UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended December 31, 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 of America	36-4587081
(State or other jurisdiction of incorporation or	(I.R.S.Employer Identification No.)
organization)

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

(812) 537-4822

(Registrant’s telephone number, including area code)

N/A

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

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

Yes x      No ¨

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

Yes ¨      No ¨

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

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

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

Yes ¨      No x

As of February 11, 2011, there were 7,845,554 shares of the registrant’s common stock outstanding, of which 4,655,200 shares were held by United Community MHC.

UNITED COMMUNITY BANCORP

Table of Contents

		Page No.
Part I.  Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Statements of Financial Condition at December 31, 2010 and
	June 30, 2010	1
	Consolidated Statements of Income for the Three and Six Month Periods Ended
	December 31, 2010 and 2009	2
	Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Month
	Periods Ended December 31, 2010 and 2009	3
	Consolidated Statements of Cash Flows for the Six Month Periods Ended
	December 31, 2010 and 2009	4
	Notes to Unaudited Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results
	of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	24
Item 4.	Controls and Procedures	25
Part II.  Other Information
Item 1.	Legal Proceedings	26
Item 1A.	Risk Factors	26
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	26
Item 3.	Defaults Upon Senior Securities	26
Item 4.	Submission of Matters to a Vote of Security Holders	26
Item 5.	Other Information	26
Item 6.	Exhibits	26
Signatures		27

Part I. Financial Information

Item 1. Financial Statements

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Financial Condition

(In thousands, except share amounts)	December 31, 2010			June 30, 2010
Assets
Cash and due from banks	$	19,343		$	32,023
Investment securities:
Securities available for sale - at estimated market value		66,034			62,089
Securities held to maturity - at amortized cost		611			631
Mortgage-backed securities available for sale - at estimated market value		74,660			57,238
Loans receivable, net		298,240			309,575
Loans available for sale		1,847			364
Property and equipment, net		7,584			7,513
Federal Home Loan Bank stock, at cost		2,008			2,016
Accrued interest receivable:
Loans		1,327			1,573
Investments and mortgage-backed securities		810			717
Other real estate owned, net		152			297
Cash surrender value of life insurance policies		7,247			7,109
Deferred income taxes		4,215			3,721
Goodwill		2,522			2,522
Intangible asset		1,183			1,400
Prepaid expenses and other assets		2,990			3,316
Total assets	$	490,773		$	492,104
Liabilities and Stockholders' Equity
Deposits	$	429,808		$	430,180
Advance from FHLB		2,333			2,833
Accrued interest on deposits		79			119
Accrued interest on FHLB advance		6			7
Advances from borrowers for payment of insurance and taxes		235			168
Accrued expenses and other liabilities		3,092			3,317
Total liabilities		435,553			436,624
Stockholders' equity
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued		-			-
Common stock, $0.01 par value; 19,000,000 shares authorized, 8,464,000
shares issued and 7,845,554 shares outstanding at December 31, 2010
and June 30, 2010.		36			36
Additional paid-in capital		36,913			36,995
Retained earnings		28,195			28,048
Less shares purchased for stock plans		(2,895	)		(3,042	)
Treasury Stock, at cost -  618,446  shares at December 31, 2010
and June 30, 2010, respectively		(7,054	)		(7,054	)
Accumulated other comprehensive income:
Unrealized gain on securities available for sale, net of income taxes		25			497
Total stockholders' equity		55,220			55,480
Total liabilities and stockholders' equity	$	490,773		$	492,104

See accompanying notes to the consolidated financial statements.

1

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Income

(In thousands, except share amounts)

	For the three months ended December 31,					For the six months ended December 31
	2010			2009		2010			2009
Interest income:
Loans	$	4,354		$	3,997	$	8,681		$	8,158
Investments and mortgage - backed securities		679			714		1,382			1,374
Total interest income		5,033			4,711		10,063			9,532
Interest expense:
Deposits		1,413			1,560		3,026			3,235
Borrowed funds		20			28		42			58
Total interest expense		1,433			1,588		3,068			3,293
Net interest income		3,600			3,123		6,995			6,239
Provision for loan losses		737			324		1,456			946
Net interest income after
provision for loan losses		2,863			2,799		5,539			5,293
Other income:
Service charges		606			514		1,207			996
Gain on sale of loans		215			110		442			196
Gain on sale of investments		-			51		44			39
Gain (loss) on sale of other real estate owned		(27	)		-		(25	)		20
Income from Bank Owned Life Insurance		70			82		139			139
Other		109			185		161			238
Total other income		973			942		1,968			1,628
Other expense:
Compensation and employee benefits		1,687			1,441		3,358			2,912
Premises and occupancy expense		336			278		645			554
Deposit insurance premium		180			193		408			413
Advertising expense		117			85		218			176
Data processing expense		96			64		180			120
ATM service fees		125			110		263			217
Provision for loss on sale of real estate owned		-			200		-			300
Acquisition expense		-			-		38			-
Other operating expenses		663			698		1,345			1,252
Total other expense		3,204			3,069		6,455			5,944
Income before income tax provision		632			672		1,052			977
Income tax provision		53			196		202			279
Net income	$	579		$	476	$	850		$	698
Basic and diluted earnings per share	$	0.08		$	0.06	$	0.11		$	0.09

See accompanying notes to the consolidated financial statements.

2

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss)

(In thousands)

	For the three months						For the six months
	ended December 31,						December 31,
	2010			2009			2010			2009
Net income	$	579		$	476		$	850		$	698
Other comprehensive loss, net of tax
Unrealized loss on available for sale securities		(716	)		(528	)		(445	)		(61	)
Reclassification adjustment for gains on
available for sale securities included in income		-			(31	)		(27	)		(23	)
Total comprehensive income (loss)	$	(137	)	$	(83	)	$	378		$	614

See accompanying notes to consolidated financial statements.

3

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(In thousands)

	(Unaudited)
	Six months ended
	December 31,
(In thousands)	2010			2009
Operating activities:
Net income	$	850		$	698
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		266			231
Provision for loan losses		1,456			946
Provision for loss on sale of real estate acquired through
foreclosure		-			300
Deferred loan origination costs		(40	)		(5	)
Amortization of premium on investments		509			(24	)
Proceeds from sale of loans		13,835			17,376
Loans disbursed for sale in the secondary market		(14,876	)		(15,427	)
Gain on sale of loans		(442	)		(196	)
Amortization of intangible asset		217			-
Amortization of acquisition-related loan yield discount		(124	)		-
Amortization of acquisition-related credit risk discount		(102	)		-
Amortization of acquisition-related CD yield adjustment		(72	)		-
(Gain) loss on the sale of available for sale securities		(44	)		(39	)
ESOP shares committed to be released		(44	)		72
Stock-based compensation expense		109			189
Deferred income taxes		(252	)		36
(Gain) loss on sale of other real estate owned		25			(20	)
Effects of change in operating assets and liabilities:
Accrued interest receivable		153			24
Prepaid expenses and other assets		326			(1,669	)
Accrued interest on deposits		(40	)		(3	)
Accrued expenses and other		(226	)		(250	)
Net cash provided by operating activities		1,484			2,239
Investing activities:
Proceeds from maturity of available for sale investment securities		5,302			4,890
Proceeds from the sale of available for sale investment securities		4,044			3,498
Proceeds from maturity of held to maturity investment securities		20			-
Proceeds from the sale of mortgage-backed securities		-			5,350
Proceeds from repayment of mortgage-backed securities
available for sale		8,729			4,554
Proceeds from sale of other real estate owned		180			1,759
Proceeds from sale of Federal Home Loan Bank stock		8			-
Purchases of available for sale investment securities		(15,143	)		(8,713	)
Purchases of mortgage-backed securities		(25,479	)		(17,670	)
Increase in cash surrender value of life insurance		(139	)		(140	)
Net increase (decrease) in loans		10,085			(71	)
Capital expenditures		(337	)		(258	)
Net cash used in investing activities		(12,730	)		(6,801	)
Financing activities:
Net decrease in deposits		(300	)		(2,699	)
Repayments of Federal Home Loan Bank advances		(500	)		(500	)
Dividends paid to stockholders		(701	)		(545	)
Repurchases of common stock		-			(73	)
Net increase (decrease) in advances from borrowers for payment
of insurance and taxes		67			(9	)
Net cash used in financing activities		(1,434	)		(3,826	)
Net decrease in cash and cash equivalents		(12,680	)		(8,388	)
Cash and cash equivalents at beginning of period		32,023			27,004
Cash and cash equivalents at end of period	$	19,343		$	18,616

See accompanying notes to consolidated financial statements.

4

UNITED COMMUNITY BANCORP AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

The accompanying unaudited consolidated financial statements were prepared in accordance with the rules and regulations of the Securities and Exchange Commission, and therefore do not include all information or footnotes necessary for complete financial statements in conformity with accounting principles generally accepted in the United States of America. However, all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial statements have been included.  No other adjustments have been included.  The results for the three and six month periods ended December 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011.  These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and the accompanying notes thereto for the year ended June 30, 2010, which are included on the Company’s Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2010.  The Company evaluates events and transactions occurring subsequent to the date of the financial statements for matters requiring recognition or disclosure in the financial statements.

2. EMPLOYEE STOCK OWNERSHIP PLAN (ESOP) – As of December 31, 2010 and June 30, 2010, the ESOP owned 202,061 and 230,897 shares, respectively, of the Company's common stock, which were held in a suspense account until released for allocation to participants.

3. EARNINGS PER SHARE (EPS) – In June 2008, the Financial Accounting Standards Board (FASB) issued Accounting Standards Codification (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. The Company’s restricted share awards contain non-forfeitable dividend rights but do not contractually obligate the holders to share in the losses of the Company. Accordingly, during periods of net income, unvested restricted shares are included in the determination of both basic and diluted EPS. During periods of net loss, these shares are excluded from both basic and diluted EPS.

Basic EPS is based on the weighted average number of common shares and unvested restricted shares outstanding, adjusted for ESOP shares not yet committed to be released. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. For the three and six month periods ended December 31, 2010 and 2009, 346,304  outstanding stock option awards were excluded from the computation of diluted weighted average outstanding shares 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:

5

	Three Months Ended				Six Months Ended
	December 31,				December 31,
	2010		2009		2010		2009
Basic weighted average outstanding shares		7,631,858		7,608,208		7,631,858		7,610,139
Effect of dilutive stock options		-		-		-		-
Diluted weighted average outstanding shares		7,631,858		7,608,208		7,631,858		7,610,139

4.  STOCK-BASED COMPENSATION – The Company applies the provisions of ASC 718-10-35-2, Compensation-Stock Compensation, to stock-based compensation, which requires the Company to measure the cost of employee services received in exchange for awards of equity instruments and to recognize this cost in the financial statements over the period during which the employee is required to provide such services. The Company has elected to recognize compensation cost associated with its outstanding stock-based compensation awards with graded vesting on an accelerated basis pursuant to ASC 718-10-35-8. The expense is calculated for stock options at the date of grant using the Black-Scholes option pricing model. The expense associated with restricted stock awards is calculated based upon the value of the common stock on the date of grant.

5. DIVIDENDS – On July 22, 2010 and October 28, 2010, the Board of Directors of the Company declared cash dividends on the Company’s outstanding shares of stock of $0.11 per share.  United Community MHC, which owns 4,655,200 shares of the Company’s common stock, waived receipt of the dividends.  The dividends were paid on August 31, 2010 and November 30, 2010, respectively.  Accordingly, cash dividends, net of unvested shares held in ESOP, of $701,000 were paid to shareholders during the six month period ended December 31, 2010.

6. SUPPLEMENTAL CASH FLOW INFORMATION

	Six Months Ended
	December 31,
	2010			2009
	(In thousands)
Supplemental disclosure of cash flow information is as follows:
Cash paid during the period for:
Income taxes, net of refunds received	$	682		$	-
Interest	$	3,109		$	3,296
Supplemental disclosure of non-cash investing and financing activities is as follows:
Unrealized gains (losses) on securities
designated as available for sale, net of tax	$	(472	)	$	(84	)
Transfers of loans to other real estate owned	$	60		$	888

7.  TROUBLED DEBT RESTRUCTURINGS - From time to time, as part of our loss mitigation process, loans may be renegotiated in a troubled debt restructuring (TDR) when we determine that greater economic value will ultimately be recovered under the new terms than through foreclosure, liquidation, or bankruptcy. We may consider the borrower’s payment status and history, the borrower’s ability to pay upon a rate reset on an adjustable rate mortgage, size of the payment increase upon a rate reset, period of time remaining prior to the rate reset, and other relevant factors in determining whether a borrower is experiencing financial difficulty. However, TDRs are also considered to be impaired, except for those that have been performing under the new terms for at least six consecutive months.  TDRs are accounted for as set forth in ASC 310 Receivables (“ASC 310”).  A TDR may be on non-accrual or it may accrue interest.  A TDR is typically on non-accrual until the borrower successfully performs under the new terms for six consecutive months.  However, a TDR may be placed on accrual immediately following the TDR in those instances where a borrower’s payments are current prior to the modification and management determines that principal and interest under the new terms are fully collectible.

6

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

At December 31, 2010, the Bank had nineteen loans totaling $20.1 million that qualified as TDRs, and has reserved for losses on these loans for $2.0 million. At December 31, 2010, the Bank had no other commitments to lend on its TDRs. At June 30, 2010, the Bank had thirteen loans totaling $9.0 million that qualified as TDRs, and has reserved for losses on these loans for $1.8 million.  Management continues to monitor the performance of loans classified as TDRs, and does not anticipate any additional losses on TDRs at December 31, 2010.

8. DISCLOSURES ABOUT FAIR VALUE OF ASSETS AND LIABILITIES

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

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

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

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

Investments and mortgage-backed securities

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

Loans receivable

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

Federal Home Loan Bank stock

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

Deposits

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

7

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.  Off-balance sheet items at December 31, 2010 are comprised solely of loan commitments.

Fair value of financial instruments

The estimated fair values of the Company's financial instruments at December 31, 2010 and June 30, 2010 are as follows:

	December 31, 2010				June 30, 2010
	Carrying Amounts		Fair Value		Carrying Amounts		Fair Value
	(In thousands)
Financial assets:
Cash and due from banks	$	19,343	$	19,343	$	32,023	$	32,023
Investment securities available for sale		66,034		66,034		62,089		62,089
Investment securities held to maturity		611		611		631		631
Mortgage-backed securities		74,660		74,660		57,238		57,238
Loans receivable and loans receivable held for sale		300,087		294,234		309,939		304,943
Accrued interest receivable		2,137		2,137		2,290		2,290
Investment in FHLB stock		2,008		2,008		2,016		2,016
Financial liabilities:
Deposits	$	429,808	$	431,508	$	430,180		432,091
Accrued interest payable		85		85		126		126
FHLB advance		2,333		2,387		2,833		2,904
Off balance-sheet items	$	-	$	-	$	-	$	-

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

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

Level 1 Quoted prices in active markets for identical assets or liabilities.

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

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

8

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)
December 31, 2010:
Mortgage-backed securities	$	74,660	$	-	$	74,660	$	-
U.S. Government corporations and agencies		50,608		-		50,608		-
Municipal bonds		15,302		-		15,302		-
Other equity securities		124		124		-		-
June 30, 2010:
Mortgage-backed securities	$	57,238	$	-	$	57,238	$	-
U.S. Government corporations and agencies		49,369		-		49,369		-
Municipal bonds		12,591		-		12,591		-
Other equity securities		129		129		-		-

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

	Total		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant other unobservable inputs (Level 3)
	(In thousands)
December 31, 2010:
Other real estate owned	$	152	$	-	$	152	$	-
Loans available for sale		1,847		-		1,847		-
Impaired loans		24,455		-		24,455		-
June 30, 2010:
Other real estate owned	$	297		-	$	297		-
Loans available for sale		364		-		364		-
Impaired loans		13,854		-		13,854		-

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

9

Investment securities available for sale at December 31, 2010 consist of the following:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(In thousands)
Mortgage-backed securities	$	74,257	$	631	$	228	$	74,660
U.S. Government corporations and agencies		50,454		172		18		50,608
Municipal bonds		15,736		16		450		15,302
Other equity securities		211		-		87		124
	$	140,658	$	819	$	783	$	140,694

Investment securities held to maturity at December 31, 2010 consist of the following:

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(In thousands)
Municipal bonds	$	611		-		-	$	611

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

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(In thousands)
Mortgage-backed securities	$	56,669	$	636	$	67	$	57,238
U.S. Government corporations and agencies		49,157		212		-		49,369
Municipal bonds		12,538		137		84		12,591
Other equity securities		211		-		82		129
	$	118,575	$	985	$	233	$	119,327

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

			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
	(In thousands)
Municipal bonds	$	631		-		-	$	631

10

The mortgage-backed securities, U.S. Government agency bonds and municipal bonds available for sale have the following maturities at December 31, 2010:

	Amortized		Estimated
	cost		market value
	(In thousands)
Due or callable in one year or less	$	38,150	$	38,282
Due or callable in 1 - 5 years		86,560		86,986
Due or callable in 5 - 10 years		1,039		1,025
Due or callable in greater than 10 years		14,698		14,277
Total debt securities	$	140,447	$	140,570

All other securities available for sale at December 31, 2010 are saleable within one year.  The Bank held $611,000 and $631,000 in investment securities that are being held to maturity at December 31, 2010 and June 30, 2010, respectively.  The investment securities held to maturity have annual returns of principal and will be fully matured between 2014 and 2019.

The expected returns of principal of investments held to maturity are as follows as of December 31, 2010 (in thousands):

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

Gross proceeds on the sale of investment and mortgage-backed securities were $0 and $8.3 million for the three month periods ended December 31, 2010 and 2009, respectively.  Gross realized gains for the three month periods ended December 31, 2010 and 2009 were $0 and $129,000, respectively.  Gross realized losses for the three month periods ended December 31, 2010 and 2009 were $0 and $77,000, respectively.

Gross proceeds on the sale of investment and mortgage-backed securities were $4.0 million and $8.8 million for the six month periods ended December 31, 2010 and 2009, respectively.  Gross realized gains for the six month periods ended December 31, 2010 and 2009 were $44,000 and $129,000, respectively.  Gross realized losses for the six month periods ended December 31, 2010 and 2009 were $0 and $90,000, respectively.

The table below indicates the length of time individual investment securities and mortgage-backed securities have been in a continuous loss position at December 31, 2010:

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Mortgage-backed securities	$	35,687	$	228	$	-	$	-	$	35,687	$	228
U.S. Government corporations and agencies		3,680		18		-		-		3,680		18
Municipal bonds		12,833		450		-		-		12,833		450
Other equity securities		-		-		124		87		124		87
	$	52,200	$	696	$	124	$	87	$	52,324	$	783
Number of investments	44				1				45

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.

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9. GOODWILL AND INTANGIBLE ASSET

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

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

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

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

The following table indicates changes to the core deposit intangible asset and goodwill balances for the six month period ended December 31, 2010:

	Core Deposit Intangible			Goodwill
	(dollars in thousands)
Balance at June 30, 2010	$	1,400		$	2,522
Amortization		(217	)		-
Balance at December 31, 2010	$	1,183		$	2,522

The core deposit intangible is being amortized using the double declining balance method over its estimated useful life of 8.75 years.  Remaining amortization of the core deposit intangible is as follows (dollars in thousands) as of December 31, 2010:

January 1, 2011 through June 30, 2011	$	94
2012		226
2013		179
2014		142
2015		118
2016 and thereafter		424
	$	1,183

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

The following table illustrates certain disclosures required by ASC 310-10-50-11B(c), (g) and (h).

Allowance for Credit Losses and Recorded Investment in Loans Receivable

For the six months ended December 31, 2010

	Mortgage			Consumer			One- to four-family nonowner occupied			Multi- family nonowner occupied		Non- residential realestate			Construction		Land		Commercial			Total
Allowance for Credit Losses:
Beginning Balance:	$	439		$	908		$	(20	)	$	2,863	$	1,256		$	4	$	10	$	221		$	5,681
Charge offs		(188	)		(105	)		-			-		(206	)		-		-		(38	)	$	(537	)
Recoveries		17			11			-			-		1			-		-		-		$	29
Provision		547			184			73			259		345			9		22		17		$	1,456
Reclassified from credit risk allowance on acquired loans		55			-			-			-		-			-		-		-		$	55
Ending Balance:	$	870		$	998		$	53		$	3,122	$	1,396		$	13	$	32	$	200		$	6,684
Balance, Individually Evaluated	$	217		$	706		$	-		$	2,658	$	-		$	-	$	-	$	-		$	3,581
Balance, Collectively Evaluated	$	653		$	199		$	53		$	464	$	1,396		$	13	$	32	$	200		$	3,010
Balance, Loans acquired with deteriorated credit quality	$	-		$	93		$	-		$	-	$	-		$	-	$	-	$	-		$	93
Financing receivables:
Ending Balance	$	116,038		$	43,651		$	14,264		$	48,215	$	71,806		$	1,549	$	3,901	$	6,729		$	306,153
Ending Balance: individually evaluated for impairment	$	1,348		$	776		$	980		$	13,614	$	9,033		$	-	$	-	$	-		$	25,751
Ending Balance: collectively evaluated for impairment	$	100,096		$	33,502		$	12,371		$	34,018	$	54,190		$	1,549	$	3,901	$	3,303		$	242,930
Ending Balance: loans acquired with deteriorated credit quality	$	14,594		$	9,373		$	913		$	583	$	8,583		$	-	$	-	$	3,426		$	37,472

13

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

Credit Risk Profile by Internally Assigned Grade

	Mortgage		Consumer		One- to four-family nonowner occupied		Multi-family nonowner occupied		Non- residential real estate		Construction		Land		Commercial		Total
Grade:
Pass	$	111,533	$	42,121	$	11,976	$	33,917	$	56,109	$	1,549	$	1,173	$	6,454	$	264,832
Special mention		853		89		979		2,973		7,291		-		-		241		12,426
Substandard		3,435		819		1,100		9,975		8,129		-		2,698		34		26,190
Doubtful		-		-		-		-		-		-		-		-		-
Loss		217		622		209		1,350		277		-		30		-		2,705
Total:	$	116,038	$	43,651	$	14,264	$	48,215