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Table of Contents

 

 

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 June 30, 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

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

16,309,321 shares outstanding as of August 4, 2010

 

 

 


Table of Contents

United Financial Bancorp, Inc.

 

INDEX
     Page

PART I. FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Condition

June 30, 2010 (unaudited) and December 31, 2009

   1
 

Consolidated Statements of Earnings

Three Months and Six Months Ended June 30, 2010 and 2009 (unaudited)

   2
 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income

Six Months Ended June 30, 2010 and 2009 (unaudited)

   3
 

Consolidated Statements of Cash Flows

Six Months Ended June 30, 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

   38

Item 4.

 

Controls and Procedures

   38

PART II. OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

   38

Item 1A.

 

Risk Factors

   38

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   39

Item 3.

 

Defaults Upon Senior Securities

   39

Item 4.

 

[Removed and Reserved]

   39

Item 5.

 

Other Information

   39

Item 6.

 

Exhibits

   40

SIGNATURES

   41


Table of Contents

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)

 

 

     June 30,
2010
    December 31,
2009
 
     (unaudited)     (audited)  

ASSETS

    

Cash and due from banks

   $ 16,214      $ 14,565   

Interest-bearing deposits

     41,664        7,312   
                

Total cash and cash equivalents

     57,878        21,877   

Short-term investments

     —          1,096   

Securities available for sale, at fair value

     226,100        243,304   

Securities held to maturity, at amortized cost (fair value of $76,038 at June 30, 2010 and $63,063 at December 31, 2009)

     74,247        63,174   

Loans held for sale

     725        —     

Loans, net of allowance for loan losses of $9,722 at June 30, 2010 and $9,180 at December 31, 2009

     1,086,852        1,115,416   

Other real estate owned

     2,007        1,545   

Accrued interest receivable

     5,141        5,209   

Deferred tax asset, net

     12,181        11,295   

Stock in the Federal Home Loan Bank of Boston

     15,365        15,365   

Banking premises and equipment, net

     15,647        15,935   

Bank-owned life insurance

     28,526        28,476   

Goodwill

     7,731        7,844   

Other intangible assets

     559        613   

Other assets

     11,956        9,891   
                

TOTAL ASSETS

   $ 1,544,915      $ 1,541,040   
                

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits:

    

Interest-bearing

   $ 940,697      $ 884,553   

Non-interest-bearing

     166,999        154,374   
                

Total deposits

     1,107,696        1,038,927   

Short-term borrowings

     32,479        75,488   

Long-term debt

     160,562        179,988   

Subordinated debentures

     5,402        5,357   

Escrow funds held for borrowers

     1,687        1,977   

Capitalized lease obligations

     5,077        5,141   

Accrued expenses and other liabilities

     8,910        8,916   
                

Total liabilities

     1,321,813        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 June 30, 2010 and December 31, 2009

  

 

187

  

 

 

187

  

Paid-in capital

     179,065        178,666   

Retained earnings

     79,962        77,456   

Unearned compensation

     (11,096     (11,441

Treasury stock, at cost (2,348,307 shares at June 30, 2010 and 1,868,335 shares at December 31, 2009)

     (31,512     (24,980

Accumulated other comprehensive income, net of taxes

     6,496        5,358   
                

Total stockholders’ equity

     223,102        225,246   
                

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,544,915      $ 1,541,040   
                

See notes to unaudited consolidated financial statements

 

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Table of Contents

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(Dollars in thousands, except per share amounts)

 

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
   2010    2009    2010     2009

Interest and dividend income:

          

Loans

   $ 15,404    $ 11,721    $ 30,861      $ 23,772

Investments

     3,122      3,390      6,414        7,261

Other interest-earning assets

     10      9      18        17
                            

Total interest and dividend income

     18,536      15,120      37,293        31,050

Interest expense:

          

Deposits

     3,507      3,644      6,882        7,469

Borrowings

     1,742      1,933      3,628        3,883
                            

Total interest expense

     5,249      5,577      10,510        11,352

Net interest income before provision for loan losses

     13,287      9,543      26,783        19,698

Provision for loan losses

     450      675      1,183        1,215
                            

Net interest income after provision for loan losses

     12,837      8,868      25,600        18,483

Non-interest income:

          

Fee income on depositors’ accounts

     1,340      1,162      2,711        2,269

Net gain on sale of loans

     109      238      197        363

Net gain on sale of securities

     —        461      —          461

Impairment charge on security

     —        —        (145     —  

Wealth management income

     167      212      305        344

Income from bank-owned life insurance

     340      340      686        654

Other income

     263      182      502        355
                            

Total non-interest income

     2,219      2,595      4,256        4,446

Non-interest expense:

          

Salaries and benefits

     5,968      4,615      12,046        9,279

Occupancy expenses

     800      641      1,727        1,306

Marketing expenses

     622      414      1,182        756

Data processing expenses

     959      797      2,026        1,641

Professional fees

     358      295      899        718

Merger related expenses

     169      1,161      1,148        1,161

FDIC insurance assessments

     325      890      740        1,230

Amortization of intangible assets

     28      6      55        11

Other expenses

     1,402      1,211      2,826        2,083
                            

Total non-interest expense

     10,631      10,030      22,649        18,185

Income before income taxes

     4,425      1,433      7,207        4,744

Income tax expense

     1,492      873      2,523        2,061
                            

Net income

   $ 2,933    $ 560    $ 4,684      $ 2,683
                            

Earnings per share:

          

Basic

   $ 0.19    $ 0.04    $ 0.30      $ 0.17

Diluted

   $ 0.19    $ 0.04    $ 0.30      $ 0.17

Weighted average shares outstanding:

          

Basic

     15,440,400      15,180,716      15,528,928        15,443,352

Diluted

     15,517,810      15,194,405      15,589,973        15,457,191

See notes to unaudited consolidated financial statements.

 

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Table of Contents

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND

COMPREHENSIVE INCOME (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2010 and 2009

(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
    Total  

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

   —          —        —          2,683        —          —          —          2,683   

Other comprehensive income

   —          —        —          —          —          —          646        646   
                       

Total comprehensive income

                    3,329   
                       

Cash dividends paid ($0.14 per share)

   —          —        —          (2,154     —          —          —          (2,154

Treasury stock purchases

   (1,251,979     —        —          —          —          (16,901     —          (16,901

Shares repurchased in connection with restricted stock forfeited for tax purposes

   (10,459     —        —          —          —          (137     —          (137

Tax benefit from MRP vesting

   —          —        33        —          —          —          —          33   

Reissuance of treasury shares in connection with restricted stock grants

   398        —        (5     —          —          5        —          —     

Stock-based compensation

   —          —        1,238        —          —          —          —          1,238   

ESOP shares committed to be released

   —          —        135        —          358        —          —          493   
                                                             

Balances at June 30, 2009

   16,239,909      $ 178    $ 165,759      $ 76,754      $ (11,786   $ (20,530   $ 3,240      $ 213,615   
                                                             

Balances at December 31, 2009

   16,838,598      $ 187    $ 178,666      $ 77,456      $ (11,441   $ (24,980   $ 5,358      $ 225,246   

Net income

   —          —        —          4,684        —          —          —          4,684   

Other comprehensive income

   —          —        —          —          —          —          1,417        1,417   

Prior service costs on pension and other post retirement benefit plans

   —          —        —          —          —          —          (279     (279
                       

Total comprehensive income

                    5,822   
                       

Cash dividends paid ($0.14 per share)

   —          —        —          (2,178     —          —          —          (2,178

Treasury stock purchases

   (538,645     —        —          —          —          (7,274     —          (7,274

Shares repurchased in connection with restricted stock forfeited for tax purposes

   (14,029     —        —          —          —          (202     —          (202

Tax benefit from MRP vesting

   —          —        63        —          —          —          —          63   

Reissuance of treasury shares in connection with restricted stock grants

   72,702        —        (944     —          —          944        —          —     

Stock-based compensation

   —          —        1,179        —          —          —          —          1,179   

ESOP shares committed to be released

   —          —        101        —          345        —          —          446   
                                                             

Balances at June 30, 2010

   16,358,626      $ 187    $ 179,065      $ 79,962      $ (11,096   $ (31,512   $ 6,496      $ 223,102   
                                                             

 

(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:

 

     Six Months Ended June 30,  
     2010     2009  

Change in unrealized holding gains on available-for-sale securities

   $ 2,158      $ 1,491   

Reclassification adjustment for losses (gains) realized in income

     145        (461
                

Net change in unrealized gains

     2,303        1,030   

Tax effect

     (886     (384
                
     1,417        646   
                

Pension liability for retirement plans

     (332     —     

Pension liability adjustment

     (44     —     
                

Net change in pension liability

     (376     —     

Tax effect

     97        —     
                
     (279     —     
                

Other comprehensive income

   $ 1,138      $ 646   
                

See notes to unaudited consolidated financial statements.

 

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Table of Contents

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2010 and 2009

(Dollars in thousands)

 

 

     June 30,  
     2010     2009  

Cash flows from operating activities:

    

Net income

   $ 4,684      $ 2,683   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Provision for loan losses

     1,183        1,215   

ESOP expense

     446        493   

Stock-based compensation

     1,179        1,238   

Tax benefit from MRP vesting

     (63     —     

Amortization of premiums and discounts

     546        169   

Depreciation and amortization

     701        508   

Amortization of intangible assets

     55        11   

Net (gain) loss on sale of other real estate owned

     (121     15   

Impairment charges on securities

     145        —     

Net gain on sale of securities

     —          (461

Loans originated for sale

     (5,309     (16,018

Proceeds from sales of loans held for sale

     4,693        16,381   

Net gain on sale of loans

     (197     (363

Net increase in cash surrender value of bank-owned life insurance

     (50     (617

Decrease in accrued interest receivable

     68        297   

Increase in other assets

     (3,692     (4,805

Decrease in accrued expenses and other liabilities

     (186     (2,953
                

Net cash provided by (used in) operating activities

     4,082        (2,207

Cash flows from investing activities:

    

Purchases of securities available for sale

     (20,629     (4,599

Proceeds from sales of securities available for sale

     —          24,386   

Proceeds from maturities, calls and principal repayments of securities available for sale

     39,883        39,987   

Purchases of securities held to maturity

     (18,282     (23,129

Proceeds from maturities, calls and principal repayments of securities held to maturity

     6,914        308   

Decrease (increase) in investment in short term time deposits

     1,096        (15

Proceeds from sales of other real estate owned

     866        370   

Net loan originations, purchases and principal repayments

     16,451        (10,080

Proceeds from sales of loans

     9,725        13,637   

Purchases of property and equipment

     (400     (429

Cash paid to acquire Levine Financial Group

     —          (92
                

Net cash provided by investing activities

     35,624        40,344   

(Continued)

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE SIX MONTHS ENDED JUNE 30, 2010 and 2009 (Concluded)

(Dollars in thousands)

 

 

     2010     2009  

Cash flows from financing activities:

    

Net increase in deposits

     68,769        32,886   

Net change in short-term borrowings

     (41,958     (36,896

Proceeds from issuance of long-term debt

     —          1,043   

Repayment of long-term debt

     (20,432     (6,502

Net (decrease) increase in escrow funds held for borrowers

     (290     159   

Payments on capitalized lease obligations

     (203     (139

Tax benefit from MRP vesting

     63        33   

Treasury stock purchases

     (7,476     (17,038

Cash dividends paid

     (2,178     (2,154
                

Net cash used in financing activities

     (3,705     (28,608
                

Increase in cash and cash equivalents

     36,001        9,529   

Cash and cash equivalents at beginning of period

     21,877        13,572   
                

Cash and cash equivalents at end of period

   $ 57,878      $ 23,101   
                

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period:

    

Interest on deposits, borrowings and other interest bearing liabilities

   $ 11,579      $ 11,341   

Income taxes – net

     3,766        9,625   

Non-cash items:

    

Capitalized lease assets and obligations

     —          2,119   

Transfer of loans to other real estate owned

     1,161        —     

Trade date accounting for treasury stock purchases

     168        —     

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 June 30, 2010 and the results of operations for the three and six months ended June 30, 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.

 

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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.

In July 2010, the FASB issued Accounting Standard Update 2010-20 (ASU 2010-20) “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses”, which amends the authoritative accounting guidance in accordance with and as required by the Receivables Topic of FASB ASC 310. The ASU is intended to provide financial statement users with greater transparency about an entity’s allowance for loan losses and the credit quality of its loan portfolio. Under the new guidelines, the allowance for loan losses and fair value are to be disclosed by portfolio segment, while credit quality information, impaired loans and non-accrual status are to be presented by class of loans. Disclosure of the nature and extent, the financial impact and segment information of troubled debt restructurings will also be required. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the loan portfolio’s risk and performance. This guidance is effective for interim and annual reporting periods ending on or after December 15, 2010. The Company is evaluating the impact the adoption of ASU 2010-20 will have on its financial statements.

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.

 

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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.

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 June 30, 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, any establishment of a deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.

 

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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.

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. 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
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Net income

   $ 2,933    $ 560    $ 4,684    $ 2,683
                           

Weighted average common shares applicable to basic EPS

     15,440,400      15,180,716      15,528,928      15,443,352

Effect of dilutive potential common shares (1) (2)

     77,410      13,689      61,045      13,839
                           

Weighted average common shares applicable to diluted EPS

     15,517,810      15,194,405      15,589,973      15,457,191
                           

Earnings per share:

           

Basic

   $ 0.19    $ 0.04    $ 0.30    $ 0.17

Diluted

   $ 0.19    $ 0.04    $ 0.30    $ 0.17

 

(1) Options to purchase 1,470,776 and 1,295,863 shares for six months ended June 30, 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.

 

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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
Cost
   Unrealized     Fair Value
        Gains    Losses    

Securities Available for Sale

          

June 30, 2010:

          

Debt Securities:

          

Government-sponsored enterprises

   $ 10,291    $ 21    $ (8   $ 10,304

Government-sponsored and government-guaranteed mortgage-backed securities

     187,754      11,443      (1     199,196

Private label mortgage-backed securities

     3,612      84      (42     3,654

Municipal bonds

     11,003      317      (239     11,081

Corporate bonds

     1,446      362      —          1,808
                            

Subtotal

     214,106      12,227      (290     226,043

Marketable equity securities

     97      —        (40     57
                            

Total

   $ 214,203    $ 12,227    $ (330   $ 226,100
                            

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
Cost
   Unrealized     Fair Value
        Gains    Losses    

Securities Held to Maturity

          

June 30, 2010:

          

Government-sponsored and government-guaranteed mortgage-backed securities

   $ 64,783    $ 1,648    $ —        $ 66,431

Private label mortgage-backed securities

     568      10      —          578

IRB

     1,030      —        —          1,030

State of Israel bonds

     150      —        (1     149

Municipal bonds

     7,716      136      (2     7,850
                            

Total

   $ 74,247    $ 1,794    $ (3   $ 76,038
                            

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
                            

 

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The scheduled maturities of debt securities available for sale and held to maturity at June 30, 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 June 30, 2010
     Securities
Available for Sale
   Securities
Held to Maturity
     Amortized
Cost
   Fair Value    Amortized
Cost
   Fair Value

Due in one year or less

   $ 600    $ 604    $ 130    $ 131

Due from one year to five years

     7,284      7,488      941      988

Due from five years to ten years

     29,016      30,259      17,247      17,709

Due after ten years

     177,206      187,692      55,929      57,210
                           
   $ 214,106    $ 226,043    $ 74,247    $ 76,038
                           

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 $4.2 million of private label residential mortgage-backed securities as a result of its acquisition of CNB Financial Corp. on November 30, 2009.

Gross unrealized losses and fair values at June 30, 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  
     Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Number  of
Securities
   Fair Value    Unrealized
Losses
 
                  

At June 30, 2010:

                  

Securities Available for Sale

                  

Debt Securities:

                  

Government-sponsored enterprises

   $ 7,491    $ (8   $ —      $ —        2    $ 7,491    $ (8

Government-sponsored and government-guaranteed mortgage-backed securities

     457      (1     —        —        1      457      (1

Private label mortgage-backed securities

     1,004      (42     —        —        1      1,004      (42

Municipal bonds

     1,323      (154     944      (85   7      2,267      (239
                                                  
     10,275      (205     944      (85   11      11,219      (290

Marketable equity securities

     57      (40        2      57      (40
                                                  

Total

   $ 10,332    $ (245   $ 944    $ (85   13    $ 11,276    $ (330
                                                  

Securities Held to Maturity

                  

State of Israel bonds

   $ 74    $ (1   $ —      $ —        1    $ 74    $ (1

Municipal bonds

     454      (2     —        —        2      454      (2
                                                  

Total

   $ 528    $ (3   $ —      $ —        3    $ 528    $ (3
                                                  

 

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     Less than 12 months     12 months or longer     Total  
     Fair Value    Unrealized
Losses
    Fair Value    Unrealized
Losses
    Number of
Securities
   Fair Value    Unrealized
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
                                                  

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 June 30, 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.

NOTE F – LOANS

The components of the loan portfolio were as follows at June 30, 2010 and December 31, 2009:

 

     June 30,
2010
    December 31,
2009
 

Residential mortgages

   $ 317,346      $ 343,300   

Commercial mortgages

     425,091        409,680   

Construction

     38,978        48,808   

Home equity

     138,268        137,371   

Commercial and industrial

     152,972        159,437   

Automobile

     13,045        14,729   

Consumer

     8,541        8,916   
                

Total loans

     1,094,241        1,122,241   

Net deferred loan costs and fees

     2,333        2,355   

Allowance for loan losses

     (9,722     (9,180
                

Loans, net

   $ 1,086,852      $ 1,115,416   
                

 

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NOTE G – NON-PERFORMING ASSETS

The table below sets forth the amounts and categories of non-performing assets at June 30, 2010 and December 31, 2009:

 

          June 30,     
2010
    December 31,
2009
 

Non-accrual loans:

    

Residential mortgages

   $ 1,067      $ 1,190   

Commercial mortgages

     6,033  (1)      10,717   

Construction

     5,187        3,280   

Home equity

     75        492   

Commercial and industrial

     640        571   

Automobile

     1        4   

Other consumer

     33        33   
                

Total non-accrual loans

     13,036        16,287   

Troubled debt restructure

     3,501  (2)      —     

Other real estate owned

     2,007        1,545   
                

Total non-performing assets

   $ 18,544      $ 17,832   
                

Ratios:

    

Total non-accrual loans to total loans

     1.19     1.45

Total non-performing assets to total assets

     1.20     1.16

 

(1) Includes an $860,000 troubled debt restructured commercial mortgage loan which was restructured in the second quarter of 2010. There were no additional commitments to this borrower. As of June 30, 2010 there were no other troubled debt restructured loans added during the second quarter of 2010.
(2) Includes a commercial mortgage loan which was restructured in the first quarter of 2010 and was returned to accrual status at June 30, 2010 as the customer has been current on the new payments for six months. Although this loan is performing in accordance with the terms of the restructuring it will continue to be included in non-performing loans.

NOTE H – FAIR VALUE OF IMPAIRED LOANS ACQUIRED

Loans acquired with evidence of credit quality deterioration since origination and for which it is probable at purchase that the Company will be unable to collect all contractually required payments are accounted for as required by and in accordance with the Receivables Topic of FASB ASC, “Loans and Debt Securities Acquired with Deteriorating Credit Quality” (ASC 310). Evidence of credit quality deterioration as of the purchase date may include statistics such as past due status, refreshed borrower credit scores and refreshed loan-to-value (LTV), some of which are not immediately available as of the purchase date. The Company continues to evaluate this information and other credit-related information as it becomes available. ASC 310 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in loans if those differences are attributable, at least in part, to credit quality.

 

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The initial fair values for loans within the scope of ASC 310 are determined by discounting both principal and interest cash flows expected to be collected using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value. The Company estimates the cash flows expected to be collected at acquisition using internal credit risk, interest rate and prepayment risk models that incorporate management’s best estimate of current key assumptions, such as default rates, loss severity and payment speeds.

As of November 30, 2009, the CNB Financial Corp. commercial loans acquired by the Company within the scope of ASC 310 had an unpaid principal balance of $5.2 million and a fair value of $3.1 million. At June 30, 2010, the unpaid principal balance on these commercial loans was $4.8 million and the carrying value on these loans was $2.5 million. The following table provides details on loans obtained in connection with the CNB Financial acquisition within the scope of ASC 310.

 

Acquired loan information for CNB Financial:

  

As of November 30, 2009:

  

Contractually required payments

   $ 5,178   

Less: Nonaccretable difference

     (2,099
        

Cash flows expected to be collected (1)

     3,079   

Less: Accretable yield

     (13
        

Fair value of loans acquired

   $ 3,066   
        

 

(1) The Bank has not factored any prepayments into the expected cash flows.

Under ASC 310, the excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized in interest income over the remaining life of the loans. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable difference. Changes in the expected cash flows from the date of acquisition will either impact the accretable yield or result in a charge to the provision for credit losses. Subsequent decreases to expected principal cash flows will result in a charge to provision for credit losses and a corresponding increase to allowance for loan losses. Subsequent increases in expected principal cash flows will result in recovery of any previously recorded allowance for loan losses, to the extent applicable, and a reclassification from nonaccretable difference to accretable yield for any remaining increase. All changes in expected interest cash flows will result in reclassifications to/from nonaccretable differences. There were no changes in expected cash flows from the date of acquisition that resulted in adjustments to the accretable or nonaccretable differences or provision for credit losses.

Loans in the ASC 310 population that are modified subsequent to acquisition are reviewed to compare modified contractual cash flows to the ASC 310 carrying value. If modified cash flows are lower than the carrying value, the loan is removed from the ASC 310 pool at its carrying value, as well as the related allowance for loan losses, and classified as a troubled debt restructure. At June 30, 2010 the Company did not have any troubled debt restructured acquired loans.

 

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NOTE I – ALLOWANCE FOR LOAN LOSSES

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

 

     For the Six Months  Ended
June 30,
 
     2010     2009  

Balance at beginning of period

   $ 9,180      $ 8,250   

Provision for loan losses

     1,183        1,215   

Charge-offs:

    

Residential mortgages

     (54     —     

Commercial mortgages

     (361     (282

Construction

     (108     (130

Home equity

     (48     —     

Commercial and industrial

     (138     (135

Automobile

     (3     (5

Other consumer

     (13     (1
                

Total charge-offs

     (725     (553

Recoveries:

    

Commercial mortgages

     79        —     

Commercial and industrial

     5        48   

Automobile

     —          2   
                

Total recoveries

     84        50   

Net charge-offs

     (641     (503
                

Balance at end of period

   $ 9,722      $ 8,962   
                

Ratios:

    

Net charge-offs to average loans outstanding (annualized)

     0.12     0.12

Allowance for loan losses to non-accrual loans at end of period

     74.58     167.99

Allowance for loan losses to total loans at end of period

     0.89     1.03

NOTE J – COMMITMENTS

Financial instruments with off-balance sheet risk at June 30, 2010 and December 31, 2009 were as follows:

 

     June 30,
2010
   December 31,
2009

Unused lines of credit

   $ 226,088    $ 226,543

Amounts due mortgagors

     28,962      30,225

Standby letters of credit

     3,366      6,155

Commitments to originate loans

     14,062      16,120

The Company also has a commitment to invest up to $1.0 million in a venture capital fund. As of June 30, 2010, the Company has contributed $400,000 to the fund.

 

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NOTE K – DEPOSITS

Deposit accounts, by type, are summarized as follows at June 30, 2010 and December 31, 2009:

 

     June 30,
2010
   December  31,
2009

Demand

   $ 166,999    $ 154,374

NOW

     41,149      42,262

Savings

     191,386      174,270

Money market

     249,289      189,763

Certificates of deposit

     458,873      478,258
             
   $ 1,107,696    $ 1,038,927
             

NOTE L – CONTINGENCIES

United Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to its foreclosure on a certain loan property. The litigants are claiming that Commonwealth National Bank acted in bad faith and in violation of applicable law and that their actions resulted in a sale of the underlying property for less than it should have thereby causing damage to the parties. United Bank believes these claims are without merit and is vigorously defending the litigation. The parties are scheduled to go to trial in October 2010. No estimate of the any reasonably possible loss or range of loss to United Bank can be made at this time. In addition, the Company is a defendant in other claims and legal action 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.

 

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Assets measured at fair value on a recurring basis, are summarized below:

 

     Level 1    Level 2    Level 3    Total
Fair Value

At June 30, 2010

           

Securities available for sale:

           

Government-sponsored enterprises

   $ 10,304    $ —      $ —      $ 10,304

Government-sponsored and government- guaranteed mortgage-backed securities

     —        199,196      —        199,196

Private label mortgage-backed securities

     —        3,654      —        3,654

Municipal bonds

     —        10,767      314      11,081

Corporate bonds

     —        —        1,808      1,808

Marketable equity securities

     57      —        —        57

Mortgage servicing rights

     —        —        500      500
                           

Total

   $ 10,361    $ 213,617    $ 2,622    $ 226,600
                           

 

At December 31, 2009

           

Securities available for sale

           

Government-sponsored enterprises

   $ 353    $ —      $ —      $ 353

Government-sponsored and government- guaranteed mortgage-backed securities

     —        224,836      —        224,836

Private label mortgage-backed securities

     —        5,036      —        5,036

Municipal bonds

     —        10,631      302      10,933

Corporate bonds

     —        —        1,712      1,712

Marketable equity securities

     434      —        —        434

Mortgage servicing rights

     —        —        313      313
                           

Total

   $ 787    $ 240,503    $ 2,327    $ 243,617
                           

The Company had no liabilities measured at fair value on a recurring basis at June 30, 2010 or December 31, 2009.

The table below presents the changes in Level 3 assets measured at fair value on a recurring basis for the six months ended June 30, 2010.

 

Balance at December 31, 2009

   $ 2,327   

Total realized/unrealized losses included in net income

     (10

Change in unrealized gain

     108   

Purchases, sales, issuances and settlements

     197   

Transfers in and out of Level 3

     —     
        

Balance at June 30, 2010

   $ 2,622   
        

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.

 

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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 assets for the three and six months ended June 30, 2010.

 

                    Three Months
Ended
June 30, 2010
   Six Months
Ended
June 30, 2010
 
     At June 30, 2010    Total
Gains/(Losses)
   Total
Gains/(Losses)
 
     Level 1    Level 2    Level 3      

Assets:

              

Loans

   $ —      $ 16,537    $ —      $ 96    $ (511

Other real estate owned

     —        2,007      —        98      98   

Other assets

     —        —        545      —        (145
                                    

Total assets

   $ —      $ 18,544    $ 545    $ 194    $ (558
                                    

The amount of loans represents the carrying value and related write-down and valuation allowance of impaired loans for which adjustments are based on the estimated fair value of the underlying collateral. The other real estate owned amount represents the carrying value for which adjustments are also based on the estimated fair value of the property. Included in other assets is private company stock which is carried at cost. Management determined that several impairment indicators exist and that the investment is impaired. In its evaluation, management considered the investee’s earnings performance, credit rating, asset quality, regulatory, economic, or technological environment operating environment, and the investee’s ability to continue as a going concern. The cost basis of the individual security was written down to fair value as a new cost basis and the amount of the write-down is accounted for as a realized loss and is included in earnings. As a result, management recorded an impairment charge of $145,000 in the first quarter of 2010. There were no additional indicators of impairment in the second quarter of 2010.

The Company is required to provide supplemental financial statement disclosures of the estimated fair value of its financial instruments. Financial instruments include cash and cash equivalents, investment and mortgage-backed securities, loans, deposits, borrowings and certain off-balance sheet items such as loan commitments. Other assets significant to the Company, including bank premises and equipment, deferred tax assets, as well as core deposit and other intangible assets are not considered financial instruments and are excluded from the fair value disclosures. In addition, the tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company’s entire holdings of a particular financial instrument. Because a market may not readily exist for a significant portion of the Company’s financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The following methods and assumptions were used by the Company in estimating fair values of its financial instruments:

Cash and Cash Equivalents and Short-term Investments. For cash and short term investments having maturities of 90 days or less, the carrying amounts reported in the balance sheets approximate fair values. The carrying amount of short-term investments held at June 30, 2010 and at December 31, 2009 also approximates fair value.

 

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Investment Securities and FHLBB Stock. The fair value of securities to be held to maturity and securities available for sale is estimated based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Ownership of Federal Home Loan Bank of Boston “(FHLBB)” stock is restricted to member banks; therefore, the stock is not traded. The estimated fair value of FHLBB stock is equal to its carrying value, which represents the price at which the FHLBB is obligated to redeem its stock.

Loans. For valuation purposes, the loan portfolio was segregated into its significant categories, which are residential mortgage, commercial real estate, commercial and consumer loans. These categories were further segregated, where appropriate, into components based on significant financial characteristics such as type of interest rate (fixed or adjustable). Fair values were estimated for each component using a valuation method selected by management. The fair values of residential mortgage, commercial real estate, commercial and consumer loans were estimated by discounting the anticipated cash flows from the respective portfolios. Estimates of the timing and amount of these cash flows were based on factors such as future loan prepayments. The discount rates reflected current market rates for loans with similar terms to borrowers of similar credit quality. The fair value of home equity lines of credit was based on the outstanding loan balances, as required by the Financial Instruments Topic of FASB ASC.

Deposits. The fair value of deposits with no stated maturity, such as demand deposits, NOW, regular savings, and money market deposit accounts, is equal to the amount payable on demand. The fair value estimates do not include the benefit that results from the generally lower cost of funding provided by the deposit liabilities compared to the cost of borrowing funds in the market. The fair value estimate of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities.

Federal Home Loan Bank of Boston Advances. The fair value estimate of the borrowings from the FHLBB is determined by discounting the anticipated future cash payments by using the rates currently available to the Bank for debt with similar terms and remaining maturities.

Repurchase Agreements. The Company enters into overnight repurchase agreements with its customers. Since these agreements are short-term instruments, the fair value of these agreements approximates their recorded balance. The Company also secures term repurchase agreements through other financial institutions. The fair value of these agreements are determined by discounting the anticipated future cash payments using rates currently available to the Bank for debt with similar terms and remaining maturities.

Subordinated Debentures. The Company has outstanding subordinated debt in the form of trust preferred securities issued through a private placement offering. The fair value estimate is determined by discounting the anticipated future cash payments by using the rates currently available to the Company for debt with similar terms and remaining maturities.

Off-Balance Sheet Instruments. The fair value of off-balance-sheet mortgage lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. In the case of the commitments discussed in Note J, the fair value equals the carrying amounts which are not significant.

 

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The fair value of the Company’s financial instruments is as follows at dates indicated:

 

     At June 30, 2010    At December 31, 2009
     Carrying
Value
   Estimated
Fair Value
   Carrying
Value
   Estimated
Fair Value

Financial Assets:

           

Cash and cash equivalents

   $ 57,878    $ 57,878    $ 21,877    $ 21,877

Short-term investments

     —        —        1,096      1,096

Securities available for sale

     226,100      226,100      243,304      243,304

Securities held to maturity

     74,247      76,038      63,174      63,063

Stock in Federal Home Loan Bank of Boston

     15,365      15,365      15,365      15,365

Net loans

     1,086,852      1,085,766      1,115,416      1,109,232

Financial Liabilities:

           

Deposits (with no stated maturity)

     648,823      648,823      560,669      560,669

Time deposits

     458,873      465,650      478,258      483,843

Federal Home Loan Bank of Boston advances

     157,397      163,501      208,173      211,954

Repurchase agreements

     35,644      35,092      47,303      46,068

Subordinated debentures

     5,402      5,402      5,357      5,357

NOTE N – PENSION AND POSTRETIREMENT BENEFIT PLANS

The Company maintains a Senior Executive Retirement Plan (SERP) and a Director Retirement Plan. These plans had no assets at June 30, 2010 and 2009. The following table presents the components of the net periodic benefit cost for the indicated periods:

 

     For the Three Months Ended June 30,    For the Six Months Ended June 30,
     2010    2009    2010    2009
         SERP        Director
Retirement
Plan
       SERP        Director
Retirement
Plan
       SERP        Director
Retirement
Plan
       SERP        Director
Retirement
Plan

Periodic benefit cost:

                       

Service cost

   $ 80    $ 17    $ 69    $ 15    $ 160    $ 34    $ 138    $ 29

Interest cost

     44      10      35      9      88      20      70      18
                                                       

Total pension cost

     124      27      104      24      248      54      208      47

Prior service cost amortization

     29      9      19      9      57      18      38      18
                                                   

Net periodic benefit cost

   $ 153    $ 36    $ 123    $ 33    $ 305    $ 72    $ 246    $ 65
                                                       

Benefits expected to be paid over the next five years as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 have not changed. These plans are funded on a pay-as-you-go-basis and the Company does not expect to make any contributions to these plans in 2010.

NOTE O – SUBSEQUENT EVENTS

In connection with the preparation of these financial statements, the Company has evaluated events and transactions through the date the financial statements were issued.

Cash dividend declared. On July 15, 2010, the Company’s Board of Directors announced a 14% increase in its quarterly cash dividend to $0.08 per share. The dividend is payable on August 27, 2010 to stockholders of record as of August 6, 2010.

 

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

Forward-Looking Statements

This report may contain, and from time to time, the Company may disclose, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” or similar expressions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements provided that the Company notes that a variety of factors could cause the Company’s actual results to differ materially from the anticipated results expressed in the Company’s forward-looking statements. Factors that may cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, general economic conditions, changes in market interest rates, changes in size, composition or risks in the loan portfolio, loan or deposit demand, legislative or regulatory changes, and significant increases in competitive pressures. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009 under “Item 1A. Risk Factors”. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Comparison of Financial Condition at June 30, 2010 and December 31, 2009

Total assets increased $3.9 million, or 0.3%, to $1.545 billion at June 30, 2010 from $1.541 billion at December 31, 2009 mainly due to growth in interest-bearing deposits and held to maturity investment securities, partially offset by decreases in net loans and available for sale investment securities. Interest-bearing deposits increased $34.4 million reflecting excess cash on deposit at the FHLBB. Securities held to maturity increased $11.1 million, or 17.5%, to $74.2 million at June 30, 2010 due to purchases of government-sponsored and guaranteed mortgage-backed securities totaling $18.3 million, partially offset by repayments of $6.9 million. Net loans decreased $28.6 million, or 2.6%, to $1.087 billion at June 30, 2010 from $1.115 billion at December 31, 2009 reflecting the sale of $14.3 million in lower coupon, fixed rate residential mortgages. The residential real estate, construction and commercial loan portfolios were also affected by slower origination volume, loan prepayments and normal amortization. Securities available for sale decreased $17.2 million, or 7.1%, to $226.1 million at June 30, 2010 from $243.3 million at December 31, 2009, as a result of repayments, primarily of government-sponsored and guaranteed mortgage-backed securities.

Total deposits increased $68.8 million, or 6.6%, to $1.108 billion at June 30, 2010 compared to $1.039 billion at December 31, 2009 primarily due to growth in core deposits accounts of $88.2 million, or 15.7%, to $648.8 million at June 30, 2010 from $560.7 million at December 31, 2009. The strong growth in core account balances was driven by the success of sales and marketing initiatives in our new Worcester market, competitive products and pricing, attention to excellence in customer service and targeted promotional activities. The increase in core deposits was partially offset by a decrease in certificates of deposit of $19.4 million, or 4.1%, to $458.9 million at June 30, 2010 compared to $478.3 million at December 31, 2009 in connection with planned runoff in the brokered deposit portfolio. Short-term borrowings were reduced by $43.0 million, or 57.0%, to $32.5 million at June 30, 2010 compared to $75.5 million at December 31, 2009 as a result of paydowns of FHLBB advances using cash flows from the loan and investment portfolios and increased deposit levels. Long-term debt decreased $19.4 million, or 10.8%, to $160.6 million at June 30, 2010 compared to $180.0 million at December 31, 2009 largely attributable to maturities and payments. At June 30, 2010, the Company continued to have considerable liquidity including significant unused borrowing capacity at the FHLBB and the Federal Reserve Bank and access to funding through the repurchase agreement and brokered deposit markets.

 

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Total stockholders’ equity decreased $2.1 million, or 1.0%, to $223.1 million at June 30, 2010 from $225.2 million at December 31, 2009 as a result of repurchases of our common stock totaling $7.5 million and cash dividend payments amounting to $2.2 million. These decreases were partially offset by net income of $4.7 million for the six months ended June 30, 2010, an increase of $1.1 million in other comprehensive income, stock-based compensation expense totaling $1.2 million and employee stock ownership plan (“ESOP”) compensation expense of $446,000.

Credit Quality

The Company actively manages credit risk through its underwriting practices and collection operations and it does not offer nor has it historically offered residential mortgage and other consumer loans to subprime or Alt-A borrowers. Non-accrual loans totaled $13.0 million, or 1.19%, of total loans, at June 30, 2010 compared to $16.3 million, or 1.45%, of total loans, at December 31, 2009. The non-accrual loan total for June 30, 2010 includes an $860,000 commercial real estate loan which was impaired at March 31, 2010 and restructured during the second quarter of 2010 and two loans totaling $2.8 million which are expected to be repaid in the third quarter of 2010 from the proceeds of a foreclosure sale that occurred on June 30, 2010, which required a closing within thirty days. The non-accrual loan total for December 31, 2009 includes a $3.5 million commercial real estate loan which was impaired at December 31, 2009 and restructured during the first quarter of 2010. This loan was classified as a troubled debt restructure and was placed on non-accrual status as of March 31, 2010. As of June 30, 2010 this loan has been returned to accruing status as the customer has been current on the new payments for six months. Although this loan is performing in accordance with the terms of the restructuring it will continue to be included in non-performing assets as a trouble debt restructure not as a non-accrual loan. See also “Note G – Non-Performing Assets” in the Notes to the Unaudited Consolidated Financial Statements in this report.

 

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Delinquent Loans. The following table sets forth our loan delinquencies by type and by amount at the dates indicated.

 

     Loans Delinquent For
     60 - 89 Days    90 Days and Over     Total
     Number    Amount    Number    Amount     Number    Amount
     (Dollars in thousands)

At June 30, 2010

                

Residential mortgages

   10    $ 1,971    7    $ 1,067      17    $ 3,038

Commercial mortgages

   5      825    14      5,173  (1)    19      5,998

Construction

   1      142    10      5,187      11      5,329

Home equity

   5      242    1      75      6      317

Commercial and industrial

   6      222    16      640      22      862

Automobile

   1      18    1      1      2      19

Other consumer

   2      58    1      33      3      91
                                    

Total

   30    $ 3,478    50    $ 12,176      80    $ 15,654
                                    

At December 31, 2009

                

Residential mortgages

   13    $ 1,355    5    $ 1,190      18    $ 2,545

Commercial mortgages

   8      2,298    13      10,717      21      13,015

Construction

   3      424    5      3,280      8      3,704

Home equity

   3      157    4      492      7      649

Commercial and industrial

   3      54    15      571      18      625

Automobile

   —        —      3      4      3      4

Other consumer

   3      11    1      33      4      44
                                    

Total

   33    $ 4,299    46    $ 16,287      79    $ 20,586
                                    

 

(1) Does not include an $860,000 commercial mortgage loan which was restructured in the second quarter of 2010 and was placed on non-accrual status. Although this loan is reported as a non-performing asset, the borrower is current with respect to restructured payment terms.

Classified Assets. The following table shows the aggregate amount of our classified assets at the date indicated for both loans and foreclosed assets. The total amount of loans in the table below at June 30, 2010 includes twenty two relationships which represent 57% of the classified loans. Construction loans for one- to-four family or condominium development represent 17% of the total classified asset total, a decrease from 24% at December 31, 2009. Of the $2.0 million in other real estate owned, $330,000 is under contract with a closing expected in the third quarter of 2010.

 

     At June 30,
2010
   At December 31,
2009
     (In thousands)

Classified Loans:

     

Special mention

   $ 31,988    $ 33,507

Substandard

     46,415      45,354

Doubtful

     114      136

Loss

     —        —  
             

Total classified loans

   $ 78,517    $ 78,997

Foreclosed Assets:

     

Other real estate owned

     2,007      1,545
             

Total classified assets

   $ 80,524    $ 80,542
             

 

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Table of Contents

Comparison of Operating Results for the Three Months Ended June 30, 2010 and 2009

Overview

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

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

Net Income. Net income was $2.9 million, or $0.19 per diluted share, for the second quarter of 2010 compared to net income of $560,000, or $0.04 per diluted share, for the same period in 2009. Excluding merger related expenses related to our acquisition of CNB Financial Corp. totaling $1.2 million and a special FDIC insurance assessment of $538,000 ($312,000 net of taxes) for the 2009 period, net income would have been $2.0 million, or $0.13 per diluted share. The improved quarterly operating results were primarily due to growth in net interest income, driven by net interest margin expansion and an increase in average interest earning assets, as well as a reduction in the provision for loan losses and growth in fee income. These items were partially offset by a decrease in gains from sales of securities and loans and an increase in non-interest expense. The improvement in earnings per share was influenced by growth in earnings and the positive impact of Company stock repurchases.

 

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

 

     Three Months Ended June 30,  
     2010     2009  
     Average
Balance
   Interest
and
Dividends
   Yield/
Cost
    Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
          (Dollars in thousands)       

Interest-earning assets:

                

Loans:

                

Residential real estate(1)

   $ 325,997    $ 4,420    5.42   $ 341,193    $ 4,678    5.48

Commercial real estate

     461,210      6,957    6.03     290,205      4,194    5.78

Home equity

     138,885      1,438    4.14     120,703      1,365    4.52

Commercial and industrial

     151,432      2,265    5.98     82,202      1,112    5.41

Consumer and other

     22,885      324    5.66     26,579      372    5.60
                                

Total loans

     1,100,409      15,404    5.60     860,882      11,721    5.45

Investment securities

     294,849      3,122    4.24     283,005      3,390    4.79

Other interest-earning assets

     44,419      10    0.09     24,421      9    0.15
                                

Total interest-earning assets

     1,439,677      18,536    5.15     1,168,308      15,120    5.18

Noninterest-earning assets(2)

     86,477           57,902      
                        

Total assets

   $ 1,526,154         $ 1,226,210      
                        

Interest-bearing liabilities:

                

Savings accounts

   $ 181,176      435    0.96   $ 116,078      331    1.14

Money market accounts

     241,096      555    0.92     182,055      604    1.33

NOW accounts

     37,557      49    0.52     29,615      34    0.46

Certificates of deposit

     460,607      2,468    2.14     361,356      2,675    2.96
                                

Total interest-bearing deposits

     920,436      3,507    1.52     689,104      3,644    2.12

FHLB advances

     158,333      1,412    3.57     164,955      1,704    4.13

Other interest-bearing liabilities

     49,809      330    2.65     33,140      229    2.76
                                

Total interest-bearing liabilities

     1,128,578      5,249    1.86     887,199      5,577    2.51

Demand deposits

     164,449           114,321      

Other noninterest-bearing liabilities

     9,199           8,189      
                        

Total liabilities

     1,302,226           1,009,709      

Stockholders’ equity

     223,928           216,501      
                        

Total liabilities and stockholders’ equity

   $ 1,526,154         $ 1,226,210      
                        

Net interest income

      $ 13,287         $ 9,543   
                        

Interest rate spread(3)

         3.29         2.67

Net interest-earning assets(4)

   $ 311,099         $ 281,109      
                        

Net interest margin(5)

         3.69         3.27

Average interest-earning assets to average interest-bearing liabilities

         127.57         131.68

 

(1) Includes loans held for sale.
(2) Includes bank-owned life insurance, the income on which is classified as non-interest income.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents annualized net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

     Three Months Ended June 30,
2010 vs. 2009
 
     Increase (Decrease) Due to        
     Volume     Rate     Net  
     (In thousands)  

Interest-earning assets:

      

Loans:

      

Residential real estate(1)

   $ (206   $ (52   $ (258

Commercial real estate

     2,572        191        2,763   

Home equity

     195        (122     73   

Commercial and industrial

     1,025        128        1,153   

Consumer and other

     (53     5        (48
                        

Total loans

     3,533        150        3,683   

Investment securities

     138        (406     (268

Other interest-earning assets

     5        (4     1   
                        

Total interest-earning assets

     3,676        (260     3,416   

Interest-bearing liabilities:

      

Savings accounts

     163        (59     104   

Money market accounts

     165        (214     (49

NOW accounts

     10        5        15   

Certificates of deposit

     634        (841     (207
                        

Total interest-bearing deposits

     972        (1,109     (137

FHLB advances

     (66     (226     (292

Other interest-bearing liabilities

     110        (9     101   
                        

Total interest-bearing liabilities

     1,016        (1,344     (328
                        

Change in net interest income

   $ 2,660      $ 1,084      $ 3,744   
                        

 

(1) Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $3.7 million, or 39.2%, to $13.3 million for the second quarter of 2010 from $9.5 million for the same period in 2009 as a result of net interest margin expansion and an increase in average interest earning assets. Net interest margin increased 42 basis points to 3.69% for the three months ended June 30, 2010, from 3.27% for the same period in 2009 due to amortization of certain acquisition accounting adjustments totaling $706,000 and improved spreads, primarily due to lower cost of funds. These items were partially offset by an increased cost to fund share repurchases, growth in excess cash balances held in low yielding Federal Reserve Bank and FHLBB accounts and an increase in non-performing loans.

 

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Interest Income. Interest income increased $3.4 million, or 22.6%, to $18.5 million for the three months ended June 30, 2010 from $15.1 million for the prior year period due to an increase in average interest-earning assets, partially offset by a decrease in the yield on earning assets. Total average interest-earning asset balances increased $271.4 million, or 23.2%, to $1.440 billion for the second quarter of 2010, due in large part to the Company’s acquisition of CNB Financial Corp. in the fourth quarter of 2009 and, to a lesser extent, organic loan origination activity and an increase in excess cash balances. These items were partially offset by loan and investment security sales and prepayments and normal amortization of the existing loan and mortgage-backed securities portfolio. The yield on average interest-earning assets decreased by 3 basis points to 5.15% for the second quarter of 2010 in connection with the lower interest rate environment, partially offset by accretion of certain loan fair value accounting adjustments totaling $376,000 in the second quarter of 2010. The decrease in market rates contributed to the downward repricing of a portion of the Company’s existing assets and to lower rates for new assets.

Interest Expense. Interest expense decreased $328,000, or 5.9%, to $5.2 million for the three months ended June 30, 2010 from $5.6 million for the prior year period reflecting a decrease in the average rate paid on interest-bearing liabilities, partially offset by an increase in average interest-bearing liabilities. The average rate paid on interest-bearing liabilities declined 65 basis points to 1.86% for the three months ended June 30, 2010 reflecting the repricing of savings, money market and certificate of deposit balances in response to the lower interest rate environment as well as a $330,000 reduction in interest expense associated with the amortization of certain fair value accounting adjustments relating to deposits and borrowings. Average interest-bearing liabilities increased $241.4 million, or 27.2%, to $1.129 billion for the three months ended June 30, 2010 from $887.2 million for the prior year period reflecting growth in interest-bearing deposits and other interest-bearing liabilities due in large part to the Company’s acquisition of CNB Financial Corp. in the fourth quarter of 2009.

Provision for Loan Losses. The provision for loan losses decreased $225,000, or 33.3%, to $450,000 for the three months ended June 30, 2010 compared to $675,000 for the same period in 2009. The decrease in the provision for the second quarter of 2010 was driven by improvement in credit quality, a decrease in net loan originations and loan sales. The allowance for loan losses is based on management’s estimate of the probable losses inherent in the portfolio, considering the impact of certain factors. Among the factors management considers are prior loss experience, current economic conditions and their effect on borrowers, the composition and size of the portfolio, trends in nonperforming loans and delinquency rates and the performance of individual loans in relation to contractual terms. The provision for loan losses reflects adjustments to the allowance based on management’s review of the loan portfolio in light of those conditions. The allowance for loan losses was $9.7 million, or 0.89% of loans outstanding at June 30, 2010. In accordance with generally accepted accounting principles, the Company recorded the loans acquired from CNB Financial Corp. at fair value and recognized the credit mark on loans purchased from other financial institutions as a component of fair value. At June 30, 2010, the remaining balance of the loan fair value adjustments was $6.0 million, or 2.4% of the total $250.9 million in outstanding purchased loans. Excluding the $228.8 million outstanding balance of loans acquired from CNB Financial Corp. and $22.1 million outstanding balance of loans purchased from other financial institutions, the ratio of the allowance for loan losses to total loans would have been 1.15%.

 

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Non-interest Income. Non-interest income decreased $376,000, or 14.5%, to $2.2 million for the three months ended June 30, 2010, mainly attributable to a decrease in gains on sales of loans and securities of $590,000 or 84.4%, partially offset by growth in deposit service charges of $178,000 or 15.3%. Fee income from depositors’ accounts increased as a result of growth in accounts and transactions.

Non-interest Expense. Non-interest expense increased $601,000, or 6.0%, to $10.6 million for the second quarter of 2010 from $10.0 million for the same period in 2009. Excluding acquisition related costs of $169,000 in 2010 and $1.2 million in 2009, non-interest expenses would have increased $1.6 million, or 18.0%. Salaries and benefits increased $1.4 million, or 29.3%, mainly due to costs incurred to support our new Worcester operations and, to a lesser extent, annual wage increases and a larger incentive accrual due to improved operating performance. Occupancy costs grew $159,000, or 24.8%, principally attributable to expenses incurred to operate our new Worcester facilities. Marketing expenses increased $208,000, or 50.2%, in connection with advertising and promotional expenses focused on our Worcester market. Data processing costs increased $162,000, or 20.3%, reflecting expenses for our new Worcester accounts and a larger loan and deposit account base in our Springfield market. Other expenses increased $213,000, or 17.5%, largely related to additional costs for the Worcester operations. These items were partially offset by a decrease of $565,000, or 63.5%, in FDIC insurance premiums mainly reflecting a one-time special assessment of $538,000 incurred in 2009.

Income Tax Expense. Income tax expense increased $619,000 to $1.5 million for three months ended June 30, 2010 from the comparable 2009 period as a result of an increase in taxable income, partially offset by a decrease in the effective tax rate from 60.9% in 2009 to 33.7% in 2010. The higher effective tax rate for 2009 was driven primarily by non-deductible merger expenses.

Comparison of Operating Results for the Six Months Ended June 30, 2010 and 2009

Net Income. Net income for the six months ended June 30, 2010 amounted to $4.7 million, or $0.30 per diluted share, compared to $2.7 million, or $0.17 per diluted share, for the same period in 2009. Excluding acquisition-related expenses totaling $1.1 million and the related tax benefit of $329,000, net income would have been $5.5 million, or $0.35 per diluted share, for the six months ended June 30, 2010. Excluding non-deductible acquisition-related expenses totaling $1.2 million and a special FDIC insurance assessment of $538,000 ($312,000 net of taxes) for the same period in 2009, net income would have been $4.2 million, or $0.27 per diluted share. The improved operating results for the six months were primarily due to growth in net interest income, driven by net interest margin expansion and an increase in average interest earning assets and an increase in fee income. These items were partially offset by a decrease in gains from sales of securities and loans, a $145,000 non-cash, non-deductible charge for other-than-temporary-impairment of an investment security recognized in the first quarter of 2010 and an increase in non-interest expense. The improvement in earnings per share was influenced by growth in earnings and the positive impact of Company stock repurchases.

 

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

 

     Six Months Ended June 30,  
     2010     2009  
     Average
Balance
   Interest
and
Dividends
   Yield/
Cost
    Average
Balance
   Interest
and
Dividends
   Yield/
Cost
 
          (Dollars in thousands)       

Interest-earning assets:

                

Loans:

                

Residential real estate(1)

   $ 333,624    $ 9,051    5.43   $ 348,090    $ 9,621    5.53

Commercial real estate

     458,547      14,027    6.12     286,418      8,382    5.85

Home equity loans

     138,708      2,882    4.16     121,034      2,784    4.60

Commercial and industrial

     152,028      4,243    5.58     82,502      2,224    5.39

Consumer and other

     23,430      658    5.62     27,163      761    5.60
                                

Total loans

     1,106,337      30,861    5.58     865,207      23,772    5.50

Investment securities

     298,860      6,414    4.29     298,316      7,261    4.87

Other interest-earning assets

     31,785      18    0.11     19,568      17    0.17
                                

Total interest-earning assets

     1,436,982      37,293    5.19     1,183,091      31,050    5.25

Noninterest-earning assets(2)

     90,691           55,557      
                        

Total assets

   $ 1,527,673         $ 1,238,648      
                        

Interest-bearing liabilities:

                

Savings accounts

   $ 175,862      834    0.95   $ 110,900      620    1.12

Money market accounts

     223,807      1,004    0.90     176,645      1,229    1.39

NOW accounts

     38,101      100    0.52     29,977      68    0.45

Certificates of deposit

     464,060      4,944    2.13     364,178      5,552    3.05
                                

Total interest-bearing deposits

     901,830      6,882    1.53     681,700      7,469    2.19

FHLB advances

     180,366      2,963    3.29     184,619      3,440    3.73

Other interest-bearing liabilities

     51,883      665    2.56     32,463      443    2.73
                                

Total interest-bearing liabilities

     1,134,079      10,510    1.85     898,782      11,352    2.53

Demand deposits

     159,929           112,719      

Other noninterest-bearing liabilities

     9,310           8,567      
                        

Total liabilities

     1,303,318           1,020,068      

Stockholders’ equity

     224,355           218,580      
                        

Total liabilities and stockholders’ equity

   $ 1,527,673         $ 1,238,648      
                        

Net interest income

      $ 26,783         $ 19,698   
                        

Interest rate spread(3)

         3.34         2.72

Net interest-earning assets(4)

   $ 302,903         $ 284,309      
                        

Net interest margin(5)

         3.73         3.33

Average interest-bearing assets to average interest-bearing liabilities

         126.71         131.63

 

(1) Includes loans held for sale.
(2) Includes bank-owned life insurance, the income on which is classified as non-interest income.
(3) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(4) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(5) Net interest margin represents annualized net interest income divided by average total interest-earning assets.

 

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Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

 

     Six Months Ended June 30,
2010 vs. 2009
 
   Increase (Decrease) Due to        
     Volume     Rate     Net  
     (In thousands)  

Interest-earning assets:

      

Loans:

      

Residential real estate(1)

   $ (395   $ (175   $ (570

Commercial real estate

     5,249        396        5,645   

Home equity loans

     384        (286     98   

Commercial and industrial

     1,937        82        2,019   

Consumer and other

     (105     2        (103
                        

Total loans

     7,070        19        7,089   

Investment securities

     13        (860     (847

Other interest-earning assets

     8        (7     1   
                        

Total interest-earning assets

     7,091        (848     6,243   

Interest-bearing liabilities:

      

Savings accounts

     319        (105     214   

Money market accounts

     278        (503     (225

NOW accounts

     20        12        32   

Certificates of deposit

     1,304        (1,912     (608
                        

Total interest-bearing deposits

     1,921        (2,508     (587

FHLB advances

     (78     (399     (477

Other interest-bearing liabilities

     250        (28     222   
                        

Total interest-bearing liabilities

     2,093        (2,935     (842
                        

Change in net interest income

   $ 4,998      $ 2,087      $ 7,085   
                        

 

(1) Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $7.1 million, or 36.0%, to $26.8 million for the six months ended June 30, 2010 from $19.7 million for the comparable 2009 period as a result of net interest margin expansion and an increase in average interest earning assets. Net interest margin increased 40 basis points to 3.73% for the six months ended June 30, 2010 from 3.33% for the prior year period due to amortization of certain acquisition accounting adjustments totaling $1.4 million and improved spreads. Average earning assets expanded $253.9 million, or 21.5%, to $1.437 billion, mainly due to the Company’s acquisition of CNB Financial Corp. in the fourth quarter of 2009. These items were partially offset by an increased cost to fund share repurchases, growth in excess cash balances held in low yielding Federal Reserve Bank and FHLBB accounts and an increase in non-performing loans.

 

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Interest Income. Interest income increased $6.2 million, or 20.1%, to $37.3 million for the six months ended June 30, 2010 from $31.1 million for the prior year period due to an increase in average interest-earning assets, partially offset by a decrease in the yield on earning assets. Total average interest-earning asset balances increased $253.9 million, or 21.5%, to $1.437 billion for the second quarter of 2010, due in large part to the Company’s acquisition of CNB Financial Corp. in the fourth quarter of 2009 and, to a lesser extent, organic loan origination activity. These items were partially offset by loan and investment security sales, as well as prepayments and normal amortization of the existing loan and mortgage-backed securities portfolio. The yield on average interest-earning assets decreased by 6 basis points to 5.19% for the second quarter of 2010 in connection with the lower interest rate environment, partially offset by accretion of certain loan fair value accounting adjustments totaling $678,000 for the six months ended June 30, 2010. The decrease in market rates contributed to the downward repricing of a portion of the Company’s existing assets and to lower rates for new assets.

Interest Expense. Interest expense decreased $842,000, or 7.4%, to $10.5 million for the six months ended June 30, 2010 from $11.4 million for the prior year period due to a decrease in the average rate paid on interest-bearing liabilities, partially offset by growth in average interest-bearing liabilities. The average rate paid on interest-bearing liabilities declined 68 basis points to 1.85% for the six months ended June 30, 2010 reflecting the repricing of savings, money market and certificate of deposit balances in response to the lower interest rate environment as well as a $760,000 reduction in interest expense associated with the amortization of certain deposits and borrowings fair value accounting adjustments. Average interest-bearing liabilities increased $235.3 million, or 26.2%, to $1.134 billion for the six months ended June 30, 2010 from $898.8 million for the prior year period reflecting growth in interest-bearing deposits and other interest-bearing liabilities due in large part to the Company’s acquisition of CNB Financial Corp. in the fourth quarter of 2009.

Provision for Loan Losses. The provision for loan losses decreased $32,000, or 2.6%, to $1.2 million for the six months ended June 30, 2010 driven by improvement in credit quality, a decrease in net loan originations and loan sales.

Non-interest Income. Non-interest income decreased $190,000, or 4.3%, to $4.3 million for the six months ended June 30, 2010 mainly attributable to a decrease in gains on sales of loans and securities of $627,000, or 76.1%, and an other-than-temporary impairment charge of an equity security of $145,000 in the first quarter of 2010. These items were partially offset by growth in deposit service charges of $442,000 or 19.5%, as a result of growth in accounts and transactions.

 

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Non-interest Expense. Non-interest expense increased $4.5 million, or 24.5%, to $22.6 million for the six months ended June 30, 2010 from $18.2 million for the prior year period. Total salaries and benefits increased $2.8 million, or 29.8%, mainly due to costs incurred to support our new Worcester operations and, to a lesser extent, annual wage increases and a larger incentive accrual due to improved operating performance. Occupancy costs grew $421,000, or 32.2%, principally attributable to expenses incurred to operate our new Worcester facilities. Marketing expenses increased $426,000, or 56.3%, in connection with advertising and promotional expenses focused on our Worcester market. Data processing costs increased $385,000, or 23.5%, reflecting expenses for our new Worcester accounts and a larger loan and deposit account base in our Springfield market. Professional service costs increased $181,000, or 25.2%, as a result of increases in annual audit, legal, loan review and consulting costs. Other expenses increased $787,000, or 37.6%, largely related to additional costs for the Worcester operations. These items were partially offset by a decrease of $490,000, or 39.8%, in FDIC insurance premiums due to a one-time special assessment of $538,000 incurred in 2009.

Income Tax Expense. Income tax expense increased $462,000 to $2.5 million for six months ended June 30, 2010 from $2.1 million for the comparable 2009 period due in large part to an increase in income before income taxes offset by a decrease in the effective rate from 56.6% to 34.9%.

Market Risk, Liquidity and Capital Resources

Market Risk

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

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

 

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Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII for the following twelve months, resulting from an instantaneous and sustained parallel shift in the yield curve of +200 and -100 basis points at June 30, 2010 and December 31, 2009.

 

Net Interest Income At-Risk

Change in Interest Rates   

Estimated Increase (Decrease)

in NII

  

Estimated Increase (Decrease)

in NII

(Basis Points)

  

(June 30, 2010)

  

(December 31, 2009)

-100

   (2.2)%    (2.8)%

Stable

   0.0%    0.0%

+200

   1.8%    0.5%

The preceding income simulation analysis is for United Bank and its subsidiary only and does not represent a forecast of NII and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, market conditions, prepayment/refinancing levels, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables and other factors may vary significantly from assumptions used.

Net Portfolio Value Simulation Analysis. The Office of Thrift Supervision requires the computation of amounts by which the net present value of an institution’s cash flow from assets, liabilities and off balance sheet items (the institution’s net portfolio value or “NPV”) would change in the event of a range of assumed changes in market interest rates. The Office of Thrift Supervision provides all institutions that file a Consolidated Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report an interest rate sensitivity report of net portfolio value. The Office of Thrift Supervision simulation model uses a discounted cash flow analysis and an option-based pricing approach to measuring the interest rate sensitivity of net portfolio value. Historically, the Office of Thrift Supervision model estimated the economic value of each type of asset, liability and off-balance sheet contract under the assumption that the United States Treasury yield curve increases or decreases instantaneously by 100 to 300 basis points in 100 basis point increments. However, given the low level of market interest rates, a net portfolio value calculation for an interest rate decrease of greater than 100 basis points was not prepared. A basis point equals one-hundredth of one percent, and 200 basis points equals two percent. An increase in interest rates from 3% to 5% would mean, for example, a 200 basis point increase in the “Change in Interest Rates” column below. The Office of Thrift Supervision provides us the results of the interest rate sensitivity model, which is based on information we provide to the Office of Thrift Supervision to estimate the sensitivity of our net portfolio value.

 

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Table of Contents

The tables below set forth, at the dates indicated, the estimated changes in our net portfolio value that would result from the designated instantaneous changes in the United States Treasury yield curve. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results. This data is for the Bank and its subsidiary only and does not include any yield curve changes in the assets of United Financial Bancorp, Inc.

 

    June 30, 2010  
                    NPV as a Percentage of  Present
Value of Assets (3)
 

Change in

Interest Rates

(basis points) (1)

      Estimated    
NPV (2)
  Estimated Increase (Decrease)  in
NPV
    NPV Ratio (4)     Increase
(Decrease)

     (basis points)    
 
    Amount     Percent      
    (Dollars in thousands)              
+300   $ 132,958   $ (47,219   (26 )%    9.35   (243
+200     153,757     (26,420   (15   10.53      (125
+100     170,694     (9,483   (5   11.40      (38
      0     180,177       11.77     
-100     190,846     10,669      6      12.25      48   
    December 31, 2009  
                    NPV as a Percentage of Present  
                    Value of Assets (3)  

Change in

Interest Rates
(basis points) (1)

  Estimated
NPV (2)
  Estimated Increase (Decrease)  in
NPV
    NPV Ratio (4)     Increase
(Decrease)
(basis points)
 
    Amount     Percent      
    (Dollars in thousands)              
+300   $ 138,536   $ (53,844   (28 )%    9.83   (278
+200     160,423     (31,957   (17   11.07      (155
+100     179,607     (12,773   (7   12.07      (55
      0     192,380       12.62     
-100     206,234     13,854      7      13.27      65   

 

(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) NPV is the discounted present value of expected cash flows from assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of incoming cash flows on interest-earning assets.
(4) NPV ratio represents NPV divided by the present value of assets.

The tables above indicate that at June 30, 2010 and December 31, 2009, in the event of a 300 basis point increase in interest rates, we would experience a 26% and 28%, respectively, decrease in net portfolio value. In the event of a 100 basis point decrease in interest rates at June 30, 2010 and December 31, 2009, we would experience a 6% and 7%, respectively, increase in net portfolio value.

 

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Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

Liquidity

Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, advances from the FHLBB, loan and mortgage-backed securities repayments and maturities and sales of loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by market interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 10% or greater. At June 30, 2010, our liquidity ratio was 21.02%, compared to 19.49% at December 31, 2009.

We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.

Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2010, cash and cash equivalents totaled $57.9 million. Securities classified as available-for-sale and held-to-maturity, which provide additional sources of liquidity, totaled $226.1 million and $74.2 million, respectively, at June 30, 2010. In addition, at June 30, 2010, we had the ability to borrow a total of approximately $389.0 million from the FHLBB. On that date, we had $155.1 million in advances outstanding.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At June 30, 2010, we had $14.1 million in loan commitments outstanding. In addition to commitments to originate loans, we had $226.1 million in unused lines of credit to borrowers and $29.0 million to be disbursed under existing construction loan commitments. Certificates of deposit due within one year of June 30, 2010 totaled $305.4 million, or 27.6% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and FHLBB advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2010. We believe however, based on past experience that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

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Our primary investing activities are the origination of loans and the purchase of securities. For the six months ended June 30, 2010, we originated $92.4 million of loans and purchased $38.9 million of securities. In the comparable 2009 period, we originated $117.4 million of loans and purchased $27.7 million of securities.

Financing activities consist primarily of activity in deposit accounts and FHLBB advances. We experienced a net increase in total deposits of $68.8 million and $32.9 million for the six months ended June 30, 2010 and 2009, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors and other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBB, which provides an additional source of funds. FHLBB advances decreased by $50.8 million and $47.5 million during the six months ended June 30, 2010 and 2009, respectively, reflecting the use of cash flows received from the loan and investment portfolios and excess deposit funds to pay down short term FHLBB advances. We have also used FHLBB advances to “match-fund” certain longer-term one- to four-family residential mortgage loans and commercial real estate loans. The Bank’s unused borrowing capacity with the FHLBB, excluding its available line of credit balance of $1.5 million at June 30, 2010 and $12.4 million at December 31, 2009, was approximately $231.4 million at June 30, 2010 and $185.8 million at December 31, 2009. At June 30, 2010 and December 31, 2009, the Bank had no borrowing against the line of credit. We also have access to funding through the repurchase agreement and brokered CD markets and have received approval from the Federal Reserve Bank to access its discount window. The Bank’s unused borrowing capacity with the Federal Reserve Bank was approximately $55.7 million at June 30, 2010.

United Financial is a separate legal entity from the Bank and must provide for its own liquidity. In addition to its operating expenses, United Financial is responsible for paying any dividends declared to its shareholders. United Financial also has repurchased shares of its common stock. At June 30, 2010, United Financial had liquid assets of $25.4 million.

Off-Balance Sheet Arrangements and Aggregate Contractual Obligations

Commitments

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. We consider commitments to extend credit in determining our allowance for loan losses.

 

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Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment. The following table summarizes our significant fixed and determinable contractual obligations and other funding needs by payment date at June 30, 2010. The payment amounts represent those amounts due to the recipient and do not include any unamortized premiums or discounts or other similar carrying amount adjustments.

 

     Payments Due by Period (In Thousands)
     Less Than
One  Year
   One to Three
Years
   Three to  Five
Years
   More than
Five  Years
   Total

Contractual Obligations:

              

Certificates of deposit

   $ 305,411    $ 98,101    $ 55,145    $ —      $ 458,657

Federal Home Loan Bank advances

     16,297      64,375      51,153      23,250      155,075

Repurchase agreements

     15,644      —        —        20,000      35,644

Subordinated debentures

     —        —        —        7,732      7,732

Standby letters of credit

     3,366      —        —        —        3,366

Operating leases

     1,086      1,831      1,752      4,657      9,326

Capitalized leases

     406      812      813      6,559      8,590

Future benefits to be paid under retirement plans

     199      3,540      171      4,650      8,560
                                  

Total

   $ 342,409    $ 168,659    $ 109,034    $ 66,848    $ 686,950
                                  

Commitments:

              

Commitments to extend credit

   $ 272,478    $ —      $ —      $ —      $ 272,478

Commitment to invest in venture capital fund

     600      —        —        —        600
                                  

Total

   $ 273,078    $ —      $ —      $ —      $ 273,078
                                  

Capital Resources

United Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2010, the Bank exceeded all regulatory capital requirements and was considered “well capitalized” under regulatory requirements.

 

     Actual     For Capital
Adequacy Purposes
    To Be Well Capitalized
Under  Regulatory
Framework
 

As of June 30, 2010:

      

Total risk-based capital

   15.78   8.00   10.00

Tier 1 risk-based capital

   14.94   4.00   6.00

Tier 1 (core) capital

   11.38   4.00   5.00

Tangible equity

   11.38   1.50   N/A   

As of December 31, 2009:

      

Total risk-based capital

   16.53   8.00   10.00

Tier 1 risk-based capital

   15.73   4.00   6.00

Tier 1 (core) capital

   12.14   4.00   5.00

Tangible equity

   12.14   1.50   N/A   

 

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included above in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the caption “Market Risk, Liquidity and Capital Resources.”

 

ITEM 4. Controls and Procedures

Under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and in a timely manner alerting them to material information relating to the Company (or its consolidated subsidiary) required to be filed in its periodic SEC filings.

No change in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. In the ordinary course of business, we routinely enhance our internal controls and procedures for financial reporting by either upgrading our current systems or implementing new systems. Changes have been made and will be made to our internal controls and procedures for financial reporting as a result of these efforts.

PART II. OTHER INFORMATION

 

ITEM 1. Legal Proceedings

At June 30, 2010, the Company was not involved in any legal proceedings, the outcome of which is expected to be material to the Company’s Consolidated Financial Statements.

 

ITEM 1A. Risk Factors

Recently enacted regulatory reform may have a material impact on our operations.

On July 21, 2010, the President signed into law The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). The Dodd-Frank Act restructures the regulation of depository institutions. Under the Dodd-Frank Act, the Office of Thrift Supervision will be merged into the Office of the Comptroller of the Currency, which regulates national banks. Savings and loan holding companies will be regulated by the Federal Reserve Board. The Dodd-Frank Act contains various provisions designed to enhance the regulation of depository institutions and prevent the recurrence of a financial crisis such as occurred in 2008-2009. Also included is the creation of a new federal agency to administer and enforce consumer and fair lending laws, a function that is now performed by the depository institution regulators. The federal preemption of state laws currently accorded federally chartered depository institutions will be reduced as well. The Dodd-Frank Act also will impose consolidated capital requirements on savings and loan holding companies effective in five years, which will limit our ability to borrow at the holding company and invest the proceeds from such borrowings as capital in United Bank that could be leveraged to support additional growth. The full impact of the Dodd-Frank Act on our business and operations will not be known for years until regulations implementing the statute are written and adopted. The Dodd-Frank Act may have a material impact on our operations, particularly through increased compliance costs resulting from possible future consumer and fair lending regulations.

 

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In addition to the other information set forth in this report, the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2009, which could materially affect our business, financial condition or future results should be carefully considered. At June 30, 2010, the risk factors for the Company have not changed materially from those reported in our Annual Report on Form 10-K. In addition, the risks described in our Annual Report on Form 10-K are not the only risks that the Company faces. Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) No unregistered securities were sold by the Company during the quarter ended June 30, 2010.

(b) Not applicable

(c) The following table provides certain information with regard to shares repurchased by the Company in the second quarter of 2010.

 

Period

   (a)
Total Number
of Shares

(or Units)
Purchased
    (b)
Average Price
Paid Per
Share

(or Unit)
   (c)
Total Number  of
Shares

(or Units)
Purchased as Part

of Publicly
Announced Plans
or Programs
   (d)
Maximum Number
(or Approximate
Dollar Value) of

Shares (or Units) that
May Yet Be
Purchased Under the
Plans or Programs (1)

April 1 - 30, 2010

   4,683      $ 13.66    4,683    563,504

May 1 - 31, 2010

   281,624        13.78    281,624    281,880

June 1 - 30, 2010

   102,029  (2)      13.78    88,000    193,880
                

Total

   388,336      $ 13.78    374,307   

 

(1) On October 16, 2009, the Board of Directors approved a plan to repurchase up to 5%, or approximately 798,055 shares, of the Company’s common stock. Under the plan, the Company intends to repurchase shares from time to time, depending on market conditions and will continue until it is completed.
(2) Includes the withholding of 14,029 shares at $14.39 per share subject to restricted stock awards under the United Financial Bancorp, Inc. 2008 Equity Incentive Plan as payment of taxes due upon the vesting of the restricted stock awards.

 

ITEM 3. Defaults Upon Senior Securities

Not applicable.

 

ITEM 4. [Removed and Reserved]

 

ITEM 5. Other Information

Not applicable.

 

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ITEM 6. Exhibits.

 

3.1    Articles of Incorporation of United Financial Bancorp, Inc. (1)
3.2    Amended and Restated Bylaws of United Financial Bancorp, Inc. (2)
4    Form of Common Stock Certificate of United Financial Bancorp, Inc. (1)
31.1    Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2    Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32    Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

 

(1) Incorporated by reference to the Registration Statement on Form S-1 of United Financial Bancorp, Inc. (File No. 333-144245), originally filed with the Securities and Exchange Commission on June 29, 2007.
(2) Incorporated by reference to the Form 10-K of United Financial Bancorp, Inc. filed with the Securities and Exchange Commission on March 13, 2009.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed by the undersigned thereunto duly authorized.

 

    United Financial Bancorp, Inc.

Date: August 6, 2010

    By:  

/s/ Richard B. Collins

      Richard B. Collins
      Chairman, President and Chief Executive Officer

Date: August 6, 2010

    By:  

/s/ Mark A. Roberts

      Mark A. Roberts
      Executive Vice President and Chief Financial Officer

 

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