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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)
 
[X]             Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2010
 
OR
 
[   ]             Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______________ to _____________

Commission File Number 000-52947

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

Maryland
74-3242562
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
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
16,721,879 shares outstanding as of May 4, 2010

 
 

 


United Financial Bancorp, Inc.

INDEX
 
Page
   
PART I. FINANCIAL INFORMATION
 
     
Item 1.
Financial Statements
 
     
 
Consolidated Statements of Condition
 
 
March 31, 2010 (unaudited) and December 31, 2009
1
     
 
Consolidated Statements of Earnings
 
 
Three Months Ended March 31, 2010 and 2009 (unaudited)
2
     
 
Consolidated Statements of Stockholders’ Equity and Comprehensive Income
 
 
Three Months Ended March 31, 2010 and 2009 (unaudited)
3
     
 
Consolidated Statements of Cash Flows
 
 
Three Months Ended March 31, 2010 and 2009 (unaudited)
4
     
 
Notes to Unaudited Consolidated Financial Statements
6
     
Item 2.
Management's Discussion and Analysis of Financial Condition
 
 
and Results of Operations
21
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
     
Item 4.
Controls and Procedures
33
     
PART II. OTHER INFORMATION
 
     
Item 1.
Legal Proceedings
33
     
Item 1A.
Risk Factors
33
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
34
     
Item 3.
Defaults Upon Senior Securities
34
     
Item 4.
[Removed and Reserved]
34
     
Item 5.
Other Information
34
     
Item 6.
Exhibits
35
     
     
SIGNATURES
36

 
 

 

PART I.                      FINANCIAL INFORMATION
ITEM 1.                      Financial Statements

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

 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
   
(audited)
 
ASSETS
           
             
Cash and due from banks
  $ 13,932     $ 14,565  
Interest-bearing deposits
    7,735       7,312  
        Total cash and cash equivalents
    21,667       21,877  
                 
Short-term investments
    1,100       1,096  
Securities available for sale, at fair value
    225,043       243,304  
Securities held to maturity, at amortized cost  (fair value of $71,658 at
               
   March 31, 2010 and $63,063 at December 31, 2009)
    71,498       63,174  
Loans, net of allowance for loan losses of  $9,610 at March 31, 2010
               
   and $9,180 at December 31, 2009
    1,093,830       1,115,416  
Other real estate owned
    1,976       1,545  
Accrued interest receivable
    5,281       5,209  
Deferred tax asset, net
    11,214       11,295  
Stock in the Federal Home Loan Bank of Boston
    15,365       15,365  
Banking premises and equipment, net
    15,808       15,935  
Bank-owned life insurance
    28,793       28,476  
Goodwill
    7,717       7,844  
Other intangible assets
    586       613  
Other assets
    12,805       9,891  
                 
        TOTAL ASSETS
  $ 1,512,683     $ 1,541,040  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
                 
Liabilities:
               
Deposits:
               
    Interest-bearing
  $ 904,085     $ 884,553  
    Non-interest-bearing
    161,107       154,374  
        Total deposits
    1,065,192       1,038,927  
Short-term borrowings
    33,995       75,488  
Long-term debt
    168,203       179,988  
Subordinated debentures
    5,380       5,357  
Escrow funds held for borrowers
    2,143       1,977  
Capitalized lease obligations
    5,109       5,141  
Accrued expenses and other liabilities
    8,429       8,916  
                 
        Total liabilities
    1,288,451       1,315,794  
                 
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;
               
    18,706,933 shares issued at March 31, 2010 and December 31, 2009
    187       187  
Paid-in capital
    178,422       178,666  
Retained earnings
    78,117       77,456  
Unearned compensation
    (11,268 )     (11,441 )
Treasury stock, at cost (1,962,971 shares at March 31, 2010 and 1,868,335
               
    shares at December 31, 2009)
    (26,203 )     (24,980 )
Accumulated other comprehensive income, net of taxes
    4,977       5,358  
        Total stockholders’ equity
    224,232       225,246  
                 
        TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  $ 1,512,683     $ 1,541,040  
                 
 
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
 
   
March 31,
 
   
2010
   
2009
 
Interest and dividend income:
           
   Loans
  $ 15,457     $ 12,051  
   Investments
    3,292       3,871  
   Other interest-earning assets
    8       8  
      Total interest and dividend income
    18,757       15,930  
                 
Interest expense:
               
   Deposits
    3,375       3,825  
   Borrowings
    1,886       1,950  
      Total interest expense
    5,261       5,775  
                 
Net interest income before provision for loan losses
    13,496       10,155  
                 
Provision for loan losses
    733       540  
                 
Net interest income after provision for loan losses
    12,763       9,615  
                 
Non-interest income:
               
   Fee income on depositors’ accounts
    1,371       1,107  
   Net gain on sale of loans
    88       125  
   Impairment charge on security
    (145 )     -  
   Wealth management income
    138       132  
   Income from bank-owned life insurance
    346       314  
   Other income
    239       173  
      Total non-interest income
    2,037       1,851  
                 
Non-interest expense:
               
   Salaries and benefits
    6,078       4,664  
   Occupancy expenses
    927       665  
   Marketing expenses
    560       342  
   Data processing expenses
    1,067       844  
   Professional fees
    541       423  
   Merger related expenses
    979       -  
   FDIC insurance assessments
    415       340  
   Amortization of intangible assets
    28       6  
   Other expenses
    1,423       871  
      Total non-interest expense
    12,018       8,155  
                 
Income before income taxes
    2,782       3,311  
                 
Income tax expense
    1,031       1,188  
                 
Net income
  $ 1,751     $ 2,123  
                 
Earnings per share:
               
   Basic
  $ 0.11     $ 0.14  
   Diluted
  $ 0.11     $ 0.14  
                 
Weighted average shares outstanding (1):
               
   Basic
    15,618,540       15,709,006  
   Diluted
    15,662,592       15,722,382  
                 
 
 
(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 had no impact on earnings per share 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 THREE MONTHS ENDED MARCH 31, 2010 and 2009
(Dollars in thousands, except per share amounts)


                                       
Accumulated
       
   
Common
                                 
Other
       
   
Shares
   
Common
   
Paid-In
   
Retained
   
Unearned
   
Treasury
   
Comprehensive
       
   
Outstanding
   
Stock
   
Capital
   
Earnings
   
Compensation
   
Stock
   
Income (Loss)
   
Total
 
                                                 
Balances at December 31, 2008
    17,501,949     $ 178     $ 164,358     $ 75,888     $ (12,144 )   $ (3,497 )   $ 2,931     $ 227,714  
                                                                 
Net income
    -       -       -       2,123       -       -       -       2,123  
Other comprehensive loss
    -       -       -       -       -       -       1,517       1,517  
    Total comprehensive income
                                                            3,640  
                                                                 
Cash dividends paid ($0.07 per share)
    -       -       -       (1,091 )     -       -       -       (1,091 )
Treasury stock purchases
    (1,000,579 )     -       -       -       -       (13,624 )     -       (13,624 )
Stock-based compensation
    -       -       621       -       -       -       -       621  
ESOP shares committed to be released
    -       -       67       -       186       -       -       253  
                                                                 
Balances at March 31, 2009
    16,501,370     $ 178     $ 165,046     $ 76,920     $ (11,958 )   $ (17,121 )   $ 4,448     $ 217,513  
                                                                 
Balances at December 31, 2009
    16,838,598     $ 187     $ 178,666     $ 77,456     $ (11,441 )   $ (24,980 )   $ 5,358     $ 225,246  
Prior service costs on pension and other
                                                               
   post retirement benefit plans
    -       -       -       -       -       -       (472 )     (472 )
                                                                 
Net income
    -       -       -       1,751       -       -       -       1,751  
Other comprehensive income
    -       -       -       -       -       -       91       91  
    Total comprehensive income
                                                            1,842  
                                                                 
Cash dividends paid ($0.07 per share)
    -       -       -       (1,090 )     -       -       -       (1,090 )
Treasury stock purchases
    (164,338 )     -       -       -       -       (2,124 )     -       (2,124 )
Reissuance of treasury shares in connection
                                                               
  with restricted stock grants
    69,702       -       (901 )     -       -       901       -       -  
Stock-based compensation
    -       -       591       -       -       -       -       591  
ESOP shares committed to be released
    -       -       66       -       173       -       -       239  
                                                                 
Balances at March 31, 2010
    16,743,962     $ 187     $ 178,422     $ 78,117     $ (11,268 )   $ (26,203 )   $ 4,977     $ 224,232  
                                                                 
The components of other comprehensive income and related tax effects are as follows:
 
   
Three Months Ended March 31,
 
   
2010
   
2009
 
             
Change in unrealized holding gains on available-for-sale securities
  $ 27     $ 2,461  
Reclassification adjustment for losses realized in income
    145       -  
   Net change in unrealized gains
    172       2,461  
Tax effect
    (81 )     (944 )
                 
   Other comprehensive income
  $ 91     $ 1,517  
                 
 
See notes to unaudited consolidated financial statements.

 
3

 

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 and 2009
(Dollars in thousands)

 
   
2010
   
2009
 
Cash flows from operating activities:
           
Net income
  $ 1,751     $ 2,123  
Adjustments to reconcile net income to net cash used in operating activities:
         
   Provision for loan losses
    733       540  
   ESOP expense
    239       253  
   Stock-based compensation
    591       621  
   Amortization of premiums and discounts
    273       93  
   Depreciation and amortization
    360       250  
   Amortization of intangible assets
    28       6  
   Net (gain) loss on sale of other real estate owned
    (23 )     7  
   Impairment charges on securities
    145       -  
   Net gain on sale of loans
    (88 )     (125 )
   Increase in cash surrender value of bank-owned life insurance
    (317 )     (295 )
   (Increase) decrease in accrued interest receivable
    (72 )     131  
   Increase in other assets
    (2,792 )     (218 )
   Decrease in accrued expenses and other liabilities
    (892 )     (3,896 )
Net cash used in operating activities
    (64 )     (510 )
Cash flows from investing activities:
               
   Purchases of securities available for sale
    -       (4,599 )
   Proceeds from maturities, calls and principal repayments of securities
         
     available for sale
    18,303       16,782  
   Purchases of securities held to maturity
    (11,601 )     (2,043 )
   Proceeds from maturities, calls and principal repayments of securities
         
     held to maturity
    3,134       -  
   Investment in short term time deposits
    (4 )     (8 )
   Proceeds from sales of other real estate owned
    271       268  
   Net loan originations, purchases and principal repayments
    10,396       (1,830 )
   Proceeds from sales of loans
    9,725       10,927  
   Purchases of property and equipment
    (230 )     (134 )
   Cash paid to acquire Levine Financial Group
    -       (92 )
Net cash provided by investing activities
    29,994       19,271  
                 
 
(Continued)


 
4

 

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2010 and 2009 (Concluded)
(Dollars in thousands)

 
   
2010
   
2009
 
Cash flows from financing activities:
           
   Net increase in deposits
    26,265       12,658  
   Net change in short-term borrowings
    (35,393 )     (16,578 )
   Repayment of long-term debt
    (17,862 )     (2,717 )
   Net increase in escrow funds held for borrowers
    166       485  
   Payments on capitalized lease obligations
    (102 )     (63 )
   Treasury stock purchases
    (2,124 )     (13,163 )
   Cash dividends paid
    (1,090 )     (1,091 )
Net cash used in financing activities
    (30,140 )     (20,469 )
Decrease in cash and cash equivalents
    (210 )     (1,708 )
Cash and cash equivalents at beginning of period
    21,877       13,572  
Cash and cash equivalents at end of period
  $ 21,667     $ 11,864  
                 
                 
                 
Supplemental Disclosure of Cash Flow Information:
               
Cash paid during the period:
               
   Interest on deposits, borrowings and other interest bearing liabilities
  $ 5,983     $ 5,741  
   Income taxes – net
    41       4,600  
Non-cash items:
               
   Transfer of loans to other real estate owned
    677       -  
   Trade date accounting for treasury stock purchases
    -       461  
 
See notes to unaudited consolidated financial statements.


 
5

 


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2010
Dollars in Thousands (except per share amounts)
 

 
NOTE A – BASIS OF PRESENTATION

The consolidated financial statements include the accounts of United Financial Bancorp, Inc. and its wholly-owned subsidiary, United Bank (the “Bank”). UCB Securities, Inc. is a subsidiary of the Bank and is engaged in the buying, selling and holding of securities.  UB Properties, LLC is a subsidiary of the Bank formed to hold real estate assets acquired through foreclosure.  All significant intercompany accounts and transactions have been eliminated in consolidation.  These entities are collectively referred to herein as the “Company”.

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 March 31, 2010 and the results of operations for the three months ended March 31, 2010 and 2009. The interim results of operations presented herein are not necessarily indicative of the results to be expected for the entire year or any other period. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto for the year ended December 31, 2009 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 12, 2010.

NOTE B – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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 adoption of ASU 2009-05 on January 1, 2010 had no material effect on the Company’s Consolidated Financial Statements.

In January 2010, the FASB issued Accounting Standard Update 2010-06 (ASU 2010-06) “Improving Disclosures about Fair Value Measurements”, 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 recommendations of a number of constituents that the FASB improve disclosure requirements related to Fair Value Measurements and Disclosures.  This update is effective for interim and fiscal periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. The adoption of this new guidance has been applied to the Company’s Consolidated Financial Statements as disclosed in Note M.  The disclosure exceptions are effective for fiscal years beginning after December 15, 2010, and for the interim periods within those fiscal years.  The adoption of ASU 2010-06 disclosure provisions effective for the Company on January 1, 2010 had no material effect on the Company’s Consolidated Financial Statements.


 
6

 

In February 2010, the FASB issued Accounting Standard Update 2010-09 (ASU 2010-09) “Amendments to Certain Recognition and Disclosure Requirements”, in accordance with and as required by the Subsequent Events Topic of FASB ASC 855.  This ASU was issued in response to a number of constituents informing the FASB that the requirements to disclose the date that the financial statements are issued potentially conflict with existing Securities and Exchange Commission’s (SEC) guidance.  This update provides that an entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated.  This change alleviates potential conflicts between FASB ASC 855 and the SEC’s requirements.  The adoption of this new guidance has been applied to the Company’s Consolidated Financial Statements as disclosed in Note O.

NOTE C – 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, the evaluation of the investment portfolio for other-than-temporary impairment (“OTTI”), income taxes, goodwill and identifiable intangible assets and fair value of financial instruments.

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.  Inaccurate 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.

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, among other things, 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 in establishing factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.


 
7

 

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 the Company’s operating results. In addition, the Office of Thrift Supervision, our primary federal regulator, as an integral part of its examination process, periodically reviews the Company’s allowance for loan losses. Such an agency may require the Company 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.

Income Taxes. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax bases of the Company’s asset and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. At March 31, 2010 and December 31, 2009 the Company has not recorded a valuation allowance. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities.  In determining the need for a valuation allowance, the Company uses historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. These underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.

Goodwill and Identifiable Intangible Assets. Goodwill and identifiable intangible assets are recorded as a result of business acquisitions and combinations. These assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. If the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

 
8

 


Fair Valuation of Financial Instruments. The Company uses fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. Securities available for sale are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, or to establish a loss allowance or write-down based on the fair value of impaired assets. Further, the notes to financial statements include information about the extent to which fair value is used to measure assets and liabilities, the valuation methodologies used and its impact to earnings. Additionally, for financial instruments not recorded at fair value, the notes to financial statements disclose the estimate of their fair value. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions.

NOTE D – 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 Bank’s Employee Stock Ownership Plan (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
 
   
March 31,
 
   
2010
   
2009
 
Net income
  $ 1,751     $ 2,123  
                 
Weighted average common shares applicable to basic EPS (3)
    15,618,540       15,709,006  
Effect of dilutive potential common shares (1) (2)
    44,052       13,376  
                 
Weighted average common shares applicable to diluted EPS (3)
    15,662,592       15,722,382  
                 
Earnings per share:
               
   Basic
  $ 0.11     $ 0.14  
   Diluted
  $ 0.11     $ 0.14  
(1)   Options to purchase 1,470,776 and 1,295,863 shares for three months ended March 31, 2010 and 2009, 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 had no impact on earnings per share as previously reported.


 
9

 


NOTE E – 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
                       
March 31, 2010:
                       
Debt Securities:
                       
Government-sponsored enterprises
  $ 314     $ 11     $ -     $ 325  
Government-sponsored and government-
                               
   guaranteed mortgage-backed securities
    198,481       9,518       (121 )     207,878  
Private label mortgage-backed securities
    3,934       75       (55 )     3,954  
Municipal bonds
    11,004       186       (262 )     10,928  
Corporate bonds
    1,448       372       -       1,820  
Subtotal
    215,181       10,162       (438 )     224,905  
Marketable equity securities
    97       41       -       138  
Total
  $ 215,278     $ 10,203     $ (438 )   $ 225,043  
                                 
December 31, 2009:
                               
Debt Securities:
                               
Government-sponsored enterprises
  $ 342     $ 11     $ -     $ 353  
Government-sponsored and government-
                               
   guaranteed mortgage-backed securities
    215,819       9,216       (199 )     224,836  
Private label mortgage-backed securities
    4,999       97       (60 )     5,036  
Municipal bonds
    11,004       189       (260 )     10,933  
Corporate bonds
    1,449       279       (16 )     1,712  
Subtotal
    233,613       9,792       (535 )     242,870  
Marketable equity securities
    97       337       -       434  
Total
  $ 233,710     $ 10,129     $ (535 )   $ 243,304  
 
   
Amortized
   
Unrealized
       
   
Cost
   
Gains
   
Losses
   
Fair Value
 
Securities Held to Maturity
                       
March 31, 2010:
                       
Government-sponsored and government-
                       
   guaranteed mortgage-backed securities
  $ 62,152     $ 358     $ (270 )   $ 62,240  
Private label mortgage-backed securities
    687       6       -       693  
IRB
    1,035       -       -       1,035  
State of Israel bonds
    150       -       -       150  
Municipal bonds
    7,474       78       (12 )     7,540  
Total
  $ 71,498     $ 442     $ (282 )   $ 71,658  
December 31, 2009:
                               
Government-sponsored and government-
                               
   guaranteed mortgage-backed securities
  $ 53,769     $ 180     $ (418 )   $ 53,531  
Private label mortgage-backed securities
    737       13       -       750  
IRB
    1,039       -       -       1,039  
State of Israel bonds
    150       -       -       150  
Municipal bonds
    7,479       114       -       7,593  
Total
  $ 63,174     $ 307     $ (418 )   $ 63,063  
 

 
10

 

The scheduled maturities of debt securities available for sale and held to maturity at March 31, 2010, are shown below. Actual maturities will differ from contractual maturities because issuers generally have the right to call or prepay obligations with or without call or prepayment penalties.
 
   
At March 31, 2010
 
   
Securities
   
Securities
 
   
Available for Sale
   
Held to Maturity
 
   
Amortized
         
Amortized
       
   
Cost
   
Fair Value
   
Cost
   
Fair Value
 
                         
Due in one year or less
  $ 2,925     $ 2,930     $ 460     $ 464  
Due from one year to five years
    5,403       5,561       604       628  
Due from five years to ten years
    22,362       23,369       18,566       18,694  
Due after ten years
    184,491       193,045       51,868       51,872  
    $ 215,181     $ 224,905     $ 71,498     $ 71,658  

The Company’s portfolio of mortgage-backed securities, which represent interests in pools of residential mortgage loans, consists primarily 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. The Company also owns $4.4 million of private label residential mortgage-backed securities as a result of its acquisition of CNB Financial on November 30, 2009.

Gross unrealized losses and fair values at March 31, 2010 and December 31, 2009 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 March 31, 2010:
                                         
Securities Available for Sale
                                         
Debt Securities:
                                         
Government-sponsored and
                                         
   government-guaranteed mortgage-
                                         
   backed securities
  $ 13,670     $ (119 )   $ 871     $ (2 )     16     $ 14,541     $ (121 )
Private label mortgage-backed
                                                       
   securities
    2,092       (55 )     -       -       2       2,092       (55 )
Municipal bonds
    1,766       (161 )     928       (101 )     8       2,694       (262 )
Total
  $ 17,528     $ (335 )   $ 1,799     $ (103 )     26     $ 19,327     $ (438 )
                                                         
Securities Held to Maturity
                                                       
Government-sponsored and
                                                       
   government-guaranteed mortgage-
                                                       
   backed securities
  $ 31,609     $ (270 )   $ -     $ -       13     $ 31,609     $ (270 )
Municipal bonds
    2,981       (12 )     -       -       16       2,981       (12 )
Total
  $ 34,590     $ (282 )   $ -     $ -       29     $ 34,590     $ (282 )
                                                         
 

 
11

 

   
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 December 31, 2009:
                                         
Securities Available for Sale
                                         
Debt Securities:
                                         
Government-sponsored and
                                         
   government-guaranteed mortgage-
                                         
   backed securities
  $ 14,428     $ (197 )   $ 1,068     $ (2 )     16     $ 15,496     $ (199 )
Private label mortgage-backed
                                                       
   securities
    2,301       (60 )     -       -       2       2,301       (60 )
Municipal bonds
    2,076       (166 )     935       (94 )     9       3,011       (260 )
Corporate bonds
    -       -       308       (16 )     1       308       (16 )
Total
  $ 18,805     $ (423 )   $ 2,311     $ (112 )     28     $ 21,116     $ (535 )
                                                         
Securities Held to Maturity
                                                       
Government-sponsored  and
                                                       
   government-guaranteed mortgage-
                                                       
   backed securities
  $ 36,742     $ (418 )   $ -     $ -       15     $ 36,742     $ (418 )
Municipal bonds
    -       -       -       -       -       -       -  
Total
  $ 36,742     $ (418 )   $ -     $ -       15     $ 36,742     $ (418 )
 
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 March 31, 2010. 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. At March 31, 2010, management has recorded an impairment charge of $145,000 on one of its private company stock which is carried at cost and is included in other assets.

NOTE F – LOANS

The components of the loan portfolio were as follows at March 31, 2010 and December 31, 2009:
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
             
Residential mortgages
  $ 328,140     $ 343,300  
Commercial mortgages
    413,118       409,680  
Construction
    49,082       48,808  
Home equity
    136,652       137,371  
Commercial and industrial
    151,270       159,437  
Automobile
    14,137       14,729  
Consumer
    8,688       8,916  
   Total loans
    1,101,087       1,122,241  
                 
Net deferred loan costs and fees
    2,353       2,355  
Allowance for loan losses
    (9,610 )     (9,180 )
   Loans, net
  $ 1,093,830     $ 1,115,416  
                 

 
12

 

NOTE G – NON-PERFORMING ASSETS

The table below sets forth the amounts and categories of non-performing assets at March 31, 2010 and December 31, 2009: 
 
   
March 31,
   
December 31,
 
   
2010
   
2009
 
             
Non-accrual loans:
           
   Residential mortgages
  $ 943     $ 1,190  
   Commercial mortgages (1)
    10,086       10,717  
   Construction
    4,346       3,280  
   Home equity
    528       492  
   Commercial and industrial
    510       571  
   Automobile
    -       4  
   Other consumer
    47       33