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UBNK > SEC Filings for UBNK > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for UNITED FINANCIAL BANCORP, INC.

Form 10-Q for UNITED FINANCIAL BANCORP, INC.


8-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

This report may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, future strategies, technological developments, new products, and similar matters. Forward-looking statements are generally preceded by terms such as "expects," "believes," "anticipates," "intends" or similar expressions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements provided that the Company notes factors that could cause the Company's actual results to differ materially from the anticipated results expressed in the Company's forward-looking statements. Factors that may cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, general economic conditions, changes in market interest rates and real estate values, changes in the size, composition or risks in the loan and securities portfolios, loan or deposit demand, changes in asset quality, including levels of delinquent, classified and charged-off loans, legislative, accounting or regulatory changes, and significant increases in competitive pressures. Additional factors are discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 under "Item 1A. Risk Factors". These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Comparison of Financial Condition at September 30, 2012 and December 31, 2011

Total assets increased $59.9 million, or 3.7%, to $1.68 billion at September 30, 2012 from $1.62 billion at December 31, 2011 reflecting strong growth in net loans and an increase in securities available for sale, partially offset by a decrease in interest-bearing deposits and held to maturity investment securities. Net loans increased $95.0 million, or 8.5%, to $1.21 billion at September 30, 2012 from $1.11 billion at December 31, 2011 mainly due to strong growth in the commercial loan portfolios and to a lesser extent an increase in home equity loans, partially offset by modest run-off in residential mortgages and consumer loans. Commercial


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mortgages increased $63.3 million, or 14.1%, and commercial and industrial loans increased $24.9 million, or 14.2%, primarily the result of business development efforts, competitive products and pricing and the establishment of a loan production office in Beverly, Massachusetts in 2011 and Glastonbury, Connecticut during the second quarter of 2012. Home equity loans increased $7.5 million, or 5.6%, largely attributable to sales and marketing initiatives as well as competitive products and pricing. These increases were partially offset by a decrease in residential mortgages of $2.2 million, or 0.7%, driven by sales of 30-year fixed rate loan originations totaling $13.4 million and payments, offset to a large extent by originations of 10- and 15-year fixed rate loans. Securities available for sale increased $17.0 million, or 7.7%, to $238.8 million at September 30, 2012 from $221.8 million at December 31, 2011 primarily due to purchases of fixed-rate agency mortgage-backed securities totaling $66.0 million, partially offset by repayments of government-sponsored agency debt and mortgage-backed securities of $47.0 million. Interest-bearing deposits decreased $29.7 million, or 71.8%, reflecting the use of excess cash to fund purchases of available for sale securities and loan originations. Securities held to maturity decreased $24.4 million, or 21.1%, to $91.5 million at September 30, 2012 from $115.9 million at December 31, 2011 as a result of repayments of government-sponsored agency debt and mortgage-backed securities.

Total deposits increased $45.2 million, or 3.7%, to $1.28 billion at September 30, 2012 compared to $1.23 billion at December 31, 2011 primarily due to growth in core deposit accounts of $53.9 million, or 6.7%, to $862.1 million at September 30, 2012 from $808.2 million at December 31, 2011. The growth in core deposit account balances was driven by sales and marketing initiatives, competitive products and pricing, attention to excellence in customer service and targeted promotional activities. The increase in core deposits was partially offset by a decrease in certificates of deposit of $8.7 million, or 2.1%, to $413.1 million at September 30, 2012 compared to $421.7 million at December 31, 2011 resulting from customers' preference for savings, demand and NOW accounts due to the low rate environment. Long-term debt increased $13.4 million, or 10.6%, to $140.3 million at September 30, 2012 compared to $126.9 million at December 31, 2011 as new Federal Home Loan Bank advances were secured to fund loan growth. Short-term borrowings decreased $2.7 million, or 15.5%, to $14.6 million at September 30, 2012 from $17.3 million at December 31, 2011 mainly due to a decrease in overnight repurchase agreements. At September 30, 2012, the Company continued to have considerable liquidity including significant unused borrowing capacity at the FHLBB and the Federal Reserve Bank of Boston and access to funding through the repurchase agreement and brokered deposit markets.

Total stockholders' equity increased $2.8 million, or 1.2%, to $230.2 million at September 30, 2012 from $227.4 million at December 31, 2011 as a result of net income of $8.4 million, stock-based compensation credits totaling $1.1 million and ESOP compensation of $815,000. These increases were partially offset by repurchases of common stock totaling $4.0 million and cash dividend payments amounting to $4.1 million.

Credit Quality and Reserve Coverage

The Company actively manages credit risk through its underwriting practices, loan review activities and collection operations, and does not offer nor has it historically offered residential mortgage and other consumer loans to subprime or Alternative-A-paper borrowers. All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status. Non-accrual loans totaled $8.9 million, or 0.73% of total loans, at September 30, 2012 compared to $8.5 million, or 0.75% of total loans, at December 31, 2011, primarily due to an $832,000 increase in commercial real estate non-accrual loans. Classified loans decreased $8.1 million, or 20.5%, to $31.3 million at September 30, 2012, compared to $39.4 million at December 31, 2011. At September 30, 2012, classified loans included ten relationships representing 44.5% of the total. Of the $1.3 million in other real estate owned, one property with a book balance of $139,113 has a purchase and sales offer which has been accepted. Refer to "Note H - Loans" in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.


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At September 30, 2012, the ratio of the allowance for loan losses to total loans was 1.03% compared to 0.99% at December 31, 2011. Excluding the impact of acquired loans totaling $125.0 million at September 30, 2012 and $168.0 million at December 31, 2011, the ratio of the allowance for loan losses to total loans would have been 1.15% at September 30, 2012 and 1.17% at December 31, 2011. Net charge-offs totaled $1.0 million, or 0.12% of average loans outstanding on an annualized basis, for the nine months ended September 30, 2012 as compared to net charge-offs of $1.5 million, or 0.18% of average loans outstanding on an annualized basis, for the same period in 2011. Net charge-offs in both periods consisted primarily of commercial loans. Refer to "Note H - Loans" in the Notes to the Unaudited Consolidated Financial Statements in this report for disclosures about the allowance for loan losses.

Comparison of Operating Results for the Three Months Ended September 30, 2012 and 2011

Overview

Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income earned on interest-earning assets, consisting primarily of loans, investment securities and other interest-earning assets, and the interest paid on interest-bearing liabilities, consisting primarily of deposits, FHLBB advances and repurchase agreements.

Our results of operations also are affected by provisions for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of deposit account fees, wealth management fees, increases in the cash surrender value of bank-owned life insurance, gains on sale of loans and securities and miscellaneous other income. Non-interest expense consists primarily of salaries and benefits, occupancy, marketing, data processing, professional fees, FDIC insurance assessments, low income housing tax credit fund and other operating expenses. Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Net Income. Net income decreased $156,000, or 5.1%, to $2.9 million for the third quarter of 2012 compared to net income of $3.1 million for the same period in 2011. Excluding acquisition related expenses of $366,000 ($254,000 net of tax benefit) incurred in 2012 and impairment charges on securities of $202,000
($119,000 net of tax benefit) in 2012 and $33,000 ($19,000 net of tax benefit)
in 2011, net income would have increased by $198,000, or 6.4%, to $3.3 million largely due to an increase of $257,000 (excluding impairment charges on securities) in non-interest income, a decrease in non-interest expense of $175,000 (excluding acquisition related expenses), and an increase in net interest income of $151,000. These positive results were offset in part by an increase of $300,000 in provision for loan losses. Diluted earnings per share was $0.20 for both periods. Excluding the after tax impact of acquisition related expenses and impairment charges on securities, diluted earnings per share would have increased $0.02, or 10.0%, to $0.22 for the three months ended September 30, 2012.


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Average Balances and Yields. The following table sets forth average balances, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.

                                                                  Three Months Ended September 30,
                                                         2012                                          2011
                                                        Interest                                      Interest
                                         Average           and          Yield/         Average           and          Yield/
                                         Balance        Dividends        Cost          Balance        Dividends        Cost
                                                                       (Dollars in thousands)
Interest-earning assets:
Loans:
Residential real estate(1)             $   313,919     $     3,493         4.45 %    $   318,705     $     3,894         4.89 %
Commercial real estate                     512,834           6,841         5.34 %        467,735           6,940         5.93 %
Home equity                                140,812           1,239         3.52 %        139,091           1,345         3.87 %
Commercial and industrial                  197,552           2,742         5.55 %        171,187           2,120         4.95 %
Consumer and other                          13,685             179         5.23 %         16,954             230         5.43 %

Total loans(2)                           1,178,802          14,494         4.92 %      1,113,672          14,529         5.22 %
Investment securities                      338,352           2,549         3.01 %        358,929           3,249         3.62 %
Other interest-earning assets               26,625              27         0.41 %         31,339              22         0.28 %

Total interest-earning assets            1,543,779          17,070         4.42 %      1,503,940          17,800         4.73 %
Noninterest-earning assets(3)              106,369                                       101,904

Total assets                           $ 1,650,148                                   $ 1,605,844


Interest-bearing liabilities:
Savings accounts                       $   259,783             290         0.45 %    $   240,101             425         0.71 %
Money market accounts                      293,291             313         0.43 %        276,718             477         0.69 %
NOW accounts                                55,788              42         0.30 %         41,471              36         0.35 %
Certificates of deposit                    414,160           1,799         1.74 %        434,283           2,076         1.91 %

Total interest-bearing deposits          1,023,022           2,444         0.96 %        992,573           3,014         1.21 %
FHLB advances                              103,915             791         3.04 %        132,544           1,080         3.26 %
Other interest-bearing liabilities          51,194             285         2.23 %         48,153             307         2.55 %

Total interest-bearing liabilities       1,178,131           3,520         1.20 %      1,173,270           4,401         1.50 %
Demand deposits                            231,126                                       193,957
Other noninterest-bearing
liabilities                                 11,277                                        10,339

Total liabilities                        1,420,534                                     1,377,566
Stockholders' equity                       229,614                                       228,278

Total liabilities and stockholders'
equity                                 $ 1,650,148                                   $ 1,605,844


Net interest income                                    $    13,550                                   $    13,399

Interest rate spread(4)                                                    3.22 %                                        3.23 %
Net interest-earning assets(5)         $   365,648                                   $   330,670

Net interest margin(6)                                                     3.51 %                                        3.56 %
Average interest-earning assets to
average interest-bearing liabilities                                     131.04 %                                      128.18 %

(1) Includes loans held for sale.

(2) Loans, including non-accrual loans, are net of deferred loan origination costs and advanced funds.

(3) Includes bank-owned life insurance, the income on which is classified as non-interest income.

(4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) Net interest margin represents annualized net interest income divided by average total interest-earning assets.


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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. 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 both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

                                              Three Months Ended September 30,
                                                        2012 vs. 2011
                                           Increase (Decrease) Due to
                                           Volume               Rate           Net
                                                       (In thousands)

    Interest-earning assets:
    Loans:
    Residential real estate(1)           $       (57 )      $       (344 )    $ (401 )
    Commercial real estate                       636                (735 )       (99 )
    Home equity                                   17                (123 )      (106 )
    Commercial and industrial                    349                 273         622
    Consumer and other                           (42 )                (9 )       (51 )

    Total loans                                  903                (938 )       (35 )
    Investment securities                       (178 )              (522 )      (700 )
    Other interest-earning assets                 (3 )                 8           5

    Total interest-earning assets                722              (1,452 )      (730 )


    Interest-bearing liabilities:
    Savings accounts                              33                (168 )      (135 )
    Money market accounts                         27                (191 )      (164 )
    NOW accounts                                  12                  (6 )         6
    Certificates of deposit                      (93 )              (184 )      (277 )

    Total interest-bearing deposits              (21 )              (549 )      (570 )
    FHLB advances                               (222 )               (67 )      (289 )
    Other interest-bearing liabilities            18                 (40 )       (22 )

    Total interest-bearing liabilities          (225 )              (656 )      (881 )


    Change in net interest income        $       947        $       (796 )    $  151

(1) Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $151,000, or 1.1%, to $13.6 million for the third quarter of 2012 from $13.4 million for the same period in 2011 mainly as a result of an increase in average interest-earning assets, partially offset by a contraction in the net interest margin. Total average interest-earning assets increased $39.8 million, or 2.6%, to $1.54 billion for the third quarter of 2012, driven by strong loan growth partially offset by decreases in interest-earning cash balances and investment securities. The net interest margin decreased by 5 basis points to 3.51% for the three months ended September 30, 2012 reflecting the downward re-pricing of certain fixed-rate loans and investments as a result of the lower interest rate environment, offset in part by reduced funding costs and an increase of $370,000 in the amortization of certain acquisition accounting adjustments to $631,000 for the third quarter of 2012 from $261,000 for the same period in 2011.

Interest Income. Interest income decreased $730,000, or 4.1%, to $17.1 million for the three months ended September 30, 2012 from $17.8 million for the prior year period due to a lower yield on average interest-earning assets, partially offset by growth in average interest-earning assets. The yield on average interest-earning assets decreased by 31 basis points to 4.42% for the third quarter of 2012 in connection with the lower interest rate environment. The decrease in market rates contributed to the downward repricing of a portion of the Company's existing assets and to lower rates for new assets.


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Interest Expense. Interest expense decreased $881,000, or 20.0%, to $3.5 million for the three months ended September 30, 2012 from $4.4 million for the prior year period reflecting a decrease in the average rate paid on interest-bearing liabilities, partially offset by an increase in average interest-bearing liabilities. The average rate paid on interest-bearing liabilities declined 30 basis points to 1.20% for the three months ended September 30, 2012 due to the repricing of deposits in response to the lower interest rate environment. Average interest-bearing liabilities increased $4.9 million, or 0.4%, to $1.18 billion for the three months ended September 30, 2012 from $1.17 billion for the prior year period as a result of growth of $30.4 million, or 3.1%, in interest-bearing deposits and a $3.0 million, or 6.3%, increase in other interest-bearing liabilities. These increases were partially offset by a decrease of $28.6 million, or 21.6%, in average FHLBB advances as a result of payoffs of maturing advances.

Provision for Loan Losses. The allowance for loan losses is based on management's estimate of the probable losses inherent in the portfolio, considering the impact of prior loss experience, current economic conditions and their effect on borrowers, the composition and size of the portfolio, trends in non-performing loans, classified and impaired loans, and delinquency rates and the performance of individual loans in relation to contractual terms. The provision for loan losses reflects adjustments to the allowance based on management's review of the loan portfolio in light of those conditions. The provision for loan losses increased by $300,000, or 40.0%, to $1.1 million for the three months ended September 30, 2012 from $750,000 for the same period in 2011, driven by an increase in general reserves associated with stronger commercial loan origination activity and the continuing shift to a more commercially oriented loan portfolio, offset by a decrease in charge-offs. The allowance for loan losses was $12.6 million, or 1.03% of loans outstanding at September 30, 2012. Excluding the impact of acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.15%.

Non-interest Income. Non-interest income increased $88,000, or 3.6%, to $2.5 million for the third quarter of 2012 from $2.4 million for the same period in 2011. Net gains from sales of loans increased $137,000 due to improved pricing for sales of 30-year fixed rate loans and, to a lesser extent, increased sales volume. Other income increased $50,000, or 18.6%, as a result of higher loan prepayment penalties. Fee income on depositors' accounts increased $32,000, or 2.3%, driven by growth in overdraft fees and debit card income. Wealth management income increased $31,000, or 12.5%, reflecting growth in fee-based assets under management. These increases were partially offset by an increase of $169,000 in impairment charges on securities. Management evaluated its securities portfolio and recognized pre-tax, non-cash charges totaling $202,000 in 2012 for other-than-temporary impairment ("OTTI") of a corporate bond and a cost basis investment. In the third quarter of 2011, the Company recognized a $33,000 OTTI charge related to a cost basis investment.

Non-interest Expense. Non-interest expense increased $191,000, or 1.7%, to $11.2 million in the third quarter of 2012 from $11.0 million in the same period last year. Excluding acquisition related costs incurred in connection with the Company's proposed acquisition of New England Bancshares totaling $366,000 in the third quarter of 2012, non-interest expense would have declined by $175,000, or 1.6%. Low income housing tax credit fund expense decreased by $232,000 due to a prior period adjustment. Professional fees decreased $201,000, or 35.1%, due in large part to legal and consulting costs incurred in 2011 in connection with strategic initiatives. Other expenses decreased $91,000, or 5.5%, reflecting a lower write-down of fair value of mortgage servicing rights. These items were partially reduced by higher compensation and data processing expenses. Salaries and benefits increased $197,000, or 3.2%, mainly due to a new loan production office opened in Glastonbury, Connecticut during the second quarter of 2012, annual salary increases and a higher short-term incentive plan accrual related to improved operating performance. Data processing expenses increased $148,000, or 15.4%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards.

Income Tax Expense. Income tax expense decreased $96,000, or 9.7%, to $890,000 for the third quarter of 2012 from $986,000 in the same period last year primarily due to a lower effective tax rate and a decrease in pre-tax income.


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Comparison of Operating Results for the Nine Months Ended September 30, 2012 and 2011

Net Income. Net income for the nine months ended September 30, 2012 amounted to $8.4 million, or $0.56 per diluted share, compared to $8.2 million, or $0.54 per diluted share, for the same period in 2011. Excluding acquisition related expenses of $958,000 ($818,000 net of tax benefit) incurred in 2012 and impairment charges on securities of $202,000 ($119,000 net of tax benefit) in 2012 and $92,000 ($54,000 net of tax benefit) incurred in 2011, net income would have increased by $1.0 million, or 12.6%, to $9.3 million, or $0.63 per diluted share, for the nine months of 2012. The 2012 results were positively impacted by an increase of $981,000 in non-interest income (excluding impairment charges on securities), a $372,000 increase in net interest income and a decrease of $367,000 in non-interest expense (excluding acquisition related expenses). These positive results were offset in part by increases of $277,000 in income tax expense and $219,000 in provision for loan losses.


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Average Balances and Yields. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.

                                                                  Nine Months Ended September 30,
                                                         2012                                          2011
                                                        Interest                                      Interest
                                         Average           and          Yield/         Average           and          Yield/
                                         Balance        Dividends        Cost          Balance        Dividends        Cost
                                                                        (Dollars in thousands)
Interest-earning assets:
. . .
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