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UBNK > SEC Filings for UBNK > Form 10-Q on 8-May-2013All Recent SEC Filings

Show all filings for UNITED FINANCIAL BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for UNITED FINANCIAL BANCORP, INC.


8-May-2013

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, 2012 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 March 31, 2013 and December 31, 2012

Total assets increased $26.9 million, or 1.1%, to $2.43 billion at March 31, 2013 from $2.40 billion at December 31, 2012 reflecting growth in net loans and interest-bearing deposits, partially offset by decreases in securities available for sale and held to maturity investment securities. Net loans increased $22.8 million, or 1.3%, to $1.83 billion at March 31, 2013 from $1.81 billion at December 31, 2012 due to growth of $11.0 million, or 20.9%, in construction loans, $10.0 million, or 1.2%, in commercial mortgages and $7.3 million, or 2.4%, in commercial and industrial loans, as a result of successful business development efforts and competitive products and pricing. These increases were offset by decreases in home equity loans of $2.9 million, or 1.6%, and residential mortgages of $1.2 million, or 0.3%. Home equity loan balances declined due to the decreased usage of existing home equity lines. The decrease in residential mortgages is primarily due to payments and $3.8 million in sales of 30-year fixed rate loan originations, offset by originations of 10- and 15-year fixed rate loans. Interest-bearing deposits increased $30.3 million primarily reflecting excess cash on deposit at the Federal Reserve Bank. Securities available for sale decreased $11.4 million, or 3.9%, to $282.9 million at March 31, 2013 from $294.3 million at December 31, 2012 primarily due to repayments of government-sponsored agency debt and mortgage-backed securities of $23.5 million, partially offset by purchases of fixed- and variable-rate agency mortgage-backed securities totaling $16.6 million. Securities held to maturity decreased $6.9 million, or 8.3%, to $76.1 million at March 31, 2013 from $83.0 million at December 31, 2012 as a result of repayments of government-sponsored agency debt and mortgage-backed securities.

Total deposits increased $46.4 million, or 2.5%, to $1.89 billion at March 31, 2013 compared to $1.85 billion at December 31, 2012 reflecting growth of $21.7 million, or 1.9%, in core account balances and an increase of $24.7 million, or 3.5%, in certificates of deposit. Core deposit balances were $1.16 billion, or 61.4% of total deposits, at March 31, 2013 compared to $1.14 billion, or 61.7% of total deposits, at December 31, 2012. 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 certificates of deposit is attributable to the purchase of $20.0 million in brokered CDs with a weighted average rate of 0.30% and a maturity of three months. Short-term borrowings decreased $12.6 million, or 15.9%, to $66.7 million at March 31, 2013 from $79.2 million at December 31, 2012 mainly due to a decrease in overnight customer repurchase agreements. Total subordinated debentures decreased $4.0


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million, or 41.3%, to $5.7 million at March 31, 2013 as a result of the full redemption of callable debt instruments previously issued by New England Bancshares, Inc. At March 31, 2013, 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 decreased $834,000, or 0.3%, to $306.4 million at March 31, 2013 from $307.2 million at December 31, 2012 as a result of repurchases of common stock totaling $3.0 million, cash dividend payments amounting to $2.0 million and $852,000 in other comprehensive loss, partially offset by net income of $4.7 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 $14.2 million, or 0.77% of total loans, at March 31, 2013 compared to $14.7 million, or 0.81% of total loans, at December 31, 2012. Classified loans, which are loans that are of lesser quality and are reported as special mention, substandard, doubtful or loss, increased $2.3 million, or 2.5%, to $95.2 million at March 31, 2013 compared to $92.9 million at December 31, 2012, primarily due to an increase in classified commercial and industrial and construction loans. Other real estate owned totaled $1.4 million at March 31, 2013 and includes three properties with a book balance of $359,000 that are under contract to sell. Refer to "Note G - Loans" in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.

At March 31, 2013, the ratio of the allowance for loan losses to total loans was 0.69% compared to 0.67% at December 31, 2012. Excluding the impact of acquired loans totaling $616.2 million at March 31, 2013 and $664.6 million at December 31, 2012, the ratio of the allowance for loan losses to total loans would have been 1.04% at March 31, 2013 and 1.05% at December 31, 2012. Net charge-offs totaled $343,000, or 0.07% of average loans outstanding on an annualized basis, for the three months ended March 31, 2013 as compared to net charge-offs of $457,000, or 0.16% of average loans outstanding on an annualized basis, for the same period in 2012. Net charge-offs in both periods consisted primarily of commercial loans. Refer to "Note G - 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 March 31, 2013 and 2012

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.


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Net Income. Net income increased $1.9 million, or 65.0%, to $4.7 million for the first quarter of 2013 compared to net income of $2.8 million for the same period in 2012. Excluding branch closing costs totaling $510,000 ($302,000 net of tax benefit) and acquisition related expenses of $158,000 ($152,000 net of tax benefit) resulting from the Company's acquisition of New England Bancshares, Inc. ("NEBS") in November 2012, net income would have increased by $2.3 million, or 80.9%, to $5.2 million for the first quarter of 2013. The improved quarterly operating results were largely due to growth in net interest income of $7.4 million, driven by net interest margin expansion and an increase in average interest earning assets and, to a lesser extent, an increase in non-interest income. These positive results were offset in part by increases of $4.6 million in non-interest expense and $300,000 in provision for loan losses. Diluted earnings per share increased $0.04, or 21.1%, to $0.23 for the three months ended March 31, 2013 compared to $0.19 for the same period last year due to improved earnings, offset in part by an increase in weighted average shares outstanding. Total diluted weighted average shares increased by 5.3 million shares for the three months ended March 31, 2013 compared to the same period in 2012 due to the issuance of shares for the acquisition of NEBS, partially offset by the repurchase of shares under the Company's current stock repurchase plan. Excluding the after tax impact of branch closing costs and acquisition related expenses, diluted earnings per share would have increased $0.06, or 32%, to $0.25 for the three months ended March 31, 2013 compared to the same period in 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 March 31,
                                                         2013                                          2012
                                                        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)             $   445,630     $     4,217         3.79 %    $   315,439     $     3,712         4.71 %
Commercial real estate                     864,727          11,692         5.41 %        491,552           6,943         5.65 %
Home equity                                178,172           1,494         3.35 %        135,891           1,231         3.62 %
Commercial and industrial                  319,971           4,329         5.41 %        175,687           1,993         4.54 %
Consumer and other                          22,120             324         5.86 %         14,974             196         5.24 %

Total loans(2)                           1,830,620          22,056         4.82 %      1,133,543          14,075         4.97 %
Investment securities                      365,237           2,313         2.53 %        338,405           2,855         3.37 %
Other interest-earning assets               21,985              18         0.33 %         54,067              41         0.30 %

Total interest-earning assets            2,217,842          24,387         4.40 %      1,526,015          16,971         4.45 %
Noninterest-earning assets(3)              179,185                                       102,056

Total assets                           $ 2,397,027                                   $ 1,628,071


Interest-bearing liabilities:
Savings accounts                       $   350,418             335         0.38 %    $   254,668             368         0.58 %
Money market accounts                      406,860             393         0.39 %        303,684             442         0.58 %
NOW accounts                                79,082              90         0.46 %         48,478              40         0.33 %
Certificates of deposit                    715,763           1,985         1.11 %        418,420           1,903         1.82 %

Total interest-bearing deposits          1,552,123           2,803         0.72 %      1,025,250           2,753         1.07 %
FHLBB advances                             136,627             792         2.32 %        105,302             822         3.12 %
Other interest-bearing liabilities          82,224             299         1.45 %         51,899             296         2.28 %

Total interest-bearing liabilities       1,770,974           3,894         0.88 %      1,182,451           3,871         1.31 %
Demand deposits                            302,851                                       206,035
Other noninterest-bearing
liabilities                                 16,649                                        11,731

Total liabilities                        2,090,474                                     1,400,217
Stockholders' equity                       306,553                                       227,854

Total liabilities and stockholders'
equity                                 $ 2,397,027                                   $ 1,628,071


Net interest income                                    $    20,493                                   $    13,100

Interest rate spread(4)                                                    3.52 %                                        3.14 %
Net interest-earning assets(5)         $   446,868                                   $   343,564

Net interest margin(6)                                                     3.70 %                                        3.43 %
Average interest-earning assets to
average interest-bearing liabilities                                     125.23 %                                      129.06 %

(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 March 31,
                                                        2013 vs. 2012
                                           Increase (Decrease) Due to
                                            Volume                Rate          Net
                                                        (In thousands)

    Interest-earning assets:
    Loans:
    Residential real estate(1)           $       1,329          $   (824 )    $   505
    Commercial real estate                       5,058              (309 )      4,749
    Home equity                                    360               (97 )        263
    Commercial and industrial                    1,892               444        2,336
    Consumer and other                             103                25          128

    Total loans                                  8,742              (761 )      7,981
    Investment securities                          213              (755 )       (542 )
    Other interest-earning assets                  (26 )               3          (23 )

    Total interest-earning assets                8,929            (1,513 )      7,416


    Interest-bearing liabilities:
    Savings accounts                               113              (146 )        (33 )
    Money market accounts                          124              (173 )        (49 )
    NOW accounts                                    31                19           50
    Certificates of deposit                      1,011              (929 )         82

    Total interest-bearing deposits              1,279            (1,229 )         50
    FHLBB advances                                 211              (241 )        (30 )
    Other interest-bearing liabilities             134              (131 )          3

    Total interest-bearing liabilities           1,624            (1,601 )         23


    Change in net interest income        $       7,305          $     88      $ 7,393

(1) Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $7.4 million, or 56.4%, to $20.5 million for the first quarter of 2013 from $13.1 million for the same period in 2012 mainly as a result of an increase in average interest-earning assets and net interest margin expansion. Total average interest-earning assets increased $691.8 million, or 45.3%, to $2.22 billion for the first quarter of 2013, driven by the acquisition of New England Bank and organic loan growth, partially offset by a decrease in interest-earning cash balances. The net interest margin increased by 27 basis points to 3.70% for the three months ended March 31, 2013 due in large part to a $1.4 million increase in the net accretion of acquisition accounting adjustments to $1.8 million for the first quarter of 2013 from $371,000 for the same period in 2012.

Interest Income. Interest income increased $7.4 million, or 43.7%, to $24.4 million for the three months ended March 31, 2013 from $17.0 million for the prior year period due to an increase in average interest-earning assets, partially offset by a decrease in the yield on earning assets. The yield on average interest-earning assets decreased by 5 basis points to 4.40% for the first quarter of 2013 in connection with the lower interest rate environment, partially offset by an increase of $440,000 in the accretion of loan acquisition accounting adjustments. 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 increased $23,000, or 0.6%, for the three months ended March 31, 2013 compared to the prior year period, reflecting an increase in average interest-bearing liabilities, partially offset by a decrease in the average rate paid on interest-bearing liabilities. Average interest-bearing liabilities increased $588.5 million, or 49.8%, to $1.77 billion for the three months ended March 31, 2013 from $1.18 billion for the prior year period due in large part to the Company's acquisition of NEBS in the fourth quarter of 2012 and organic deposit growth. The average rate paid on interest-bearing liabilities declined 43 basis points to 0.88% for the three months ended March 31, 2013 due to the repricing of deposits in response to the lower interest rate environment and an increase of $940,000 in the net accretion of acquisition accounting adjustments.

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 46.2%, to $950,000 for the three months ended March 31, 2013 from $650,000 for the same period in 2012, driven by an increase in general reserves associated with stronger commercial loan origination activity, an increase in impaired loan reserves and the continuing shift to a more commercially oriented loan portfolio, offset in part by a decrease in net charge-offs. Net charge-offs decreased from $457,000 for the three months ended March 31, 2012 to $343,000 for the three months ended March 31, 2013. The allowance for loan losses was $12.7 million, or 0.69% of loans outstanding at March 31, 2013.

Non-interest Income. Non-interest income increased $225,000, or 8.7%, to $2.8 million for the first quarter of 2013 from $2.6 million for the same period in 2012. Other income increased $129,000, or 33.1%, as a result of higher loan prepayment penalties and late charges as well as increased credit enhancement fees related to loans sold to the FHLBB. Fee income on depositors' accounts increased $91,000, or 6.5%, driven by growth in overdraft fees and debit card income. These increases were offset in part by losses totaling $50,000 from sales of $2.6 million in private label mortgage-backed securities and a decrease of $16,000 in wealth management income.

Non-interest Expense. Non-interest expense increased $4.6 million, or 40.6%, to $15.9 million in the first quarter of 2013 from $11.3 million in the same period last year. Excluding branch closing costs of $510,000 and acquisition-related costs totaling $158,000 incurred in connection with the Company's acquisition of NEBS, non-interest expense would have increased $3.9 million, or 34.7%, to $15.2 million mainly due to additional costs incurred to operate our new Connecticut franchise. Salaries and benefits increased $2.0 million, or 31.6%, mainly due to costs incurred to support our new Connecticut operations, staffing costs associated with a new loan production office opened in Glastonbury, Connecticut during the second quarter of 2012 and a new branch established in Northborough, Massachusetts during the fourth quarter of 2012, annual wage increases and a larger incentive accrual due to improved operating performance. Occupancy costs grew $754,000, or 86.3%, principally attributable to expenses incurred to operate our new Connecticut facilities as well as expenses related to the new loan production office and new branch. Other expenses increased $698,000, or 47.1%, reflecting increased expenses from the expansion of our franchise into Connecticut. Data processing expenses increased $187,000, or 18.3%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards. Professional fees increased $172,000, or 34.0%, primarily due to additional legal and consulting costs associated with our Connecticut operations and increased expenses related to loan workout activities and third party loan reviews.

Income Tax Expense. Income tax expense increased $891,000, or 99.1%, to $1.8 million for the first quarter of 2013 from $899,000 in the same period last year as a result of an increase in taxable income and to a lesser extent, a higher effective tax rate.


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Market Risk, Liquidity and Capital Resources

Market Risk

The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk ("IRR"). Our assets, the largest portion of which are mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage IRR and reduce the exposure of our net interest income ("NII") to changes in market interest rates. Accordingly, our Board of Directors has established an Asset/Liability Management Committee, which is responsible for evaluating the IRR inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. With the assistance of an IRR management consultant, the committee monitors the level of IRR on a regular basis and meets at least quarterly to review our asset/liability policies and IRR position.

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the FHLBB, to "match fund" certain longer-term loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable-rate and shorter-term loans;
(iv) offering a variety of consumer loans, which typically have shorter-terms;
(v) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations; and (vi) sales of thirty-year fixed-rate residential real estate loans. Reducing the average maturity of our interest-earning assets by increasing our investments in shorter-term loans and securities, as well as loans and securities with variable rates of interest, helps to better match the maturities and interest rates of our assets and liabilities, thereby reducing the exposure of our NII to changes in market interest rates.

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII . . .

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