiquidity, it may be
difficult to value certain of our assets if trading becomes less frequent and/or
market data becomes less observable. There may be certain asset classes that
were in active markets with significant observable data that become illiquid due
to the current financial environment. In such cases, certain asset valuations
may require more subjectivity and management judgment. As such, valuations may
include inputs and assumptions that are less observable or require greater
estimation. Further, rapidly changing and unprecedented credit and equity market
conditions could materially impact the valuation of assets as reported within
our consolidated financial statements, and the period-to-period changes in value
could vary significantly. Decreases in value may have a material adverse effect
on our results of operations or financial condition.
  UCB
relies on other companies to provide key components of its business
infrastructure.
 
 Third
party vendors provide key components of United Community Bancorp’s business
infrastructure such as internet connections, network access and fund
distribution. While United Community Bancorp has selected these third party
vendors carefully, its does not control their actions. Any problems caused by
these third parties, including those which result from their failure to provide
services for any reason or their poor performance of services, could adversely
affect United Community Bancorp’s ability to deliver products and services to
its customers and otherwise to conduct its business. Replacing these third party
vendors could also entail significant delay and expense.
  Item
1B. Unresolved Staff Comments
 
 Not
applicable.
 
 28
  Item 2. Properties
 
 The following table sets forth the
location of the Company’s office facilities at June 30, 2010, and certain other
information relating to these properties at that date.
  Location
                                                  
                                                  Year
                                                    Opened
                                                  
                                                  Owned/
                                                    Leased
                                                  
                                                  Date of Lease
                                                    Expiration
                                                  
                                                  
                                                  Net Book
                                                    Value
                                                    as of
                                                    June 30, 2010Main
      Office:92
      Walnut Street
                                                  
                                                  2004
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  $
                                                  1,324,000Lawrenceburg,
      Indiana 47025Full-Service
      Branches:215
      W. Eads Parkway
                                                  
                                                  1914
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  359,000Lawrenceburg,
      Indiana 4702519710
      Stateline Road
                                                  
                                                  2000
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  689,000Lawrenceburg,
      Indiana 47025447
      Bielby Road
                                                  
                                                  1999
                                                  
                                                  Leased
                                                  
                                                  
                                                  2/2011
                                                  
                                                  
                                                  __Lawrenceburg,
      Indiana 47025500
      Green Boulevard
                                                  
                                                  2006
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  1,106,000Aurora,
      Indiana 470017600
      Frey Road
                                                  
                                                  2006
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  1,227,000St.
      Leon, Indiana 47012106
      Mill Street
                                                  
                                                  2010
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  365,000Milan,
      Indiana 47031 (1)420
      South Buckeye
                                                  
                                                  2010
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  395,000Osgood,
      Indiana 47037 (1)111
      East U.S. 50
                                                  
                                                  2010
                                                  
                                                  Owned
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  387,000Versailles,
      Indiana 47042 (1)Other
      Properties:Corner
      of State Route 350 & State Route 101
                                                  
                                                  Future
                                                  
                                                  Owned(2)
                                                  
                                                  __
                                                  
                                                  
                                                  
                                                  135,000Milan,
      Indiana 47031
 
 
  (1)
                Acquired
      from Integra Bank National Association on June 4, 2010.(2)
                Land
      only.
 
 Item 3. 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.
  29
  Item 4.   [Removed and
Reserved]
 
 PART
II
 
 Item 5.
                  Market for the
      Registrant’s Common Equity, Related
      Stockholder Matters and Issuer Purchasersof
      Equity Securities
  The
Company’s common stock, par value $0.01 per share, is traded on the Nasdaq
Global Marketunder
the symbol “UCBA.” On June 30, 2009, there were 707 holders of record of the
Company’s common stock. The Company began paying quarterly dividends during the
fourth quarter of fiscal year 2006. The Company’s ability to pay dividends is
dependent on dividends received from the Bank. See “Business—Regulation and
Supervision—Limitation on Capital Distributions” and Note 15 to the
consolidated financial statements, included in Item 8 of this Annual Report on
Form 10-K, for a discussion of the restrictions on the payment of cash dividends
by the Company.
 
 The
following table sets forth the high and low sales prices for the common stock as
reported on the Nasdaq Global Market and the cash dividends declared on the
common stock.
 
 Fiscalyear2010:
                      
                      High
                      
                      
                      Low
                      
                      
                      Dividends
                        DeclaredFirst
      Quarter
                      
                      $
                      7.55
                      
                      
                      $
                      5.01
                      
                      
                      $
                      0.10Second
      Quarter
                      
                      $
                      7.03
                      
                      
                      $
                      6.15
                      
                      
                      $
                      0.10Third
      Quarter
                      
                      $
                      6.95
                      
                      
                      $
                      6.15
                      
                      
                      $
                      0.10Fourth
      Quarter
                      
                      $
                      7.75
                      
                      
                      $
                      6.06
                      
                      
                      $
                      0.11
 
 FiscalYear2009:
                        
                        High
                        
                        
                        Low
                        
                        
                        Dividends
                          DeclaredFirst
      Quarter
                        
                        $
                        9.99
                        
                        
                        $
                        5.01
                        
                        
                        $
                        0.09Second
      Quarter
                        
                        $
                        9.95
                        
                        
                        $
                        4.64
                        
                        
                        $
                        0.09Third
      Quarter
                        
                        $
                        6.96
                        
                        
                        $
                        3.70
                        
                        
                        $
                        0.09Fourth
      Quarter
                        
                        $
                        7.20
                        
                        
                        $
                        5.40
                        
                        
                        $
                        0.10
 
 Purchases
of Equity Securities
 
 The following table presents
information regarding the Company’s stock repurchases during the three months
ended June 30, 2010.
  (a)
                      
                      
                      (b)
                      
                      
                      (c)
                      
                      
                      (d)Total Number of
                      
                      
                      Maximum NumberTotal
                      
                      
                      
                      
                      
                      Shares Purchased
                      
                      
                      of Shares that MayNumber of
                      
                      
                      Average
                      
                      
                      as Part of Publicly
                      
                      
                      Yet Be PurchasedShares
                      
                      
                      Price Paid
                      
                      
                      Announced Plans
                      
                      
                      Under the Plans orPeriod
                      
                      Purchased
                      
                      
                      per Share
                      
                      
                      or Programs
                      
                      
                      ProgramsMonth
      #1: AprilApril
      1 to April 30
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Month
      #2: MayMay
      1 to May 31
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Month
      #3: JuneJune
      1 to June 30
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Total
                      
                      
                      -
                      
                      
                      $
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
 
 On August 14, 2008, the Board of
Directors of the Company approved the repurchase of up to 162,371 shares of its
outstanding common stock, or 5% of outstanding shares not held by United
Community MHC.
 
 30
 
 Item
6. Selected Financial Data
 
 At June 30,2010
                                    
                                    
                                    2009
                                    
                                    
                                    2008
                                    
                                    
                                    2007
                                    
                                    
                                    2006(Dollars in thousands)Financial
      Condition Data:Total
      assets
                                    
                                    $
                                    492,104
                                    
                                    
                                    $
                                    401,579
                                    
                                    
                                    $
                                    382,726
                                    
                                    
                                    $
                                    381,061
                                    
                                    
                                    $
                                    354,707Cash
      and cash equivalents
                                    
                                    
                                    32,023
                                    
                                    
                                    
                                    27,004
                                    
                                    
                                    
                                    35,710
                                    
                                    
                                    
                                    43,025
                                    
                                    
                                    
                                    15,010Securities
      held-to-maturity
                                    
                                    
                                    631
                                    
                                    
                                    
                                    175
                                    
                                    
                                    
                                    200
                                    
                                    
                                    
                                    223
                                    
                                    
                                    
                                    245Securities
      available-for-sale
                                    
                                    
                                    62,089
                                    
                                    
                                    
                                    46,769
                                    
                                    
                                    
                                    13,816
                                    
                                    
                                    
                                    17,231
                                    
                                    
                                    
                                    42,083Mortgage-backed
      securities available-for-sale
                                    
                                    
                                    57,238
                                    
                                    
                                    
                                    29,713
                                    
                                    
                                    
                                    24,211
                                    
                                    
                                    
                                    26,701
                                    
                                    
                                    
                                    34,263Loans
      receivable, net
                                    
                                    
                                    309,575
                                    
                                    
                                    
                                    272,270
                                    
                                    
                                    
                                    284,352
                                    
                                    
                                    
                                    273,605
                                    
                                    
                                    
                                    244,537Deposits
                                    
                                    
                                    430,180
                                    
                                    
                                    
                                    339,616
                                    
                                    
                                    
                                    320,774
                                    
                                    
                                    
                                    316,051
                                    
                                    
                                    
                                    289,807Advances
      from Federal Home Loan Bank
                                    
                                    
                                    2,833
                                    
                                    
                                    
                                    3,833
                                    
                                    
                                    
                                    4,833
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —Stockholders’
      equity
                                    
                                    
                                    55,480
                                    
                                    
                                    
                                    55,079
                                    
                                    
                                    
                                    54,489
                                    
                                    
                                    
                                    62,461
                                    
                                    
                                    
                                    62,485
 
 For the Years Ended June 30,2010
                            
                            
                            2009
                            
                            
                            2008
                            
                            
                            2007
                            
                            
                            2006(Dollars in thousands)Operating
      Data:Interest
      income
                            
                            $
                            18,936
                            
                            
                            $
                            19,912
                            
                            
                            $
                            21,615
                            
                            
                            $
                            21,687
                            
                            
                            $
                            17,878Interest
      expense
                            
                            
                            6,429
                            
                            
                            
                            7,906
                            
                            
                            
                            11,353
                            
                            
                            
                            10,576
                            
                            
                            
                            7,762Net
      interest income
                            
                            
                            12,507
                            
                            
                            
                            12,006
                            
                            
                            
                            10,262
                            
                            
                            
                            11,111
                            
                            
                            
                            10,116Provision
      for loan losses
                            
                            
                            2,509
                            
                            
                            
                            2,447
                            
                            
                            
                            4,718
                            
                            
                            
                            730
                            
                            
                            
                            120Net
      interest income after provision for loan losses
                            
                            
                            9,998
                            
                            
                            
                            9,559
                            
                            
                            
                            5,544
                            
                            
                            
                            10,381
                            
                            
                            
                            9,996Other
      income
                            
                            
                            3,557
                            
                            
                            
                            2,787
                            
                            
                            
                            2,197
                            
                            
                            
                            2,848
                            
                            
                            
                            1,189Other
      expense
                            
                            
                            12,198
                            
                            
                            
                            11,450
                            
                            
                            
                            9,850
                            
                            
                            
                            9,250
                            
                            
                            
                            9,572Income
      (loss) before income taxes
                            
                            
                            1,357
                            
                            
                            
                            896
                            
                            
                            
                            (2,109
                            )
                            
                            
                            3,979
                            
                            
                            
                            1,613Provision
      (benefit) for income taxes
                            
                            
                            343
                            
                            
                            
                            177
                            
                            
                            
                            (653
                            )
                            
                            
                            1,485
                            
                            
                            
                            575Net
      income (loss)
                            
                            $
                            1,014
                            
                            
                            $
                            719
                            
                            
                            $
                            (1,456
                            )
                            
                            $
                            2,494
                            
                            
                            $
                            1,038
 
 31
 
 At or for the Years Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006Performance
      Ratios:Return
      on average assets
                      
                      
                      0.24
                      %
                      
                      
                      0.18
                      %
                      
                      
                      (0.38
                      )%
                      
                      
                      0.67
                      %
                      
                      
                      0.31
                      %Return
      on average equity
                      
                      
                      1.83
                      
                      
                      
                      1.31
                      
                      
                      
                      (2.48
                      )
                      
                      
                      3.96
                      
                      
                      
                      2.53Interest
      rate spread (1)
                      
                      
                      2.96
                      
                      
                      
                      3.04
                      
                      
                      
                      2.43
                      
                      
                      
                      2.68
                      
                      
                      
                      2.94Net
      interest margin (2)
                      
                      
                      3.12
                      
                      
                      
                      3.25
                      
                      
                      
                      2.85
                      
                      
                      
                      3.15
                      
                      
                      
                      3.15Noninterest
      expense to average assets
                      
                      
                      2.87
                      
                      
                      
                      2.92
                      
                      
                      
                      2.58
                      
                      
                      
                      2.48
                      
                      
                      
                      2.82Efficiency
      ratio (3)
                      
                      
                      75.93
                      
                      
                      
                      77.40
                      
                      
                      
                      79.06
                      
                      
                      
                      66.27
                      
                      
                      
                      84.67Average
      interest-earning assets to average interest-bearing
      liabilities
                      
                      
                      109.51
                      
                      
                      
                      110.34
                      
                      
                      
                      112.97
                      
                      
                      
                      115.40
                      
                      
                      
                      108.42Average
      equity to average assets
                      
                      
                      13.06
                      
                      
                      
                      14.02
                      
                      
                      
                      15.41
                      
                      
                      
                      16.92
                      
                      
                      
                      12.07Dividend
      payout ratio (4)
                      
                      
                      115.38
                      
                      
                      
                      152.43
                      
                      
                      NM
                      
                      
                      
                      41.46
                      
                      
                      
                      38.09United
      Community Bank Capital Ratios:Tangible
      capital
                      
                      
                      9.17
                      
                      
                      
                      12.08
                      
                      
                      
                      13.00
                      
                      
                      
                      13.42
                      
                      
                      
                      13.23Core
      capital
                      
                      
                      9.26
                      
                      
                      
                      12.08
                      
                      
                      
                      13.00
                      
                      
                      
                      13.42
                      
                      
                      
                      13.23Total
      risk-based capital
                      
                      
                      14.27
                      
                      
                      
                      18.40
                      
                      
                      
                      20.51
                      
                      
                      
                      21.24
                      
                      
                      
                      19.66Asset
      Quality Ratios:Nonperforming
      loans as a percent of total loans
                      
                      
                      3.42
                      
                      
                      
                      3.40
                      
                      
                      
                      2.62
                      
                      
                      
                      1.14
                      
                      
                      
                      0.33Allowance
      for loan losses as a percent of total loans
                      
                      
                      0.78
                      
                      
                      
                      1.53
                      
                      
                      
                      1.59
                      
                      
                      
                      0.97
                      
                      
                      
                      0.85Allowance
      for loan losses as a percent of nonperforming loans
                      
                      
                      22.91
                      
                      
                      
                      45.10
                      
                      
                      
                      61.98
                      
                      
                      
                      84.55
                      
                      
                      
                      256.39Net
      charge-offs to average outstanding loans during the
      period
                      
                      
                      0.04
                      
                      
                      
                      1.00
                      
                      
                      
                      1.06
                      
                      
                      
                      0.06
                      
                      
                      
                      0.12Other
      Data:Number
      of:Real
      estate loans outstanding
                      
                      
                      1,685
                      
                      
                      
                      1,463
                      
                      
                      
                      1,396
                      
                      
                      
                      1,456
                      
                      
                      
                      2,146Deposit
      accounts
                      
                      
                      27,595
                      
                      
                      
                      24,572
                      
                      
                      
                      22,175
                      
                      
                      
                      21,655
                      
                      
                      
                      19,380Offices
                      
                      
                      9
                      
                      
                      
                      6
                      
                      
                      
                      6
                      
                      
                      
                      6
                      
                      
                      
                      5
  
 
 NM
                Not
      meaningful.
 (1)
                Represents
      the difference between the weighted average yield on average
      interest-earning assets and the weighted average cost on average
      interest-bearing liabilities.
 (2)
                Represents
      net interest income as a percent of average interest-earning
      assets.
 (3)
                Represents
      other expense divided by the sum of net interest income and other
      income.
 (4)
                Due
      to the timing of the Bank’s reorganization into the mutual holding company
      structure and the completion of the Company’s minority stock offering on
      March 30, 2006, the 2006 calculation is based solely on earnings
      subsequent to that date.
 
 32
 
 Item 7.   Management’s Discussion and Analysis of
Financial Condition and
Results of Operations
 
 Overview
 
 Income.Our primary source of pre-tax income is net interest income. Net interest
income is the difference between interest income, which is the income that we
earn on our loans and securities, and interest expense, which is the interest
that we pay on our deposits and Federal Home Loan Bank borrowings. Other
significant sources of pre-tax income are service charges on deposit accounts
and other loan fees. We also recognize income or losses from the sale of
investments in years that we have such sales.
 
 Allowance for
Loan Losses. The allowance for loan losses is a valuation allowance for
probable credit losses inherent in the loan portfolio. The allowance is
established through the provision for loan losses, which is charged to income.
Charge-offs, if any, are charged to the allowance. Subsequent recoveries, if
any, are credited to the allowance. Management estimates the allowance balance
required using past loan loss experience, the nature and value of the portfolio,
information about specific borrower situations, and estimated collateral values,
economic conditions, and other factors. Allocation of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management’s judgment, should be charged-off.
 
 Expenses.
The noninterest expenses we incur in operating our business consist of salaries
and employee benefits expenses, occupancy and equipment expenses, advertising
and public relations expenses, regulatory fees and deposit insurance premiums
and various other miscellaneous expenses.
 
 Salaries
and employee benefits consist primarily of salaries and wages paid to our
employees, payroll taxes and expenses for health insurance and other employee
benefits, and stock-based compensation.
 
 Occupancy
and equipment expenses, which are the fixed and variable costs of buildings and
equipment, consist primarily of depreciation charges, furniture and equipment
expenses, maintenance, real estate taxes, insurance and costs of utilities.
Depreciation of premises and equipment is computed using the straight-line
method based on the useful lives of the related assets, which range from three
to 40 years.
 
 Advertising
and public relations expenses include expenses for print, radio and television
advertisements, promotions, third-party marketing services and premium
items.
 
 Regulatory
fees and deposit insurance premiums are primarily payments we make to the FDIC
for insurance of our deposit accounts.
 
 Other
expenses include expenses for supplies, telephone and postage, data processing,
expenses related to other real estate owned by the Bank, director and committee
fees, professional fees, insurance and surety bond premiums and other fees and
expenses.
 
 Noninterest
expenses have also increased as a result of our strategy to expand our branch
network. These additional expenses consist of salaries and employee benefits and
occupancy and equipment expenses. Over time, we anticipate that we will generate
sufficient income to offset the expenses related to our new facilities and new
employees, but we cannot assure you that our branch expansion will increase our
earnings or that it will increase our earnings within a reasonable period of
time.
 
 Critical
Accounting Policies
 
 We
consider accounting policies involving significant judgments and assumptions by
management that have, or could have, a material impact on the carrying value of
certain assets or on income to be critical accounting policies. We consider the
following to be our critical accounting policies: allowance for loan losses and
deferred income taxes.
 
 33
  Allowance for
Loan Losses. The allowance for loan losses is the amount estimated by
management as necessary to cover probable credit losses in the loan portfolio at
the statement of financial condition date. The allowance is established through
the provision for loan losses, which is charged to income. Determining the
amount of the allowance for loan losses necessarily involves a high degree of
judgment. Among the material estimates required to establish the allowance are:
loss exposure at default; the amount and timing of future cash flows on impacted
loans; value of collateral; and determination of loss factors to be applied to
the various elements of the portfolio. All of these estimates are susceptible to
significant change. Management reviews the level of the allowance on a quarterly
basis and establishes the provision for loan losses based upon an evaluation of
the portfolio, past loss experience, current economic conditions and other
factors related to the collectibility of the loan portfolio. Although we believe
that we use the best information available to establish the allowance for loan
losses, future adjustments to the allowance may be necessary if economic
conditions differ substantially from the assumptions used in making the
evaluation. In addition, the OTS, 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 this Annual Report on Form 10-K.
 
 Deferred Income
Taxes. We use the asset and liability method of accounting for income
taxes as prescribed in Accounting Standards Codification (ASC) 740-10-50. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. If current available information raises doubt as to the realization of
the deferred tax assets, a valuation allowance is established. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. We exercise significant judgment in evaluating the
amount and timing of recognition of the resulting tax liabilities and assets.
These judgments require us to make projections of future taxable income. The
judgments and estimates we make in determining our deferred tax assets, which
are inherently subjective, are reviewed on a continual basis as regulatory and
business factors change. Any reduction in estimated future taxable income may
require us to record a valuation allowance against our deferred tax assets. A
valuation allowance would result in additional income tax expense in the period,
which would negatively affect earnings. The Company adopted the
provisions of ASC 275-10-50-8 to account for uncertainty in income taxes
effective July 1, 2007. Implementation resulted in no cumulative effect
adjustment to retained earnings as of the date of adoption. The Company had no
unrecognized tax benefits as of June 30, 2010 and 2009. The Company
recognized no interest and penalties on the underpayment of income taxes during
fiscal years June 30, 2010 and 2009, and had no accrued interest and
penalties on the balance sheet as of June 30, 2010 and 2009. The Company
has no tax positions for which it is reasonably possible that the total amounts
of unrecognized tax benefits will significantly increase with the next twelve
months. The Company is no longer subject to U.S. federal, state and local income
tax examinations by tax authorities for tax years before
2006.
 
 Operating
Strategy
 
 Our
mission is to operate and grow a profitable, independent community-oriented
financial institution serving primarily retail customers and small businesses in
our market areas. We plan to continue our strategy of:
  • increasing
core deposits through the expansion of our branch network and new deposit
products;
  • expanding
our branch network and upgrading our existing branches;
  • pursuing
opportunities to increase and diversify our loan portfolio in our expanding
market areas;
  • applying
disciplined underwriting practices to maintain a high quality loan portfolio;
and
  • continuing
to increase our sale of non-deposit investment products and
services.
 
 Increasing
core deposits through the expansion of our branch network and new deposit
products
 
 Historically,
retail deposits are our primary source of funds for investing and lending.
However, in recent years, we have increased our reliance on municipal deposits
significantly. These municipal deposits represent tax and other revenues from
the local gaming industry. Currently, our core deposits include all deposit
account types except certificates of deposit and municipal deposits. Core
deposits are generally lower in cost to us than certificate of deposit accounts,
and they are generally less sensitive to withdrawal when interest rates
fluctuate. At June 30, 2010, core deposits represented 31.8% of our total
deposits.
  34
  Expanding
our branch network and upgrading our existing
branches
 
 On June
4, 2010, United Community Bank completed the purchase of three branches from
Integra Bank National Association. The purchase of the three branches has
expanded the Bank’s footprint to include Ripley County, Indiana.
  The new
branches continue to be funded by cash generated by our business. Consequently,
we did not need to borrow funds for these expansion projects. We may
continue to upgrade our current branch facilities and may pursue further
expansion in Southeastern Indiana, Northern Kentucky or Southwest Ohio in future
years through de novo branching, branch acquisitions and acquisitions of other
financial institutions.
 
 Pursuing
opportunities to increase and diversify our lending portfolio in our expanding
market areas
 
 In recent
years we have sought to diversify our loan portfolio beyond residential mortgage
loans. At June 30, 2010 our multi-family and nonresidential real estate,
land, consumer, commercial business, and construction loan portfolio was 57.0%
of our total loan portfolio. During this period, we have taken advantage of the
significant growth in both residential and nonresidential real estate
development in our market and have originated loans in other market
areas. We expect to continue to expand all of our lending activities. We
expect that our loan portfolio, including our multi-family and nonresidential
real estate, commercial business and construction loan portfolio, will continue
to increase.
 
 Applying
disciplined underwriting practices to maintain the high quality of our loan
portfolio
  We
believe that high asset quality is a key to long-term financial success. We have
sought to grow and diversify the loan portfolio, while maintaining a high level
of asset quality and moderate credit risk, using underwriting standards that we
believe are conservative and diligent monitoring and collection efforts. The
recession in the local and national economy during the year ended June 30, 2010
has had a negative impact on the ability of some of our borrowers to repay their
loans. Our nonperforming loans totaled $10.6 million or 3.42% of our total
loans at June 30, 2010, compared to $6.0 million or 2.19% at June 30, 2009, and
$7.5 or 2.62% at June 30, 2008. Management does not believe that the recent
increase in nonperforming loans is indicative of our current lending
policies. Management is continuing to work with these borrowers to minimize
the risk of loss to the Bank, and has continued to implement more stringent
lending standards in an effort to reduce nonperforming loans in the
future.
  Continuing
to increase noninterest income
 
 Our
profits rely heavily on the spread between the interest earned on loans and
securities and interest paid on deposits and Federal Home Loan Bank borrowings.
In order to decrease our reliance on interest rate spread income, we have
pursued initiatives to increase noninterest income. Our primary recurring source
of noninterest income has been services charges on deposit products and other
services. Recent regulatory changes have restricted our ability to charge
for other services. We are continuing to review programs to enhance our
service fee structure within the new regulatory environment.
 
 Balance
Sheet Analysis
 
 Loans.Our
primary lending activity is the origination of loans secured by real estate. We
originate one- to four-family residential loans, multi-family and nonresidential
real estate loans and construction loans. To a lesser extent, we originate
commercial and consumer loans. From time to time, as part of our loss
mitigation process, loans may be renegotiated in a troubled debt restructuring
when we determine that greater economic value will ultimately be recovered under
the new terms than through foreclosure, liquidation, or bankruptcy. We may
consider the borrower’s payment status and history, the borrower’s ability to
pay upon a rate reset on an adjustable rate mortgage, size of the payment
increase upon a rate reset, period of time remaining prior to the rate reset,
and other relevant factors in determining whether a borrower is experiencing
financial difficulty. We do not offer, and have not previously offered,
subprime, Alt-A, low-doc, no-doc loans or loans with negative amortization and
generally do not offer interest-only loans.
  35
  The
largest segment of our loan portfolio is one- to four-family residential loans.
At June 30, 2010, these loans totaled $137.5 million, or 43.6% of total gross
loans, compared to $124.4 million, or 44.8% of total loans, at June 30, 2009. As
a percentage of the total loan portfolio, one- to four-family residential loans
have decreased over the last two years, due to customers refinancing into lower
fixed rate loans that are being sold to Freddie Mac.
 
 Multi-family
and nonresidential real estate and land loans totaled $129.7 million and
represented 41.2% of total loans at June 30, 2010, compared to $119.1 million,
or 42.7% of total loans, at June 30, 2009. Our multi-family and nonresidential
real estate loan portfolio growth as a percentage of the overall portfolio in
recent years is the result of one- to four-family loans being refinanced into
lower fixed rates and sold to Freddie Mac.
 
 Construction
loans totaled $1.6 million, or 0.5% of total loans, at June 30, 2010, compared
to $1.6 million, or 0.6% of total loans, at June 30, 2009. The increase in
construction loans is the result of having seven loans outstanding at June 30,
2010 compared to only five at June 30, 2009.
 
 Commercial
business loans totaled $7.3 million, or 2.3% of total loans, at June 30, 2010,
compared to $4.4 million, or 1.6% of total loans, at June 30, 2009 and $6.1
million, or 2.1% of total loans, at June 30, 2008.
 
 Consumer
loans totaled $39.1 million, or 12.4% of total loans, at June 30, 2010, compared
to $27.8 million, or 10.0% of total loans, at June 30, 2009. The increase in the
consumer loan portfolio for the year ended June 30, 2010 is attributable to the
previously mentioned acquisition of three branches from Integra
Bank.
  36
  The
following table sets forth the composition of our loan portfolio at the dates
indicated.
  At
      June 30,2010
                                
                                
                                2009
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2006Amount
                                
                                
                                Percent
                                
                                
                                Amount
                                
                                
                                Percent
                                
                                
                                Amount
                                
                                
                                Percent
                                
                                
                                Amount
                                
                                
                                Percent
                                
                                
                                Amount
                                
                                
                                Percent(Dollars
      in thousands)Residential
      real estate:One-
      to four-family
                                
                                $
                                137,473
                                
                                
                                
                                43.6
                                %
                                
                                $
                                124,391
                                
                                
                                
                                44.8
                                %
                                
                                $
                                134,965
                                
                                
                                
                                46.5
                                %
                                
                                $
                                126,398
                                
                                
                                
                                45.4
                                %
                                
                                $
                                117,060
                                
                                
                                
                                47.2
                                %Multi-family
                                
                                
                                46,777
                                
                                
                                
                                14.9
                                
                                
                                
                                47,060
                                
                                
                                
                                22.3
                                
                                
                                
                                43,671
                                
                                
                                
                                15.1
                                
                                
                                
                                37,500
                                
                                
                                
                                13.5
                                
                                
                                
                                20,250
                                
                                
                                
                                8.2Total
      residential real estate loans
                                
                                
                                184,250
                                
                                
                                
                                58.4
                                
                                
                                
                                171,451
                                
                                
                                
                                67.1
                                
                                
                                
                                178,636
                                
                                
                                
                                61.6
                                
                                
                                
                                163,898
                                
                                
                                
                                58.9
                                
                                
                                
                                137,310
                                
                                
                                
                                55.4Construction
                                
                                
                                1,566
                                
                                
                                
                                0.5
                                
                                
                                
                                1,609
                                
                                
                                
                                0.6
                                
                                
                                
                                2,493
                                
                                
                                
                                0.9
                                
                                
                                
                                9,507
                                
                                
                                
                                3.4
                                
                                
                                
                                11,228
                                
                                
                                
                                4.5Nonresidential
      real estate and land
                                
                                
                                82,969
                                
                                
                                
                                26.3
                                
                                
                                
                                72,029
                                
                                
                                
                                20.7
                                
                                
                                
                                73,238
                                
                                
                                
                                25.3
                                
                                
                                
                                76,333
                                
                                
                                
                                27.5
                                
                                
                                
                                73,419
                                
                                
                                
                                29.6Commercial
      business
                                
                                
                                7,344
                                
                                
                                
                                2.3
                                
                                
                                
                                4,439
                                
                                
                                
                                1.6
                                
                                
                                
                                6,062
                                
                                
                                
                                2.1
                                
                                
                                
                                5,937
                                
                                
                                
                                2.1
                                
                                
                                
                                5,005
                                
                                
                                
                                2.0Consumer:Home
      equity
                                
                                
                                29,301
                                
                                
                                
                                9.3
                                
                                
                                
                                21,591
                                
                                
                                
                                7.8
                                
                                
                                
                                19,608
                                
                                
                                
                                6.7
                                
                                
                                
                                16,580
                                
                                
                                
                                6.0
                                
                                
                                
                                15,872
                                
                                
                                
                                6.4Auto
                                
                                
                                1,617
                                
                                
                                
                                0.5
                                
                                
                                
                                1,761
                                
                                
                                
                                0.6
                                
                                
                                
                                1,960
                                
                                
                                
                                0.7
                                
                                
                                
                                2,049
                                
                                
                                
                                0.7
                                
                                
                                
                                2,587
                                
                                
                                
                                1.1Share
      loans
                                
                                
                                1,369
                                
                                
                                
                                0.4
                                
                                
                                
                                1,272
                                
                                
                                
                                0.5
                                
                                
                                
                                1,382
                                
                                
                                
                                0.5
                                
                                
                                
                                1,250
                                
                                
                                
                                0.4
                                
                                
                                
                                1,258
                                
                                
                                
                                0.5Other
                                
                                
                                6,838
                                
                                
                                
                                2.2
                                
                                
                                
                                3,150
                                
                                
                                
                                1.1
                                
                                
                                
                                6,547
                                
                                
                                
                                2.2
                                
                                
                                
                                2,716
                                
                                
                                
                                1.0
                                
                                
                                
                                1,127
                                
                                
                                
                                0.5Total
      consumer loans
                                
                                
                                39,125
                                
                                
                                
                                12.4
                                
                                
                                
                                27,774
                                
                                
                                
                                10.0
                                
                                
                                
                                29,497
                                
                                
                                
                                10.1
                                
                                
                                
                                22,595
                                
                                
                                
                                8.1
                                
                                
                                
                                20,844
                                
                                
                                
                                8.5Total
      loans
                                
                                $
                                315,254
                                
                                
                                
                                100.0
                                %
                                
                                $
                                277,302
                                
                                
                                
                                100.0
                                %
                                
                                $
                                289,926
                                
                                
                                
                                100.0
                                %
                                
                                $
                                278,270
                                
                                
                                
                                100.0
                                %
                                
                                $
                                247,806
                                
                                
                                
                                100.0
                                %Less
      (Plus):Deferred
      loan costs, net
                                
                                
                                (496
                                )
                                
                                
                                
                                
                                
                                
                                (412
                                )
                                
                                
                                
                                
                                
                                
                                (381
                                )
                                
                                
                                
                                
                                
                                
                                (300
                                )
                                
                                
                                
                                
                                
                                
                                (279
                                )Undisbursed
      portion of loans in process
                                
                                
                                494
                                
                                
                                
                                
                                
                                
                                
                                1,231
                                
                                
                                
                                
                                
                                
                                
                                1,184
                                
                                
                                
                                
                                
                                
                                
                                2,294
                                
                                
                                
                                
                                
                                
                                
                                1,443Allowance
      for loan losses
                                
                                
                                5,681
                                
                                
                                
                                
                                
                                
                                
                                4,213
                                
                                
                                
                                
                                
                                
                                
                                4,619
                                
                                
                                
                                
                                
                                
                                
                                2,671
                                
                                
                                
                                
                                
                                
                                
                                2,105Loans,
      net
                                
                                $
                                309,575
                                
                                
                                
                                
                                
                                
                                $
                                272,270
                                
                                
                                
                                
                                
                                
                                $
                                284,504
                                
                                
                                
                                
                                
                                
                                $
                                273,605
                                
                                
                                
                                
                                
                                
                                $
                                244,537
 
 37
  Loan
Maturity
 
 The
following table sets forth certain information at June 30, 2010 regarding the
dollar amount of loan principal repayments becoming due during the periods
indicated. The table does not include any estimate of prepayments, which
significantly shorten the average life of all loans and may cause our actual
repayment experience to differ from that shown below. Demand loans having no
stated schedule of repayments and no stated maturity are reported as due in one
year or less.
  One- to
                    Four-
                    Family
                    Real Estate
                    Loans
                  
                  
                  Multi-
                    family
                    Real Estate
                    Loans
                  
                  
                  Construction
                    Loans
                  
                  
                  Non-
                    residential
                    Real
                    Estate and
                    Land
                    Loans
                  
                  
                  Consumer
                    and
                    Commercial
                    Business
                    Loans
                  
                  
                  Total
                    Loans(In thousands)At
      June 30, 2010Amounts
      due in:One
      year or less
                  
                  $
                  60,013
                  
                  
                  $
                  18,926
                  
                  
                  $
                  905
                  
                  
                  $
                  37,092
                  
                  
                  $
                  38,264
                  
                  
                  $
                  155,200More
      than one to five years
                  
                  
                  51,630
                  
                  
                  
                  21,570
                  
                  
                  
                  529
                  
                  
                  
                  39,675
                  
                  
                  
                  5,660
                  
                  
                  
                  119,064More
      than five years
                  
                  
                  25,830
                  
                  
                  
                  6,281
                  
                  
                  
                  132
                  
                  
                  
                  6,202
                  
                  
                  
                  2,545
                  
                  
                  
                  40,990Total
                  
                  $
                  137,473
                  
                  
                  $
                  46,777
                  
                  
                  $
                  1,566
                  
                  
                  $
                  82,969
                  
                  
                  $
                  46,469
                  
                  
                  $
                  315,254
 
 The
following table sets forth the dollar amount of all loans at June 30, 2010 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)At
      June 30, 2010Residential
      real estate:One-
      to four-family
                            
                            $
                            28,807
                            
                            
                            $
                            108,666
                            
                            
                            $
                            137,473Multi-family
                            
                            
                            3,788
                            
                            
                            
                            42,989
                            
                            
                            
                            46,777Construction
                            
                            
                            1,022
                            
                            
                            
                            544
                            
                            
                            
                            1,566Nonresidential
      real estate and
      land
                            
                            
                            19,446
                            
                            
                            
                            63,523
                            
                            
                            
                            82,969Consumer
      and commercial
      business
                            
                            
                            9,186
                            
                            
                            
                            37,283
                            
                            
                            
                            46,469Total
                            
                            $
                            62,249
                            
                            
                            $
                            253,005
                            
                            
                            $
                            315,254
  38
  Loans
Originated
 
 The
following table shows loan origination, participation, purchase and sale
activity during the periods indicated.
  Year
      Ended June 30,2010
                      
                      
                      2009(In
      thousands)Total
      loans at beginning of period
                      
                      $
                      277,302
                      
                      
                      $
                      289,774Loans
      originated:Real
      estate mortgages
                      
                      
                      51,647
                      
                      
                      
                      42,602Land
                      
                      
                      3,975
                      
                      
                      
                      589Construction
                      
                      
                      1,446
                      
                      
                      
                      2,616Commercial
      business
                      
                      
                      923
                      
                      
                      
                      837Consumer
                      
                      
                      4,170
                      
                      
                      
                      2,631Total
      loans originated
                      
                      
                      62,161
                      
                      
                      
                      49,275Loans
      purchased at fair value
                      
                      
                      43,913
                      
                      
                      
                      —Deduct:Loan
      principal repayments
                      
                      
                      42,991
                      
                      
                      
                      33,524Loan
      sales
                      
                      
                      25,131
                      
                      
                      
                      28,375Other
      repayments
                      
                      
                      —
                      
                      
                      
                      —Net
      loan activity, net of acquisition
                      
                      
                      37,952
                      
                      
                      
                      (12,624
                      )Total
      loans at end of period
                      
                      $
                      315,254
                      
                      
                      $
                      277,302
 
 Securities.Our securities portfolio consists primarily of callable U.S. government
agency bonds, U.S. government agency mortgage-backed securities, and municipal
bonds. As of June 30, 2010, our securities totaled $120.0 million, an increase
of $43.3 million from $76.7 at June 30, 2009, and an increase of $81.8 million
from $38.2 million at June 30, 2008. The increases in 2009 and 2010
were primarily the result of redeploying the proceeds from the sales of loans
into higher yielding investment securities. Our callable securities consist
of U.S. government agency bonds and municipal bonds which contain either a
one-time call option or may be callable anytime after the first call
date.
 
 39
  The
following table sets forth the amortized cost and fair values of our securities
portfolio at the dates indicated.
  At
      June 30,2010
                                                    
                                                    2009
                                                    
                                                    2008Amortized
                                                      Cost
                                                    
                                                    
                                                    Fair
                                                      Value
                                                    
                                                    
                                                    Amortized
                                                      Cost
                                                    
                                                    
                                                    Fair
                                                      Value
                                                    
                                                    
                                                    Amortized
                                                      Cost
                                                    
                                                    
                                                    Fair
                                                      Value(In
      thousands)Securities
      available-for-sale:U.S.
      League intermediate-term portfolio
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    60
                                                    
                                                    
                                                    $
                                                    47
                                                    
                                                    
                                                    $
                                                    1,785
                                                    
                                                    
                                                    $
                                                    1,718Callable
      agency bonds
                                                    
                                                    
                                                    49,157
                                                    
                                                    
                                                    
                                                    49,369
                                                    
                                                    
                                                    
                                                    39,515
                                                    
                                                    
                                                    
                                                    39,641
                                                    
                                                    
                                                    
                                                    8,943
                                                    
                                                    
                                                    
                                                    8,864Freddie
      Mac common stock
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    9
                                                    
                                                    
                                                    
                                                    155Municipal
      bonds
                                                    
                                                    
                                                    12,538
                                                    
                                                    
                                                    
                                                    12,591
                                                    
                                                    
                                                    
                                                    7,091
                                                    
                                                    
                                                    
                                                    6,952
                                                    
                                                    
                                                    
                                                    3,040
                                                    
                                                    
                                                    
                                                    2,929Other
      equity securities
                                                    
                                                    
                                                    211
                                                    
                                                    
                                                    
                                                    129
                                                    
                                                    
                                                    
                                                    211
                                                    
                                                    
                                                    
                                                    129
                                                    
                                                    
                                                    
                                                    211
                                                    
                                                    
                                                    
                                                    150Mortgage-backed
      securities
                                                    
                                                    
                                                    56,669
                                                    
                                                    
                                                    
                                                    57,238
                                                    
                                                    
                                                    
                                                    29,144
                                                    
                                                    
                                                    
                                                    29,713
                                                    
                                                    
                                                    
                                                    24,683
                                                    
                                                    
                                                    
                                                    24,211Total
                                                    
                                                    $
                                                    118,575
                                                    
                                                    
                                                    $
                                                    119,327
                                                    
                                                    
                                                    $
                                                    76,021
                                                    
                                                    
                                                    $
                                                    76,482
                                                    
                                                    
                                                    $
                                                    38,671
                                                    
                                                    
                                                    $
                                                    38,027Securities
      held-to-maturity:Municipal
      bonds
                                                    
                                                    $
                                                    631
                                                    
                                                    
                                                    $
                                                    631
                                                    
                                                    
                                                    $
                                                    175
                                                    
                                                    
                                                    $
                                                    175
                                                    
                                                    
                                                    $
                                                    200
                                                    
                                                    
                                                    $
                                                    200
 
 At June
30, 2010, we had no investments in a single company or entity (other than U.S.
Government-sponsored entity securities) that had an aggregate book value in
excess of 10% of our stockholders’ equity.
  40
  The
following table sets forth the stated maturities and weighted average yields of
investment securities at June 30, 2010. Weighted average yields on tax-exempt
securities are not presented on a tax equivalent basis as the amount would be
immaterial. Certain mortgage-backed securities have adjustable interest rates
and will reprice annually within the various maturity ranges. These repricing
schedules are not reflected in the table below.
  One
      Year
                                      or
      Less
                                    
                                    
                                    More
      than
                                      One
      Year to
                                      Five
      Years
                                    
                                    
                                    More
      than
                                      Five
      Years to
                                      Ten
      Years
                                    
                                    
                                    More
      than
                                      Ten
      Years
                                    
                                    
                                    TotalCarrying
                                      Value
                                    
                                    
                                    Weighted
      Average
                                    
                                    
                                    Carrying
                                      Value
                                    
                                    
                                    Weighted
      Average
                                    
                                    
                                    Carrying
                                      Value
                                    
                                    
                                    Weighted
      Average
                                    
                                    
                                    Carrying
                                      Value
                                    
                                    
                                    Weighted
      Average
                                    
                                    
                                    Carrying
                                      Value
                                    
                                    
                                    Weighted
      Average(Dollars
      in thousands)Securities
      available-for-sale:Callable
      agency bonds
                                    
                                    $
                                    31,093
                                    
                                    
                                    
                                    1.53
                                    
                                    
                                    $
                                    18,276
                                    
                                    
                                    
                                    1.29
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    $
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    $
                                    49,369
                                    
                                    
                                    
                                    1.44
                                    %Municipal
      bonds
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    279
                                    
                                    
                                    
                                    5.01
                                    
                                    
                                    
                                    12,312
                                    
                                    
                                    
                                    5.75
                                    
                                    
                                    
                                    12,591
                                    
                                    
                                    
                                    5.73Other
      equity securities
                                    
                                    
                                    129
                                    
                                    
                                    
                                    5.92
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    129
                                    
                                    
                                    
                                    5.92Mortgage-backed
      securities
                                    
                                    
                                    —
                                    
                                    
                                    
                                    —
                                    
                                    
                                    
                                    1,443
                                    
                                    
                                    
                                    4.50
                                    
                                    
                                    
                                    7,402
                                    
                                    
                                    
                                    5.38
                                    
                                    
                                    
                                    48,393
                                    
                                    
                                    
                                    5.68
                                    
                                    
                                    
                                    57,238
                                    
                                    
                                    
                                    5.61Total
                                    
                                    $
                                    31,222
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    19,719
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    7,681
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    60,705
                                    
                                    
                                    
                                    
                                    
                                    
                                    $
                                    119,327
                                    
                                    
                                    
                                    3.90Securities
      held-to-maturity:Municipal
      bonds
                                    
                                    $
                                    —
                                    
                                    
                                    
                                    —
                                    %
                                    
                                    $
                                    —
                                    
                                    
                                    
                                    —
                                    %
                                    
                                    $
                                    631
                                    
                                    
                                    
                                    3.79
                                    %
                                    
                                    $
                                    —
                                    
                                    
                                    
                                    —
                                    %
                                    
                                    $
                                    631
                                    
                                    
                                    
                                    3.79
                                    %
 
 41
  Deposits. Our primary source of funds
is our deposit accounts, which are comprised of noninterest-bearing accounts,
interest-bearing NOW accounts, money market accounts, passbook accounts and
certificates of deposit. These deposits are provided primarily by individuals
within our market areas. During the year ended June 30, 2010, our deposits
increased $90.6 million, or 26.7%, as a result of increases in NOW accounts and
the previously mentioned acquisition of three branches from Integra Bank
National Association. During fiscal 2009, the increase of $18.8 million in
certificates of deposit was a result of increased marketing and advertising
efforts in our local market.
 
 The
following table sets forth the balances of our deposit products at the dates
indicated.
  At
      June 30,2010
                                      
                                      
                                      2009
                                      
                                      
                                      2008(In
      thousands)NOW
      accounts
                                      
                                      $
                                      103,216
                                      
                                      
                                      $
                                      71,854
                                      
                                      
                                      $
                                      64,206Passbook
      accounts
                                      
                                      
                                      53,989
                                      
                                      
                                      
                                      40,980
                                      
                                      
                                      
                                      41,787Money
      market deposit accounts
                                      
                                      
                                      55,062
                                      
                                      
                                      
                                      61,933
                                      
                                      
                                      
                                      68,621Certificates
      of deposit
                                      
                                      
                                      217,913
                                      
                                      
                                      
                                      164,849
                                      
                                      
                                      
                                      146,160Total
                                      
                                      $
                                      430,180
                                      (1)(4)
                                      
                                      $
                                      339,616
                                      (2)(4)
                                      
                                      $
                                      320,774
                                      (3)(4)
 (1)
                  Includes
      $121.6 million in municipal
deposits.
 (2)
                Includes
      $124.3 million in municipal
deposits.
 (3)
                Includes
      $127.5 million in municipal
deposits.
 (4)
                No
      investments are pledged to secure the municipal deposits. The municipal
      deposits are insured by the Public Deposit Insurance Fund
      administered by the Indiana Board for
  Depositories.
 
 The
following table indicates the amount of jumbo certificates of deposit by time
remaining until maturity as of June 30, 2010. Jumbo certificates of deposit
require minimum deposits of $100,000. We did not have any brokered deposits as
of June 30, 2010.
  MaturityPeriod
                      
                      Certificates
                        of Deposit(In
      thousands)At
      June 30, 2010Three
      months or less
                      
                      $
                      28,781Over
      three through six months
                      
                      
                      13,559Over
      six through twelve months
                      
                      
                      47,927Over
      twelve months
                      
                      
                      23,104Total
                      
                      $
                      113,371
  42
  The
following table sets forth the time deposits classified by rates at the dates
indicated.
  At
      June 30,2010
                      
                      
                      2009
                      
                      
                      2008(In
      thousands)0.00
      - 1.00%
                      
                      $
                      7,171
                      
                      
                      $
                      3,636
                      
                      
                      $
                      2,3791.01
      - 2.00%
                      
                      
                      75,517
                      
                      
                      
                      5,502
                      
                      
                      
                      3622.01
      - 3.00%
                      
                      
                      91,166
                      
                      
                      
                      51,885
                      
                      
                      
                      18,1933.01
      - 4.00%
                      
                      
                      26,436
                      
                      
                      
                      62,733
                      
                      
                      
                      27,1954.01
      - 5.00%
                      
                      
                      12,036
                      
                      
                      
                      26,483
                      
                      
                      
                      58,6945.01
      - 6.00%
                      
                      
                      5,452
                      
                      
                      
                      14,478
                      
                      
                      
                      39,1986.01
      - 7.00%
                      
                      
                      135
                      
                      
                      
                      132
                      
                      
                      
                      139Total
                      
                      $
                      217,913
                      
                      
                      $
                      164,849
                      
                      
                      $
                      146,160
 
 The
following table sets forth the amount and maturities of time deposits classified
by rates at June 30, 2010.
 
 Amount
      Due
                      
                      
                      
                      
                      
                      Percent
      ofLess
      Than
                        One
      Year
                      
                      
                      More
      Than
                        One
      Year to
                        Two
      Years
                      
                      
                      More
      Than
                        Two
      Years to
                        Three
      Years
                      
                      
                      More
      Than
                        Three
      Years
                        to
      Four
                        Years
                      
                      
                      More
      Than
                        Four
      Years
                      
                      
                      Total
                      
                      
                      Total
                        Certificate
                        of
      Deposit
                        Accounts(Dollars
      in thousands)0.00
      – 1.00%
                      
                      $
                      6,618
                      
                      
                      $
                      495
                      
                      
                      $
                      18
                      
                      
                      $
                      20
                      
                      
                      $
                      20
                      
                      
                      $
                      7,171
                      
                      
                      
                      3.3%1.01
      – 2.00%
                      
                      
                      64,783
                      
                      
                      
                      10,552
                      
                      
                      
                      68
                      
                      
                      
                      114
                      
                      
                      
                      -
                      
                      
                      
                      75,517
                      
                      
                      
                      34.72.01
      – 3.00%
                      
                      
                      65,266
                      
                      
                      
                      14,376
                      
                      
                      
                      9,234
                      
                      
                      
                      1,203
                      
                      
                      
                      1,087
                      
                      
                      
                      91,166
                      
                      
                      
                      41.93.01
      – 4.00%
                      
                      
                      14,321
                      
                      
                      
                      5,715
                      
                      
                      
                      2,347
                      
                      
                      
                      1,214
                      
                      
                      
                      2,839
                      
                      
                      
                      26,436
                      
                      
                      
                      12.14.01
      – 5.00%
                      
                      
                      6,082
                      
                      
                      
                      3,523
                      
                      
                      
                      1,976
                      
                      
                      
                      408
                      
                      
                      
                      47
                      
                      
                      
                      12,036
                      
                      
                      
                      5.55.01
      – 6.00%
                      
                      
                      5,260
                      
                      
                      
                      164
                      
                      
                      
                      28
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      5,452
                      
                      
                      
                      2.56.01
      – 7.00%
                      
                      
                      135
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      135
                      
                      
                      
                      0.0Total
                      
                      $
                      162,465
                      
                      
                      $
                      34,825
                      
                      
                      $
                      13,671
                      
                      
                      $
                      2,959
                      
                      
                      $
                      3,993
                      
                      
                      $
                      217,913
                      
                      
                      
                      100.0%
 
 The following table sets forth deposit
activity for the periods indicated.
  Year
      Ended June 30,2010
                        
                        
                        2009
                        
                        
                        2008(In
      thousands)Beginning
      balance
                        
                        $
                        339,616
                        
                        
                        $
                        320,774
                        
                        
                        $
                        316,051Deposits
      assumed
                        
                        
                        53,277
                        
                        
                        
                        -
                        
                        
                        
                        -Increase
      (decrease) before interest credited
                        
                        
                        30,966
                        
                        
                        
                        11,014
                        
                        
                        
                        (6,593
                        )Interest
      credited
                        
                        
                        6,321
                        
                        
                        
                        7,828
                        
                        
                        
                        11,316Net
      increase in deposits
                        
                        
                        90,564
                        
                        
                        
                        18,842
                        
                        
                        
                        4,723Ending
      balance
                        
                        $
                        430,180
                        
                        
                        $
                        339,616
                        
                        
                        $
                        320,774
 
 43
  Borrowings.We utilize borrowings from
the Federal Home Loan Bank of Indianapolis to supplement our supply of funds for
loans and investments.
  Year
      Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2008(Dollars
      in thousands)Maximum
      amount of advances outstanding at any month end during the
      period:FHLB
      advances
                      
                      $
                      3,833
                      
                      
                      $
                      4,833
                      
                      
                      $
                      5,000Average
      advances outstanding during the period:FHLB
      advances
                      
                      $
                      3,333
                      
                      
                      $
                      4,333
                      
                      
                      $
                      4,916Weighted
      average interest rate during the period:FHLB
      advances
                      
                      
                      3.20
                      %
                      
                      
                      3.20
                      %
                      
                      
                      3.20
                      %Balance
      outstanding at end of period:FHLB
      advances
                      
                      $
                      2,833
                      
                      
                      $
                      3,833
                      
                      
                      $
                      4,833Weighted
      average interest rate at end of period:FHLB
      advances
                      
                      
                      3.20
                      %
                      
                      
                      3.20
                      %
                      
                      
                      3.20
                      %
 
 Results
of Operations for the Years Ended June 30, 2010 and 2009
 
 Overview.
  2010
                    
                    
                    2009
                    
                    
                    %
                      Change
                      2010/2009(Dollars
      in thousands)Net
      income
                    
                    $
                    1,014
                    
                    
                    $
                    719
                    
                    
                    
                    41.0
                    %Return
      on average assets
                    
                    
                    0.24
                    %
                    
                    
                    0.18
                    %
                    
                    
                    33.3Return
      on average equity
                    
                    
                    1.83
                    %
                    
                    
                    1.31
                    %
                    
                    
                    39.7Average
      equity to average assets
                    
                    
                    13.06
                    %
                    
                    
                    14.02
                    %
                    
                    
                    (6.8
                    )
 
 Net income for the year ended June 30,
2010 was $1.0 million, compared to $719,000 for the year ended June 30, 2009.
The increase is primarily the result of an increase in net interest income of
$501,000, or 4.2%, an increase in noninterest income of $770,000, or 27.6%,
partially offset by an increase in noninterest expense of $748,000, or 6.5%, and
an increase in the provision for income taxes of $166,000, or
93.7%.
  Net
Interest Income.
  The
increase in net interest income is the result of a decrease in the average
interest rate paid on interest-bearing liabilities from 2.36% for the prior year
end to 1.76% for the year ended June 30, 2010, partially offset by a decrease in
the average rate earned on interest-earning assets from 5.40% for the prior year
end to 4.72% for the year ended June 30, 2010. The decrease in rates has been
driven by decreases in market interest rates in the year ended June 30,
2010.
 
 44
  Average Balances
and Yields.The following table
presents information regarding average balances of assets and liabilities, the
total dollar amounts of interest income and dividends from average
interest-earning assets, the total dollar amounts of interest expense on average
interest-bearing liabilities, and the resulting annualized average yields and
costs. The yields and costs for the periods indicated are derived by dividing
income or expense by the average balances of assets or liabilities,
respectively, for the periods presented. For purposes of this table, average
balances have been calculated using month-end balances, and nonaccrual loans are
included in average balances only. Management does not believe that the use of
month-end balances instead of daily average balances has caused any material
differences in the information presented. Loan fees are included in interest
income on loans and are insignificant. Yields are not presented on a
tax-equivalent basis. Any adjustments necessary to present yields on a
tax-equivalent basis are insignificant.
  Year
      Ended June 30,2010
                        
                        
                        2009Average
                          Balance
                        
                        
                        Interest
                          and
                          Dividends
                        
                        
                        Yield/
                          Cost
                        
                        
                        Average
                          Balance
                        
                        
                        Interest
                          and
                          Dividends
                        
                        
                        Yield/
                          Cost(Dollars
      in Thousands)Assets:Interest-earning
      assets:Loans
                        
                        $
                        274,628
                        
                        
                        $
                        16,334
                        
                        
                        
                        5.95
                        %
                        
                        $
                        282,978
                        
                        
                        $
                        17,784
                        
                        
                        
                        6.28
                        %Investment
      securities
                        
                        
                        91,122
                        
                        
                        
                        2,587
                        
                        
                        
                        2.84
                        
                        
                        
                        50,462
                        
                        
                        
                        1,971
                        
                        
                        
                        3.91Other
      interest-earning assets
                        
                        
                        35,191
                        
                        
                        
                        15
                        
                        
                        
                        0.04
                        
                        
                        
                        35,439
                        
                        
                        
                        157
                        
                        
                        
                        0.44Total
      interest-earning assets
                        
                        
                        400,941
                        
                        
                        
                        18,936
                        
                        
                        
                        4.72
                        
                        
                        
                        368,879
                        
                        
                        
                        19,912
                        
                        
                        
                        5.40Noninterest-earning
      assets
                        
                        
                        24,067
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        23,607Total
      assets
                        
                        $
                        425,008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        392,486Liabilities
      and equity:Interest-bearing
      liabilities:NOW
      and money market deposit accounts
                        
                        $
                        135,614
                        
                        
                        
                        871
                        
                        
                        
                        0.64
                        
                        
                        $
                        136,417
                        
                        
                        
                        1,609
                        
                        
                        
                        1.18Passbook
      accounts
                        
                        
                        42,480
                        
                        
                        
                        136
                        
                        
                        
                        0.32
                        
                        
                        
                        40,358
                        
                        
                        
                        285
                        
                        
                        
                        0.71Certificates
      of deposit
                        
                        
                        184,680
                        
                        
                        
                        5,314
                        
                        
                        
                        2.88
                        
                        
                        
                        153,208
                        
                        
                        
                        5,872
                        
                        
                        
                        3.83Total
      interest-bearing deposits
                        
                        
                        362,774
                        
                        
                        
                        6,321
                        
                        
                        
                        1.74
                        
                        
                        
                        329,983
                        
                        
                        
                        7,766
                        
                        
                        
                        2.35FHLB
      advances
                        
                        
                        3,333
                        
                        
                        
                        108
                        
                        
                        
                        3.24
                        
                        
                        
                        4,333
                        
                        
                        
                        140
                        
                        
                        
                        3.23Total
      interest-bearing liabilities
                        
                        
                        366,107
                        
                        
                        
                        6,429
                        
                        
                        
                        1.76
                        
                        
                        
                        334,316
                        
                        
                        
                        7,906
                        
                        
                        
                        2.36Noninterest-bearing
      liabilities
                        
                        
                        3,413
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3,132Total
      liabilities
                        
                        
                        369,520
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        337,448Total
      stockholders’ equity
                        
                        $
                        55,488
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        55,038Total
      liabilities and stockholders’ equity
                        
                        $
                        425,008
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        392,486Net
      interest income
                        
                        
                        
                        
                        
                        $
                        12,507
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        $
                        12,006Interest
      rate spread
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        2.96
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.04
                        %Net
      interest margin
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.12
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        3.25
                        %Average
      interest-earning assets to average interest-bearing
      liabilities
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        109.51
                        %
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        110.34
                        %
  
  45
  Rate/Volume
Analysis. The
following table sets forth the effects of changing rates and volumes on our net
interest income. The rate column shows the effects attributable to changes in
rate (changes in rate multiplied by prior volume). The volume column shows the
effects attributable to changes in volume (changes in volume multiplied by
prior rate). The net column represents the sum of the prior columns. For
purposes of this table, changes attributable to changes in both rate and volume
that cannot be segregated have been allocated proportionally based on the
changes due to rate and the changes due to volume.
  Year Ended
                                  June 30,
                                  2010 Compared to 2009Increase (Decrease)
                                  Due toVolume
                                
                                
                                Rate
                                
                                
                                Net(In thousands)Interest
      and dividend income:Loans
                                
                                $
                                (525
                                )
                                
                                $
                                (925
                                )
                                
                                $
                                (1,450
                                )Investment
      securities
                                
                                
                                1,588
                                
                                
                                
                                (972
                                )
                                
                                
                                616Other
      interest-earning assets
                                
                                
                                (1
                                )
                                
                                
                                (141
                                )
                                
                                
                                (142
                                )Total
      interest-earning assets
                                
                                
                                1,062
                                
                                
                                
                                (2,038
                                )
                                
                                
                                (976
                                )Interest
      expense:Deposits
                                
                                
                                772
                                
                                
                                
                                (2,217
                                )
                                
                                
                                (1,445
                                )FHLB
      advances
                                
                                
                                (33
                                )
                                
                                
                                (0
                                )
                                
                                
                                (33
                                )Total
      interest-bearing liabilities
                                
                                
                                739
                                
                                
                                
                                (2,217
                                )
                                
                                
                                (1,478
                                )Net
      change in net interest income
                                
                                $
                                323
                                
                                
                                $
                                179
                                
                                
                                $
                                502
 
 Provision for
Loan Losses.
  The
provision for loan losses was $2.5 million for the year ended June 30, 2010,
compared to $2.4 million for the prior year. The provision remained steady as
the local and national economy continue to struggle. Nonperforming loans
increased at June 30, 2010, compared to 2009, from $9.4 million at June 30, 2009
to $10.6 million at June 30, 2010.
  An
analysis of the changes in the allowance for loan losses is presented under
“Risk Management—Analysis and Determination of the
Allowance for Loan Losses.”
  NoninterestIncome.
The following table shows the components of other income for the years ended
June 30, 2010 and 2009.
 
 2010
                        
                        
                        2009
                        
                        
                        %
                          Change
                          2010/2009(Dollars
      in thousands)Service
      charges
                        
                        $
                        1,988
                        
                        
                        $
                        1,776
                        
                        
                        
                        11.9
                        %Gain
      on sale loans
                        
                        
                        278
                        
                        
                        
                        526
                        
                        
                        
                        (47.1
                        )Gain
      (loss) on sale of investments
                        
                        
                        311
                        
                        
                        
                        (183
                        )
                        
                        
                        269.9Gain
      on sale of other real estate owned
                        
                        
                        34
                        
                        
                        
                        -
                        
                        
                        
                        100.0Income
      from Bank Owned Life Insurance
                        
                        
                        282
                        
                        
                        
                        256
                        
                        
                        
                        10.2Other
                        
                        
                        664
                        
                        
                        
                        412
                        
                        
                        
                        61.2Total
                        
                        $
                        3,557
                        
                        
                        $
                        2,787
                        
                        
                        
                        27.6
  46
  The
increase in noninterest income is attributable to the increase in service
charges of $212,000, an increase in gain on sale of investments of $494,000, an
increase of $252,000 in other income, partially offset by a decrease of $248,000
in gain on sale of loans. The increase in service charges is due to an increased
customer base. The growth in the customer base is attributable to additional
marketing and advertising efforts as well as the acquisition of three branches
from Integra Bank in June, 2010. The increase in gain on sale of investments is
the result of the Bank purchasing additional securities in an effort to better
diversify its investment portfolio in both type and duration of investments. The
increase in other income is attributable to the settlement of a claim in the
current year. The decrease in sale of loans is due to rates remaining relatively
flat in the current year, while they decreased significantly in the prior year
causing a significant increase of refinancing into longer term fixed rate loans
that were sold to Freddie Mac.
 
 NoninterestExpense.The following table shows the components of other expense and the
percentage changes for the years ended June 30, 2010 and 2009.
  2010
                      
                      
                      2009
                      
                      
                      %
                        Change
                        2010/2009(Dollars
      in thousands)Compensation
      and employee benefits
                      
                      $
                      6,040
                      
                      
                      $
                      5,659
                      
                      
                      
                      6.7
                      %Premises
      and occupancy expense
                      
                      
                      1,101
                      
                      
                      
                      1,074
                      
                      
                      
                      2.5Deposit
      insurance premium
                      
                      
                      740
                      
                      
                      
                      457
                      
                      
                      
                      61.9Advertising
      expense
                      
                      
                      378
                      
                      
                      
                      296
                      
                      
                      
                      27.7Data
      processing expense
                      
                      
                      296
                      
                      
                      
                      241
                      
                      
                      
                      22.8ATM
      service fees
                      
                      
                      423
                      
                      
                      
                      430
                      
                      
                      
                      (1.6
                      )Provision
      for loss on sale of other real estate owned
                      
                      
                      510
                      
                      
                      
                      770
                      
                      
                      
                      (33.8
                      )Acquisition
      related expenses
                      
                      
                      439
                      
                      
                      
                      -
                      
                      
                      
                      100.0Other
      operating expenses
                      
                      
                      2,271
                      
                      
                      
                      2,523
                      
                      
                      
                      10.0Total
                      
                      $
                      12,198
                      
                      
                      $
                      11,450
                      
                      
                      
                      6.5
                      %
 
 The
increase in noninterest expense is attributable to increases in acquisition
expenses, deposit insurance premiums, and employee compensation, partially
offset by a decrease in the provision for loss on the sale of real estate owned.
The acquisition related expenses in the current year relate to the expenses
incurred with the acquisition of three branches from Integra. The increase in
deposit insurance premiums is a result of increased deposit balances during the
year, along with increased assessment rates due to the impact of the current
economic environment on the deposit insurance fund. The increase in employee
compensation is the result of adding staff as our customer base has grown over
the last year including the branch acquisition at the end of the year. The
decrease in provision for loss on the sale of other real estate owned is a
result of the Bank holding less real estate owned (REO) for sale in the current
year than in the prior year. During the year ended June 30, 2010 the REO balance
decreased from $1.9 million to $297,000.
  Income
Taxes.
 
 Income
tax expense increased $166,000 to a provision of $343,000 for the year ended
June 30, 2010, compared to the year ended June 30, 2009. The increase in
expense was primarily due to an increase of $461,000 in income before
taxes. The effective tax rate for 2010 was 25.0% compared to 19.8% in
2009. The increase in the effective rate was attributable to tax exempt
municipal bond income being a smaller portion of income before taxes in the
current year.
  Risk
Management
 
 Overview.
Managing risk is an essential part of successfully managing a financial
institution. Our most prominent risk exposures are credit risk, interest rate
risk and market risk. Credit risk is the risk of not collecting the interest
and/or the principal balance of a loan or investment when it is due. Interest
rate risk is the potential reduction of net interest income as a result of
changes in interest rates. Market risk arises from fluctuations in interest
rates that may result in changes in the values of financial instruments, such as
available-for-sale securities, that are accounted for on a mark-to-market basis.
Other risks that we face are operational risks, liquidity risks and reputation
risk. Operational risks include risks related to fraud, regulatory compliance,
processing errors, technology and disaster recovery. Liquidity risk is the
possible inability to fund obligations to depositors, lenders or borrowers.
Reputation risk is the risk that negative publicity or press, whether true or
not, could cause a decline in our customer base or revenue.
 
 47
  Credit Risk
Management. Our strategy for credit risk management focuses on having
well-defined credit policies and uniform underwriting criteria and providing
prompt attention to potential problem loans. This strategy also emphasizes the
origination of one- to four-family mortgage loans, which typically have lower
default rates than other types of loans and are secured by collateral that
generally tends to appreciate in value.
 
 When a
borrower fails to make a required loan payment, we take a number of steps to
attempt to have the borrower cure the delinquency and restore the loan to
current status. When the loan becomes 15 days past due, a late charge notice is
generated and sent to the borrower and phone calls are made. If payment is not
then received by the 30th day of delinquency, a further notification is sent to
the borrower. If no successful workout can be achieved, after a loan becomes 90
days delinquent, we may commence foreclosure or other legal proceedings. If a
foreclosure action is instituted and the loan is not brought current, paid in
full, or refinanced before the foreclosure sale, the real property securing the
loan generally is sold at foreclosure. We may consider loan workout arrangements
with certain borrowers under certain circumstances.
 
 Management
reports to the Board of Directors monthly regarding the amount of loans
delinquent more than 30 days, all loans in foreclosure, all foreclosed and
repossessed property that we own.
 
 Analysis of
Nonperforming and Classified Assets. We consider repossessed assets and
loans that are 90 days or more past due to be nonperforming assets. Loans are
generally placed on nonaccrual status when they become 90 days delinquent at
which time the accrual of interest ceases and the allowance for any
uncollectible accrued interest is established and charged against operations.
Typically, payments received on a nonaccrual loan are applied to the outstanding
principal and interest as determined at the time of collection of the
loan.
 
 Real
estate that we acquire as a result of foreclosure or by deed-in-lieu of
foreclosure is classified as foreclosed assets until it is sold. When property
is acquired, it is initially recorded at the lower of its cost, or market, less
estimate selling expenses. Holding costs and declines in fair value after
acquisition of the property result in charges against income.
 
 48
  The
following table provides information with respect to our nonperforming assets at
the dates indicated.
  At
      June 30,2010
                          
                          
                          2009
                          
                          
                          2008
                          
                          
                          2007
                          
                          
                          2006(Dollars
      in thousands)Nonaccrual
      loans:Residential
      real estate:One-
      to four-family
                          
                          $
                          2,436
                          
                          
                          $
                          1,943
                          
                          
                          $
                          853
                          
                          
                          $
                          810
                          
                          
                          $
                          602Multi-family
                          
                          
                          5,245
                          
                          
                          
                          2,492
                          
                          
                          
                          3,072
                          
                          
                          
                          —
                          
                          
                          
                          —Nonresidential
      real estate and land
                          
                          
                          2,738
                          
                          
                          
                          1,455
                          
                          
                          
                          2,885
                          
                          
                          
                          2,264
                          
                          
                          
                          183Consumer
      and other loans
                          
                          
                          155
                          
                          
                          
                          84
                          
                          
                          
                          642
                          
                          
                          
                          85
                          
                          
                          
                          36Total
                          
                          $
                          10,574
                          
                          
                          $
                          5,974
                          
                          
                          $
                          7,452
                          
                          
                          $
                          3,159
                          
                          
                          $
                          821Accruing
      loans past due 90 days or more:Residential
      real estate:One-
      to four-family
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Nonresidential
      real estate and land
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
      of nonaccrual loans and accruing loans 90 days or more past
      due
                          
                          
                          10,574
                          
                          
                          
                          5,974
                          
                          
                          
                          7,452
                          
                          
                          
                          3,159
                          
                          
                          
                          821Real
      estate owned
                          
                          
                          297
                          
                          
                          
                          1,940
                          
                          
                          
                          2,895
                          
                          
                          
                          111
                          
                          
                          
                          151Other
      nonperforming assets
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —
                          
                          
                          
                          —Total
      nonperforming assets
                          
                          $
                          10,871
                          
                          
                          $
                          7,914
                          
                          
                          $
                          10,347
                          
                          
                          $
                          3,270
                          
                          
                          $
                          972Total
      nonperforming loans to total loans
                          
                          
                          3.42
                          %
                          
                          
                          2.18
                          %
                          
                          
                          2.56
                          %
                          
                          
                          1.14
                          %
                          
                          
                          0.33
                          %Total
      nonperforming loans to total assets
                          
                          
                          2.15
                          
                          
                          
                          1.49
                          
                          
                          
                          1.95
                          
                          
                          
                          0.83
                          
                          
                          
                          0.23Total
      nonperforming assets to total assets
                          
                          
                          2.21
                          
                          
                          
                          1.97
                          
                          
                          
                          2.70
                          
                          
                          
                          0.86
                          
                          
                          
                          0.27
 
 Interest
income that would have been recorded for the year ended June 30, 2010 had
nonaccruing loans been current according to their original terms was, in each
case, not material. No interest related to nonaccrual loans was included in
interest income for the year ended June 30, 2010.
 
 Federal
regulations require us to review and classify our assets on a regular basis. In
addition, the OTS 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. When we
classify an asset as special mention or substandard, we account for those
classifications when establishing a general allowance for loan losses. If we
classify an asset as doubtful or loss, we establish a specific allowance for the
asset at that time.
 
 49
  The
following table shows the aggregate amounts of our classified assets at the
dates indicated.
  At
      June 30,2010
                      
                      
                      2009(Dollars
      in thousands)Special
      mention assets
                      
                      $
                      20,061
                      
                      
                      $
                      16,942Substandard
      assets
                      
                      
                      14,395
                      
                      
                      
                      12,624Doubtful
      assets
                      
                      
                      -
                      
                      
                      
                      -Loss
      assets
                      
                      
                      3,259
                      
                      
                      -Total
      classified assets
                      
                      $
                      37,715
                      
                      
                      $
                      29,566
 
 Other
than disclosed in the above tables, there are no other loans at June 30, 2010
that management has serious doubts about the ability of the borrowers to comply
with the present loan repayment terms. The increase in classified assets is due
to the continued economic recession. Management believes there are adequate
allowances and collateral securing these loans to cover losses that may result
from these nonperforming loans. All of the loans were more than 90 days
delinquent at June 30, 2010.
 
 Troubled Debt
Restructurings.At June 30, 2010, the Bank had thirteen loans categorized
as troubled debt restructurings, totaling $9.0 million. At June 30, 2009, the
Bank had five loans categorized as troubled debt restructurings, totaling $4.5
million. At June 30, 2010 and 2009, the Bank had one loan for $1.1 million that
was categorized as both a nonperforming loan and a troubled debt restructuring.
There are no other commitments to lend additional amounts to these borrowers.
Management has reduced the carrying value of all troubled debt restructurings to
their fair market values, based upon differences between their agreed upon rates
of interest and available market rates at the time of the loan.
 
 Delinquencies.The following table provides
information about delinquencies in our loan portfolio at the dates
indicated.
  At June 30,2010
                    
                    
                    2009
                    
                    
                    200830-59
                      Days
                      Past Due
                    
                    
                    60-89
                      Days
                      Past Due
                    
                    
                    30-59
                      Days
                      Past Due
                    
                    
                    60-89
                      Days
                      Past Due
                    
                    
                    30-59
                      Days
                      Past Due
                    
                    
                    60-89
                      Days
                      Past Due(Dollars
      in thousands)Residential
      real estate:One-
      to four-family
                    
                    $
                    1,083
                    
                    
                    $
                    515
                    
                    
                    $
                    1,539
                    
                    
                    $
                    1,754
                    
                    
                    $
                    1,561
                    
                    
                    $
                    742Multi-family
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    1,208Nonresidential
      real estate and land
                    
                    
                    648
                    
                    
                    
                    3,598
                    
                    
                    
                    383
                    
                    
                    
                    1,080
                    
                    
                    
                    324
                    
                    
                    
                    535Consumer
      and other loans
                    
                    
                    728
                    
                    
                    
                    337
                    
                    
                    
                    104
                    
                    
                    
                    62
                    
                    
                    
                    73
                    
                    
                    
                    22Total
                    
                    $
                    2,459
                    
                    
                    $
                    4,450
                    
                    
                    $
                    2,026
                    
                    
                    $
                    2,896
                    
                    
                    $
                    1,958
                    
                    
                    $
                    2,507
 
 Analysis and
Determination of the Allowance for Loan Losses. The allowance for loan
losses is a valuation allowance for probable credit losses in the loan
portfolio. We evaluate the need to establish allowances against losses on loans
on a quarterly basis. When additional allowances are necessary, a provision for
loan losses is charged to earnings. The recommendations for increases or
decreases to the allowance are presented by management to the Board of
Directors.
 
 Our
methodology for assessing the appropriateness of the allowance for loan losses
consists of: (1) a specific allowance on identified problem loans; and (2) a
general valuation allowance on the remainder of the loan portfolio. Although we
determine the amount of each element of the allowance separately, the entire
allowance for loan losses is available for the entire portfolio.
 
 50
  Specific Allowance
Required for Identified Problem Loans.
We establish an allowance on certain identified problem loans based on such
factors as: (1) the strength of the customer’s personal or business cash flows;
(2) the availability of other sources of repayment; (3) the amount due or past
due; (4) the type and value of collateral; (5) the strength of our collateral
position; (6) the estimated cost to sell the collateral; and (7) the borrower’s
effort to cure the delinquency.
 
 General Valuation
Allowance on the Remainder of the Loan Portfolio. We establish a general
allowance for loans that are not delinquent to recognize the inherent losses
associated with lending activities. This general valuation allowance is
determined by segregating the loans by loan category and assigning percentages
to each category. The percentages are adjusted for significant factors that, in
management’s judgment, affect the collectibility of the portfolio as of the
evaluation date. These significant factors may include changes in existing
general economic and business conditions affecting our primary lending areas and
the national economy, staff lending experience, recent loss experience in
particular segments of the portfolio, specific reserve and classified asset
trends, delinquency trends and risk rating trends. These loss factors are
subject to ongoing evaluation to ensure their relevance in the current economic
environment.
 
 As a
result of our systematic analysis of the adequacy of the allowance for loan
losses, the loss factors we presently use to determine the reserve level were
updated in 2008 based on various risk factors such as trends in underperforming
loans, trends and concentrations in loans and loan volume, economic trends in
our market area, particularly the impact of the gaming and tourism industry on
the economy of our market area, the effect of which has become significant in
recent periods. In order to reflect trends in the composition of our loan
portfolio and in our recent historical loan loss experience, we increased the
allowance percentage on certain loan categories which demonstrated a higher risk
of loss and decreased the allowance percentage on certain loan categories which
demonstrated a lower risk of loss. The update to the allowance percentages
resulted in a decrease in the amount of the allowance allocated to loans secured
by one- to four-family residential properties and an increase in the amount of
the allowance allocated to loans secured by multi-family real estate,
nonresidential real estate and loans, commercial business loans and consumer
loans.
 
 We also
identify loans that may need to be charged-off as a loss by reviewing all
delinquent loans, classified loans and other loans that management may have
concerns about collectability. For individually reviewed loans, the borrower’s
inability to make payments under the terms of the loan or a shortfall in
collateral value would result in our allocating a portion of the allowance to
the loan that was impaired.
 
 At June
30, 2010, our allowance for loan losses represented 1.83% of total loans and
53.7% of nonperforming loans. At June 30, 2009, our allowance for loan
losses represented 1.6% of total loans and 70.5% of nonperforming loans. The
allowance for loan losses increased to $5.7 million at June 30, 2010 from $4.2
million at June 30, 2009.
 
 51
  The
following table sets forth the breakdown of the allowance for loan losses by
loan category at the dates indicated.
  At June 30,2010
                              
                              
                              2009
                              
                              
                              2008Amount
                              
                              
                              % 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
                              
                              
                              Amount
                              
                              
                              % of
                                Allowance
                                to Total
                                Allowance
                              
                              
                              % of
                                Loans in
                                Category
                                to Total
                                Loans(Dollars
      in thousands)Residential
      real estate
                              
                              $
                              1,529
                              
                              
                              
                              26.9
                              %
                              
                              
                              58.4
                              %
                              
                              $
                              537
                              
                              
                              
                              12.7
                              %
                              
                              
                              67.1
                              %
                              
                              $
                              524
                              
                              
                              
                              11.3
                              %
                              
                              
                              61.6
                              %Nonresidential
      real estate and land
                              
                              
                              3,187
                              
                              
                              
                              56.1
                              
                              
                              
                              25.3
                              
                              
                              
                              3,297
                              
                              
                              
                              78.3
                              
                              
                              
                              20.7
                              
                              
                              
                              3,823
                              
                              
                              
                              82.8
                              
                              
                              
                              25.2Commercial
                              
                              
                              58
                              
                              
                              
                              1.0
                              
                              
                              
                              2.4
                              
                              
                              
                              54
                              
                              
                              
                              1.3
                              
                              
                              
                              1.6
                              
                              
                              
                              7
                              
                              
                              
                              0.2
                              
                              
                              
                              2.1Consumer
                              
                              
                              907
                              
                              
                              
                              16.0
                              
                              
                              
                              13.3
                              
                              
                              
                              325
                              
                              
                              
                              7.7
                              
                              
                              
                              10.0
                              
                              
                              
                              265
                              
                              
                              
                              5.7
                              
                              
                              
                              10.2Construction
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              0.6
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              0.6
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              0.9Total
      allowance for loan lossesTotal allowance for loan losses
                              
                              $
                              5,681
                              
                              
                              
                              100.0
                              %
                              
                              
                              100.0
                              %
                              
                              $
                              4,213
                              
                              
                              
                              100.0
                              %
                              
                              
                              100.0
                              %
                              
                              $
                              4,619
                              
                              
                              
                              100.0
                              %
                              
                              
                              100.0
                              %Total
      loansTotal loans
                              
                              $
                              309,575
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              272,270
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              $
                              289,926
 
 At June 30,2007
                            
                            
                            2006Amount
                            
                            
                            % 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)Residential
      real estate
                            
                            $
                            331
                            
                            
                            
                            12.4
                            %
                            
                            
                            58.9
                            %
                            
                            $
                            484
                            
                            
                            
                            23.0
                            %
                            
                            
                            55.4
                            %Nonresidential
      real estate and land
                            
                            
                            1,949
                            
                            
                            
                            73.0
                            
                            
                            
                            27.5
                            
                            
                            
                            1,361
                            
                            
                            
                            64.6
                            
                            
                            
                            29.6Commercial
                            
                            
                            10
                            
                            
                            
                            0.4
                            
                            
                            
                            2.1
                            
                            
                            
                            14
                            
                            
                            
                            0.7
                            
                            
                            
                            2.0Consumer
                            
                            
                            381
                            
                            
                            
                            14.2
                            
                            
                            
                            8.1
                            
                            
                            
                            246
                            
                            
                            
                            11.7
                            
                            
                            
                            8.5Construction
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            3.4
                            
                            
                            
                            —
                            
                            
                            
                            —
                            
                            
                            
                            4.5Total
      allowance for loan losses
                            
                            $
                            2,671
                            
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %
                            
                            $
                            2,105
                            
                            
                            
                            100.0
                            %
                            
                            
                            100.0
                            %Total
      loans
                            
                            $
                            278,270
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            
                            $
                            247,806
 
 Although
we believe that we use the best information available to establish the allowance
for loan losses, future adjustments to the allowance for loan losses may be
necessary and our results of operations could be adversely affected if
circumstances differ substantially from the assumptions used in making the
determinations. Furthermore, while we believe we have established our allowance
for loan losses in conformity with U.S. generally accepted accounting
principles, there can be no assurance that the OTS, in reviewing our loan
portfolio, will not request us to increase our allowance for loan losses. The
OTS may require us to increase our allowance for loan losses based on judgments
different from ours. In addition, because future events affecting borrowers and
collateral cannot be predicted with certainty, there can be no assurance that
increases will not be necessary should the quality of any loans deteriorate as a
result of the factors discussed above. Any material increase in the allowance
for loan losses may adversely affect our financial condition and results of
operations.
  52
  Analysis of Loan
Loss Experience. The following table sets forth an analysis of the
allowance for loan losses for the periods indicated.
  Year
      Ended June 30,2010
                      
                      
                      2009
                      
                      
                      2008
                      
                      
                      2007
                      
                      
                      2006(Dollars
      in thousands)Allowance
      at beginning of period
                      
                      $
                      4,213
                      
                      
                      $
                      4,619
                      
                      
                      $
                      2,671
                      
                      
                      $
                      2,105
                      
                      
                      $
                      2,266Provision
      for loan losses
                      
                      
                      2,509
                      
                      
                      
                      2,447
                      
                      
                      
                      4,718
                      
                      
                      
                      730
                      
                      
                      
                      120Charge-offs:Real
      estate
                      
                      
                      124
                      
                      
                      
                      101
                      
                      
                      
                      343
                      
                      
                      
                      82
                      
                      
                      
                      18Nonresidential
      real estate and land
                      
                      
                      34
                      
                      
                      
                      2,537
                      
                      
                      
                      2,440
                      
                      
                      
                      —
                      
                      
                      
                      —Multi-family
      residential real estate
                      
                      
                      831
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Consumer
      and other loans
                      
                      
                      96
                      
                      
                      
                      182
                      
                      
                      
                      —
                      
                      
                      
                      129
                      
                      
                      
                      271Total
      charge-offs
                      
                      
                      1,087
                      
                      
                      
                      2,820
                      
                      
                      
                      2,783
                      
                      
                      
                      211
                      
                      
                      
                      289Recoveries:Real
      estate
                      
                      
                      2
                      
                      
                      
                      5
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Nonresidential
      real estate and land
                      
                      
                      19
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Multi-family
      residential real estate
                      
                      
                      5
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Consumer
      and other loans
                      
                      
                      20
                      
                      
                      
                      13
                      
                      
                      
                      13
                      
                      
                      
                      47
                      
                      
                      
                      8Total
      recoveries
                      
                      
                      46
                      
                      
                      
                      18
                      
                      
                      
                      13
                      
                      
                      
                      47
                      
                      
                      
                      8Net
      charge-offs
                      
                      
                      (1,041
                      )
                      
                      
                      (2,802
                      )
                      
                      
                      (2,770
                      )
                      
                      
                      (164
                      )
                      
                      
                      (281
                      )Loss
      on restructuring of loan
                      
                      
                      3
                      
                      
                      
                      51
                      
                      
                      
                      —
                      
                      
                      
                      —
                      
                      
                      
                      —Allowance
      at end of period
                      
                      $
                      5,681
                      
                      
                      $
                      4,213
                      
                      
                      $
                      4,619
                      
                      
                      $
                      2,671
                      
                      
                      $
                      2,105Allowance
      to nonperforming loans
                      
                      
                      53.73
                      %
                      
                      
                      70.51
                      %
                      
                      
                      62.00
                      %
                      
                      
                      84.55
                      %
                      
                      
                      256.39
                      %Allowance
      to total loans outstanding at the end of the period
                      
                      
                      1.84
                      %
                      
                      
                      1.53
                      %
                      
                      
                      1.59
                      %
                      
                      
                      0.97
                      %
                      
                      
                      0.85
                      %Net
      charge-offs to average loans outstanding during the
      period
                      
                      
                      0.04
                      %
                      
                      
                      1.00
                      %
                      
                      
                      1.06
                      %
                      
                      
                      0.06
                      %
                      
                      
                      0.12
                      %
 
 Interest Rate
Risk Management. 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 mortgage 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 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, which includes members of management and 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.
 
 Our goal
is to manage asset and liability positions to moderate the effects of interest
rate fluctuations on net interest income and net income.
  53
 
 Net Portfolio
Value Analysis.We use
a net portfolio value analysis prepared by the OTS to review our level of
interest rate risk. This analysis measures interest rate risk by computing
changes in net portfolio value of our cash flows from assets, liabilities and
off-balance sheet items in the event of a range of assumed changes in market
interest rates. Net portfolio value represents the market value of portfolio
equity and is equal to the market value of assets minus the market value of
liabilities, with adjustments made for off-balance sheet items. These analyses
assess the risk of loss in market risk-sensitive instruments in the event of a
sudden and sustained 50 to 300 basis point increase or 50 and 100 basis point
decrease in market interest rates with no effect given to any steps that we
might take to counter the effect of that interest rate movement. Because of the
low level of market interest rates, these analyses are not performed for
decreases of more than 100 basis points.
 
 The
following table, which is based on information that we provide to the OTS,
presents the change in our net portfolio value at June 30, 2010 that would occur
in the event of an immediate change in interest rates based on OTS assumptions,
with no effect given to any steps that we might take to counteract that
change.
 
 NetPortfolioValue
                      (DollarsinThousands)
                    
                    
                    NetPortfolioValueas%of
                      PortfolioValueofAssetsBasisPoint(“bp”)
                      ChangeinRates
                    
                    
                    Amount
                    
                    
                    Change
                    
                    
                    %Change
                    
                    
                    NPVRatio
                    
                    
                    Change(bp)300
                    
                    
                    $
                    59,161
                    
                    
                    $
                    (1,993)
                    
                    
                    
                    (3)%
                    
                    
                    
                    11.86%
                    
                    
                    
                    (22)bp200
                    
                    
                    
                    61,564
                    
                    
                    
                    409
                    
                    
                    
                    1
                    
                    
                    
                    12.25
                    
                    
                    
                    16100
                    
                    
                    
                    61,698
                    
                    
                    
                    543
                    
                    
                    
                    1
                    
                    
                    
                    12.23
                    
                    
                    
                    1550
                    
                    
                    
                    61,471
                    
                    
                    
                    316
                    
                    
                    
                    1
                    
                    
                    
                    12.17
                    
                    
                    
                    80
                    
                    
                    
                    61,155
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    12.08
                    
                    
                    
                    -(50)
                    
                    
                    
                    60,045
                    
                    
                    
                    (1,110)
                    
                    
                    
                    (2)
                    
                    
                    
                    11.86
                    
                    
                    
                    (22)(100)
                    
                    
                    
                    60,996
                    
                    
                    
                    (159)
                    
                    
                    
                    -
                    
                    
                    
                    12.01
                    
                    
                    
                    (7)
  The OTS
uses various assumptions in assessing interest rate risk. These assumptions
relate to interest rates, loan prepayment rates, deposit decay rates and the
market values of certain assets under differing interest rate scenarios, among
others. As with any method of measuring interest rate risk, certain shortcomings
are inherent in the methods of analyses presented in the foregoing tables. For
example, although certain assets and liabilities may have similar maturities or
periods to repricing, they may react in different degrees to changes in market
interest rates. Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market rates.
Additionally, certain assets, such as adjustable-rate mortgage loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Further, in the event of a change in interest rates,
expected rates of prepayments on loans and early withdrawals from certificates
could deviate significantly from those assumed in calculating the table.
Prepayment rates can have a significant impact on interest income. Because of
the large percentage of loans and mortgage-backed securities we hold, rising or
falling interest rates have a significant impact on the prepayment speeds of our
earning assets that in turn affect the rate sensitivity position. When interest
rates rise, prepayments tend to slow. When interest rates fall, prepayments tend
to rise. Our asset sensitivity would be reduced if prepayments slow and vice
versa. While we believe these assumptions to be reasonable, there can be no
assurance that assumed prepayment rates will approximate actual future
mortgage-backed security and loan repayment activity.
 
 Liquidity
Management.
Liquidity is the ability to meet current and future financial obligations of a
short-term nature. Our primary sources of funds consist of deposit inflows, loan
repayments, maturities and sales of securities and borrowings from the Federal
Home Loan Bank of Indianapolis. While maturities and scheduled amortization of
loans and securities are predictable sources of funds, deposit flows and
loan prepayments are greatly influenced by general interest rates, economic
conditions and competition.
 
 We
regularly adjust our investments in liquid assets based upon our assessment of:
(1) expected loan demands; (2) expected deposit flows, in particular municipal
deposit flows; (3) yields available on interest-earning deposits and securities;
and (4) the objectives of our asset/liability management
policy.
  54
  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 $32.0 million at June 30, 2010.
Securities classified as available-for-sale whose market value exceeds our cost,
which provide additional sources of liquidity, totaled $104.1 million at June
30, 2010. Total securities classified as available-for-sale were $119.3 million
at June 30, 2010. In addition, at June 30, 2010, we had the ability to borrow a
total of approximately $83.0 million from the Federal Home Loan Bank of
Indianapolis.
 
 At June
30, 2010, we had $38.7 million in loan commitments outstanding, consisting of
$1.1 million in mortgage loan commitments, $4.3 million in commercial loan
commitments, $26.6 million in unused home equity lines of credit, $5.8 million
in commercial lines of credit, and $856,000 in letters of credit
outstanding.  Certificates of deposit due within one year of June 30,
2010 totaled $162.5 million. This represented 74.6% of certificates of deposit
at June 30, 2010. We believe the large percentage of certificates of deposit
that mature within one year reflects customers’ hesitancy to invest their funds
for long periods in the current low interest rate environment.If these maturing
deposits do not remain with us, we will be required to seek other sources of
funds, including other certificates of deposit and borrowings. Depending on
market conditions, we may be required to pay higher rates on such deposits or
other borrowings than we currently pay on the certificates of deposit due on or
before June 30, 2010. We believe, however, based on past experience that a
significant portion of our certificates of deposit will remain with us. We have
the ability to attract and retain deposits by adjusting the interest rates
offered.
 
 The
following table presents certain of our contractual obligations as of June 30,
2010.
 
 PaymentsDuebyPeriodContractualObligations
                  
                  Total
                  
                  
                  Lessthan
                    OneYear
                  
                  
                  Oneto
                    Three
                    Years
                  
                  
                  Threeto
                    FiveYears
                  
                  
                  MoreThan
                    5Years(Dollars
      in Thousands)At
      June 30, 2010Long-term
      debt obligations
                  
                  $
                  2,833
                  
                  
                  $
                  1,000
                  
                  
                  $
                  1,833
                  
                  
                  $
                  —
                  
                  
                  $
                  —Operating
      lease obligations
                  
                  
                  74
                  
                  
                  
                  31
                  
                  
                  
                  32
                  
                  
                  
                  11
                  
                  
                  
                  —Other
      long-term liabilities reflected on the balance sheet
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —
                  
                  
                  
                  —Total
                  
                  $
                  2,907
                  
                  
                  $
                  1,031
                  
                  
                  $
                  1,865
                  
                  
                  $
                  11
                  
                  
                  $
                  —
 
 Our
primary investing activities are the origination and purchase of loans and the
purchase of securities. Our primary financing activities consist of activity in
deposit accounts and Federal Home Loan Bank advances. Deposit flows are affected
by the overall level of interest rates, the interest rates and products offered
by us and our local competitors and other factors. We generally manage the
pricing of our deposits to be competitive and to increase core deposit
relationships. Occasionally, we offer promotional rates on certain deposit
products to attract deposits.
 
 The
following table presents our primary investing and financing activities during
the periods indicated.
 
 Year Ended June 30,2010
                    
                    
                    2009(Dollars in thousands)Investing
      activities:Loans
      disbursed or closed, net of acquisition
                    
                    $
                    (62,161
                    )
                    
                    $
                    (46,378
                    )Loan
      principal repayments
                    
                    
                    41,597
                    
                    
                    
                    31,153Proceeds
      from maturities and principal repayments of securities
                    
                    
                    28,334
                    
                    
                    
                    12,138Proceeds
      from sales of securities available-for-sale
                    
                    
                    20,557
                    
                    
                    
                    1,550Purchases
      of securities
                    
                    
                    (91,931
                    )
                    
                    
                    (51,349
                    )Capital
      expenditures, net of acquisition
                    
                    
                    (796
                    )
                    
                    
                    (163
                    )
  55
 
 Financing
      activities:Increase
      in deposits, net of acquisition
                      
                      
                      37,258
                      
                      
                      
                      18,842Proceeds
      from Federal Home Loan Bank advances
                      
                      
                      —
                      
                      
                      
                      —Repayments
      of Federal Home Loan Bank advances
                      
                      
                      (1,000
                      )
                      
                      
                      (1,000
                      )Dividends
      paid to stockholders
                      
                      
                      (1,170
                      )
                      
                      
                      (1,096
                      )Repurchases
      of common stock
                      
                      
                      (80
                      )
                      
                      
                      (325
                      )
 
 Capital
Management. United Community Bank is subject to various regulatory
capital requirements administered by the OTS, 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 June 30, 2010,
we exceeded all of our regulatory capital requirements. We are considered “well
capitalized” under regulatory guidelines. See “Regulation and
Supervision—Regulation of Federal Savings
Associations—Capital Requirements,”and Note 17 to the
consolidated financial statements included in Item 8 to this Annual Report on
Form 10-K.
 
 Off-Balance Sheet
Arrangements. In the normal course of operations, we engage in a variety
of financial transactions that, in accordance with U.S. generally accepted
accounting principles, are not recorded in our financial statements. These
transactions involve, to varying degrees, elements of credit, interest rate and
liquidity risk. Such transactions are used primarily to manage customers’
requests for funding and take the form of loan commitments, letters of credit
and lines of credit. For information about our loan commitments and unused lines
of credit, see Note 15 of the notes to the consolidated financial statements. We
currently have no plans to engage in hedging activities in the
future.
 
 For the
year ended June 30, 2010, we engaged in no off-balance sheet transactions
reasonably likely to have a material effect on our financial condition, results
of operations or cash flows.
 
 Effect
of Inflation and Changing Prices
 
 The
financial statements and related financial data presented in this report have
been prepared in accordance with U.S. generally accepted accounting principles,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time due to inflation. The primary impact of
inflation on our operations is reflected in increased operating costs. Unlike
most industrial companies, virtually all the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates
generally have a more significant impact on a financial institution’s
performance than do general levels of inflation. Interest rates do not
necessarily move in the same direction or to the same extent as the prices of
goods and services.
 
 Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk
 
 The
information required by this item is incorporated herein by reference to the
section captioned “Risk
Management” in Item 7 of this Annual Report on Form 10-K.
  56
  Item 8. Financial Statements and
Supplementary Data
  Management’s
Report on Internal Control over Financial Reporting
  Company’s
management is responsible for establishing and maintaining adequate internal
control over financial reporting. The internal control process has been designed
under our supervision to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of the Company’s financial statements
for external reporting purposes in accordance with accounting principles
generally accepted in the United States of America.
  Management
conducted an assessment of the effectiveness of the Company’s internal control
over financial reporting as of June 30, 2010, utilizing the framework
established in Internal Control – Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).  Based on
this assessment, management has determined that the Company’s internal control
over financial reporting as of June 30, 2010 is effective.
  Our
internal control over financial reporting includes policies and procedures that
pertain to the maintenance of records that accurately and fairly reflect, in
reasonable detail, transactions and dispositions of assets; and provide
reasonable assurances that: (1) transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America; (2) receipts and
expenditures are being made only in accordance with authorizations of management
and the directors of the Company; and (3) unauthorized acquisitions, use, or
disposition of the Company’s assets that could have a material effect on the
Company’s financial statements are prevented or timely detected.
  All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparations and presentations.  Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
  This
annual report does not include an attestation report of the Company’s
independent registered public accounting firm regarding internal control over
financial reporting.  Management’s report was not subject to attestation by
the Company’s independent registered public accounting firm pursuant to
temporary rules of the Securities and Exchange Commission that permit the
Company to provide only management’s report in this annual report.
  September
28, 2010
  57
  [LETTERHEAD
OF CLARK, SCHAEFER, HACKETT & CO.]
  Report
of Independent Registered
 Public Accounting
Firm
 
 To the
Board of Directors of
 United
Community Bancorp and Subsidiaries:
 
 We have
audited the consolidated statements of financial condition of United Community
Bancorp and Subsidiaries as of June 30, 2010 and 2009, and the related
consolidated statements of income, comprehensive income, stockholders’ equity,
and cash flows for each of the years then ended. The Company’s management is
responsible for these financial statements. Our responsibility is to express an
opinion on these financial statements based on our audits.
 
 We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
 
 In our
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of United Community Bancorp and
Subsidiaries as of June 30, 2010 and 2009, and the results of its operations and
its cash flows for each of the years then ended in conformity with accounting
principles generally accepted in the United States of America.
 
 /s/
      Clark, Schaefer, Hackett & Co.Cincinnati,
      OhioSeptember
      28, 2010
  58
 UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
 
 Consolidated
Statements of Financial Condition
 
 (In thousands, except share amounts)
                        
                        June 30, 2010
                        
                        
                        June 30, 2009AssetsCash
      and due from banks
                        
                        $
                        32,023
                        
                        
                        $
                        27,004Investment
      securities:Securities
      available for sale - at estimated market value
                        
                        
                        62,089
                        
                        
                        
                        46,769Securities
      held to maturity - at amortized cost
                        
                        
                        631
                        
                        
                        
                        175Mortgage-backed
      securities available for sale - at estimated market value
                        
                        
                        57,238
                        
                        
                        
                        29,713Loans
      receivable, net
                        
                        
                        309,575
                        
                        
                        
                        272,270Loans
      available for sale
                        
                        
                        364
                        
                        
                        
                        2,193Property
      and equipment, net
                        
                        
                        7,513
                        
                        
                        
                        6,011Federal
      Home Loan Bank stock, at cost
                        
                        
                        2,016
                        
                        
                        
                        2,016Accrued
      interest receivable:Loans
                        
                        
                        1,573
                        
                        
                        
                        1,259Investments
      and mortgage-backed securities
                        
                        
                        717
                        
                        
                        
                        486Other
      real estate owned, net
                        
                        
                        297
                        
                        
                        
                        1,940Cash
      surrender value of life insurance policies
                        
                        
                        7,109
                        
                        
                        
                        6,826Deferred
      income taxes
                        
                        
                        3,113
                        
                        
                        
                        2,700Prepaid
      expenses and other assets
                        
                        
                        3,316
                        
                        
                        
                        2,217Goodwill
                        
                        
                        3,130
                        
                        
                        
                        -Intangible
      asset
                        
                        
                        1,400
                        
                        
                        
                        -Total
      assets
                        
                        $
                        492,104
                        
                        
                        $
                        401,579Liabilities and Stockholders'
      EquityDeposits
                        
                        $
                        430,180
                        
                        
                        $
                        339,616Advance
      from FHLB
                        
                        
                        2,833
                        
                        
                        
                        3,833Accrued
      interest on deposits
                        
                        
                        119
                        
                        
                        
                        15Accrued
      interest on FHLB advance
                        
                        
                        7
                        
                        
                        
                        8Advances
      from borrowers for payment of insurance and taxes
                        
                        
                        168
                        
                        
                        
                        179Accrued
      expenses and other liabilities
                        
                        
                        3,317
                        
                        
                        
                        2,849Total
      liabilities
                        
                        
                        436,624
                        
                        
                        
                        346,500Stockholders'
      equityPreferred
      stock, $0.01 par value; 1,000,000 shares authorized, none
      issued
                        
                        
                        -
                        
                        
                        
                        -Common
      stock, $0.01 par value; 19,000,000 shares authorized, 8,464,000 shares
      issued and 7,845,554 shares outstanding at June 30, 2010 and 8,464,000
      shares issued, and 7,857,974 shares outstanding at June 30,
      2009
                        
                        
                        36
                        
                        
                        
                        36Additional
      paid-in capital
                        
                        
                        36,995
                        
                        
                        
                        36,791Retained
      earnings
                        
                        
                        28,048
                        
                        
                        
                        28,204Less
      shares purchased for stock plans
                        
                        
                        (3,042
                        )
                        
                        
                        (3,254
                        )Treasury
      Stock, at cost -  618,446 and 606,026 shares at June 30, 2010
      and June 30, 2009, respectively
                        
                        
                        (7,054
                        )
                        
                        
                        (6,974
                        )Accumulated
      other comprehensive income:Unrealized
      gain on securities available for sale, net of income taxes
                        
                        
                        497
                        
                        
                        
                        276Total
      stockholders' equity
                        
                        
                        55,480
                        
                        
                        
                        55,079Total
      liabilities and stockholders' equity
                        
                        $
                        492,104
                        
                        
                        $
                        401,579
 
 See
accompanying notes to the consolidated financial statements.
  59
 
 UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
 
 Consolidated
Statements of Income
 (In
thousands, except share amounts)
 
 For the year ended
                                June 30,2010
                              
                              
                              2009Interest
      income:Loans
                              
                              $
                              16,334
                              
                              
                              $
                              17,784Investments
      and mortgage - backed securities
                              
                              
                              2,602
                              
                              
                              
                              2,128Total
      interest income
                              
                              
                              18,936
                              
                              
                              
                              19,912Interest
      expense:Deposits
                              
                              
                              6,321
                              
                              
                              
                              7,766Borrowed
      funds
                              
                              
                              108
                              
                              
                              
                              140Total
      interest expense
                              
                              
                              6,429
                              
                              
                              
                              7,906Net
      interest income
                              
                              
                              12,507
                              
                              
                              
                              12,006Provision
      for loan losses
                              
                              
                              2,509
                              
                              
                              
                              2,447Net
      interest income after provision for loan losses
                              
                              
                              9,998
                              
                              
                              
                              9,559Noninterest
      income:Service
      charges
                              
                              
                              1,988
                              
                              
                              
                              1,776Gain
      on sale of loans
                              
                              
                              278
                              
                              
                              
                              526Gain
      (loss) on sale of investments
                              
                              
                              311
                              
                              
                              
                              (183
                              )Gain
      on sale of other real estate owned
                              
                              
                              34
                              
                              
                              
                              -Income
      from Bank Owned Life Insurance
                              
                              
                              282
                              
                              
                              
                              256Other
                              
                              
                              664
                              
                              
                              
                              412Total
      noninterest income
                              
                              
                              3,557
                              
                              
                              
                              2,787Noninterest
      expense:Compensation
      and employee benefits
                              
                              
                              6,040
                              
                              
                              
                              5,659Premises
      and occupancy expense
                              
                              
                              1,101
                              
                              
                              
                              1,074Deposit
      insurance premium
                              
                              
                              740
                              
                              
                              
                              457Advertising
      expense
                              
                              
                              378
                              
                              
                              
                              296Data
      processing expense
                              
                              
                              296
                              
                              
                              
                              241ATM
      service fees
                              
                              
                              423
                              
                              
                              
                              430Provision
      for loss on sale of real estate owned
                              
                              
                              510
                              
                              
                              
                              770Acquisition
      related expenses
                              
                              
                              439
                              
                              
                              
                              -Other
      operating expenses
                              
                              
                              2,271
                              
                              
                              
                              2,523Total
      noninterest expense
                              
                              
                              12,198
                              
                              
                              
                              11,450Income
      before income taxes
                              
                              
                              1,357
                              
                              
                              
                              896Provision
      for income taxes
                              
                              
                              343
                              
                              
                              
                              177Net
      income
                              
                              $
                              1,014
                              
                              
                              $
                              719Basic
      and diluted earnings per share
                              
                              $
                              0.13
                              
                              
                              $
                              0.09
 
 See
accompanying notes to the consolidated financial statements.
  60
 
 UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
 
 Consolidated
Statements of Comprehensive Income
 (In
thousands)
 
 For the year endedJune 30,2010
                    
                    
                    2009Net
      income
                    
                    $
                    1,014
                    
                    
                    $
                    719Other
      comprehensive income, net of tax Unrealized gain on available for sale
      securities
                    
                    
                    411
                    
                    
                    
                    551Reclassification
      adjustment for (gains) losses on available for sale securities included in
      income
                    
                    
                    (190
                    )
                    
                    
                    112Total
      comprehensive income
                    
                    $
                    1,235
                    
                    
                    $
                    1,382
 
 See
accompanying notes to consolidated financial statements.
  61
 
 UNITED
COMMUNITY BANCORP AND SUBSIDIARY
 
 Consolidated
Statements of Stockholders' Equity
 
 UnrealizedAdditional
                      
                      
                      
                      
                      
                      Shares
                      
                      
                      
                      
                      
                      Gain (Loss)Common
                      
                      
                      Paid-In
                      
                      
                      Retained
                      
                      
                      Purchased for
                      
                      
                      Treasury
                      
                      
                      on Securities(In thousands, except per share data)
                      
                      Stock
                      
                      
                      Capital
                      
                      
                      Earnings
                      
                      
                      Stock plans
                      
                      
                      Stock
                      
                      
                      Available for Sale
                      
                      
                      TotalBalance
      at June 30, 2008
                      
                      $
                      36
                      
                      
                      $
                      37,965
                      
                      
                      $
                      28,581
                      
                      
                      $
                      (5,057
                      )
                      
                      $
                      (6,649
                      )
                      
                      $
                      (387
                      )
                      
                      $
                      54,489Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      719
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      719Cash
      dividends of $0.37 per share*
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,096
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,096
                      )Stock-based
      compensation expense
                      
                      
                      -
                      
                      
                      
                      500
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      500Amortization
      of ESOP shares
                      
                      
                      -
                      
                      
                      
                      (94
                      )
                      
                      
                      -
                      
                      
                      
                      223
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      129Reclassification
      of shares already earned
                      
                      
                      -
                      
                      
                      
                      (1,580
                      )
                      
                      
                      -
                      
                      
                      
                      1,580
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -Shares
      repurchased
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (325
                      )
                      
                      
                      -
                      
                      
                      
                      (325
                      )Unrealized
      loss on investments:Net
      change during the period, net of deferred taxes of $442
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      663
                      
                      
                      
                      663Balance
      at June 30, 2009
                      
                      $
                      36
                      
                      
                      $
                      36,791
                      
                      
                      $
                      28,204
                      
                      
                      $
                      (3,254
                      )
                      
                      $
                      (6,974
                      )
                      
                      $
                      276
                      
                      
                      $
                      55,079Net
      income
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,014
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      1,014Cash
      dividends of $0.41 per share*
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,170
                      )
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (1,170
                      )Stock-based
      compensation expense
                      
                      
                      -
                      
                      
                      
                      298
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      298Amortization
      of ESOP shares
                      
                      
                      -
                      
                      
                      
                      (94
                      )
                      
                      
                      -
                      
                      
                      
                      212
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      118Shares
      repurchased
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (80
                      )
                      
                      
                      -
                      
                      
                      
                      (80
                      )Unrealized
      loss on investments:Net
      change during the period, net of deferred taxes of $72
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      221
                      
                      
                      
                      221Balance
      at June 30, 2010
                      
                      $
                      36
                      
                      
                      $
                      36,995
                      
                      
                      $
                      28,048
                      
                      
                      $
                      (3,042
                      )
                      
                      $
                      (7,054
                      )
                      
                      $
                      497
                      
                      
                      $
                      55,480
 
 * paid on
all shares other than MHC
 
 See
accompanying notes to consolidated financial statements.
  62
 
 UNITED
COMMUNITY BANCORP AND SUBSIDIARIES
 
 Consolidated
Statements of Cash Flows
 
 For the year endedJune 30,(In
      thousands)
                    
                    2010
                    
                    
                    2009Operating
      activities:Net
      income
                    
                    $
                    1,014
                    
                    
                    $
                    719Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
                    
                    
                    454
                    
                    
                    
                    472Provision
      for loan losses
                    
                    
                    2,509
                    
                    
                    
                    2,447Provision
      for losses on real estate acquired through foreclosure
                    
                    
                    510
                    
                    
                    
                    770Deferred
      loan origination costs
                    
                    
                    (84
                    )
                    
                    
                    (31
                    )Amortization
      of premium on investments
                    
                    
                    341
                    
                    
                    
                    153Proceeds
      from sale of loans
                    
                    
                    25,409
                    
                    
                    
                    28,901Loans
      disbursed for sale in the secondary market
                    
                    
                    (23,302
                    )
                    
                    
                    (30,416
                    )Gain
      on sale of loans
                    
                    
                    (278
                    )
                    
                    
                    (526
                    )Loss
      (gain) on the sale of investments
                    
                    
                    (311
                    )
                    
                    
                    183ESOP
      shares committed to be released
                    
                    
                    212
                    
                    
                    
                    129Stock-based
      compensation expense
                    
                    
                    204
                    
                    
                    
                    500Deferred
      income taxes
                    
                    
                    (503
                    )
                    
                    
                    (50
                    )Gain
      on sale of other real estate owned
                    
                    
                    (34
                    )
                    
                    
                    (50
                    )Effects
      of change in operating assets and liabilities:Accrued
      interest receivable
                    
                    
                    (545
                    )
                    
                    
                    (394
                    )Prepaid
      expenses and other assets
                    
                    
                    (1,099
                    )
                    
                    
                    (87
                    )Accrued
      interest on deposits
                    
                    
                    104
                    
                    
                    
                    (62
                    )Accrued
      expenses and other
                    
                    
                    468
                    
                    
                    
                    591Net
      cash provided by operating activities
                    
                    
                    5,069
                    
                    
                    
                    3,249Investing
      activities:Proceeds
      from maturity of available for sale investment securities
                    
                    
                    16,640
                    
                    
                    
                    6,250Proceeds
      from the sale of available for sale investment securities
                    
                    
                    9,639
                    
                    
                    
                    1,550Proceeds
      from the maturity of held to maturity investment
securities
                    
                    
                    44
                    
                    
                    
                    25Proceeds
      from repayment of mortgage-backed securities available for
      sale
                    
                    
                    11,650
                    
                    
                    
                    5,863Proceeds
      from sale of mortgage-backed securities
                    
                    
                    10,918
                    
                    
                    
                    -Proceeds
      from sale of other real estate owned
                    
                    
                    2,276
                    
                    
                    
                    1,088Purchases
      of available for sale investment securities
                    
                    
                    (42,118
                    )
                    
                    
                    (41,003
                    )Purchases
      of mortgage-backed securities
                    
                    
                    (49,813
                    )
                    
                    
                    (10,346
                    )Purchases
      of Federal Home Loan Bank stock
                    
                    
                    -
                    
                    
                    
                    (90
                    )Net
      decrease in loans, net of acquisition
                    
                    
                    3,420
                    
                    
                    
                    8,814Increase
      in cash surrender value of life insurance
                    
                    
                    (283
                    )
                    
                    
                    (256
                    )Cash
      received for acquisition of branches
                    
                    
                    3,376
                    
                    
                    
                    -Capital
      expenditures, net of acquisition
                    
                    
                    (796
                    )
                    
                    
                    (163
                    )Net
      cash used in investing activities
                    
                    
                    (35,047
                    )
                    
                    
                    (28,268
                    )Financing
      activities:Net
      increase in deposits, net of acquisition
                    
                    
                    37,258
                    
                    
                    
                    18,842Dividends
      paid to stockholders
                    
                    
                    (1,170
                    )
                    
                    
                    (1,096
                    )Repurchases
      of common stock
                    
                    
                    (80
                    )
                    
                    
                    (325
                    )Repayments
      of Federal Home Loan Bank advances
                    
                    
                    (1,000
                    )
                    
                    
                    (1,000
                    )Net
      decrease in advances from borrowers for payment of insurance and
      taxes
                    
                    
                    (11
                    )
                    
                    
                    (108
                    )Net
      cash provided by financing activities
                    
                    
                    34,997
                    
                    
                    
                    16,313Net
      increase (decrease) in cash and cash equivalents
                    
                    
                    5,019
                    
                    
                    
                    (8,706
                    )Cash
      and cash equivalents at beginning of period
                    
                    
                    27,004
                    
                    
                    
                    35,710Cash
      and cash equivalents at end of period
                    
                    $
                    32,023
                    
                    
                    $
                    27,004
 
 See
accompanying notes to the consolidated financial statements.
  63
  UNITED
COMMUNITY BANCORP
 
 Notes to
Consolidated Financial Statements
 
 NOTE 1 –
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
 
 United
Community Bancorp (the “Company”) is a Federally-chartered corporation, which
was organized to be the mid-tier holding company for United Community Bank (the
“Bank”), which is a Federally-chartered, FDIC-insured savings bank.  The
Company was organized in conjunction with the Bank’s reorganization from a
mutual savings bank to the mutual holding company structure on March 30,
2006.  United Community MHC, a Federally-chartered corporation, is the
mutual holding company parent of the Company. At June 30, 2010, United Community
MHC owned 59% of the Company’s outstanding common stock and must always own at
least a majority of the voting stock of the Company.  In addition to the
shares of the Company, United Community MHC was capitalized with $100,000 in
cash from the Company.  The Company, through the Bank, operates in a single
business segment providing traditional banking services through its office and
branches in Southeastern Indiana.  UCB Real Estate Management Holdings,
LLC, a wholly-owned subsidiary of United Community Bank, was formed for the
purpose of holding and operating real estate assets that are acquired by the
Bank through, or in lieu of, foreclosure.  UCB Financial Services, Inc, a
wholly-owned subsidiary of United Community Bank, was formed for the purpose of
collecting commissions on investments referred to Lincoln Financial
Group.
 
 PRINCIPLES
OF CONSOLIDATION – The consolidated financial statements include the accounts of
the Company and the Bank.  All significant intercompany balances and
transactions have been eliminated.
 
 USE OF
ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The consolidated
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“GAAP”).  In preparing
consolidated financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period.  The most significant estimates and
assumptions in the Company’s financial statements are recorded in the allowances
for loan and other real estate losses and deferred income taxes.  Actual
results could differ significantly from those estimates.
 
 CASH AND
CASH EQUIVALENTS – For purposes of reporting cash flows, cash and cash
equivalents include cash and interest-bearing deposits in other financial
institutions with original maturities of less than ninety days.
  64
  INVESTMENT
SECURITIES – Investment and mortgage-backed securities are classified upon
acquisition into one of three categories: held to maturity, trading, and
available for sale, in accordance with FASB Accounting Standards Codification
(ASC) Topic 320, Investments.Debt
securities that the Bank has the positive intent and ability to hold to maturity
are classified as held to maturity securities and reported at amortized
cost.  Debt and equity securities that are bought and held principally for
the purpose of selling in the near-term are classified as trading securities and
reported at fair value, with unrealized gains and losses included in
earnings.  The Bank had no trading securities at June 30, 2010 or
2009.  Debt and equity securities not classified as either held to maturity
securities or trading securities are classified as available for sale securities
and reported at fair value, with unrealized gains or losses excluded from
earnings and reported as a separate component of stockholders’ equity, net of
deferred taxes.
 
 Securities
are recorded net of applicable premium or discount with the premium or discount
being amortized on the interest method over the estimated average life of the
investment.
 
 The Bank
designates its investments in U. S. League Intermediate-Term Portfolio, certain
municipal bonds, and mortgage-backed securities as available for
sale.
 
 Gains and
losses realized on the sale of investment securities are accounted for on the
trade date using the specific identification method.
 
 LOANS
RECEIVABLE - Loans receivable that management has the intent and ability to hold
until maturity or payoff are reported at their outstanding unpaid principal
balances reduced by any charge-offs or specific valuation accounts and net of
any deferred fees or costs on originated loans, or unamortized premiums or
discounts on purchased loans.  Interest on loans is calculated by using the
simple interest method on daily balances of the principal amount
outstanding.  Loans held for sale are recorded at lower of cost or market
determined in the aggregate.  Loans are designated for sale as a part of
the Bank’s asset/liability management strategy.  Market value is determined
based on expected volatility in interest rates and the anticipated holding
period before the loan is sold.  Due to the holding period being short
term, the market value and cost of the loan are approximately the same. 
The Bank had $364,000 and $2,193,000 in loans held for sale at June 30, 2010 and
2009, respectively.
 
 The Bank
defers all loan origination fees, net of certain direct loan origination costs,
and amortizes them over the contractual life of the loan as an adjustment of
yield in accordance with ASC 310-20, Receivables – Nonrefundable Fees and
Other.
 
 The Bank
retains the servicing on loans sold and agrees to remit to the investor loan
principal and interest at agreed-upon rates.  These rates can differ from
the loan’s contractual interest rate resulting in a “yield
differential.”  In addition to previously deferred loan origination
fees and cash gains, gains on the sale of loans can represent the present value
of the future yield differential less normal servicing fees, capitalized over
the estimated life of the loans sold.  Normal servicing fees are determined
by reference to the stipulated minimum servicing fee set forth by the government
agencies to which the loans are sold.  Such servicing fees are amortized to
operations over the life of the loans using the interest method.  If
prepayments are higher than expected, an immediate charge to operations is made.
If prepayments are lower than original estimates, then the related adjustments
are made prospectively.
 
 The
mortgage servicing rights recorded by the Bank are segregated into pools for
valuation purposes using as pooling criteria the loan term and coupon rate in
accordance with ASC 860-50-30.Once pooled, each
grouping of loans is evaluated on a discounted earnings basis to determine the
present value of the future earnings that a purchaser could expect to realize
from each portfolio.  Earnings are projected from a variety of sources
including loan-servicing fees, interest earned on float, net interest earned on
escrows, miscellaneous income and costs to service the loans.  The present
value of future earnings is the “economic” value for the pool.  The Company
has selected the amortized cost method for valuation under guidance of ASC
860-50, Transfers and
Servicing – Servicing Assets and Liabilities.
  65
  The
allowance for loan and real estate losses is increased by charges to income and
decreased by charge-offs (net of recoveries).  Management's periodic
evaluation of the adequacy of the allowance is based on the Bank's past loan
loss experience, known and inherent risks such as amount of loan, type of loan,
concentrations, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral, and current economic
conditions.  In addition, various regulatory agencies, as an integral part
of their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on judgments different from those of Management.
 
 Although
Management uses the best information available to make these estimates, future
adjustments to the allowance may be necessary due to economic, operating,
regulatory and other conditions that may be beyond the Bank's
control.
 
 The
Bank’s internal asset review committee reviews each loan with three or more
delinquent payments, and each loan ninety days or more past due, and decides on
whether the circumstances involved give reason to place the loan on non-accrual
status.  The Board of Directors reviews this information as determined by
the internal asset review committee each month.  Loans may be returned to
accrual status when all principal and interest amounts contractually due
(including arrearages) are reasonably assured of repayment within an acceptable
period of time, and there is a sustained period of repayment performance by the
borrower, in accordance with the contractual terms of interest and
principal.  While a loan is classified as non-accrual, interest income is
generally recognized on a cash basis.
 
 A loan is
defined as impaired when, based on current information and events, it is
probable that a creditor will be unable to collect all amounts due according to
the contractual terms of the loan agreement.  The Bank considers its
investment in one-to-four family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment.  With respect to the Bank's investment in
multi-family and nonresidential loans, such loans are collateral-dependent and,
as a practical expedient, are carried at the lower of cost or fair value based
upon the most recent real estate appraisals.  Collateral-dependent loans
which are more than ninety days delinquent and are considered to constitute more
than a minimum delay in repayment are evaluated for impairment at that
time.
 
 Cash
receipts on a nonaccrual loan are applied to principal and interest in
accordance with its contractual terms unless full payment of principal is not
expected, in which case cash receipts, whether designated as principal or
interest, are applied as a reduction of the carrying value of the loan. A
nonaccrual loan is generally returned to accrual status when principal and
interest payments are current, full collectibility of principal and interest is
reasonably assured and a consistent record of performance has been
demonstrated.
  66
  It is the
Savings Bank’s policy to charge off unsecured credits that are more than one
hundred and twenty days delinquent.  Similarly, collateral dependent loans
which are more than ninety days delinquent are considered to constitute more
than a minimum delay in repayment and are evaluated for impairment at that
time.  Impaired loans would be charged off in the same manner as all loans
are subject to charge off.
 
 From time
to time, as part of our loss mitigation process, loans may be renegotiated in a
troubled debt restructuring when we determine that greater economic value will
ultimately be recovered under the new terms than through foreclosure,
liquidation, or bankruptcy.  We may consider the borrower’s payment status
and history, the borrower’s ability to pay upon a rate reset on an adjustable
rate mortgage, size of the payment increase upon a rate reset, period of time
remaining prior to the rate reset, and other relevant factors in determining
whether a borrower is experiencing financial difficulty.  The restructured
loan is measured for impairment under the new terms.
 
 CONCENTRATION
OF CREDIT RISK - The Bank grants residential and commercial loans to customers
in local counties in Southeastern Indiana, Northern Kentucky, and Southwestern
Ohio.  Although the Bank has a diversified loan portfolio, a substantial
portion of its debtors' ability to honor their contracts is dependent upon the
local economy.
 
 Management
maintains deposit accounts with financial institutions in excess of federal
deposit insurance limits.  The Company has not experienced any losses in
such accounts.  The Company believes it is not exposed to any significant
credit risk on cash and cash equivalents.
 
 OTHER
REAL ESTATE OWNED - Real estate properties acquired through, or in lieu of, loan
foreclosure are initially recorded at fair value at the date of foreclosure, and
are transferred to the Bank’s wholly-owned subsidiary, UCB Real Estate
Management Holdings, LLC.  Holding costs, including losses from operations,
are expensed when incurred.  Valuations are periodically performed, and an
allowance for losses is established by a charge to operations if the carrying
value of a property exceeds its estimated net realizable value.
 
 PROPERTY
AND EQUIPMENT - Property and equipment is carried at cost.  Depreciation is
provided on the straight-line method over the estimated useful lives of the
assets.  The estimated useful lives are as follows:
 
 Land
      improvements
                    7 –
      15 yearsBuildings
                    15
      – 39 yearsFurniture
      and equipment
                    3 –
      10 years
 
 Significant
renewals and betterments are charged to the property and equipment
account.  Maintenance and repairs are charged to operations in the period
incurred.
 
 INCOME
TAXES – The Company accounts for income taxes in accordance with ASC
740-10-50.  Pursuant to the provisions of ASC 740-10-50, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible differences between the tax basis of an
asset or liability and its reported amount in the consolidated financial
statements that will result in taxable or deductible amounts in future
periods.  Deferred tax assets are recorded only to the extent that the
amount of net deductible or taxable temporary differences or carry forward
attributes may be utilized against current period earnings, carried back against
prior years' earnings, offset against taxable temporary differences reversing in
future periods, or utilized to the extent of management's estimate of future
taxable income.  A valuation allowance is provided for deferred tax assets
to the extent that the value of net deductible temporary differences and carry
forward attributes exceeds management’s estimates of taxes payable on future
taxable income.  Deferred tax liabilities are provided on the total amount
of net temporary differences taxable in the future.  The Company applies a
more likely than not recognition threshold for all tax
uncertainties.
  67
  The
Company's principal temporary differences between pretax financial income and
taxable income result primarily from timing differences for certain components
of compensation and post-retirement expense, book and tax bad debt deductions,
and amortization of goodwill and other intangible assets.  Additional
temporary differences result from depreciation expense computed utilizing
accelerated methods for tax purposes, and for limitations on annual deductions
related to charitable contributions to the UCB Charitable
Foundation.
 
 The
determination of current and deferred income taxes is an accounting estimate
which is based on the analyses of many factors including interpretation of
federal and state income tax laws, the evaluation of uncertain tax positions,
differences between the tax and financial reporting basis of assets and
liabilities (temporary differences), estimates of amounts due or owed such as
the timing of reversal of temporary differences and current financial accounting
standards. Actual results could differ from the estimates and tax law
interpretations used in determining the current and deferred income tax
liabilities.
 
 EMPLOYEE
STOCK OWNERSHIP PLAN - The Company accounts for the United Community Bank
Employee Stock Ownership Plan (“ESOP”) in accordance with ASC 718-40, Compensation – Stock Compensation –
Employee Stock Ownership Plans.  ESOP shares pledged as collateral
are reported as unearned ESOP shares in stockholders’ equity.  As shares
are committed to be released from collateral, the Bank will record compensation
expense equal to the current market price of the shares.  To the extent
that the fair value of the ESOP shares differs from the cost of such charges,
the difference is recorded to stockholders’ equity as additional paid-in
capital.  Additionally, the shares become outstanding for basic net income
per share computations.
 
 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 an accelerated 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.
  68
  EARNINGS
PER SHARE – In June 2008, the Financial Accounting Standards Board (FASB) issued
ASC 260-10-65-2, Transition Related to FSP EITF 03-6-1, Determining Whether Instruments
Granted in Share-Based Payment Transactions are Participating Securities.
This guidance concludes that 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 EPS. This guidance became effective for the Company
on July 1, 2009 and has been applied retrospectively as required. 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
earnings per share (“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 each
of the years ended June 30, 2010 and 2009, outstanding options to purchase
346,304 shares were excluded from the computations of diluted earnings per share
as their effect would have been anti-dilutive.  The following is a
reconciliation of the basic and diluted weighted average number of common shares
outstanding:
 
 June 30,2010
                          
                          
                          2009Basic
      weighted average outstanding shares
                          
                          
                          7,616,623
                          
                          
                          
                          7,589,898Effect
      of dilutive stock options
                          
                          
                          -
                          
                          
                          
                          -Diluted
      weighted average outstanding shares
                          
                          
                          7,616,623
                          
                          
                          
                          7,589,898
 
 COMPREHENSIVE
INCOME (LOSS) – The Company presents in the consolidated statement of
comprehensive income (loss) those amounts from transactions and other events
which currently are excluded from the consolidated statement of operations and
are recorded directly to stockholders’ equity.
 
 GOODWILL
– In June 2010, the Company acquired three branches from Integra Bank National
Association (“Integra”), which was accounted for under the purchase method of
accounting. Under the purchase method, the Company is required to allocate the
cost of an acquired company to the assets acquired, including identified
intangible assets, and liabilities assumed based on their estimated fair values
at the date of acquisition. The excess cost over the value of net assets
acquired represents goodwill, which is not subject to amortization.
 
 Goodwill
arising from business combinations represents the value attributable to
unidentifiable intangible elements in the business acquired. Goodwill recorded
by the Company in connection with its acquisition relates to the inherent value
in the business acquired and this value is dependent upon the Company’s ability
to provide quality, cost-effective services in a competitive market place. As
such, goodwill value is supported ultimately by revenue that is driven by the
volume of business transacted. A decline in earnings as a result of a lack of
growth or the inability to deliver cost-effective services over sustained
periods can lead to impairment of goodwill that could adversely impact earnings
in future periods.
  69
  Goodwill
is not amortized but is tested for impairment when indicators of impairment
exist, or at least annually. Potential goodwill impairment exists when the fair
value of the reporting unit (as defined by US GAAP) is less than its carrying
value. An impairment loss is recognized in earnings only when the carrying
amount of goodwill is less than its implied fair value.
 
 FAIR
VALUE OF FINANCIAL INSTRUMENTS – 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.
  70
  Deposits
 
 The fair
values of passbook accounts, NOW accounts, and money market savings and demand
deposits approximate their carrying values.  The fair values of fixed
maturity certificates of deposit are estimated using a discounted cash flow
calculation that applies interest rates currently offered for deposits of
similar maturities.
 
 Advance from Federal Home
Loan Bank
 
 The fair
value is calculated using rates available to the Company on advances with
similar terms and remaining maturities.
 
 Off-balance sheet
items
 
 Carrying
value is a reasonable estimate of fair value.  These instruments are
generally variable rate or short-term in nature, with minimal fees
charged.
 
 ADVERTISING
- The Bank expenses advertising costs as incurred.  Advertising costs
consist primarily of television, radio, newspaper and billboard
advertising.
 
 EFFECT OF
RECENT ACCOUNTING PRONOUNCEMENTS
 
 In July
2010, the FASB issued Accounting Standards Update (ASU) 2010-20, "Disclosures
About the Credit Quality of Financing Receivables and the Allowance for Credit
Losses."  This purpose of this Update is to improve transparency by
companies that hold financing receivables, including loans, leases and other
long-term receivables. The Update requires such companies to disclose more
information about the credit quality of their financing receivables and the
credit reserves against them. This guidance is effective for the first interim
or annual reporting period ending after December 15, 2010, with the exception of
certain disclosures which include information for activity that occurs during a
reporting period (activity in the allowance for credit losses and modifications
of financing receivables) which will be effective for the first interim or
annual period beginning after December 15, 2010.
 
 In April
2010, the FASB issued ASU No. 2010-18, Receivables (Topic 310): Effect of Loan
Modification when the Loan is Part of a Pool that is Accounted for as a Single
Asset (a consensus of the FASB Emerging Issues Task Force).  The amendments
in this update affect any entity that acquires loans subject to ASC Subtopic
310-30, that accounts for some or all of those loans within pools, and that
subsequently modifies one or more of those loans after acquisition.  ASU
No. 2010-18 is effective for modifications of loans accounted for within pools
under Subtopic 310-30 occurring in the interim period ending September 30, 2010,
and the amendments are to be applied prospectively.  Management is
currently evaluating the impact, if any, that the adoption of this amendment
will have on its consolidated financial statements.
  71
  In
January 2010, the FASB issued ASU No. 2010-06, Improving Disclosure about Fair
Value Measurements, under Topic 820, Fair value Measurements and
Disclosures, to improve and provide new disclosures for recurring and
nonrecurring fair value measurements under the three-level hierarchy of inputs
for transfers in and out of Levels 1 and 2, and activity in Level 3.  This
update also clarifies existing disclosures of the level of disaggregation for
the classes of assets and liabilities and the disclosure about inputs and
valuation techniques. ASU No. 2010-06 became effective for the interim period
March 31, 2010, except for the disclosures about purchases, sales,
issuances, and settlements in the roll forward of activity in Level 3 fair value
measurements, which becomes effective for the interim period ending September
30, 2011.  The adoption of ASU No. 2010-06 did not have a material
impact on our consolidated financial statements.
 
 In
January 2010 the FASB issued ASU 2010-01, Accounting for Distributions to
Shareholders with Components of Stock and Cash, under Topic 505,which
amends the Codification to clarify that the stock portion of a distribution to
shareholders that allows them to elect to receive cash or stock with a potential
limitation on the total amount of cash that all shareholders can elect to
receive in the aggregate is considered a share issuance that is reflected in
earnings per share prospectively and is not a stock dividend. ASU 2010-01
codifies the consensus reached in EITF Issue No. 09-E, “Accounting for Stock Dividends,
Including Distributions to Shareholders with Components of Stock and
Cash.” ASU 2010-01 became effective for the interim period ending
December 31, 2009 for the Company. There was no material impact on the
Company’s financial statements as a result of the adoption of ASU 2010-01 for
per share or dividends paid amounts disclosed.
 
 In
June 2009, the FASB issued guidance now codified as FASB ASC Topic 105,
Generally Accepted Accounting
Principles, as the single source of authoritative nongovernmental U.S.
GAAP. FASB ASC Topic 105 does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by providing all
authoritative literature related to a particular topic in one place. All
existing accounting standard documents will be superseded and all other
accounting literature not included in the FASB Codification will be considered
non-authoritative. These provisions of FASB ASC Topic 105 were effective for
interim and annual periods ending after September 15, 2009 and,
accordingly, were effective for the Company for the quarter ended September 30,
2009. The adoption of this pronouncement did not have an impact on the Company’s
financial condition or results of operations, but will impact the Company’s
financial reporting process by eliminating all references to pre-codification
standards. On the effective date of this Statement, the Codification superseded
all then-existing non-SEC accounting and reporting standards, and all other
non-grandfathered, non-SEC accounting literature not included in the
Codification became non-authoritative.
 
 In June
2008, the FASB issued ASC 260-10-65-2, Transition Related to FSP EITF 03-6-1,
Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance concludes that 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 EPS. This guidance became effective for the Company
on July 1, 2009. Because the Company’s restricted share awards contain
non-forfeitable dividend rights, the provisions of this guidance must be
applied. Upon adoption, the Company was required to adjust all prior period EPS
data on a retrospective basis to conform with the provisions of this
guidance.
  72
  In June
2009, the FASB issued ASU 2009-16, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140. This
Statement modifies the accounting for transfers of financial assets and the
determination of what entities must be consolidated, and will have a significant
effect on securitizations and special-purpose entities. We adopted these
provisions effective July 1, 2009, as required.  The adoption of these
provisions did not have a material impact on the Company’s financial
statements.
 
 NOTE 2 –
ACQUISITION
  On June
4, 2010 the Bank completed the purchase of three banking offices of Integra Bank
Corporation’s wholly-owned bank subsidiary, Integra Bank N.A., located in Milan,
Versailles, and Osgood, Indiana and a portfolio of selected loans originated by
other offices of Integra Bank. This acquisition was consistent with the Bank’s
strategy to strengthen and expand its Southeast Indiana market share. This
transaction added $53.3 million in deposits and $45.9 million in loans. The
deposits were purchased at a premium of 4.50%. As a result of the acquisition,
the Company recorded a core deposit intangible asset of $1,400,000 and goodwill
of $3,100,000. The results of operations for this acquisition have been included
since the transaction date of June 4, 1010. None of these purchased loans have
shown evidence of credit deterioration since origination. Expenses associated
with this transaction of $439,000 were included in the other non-interest
expense in the consolidated statement of income for the year ended June 30,
2010.
  73
  NOTE 3 –
INVESTMENT SECURITIES
 
 Investment
securities available for sale at June 30, 2010 consist of the
following:
 
 Gross
                    
                    
                    Gross
                    
                    
                    EstimatedAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    MarketCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Value(Dollars
      in thousands)U.S
      Government corporations and agencies
                    
                    $
                    49,157
                    
                    
                    $
                    212
                    
                    
                    $
                    -
                    
                    
                    $
                    49,369Municipal
      bonds
                    
                    
                    12,538
                    
                    
                    
                    137
                    
                    
                    
                    84
                    
                    
                    
                    12,591Other
      equity securities
                    
                    
                    211
                    
                    
                    
                    -
                    
                    
                    
                    82
                    
                    
                    
                    129$
                    61,906
                    
                    
                    $
                    349
                    
                    
                    $
                    166
                    
                    
                    $
                    62,089
 
 Investment
securities held to maturity at June 30, 2010 consist of the
following:
 Gross
                          
                          
                          Gross
                          
                          
                          EstimatedAmortized
                          
                          
                          Unrealized
                          
                          
                          Unrealized
                          
                          
                          MarketCost
                          
                          
                          Gains
                          
                          
                          Losses
                          
                          
                          Value(Dollars
      in thousands)Municipal
      bonds
                          
                          $
                          631
                          
                          
                          $
                          -
                          
                          
                          $
                          -
                          
                          
                          $
                          631
 
 Investment
securities available for sale at June 30, 2009 consist of the
following:
 
 Gross
                    
                    
                    Gross
                    
                    
                    EstimatedAmortized
                    
                    
                    Unrealized
                    
                    
                    Unrealized
                    
                    
                    MarketCost
                    
                    
                    Gains
                    
                    
                    Losses
                    
                    
                    Value(Dollars
      in thousands)U.S.
      League Intermediate - Term Portfolio
                    
                    $
                    60
                    
                    
                    $
                    -
                    
                    
                    $
                    13
                    
                    
                    $
                    47U.S.
      Government corporations and agencies
                    
                    
                    39,515
                    
                    
                    
                    218
                    
                    
                    
                    92
                    
                    
                    
                    39,641Municipal
      bonds
                    
                    
                    7,091
                    
                    
                    
                    -
                    
                    
                    
                    139
                    
                    
                    
                    6,952Other
      equity securities
                    
                    
                    211
                    
                    
                    
                    -
                    
                    
                    
                    82
                    
                    
                    
                    129$
                    46,877
                    
                    
                    $
                    218
                    
                    
                    $
                    326
                    
                    
                    $
                    46,769
  74
  Investment
securities held to maturity at June 30, 2009 consist of the
following:
 
 Gross
                        
                        
                        Gross
                        
                        
                        EstimatedAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        MarketCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        Value(Dollars
      in thousands)Municipal
      bonds
                        
                        $
                        175
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        $
                        175
 
 The
callable bonds and municipal bonds available for sale have the following
maturities at June 30, 2010:
 Amortized
                          
                          
                          Estimatedcost
                          
                          
                          market value(Dollars
      in thousands)Due
      or callable in one year or less
                          
                          $
                          30,964
                          
                          
                          $
                          31,093Due
      or callable in 1 - 5 years
                          
                          
                          18,193
                          
                          
                          
                          18,276Due
      or callable in 5 - 10 years
                          
                          
                          269
                          
                          
                          
                          279Due
      or callable in greater than 10 years
                          
                          
                          12,269
                          
                          
                          
                          12,312Total
      debt securities
                          
                          $
                          61,695
                          
                          
                          $
                          61,960
 
 All other
securities available for sale at June 30, 2010 are saleable within one
year.  The Bank held $631,000 and $175,000 in investment securities that
are being held to maturity at June 30, 2010 and 2009, respectively.  The
investment securities held to maturity have annual returns of principal and will
be fully matured between 2014 and 2019.
 
 The
expected returns of principal of investments held to maturity are as follows as
of June 30, 2010 (dollars in thousands):
 
 2011
                        
                        $
                        652012
                        
                        
                        682013
                        
                        
                        712014
                        
                        
                        742015
                        
                        
                        772016
      and thereafter
                        
                        
                        276$
                        631
 
 Gross
proceeds on the sale of investment and mortgage-backed securities were $20.5
million and $1.6 million for the years ended June 30, 2010 and 2009,
respectively.  Realized gains for the years ended June 30, 2010 and 2009
were $437,000 and $93,000, respectively.  Gross realized losses for the
years ended June 30, 2010 and 2009 were $126,000 and $276,000,
respectively.
  75
  The table
below indicates the length of time individual investment securities and
mortgage-backed securities have been in a continuous loss position at June 30,
2010 and 2009:
 
 Less than 12 Months
                                
                                
                                12 Months or Longer
                                
                                
                                TotalFair
                                
                                
                                Unrealized
                                
                                
                                Fair
                                
                                
                                Unrealized
                                
                                
                                Fair
                                
                                
                                UnrealizedValue
                                
                                
                                Losses
                                
                                
                                Value
                                
                                
                                Losses
                                
                                
                                Value
                                
                                
                                Losses(Dollars
      in thousands)June 30, 2010Municipal
      bonds
                                
                                $
                                6,703
                                
                                
                                $
                                84
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                $
                                6,703
                                
                                
                                $
                                84Mortgage-backed
      securities
                                
                                
                                8,888
                                
                                
                                
                                67
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                8,888
                                
                                
                                
                                67Other
      equity securities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                129
                                
                                
                                
                                82
                                
                                
                                
                                129
                                
                                
                                
                                82$
                                15,591
                                
                                
                                
                                151
                                
                                
                                
                                129
                                
                                
                                
                                82
                                
                                
                                
                                15,720
                                
                                
                                
                                233Number
      of investments
                                
                                
                                
                                19
                                
                                
                                
                                
                                
                                
                                
                                1
                                
                                
                                
                                
                                
                                
                                
                                20
 
 June 30, 2009U.S.
      League Intermediate - Term Portfolio & Callable Government
      agencies
                                
                                $
                                9,624
                                
                                
                                
                                92
                                
                                
                                
                                60
                                
                                
                                
                                13
                                
                                
                                
                                9,684
                                
                                
                                
                                105Municipal
      bonds
                                
                                
                                2,533
                                
                                
                                
                                63
                                
                                
                                
                                2,568
                                
                                
                                
                                76
                                
                                
                                
                                5,101
                                
                                
                                
                                139Mortgage-backed
      securities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                1,427
                                
                                
                                
                                50
                                
                                
                                
                                1,427
                                
                                
                                
                                50Other
      equity securities
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                129
                                
                                
                                
                                82
                                
                                
                                
                                129
                                
                                
                                
                                82$
                                12,157
                                
                                
                                
                                155
                                
                                
                                
                                4,184
                                
                                
                                
                                221
                                
                                
                                
                                16,341
                                
                                
                                
                                376Number
      of investments
                                
                                
                                
                                12
                                
                                
                                
                                
                                
                                
                                
                                18
                                
                                
                                
                                
                                
                                
                                
                                30
  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.
  76
  The
detail of interest and dividends on investment securities is as follows for June
30:
 
 2010
                      
                      
                      2009(Dollars
      in thousands)Taxable
      interest income
                      
                      $
                      2,212
                      
                      
                      $
                      1,924Nontaxable
      interest income
                      
                      
                      382
                      
                      
                      
                      196Dividends
                      
                      
                      8
                      
                      
                      
                      8$
                      2,602
                      
                      
                      $
                      2,128
 
 NOTE 4 –
MORTGAGE-BACKED SECURITIES
 
 Mortgage-backed
securities available for sale at June 30, 2010 consist of the
following:
 
 Gross
                        
                        
                        Gross
                        
                        
                        EstimatedAmortized
                        
                        
                        Unrealized
                        
                        
                        Unrealized
                        
                        
                        MarketCost
                        
                        
                        Gains
                        
                        
                        Losses
                        
                        
                        ValueFNMA
                        
                        $
                        40,237
                        
                        
                        
                        345
                        
                        
                        
                        11
                        
                        
                        
                        40,571FHLMC
                        
                        
                        16,432
                        
                        
                        
                        291
                        
                        
                        
                        56
                        
                        
                        
                        16,667$
                        56,669
                        
                        
                        
                        636
                        
                        
                        
                        67
                        
                        
                        
                        57,238
 
 Mortgage-backed
securities available for sale at June 30, 2009 consist of the
following:
 
 Gross
                      
                      
                      Gross
                      
                      
                      EstimatedAmortized
                      
                      
                      Unrealized
                      
                      
                      Unrealized
                      
                      
                      MarketCost
                      
                      
                      Gains
                      
                      
                      Losses
                      
                      
                      ValueFNMA
                      
                      $
                      13,154
                      
                      
                      
                      254
                      
                      
                      
                      25
                      
                      
                      
                      13,383FHLMC
                      
                      
                      15,705
                      
                      
                      
                      353
                      
                      
                      
                      25
                      
                      
                      
                      16,033GNMA
                      
                      
                      285
                      
                      
                      
                      12
                      
                      
                      
                      -
                      
                      
                      
                      297$
                      29,144
                      
                      
                      
                      619
                      
                      
                      
                      50
                      
                      
                      
                      29,713
 
 The
maturity of the mortgage-backed securities is based on the repayment of the
underlying mortgages and is as follows at June 30, 2010:
 
 Amortized
                        cost
                      
                      
                      Estimated
                        market value(Dollars in thousands)Due
      in 2 – 5 years
                      
                      $
                      1,402
                      
                      
                      $
                      1,443Due
      in 5 – 10 years
                      
                      
                      7,250
                      
                      
                      
                      7,402Due
      in greater than 10 years
                      
                      
                      48,017
                      
                      
                      
                      48,393$
                      56,669
                      
                      
                      $
                      57,238
  77
  NOTE 5 –
LOANS RECEIVABLE
 
 Loans
receivable consist of the following at June 30,
 
 2010
                      
                      
                      2009(Dollars
      in thousands)Residential
      real estateOne-to-four
      family
                      
                      $
                      137,473
                      
                      
                      
                      124,391Multi-family
                      
                      
                      46,777
                      
                      
                      
                      61,791Construction
                      
                      
                      1,566
                      
                      
                      
                      1,609Nonresidential
      real estate and land
                      
                      
                      82,969
                      
                      
                      
                      57,298Consumer
      and other loans
                      
                      
                      46,469
                      
                      
                      
                      32,213315,254
                      
                      
                      
                      277,302Less:Allowance
      for losses
                      
                      
                      5,681
                      
                      
                      
                      4,213Undisbursed
      portion of loans in process
                      
                      
                      494
                      
                      
                      
                      1,231Deferred
      loan costs, net
                      
                      
                      (496
                      )
                      
                      
                      (412
                      )$
                      309,575
                      
                      
                      
                      272,270
 
 As of
June 30, 2010 and 2009, the Bank was servicing loans for the benefit of others
in the amount of $52,341,000 and $45,108,000, respectively.  The Bank
recognized $278,000 and $526,000, of pre-tax gains on sale of loans during the
years ended June 30, 2010 and 2009, respectively.  The carrying value of
mortgage servicing rights approximated $471,000 and $405,000 as of June 30, 2010
and 2009, respectively.  No impairment has been recognized on the mortgage
service assets and correspondingly, no valuation allowance has been recognized
as of June 30, 2010 and 2009.
 
 The
Company sells loans in the secondary market.  Proceeds from the sales of
mortgage loan totaled $25,409,000 and $28,901,000 during the years ended June
30, 2010 and 2009, respectively. The Bank had $364,000 and $2,193,000 in 1-4
family fixed rate loans designated as held for sale at June 30, 2010 and 2009,
respectively. It is generally management's intention to hold all other loans
originated to maturity or earlier repayment.
 
 Changes
in the allowance for losses on loans for the year ended June 30 are as
follows:
 
 2010
                        
                        
                        2009(Dollars
      in thousands)Balance
      at beginning of year
                        
                        $
                        4,213
                        
                        
                        $
                        4,619Provisions
      charged to income
                        
                        
                        2,509
                        
                        
                        
                        2,447Charge-offs
                        
                        
                        (1,087
                        )
                        
                        
                        (2,820
                        )Recoveries
                        
                        
                        49
                        
                        
                        
                        18Loss
      on loan restructuring
                        
                        
                        (3
                        )
                        
                        
                        (51
                        )Balance
      at end of year
                        
                        $
                        5,681
                        
                        
                        $
                        4,213
  78
 
 The
amount of loans classified as nonaccrual totaled approximately $10,574,000 and
$5,975,000 June 30, 2010 and 2009, respectively.  Interest income from
these nonaccrual loans during the years ended June 30, 2010 and 2009 was
immaterial.  All loans classified as nonaccrual had allowances determined
in accordance with ASC 320-35-2 Receivables – Loan
Impairment.  At June 30, 2010 and 2009, the recorded investment in
loans for which impairment has been recognized was approximately $13,854,000 and
$7,512,000, respectively, with related reserves of $3,258,000 and $1,337,000,
respectively.  The average recorded investment in impaired loans for the
years ended June 30, 2010 and 2009 was $11,083,000 and $5,840,000,
respectively.  The amount of loans over 90 days past due totaled
$10,574,000 and $5,975,000 at June 30, 2010 and 2009, respectively.  No
loans over 90 past due were still accruing at June 30, 2010 and
2009.
 
 At June
30, 2010, the Bank had thirteen loans categorized as troubled debt
restructurings, totaling $9.0 million.  At June 30, 2009, the Bank had five
loans categorized as troubled debt restructurings, totaling $4.5 million. 
At June 30, 2010, the Bank had one loan for $1.1 million that was categorized as
both a nonperforming loan and a troubled debt restructuring.  There are no
commitments to lend additional amounts to these borrowers.  Management has
reduced the carrying value of all troubled debt restructurings to their fair
market values, based upon differences between their agreed upon rates of
interest and available market rates at the time of the loan.
 
 ASC
310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality, requires acquired
loans to be recorded at fair value and prohibits carrying over valuation
allowances when initially accounting for acquired impaired loans. Loans carried
at fair value, mortgage loans held for sale, and loans to borrowers in good
standing under revolving credit agreements are excluded from the scope of this
pronouncement. It limits the yield that may be accreted to the excess of the
undiscounted expected cash flows over the investor’s initial investment in the
loan. The excess of the contractual cash flows over expected cash flows may not
be recognized as an adjustment of yield. Subsequent increases in cash flows
expected to be collected are recognized prospectively through an adjustment of
the loan’s yield over its remaining life. Decreases in expected cash flows are
recognized as impairments.
 
 The
Company acquired loans pursuant to the acquisition of Integra branches in June
2010. The Company reviewed the loan portfolio at acquisition to determine
whether there was evidence of deterioration of credit quality since origination
and if it was probable that it will be unable to collect
all amounts due according to the loan’s contractual terms. When both conditions
existed, the Company accounted for each loan individually, considered expected
prepayments, and estimated the amount and timing of discounted expected
principal, interest, and other cash flows (expected at acquisition) for each
loan. The Company determined the excess of the loan’s scheduled contractual
principal and contractual interest payments over all cash flows expected at
acquisition as an amount that should not be accreted into interest income
(nonaccretable difference).
The remaining amount, representing the excess of the loan’s cash flows expected
to be collected over the amount paid, is accreted into interest income over the
remaining life of the loan (accretable yield).
  79
 
 Over the
life of the loan, the Company continues to estimate cash flows expected to be
collected. The Company evaluates at the balance sheet date whether the present
value of its loans determined using the effective interest rates has decreased,
and if so, the Company establishes avaluation allowance for the loan. Valuation
allowances for acquired loans reflect only those losses incurred after
acquisition; that is, the present value of cash flows expected at acquisition
that are not expected to be collected. Valuation allowances are established only
subsequent to our acquisition of the loans. For loans that are not accounted for
as debt securities, the present value of any subsequent increase in the loan’s
or pool’s actual cash flows or cash flows expected to be collected is used first
to reverse any existing valuation allowance for that loan. For any remaining
increases in cash flows expected to be collected, the Company adjusts the amount
of accretable yield recognized on a prospective basis over the loan’s remaining
life. The Company does not have any such loans that were accounted for as debt
securities.
 
 Loans
that were acquired in the Integra branch acquisition for which there was
evidence of deterioration of credit quality since origination and for which it
was probable that all contractually required payments would not be made as
scheduled had an outstanding balance of $45.7 million and a carrying amount of
$45.1 million at June 30, 2010. The carrying amount of these loans is included
in the balance sheet amount of loans receivable at June 30, 2010.  No loans
have experienced further deterioration since the acquisition date.
 
 The
following table depicts the accretable yield (in thousands) at the beginning and
end of the period.
 
 Balance,
      June 30, 2009
                      
                      $
                      -Accretion
                      
                      
                      -Disposals
                      
                      
                      -Additions
                      
                      
                      1,400Balance,
      June 30, 2010
                      
                      $
                      1,400
 
 NOTE 6 –
OTHER REAL ESTATE OWNED
 
 Other
real estate owned consists of the following at June 30:
 
 2010
                      
                      
                      2009(Dollars
      in thousands)One
      to four family
                      
                      $
                      169
                      
                      
                      $
                      -Land
                      
                      
                      340
                      
                      
                      
                      340Commercial
      real estate
                      
                      
                      -
                      
                      
                      
                      2,304Provision
      for losses on real estate owned
                      
                      
                      (212
                      )
                      
                      
                      (704
                      )$
                      297
                      
                      
                      $
                      1,940
  80
 
 Activity
in the allowance for losses on real estate owned is as follows for years ended
June 30,
 
 2010
                      
                      
                      2009(Dollars
      in thousands)Balance,
      beginning of period
                      
                      $
                      704
                      
                      
                      $
                      111Allowance
      for losses on real estate owned
                      
                      
                      510
                      
                      
                      
                      770Charged
      off upon sale of property
                      
                      
                      (1,002
                      )
                      
                      
                      (177
                      )Balance,
      end of period
                      
                      $
                      212
                      
                      
                      $
                      704
 
 NOTE 7 –
PROPERTY AND EQUIPMENT
 
 Property
and equipment is summarized as follows:
 
 June 30,2010
                      
                      
                      2009(Dollars
      in thousands)Land
      and land improvements
                      
                      $
                      2,977
                      
                      
                      $
                      1,830Buildings
      and building improvements
                      
                      
                      4,898
                      
                      
                      
                      4,538Furniture
      and equipment
                      
                      
                      3,337
                      
                      
                      
                      2,88411,212
                      
                      
                      
                      9,252Less:  accumulated
      depreciation
                      
                      
                      3,699
                      
                      
                      
                      3,241$
                      7,513
                      
                      
                      $
                      6,011
  81
  NOTE 8 -
DEPOSITS
 
 Deposits
at June 30, 2010 and 2009 consist of the following:
 
 2010
                        
                        
                        2009(Dollars
      in thousands)Weighted
                        
                        
                        
                        
                        
                        WeightedAverage
                        
                        
                        
                        
                        
                        AverageRate
                        
                        
                        Balance
                        
                        
                        Rate
                        
                        
                        BalanceDemand
      deposit accounts
                        
                        
                        0.48
                        %
                        
                        $
                        103,216
                        
                        
                        
                        0.50
                        %
                        
                        $
                        71,854Passbook
                        
                        
                        0.43
                        %
                        
                        
                        53,989
                        
                        
                        
                        0.31
                        %
                        
                        
                        40,980Money
      market deposit accounts
                        
                        
                        0.61
                        %
                        
                        
                        55,062
                        
                        
                        
                        0.61
                        %
                        
                        
                        61,933Total
      demand and passbook deposits
                        
                        
                        
                        
                        
                        
                        212,267
                        
                        
                        
                        
                        
                        
                        
                        174,767Certificates
      of deposit:Less
      than 12 months
                        
                        
                        1.75
                        %
                        
                        
                        73,467
                        
                        
                        
                        2.32
                        %
                        
                        
                        95,08112
      months to 24 months
                        
                        
                        2.59
                        %
                        
                        
                        93,114
                        
                        
                        
                        3.63
                        %
                        
                        
                        38,24124
      months to 36 months
                        
                        
                        3.13
                        %
                        
                        
                        6,313
                        
                        
                        
                        3.59
                        %
                        
                        
                        2,484More
      than 36 months
                        
                        
                        4.27
                        %
                        
                        
                        9,647
                        
                        
                        
                        3.65
                        %
                        
                        
                        2,228Individual
      retirement accounts
                        
                        
                        3.24
                        %
                        
                        
                        35,372
                        
                        
                        
                        4.38
                        %
                        
                        
                        26,815Total
      certificates of deposit
                        
                        
                        
                        
                        
                        
                        217,913
                        
                        
                        
                        
                        
                        
                        
                        164,849Total
      deposit accounts
                        
                        
                        
                        
                        
                        $
                        430,180
                        
                        
                        
                        
                        
                        
                        $
                        339,616
 
 Interest
expense on deposits is as follows:
 
 For the years ended June 302010
                      
                      
                      2009(Dollars
      in thousands)NOW
      and money market accounts
                      
                      $
                      871
                      
                      
                      $
                      1,609Savings
                      
                      
                      136
                      
                      
                      
                      285Certificates
      of deposit
                      
                      
                      5,314
                      
                      
                      
                      5,872$
                      6,321
                      
                      
                      $
                      7,766
 
 The
aggregate amount of time deposits with a minimum denomination of $100,000 was
approximately $113,371,000 and $89,805,000 at June 30, 2010 and 2009,
respectively.  Individual deposits with denominations of more than $250,000
are not federally insured.
 
 Total
non-interest bearing deposits were $28,627,000 and $16,531,000 at June 30, 2010
and 2009, respectively.  Municipal deposits totaled $121,607,000 and
$124,282,000 at June 30, 2010 and 2009, respectively.
  82
 
 Maturities
of certificate accounts at June 30, 2010 and 2009 are approximately as
follows:
 
 2010
                      
                      
                      2009(In
      thousands)One
      year or less
                      
                      $
                      162,465
                      
                      
                      $
                      108,5511 -
      2 years
                      
                      
                      34,825
                      
                      
                      
                      44,1322 -
      3 years
                      
                      
                      13,671
                      
                      
                      
                      9,2443 -
      4 years
                      
                      
                      2,959
                      
                      
                      
                      2,0354 -
      5 years
                      
                      
                      3,943
                      
                      
                      
                      747Over
      5 years
                      
                      
                      50
                      
                      
                      
                      140$
                      217,913
                      
                      
                      $
                      164,849
  NOTE 9 –
GOODWILL AND ACQUISITION INTANGIBLES
  Goodwill
  The
Integra acquisition included $3,130,000 in goodwill.  Further details of
this transaction are included in Note 2.
  Intangible
Assets
  The
Integra acquisition included a core deposit intangible asset of
$1,400,000.  Amortization of the core deposit intangible is as follows
(dollars in thousands):
 
 Amount2011
                      
                      $
                      1582012
                      
                      
                      1582013
                      
                      
                      1582014
                      
                      
                      1582015
                      
                      
                      1582016
      and thereafter
                      
                      
                      610$
                      1,400
  83
  NOTE 10 –
FAIR VALUES OF ASSETS AND LIABILITIES
  The
estimated fair values of the Company's financial instruments at June 30, 2010
and 2009 are as follows:
 
 2010
                        
                        
                        2009Carrying
                          Amounts
                        
                        
                        Fair
                          Value
                        
                        
                        Carrying
                          Amounts
                        
                        
                        Fair
                          Value(In thousands)Financial
      assets:Cash
      and interest bearing deposits
                        
                        $
                        32,023
                        
                        
                        
                        32,023
                        
                        
                        $
                        27,004
                        
                        
                        
                        27,004Investment
      securities available for sale
                        
                        
                        62,089
                        
                        
                        
                        62,089
                        
                        
                        
                        46,769
                        
                        
                        
                        46,769Investment
      securities held to maturity
                        
                        
                        631
                        
                        
                        
                        631
                        
                        
                        
                        175
                        
                        
                        
                        175Mortgage-backed
      securities
                        
                        
                        57,
      238
                        
                        
                        
                        57,238
                        
                        
                        
                        29,713
                        
                        
                        
                        29,713Loans
      receivable and loans held for sale
                        
                        
                        309,939
                        
                        
                        
                        304,943
                        
                        
                        
                        274,463
                        
                        
                        
                        270,760Accrued
      interest receivable
                        
                        
                        2,290
                        
                        
                        
                        2,290
                        
                        
                        
                        1,745
                        
                        
                        
                        1,745Investment
      in FHLB stock
                        
                        
                        2,016
                        
                        
                        
                        2,016
                        
                        
                        
                        2,016
                        
                        
                        
                        2,016Financial
      liabilities:Deposits
                        
                        $
                        430,180
                        
                        
                        
                        432,091
                        
                        
                        $
                        339,616
                        
                        
                        
                        341,322Accrued
      interest payable
                        
                        
                        126
                        
                        
                        
                        126
                        
                        
                        
                        23
                        
                        
                        
                        23FHLB
      advances
                        
                        
                        2,833
                        
                        
                        
                        2,904
                        
                        
                        
                        3,833
                        
                        
                        
                        3,856Off-balance
      sheet items
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
                        
                        
                        
                        -
 
 As
discussed in Note 1, Basis of
Presentation and Summary of Significant Accounting Pronouncements, 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.
  84
  Fair
value methods and assumptions are set forth below for each type of financial
instrument. Where quoted prices are available in an active market, securities
are classified within Level 1 of the valuation hierarchy. Level 2
securities include U.S. Government and agency mortgage-backed securities, U.S.
Government agency bonds, municipal securities, and other real estate owned. If
quoted market prices are not available, the Bank utilizes a third party vendor
to calculate the fair value of its available for sale securities. The third
party vendor uses quoted prices of securities with similar characteristics when
available.  If such quotes are not available, the third party vendor
uses pricing models or discounted cash flow models with observable inputs to
determine the fair value of these securities.  For other real estate
owned, the Bank utilizes appraisals obtained from independent third parties to
determine fair value.
 
 Fair
value measurements for certain assets and liabilities measured at fair value on
a recurring basis:
 
 Total
                            
                            
                            Quoted prices
                              in active
                              markets for
                              identical assets
                              (Level 1)
                            
                            
                            Significant
                              other
                              observable
                              inputs
                              (Level 2)
                            
                            
                            Significant
                              other
                              unobservable
                              inputs
                              (Level 3)(In thousands)June 30, 2010:Mortgage-backed
      securities
                            
                            $
                            57,238
                            
                            
                            $
                            -
                            
                            
                            $
                            57,238
                            
                            
                            $
                            -U.S.
      Government corporations and agencies
                            
                            
                            49,369
                            
                            
                            
                            -
                            
                            
                            
                            49,369
                            
                            
                            
                            -Municipal
      bonds
                            
                            
                            12,591
                            
                            
                            
                            -
                            
                            
                            
                            12,591
                            
                            
                            
                            -Other
      equity securities
                            
                            
                            129
                            
                            
                            
                            129
                            
                            
                            
                            -
                            
                            
                            
                            -June
      30, 2009:Mortgage-backed
      securities
                            
                            $
                            29,713
                            
                            
                            $
                            -
                            
                            
                            $
                            29,713
                            
                            
                            $
                            -U.S.
      League intermediate-term portfolio
                            
                            
                            47
                            
                            
                            
                            -
                            
                            
                            
                            47
                            
                            
                            
                            -U.S.
      Government corporations and agencies
                            
                            
                            39,641
                            
                            
                            
                            -
                            
                            
                            
                            39,641
                            
                            
                            
                            -Municipal
      bonds
                            
                            
                            6,952
                            
                            
                            
                            -
                            
                            
                            
                            6,952
                            
                            
                            
                            -Other
      equity securities
                            
                            
                            129
                            
                            
                            
                            129
                            
                            
                            
                            -
                            
                            
                            
                            -
 
 Fair
value measurements for certain assets and liabilities measured at fair value on
a nonrecurring basis:
 
 Total
                                
                                
                                Quoted prices
                                  in active
                                  markets for
                                  identical assets
                                  (Level 1)
                                
                                
                                Significant
                                  other
                                  observable
                                  inputs
                                  (Level 2)
                                
                                
                                Significant
                                  other
                                  unobservable
                                  inputs
                                  (Level 3)(In thousands)June 30, 2010:Other
      real estate owned
                                
                                $
                                297
                                
                                
                                $
                                -
                                
                                
                                $
                                297
                                
                                
                                $
                                -Loans
      held for sale
                                
                                
                                364
                                
                                
                                
                                -
                                
                                
                                
                                364
                                
                                
                                
                                -Impaired
      loans
                                
                                
                                13,854
                                
                                
                                
                                -
                                
                                
                                
                                13,854
                                
                                
                                
                                -June
      30, 2009:Other
      real estate owned
                                
                                $
                                1,940
                                
                                
                                $
                                -
                                
                                
                                $
                                1,940
                                
                                
                                $
                                -Loans
      held for sale
                                
                                
                                2,193
                                
                                
                                
                                -
                                
                                
                                
                                2,193
                                
                                
                                
                                -Impaired
      loans
                                
                                
                                7,512
                                
                                
                                
                                -
                                
                                
                                
                                7,512
                                
                                
                                
                                -
 
 The
adjustments to other real estate owned and impaired loans are based primarily on
appraisals of the real estate or other observable market prices. Our policy is
that fair values for these assets are based on current appraisals. In most
cases, we maintain current appraisals for these items.
  85
  NOTE 11 –
BORROWED FUNDS
 
 Pursuant
to collateral agreements with the FHLB, advances are secured by all stock in the
FHLB and a blanket pledge agreement for qualifying first mortgage
loans.  The Bank had $2,833,000 and $3,833,000 in outstanding FHLB
advances at June 30, 2010 and 2009, respectively.  At June 30, 2010
and 2009, the Bank had only one advance from the FHLB.  The original
amount of the advance was $5,000,000 at a fixed interest rate of
3.2%.  Principal payments of $83,000 are due on a monthly basis until
the loan is paid in full in April 2013.  Interest payments are also
due at the time that the principal payment is made.
 
 NOTE 12 –
EMPLOYEE BENEFIT PLANS
 
 401(k) Profit Sharing
Plan
 The Bank
has a standard 401(k) profit sharing plan.  Eligible participants must
be at least 18 years of age and have one year of service.  The Bank
makes matching contributions based on each employee's deferral
contribution.  Total expense under the plan for the years ended June
30, 2010 and 2009 totaled $125,000 and $118,000, respectively.
 
 ESOP
 As of
June 30, 2010 and 2009, the ESOP owned 216,239 and 245,262 shares, respectively,
of the Company's common stock, which were held in a suspense account until
released for allocation to the participants.  Additionally, as of June
30, 2010, the Company has committed to release 14,658 shares.  The
Company recognized compensation expense of $118,000 and $130,000 during the
years ended June 30, 2010 and 2009, respectively, which equals the fair value of
the ESOP shares during the periods in which they became committed to be
released.  The fair value of the unearned ESOP shares approximated
$1,574,000 at June 30, 2010.
 
 Contributions
to the ESOP and shares released from the suspense account will be allocated to
each eligible participant based on the ratio of each such participant's
compensation, as defined in the ESOP, to the total compensation of all eligible
plan participants.  Participants become 100% vested in their accounts
upon three years of service.  Participants with less than three years
of service are 0% vested in their accounts.
 
 The term
loan, which bears interest at 7.75%, is payable in fifteen annual installments
of $370,000 through December 31, 2020.  Shares purchased with the loan
proceeds are initially pledged as collateral for the term loan and are held in a
suspense account for future allocation to the ESOP participants.  Each
plan year, in addition to any discretionary contributions, the Company shall
contribute cash to the ESOP to enable the ESOP to make its principal and
interest payments under the term loan.  Company contributions may be
increased by any investment earnings attributable to such contributions and any
cash dividends paid with respect to Company stock held by the ESOP.
 
 Deferred
Compensation
 In March
2002, the Bank adopted a supplemental retirement income program with selected
officers and board members.  To fund this plan, the Bank purchased
single-premium life insurance policies on each officer and director, at a
cumulative total cost of $5,100,000.  The cash surrender value of
these policies was $7,109,000 and $6,826,000 at June 30, 2010 and 2009,
respectively.  The directors' liability is accrued based on life
expectancies, return on investment and a discount rate.  For the
officers, an annual contribution based on actuarial assumptions is made to a
secular trust with the employee as the beneficiary.  Deferred
compensation payments are funded by available assets in the secular
trust.  No further funding is required by the Bank, with the exception
that upon a change in control of the Bank, the plan provides for full
supplemental benefits which would have occurred at age 65.
  86
 
 Future
expected contributions for the funding of officers’ deferred compensation are as
follows:
 
 2011
                        
                        $
                        197,0002012
                        
                        
                        197,0002013
                        
                        
                        197,0002014
                        
                        
                        197,0002015
                        
                        
                        197,0002016
      and thereafter
                        
                        
                        374,000$
                        1,359,000
 
 At June
30, 2010 and 2009, the Bank had accrued directors' supplemental retirement
expense of $1,315,000 and $1,270,000, respectively.  Officers and
directors supplemental retirement expense totaled $417,000 and $402,000 for the
years ended June 30, 2010 and 2009, respectively.
 
 Supplemental Executive
Retirement Plan
 A
Supplemental Executive Retirement Plan (SERP) was established to provide
participating executives (as determined by the Company's Board of Directors)
with benefits that cannot be provided under the 401(k) Profit Sharing Plan or
ESOP as a result of limitations imposed by the Internal Revenue
Code.  The SERP will also provide benefits to eligible employees if
they retire or are terminated following a change in control before the complete
allocation of shares under the ESOP.  SERP expense totaled $7,000 and
$7,000 for the years ended June 30, 2010 and 2009, respectively.
 
 Employee Severance
Compensation Plan
 An
Employee Severance Compensation Plan (Severance Plan) was established to provide
eligible employees with severance benefits if a change in control of the Bank
occurs causing involuntary termination of employment in a comparable
position.  Employees are eligible upon the completion of one year of
service.  Under the Severance Plan, eligible employees will be
entitled to severance benefits ranging from one month of compensation, as
defined in the plan, up to 199% of compensation.  Such benefits are
payable within five business days from termination of employment.
 
 NOTE 13 –
STOCK-BASED COMPENSATION
 
 In
November 2006, the Company adopted the United Community Bancorp 2006 Equity
Incentive Plan (Equity Incentive Plan) for the issuance of restricted stock,
incentive stock options and non-statutory stock options to employees, officers
and directors of the Company.  The aggregate number of shares of
common stock reserved and available for issuance pursuant to awards granted
under the Equity Incentive Plan is 580,630.  Of the total shares
available, 414,736 may be issued in connection with the exercise of stock
options and 165,894 may be issued as restricted stock.  The maximum
number of shares of common stock that may be covered by options granted under
the Equity Incentive Plan to any one person during any one calendar year is
103,684.
 
 In
December 2006, the Board of Directors of the Company authorized the funding of a
trust that purchased 165,894 shares of the Company's outstanding common stock to
be used to fund restricted stock awards under the Equity Incentive
Plan.
  87
 
 In
December 2006, the Company granted restricted stock awards for a total of
149,297 shares of common stock, incentive stock option awards for a total of
219,446 shares of common stock and non-statutory stock option awards for a total
of 153,815 shares of common stock.  These awards vest at 20% annually
from January 2008 through January 2012.  The restricted stock awards
were valued at the stock price on the date of grant, or $11.53 per
share.  The stock options were valued using the following
assumptions:  expected volatility of 11.49%, risk-free interest rate
of 4.6%, expected term of ten years and expected dividend yield of
2.3%.
 
 During
each of the years ended June 30, 2010 and 2009, 27,703 restricted share awards
and 69,261 stock options became fully vested.  Total recognized
compensation expense for the years ended June 30, 2010 and 2009 was $298,000 and
$500,000, respectively.  The remaining unvested expense as of June 30,
2010 that will be recorded as expense in future periods is
$206,000.  The weighted average time over which this expense will be
recorded is 18 months.
 
 Information
related to stock options for the years ended June 30, 2010 and 2009 is as
follows:
 
 WeightedWeighted
                                
                                AverageAverage
                                
                                RemainingExercise
                                
                                ContractualShares
                                
                                
                                Price
                                
                                TermOutstanding at June 30, 2008
                                
                                
                                346,304
                                
                                
                                $
                                11.53Granted
                                
                                
                                -
                                
                                
                                
                                -Forfeited
                                
                                
                                -
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -Outstanding
      at June 30, 2009
                                
                                
                                346,304
                                
                                
                                
                                11.53Granted
                                
                                
                                -
                                
                                
                                
                                -Forfeited
                                
                                
                                -
                                
                                
                                
                                -Exercised
                                
                                
                                -
                                
                                
                                
                                -Outstanding
      at June 30, 2010
                                
                                
                                346,304
                                
                                
                                
                                11.53
                                
                                6.5 yearsExercisable
      at June 30, 2010
                                
                                
                                207,783
                                
                                
                                
                                11.53
                                
                                6.5 yearsFair
      value of options
                                
                                
                                
                                
                                
                                $
                                2.37
  88
 
 A summary
of the status of unvested stock options for the year ended June 30, 2010 is as
follows:
 
 WeightedAverageGrant DateShares
                          
                          
                          Fair ValueOutstanding
      at June 30, 2009
                          
                          
                          207,782
                          
                          
                          $
                          2.37Granted
                          
                          
                          -
                          
                          
                          
                          -Vested
                          
                          
                          (69,261
                          )
                          
                          
                          2.37Forfeited
                          
                          
                          -
                          
                          
                          
                          -Outstanding
      at June 30, 2010
                          
                          
                          138,521
                          
                          
                          
                          2.37
 
 Information
related to restricted stock grants for the years ended June 30, 2010 and 2009 is
as follows:
 
 WeightedAverageGrant DateFairShares
                                  
                                  
                                  ValueOutstanding
      at June 30, 2008
                                  
                                  
                                  110,811
                                  
                                  
                                  $
                                  11.53Granted
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Vested
                                  
                                  
                                  (27,703
                                  )
                                  
                                  
                                  (11.53
                                  )Forfeited
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Outstanding
      at June 30, 2009
                                  
                                  
                                  83,108
                                  
                                  
                                  
                                  11.53Granted
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Vested
                                  
                                  
                                  (27,703
                                  )
                                  
                                  
                                  (11.53
                                  )Forfeited
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Outstanding
      at June 30, 2010
                                  
                                  
                                  55,405
                                  
                                  
                                  $
                                  11.53
  89
 
 NOTE
14 – SUPPLEMENTAL CASH FLOW INFORMATION
 
 For the years ended June 302010
                                    
                                    
                                    2009(Dollars
      in Thousands)Supplemental
      disclosure of cash flow information is as follows:Cash
      paid during the year for:Income
      taxes
                                    
                                    $
                                    -
                                    
                                    
                                    $
                                    10Interest
                                    
                                    $
                                    6,327
                                    
                                    
                                    $
                                    7,970Supplemental
      disclosure of non-cash investing and financing activities is as
      follows:Unrealized
      gains on securities designated as available for sale, net of
      taxes
                                    
                                    $
                                    221
                                    
                                    
                                    $
                                    663Transfers
      of loans to other real estate owned
                                    
                                    $
                                    1,109
                                    
                                    
                                    $
                                    787
 
 NOTE 15 –
COMMITMENTS
 
 Leases
 
 The Bank
is party to various operating leases for property and equipment. Lease expense
for the years ended June 30, 2010 and 2009 was $43,000 and $41,000,
respectively.
 
 Future
minimum lease payments under these lease agreements are as follows as of June
30, 2010:
 
 2011
                        
                        $
                        31,0002012
                        
                        
                        16,0002013
                        
                        
                        16,0002014
                        
                        
                        11,000$
                        74,000
 
 The Bank
entered into lease agreements with various tenants who lease space from the Bank
in certain locations where the Bank has a branch office.  Revenue from
these leases for the years ended June 30, 2010 and 2009 was $37,000 and $42,000,
respectively.
  90
 
 Future
minimum lease payments under these lease agreements are as follows as of June
30, 2010:
 
 2011
                        
                        $
                        24,000
 
 Loans
 
 In the
ordinary course of business, the Bank has various outstanding commitments to
extend credit that are not reflected in the accompanying consolidated financial
statements.  These commitments involve elements of credit risk in
excess of the amounts recognized in the balance sheet.
 
 The Bank
uses the same credit policies in making commitments for loans as it does for
loans that have been disbursed and recorded in the consolidated balance
sheet.  The Bank generally requires collateral when it makes loan
commitments, which generally consists of the right to receive first mortgages on
improved or unimproved real estate when performance under the contract
occurs.
 
 Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  Since some portions of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.  Certain of these
commitments are for fixed rate loans, and, therefore, their values are subject
to market risk as well as credit risk.  Generally, these commitments
do not extend beyond 90 days.
 
 At June
30, 2010, the Bank’s total commitment to extend credit at variable rates was
$38,981,000. The amount of fixed rate commitments was approximately $826,000 at
June 30, 2010. The fixed rate loan commitments at June 30, 2010 have interest
rates ranging from 4.25% to 5.00%. In addition, the Bank had $856,000 of letters
of credit outstanding at June 30, 2010.
  91
 
 NOTE 16 –
RELATED PARTY TRANSACTIONS
 
 Loans to
executive officers, directors and their affiliated companies, totaled $3,517,000
and $3,508,000 at June 30, 2010 and 2009, respectively.  All loans
were current at June 30, 2010 and 2009, respectively.
 
 The
activity in loans to executive officer, directors and their affiliated companies
for the years ended June 30, 2010 and 2009 is as follows:
 
 June 30,2010
                      
                      
                      2009(Dollars
      in thousands)Beginning
      balance
                      
                      $
                      3,508
                      
                      
                      $
                      3,393New
      loans
                      
                      
                      138
                      
                      
                      
                      169Payments
      on loans
                      
                      
                      (129
                      )
                      
                      
                      (54
                      )Ending
      balance
                      
                      $
                      3,517
                      
                      
                      $
                      3,508
  Deposits
from officers and directors and affiliates totaled $1,975,000 and $2,078,000 at
June 30, 2010 and 2009, respectively.
 
 NOTE 17 –
REGULATORY CAPITAL
 
 The Bank
is subject to regulatory capital requirements administered by federal banking
agencies. Capital adequacy guidelines and prompt corrective action regulation
involve quantitative measures of assets, liabilities, and certain off balance
sheet items calculated under regulatory accounting practices.  Capital
amounts and classifications are also subject to qualitative judgments by
regulators.  Failure to meet capital requirements can initiate
regulatory action that, if undertaken, could have a direct material effect on
the consolidated financial statements.
 
 Prompt
corrective action regulations provide five classifications: well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized and
critically undercapitalized, although these terms are not used to represent
overall financial condition. If adequately capitalized, regulatory approval is
required to accept broker deposits.  If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital
restoration plans are required.  At November 17, 2008, the most recent
regulatory notifications categorized the Bank as well
capitalized.  There are no conditions or events since that
notification that management believes have changed the institution’s
category.  Management believes that, under current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements in
the foreseeable future.  Actual and required capital amounts and
ratios are presented below:
  92
 
 The
following tables summarize the Bank's capital amounts and the ratios
required:
 
 To be wellcapitalized underprompt correctiveFor capital
                              
                              
                              actionActual
                              
                              
                              adequacy purposes
                              
                              
                              provisionsAmount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio
                              
                              
                              Amount
                              
                              
                              Ratio(Dollars
      in thousands)June 30, 2010Tier
      1 capital to risk-weighted assets
                              
                              $
                              44,811
                              
                              
                              
                              13.54
                              %
                              
                              
                              13,240
                              
                              
                              
                              4.0
                              %
                              
                              
                              19,860
                              
                              
                              
                              6.0
                              %Total
      capital to risk-weighted assets
                              
                              
                              47,233
                              
                              
                              
                              14.27
                              %
                              
                              
                              26,479
                              
                              
                              
                              8.0
                              %
                              
                              
                              33,099
                              
                              
                              
                              10.0
                              %Tier
      1 capital to adjustedtotal assets
                              
                              
                              44,811
                              
                              
                              
                              9.26
                              %
                              
                              
                              19,548
                              
                              
                              
                              4.0
                              %
                              
                              
                              24,435
                              
                              
                              
                              5.0
                              %Tangible
      capital to adjustedtotal assets
                              
                              
                              44,811
                              
                              
                              
                              9.17
                              %
                              
                              
                              7,331
                              
                              
                              
                              1.5
                              %
                              
                              
                              -
                              
                              
                              
                              -June 30, 2009Tier
      1 capital to risk-weighted assets
                              
                              $
                              48,216
                              
                              
                              
                              17.50
                              %
                              
                              
                              11,022
                              
                              
                              
                              4.0
                              %
                              
                              
                              16,533
                              
                              
                              
                              6.0
                              %Total
      capital to risk-weighted assets
                              
                              
                              50,689
                              
                              
                              
                              18.40
                              %
                              
                              
                              22,044
                              
                              
                              
                              8.0
                              %
                              
                              
                              27,555
                              
                              
                              
                              10.0
                              %Tier
      1 capital to adjusted total assets
                              
                              
                              48,216
                              
                              
                              
                              12.08
                              %
                              
                              
                              15,972
                              
                              
                              
                              4.0
                              %
                              
                              
                              19,965
                              
                              
                              
                              5.0
                              %Tangible
      capital to adjusted total assets
                              
                              
                              48,216
                              
                              
                              
                              12.08
                              %
                              
                              
                              5,989
                              
                              
                              
                              1.5
                              %
                              
                              
                              -
                              
                              
                              
                              -
 
 Dividends
from the Bank are one of the major sources of funds for the
Bancorp.  These funds aid the parent company in payment of dividends
to shareholders, expenses, and other obligations.  Payment of
dividends to the parent company is subject to various legal and regulatory
limitations.  Regulatory approval is required prior to the declaration
of any dividends in excess of available retained earnings.  The amount
of dividends that may be declared without regulatory approval is further limited
to the sum of net income for the current year and retained net income for the
preceding two years, less any required transfers to surplus or common
stock.  As of June 30, 2010, the Bank has never paid dividends income
to the Bancorp in excess of regulatory limits.
  93
  NOTE 18 –
INCOME TAXES
 
 The
components of the provision for income taxes are summarized as
follows:
 
 2010
                        
                        
                        2009(Dollars in thousands)Current
      tax expense:Federal
                        
                        $
                        695
                        
                        
                        $
                        174State
                        
                        
                        134
                        
                        
                        
                        53829
                        
                        
                        
                        227Deferred
      tax benefit:Federal
                        
                        
                        (414
                        )
                        
                        
                        (32
                        )State
                        
                        
                        (72
                        )
                        
                        
                        (18
                        )(486
                        )
                        
                        
                        (50
                        )$
                        343
                        
                        
                        $
                        177
 
 The tax
effect of temporary differences that give rise to significant portions of
deferred tax assets and deferred tax liabilities at June 30, 2010 and 2009 are
as follows:
 
 June 30,2010
                      
                      
                      2009(Dollars
      in thousands)Deferred
      tax assets arising from:Loan
      loss reserve
                      
                      $
                      2,250
                      
                      
                      $
                      1,667Reserve
      for loss on real estate owned
                      
                      
                      84
                      
                      
                      
                      278Vacation
      and bonus accrual
                      
                      
                      285
                      
                      
                      
                      223Supplemental
      retirement
                      
                      
                      435
                      
                      
                      
                      416Stock-based
      compensation
                      
                      
                      331
                      
                      
                      
                      361Contribution
      to UCB Charitable Foundation
                      
                      
                      274
                      
                      
                      
                      347Acquisition-related
      expenses
                      
                      
                      174
                      
                      
                      
                      -State
      depreciation differences
                      
                      
                      87
                      
                      
                      
                      95Other-than-temporary
      impairment
                      
                      
                      -
                      
                      
                      
                      1Reserve
      for loss on deposit accounts
                      
                      
                      59
                      
                      
                      
                      40AMT
      credit carryforward
                      
                      
                      135
                      
                      
                      
                      135Post-retirement
      health care benefits
                      
                      
                      50
                      
                      
                      
                      50Total
      deferred tax assets
                      
                      
                      4,164
                      
                      
                      
                      3,613Deferred
      tax liabilities arising from:Mortgage
      servicing rights
                      
                      
                      (186
                      )
                      
                      
                      (161
                      )Depreciation
                      
                      
                      (223
                      )
                      
                      
                      (223
                      )Deferred
      loan fees
                      
                      
                      (196
                      )
                      
                      
                      (159
                      )Unrealized
      gain in market value of investments
                      
                      
                      (256
                      )
                      
                      
                      (180
                      )Total
      deferred tax liabilities
                      
                      
                      (861
                      )
                      
                      
                      (723
                      )Valuation
      allowance
                      
                      
                      (190
                      )
                      
                      
                      (190
                      )Net
      deferred tax asset
                      
                      $
                      3,113
                      
                      
                      $
                      2,700
  94
 
 During
the year ended June 30, 2006, the Company contributed $1,858,000 to fund the UCB
Charitable Foundation.  The deduction for federal income tax purposes
is limited to ten percent of federal taxable income.  The
non-deductible portion, which approximates $805,000 at June 30, 2010, is
available for future deductions through the year ended June 30,
2011.  At June 30, 2010, the Company has recorded a valuation
allowance against $560,000 of this amount, based on the level of anticipated
future taxable income. Net deferred tax liabilities and federal income tax
expense in future years can be significantly affected by changes in enacted tax
rates.
 
 The rate
reconciliation for years ended June 30, 2010 and 2009 is as
follows:
 
 2010
                          
                          
                          2009(Dollars
      in thousands)Federal
      income taxes at statutory rate
                          
                          $
                          461
                          
                          
                          $
                          305State
      taxes, net of federal benefit
                          
                          
                          62
                          
                          
                          
                          35Increase
      (decrease) in taxes resulting primarily from :Non-taxable
      income on Bank-owned life insurance
                          
                          
                          (96
                          )
                          
                          
                          (87
                          )Non-deductible
      stock-based compensation
                          
                          
                          19
                          
                          
                          
                          106Tax
      exempt income
                          
                          
                          (137
                          )
                          
                          
                          (67
                          )Other
                          
                          
                          34
                          
                          
                          
                          (115
                          )$
                          343
                          
                          
                          $
                          177
 
 Retained
earnings at June 30, 2010, and 2009, include approximately $749,000 related to
the pre-1987 allowance for loan losses for which no deferred federal income tax
liability has been recognized. These amounts represent an allocation of income
to bad debt deductions for tax purposes only. If the Bank no longer qualifies as
a bank, or in the event of a liquidation of the Bank, income would be created
for tax purposes only, which would be subject to the then-current corporate
income tax rate. The unrecorded deferred income tax liability on the above
amount for financial statement purposes was approximately $255,000.
 
 The
Company adopted the provisions of ASC 275-10-50-8 to account for uncertainty in
income taxes effective July 1, 2007. Implementation resulted in no
cumulative effect adjustment to retained earnings as of the date of adoption.
The Company had no unrecognized tax benefits as of June 30, 2010 and 2009.
The Company recognized no interest and penalties on the underpayment of income
taxes during fiscal years June 30, 2010 and 2009, and had no accrued
interest and penalties on the balance sheet as of June 30, 2010 and 2009.
The Company has no tax positions for which it is reasonably possible that the
total amounts of unrecognized tax benefits will significantly increase with the
next twelve months.  The Company is no longer subject to U.S. federal,
state and local income tax examinations by tax authorities for tax years before
2006.
  95
  NOTE 19 –
PARENT ONLY FINANCIAL STATEMENTS
 
 The
following condensed financial statements summarize the financial position of
United Community Bancorp (parent company only) as of June 30, 2010 and 2009, and
the results of its operations and cash flows for the fiscal years ended June 30,
2010 and 2009 (all amounts in thousands):
 
 UNITED
COMMUNITY BANCORP
 STATEMENTS
OF FINANCIAL CONDITION
 June 30,
2010 and 2009
 
 2010
                      
                      
                      2009ASSETSCash
      and cash equivalents
                      
                      $
                      2,797
                      
                      
                      $
                      1,292Securities
      available for sale – at estimated market value
                      
                      
                      128
                      
                      
                      
                      128Accrued
      interest receivable
                      
                      
                      89
                      
                      
                      
                      100Deferred
      income taxes
                      
                      
                      247
                      
                      
                      
                      327Prepaid
      expenses and other assets
                      
                      
                      2,376
                      
                      
                      
                      4,600Investment
      in United Community Bank
                      
                      
                      49,940
                      
                      
                      
                      48,63655,577
                      
                      
                      
                      55,083LIABILITIES
      AND STOCKHOLDERS’ EQUITYOther
      liabilities
                      
                      
                      97
                      
                      
                      
                      4Stockholders’
      equity
                      
                      
                      55,480
                      
                      
                      
                      55,079$
                      55,577
                      
                      
                      $
                      55,083
 
 UNITED
COMMUNITY BANCORP
 STATEMENTS
OF OPERATIONS
 June 30,
2010 and 2009
  2010
                          
                          
                          2009Interest
      income:ESOP
      loan
                          
                          $
                          189
                          
                          
                          $
                          205Securities
                          
                          
                          9
                          
                          
                          
                          22Other
      income:Equity
      in earnings ofUnited
      Community Bank
                          
                          
                          1,080
                          
                          
                          
                          1,025Net
      revenue
                          
                          
                          1,278
                          
                          
                          
                          1,252Operating
      expenses:Other
      operating expenses
                          
                          
                          295
                          
                          
                          
                          306Income
      before income taxes
                          
                          
                          983
                          
                          
                          
                          946Income
      tax expense (benefit)
                          
                          
                          (31
                          )
                          
                          
                          227Net
      income
                          
                          $
                          1,014
                          
                          
                          $
                          719
  96
  UNITED
COMMUNITY BANCORP
 STATEMENTS
OF CASH FLOWS
 June 30,
2010 and 2009
 
 2010
                        
                        
                        2009Operating
      activities:Net
      earnings
                        
                        $
                        1,014
                        
                        
                        $
                        719Adjustments
      to reconcile net income to net cash provided by operating
      activities:Equity
      in earnings of United Community Bank
                        
                        
                        (1,080
                        )
                        
                        
                        (1,235
                        )Shares
      committed to be released
                        
                        
                        212
                        
                        
                        
                        129Amortization
      and expense of stock-based compensation plans
                        
                        
                        204
                        
                        
                        
                        500Deferred
      income taxes (benefits)
                        
                        
                        80
                        
                        
                        
                        (108
                        )Effects
      of change in assets and liabilities
                        
                        
                        2,325
                        
                        
                        
                        962,755
                        
                        
                        
                        101Financing
      activities:Purchase
      of treasury stock
                        
                        
                        (80
                        )
                        
                        
                        (325
                        )Dividends
      paid to stockholders
                        
                        
                        (1,170
                        )
                        
                        
                        (1,097
                        )(1,250
                        )
                        
                        
                        (1,422
                        )Net
      increase (decrease) in cash and cash equivalents
                        
                        
                        1,505
                        
                        
                        
                        (1,321
                        )Cash
      and cash equivalents at beginning of year
                        
                        
                        1,292
                        
                        
                        
                        2,613Cash
      and cash equivalents at end of year
                        
                        $
                        2,797
                        
                        
                        $
                        1,292
  97
  NOTE 20 –
QUARTERLY FINANCIAL DATA (UNAUDITED)
 
 The
following tables present quarterly financial information for the Company for
2010 and 2009:
 
 For
      the year ended June 30, 2010(Dollars in thousands)Fourth
                    
                    
                    Third
                    
                    
                    Second
                    
                    
                    Firstquarter
                    
                    
                    quarter
                    
                    
                    quarter
                    
                    
                    quarterInterest
      income
                    
                    $
                    4,688
                    
                    
                    $
                    4,716
                    
                    
                    $
                    4,711
                    
                    
                    $
                    4,821Interest
      expense
                    
                    
                    1,594
                    
                    
                    
                    1,542
                    
                    
                    
                    1,588
                    
                    
                    
                    1,705Net
      interest income
                    
                    
                    3,094
                    
                    
                    
                    3,174
                    
                    
                    
                    3,123
                    
                    
                    
                    3,116Provision
      for loan losses
                    
                    
                    1,112
                    
                    
                    
                    451
                    
                    
                    
                    324
                    
                    
                    
                    622Net
      interest income after provision for loan losses
                    
                    
                    1,982
                    
                    
                    
                    2,723
                    
                    
                    
                    2,799
                    
                    
                    
                    2,494Other
      income
                    
                    
                    1,180
                    
                    
                    
                    749
                    
                    
                    
                    942
                    
                    
                    
                    686Other
      expense
                    
                    
                    3,346
                    
                    
                    
                    2,908
                    
                    
                    
                    3,069
                    
                    
                    
                    2,875Income
      (loss) before income taxes
                    
                    
                    (184
                    )
                    
                    
                    564
                    
                    
                    
                    672
                    
                    
                    
                    305Provision
      (benefit) for income taxes
                    
                    
                    (150
                    )
                    
                    
                    214
                    
                    
                    
                    196
                    
                    
                    
                    83Net
      income (loss)
                    
                    $
                    (34
                    )
                    
                    $
                    350
                    
                    
                    $
                    476
                    
                    
                    $
                    222
 
 For
      the year ended June 30, 2009(Dollars in thousands)Fourth
                    
                    
                    Third
                    
                    
                    Second
                    
                    
                    Firstquarter
                    
                    
                    quarter
                    
                    
                    quarter
                    
                    
                    quarterInterest
      income
                    
                    $
                    4,689
                    
                    
                    $
                    5,049
                    
                    
                    $
                    5,030
                    
                    
                    $
                    5,144Interest
      expense
                    
                    
                    1,733
                    
                    
                    
                    1,774
                    
                    
                    
                    2,091
                    
                    
                    
                    2,308Net
      interest income
                    
                    
                    2,956
                    
                    
                    
                    3,275
                    
                    
                    
                    2,939
                    
                    
                    
                    2,836Provision
      for loan losses
                    
                    
                    1,052
                    
                    
                    
                    664
                    
                    
                    
                    396
                    
                    
                    
                    335Net
      interest income after provision for loan losses
                    
                    
                    1,904
                    
                    
                    
                    2,611
                    
                    
                    
                    2,543
                    
                    
                    
                    2,501Other
      income
                    
                    
                    854
                    
                    
                    
                    735
                    
                    
                    
                    502
                    
                    
                    
                    696Other
      expense
                    
                    
                    3,480
                    
                    
                    
                    2,738
                    
                    
                    
                    2,639
                    
                    
                    
                    2,593Income
      (loss) before income taxes
                    
                    
                    (722
                    )
                    
                    
                    608
                    
                    
                    
                    406
                    
                    
                    
                    604Provision
      (benefit) for income taxes
                    
                    
                    (443
                    )
                    
                    
                    259
                    
                    
                    
                    144
                    
                    
                    
                    217Net
      income (loss)
                    
                    $
                    (279
                    )
                    
                    $
                    349
                    
                    
                    $
                    262
                    
                    
                    $
                    387
  98
 Item 9. Changes in and Disagreements with
Accountants on Accounting and Financial Disclosure
  Not applicable.
 
 Item
9A(T).  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.
 
 Management’s annual report on internal
control over financial reporting is incorporated herein by reference to Item 8
in this Annual Report on Form 10-K.  This annual report does not
include an attestation report of the Company’s independent registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permit the Company to
provide only Management’s report in this report.
 
 There was
no change in the Company's internal control over financial reporting that
occurred during the Company's fiscal quarter ended June 30, 2010 that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
  Item
9B.  Other Information
  Not
applicable.
 
 PART
III
  Item 10.  Directors,
Executive Officers and Corporate Governance
  Directors
  The
information contained under the section captioned “Proposal I — Election of
Directors” in the Company’s definitive proxy statement for the Company’s
2009 Annual Meeting of Stockholders (the “Proxy Statement”) is incorporated
herein by reference.
  Executive
Officers
  The
information required regarding executive officers is incorporated herein by
reference to the section captioned, “Executive Officers of United
Community Bancorp and United Community Bank,” in Item 1 of this Annual
Report on Form 10-K.
  Compliance
with Section 16(a) of the Exchange Act
  The
information contained under the section captioned “Section 16(a) Beneficial Ownership
Reporting Compliance”in the Proxy Statement is incorporated herein by
reference.
  99
  Code
of Ethics
  The
Company has adopted a Code of Ethics that applies to the Company’s officers,
directors and employees.  For information concerning the Company’s
code of ethics, the information contained under the section captioned “Code of Ethics and Business
Conduct” in the Proxy Statement is incorporated by
reference.  A copy of the code of ethics is available, without charge,
upon written request to c/o Corporate Secretary, 92 Walnut Street, Lawrenceburg,
Indiana 47025.
  Corporate
Governance
  For
information regarding the audit committee and its composition and the audit
committee financial expert, the section captioned “Corporate Governance and Board
Matters – Audit Committee” in the Proxy Statement are incorporated herein
by reference.
  Item
11.Executive
Compensation
  Executive
Compensation
  The
information required by this item is incorporated herein by reference to the
sections titled “Executive
Compensation”and“Directors’ Compensation” in the Proxy Statement.
  Item
12.Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  (a)
              Security
      Ownership of Certain Beneficial
Owners
  The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
  (b)
              Security
      Ownership of Management
  The
information required by this item is incorporated herein by reference to the
section captioned “Stock
Ownership” in the Proxy Statement.
  (c)
              Changes
      in Control
  Management
of the Company knows of no arrangements, including any pledge by any person of
securities of the Company, the operation of which may at a subsequent date
result in a change in control of the Company.
  (d)
              Equity
      Compensation Plans
  The
Company has adopted the 2006 Equity Incentive Plan, pursuant to which equity may
be awarded to participants.  The plan was approved by
stockholders.
  100
  The
following table sets forth certain information with respect to the Company’s
equity compensation plan as of June 30, 2010.
  (a)
                                  
                                  
                                  (b)
                                  
                                  
                                  (c)Plan Category
                                  
                                  Number of securities to be issued
                                    upon exercise of outstanding
                                    options, warrants and rights
                                  
                                  
                                  Weighted-average exercise
                                    price of outstanding
                                    options, warrants and rights
                                  
                                  
                                  Number of securities remaining
                                    available for future issuance
                                    under equity compensation
                                    plan (excluding securities
                                    reflected in column (a))Equity
      compensation plan approved by security holders
                                  
                                  
                                  522,558
                                  
                                  
                                  $
                                  8.24
                                  (1)
                                  
                                  
                                  58,072Equity
      compensation plans not approved by security holders
                                  
                                  —
                                  
                                  
                                  —
                                  
                                  
                                  —Total
      (2)
                                  
                                  
                                  522,558
                                  
                                  
                                  $
                                  8.24
                                  (1)
                                  
                                  
                                  58,072
 
 (1)
              The
      weighted-average exercise price of outstanding stock options is
      $11.53.  Restricted stock grants do not have an exercise price
      and are subject to vesting provisions
only.
  (2)
              The
      2006 Equity Incentive Plan provides for a proportionate adjustment to the
      number of shares reserved thereunder in the event of a stock split, stock
      dividend, reclassification or similar
event.
  Item
13.Certain
Relationships and Related Transactions, and Director
Independence
  Certain
Relationships and Related Transactions
  The
information required by this item is incorporated herein by reference to the
sections titled “Policies and
Procedures for Approval of Related Persons Transactions,” and, “Transactions
with Related Persons” in the Proxy Statement.
  Director
Independence
  The information related to director
independence required by this item is incorporated herein by reference to the
section titled “Corporate
Governance and Board Matters – Director Independence” in the Proxy
Statement.
  Item 14.  Principal
Accounting Fees and Services
  The
information required by this item is incorporated herein by reference to the
sections captioned “Proposal 2
– Ratification of Independent Registered Public Accountants,” and, “Audit Related Matters,” in
the Proxy Statement.
 
 PART
IV
 
 Item
15.Exhibits
and Financial Statement Schedules
 
 List
of Documents Filed as Part of This Report
 
 (1)          Financial
Statements.  The following consolidated financial statements
are filed under Item 8 hereof:
 Report of
Independent Registered Public Accounting Firm
 Consolidated
Statements of Financial Condition as of June 30, 2010 and 2009
 Consolidated
Statements of Income for the Years Ended June 30, 2010 and 2009
 Consolidated
Statements of Comprehensive Income for the Years Ended June 30, 2010 and
2009
 Consolidated
Statements of Stockholders’ Equity for the Years Ended June 30, 2010 and
2009
  101
  Consolidated Statements of Cash Flows
for the Years Ended June 30, 2010 and 2009Notes to Consolidated Financial
Statements
 
 (2)           Financial Statement
Schedules.All schedules for which provision is made in the
applicable accounting regulations are either not required under the related
instructions or are inapplicable, and therefore have been omitted.
 
 (3)           Exhibits.  The
following is a list of exhibits as part of this Annual Report on Form 10-K and
is also the Exhibit Index.
  No.
                    
                    Description2.1
                    
                    Branch
      Purchase Agreement by and between Integra National Bank Association, a
      national banking association, and United Community Bank, a
      federally-chartered savings association (1)3.1
                    
                    Charter
      of United Community Bancorp (2)3.2
                    
                    Amended
      and Restated Bylaws of United Community Bancorp (3)4.1
                    
                    Specimen
      Stock Certificate of United Community Bancorp (2)10.1
                    
                    United
      Community Bank Employee Stock Ownership Plan and Trust
      Agreement*(2)10.2
                    
                    Form
      of ESOP Loan Documents*(2)10.3
                    
                    United
      Community Bank 401(k) Profit Sharing Plan and Trust and Adoption
      Agreement*(2)10.4
                    
                    Amended
      and Restated United Community Bank Employee Severance Compensation
      Plan*(4)10.5
                    
                    Amended
      and Restated United Community Bank Supplemental Executive Retirement
      Plan*(4)10.6
                    
                    Amended
      and Restated Employment Agreement between United Community Bancorp and
      certain executive officers*(4)10.7
                    
                    Employment
      Agreement between United Community Bank and certain executive
      officers*(4)10.8
                    
                    United
      Community Bank Directors Retirement Plan*(2)10.9
                    
                    First
      Amendment to the United Community Bank Directors’ Retirement Plan
      (4)10.10
                    
                    Executive
      Supplemental Retirement Income Agreements between United Community Bank
      and William F. Ritzmann, Elmer G. McLaughlin and James W. Kittle and
      Grantor Trust Agreements thereto*(2)10.11
                    
                    First
      Amendment to the United Community Bank Executive Supplemental Retirement
      Income Agreement (4)10.12
                    
                    Rabbi
      Trust related to Directors Retirement Plan and Executive Supplemental
      Retirement Income Agreements*(2)10.13
                    
                    United
      Community Bancorp 2006 Equity Incentive Plan (5)21
                    
                    Subsidiaries23
                    
                    Consent
      of Clark, Schaefer, Hackett & Co.31.1
                    
                    Rule
      13(a)-14(a) Certification of Chief Executive Officer31.2
                    
                    Rule
      13(a)-14(a) Certification of Chief Financial Officer32
                    
                    Certifications
      Pursuant to 18 U.S.C. Section
1350
 
 *
              Management
      contract or compensation plan or
arrangement.
  (1)
                Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with
      the SEC on February 1, 2010.
 (2)
                Incorporated
      herein by reference to the Company’s Registration Statement on Form S-1,
      as amended, as  initially filed with the SEC on December 14,
      2005 (File No. 333-130302).
 (3)
                Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with
      the SEC on October 3, 2007 (File No.
0-51800).
 (4)
                Incorporated
      herein by reference to the Company’s Current Report on Form 8-K filed with
      the SEC on February 2, 2009 (File No.
0-51800).
 (5)
                Incorporated
      herein by reference to Appendix C to the Company’s Proxy Statement filed
      with the SEC on October 5,
2006.
  102
  SIGNATURES
 
 Pursuant
to the requirements of Section 13 or 15(d) 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 BANCORPDate:  September
      28, 2010
              By:
              /s/
      William F. RitzmannWilliam
      F. RitzmannPresident
      and Chief Executive Officer(Duly
      Authorized Representative)Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report
      has been signed by the following persons on behalf of the registrant in
      the capacities and on the dates indicated.By:
              /s/
      William F. Ritzmann
              
              September
      28, 2010William
      F. RitzmannPresident,
      Chief Executive Officer and Director(Principal
      Executive Officer)By:
              /s/
      Vicki A. March
              
              September
      28, 2010Vicki
      A. MarchSenior
      Vice President, Chief Financial Officer andTreasurer(Principal
      Financial and Accounting Officer)By:
              /s/
      Ralph B. Sprecher
              
              September
      28, 2010Ralph
      B. SprecherChairman
      of the BoardBy:
              /s/
      Robert J. Ewbank
              
              September
      28, 2010Robert
      J. EwbankDirectorBy:
              /s/
      Jerry W. Hacker
              
              September
      28, 2010Jerry
      W. HackerDirectorBy:
              /s/
      Elmer G. McLaughlin
              
              September
      28, 2010Elmer
      G. McLaughlinChief
      Operating Officer and DirectorBy:
              /s/
      George M. Seitz
              
              September
      28, 2010George
      M. SeitzDirectorBy:
              /s/
      Eugene B. Seitz
              
              September
      28, 2010Eugene
      B. SeitzDirectorBy:
              /s/
      Richard C. Strzynski
              
              September
      28, 2010Richard
      C. StrzynskiDirector
  103