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

Show all filings for UNITED FINANCIAL BANCORP, INC.

Form 10-Q for UNITED FINANCIAL BANCORP, INC.


8-Aug-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 June 30, 2013 and December 31, 2012

Total assets increased $46.0 million, or 1.9%, to $2.45 billion at June 30, 2013 from $2.40 billion at December 31, 2012 reflecting growth in net loans, interest-bearing deposits and securities held to maturity, partially offset by decreases in securities available for sale. Net loans increased $42.7 million, or 2.4%, to $1.85 billion at June 30, 2013 from $1.81 billion at December 31, 2012 due to growth of $41.2 million, or 3.5%, in commercial loans (commercial and industrial, commercial real estate and construction loans) and $6.5 million, or 1.5%, in residential mortgages, as a result of successful business development efforts and competitive products and pricing. These increases were offset by decreases in consumer loans of $2.1 million, or 9.6%, and home equity loans of $1.3 million, or 0.7%. The decrease in consumer loans was primarily due to payments. Home equity loan balances declined due to the decreased usage of existing home equity lines. Interest-bearing deposits increased $25.1 million primarily reflecting excess cash on deposit at the Federal Reserve Bank. Securities held to maturity increased $3.6 million, or 4.4%, to $86.6 million at June 30, 2013 from $83.0 million at December 31, 2012 as a result of purchases of fixed- and variable-rate agency mortgage-backed securities totaling $16.9 million, partially offset by repayments of government-sponsored agency debt and mortgage-backed securities of $12.8 million. Securities available for sale decreased $21.4 million, or 7.3%, to $272.9 million at June 30, 2013 from $294.3 million at December 31, 2012 primarily due to repayments of government-sponsored agency debt and mortgage-backed securities of $43.6 million, partially offset by purchases of fixed- and variable-rate agency mortgage-backed securities totaling $33.5 million.

Total deposits increased $76.9 million, or 4.2%, to $1.93 billion at June 30, 2013 compared to $1.85 billion at December 31, 2012 reflecting growth of $50.2 million, or 4.4%, in core account balances and an increase of $26.7 million, or 3.8%, in certificates of deposit. Core deposit balances were $1.19 billion, or 61.9% of total deposits, at June 30, 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 was attributable to the purchase of $20.1 million in brokered CDs with a weighted average rate of 0.30% and a maturity of three months. Short-term borrowings decreased $8.7 million, or 11.0%, to $70.5 million at June 30, 2013 from $79.2 million at December 31, 2012 mainly due to a decrease in overnight customer repurchase agreements. Long-term debt decreased $9.8 million, or 7.3%, to $124.2 million at June 30, 2013 from $134.0 million at December 31, 2012 attributable to repayments of FHLB advances of $16.0 million, partially offset by new FHLBB advances secured totaling $6.5 million. Total subordinated debentures decreased $3.7 million, or 38.7%, to $5.9 million at June 30, 2013 as a result of the full redemption of a $4.0 million callable debt instrument previously issued by New England Bancshares, Inc. partially offset by the amortization of the mark-to-market adjustment on the Commonwealth National Bank trust preferred securities. At June 30, 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.


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Total stockholders' equity decreased $6.9 million, or 2.2%, to $300.3 million at June 30, 2013 from $307.2 million at December 31, 2012 as a result of repurchases of common stock totaling $7.3 million, $4.8 million in other comprehensive loss and cash dividend payments amounting to $4.2 million, partially offset by net income of $8.8 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 $14.0 million, or 0.75% of total loans, at June 30, 2013 compared to $14.7 million, or 0.81% of total loans, at December 31, 2012. Criticized and classified loans, which are loans that are of lesser quality and are reported for regulatory purposes as special mention, substandard, doubtful or loss, decreased $2.5 million, or 2.7%, to $90.4 million at June 30, 2013 compared to $92.9 million at December 31, 2012, primarily due to a decrease in classified commercial and industrial loans. Other real estate owned decreased $791,000, or 30.7% to $1.8 million at June 30, 2013 from $2.6 million at December 31, 2012 reflecting sales of several properties, partially offset by foreclosure activity. The other real estate owned balance at June 30, 2013 includes two properties with a book balance of $496,000 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 June 30, 2013, the ratio of the allowance for loan losses to total loans was 0.70% compared to 0.67% at December 31, 2012. Excluding the impact of acquired loans totaling $588.4 million at June 30, 2013 and $664.6 million at December 31, 2012, the ratio of the allowance for loan losses to total loans would have been 1.03% at June 30, 2013 and 1.05% at December 31, 2012. Net charge-offs totaled $861,000, or 0.09% of average loans outstanding on an annualized basis, for the six months ended June 30, 2013 as compared to net charge-offs of $781,000, or 0.14% 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 June 30, 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 $1.4 million, or 56.8%, to $4.0 million for the second quarter of 2013 compared to net income of $2.6 million for the same period in 2012. Excluding branch closing costs totaling $477,000 ($282,000 net of tax benefit), acquisition related expenses of $123,000 ($117,000 net of tax benefit) resulting from the Company's acquisition of New England Bancshares, Inc. ("NEBS") in November 2012, and a $200,000 gain related to an investment in a venture capital fund which is accounted for on a cash basis ($119,000 net of tax expense) for the 2013 period and $592,000 (no tax impact) in acquisition related expenses for the same period in 2012, net income would have increased by $1.1 million, or 36.4%, from $3.2 million for the second quarter of 2012 to $4.3 million for the second quarter of 2013. The improved quarterly operating results were largely due to growth in net interest income of $6.4 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 $4.8 million in non-interest expense and $142,000 in provision for loan losses. Diluted earnings per share increased $0.03, or 17.6%, to $0.20 for the three months ended June 30, 2013 compared to $0.17 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 5.2 million shares for the three months ended June 30, 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, acquisition related expenses and the cash basis investment gain, diluted earnings per share would have been flat for the three months ended June 30, 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 June 30,
                                                         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)             $   445,739     $     4,259         3.82 %    $   312,592     $     3,588         4.59 %
Commercial real estate                     892,533          11,245         5.04 %        498,354           6,875         5.52 %
Home equity                                177,574           1,516         3.41 %        137,526           1,225         3.56 %
Commercial and industrial                  308,627           3,950         5.12 %        188,343           2,298         4.88 %
Consumer and other                          21,108             307         5.82 %         14,326             195         5.44 %

Total loans(2)                           1,845,581          21,277         4.61 %      1,151,141          14,181         4.93 %
Investment securities                      358,184           2,248         2.51 %        340,086           2,767         3.25 %
Other interest-earning assets               26,558              24         0.36 %         55,905              51         0.36 %

Total interest-earning assets            2,230,323          23,549         4.22 %      1,547,132          16,999         4.39 %
Noninterest-earning assets(3)              177,488                                       105,865

Total assets                           $ 2,407,811                                   $ 1,652,997


Interest-bearing liabilities:
Savings accounts                       $   345,729             317         0.37 %    $   261,297             336         0.51 %
Money market accounts                      421,902             409         0.39 %        305,501             366         0.48 %
NOW accounts                                83,795              71         0.34 %         55,539              42         0.30 %
Certificates of deposit                    733,361           2,054         1.12 %        416,857           1,854         1.78 %

Total interest-bearing deposits          1,584,787           2,851         0.72 %      1,039,194           2,598         1.00 %
FHLBB advances                             112,439             716         2.55 %        103,632             819         3.16 %
Other interest-bearing liabilities          73,066             283         1.55 %         53,860             288         2.14 %

Total interest-bearing liabilities       1,770,292           3,850         0.87 %      1,196,686           3,705         1.24 %
Demand deposits                            317,343                                       217,586
Other noninterest-bearing
liabilities                                 15,821                                        10,870

Total liabilities                        2,103,456                                     1,425,142
Stockholders' equity                       304,355                                       227,855

Total liabilities and stockholders'
equity                                 $ 2,407,811                                   $ 1,652,997


Net interest income                                    $    19,699                                   $    13,294

Interest rate spread(4)                                                    3.35 %                                        3.15 %
Net interest-earning assets(5)         $   460,031                                   $   350,446

Net interest margin(6)                                                     3.53 %                                        3.44 %
Average interest-earning assets to
average interest-bearing liabilities                                     125.99 %                                      129.28 %

(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 June 30,
                                                        2013 vs. 2012
                                           Increase (Decrease) Due to
                                           Volume                Rate            Net
                                                        (In thousands)

   Interest-earning assets:
   Loans:
   Residential real estate(1)           $       1,344        $       (673 )    $   671
   Commercial real estate                       5,013                (643 )      4,370
   Home equity                                    344                 (53 )        291
   Commercial and industrial                    1,535                 117        1,652
   Consumer and other                              97                  15          112

   Total loans                                  8,333              (1,237 )      7,096
   Investment securities                          141                (660 )       (519 )
   Other interest-earning assets                  (27 )                -           (27 )

   Total interest-earning assets                8,447              (1,897 )      6,550


   Interest-bearing liabilities:
   Savings accounts                                93                (112 )        (19 )
   Money market accounts                          121                 (78 )         43
   NOW accounts                                    23                   6           29
   Certificates of deposit                      1,058                (858 )        200

   Total interest-bearing deposits              1,295              (1,042 )        253
   FHLBB advances                                  66                (169 )       (103 )
   Other interest-bearing liabilities              87                 (92 )         (5 )

   Total interest-bearing liabilities           1,448              (1,303 )        145


   Change in net interest income        $       6,999        $       (594 )    $ 6,405

(1) Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $6.4 million, or 48.2%, to $19.7 million for the second quarter of 2013 from $13.3 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 $683.2 million, or 44.2%, to $2.23 billion for the second 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 9 basis points to 3.53% for the three months ended June 30, 2013 due in large part to a $945,000 increase in the net accretion of acquisition accounting adjustments to $1.3 million for the second quarter of 2013 from $319,000 for the same period in 2012.

Interest Income. Interest income increased $6.5 million, or 38.5%, to $23.5 million for the three months ended June 30, 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 17 basis points to 4.22% for the second quarter of 2013 in connection with the lower interest rate environment, partially offset by an increase of $111,000 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 $145,000, or 3.9%, for the three months ended June 30, 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 $573.6 million, or 47.9%, to $1.77 billion for the three months ended June 30, 2013 from $1.20 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 37 basis points to 0.87% for the three months ended June 30, 2013 due to the repricing of deposits in response to the lower interest rate environment and an increase of $833,000 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 $142,000, or 18.9%, to $892,000 for the three months ended June 30, 2013 from $750,000 for the same period in 2012, driven by an increase in general reserves associated with stronger commercial loan origination activity, increases in impaired loan reserves and net charge-offs and the continuing shift to a more commercially oriented loan portfolio. Net charge-offs increased from $324,000 for the three months ended June 30, 2012 to $518,000 for the three months ended June 30, 2013. The allowance for loan losses was $13.1 million, or 0.70% of loans outstanding, at June 30, 2013.

Non-interest Income. Non-interest income increased $445,000, or 17.3%, to $3.0 million for the second quarter of 2013 from $2.6 million for the same period in 2012. Other income increased $400,000 as a result of a $200,000 gain on an investment in a venture capital fund that is accounted for on a cash basis, higher loan prepayment penalties and late charges as well as increased credit enhancement fees related to loans sold to the FHLBB. Income from bank-owned life insurance increased $74,000, or 17.0%, due in large part to the acquisition of the NEBS portfolio, partially offset by a decrease in the yield on the portfolio assets. Fee income on depositors' accounts increased $68,000, or 4.4%, driven by growth in overdraft fees, automated teller fees paid by non-customers and other account service charges. These increases were offset in part by decreases of $55,000 in gains on sales of loans and $42,000 in wealth management income.

Non-interest Expense.Non-interest expense increased $4.8 million, or 41.9%, to $16.3 million in the second quarter of 2013 from $11.5 million in the same period last year. Excluding branch closing costs of $477,000 incurred during the second quarter of 2013 and acquisition-related expenses incurred in connection with the Company's acquisition of NEBS totaling $123,000 for the 2013 period and $592,000 for the same period in 2012, non-interest expense would have increased $4.8 million, or 44.1%, to $15.7 million. Salaries and benefits increased $1.9 million, or 29.6%, 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. Other expenses increased $893,000, or 58.1%, reflecting increased expenses from the expansion of our franchise into Connecticut (i.e. telephone, depreciation, postage, core deposit intangible amortization, foreclosed properties, business development, printing, office supplies and branch security). Data processing expenses increased $597,000, or 59.1%, attributable to a larger loan and deposit base as well as increased costs related to software licenses, online banking and debit cards. Occupancy costs grew $457,000, or 52.5%, 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. Professional fees increased $245,000, or 60.6%, 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 $440,000, or 41.4%, to $1.5 million for the second quarter of 2013 from $1.1 million in the same period last year as a result of an increase in taxable income.


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Comparison of Operating Results for the Six Months Ended June 30, 2013 and 2012

Net Income. Net income for the six months ended June 30, 2013 amounted to $8.8 million, or $0.43 per diluted share, compared to $5.4 million, or $0.36 per diluted share, for the same period in 2012. Excluding branch closing costs totaling $987,000 ($584,000 net of tax benefit), acquisition related expenses of $281,000 ($271,000 net of tax benefit) and a $200,000 gain related to an investment in a venture capital fund that is accounted for on a cash basis ($119,000 net of tax expense) for the 2013 period and $592,000 (non tax deductible) of acquisition related expenses for the same period in 2012, net income would have increased by $3.5 million, or 57.5%, from $6.0 million for the six months ended June 30, 2013 to $9.5 million, or $0.47 per diluted share, for the first six months of 2013. The improved year-to-date operating results were largely due to growth in net interest income of $13.8 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 $9.4 million in non-interest expense . . .

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