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EX-32 - EXHIBIT 32 - United Financial Bancorp, Inc.ex32.htm
EX-31.1 - EXHIBIT 31.1 - United Financial Bancorp, Inc.ex31_1.htm
EX-31.2 - EXHIBIT 31.2 - United Financial Bancorp, Inc.ex31_2.htm


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549



FORM 10-Q
 
(Mark One)
 
T           Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2009
 
OR
 
o           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 000-52947

United Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)

Maryland
 
74-3242562
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)

95 Elm Street, West Springfield, Massachusetts 01089
(Address of principal executive offices)

Registrant's telephone number, including area code: (413) 787-1700

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes ¨   No ¨.

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

Large accelerated filer ¨
Accelerated filer x
Non-accelerated filer¨ (Do not check if a smaller reporting company)
Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes ¨   No x.

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
 
Common stock, $0.01 par value
16,075,650 shares outstanding as of November 3, 2009
 


 
 

 

United Financial Bancorp, Inc.

   
Page
     
PART I. FINANCIAL INFORMATION
   
         
Item 1.
     
         
     
1
         
     
2
         
     
3
         
     
4
         
     
6
         
Item 2.
   
20
         
Item 3.
   
36
         
Item 4.
   
36
         
PART II. OTHER INFORMATION
   
         
Item 1.
   
36
         
Item 1A.
   
36
         
Item 2.
   
38
         
Item 3.
   
38
         
Item 4.
   
39
         
Item 5.
   
39
         
Item 6.
   
39
         
         
 
40
 
 
 


PART I.
FINANCIAL INFORMATION

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except per share amounts)

   
September 30,
   
December 31,
 
   
2009
   
2008
 
   
(unaudited)
       
ASSETS
           
             
Cash and due from banks
  $ 10,516     $ 10,356  
Interest-bearing deposits
    2,462       3,216  
Total cash and cash equivalents
    12,978       13,572  
                 
Short-term investments
    1,091       1,071  
Securities available for sale, at fair value
    240,631       313,506  
Securities held to maturity, at amortized cost  (fair value of $40,956 at September 30, 2009 and $3,238 at December 31, 2008)
    40,505       3,191  
Loans, net of allowance for loan losses of  $9,497 at September 30, 2009 and $8,250 at December 31, 2008
    879,443       864,421  
Other real estate owned
    556       998  
Accrued interest receivable
    4,484       4,706  
Deferred tax asset, net
    10,026       7,969  
Stock in the Federal Home Loan Bank of Boston
    12,223       12,223  
Banking premises and equipment, net
    14,046       12,125  
Bank-owned life insurance
    28,143       27,173  
Other assets
    3,347       2,179  
                 
TOTAL ASSETS
  $ 1,247,473     $ 1,263,134  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Liabilities:
               
Deposits:
               
Interest-bearing
  $ 725,109     $ 668,485  
Non-interest-bearing
    115,216       114,178  
Total deposits
    840,325       782,663  
Federal Home Loan Bank of Boston advances
    145,342       208,564  
Repurchase agreements
    30,130       28,042  
Escrow funds held for borrowers
    2,130       1,667  
Capitalized lease obligations
    5,173       3,129  
Accrued expenses and other liabilities
    7,939       11,355  
                 
Total liabilities
    1,031,039       1,035,420  
                 
Stockholders’ equity:
               
Preferred stock, par value $0.01 per share, authorized 50,000,000 shares; none issued
    -       -  
Common stock, par value $0.01 per share, authorized 100,000,000 shares; 17,763,747 shares issued at September 30, 2009 and December 31, 2008
    178       178  
Paid-in capital
    166,326       164,358  
Retained earnings
    77,609       75,888  
Unearned compensation
    (11,613 )     (12,144 )
Treasury stock, at cost (1,594,302 shares at September 30, 2009 and  261,798 shares at December 31, 2008)
    (21,460 )     (3,497 )
Accumulated other comprehensive income, net of taxes
    5,394       2,931  
Total stockholders’ equity
    216,434       227,714  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,247,473     $ 1,263,134  
 
See notes to unaudited consolidated financial statements

 
1

 
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(Dollars in thousands, except per share amounts)

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Interest and dividend income:
                       
Loans
  $ 12,036     $ 12,835     $ 35,808     $ 37,676  
Investments
    3,282       3,886       10,543       10,064  
Other interest-earning assets
    7       90       24       450  
Total interest and dividend income
    15,325       16,811       46,375       48,190  
                                 
Interest expense:
                               
Deposits
    3,454       4,217       10,923       13,549  
Borrowings
    1,897       2,058       5,780       5,166  
Total interest expense
    5,351       6,275       16,703       18,715  
                                 
Net interest income before provision for loan losses
    9,974       10,536       29,672       29,475  
                                 
Provision for loan losses
    800       644       2,015       1,479  
                                 
Net interest income after provision for loan losses
    9,174       9,892       27,657       27,996  
                                 
Non-interest income:
                               
Fee income on depositors’ accounts
    1,257       1,219       3,526       3,452  
Net gain on sale of loans
    -       -       363       -  
Net gain on sale of securities
    -       -       461       8  
Wealth management income
    136       313       480       599  
Income from bank-owned life insurance
    372       14       1,026       159  
Other income
    220       187       575       608  
Total non-interest income
    1,985       1,733       6,431       4,826  
                                 
Non-interest expense:
                               
Salaries and benefits
    4,625       4,523       13,904       12,763  
Occupancy expenses
    598       636       1,904       1,723  
Marketing expenses
    337       302       1,093       1,101  
Data processing expenses
    877       804       2,518       2,338  
Professional fees
    211       321       929       1,136  
Merger related expenses
    270       -       1,431       -  
FDIC insurance assessments
    83       196       1,313       381  
Other expenses
    1,092       1,024       3,186       3,090  
Total non-interest expense
    8,093       7,806       26,278       22,532  
                                 
Income before income taxes
    3,066       3,819       7,810       10,290  
                                 
Income tax expense
    1,165       1,455       3,226       3,951  
                                 
Net income
  $ 1,901     $ 2,364     $ 4,584     $ 6,339  
                                 
Earnings per share:
                               
Basic
  $ 0.13     $ 0.14     $ 0.30     $ 0.39  
Diluted
  $ 0.13     $ 0.14     $ 0.30     $ 0.39  
                                 
Weighted average shares outstanding (1):
                               
Basic
    14,997,836       16,383,949       15,293,117       16,442,151  
Diluted
    15,004,694       16,385,242       15,303,060       16,442,582  
                                 

(1)
Prior period basic and diluted share data were revised as required by the Earnings Per Share Topic of FASB ASC and in accordance with the provisions of "Determining Whether Instruments Issued in Share-Based Payment Transactions are Participating Securities" which require that share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) be included in basic earnings per share using the two-class method. This revision decreased earnings per share $0.01 for the three months ended September 30, 2008 and had no impact on earnings per share for the nine months ended as previously reported.

See notes to unaudited consolidated financial statements.

 
2


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008
(Dollars in thousands, except per share amounts)

   
Common Shares Outstanding
   
Common Stock
   
Paid-In Capital
   
Retained Earnings
   
Unearned Compensation
   
Treasury Stock
   
Accumulated Other Comprehensive Income (Loss)
   
Total
 
                                                 
Balances at December 31, 2007
    17,763,747     $ 178     $ 165,920     $ 73,026     $ (12,835 )   $ -     $ (169 )   $ 226,120  
Net income
    -       -       -       6,339       -       -       -       6,339  
Other comprehensive loss
    -       -       -       -       -       -       (2,057 )     (2,057 )
Total comprehensive income
                                                            4,282  
                                                                 
Cash dividends paid ($0.20 per share)
    -       -       -       (3,295 )     -       -       -       (3,295 )
Net costs from issuance of common stock pursuant to second-step conversion
    -       -       (26 )     -       -       -       -       (26 )
Repurchase of stock to fund the 2008
                                                               
Equity Incentive Plan
    (359,581 )     -       -       -       -       (4,240 )     -       (4,240 )
Shares repurchased in connection with restricted stock forfeited for tax purposes
    (10,086 )     -       -       -       -       (125 )     -       (125 )
Reissuance of treasury shares in connection with restricted stock grants
    313,500       -       (3,697 )     -       -       3,697       -       -  
Stock-based compensation
    -       -       1,380       -       -       -       -       1,380  
ESOP shares committed to be released
    -       -       99       -       524       -       -       623  
                                                                 
Balances at September 30, 2008
    17,707,580     $ 178     $ 163,676     $ 76,070     $ (12,311 )   $ (668 )   $ (2,226 )   $ 224,719  
                                                                 
                                                                 
Balances at December 31, 2008
    17,501,949     $ 178     $ 164,358     $ 75,888     $ (12,144 )   $ (3,497 )   $ 2,931     $ 227,714  
                                                                 
Noncredit-related OTTI (1)
    -       -       -       337       -       -       (337 )     -  
Net income
    -       -       -       4,584       -       -       -       4,584  
Other comprehensive income
    -       -       -       -       -       -       2,800       2,800  
Total comprehensive income
                                                            7,384  
                                                                 
Cash dividends paid ($0.21 per share)
    -       -       -       (3,200 )     -       -       -       (3,200 )
Treasury stock purchases
    (1,311,979 )     -       -       -       -       (17,697 )     -       (17,697 )
Shares repurchased in connection with restricted stock forfeited for tax purposes
    (20,923 )     -       -       -       -       (271 )     -       (271 )
Tax benefit from MRP vesting
    -       -       33       -       -       -       -       33  
                                                                 
Reissuance of treasury shares in connection with restricted stock grants
    398       -       (5 )     -       -       5       -       -  
Stock-based compensation
    -       -       1,753       -       -       -       -       1,753  
ESOP shares committed to be released
    -       -       187       -       531       -       -       718  
                                                                 
Balances at September 30, 2009
    16,169,445     $ 178     $ 166,326     $ 77,609     $ (11,613 )   $ (21,460 )   $ 5,394     $ 216,434  
                                                                 

(1)
As required by the Recognition and Presentation of Other-Than-Temporary Impairments ("OTTI") Topic of FASB ASC, reflects noncredit-related OTTI on securities not expected to be sold in other comprehensive income (loss), effective April 1, 2009.
 
The components of other comprehensive income and related tax effects are as follows:
 
   
Nine Months Ended September 30,
 
   
2009
   
2008
 
             
Change in unrealized holding gains (losses) on available-for-sale securities
  $ 5,002     $ (3,415 )
Reclassification adjustment for gains realized in income
    (461 )     (8 )
Net change in unrealized gains (losses)
    4,541       (3,423 )
                 
Tax effect
    1,741       (1,366 )
                 
Other comprehensive income (loss)
  $ 2,800     $ (2,057 )
 
See notes to unaudited consolidated financial statements.

 
3


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008
(Dollars in thousands) 

   
2009
   
2008
 
Cash flows from operating activities:
           
Net income
  $ 4,584     $ 6,339  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Provision for loan losses
    2,015       1,479  
ESOP expense
    718       623  
Stock-based compensation
    1,753       1,380  
Amortization of premiums and discounts
    262       138  
Depreciation and amortization
    793       652  
Amortization of intangible assets
    17       23  
Provision for other real estate owned
    55       -  
Net loss on sale of other real estate owned
    27       45  
Net gain on sale of securities
    (461 )     (8 )
Loans originated for sale
    (16,018 )     -  
Proceeds from sales of loans held for sale
    16,381       -  
Net gain on sale of loans
    (363 )     -  
Increase in cash surrender value of bank-owned life insurance
    (970 )     (308 )
Merger related expenses
    1,431       -  
Decrease (increase) in accrued interest receivable
    222       (388 )
Increase in other assets
    (4,982 )     (2,954 )
Decrease in accrued expenses and other liabilities
    (3,168 )     (2,237 )
Net cash provided by operating activities
    2,296       4,784  
Cash flows from investing activities:
               
Purchases of securities available for sale
    (4,599 )     (203,411 )
Proceeds from sales of securities available for sale
    24,386       30,274  
Proceeds from maturities, calls and principal repayments of securities
               
available for sale
    57,897       58,425  
Purchases of securities held to maturity
    (38,856 )     -  
Proceeds from  maturities, calls and principal repayments of securities held to maturity
    1,472       385  
Investment in short term time deposits
    (20 )     (33 )
Purchases of Federal Home Loan Bank of Boston stock
    -       (1,966 )
Proceeds from sales of other real estate owned
    514       655  
Net loan originations, purchases and principal repayments
    (30,828 )     (39,708 )
Proceeds from sales of loans
    13,637       -  
Purchases of property and equipment
    (586 )     (1,059 )
Cash paid on merger related expenses
    (1,431 )     -  
Cash paid to acquire Levine Financial Group
    (92 )     -  
Net cash provided by (used in) investing activities
    21,494       (156,438 )
 
(Continued)

 
4


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 and 2008 (Concluded)
(Dollars in thousands)

   
2009
   
2008
 
Cash flows from financing activities:
           
Net increase in deposits
    57,662       42,205  
Net (decrease) increase in short-term borrowings from Federal
               
Home Loan Bank of Boston
    (42,000 )     52,145  
Proceeds of Federal Home Loan Bank of Boston long-term advances
    -       85,000  
Repayments of Federal Home Loan Bank of Boston long-term advances
    (21,222 )     (19,012 )
Net increase (decrease) in repurchase agreements
    2,088       (2,499 )
Net increase in escrow funds held for borrowers
    463       453  
Payments on capitalized lease obligations
    (240 )     (162 )
Repurchases of common stock to fund the 2008 Equity Incentive Plan
    -       (3,697 )
Tax benefit from MRP vesting
    33       -  
Treasury stock purchases
    (17,968 )     (668 )
Cash dividends paid
    (3,200 )     (3,295 )
Costs from issuance of common stock pursuant to second-step conversion
    -       (26 )
Net cash (used in) provided by financing activities
    (24,384 )     150,444  
Decrease in cash and cash equivalents
    (594 )     (1,210 )
Cash and cash equivalents at beginning of period
    13,572       14,254  
Cash and cash equivalents at end of period
  $ 12,978     $ 13,044  
                 
                 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period:
               
Interest on deposits, borrowings and other interest bearing liabilities
  $ 11,341     $ 18,531  
Income taxes – net
    9,680       9,676  
Non-cash items:
               
Capitalized lease assets and obligations
    2,119       1,308  
Transfer of loans to other real estate owned
    123       150  
 
See notes to unaudited consolidated financial statements.

 
5


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009
Dollars in Thousands (except per share amounts)
 

 
NOTE A – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of United Financial Bancorp, Inc. (“United Financial”) and its wholly owned subsidiary, United Bank. The consolidated financial statements also include the accounts of United Bank’s wholly owned subsidiary, UCB Securities, Inc., which is engaged in buying, selling and holding investment securities. These entities are collectively referred to herein as “the Company.” All significant intercompany accounts and transactions have been eliminated in consolidation.

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for the fair presentation of the Company’s financial condition as of September 30, 2009 and the results of operations for the three and nine months ended September 30, 2009 and 2008. The interim results of operations presented herein are not necessarily indicative of the results to be expected for the entire year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2008 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 13, 2009.

Amounts reported for prior periods are reclassified as necessary to conform to the current period presentation.

NOTE B – PENDING ACQUISITION

On June 25, 2009, United Financial entered into a definitive agreement with CNB Financial Corp. (“CNB Financial”), the holding company for Commonwealth National Bank, pursuant to which CNB Financial will merge with and into the Company. Concurrent with the merger, it is expected that Commonwealth National Bank will merge with and into United Bank. Under the terms of the merger agreement, CNB Financial shareholders will have the opportunity to elect to receive either: (1) $10.75 per share in cash for each CNB Financial share; (2) 0.8257 United Financial shares for each CNB Financial share; or (3) a combination of United Financial common stock and cash.  All CNB Financial shareholder elections will be subject to the allocation and proration procedures set forth in the merger agreement to ensure that 50% of the shares of CNB Financial common stock will be exchanged for United Financial common stock and 50% of the shares of CNB Financial common stock will be exchanged for cash.  As of the date of the merger agreement, the transaction value represented 125.6% of CNB Financial’s tangible book value and a 3.8% premium to core deposits measured as of March 31, 2009.
 
CNB Financial, a publicly traded bank holding company, operates six branches in Worcester, Massachusetts, and had total assets of $297 million, total loans of $242 million and total deposits of $202 million at March 31, 2009. United Financial will acquire the outstanding shares of CNB Financial for an aggregate purchase price of approximately $24 million (based upon United Financials’ closing stock price of $11.58 at September 30, 2009), which includes outstanding stock options and warrants.
 
 
6


The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval by the shareholders of CNB Financial, and is intended to qualify as a tax free reorganization for federal income tax purposes, with shares of CNB Financial exchanged for Company shares on a tax free basis. The merger is currently expected to be completed in the fourth quarter of 2009.
 
The Company’s Form 8-K filed with the SEC on June 26, 2009 contains additional information regarding our pending acquisition of CNB Financial.

 
NOTE C – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In February 2008, the Financial Accounting Standards Board (“FASB”) issued new guidance in accordance with and as required by the Fair Value Measurements and Disclosures Topic of FASB Accounting Standards Codification (“ASC”) which permits a one-year deferral in applying the measurement provisions to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application to that item is deferred until fiscal years beginning after November 15, 2008. The adoption on January 1, 2009, had no material effect on the Company’s Consolidated Financial Statements.

In April 2009, the FASB issued new guidance in accordance with and as required by the Fair Value Measurements and Disclosures Topic of FASB ASC, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly”, which provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased.  This guidance also includes identifying circumstances that indicate a transaction is not orderly. This guidance emphasizes that even if there has been a significant decrease in the volume and level of activity for the asset or liability and regardless of the valuation technique(s) used, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. This new guidance is effective for interim periods ending after June 15, 2009.  The adoption of this new guidance in the second quarter of 2009 had no material effect on the Company’s Consolidated Financial Statements.

In April 2009, the FASB issued new guidance in accordance with and as required by the Investments-Debt and Equity Securities Topic of FASB ASC, “Recognition and Presentation of Other-Than-Temporary Impairments”, in which the objective of an other-than-temporary impairment analysis under existing GAAP is to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings (such as securities classified as held-to-maturity or available-for-sale) should recognize a loss in earnings when the investment is impaired.  An investment is impaired if the fair value of the investment is less than its amortized cost basis. This new guidance amends the other-than-temporary impairment guidance in GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  This new guidance is effective for interim periods ending after June 15, 2009. The adoption of this new guidance in the second quarter of 2009 has been applied in the Company’s Consolidated Financial Statements as disclosed in Note F.
 
 
7


In April 2009, the FASB issued new guidance in accordance with and as required by the Financial Instruments Topic of FASB ASC, “Interim Disclosures about Fair Value of Financial Instruments,” which amends “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This guidance also amends “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods and is effective for interim periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  The adoption of this new guidance in the second quarter of 2009 had no material effect on the Company’s Consolidated Financial Statements.

In June 2009, the FASB issued “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”. The FASB Accounting Standards Codification (“ASC”) will be the single source of authoritative nongovernmental GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. FASB ASC is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in the FASB ASC. All other accounting literature not included in the FASB ASC is nonauthoritative. The adoption of the FASB ASC in the third quarter of 2009 had no material effect on the Company’s Consolidated Financial Statements.

In August 2009, the FASB issued Accounting Standard Update 2009-05 (ASU 2009-05) “Measuring Liabilities at Fair Value”, in accordance with and as required by the Fair Value Measurements and Disclosures Topic of FASB ASC. This ASU was issued in response to the credit crisis and will reduce potential differences in measuring liabilities at fair value and thus promote comparability of companies’ financial statements.  This update is effective for interim and fiscal periods beginning after October 1, 2009. The Company is evaluating the impact the adoption of ASU 2009-05 will have on its financial statements.

NOTE D – CRITICAL ACCOUNTING POLICIES

Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets.  Our critical accounting policies are those related to our allowance for loan losses and the evaluation of the investment portfolio for other-than-temporary impairment (“OTTI”).

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover credit losses inherent in the loan portfolio at the balance sheet date.  The allowance is established through the provision for loan losses which is charged against income.  The methodology for determining the allowance for loan losses is considered a critical accounting policy by management due to the high degree of judgment involved, the subjectivity of the assumptions utilized and the potential for changes in the economic environment that could result in adjustments to the amount of the recorded allowance for loan losses.

As a substantial amount of our loan portfolio is collateralized by real estate, appraisals of the underlying value of property securing loans and discounted cash flow valuations of properties are critical in determining the amount of the allowance required for specific loans.  Assumptions for appraisals and discounted cash flow valuations are instrumental in determining the value of properties.  Overly optimistic assumptions or negative changes to assumptions could significantly affect the valuation of a property securing a loan and the related allowance determined.  The assumptions supporting such appraisals and discounted cash flow valuations are reviewed by management to determine that the resulting values reasonably reflect amounts realizable on the related loans.

 
8


Management performs a quarterly evaluation of the adequacy of the allowance for loan losses.  We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors.  This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

The allowance has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as potential problem loans through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loans. Specific allowances are established as required by this analysis. The general component is determined by segregating the remaining loans by type of loan, credit grade and payment history.  We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations.  This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.

Although management uses available information to establish the appropriate level of the allowance for loan losses, future additions or reductions to the allowance may be necessary based on estimates that are susceptible to change as a result of changes in economic conditions and other factors.  As a result, our allowance for loan losses may not be sufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect United Financial’s operating results.  In addition, various regulatory agencies, as an integral part of their examination process, periodically review United Financial’s allowance for loan losses.  Such agencies may require United Financial to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination.

Evaluation of the Investment Portfolio for Other-Than-Temporary Impairment. The evaluation of the investment portfolio for other-than-temporary impairment is also a critical accounting estimate.  In evaluating the investment portfolio for other-than-temporary impairment, management considers the issuer’s credit rating, credit outlook, payment status and financial condition, the length of time the security has been in a loss position, the size of the loss position, our intent and ability to hold the securities to expected recovery of value and other meaningful information.  If a decline in the fair value of an investment security below its cost is judged to be other-than-temporary the cost basis of the investment security is written down to fair value as a new cost basis and the amount of the credit related impairment write-down is included in the results of operations and the non-credit related impairment for securities not expected to be sold is recognized in other comprehensive income (loss).  A number of factors or combinations of factors could cause us to conclude in one or more future reporting periods that an unrealized loss that exists with respect to these securities constitutes an impairment that is other than temporary. These factors include, but are not limited to, failure to make scheduled principal and/or interest payments, an increase in the severity of the unrealized loss on a particular security, an increase in the continuous duration of the unrealized loss without an improvement in value or changes in market conditions and/or industry or issuer specific factors that would render us unable to forecast a full recovery in value.

 
9


NOTE E – EARNINGS PER SHARE
 
Earnings per share (“EPS”) have been computed as required by the Earnings Per Share Topic of FASB ASC. Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and are adjusted to exclude the weighted average number of unallocated shares held by the ESOP. Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if potential common shares were converted into common stock using the treasury stock method.
 
The calculation of basic and diluted earnings per common share for the periods indicated is presented below.

   
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income
  $ 1,901     $ 2,364     $ 4,584     $ 6,339  
Weighted average common shares applicable to basic EPS (3)
    14,997,836       16,383,949       15,293,117       16,442,151  
Effect of dilutive potential common shares (1, 2)
    6,858       1,293       9,943       431  
Weighted average common shares applicable to diluted EPS (3)
    15,004,694       16,385,242       15,303,060       16,442,582  
                                 
Earnings per share:
                               
Basic
  $ 0.13     $ 0.14     $ 0.30     $ 0.39  
Diluted
  $ 0.13     $ 0.14     $ 0.30     $ 0.39  
                                 

(1)
Options to purchase 1,302,863 and 1,469,543 shares for three months ended September 30, 2009 and 2008, respectively, and 1,302,863 and 1,534,592 shares for nine months ended September 30, 2009 and 2008, respectively, were outstanding but not included in the computation of earnings per share because they were antidilutive.
(2)
Includes incremental shares related to dilutive stock options.
(3)
Prior period basic and diluted share data were revised as required by the Earnings Per Share Topic of FASB ASC and in accordance with the provisions of "Determining Whether Instruments Issued in Share-Based Payment Transactions are Participating Securities" which require that share-based compensation awards that qualify as participating securities (entitled to receive non-forfeitable dividends) be included in basic EPS using the two-class method. This revision decreased earnings per share $0.01 for the three months ended September 30, 2008 and had no impact on earnings per share for the nine months ended as previously reported.

 
10


NOTE F – INVESTMENT SECURITIES

The amortized cost and fair value of securities classified as available for sale and held to maturity are as follows:
 
   
Amortized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities Available for Sale
                       
September 30, 2009:
                       
Debt Securities:
                       
Government-sponsored enterprises
  $ 362     $ 14     $ -     $ 376  
Mortgage-backed securities
    217,518       10,058       (35 )     227,541  
Municipal bonds
    10,504       516       (80 )     10,940  
Corporate bonds
    1,533       241       -       1,774  
Total securities available for sale
  $ 229,917     $ 10,829     $ (115 )   $ 240,631  
                                 
December 31, 2008:
                               
Debt Securities:
                               
Government-sponsored enterprises
  $ 467     $ -     $ (2 )   $ 465  
Mortgage-backed securities
    294,824       6,601       (314 )     301,111  
Municipal bonds
    10,504       83       (195 )     10,392  
Corporate bonds
    1,538       -       -       1,538  
Total securities available for sale
  $ 307,333     $ 6,684     $ (511 )   $ 313,506  

 
   
Amortized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities Held to Maturity
                       
September 30, 2009:
                       
Mortgage-backed securities
  $ 37,346     $ 348     $ (29 )   $ 37,665  
IRB
    1,093       -       -       1,093  
Municipal bonds
    2,066       132       -       2,198  
Total
  $ 40,505     $ 480     $ (29 )   $ 40,956  
                                 
December 31, 2008:
                               
IRB
  $ 1,122     $ -     $ -     $ 1,122  
Municipal bonds
    2,069       49       (2 )     2,116  
Total
  $ 3,191     $ 49     $ (2 )   $ 3,238  
 
The Company’s portfolio of mortgage-backed securities, which represent interests in pools of residential mortgage loans, consists solely of securities issued by the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Government National Mortgage Association (Ginnie Mae), all of which are federal government owned or sponsored enterprises.
 

 
11

 
 
Gross unrealized losses and fair values at September 30, 2009 and December 31, 2008 aggregated by investment category and the length of time that individual securities have been in a continuous unrealized loss position follow:
 
   
Less than 12 months
   
12 months or longer
   
Total
 
       
Unrealized
       
Unrealized
   
Number of
     
Unrealized
 
   
Fair Value
 
Losses
   
Fair Value
 
Losses
   
Securities
 
Fair Value
 
Losses
 
At September 30, 2009:
                                 
Securities Available for Sale
                                 
Debt Securities:
                                 
    Government-sponsored enterprises
 
 $                        -
 
 $                        -
   
 $                        -
 
 $                         -
   
              -
 
 $                        -
 
 $                        -
 
    Mortgage-backed securities
 
        2,980
 
            (32
 
           168
 
              (3
 
               5
 
        3,148
 
            (35
    Municipal bonds
 
        1,125
 
            (63
 
        1,011
 
            (17
 
               6
 
        2,136
 
            (80
         Total
 
 $                 4,105
 
 $                    (95
 
 $                 1,179
 
 $                   (20
 
             11
 
 $                 5,284
 
 $                  (115
                                   
Securities Held to Maturity
                                 
    Mortgage-backed securities
 
 $                 7,326
 
 $                    (29
 
 $                        -
 
 $                         -
   
               3
 
 $                 7,326
 
 $                    (29
    Municipal bonds
 
              -
 
              -
   
              -
 
              -
   
              -
 
              -
 
              -
 
         Total
 
 $                 7,326
 
 $                    (29
 
 $                        -
 
 $                         -
   
               3
 
 $                 7,326
 
 $                    (29
                                   
                                   
At December 31, 2008:
                                 
Securities Available for Sale
                                 
Debt Securities:
                                 
    Government-sponsored enterprises
 
 $                    465
 
 $                      (2
 
 $                        -
 
 $                         -
   
               1
 
 $                    465
 
 $                      (2
    Mortgage-backed securities
 
      17,654
 
          (216
 
        4,256
 
            (98
 
             28
 
      21,910
 
          (314
    Municipal bonds
 
        5,652
 
          (195
 
              -
 
              -
   
             17
 
        5,652
 
          (195
        Total
 
 $               23,771
 
 $                  (413
 
 $                 4,256
 
 $                   (98
 
             46
 
 $               28,027
 
 $                  (511
                                   
Securities Held to Maturity
                                 
   Municipal bonds
 
 $                    385
 
 $                      (2
 
 $                        -
 
 $                         -
   
               1
 
 $                    385
 
 $                      (2
        Total
 
 $                    385
 
 $                      (2
 
 $                        -
 
 $                         -
   
               1
 
 $                    385
 
 $                      (2
                                   
 
Management has determined that no declines in the fair value of the Company’s securities portfolio are deemed to represent an other-than temporary impairment as of September 30, 2009. In its evaluation, management considered the types of securities, including if the securities were U.S. Government issued, the credit rating on the securities, credit outlook, payment status and financial condition, the length of time the security has been in a loss position, the size of the loss position, our intent and ability to hold the securities to expected recovery of value and other meaningful information. The Company does not intend to sell any debt securities and is unlikely to be required to sell any security before its maturity or market price recovery.
 
The table below indicates the other comprehensive income (“OCI”) rollforward as of September 30, 2009:
 
   
Non
 
   
Credit-related
 
   
OTTI
 
       
       
Beginning balance
  $ -  
Additions
    337  
Reductions
    -  
Ending balance
  $ 337  
 
 

 
12


NOTE G – LOANS

The components of the loan portfolio were as follows at September 30, 2009 and December 31, 2008:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Residential mortgages
  $ 327,765     $ 356,428  
Commercial mortgages
    289,196       248,457  
Construction
    32,903       32,082  
Home equity
    123,807       120,724  
Commercial and industrial
    88,307       84,919  
Automobile
    15,534       17,332  
Consumer
    9,297       10,334  
Total loans
    886,809       870,276  
                 
Net deferred loan costs and fees
    2,131       2,395  
Allowance for loan losses
    (9,497 )     (8,250 )
Loans, net
  $ 879,443     $ 864,421  
 
NOTE H – NON-PERFORMING ASSETS

The table below sets forth the amounts and categories of non-performing assets at September 30, 2009 and December 31, 2008:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
       
Non-accrual loans:
           
Residential mortgages
  $ 1,617     $ 1,244  
Commercial mortgages
    8,230       2,544  
Construction
    446       444  
Home equity
    -       -  
Commercial and industrial
    616       425  
Automobile
    1       -  
Other consumer
    40       140  
Total non-accrual loans
    10,950       4,797  
                 
Other real estate owned
    556       998  
Total non-performing assets
  $ 11,506     $ 5,795  
                 
Ratios:
               
Total non-performing loans to total loans
    1.23 %     0.55 %
Total non-performing assets to total assets
    0.92 %     0.46 %
 
 
 
13

 
 
NOTE I – ALLOWANCE FOR LOAN LOSSES

A summary of the activity in the allowance for loan losses is as follows:

   
For the Nine Months Ended
 
   
September 30,
 
   
2009
   
2008
 
             
Balance at beginning of period
  $ 8,250     $ 7,714  
Provision for loan losses
    2,015       1,479  
Charge-offs:
               
Residential mortgages
    (21 )     -  
Commercial mortgages
    (442 )     (6 )
Construction
    (135 )     (327 )
Home equity
    -       (42 )
Commercial and industrial
    (243 )     (440 )
Automobile
    (5 )     (8 )
Other consumer
    (1 )     (9 )
Total charge-offs
    (847 )     (832 )
Recoveries:
               
Commercial mortgages
    5       -  
Home equity
    -       5  
Commercial and industrial
    71       16  
Automobile
    3       2  
Other consumer
    -       1  
Total recoveries
    79       24  
Net charge-offs
    (768 )     (808 )
Balance at end of period
  $ 9,497     $ 8,385  
Ratios:
               
Net charge-offs to average loans outstanding (annualized)
    0.12 %     0.13 %
Allowance for loan losses to non-performing loans at end of period
    86.73 %     254.48 %
Allowance for loan losses to total loans at end of period
    1.07 %     0.97 %
 
NOTE J – COMMITMENTS

Financial instruments with off-balance sheet risk at September 30, 2009 and December 31, 2008 were as follows:
 
   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Unused lines of credit
  $ 170,443     $ 155,448  
Amounts due mortgagors
    23,374       14,479  
Standby letters of credit
    3,841       1,156  
Commitments to originate loans
    12,006       10,458  
 
The Company has a commitment to invest up to $1.0 million in a venture capital fund. As of September 30, 2009 the Company has contributed $200 to the fund.

 
14


NOTE K – DEPOSITS

Deposit accounts, by type, are summarized as follows at September 30, 2009 and December 31, 2008:

   
September 30,
   
December 31,
 
   
2009
   
2008
 
             
Demand
  $ 115,216     $ 114,178  
NOW
    31,783       32,390  
Savings
    134,784       99,492  
Money market
    190,145       160,736  
Certificates of deposit
    368,397       375,867  
    $ 840,325     $ 782,663  

 
NOTE L – CONTINGENCIES
 
The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

NOTE M - FAIR VALUES OF ASSETS AND LIABILITIES

In accordance with and as required by the Fair Value Measurements and Disclosures Topic of FASB ASC, the Company groups its financial assets and financial liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value, as follows:
 
Level 1 – Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S. government and government-sponsored enterprises and agency mortgage-backed securities that are traded by dealers or brokers in active markets.  Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
 
Level 2 – Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities.
 
Level 3 – Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker-traded transactions.  Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.
 
 
15

 
Assets measured at fair value on a recurring basis, are summarized below:
 
                     
Total
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
At September 30, 2009
                       
Securities available for sale
  $ 376     $ 238,162     $ 2,093     $ 240,631  
Mortgage servicing rights
    -       -       316       316  
                                 
Total
  $ 376     $ 238,162     $ 2,409     $ 240,947  
                                 
At December 31, 2008
                               
Securities available for sale
  $ 465     $ 311,209     $ 1,832     $ 313,506  
Mortgage servicing rights
    -       -       124       124  
                                 
Total
  $ 465     $ 311,209     $ 1,956     $ 313,630  
 
The Company had no liabilities measured at fair value on a recurring basis at September 30, 2009.
 
The table below presents the changes in Level 3 assets measured at fair value on a recurring basis for the nine months ended September 30, 2009.
 
Balance at December 31, 2008
  $ 1,956  
Total realized/unrealized losses included in net income
    (32 )
Change in unrealized gain
    261  
Purchases, sales, issuances and settlements
    224  
Transfers in and out of Level 3
    -  
         
Balance at September 30, 2009
  $ 2,409  

 
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value to be disclosed for that instrument is the product of the number of trading units of the instrument times that market price.

Also, the Company may be required, from time to time, to measure at fair value certain other financial and non-financial assets on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine the adjustment and the carrying value of the related individual asset for the three and nine months ended September 30, 2009.
 
                     
Three Months Ended September 30,
   
Nine Months Ended September 30,
 
                     
2009
   
2009
 
   
At September 30, 2009
   
Total
   
Total
 
   
Level 1
   
Level 2
   
Level 3
   
Gains/(Losses)
   
Gains/(Losses)
 
Assets: