Form 10-Q
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 March 31, 2012

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)   Zip Code

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  x    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

15,526,358 shares outstanding as of May 2, 2012

 

 

 


Table of Contents

INDEX

 

     Page
PART I. FINANCIAL INFORMATION   

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Condition (unaudited) March 31, 2012 and December 31, 2011

   3
 

Consolidated Statements of Earnings (unaudited) Three Months Ended March 31, 2012 and 2011

   4
 

Consolidated Statements of Comprehensive Income (unaudited) Three Months Ended March 31, 2012 and 2011

   5
 

Consolidated Statements of Stockholders’ Equity (unaudited) Three Months Ended March 31, 2012 and 2011

   6
 

Consolidated Statements of Cash Flows (unaudited) Three Months Ended March 31, 2012 and 2011

   7
 

Notes to Unaudited Consolidated Financial Statements

   9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   26

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

   37

Item 4.

 

Controls and Procedures

   37
PART II. OTHER INFORMATION   

Item 1.

 

Legal Proceedings

   37

Item 1A.

 

Risk Factors

   37

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

   38

Item 3.

 

Defaults Upon Senior Securities

   38

Item 4.

 

Mine Safety Disclosures

   38

Item 5.

 

Other Information

   38

Item 6.

 

Exhibits

   39

SIGNATURES

   40


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CONDITION (unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

     March 31,
2012
    December 31,
2011
 

ASSETS

    

Cash and due from banks

   $ 19,475      $ 20,112   

Interest-bearing deposits

     56,073        41,406   
  

 

 

   

 

 

 

Total cash and cash equivalents

     75,548        61,518   

Securities available for sale, at fair value

     233,100        221,813   

Securities held to maturity, at amortized cost (fair value of $110,226 at March 31, 2012 and $118,311 at December 31, 2011)

     107,612        115,897   

Loans held for sale

     685        53   

Loans, net of allowance for loan losses of $11,325 at March 31, 2012 and $11,132 at December 31, 2011

     1,130,274        1,112,941   

Other real estate owned

     2,442        2,054   

Accrued interest receivable

     4,748        4,846   

Deferred tax asset, net

     14,368        14,006   

Stock in the Federal Home Loan Bank of Boston

     14,454        15,365   

Banking premises and equipment, net

     17,333        16,438   

Bank-owned life insurance

     41,084        40,688   

Goodwill

     8,192        8,192   

Other assets

     10,358        9,941   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 1,660,198      $ 1,623,752   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits:

    

Interest-bearing

   $ 1,050,076      $ 1,024,073   

Non-interest-bearing

     208,553        205,902   
  

 

 

   

 

 

 

Total deposits

     1,258,629        1,229,975   

Short-term borrowings

     23,561        17,260   

Long-term debt

     126,704        126,857   

Subordinated debentures

     5,562        5,539   

Escrow funds held for borrowers

     2,250        2,103   

Capitalized lease obligations

     4,837        4,874   

Accrued expenses and other liabilities

     11,407        9,783   
  

 

 

   

 

 

 

Total liabilities

     1,432,950        1,396,391   
  

 

 

   

 

 

 

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 and outstanding at March 31, 2012 and December 31, 2011

     187        187   

Paid-in capital

     182,671        182,433   

Retained earnings

     90,553        89,019   

Unearned compensation

     (9,874     (10,047

Treasury stock, at cost (3,108,811 shares at March 31, 2012 and 2,994,036 shares at December 31, 2011)

     (42,838     (40,983

Accumulated other comprehensive income, net of taxes

     6,549        6,752   
  

 

 

   

 

 

 

Total stockholders’ equity

     227,248        227,361   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 1,660,198      $ 1,623,752   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)

(Dollars in thousands, except per share amounts)

 

 

 

      Three Months Ended
March 31,
 
      2012      2011  

Interest and dividend income:

     

Loans

   $ 14,075       $ 14,487   

Investments

     2,855         3,191   

Other interest-earning assets

     41         40   
  

 

 

    

 

 

 

Total interest and dividend income

     16,971         17,718   

Interest expense:

     

Deposits

     2,753         3,297   

Short-term borrowings

     20         37   

Long-term debt

     1,098         1,593   
  

 

 

    

 

 

 

Total interest expense

     3,871         4,927   

Net interest income before provision for loan losses

     13,100         12,791   

Provision for loan losses

     650         808   
  

 

 

    

 

 

 

Net interest income after provision for loan losses

     12,450         11,983   
  

 

 

    

 

 

 

Non-interest income:

     

Fee income on depositors’ accounts

     1,408         1,292   

Wealth management income

     227         240   

Income from bank-owned life insurance

     440         331   

Net gain on sale of loans

     108         23   

Net gain on sale of securities

     —           1   

Other income

     390         262   
  

 

 

    

 

 

 

Total non-interest income

     2,573         2,149   
  

 

 

    

 

 

 

Non-interest expense:

     

Salaries and benefits

     6,442         6,269   

Occupancy expenses

     874         844   

Marketing expenses

     440         447   

Data processing expenses

     1,020         988   

Professional fees

     506         661   

FDIC insurance assessments

     269         330   

Low income housing tax credit fund

     243         198   

Other expenses

     1,481         1,203   
  

 

 

    

 

 

 

Total non-interest expense

     11,275         10,940   
  

 

 

    

 

 

 

Income before income taxes

     3,748         3,192   

Income tax expense

     899         763   
  

 

 

    

 

 

 

Net income

   $ 2,849       $ 2,429   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.19       $ 0.16   

Diluted

   $ 0.19       $ 0.16   

Weighted average shares outstanding:

     

Basic

     14,670,606         15,014,143   

Diluted

     14,987,033         15,258,574   

Dividends paid per share

   $ 0.09       $ 0.08   

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(Dollars in thousands)

 

 

The components of comprehensive income and related tax effects are as follows:

 

     Three Months Ended March 31,  
     2012     2011  

Net Income

   $ 2,849      $ 2,429   

Other comprehensive income:

    

Unrealized gains on securities:

    

Unrealized holding gains on available-for-sale securities

     (335     (553

Reclassification adjustment for gains realized in income

     —          (1
  

 

 

   

 

 

 

Net change in unrealized gains

     (335     (554

Tax effect

     132        208   
  

 

 

   

 

 

 

Net of tax amount

     (203     (346
  

 

 

   

 

 

 

Comprehensive income

   $ 2,646      $ 2,083   
  

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011

(Dollars in thousands, except per share amounts)

 

 

 

     Common
Shares
Outstanding
    Common
Stock
     Paid-In
Capital
    Retained
Earnings
    Unearned
Compensation
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balances at December 31, 2010

     16,109,106      $ 187       $ 180,322      $ 82,899      $ (10,750   $ (34,940   $ 4,858      $ 222,576   

Net income

     —          —           —          2,429        —          —          —          2,429   

Other comprehensive loss

     —          —           —          —          —          —          (346     (346

Cash dividends paid ($0.08 per share)

     —          —           —          (1,200     —          —          —          (1,200

Treasury stock purchases

     (13,896     —           —          —          —          (195     —          (195

Cancellation of shares for tax withholdings on options exercised

     —          —           (7     —          —          —          —          (7

Reissuance of treasury shares in connection with stock options exercised

     825        —           (12     —          —          12        —          —     

Stock-based compensation

     —          —           526        —          —          —          —          526   

ESOP shares committed to be released

     —          —           97        —          172        —          —          269   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2011

     16,096,035      $ 187       $ 180,926      $ 84,128      $ (10,578   $ (35,123   $ 4,512      $ 224,052   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at December 31, 2011

     15,712,897      $ 187       $ 182,433      $ 89,019      $ (10,047   $ (40,983   $ 6,752      $ 227,361   

Net income

     —          —           —          2,849        —          —          —          2,849   

Other comprehensive loss

     —          —           —          —          —          —          (203     (203

Cash dividends paid ($0.09 per share)

     —          —           —          (1,322     —          —          —          (1,322

Treasury stock purchases

     (129,200     —           —          —          —          (2,054     —          (2,054

Restricted shares forfeited

     (8,000     —           109        —          —          (109     —          —     

Cancellation of shares for tax withholdings on options exercised

     —          —           (83     —          —          —          —          (83

Reissuance of treasury shares in connection with stock options exercised

     14,925        —           (140     (10     —          205        —          55   

Reissuance of treasury shares in connection with restricted stock grants

     7,500        —           (120     17        —          103        —          —     

Stock-based compensation

     —          —           362        —          —          —          —          362   

ESOP shares committed to be released

     —          —           110        —          173        —          —          283   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at March 31, 2012

     15,598,122      $ 187       $ 182,671      $ 90,553      $ (9,874   $ (42,838   $ 6,549      $ 227,248   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011

(Dollars in thousands)

 

 

 

Cash flows from operating activities:    2012     2011  

Net income

   $ 2,849      $ 2,429   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Provision for loan losses

     650        808   

ESOP expense

     283        269   

Stock-based compensation

     362        526   

Amortization of premiums and discounts

     461        392   

Depreciation and amortization

     405        135   

Amortization of intangible assets

     23        26   

Net loss on sale of other real estate owned

     22        11   

Net gain on sale/call of available for sale securities

     —          (1

Loans originated for sale

     (4,734     (2,254

Proceeds from sales of loans held for sale

     4,210        1,694   

Net gain on sale of loans

     (108     (23

(Prepaid) provision deferred tax

     (362     208   

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

     (396     (294

Decrease (increase) in accrued interest receivable

     98        (71

Increase in other assets

     (308     (670

Increase (decrease) in accrued expenses and other liabilities

     1,687        (480
  

 

 

   

 

 

 

Net cash provided by operating activities

     5,142        2,705   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of securities available for sale

     (25,875     (34,204

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

     14,119        21,986   

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

     7,958        6,989   

Redemption of Federal Home Loan Bank of Boston stock

     911        —     

Proceeds from sales of other real estate owned

     695        210   

Net loan originations, purchases and principal repayments

     (19,088     (23,352

Purchases of property and equipment

     (1,297     (313
  

 

 

   

 

 

 

Net cash used in investing activities

     (22,577     (28,684
  

 

 

   

 

 

 

 

 

(Continued)

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011 (Concluded)

(Dollars in thousands)

 

 

Cash flows from financing activities:    2012     2011  

Net increase in deposits

   $ 28,654      $ 30,610   

Net change in short-term borrowings

     6,301        (2,129

Repayment of long-term debt

     (130     (11,823

Net increase in escrow funds held for borrowers

     147        295   

Payments on capitalized lease obligations

     (103     (102

Cancellation of shares for tax withholdings on options exercised

     (83     (7

Reissuance of treasury shares in connection with stock options exercised

     55        —     

Treasury stock purchases

     (2,054     (195

Cash dividends paid

     (1,322     (1,200
  

 

 

   

 

 

 

Net cash provided by financing activities

     31,465        15,449   
  

 

 

   

 

 

 

Increase (decrease) in cash and cash equivalents

     14,030        (10,530

Cash and cash equivalents at beginning of period

     61,518        83,069   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 75,548      $ 72,539   
  

 

 

   

 

 

 

Supplemental Disclosure of Cash Flow Information:

    

Cash paid during the period:

    

Interest on deposits, borrowings and other interest bearing liabilities

   $ 4,012      $ 5,111   

Income taxes – net

     2,177        232   

Non-cash items:

    

Transfer of loans to other real estate owned

     1,105        165   

Trade date accounting for securities purchased

     —          (3,002

See notes to unaudited consolidated financial statements.

 

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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2012

Dollars in Thousands (except per share amounts)

 

 

NOTE A – BASIS OF PRESENTATION

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

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with general practices within the banking industry. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for the fair presentation of the Company’s financial condition as of March 31, 2012 and the results of operations for the three months ended March 31, 2012 and 2011. 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, 2011 included in the Company’s Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission on March 12, 2012.

NOTE B – RECENT ACCOUNTING PRONOUNCEMENTS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. The guidance clarifies and expands the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements, including the disclosure of quantitative information related to (1) the valuation processes used, (2) the sensitivity of the fair value measurement to changes in unobservable inputs and the interrelationships between those unobservable inputs, and (3) use of a nonfinancial asset in a way that differs from the asset’s highest and best use. The guidance also requires disclosure of the level within the fair value hierarchy for assets and liabilities not measured at fair value in the statement of financial position but for which the fair value is disclosed. The amendments in this Update are to be applied prospectively, effective during interim and annual periods beginning after December 15, 2011. Early application is not permitted. This ASU was adopted in the first quarter of 2012 and did not have an impact on the Company’s consolidated financial statements as the amendments relate only to changes in financial statement presentation.

In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220), Presentation of Comprehensive Income. This ASU amends the disclosure requirements for the presentation of comprehensive income. The amended guidance eliminates the option to present components of other comprehensive income (OCI) as part of the statement of changes in stockholder’s equity. Under the amended guidance, all changes in OCI are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. The changes are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Early application is permitted. In December 2011, the FASB issued ASU 2011-12 to defer changes that relate to the presentation of reclassification adjustments but the other requirements of ASU 2011-05 remain in effect. This ASU was adopted in the first quarter of 2012 and did not have an impact to the consolidated financial results as the amendments relate only to changes in financial statement presentation.

 

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In September 2011, the FASB issued ASU 2011-08, Intangibles – Goodwill and Other (Topic 350), Testing Goodwill for Impairment. This ASU is intended to reduce the complexity and cost of performing an evaluation of impairment of goodwill. Under the new guidance, an entity will have the option of first assessing qualitative factors (events and circumstances) to determine whether it is more likely than not (meaning a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If, after considering all relevant events and circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test will be unnecessary. This ASU was adopted in the first quarter of 2012 and did not have an impact on the Company’s consolidated financial statements.

NOTE C – CRITICAL ACCOUNTING POLICIES

The Securities and Exchange Commission (the “SEC”) defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in future periods. Management believes that the following policies would be considered critical under the SEC’s definition:

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.

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, prior loss experience, current economic conditions, trends in non-performing, classified and impaired loans, and delinquency rates, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

The Company periodically may agree to modify the contractual terms of loans. A loan is classified as a troubled debt restructure (“TDR”) if the Company grants a concession to a borrower that is experiencing financial difficulties. This usually includes a modification of loan terms, such as a reduction of the interest rate to below market terms, capitalizing past due interest or extending the maturity date or a partial forgiveness of debt. A TDR loan is returned to accrual status after the borrower demonstrates the ability to pay under the restructured terms through a sustained period of repayment performance, which is generally six months. All TDRs are initially classified as impaired.

The allowance consists of a specific, general, and unallocated component, as further described below.

Specific component. The specific component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for the commercial segment (commercial and industrial, commercial real estate and construction) by either the present value of expected future cash flows discounted at

 

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the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. A specific allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of the loan. Groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual loans in the consumer segment (residential real estate, home equity and consumer loans) for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

General component. The general component is based on historical loss experience adjusted for qualitative factors stratified by each of the loan classes: commercial and industrial, commercial real estate, construction, residential real estate, home equity and consumer. Management uses an average of historical losses based on a time frame appropriate to capture relevant loss data for each loan class. This historical loss factor for each loan class is adjusted for the following qualitative factors: the levels/trends in delinquencies, classified and non-accruals; levels and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience, ability and depth of lending management and staff; national and local economic trends and industry conditions; and effects of changes in credit concentrations. This analysis establishes factors that are applied to each loan class to determine the amount of the general component of the allowance for loan losses.

Unallocated component. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

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. On a quarterly basis, management reviews securities with a decline in fair value below the amortized cost of the investment to determine whether the decline in fair value is temporary or other-than-temporary. Declines in the fair value of marketable equity securities below their cost that are deemed to be other-than-temporary based on the severity and duration of the impairment are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses for held to maturity and available for sale debt securities, impairment is required to be recognized (1) if we intend to sell the security; (2) if it is “more likely than not” that we will be required to sell the security before recovery of its amortized cost basis; or (3) the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired held to maturity and available for sale securities that management intends to sell, or more likely than not will be required to sell, the full amount of the other-than-temporary impairment is recognized through earnings. For all other impaired held to maturity or available for sale securities, credit-related other-than-temporary impairment is recognized through earnings, while non-credit related other-than-temporary impairment is recognized in other comprehensive income, net of applicable taxes.

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 basis 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. Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. In determining the 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 its net deferred tax asset in the future, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.

 

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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. Trading assets, securities available for sale, and derivative instruments are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a non-recurring 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 by dividing net income by weighted average shares outstanding before any dilution and excluding the weighted average number of unallocated shares held by the Bank’s employee stock ownership plan (the “ESOP”). Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if potential common shares were converted into common stock using the treasury stock method.

The calculation of basic and diluted earnings per common share for the periods indicated is presented below.

 

      Three Months Ended
March 31,
 
      2012      2011  

Net income

   $ 2,849       $ 2,429   
  

 

 

    

 

 

 

Weighted average common shares applicable to basic EPS (1)

     14,670,606         15,014,143   

Effect of dilutive potential common shares (2) (3)

     316,427         244,431   
  

 

 

    

 

 

 

Weighted average common shares applicable to diluted EPS

     14,987,033         15,258,574   
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 0.19       $ 0.16   

Diluted

   $ 0.19       $ 0.16   

 

(1) Share-based compensation awards that qualify as participating securities (entiled to receive non-forfeitable dividends) are included in basic EPS using the two-class method.
(2) Options to purchase 110,229 and 308,615 shares for three months ended March 31, 2012 and 2011, respectively, were outstanding but not included in the computation of earnings per share because they were anti-dilutive, meaning the exercise price of such options exceeded the market value of the Company’s common stock.
(3) Includes incremental shares related to dilutive stock options.

 

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NOTE E – ACCUMULATED OTHER COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the statement of condition, such items are components of accumulated other comprehensive income.

The components of accumulated other comprehensive income (loss) and related tax effects are as follows:

 

     March 31,
2012
    December 31,
2011
 

Net unrealized gain on securities available for sale

   $ 11,506      $ 11,841   

Tax effect

     (4,348     (4,480
  

 

 

   

 

 

 

Net-of-tax amount

     7,158        7,361   
  

 

 

   

 

 

 

Pension liability

     (1,045     (1,045

Tax effect

     436        436   
  

 

 

   

 

 

 

Net-of-tax amount

     (609     (609
  

 

 

   

 

 

 

Accumulated other comprehensive income

   $ 6,549      $ 6,752   
  

 

 

   

 

 

 

 

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NOTE F – INVESTMENT SECURITIES

The amortized cost and fair value of securities classified as available for sale and held to maturity are as follows:

 

     Amortized
Cost
     Unrealized     Fair
Value
 
        Gains      Losses    

Securities Available for Sale

          

March 31, 2012:

          

Debt Securities:

          

Government-sponsored enterprises

   $ 174       $ 4       $ —        $ 178   

Government-sponsored and government- guaranteed mortgage-backed securities

     210,281         10,680         (93     220,868   

Private label mortgage-backed securities

     1,926         56         (9     1,973   

Municipal bonds

     7,759         612         (5     8,366   

Corporate bonds

     1,454         392         (131     1,715   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 221,594       $ 11,744       $ (238   $ 233,100   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

Debt Securities:

          

Government-sponsored enterprises

   $ 187       $ 5       $ —        $ 192   

Government-sponsored and government- guaranteed mortgage-backed securities

     198,446         11,047         —          209,493   

Private label mortgage-backed securities

     2,127         68         (17     2,178   

Municipal bonds

     7,759         625         —          8,384   

Corporate bonds

     1,453         244         (131     1,566   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 209,972       $ 11,989       $ (148   $ 221,813   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

      Amortized
Cost
     Unrealized     Fair
Value
 
         Gains      Losses    

Securities Held to Maturity

          

March 31, 2012:

          

Government-sponsored and government- guaranteed mortgage-backed securities

   $ 81,719       $ 2,184       $ —        $ 83,903   

Private label mortgage-backed securities

     120         3         —          123   

Industrial revenue bonds

     18,997         —           —          18,997   

State of Israel bonds

     150         —           —          150   

Municipal bonds

     6,626         427         —          7,053   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 107,612       $ 2,614       $ —        $ 110,226   
  

 

 

    

 

 

    

 

 

   

 

 

 

December 31, 2011:

          

Government-sponsored and government- guaranteed mortgage-backed securities

   $ 89,955       $ 2,026       $ (32   $ 91,949   

Private label mortgage-backed securities

     163         4         —          167   

Industrial revenue bonds

     19,000         —           —          19,000   

State of Israel bonds

     150         —           —          150   

Municipal bonds

     6,629         416         —          7,045   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 115,897       $ 2,446       $ (32   $ 118,311   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The scheduled maturities of debt securities available for sale and held to maturity at March 31, 2012 are shown below. Actual maturities will differ from contractual maturities because issuers generally have the right to call or prepay obligations with or without call or prepayment penalties.

 

     At March 31, 2012  
     Securities
Available for Sale
     Securities
Held to Maturity
 
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Due in one year or less

   $ 174       $ 178       $ 520       $ 522   

Due from one year to five years

     98         106         498         526   

Due from five years to ten years

     5,014         5,390         1,355         1,474   

Due after ten years

     4,101         4,585         23,400         23,678   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 9,387       $ 10,259       $ 25,773       $ 26,200   

Mortgage-backed securities

     212,207         222,841         81,839         84,026   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 221,594       $ 233,100       $ 107,612       $ 110,226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Maturities are based on the final contractual payment dates, and do not reflect the impact of potential prepayments or early redemptions. Such securities have been classified within the category that represents the final maturity date.

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.

Gross unrealized losses and fair values at March 31, 2012 and December 31, 2011 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 March 31, 2012:

                  

Securities Available for Sale

                  

Debt Securities:

                  

Government-sponsored and government-guaranteed mortgage-backed securities

   $ 17,529       $ (93   $ —         $ —          4       $ 17,529       $ (93

Private label mortgage-backed securities

     —           —          579         (9     1         579         (9

Municipal bonds

     284         (5     —           —          1         284         (5

Corporate bonds

     —           —          198         (131     1         198         (131
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 17,813       $ (98   $ 777       $ (140     7       $ 18,590       $ (238
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

There were no securities classified as held to maturity in an unrealized loss position as of March 31, 2012.

 

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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, 2011:

                  

Securities Available for Sale

                  

Debt Securities:

                  

Private label mortgage-backed securities

   $ —         $ —        $ 614       $ (17     1       $ 614       $ (17

Corporate bonds

     —           —          198         (131     1         198         (131
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —        $ 812       $ (148     2       $ 812       $ (148
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Securities Held to Maturity

                  

Government-sponsored and government-guaranteed mortgage- backed securities

   $ 7,444       $ (32   $ —         $ —          2       $ 7,444       $ (32
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 7,444       $ (32   $ —         $ —          2       $ 7,444       $ (32
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Management has determined that no declines in the fair value of the Company’s securities portfolio are deemed to represent other-than-temporary impairment as of March 31, 2012. 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 G – LOANS

The components of the loan portfolio were as follows at March 31, 2012 and December 31, 2011:

 

      March 31,
2012
    December 31,
2011
 
Commercial:     

Commercial and industrial

   $ 181,512      $ 176,086   

Commercial mortgages

     467,022        450,180   

Construction

     30,191        30,271   
Consumer:     

Residential mortgages

     312,065        314,839   

Home equity

     134,368        135,518   

Consumer

     14,186        14,985   
  

 

 

   

 

 

 

Total loans

     1,139,344        1,121,879   

Net deferred loan costs and fees

     2,255        2,194   

Allowance for loan losses

     (11,325     (11,132
  

 

 

   

 

 

 

Loans, net

   $ 1,130,274      $ 1,112,941   
  

 

 

   

 

 

 

The Company transferred a portion of its originated commercial real estate and commercial and industrial loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated statements of condition. The Company and participating lenders share ratably in any losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At March 31, 2012 and December 31, 2011, the Company was servicing loans for participants aggregating $43.3 million and $43.8 million, respectively.

 

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During the first quarter of 2012, the Company transferred a portion of an originated commercial real estate loan to a participant, which did not meet the requirements to be considered a participating interest. The transferred portion is reported as secured borrowings on the statement of condition, in the amount of $1.6 million. Total secured borrowings were $2.0 million at March 31, 2012 and are reported in long-term debt on the consolidated statement of condition.

A summary of the activity pertaining to the allowance for loan losses for the three months ended March 31, 2012 and 2011 is as follows:

 

      Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential     Home
Equity
    Consumer     Unallocated      Total  

At March 31, 2012:

                 

Beginning balance

   $ 3,446      $ 5,572      $ 860      $ 666      $ 474      $ 114      $ —         $ 11,132   

Charge-offs

     (128     (216     (76     (88     —          (5     —           (513

Recoveries

     30        25        1        —          —          —          —           56   

Provision

     72        229        20        266        (64     (3     130         650   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,420      $ 5,610      $ 805      $ 844      $ 410      $ 106      $ 130       $ 11,325   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

      Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential     Home
Equity
    Consumer     Unallocated      Total  

At March 31, 2011:

                 

Beginning balance

   $ 2,801      $ 5,000      $ 668      $ 740      $ 623      $ 155      $ —         $ 9,987   

Charge-offs

     (325     (112     (28     —          —          —          —           (465

Recoveries

     136        —          —          —          —          2        —           138   

Provision

     500        390        227        (119     (146     (44     —           808   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance

   $ 3,112      $ 5,278      $ 867      $ 621      $ 477      $ 113      $ —         $ 10,468   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Further information pertaining to the allowance for loan losses as of March 31, 2012 and December 31, 2011 is as follows:

 

     Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential     Home
Equity
    Consumer     Unallocated     Total  

At March 31, 2012:

               

Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment

  $ 225      $ 125      $ 30      $ —        $ —        $ —        $ —        $ 380   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment

  $ 3,195      $ 5,485      $ 775      $ 844      $ 410      $ 106      $ 130      $ 10,945   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 181,512      $ 467,022      $ 30,191      $ 312,065      $ 134,368      $ 14,186      $ —        $ 1,139,344   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired and individually evaluated for impairment

  $ 5,241      $ 3,552      $ 803      $ —        $ —        $ —        $ —        $ 9,596   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired and collectively evaluated for impairment

  $ 175,954      $ 462,834      $ 29,388      $ 312,065      $ 134,368      $ 14,186      $ —        $ 1,128,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality and deemed to be impaired

  $ 317      $ 636      $ —        $ —        $ —        $ —        $ —        $ 953   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Commercial
and
Industrial
    Commercial
Real Estate
    Construction     Residential     Home
Equity
    Consumer     Unallocated     Total  

At December 31, 2011:

               

Amount of allowance for loan losses for loans deemed to be impaired and individually evaluated for impairment

  $ 65      $ —        $ 70      $ —        $ —        $ —        $ —        $ 135   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans not deemed to be impaired and collectively evaluated for impairment

  $ 3,381      $ 5,472      $ 790      $ 666      $ 474      $ 114      $ —        $ 10,897   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amount of allowance for loan losses for loans acquired with deteriorated credit quality

  $ —        $ 100      $ —        $ —        $ —        $ —        $ —        $ 100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 176,086      $ 450,180      $ 30,271      $ 314,839      $ 135,518      $ 14,985      $ —        $ 1,121,879   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans deemed to be impaired and individually evaluated for impairment

  $ 3,084      $ 1,770      $ 330      $ 1,169      $ 56      $ 163      $ —        $ 6,572   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans not deemed to be impaired and collectively evaluated for impairment

  $ 172,582      $ 446,939      $ 29,941      $ 313,422      $ 135,462      $ 14,822      $ —        $ 1,113,168   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans acquired with deteriorated credit quality and deemed to be impaired

  $ 420      $ 1,471      $ —        $ 248      $ —        $ —        $ —        $ 2,139   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following is a summary of past due loans at March 31, 2012 and December 31, 2011:

 

      30-59 Days
Past Due
     60-89 Days
Past Due
     90 Days
and Over
Past Due
     Total
Past
Due
     Current      Total
Financing
Receivables
     Recorded
Investments
> 90 Days
and Accruing
 

At March 31, 2012:

                    

Commercial:

                    

Commercial and industrial

   $ 1,166       $ 112       $ 2,841       $ 4,119       $ 177,393       $ 181,512       $ —     

Commercial real estate

     3,274         340         2,279         5,893         461,129         467,022         —     

Construction

     2,043         —           190         2,233         27,958         30,191         —     

Consumer:

                    

Residential real estate

     6,901         —           1,168         8,069         303,996         312,065         —     

Home equity

     662         —           120         782         133,586         134,368         —     

Consumer

     210         —           92         302         13,884         14,186         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 14,256       $ 452       $ 6,690       $ 21,398       $ 1,117,946       $ 1,139,344       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At December 31, 2011:

                    

Commercial:

                    

Commercial and industrial

   $ 544       $ 205       $ 2,728       $ 3,477       $ 172,609       $ 176,086       $ —     

Commercial real estate

     2,518         1,028         2,131         5,677         444,503         450,180         —     

Construction

     —           —           330         330         29,941         30,271         —     

Consumer:

                    

Residential real estate

     8,747         1,984         1,417         12,148         302,691         314,839         —     

Home equity

     1,087         —           56         1,143         134,375         135,518         —     

Consumer

     376         1         163         540         14,445         14,985         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,272       $ 3,218       $ 6,825       $ 23,315       $ 1,098,564       $ 1,121,879       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following is a summary of impaired loans at March 31, 2012 and December 31, 2011:

 

      At March 31, 2012      At December 31, 2011  
      Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

With no related allowance recorded:

                 

Commercial and industrial

   $ 4,564       $ 4,564          $ 1,379       $ 2,115      

Commercial real estate

     3,065         3,183            1,961         2,073      

Construction

     613         613            190         259      

Residential real estate

     —           —              1,417         1,417      

Home Equity

     —           —              56         56      

Consumer

     —           —              164         164      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

   $ 8,242       $ 8,360          $ 5,167       $ 6,084      
  

 

 

    

 

 

       

 

 

    

 

 

    

With an allowance recorded:

                 

Commercial and industrial

   $ 677       $ 677       $ 225       $ 2,125       $ 2,125       $ 65   

Commercial real estate

     487         487         125         1,279         1,279         100   

Construction

     190         259         30         140         140         70   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,354       $ 1,423       $ 380       $ 3,544       $ 3,544       $ 235   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By portfolio segment:

                 

Commercial portfolio segment

   $ 9,596       $ 9,783       $ 380       $ 7,074       $ 7,991       $ 235   

Consumer portfolio segment

     —           —           —           1,637         1,637         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 9,596       $ 9,783       $ 380       $ 8,711       $ 9,628       $ 235   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of information pertaining to impaired and non-accrual loans:

 

      Three Months Ended
March 31, 2012
     Three Months Ended
March 31, 2011
 
      Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on a Cash
Basis
     Average
Recorded
Investment
     Interest
Income
Recognized
     Interest
Income
Recognized
on a Cash
Basis
 

Commercial:

                 

Commercial and industrial

   $ 3,982       $ 8       $ 8       $ 2,940       $ 4       $ 4   

Commercial real estate

     3,540         15         5         6,405         92         37   

Construction

     720         7         —           1,218         9         9   

Consumer:

                 

Residential real estate

     —           —           —           697         5         5   

Home Equity

     —           —           —           34         —           —     

Consumer

     —           —           —           70         2         2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,242       $ 30       $ 13       $ 11,364       $ 112       $ 57   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is a summary of non-accrual loans, at March 31, 2012 and December 31, 2011:

 

      March 31,
2012
     December 31,
2011
 

Commercial:

     

Commercial and industrial

   $ 5,102       $ 3,504   

Commercial real estate

     2,341         2,984   

Construction

     190         330   

Consumer:

     

Residential real estate

     1,168         1,417   

Home equity

     120         56   

Consumer

     93         163   
  

 

 

    

 

 

 

Total

   $ 9,014       $ 8,454   
  

 

 

    

 

 

 

 

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Table of Contents

The following table represents modifications that were deemed to be troubled debt restructures for the three months ended March 31, 2012:

 

     Three Months Ended
March 31, 2012
     Three Months Ended
March 31, 2011
 
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
     Number of
Contracts
     Pre-Modification
Outstanding
Recorded
Investment
     Post-Modification
Outstanding
Recorded
Investment
 

Troubled Debt Restructurings

                 

Commercial:

                 

Commercial and industrial

     1       $ 140       $ 140         —         $ —         $ —     

Commercial real estate

     4         1,211         1,211         1         248         263   

Construction

     2         613         613         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     7       $ 1,964       $ 1,964         1       $ 248       $ 263   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The modifications provided on one commercial and industrial loan and four commercial real estate loans are related to one borrower relationship. The modification extended the maturity of demand notes that had reached maturity. The modifications provided on the two construction loans are related to one borrower relationship. The modification extended the maturity of demand notes that had reached maturity. Management performs a discounted cash flow calculation or collateral analysis if the loan is collateral dependent to determine the amount of impaired reserve required on each of the troubled debt restructures. Any reserve required is recorded through the provision for loan losses.

As of March 31, 2012, there have been no TDR’s that have subsequently defaulted within one year of modification.

CREDIT QUALITY INFORMATION

The Company utilizes a nine grade risk rating system for commercial and industrial, commercial real estate and construction loans as follows:

Pass: Loans within these five categories are considered low to average risk.

Special Mention: Loans in this category portray one or more weaknesses that may be tolerated in the short run. Assets in this category are currently protected but are potentially weak and are being closely monitored by management.

Substandard: Loans in this category are considered inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Doubtful: Loans in this category have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. The possibility of loss is extremely high, however, its classification as an estimated loss is deferred until a more exact determination of the extent of the loss is ascertained.

Loss: Loans in this category are considered uncollectible and of such little value that their continuance as loans is not warranted.

The Company does not assign risk ratings to residential real estate, home equity and mobile home consumer loans unless they are contractually past due 90 days or more or where legal action has commenced against the borrower. All other consumer loans are charged off when they become contractually past due 120 days. Loans not assigned a rating are considered “pass.”

 

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Table of Contents

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial and industrial, commercial real estate and construction loans. Semi-annually, the Company engages an independent third party to review loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table presents the Company’s loan segment by internally assigned grades:

 

    At March 31, 2012     At December 31, 2011  
    Commercial
& Industrial
    Commercial
Real Estate
    Construction     Total     Commercial
& Industrial
    Commercial
Real Estate
    Construction     Total  

Commercial:

               

Grade:

               

Pass

  $ 163,820      $ 443,704      $ 23,879      $ 631,403      $ 157,026      $ 419,818      $ 23,955      $ 600,799   

Special Mention

    8,384        7,159        948        16,491        7,730        10,965        1,057        19,752   

Substandard

    8,631        16,159        5,364        30,154        11,230        19,397        5,259        35,886   

Doubtful

    677        —          —          677        100        —          —          100   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 181,512      $ 467,022      $ 30,191      $ 678,725      $ 176,086      $ 450,180      $ 30,271      $ 656,537   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Residential     Home Equity     Consumer     Total     Residential     Home Equity     Consumer     Total  

Consumer:

               

Grade:

               

Pass

  $ 309,614      $ 134,107      $ 14,036      $ 457,757      $ 311,921      $ 135,253      $ 14,723      $ 461,897   

Special Mention

    —          —          —          —          52        —          —          52   

Substandard

    2,451        261        150        2,862        2,866        265        262        3,393   

Doubtful

    —          —          —          —          —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 312,065      $ 134,368      $ 14,186      $ 460,619      $ 314,839      $ 135,518      $ 14,985      $ 465,342   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE H – COMMITMENTS

Financial instruments with off-balance sheet risk at March 31, 2012 and December 31, 2011 were as follows:

 

      March 31,
2012
     December 31,
2011
 

Unused lines of credit

   $ 254,953       $ 250,034   

Amounts due mortgagors

     25,466         27,495   

Standby letters of credit

     3,385         4,004   

Commitments to originate loans

     42,626         32,689   

The Company has a commitment to invest up to $1.0 million in a venture capital fund. As of March 31, 2012, the Company has contributed $700,000 to the fund.

The Company has also committed to invest up to $10.0 million, representing 25% of the Class A or senior investor balance, in a low income housing tax credits fund by the end of 2014. At March 31, 2012, the Company has invested $5.2 million in the fund, which has been reduced by net operating losses of $1.2 million. The net carrying balance of $4.0 million is included in other assets on the Company’s consolidated statement of condition. As a Class A investor, the Company has the right to transfer its investment to the fund’s Class B investor at the end of 10 years at which time the Company would have no compliance requirements or interest in the fund. The fund structure contemplates that the Class A investors will receive 95% of the tax credits and tax benefits from net operating losses for a period of eight years or until the minimum investment return has been met. Tax benefits in the form of net operating losses are recognized as they are incurred and recorded in non-interest expense.

 

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Table of Contents

NOTE I – DEPOSITS

Deposit accounts, by type, are summarized as follows at March 31, 2012 and December 31, 2011:

 

     March 31,
2012
     December 31,
2011
 

Demand

   $ 208,553       $ 205,902   

NOW

     58,078         52,899   

Savings

     263,076         247,664   

Money market

     311,684         301,770   

Certificates of deposit

     417,238         421,740   
  

 

 

    

 

 

 
   $ 1,258,629       $ 1,229,975   
  

 

 

    

 

 

 

NOTE J – CONTINGENCIES

The Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to its foreclosure on a certain loan property. The litigants claim that Commonwealth National Bank acted in bad faith and in violation of applicable law and that its actions resulted in a sale of the underlying property for less than its market value, thereby causing damage to the parties. During the third quarter of 2011 the judge issued a ruling in favor of the Bank. The litigants have appealed the decision. The Bank believes these claims and the appeal are without merit and is vigorously defending the litigation. No estimate of any reasonably possible loss or range of loss to the Bank can be made at this time.

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

NOTE K – FAIR VALUES OF ASSETS AND LIABILITIES

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 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. Level 2 includes U.S. government and mortgage-backed securities issued by government-sponsored enterprises. 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. Level 3 also includes corporate bonds that have fair values derived from unobserable issuer-provided financial information and discounted cash flow models.

 

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Table of Contents

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

 

      Level 1      Level 2      Level 3      Total
Fair Value
 

At March 31, 2012

           

Securities available for sale:

           

Government-sponsored enterprises

   $ —         $ 178       $ —         $ 178   

Government-sponsored and government-guaranteed mortgage-backed securities

     —           220,868         —           220,868   

Private label mortgage-backed securities

     —           1,973         —           1,973   

Municipal bonds

     —           8,366         —           8,366   

Corporate bonds

     —           —           1,715         1,715   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 231,385       $ 1,715       $ 233,100   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

      Level 1      Level 2      Level 3      Total
Fair Value
 

At December 31, 2011

           

Securities available for sale:

           

Government-sponsored enterprises

   $ —         $ 192       $ —         $ 192   

Government-sponsored and government-guaranteed mortgage-backed securities

     —           209,493         —           209,493   

Private label mortgage-backed securities

     —           2,178         —           2,178   

Municipal bonds

     —           8,384         —           8,384   

Corporate bonds

     —           —           1,566         1,566   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ 220,247       $ 1,566       $ 221,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company had no liabilities measured at fair value on a recurring basis at March 31, 2012 or December 31, 2011.

The table below presents the changes in Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2012.

 

Balance at December 31, 2011

   $  1,566   

Change in unrealized gain

     149   
  

 

 

 

Balance at March 31, 2012

   $ 1,715   
  

 

 

 

Due to the lack of observable market data, corporate bonds were included in Level 3 of the fair value hierarchy. The fair value has been derived by third party pricing services using pricing models and techniques which require significant judgment and estimation. Pricing models and techniques are dependent upon several unobservable inputs including the discount rate, the interest rate environment, credit defaults and losses and financial performance.

There were no transfers in or out of levels 1 and 2.

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 tables summarize the fair value hierarchy used to determine the adjustment and the carrying value of the related individual assets for the three months ended March 31, 2012 and 2011.

 

23


Table of Contents
                          Three Months Ended
March  31, 2011
 
      At March 31, 2012      Total
Losses
 
      Level 1      Level 2      Level 3     

Assets:

           

Loans

   $ —         $ —         $ 1,015       $ 214   

Other real estate owned

     —           —           790         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ —         $ 1,805       $ 214   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                          Three Months Ended
March  31, 2011
 
      At March 31, 2011      Total
Losses
 
      Level 1      Level 2      Level 3     

Assets:

           

Loans

   $ —         $ —         $ 4,343       $ 140   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

   $ —         $ —         $ 4,343       $ 140   
  

 

 

    

 

 

    

 

 

    

 

 

 

The amount of loans represents the carrying value of impaired loans net of related write-downs and valuation allowances for which adjustments are based on the estimated fair value of the underlying collateral.

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. The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

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 industrial, construction 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 assumptions developed by management and a valuation model provided by a third party specialist.

The fair values of residential mortgage, commercial real estate, commercial and industrial, construction 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 considered 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. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

 

24


Table of Contents

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 having similar remaining maturities.

Short-term Borrowings. For short-term borrowings maturing within one year, carrying values approximate fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Long-term Debt. The fair values of the Company’s long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

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 G, the fair value equals the carrying amounts which are not significant.

Summary of Fair Values of Financial Instruments. The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company.

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

 

      At March 31, 2012  
      Carrying
Value
     Level 1      Level 2      Level 3      Estimated
Fair Value
 

Financial Assets:

              

Cash and cash equivalents

   $ 75,548       $ 75,548       $ —         $ —         $ 75,548   

Securities available for sale

     233,100         —           231,385         1,715         233,100   

Securities held to maturity

     107,612         —           110,226         —           110,226   

Stock in Federal Home Loan Bank of Boston

     14,454         —           —           14,454         14,454   

Net loans

     1,130,274         —           —           1,154,101         1,154,101   

Financial Liabilities:

              

Deposits (with no stated maturity)

     841,391         —           —           841,391         841,391   

Time deposits

     417,238         —           —           424,585         424,585   

Federal Home Loan Bank of Boston advances

     104,661         —           —           108,608         108,608   

Repurchase agreements

     43,561         —           —           43,522         43,522   

Subordinated debentures

     5,562         —           5,562         —           5,562   

 

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      At December 31, 2011  
      Carrying
Value
     Level 1      Level 2      Level 3      Estimated
Fair Value
 

Financial Assets:

              

Cash and cash equivalents

   $ 61,518       $ 61,518       $ —         $ —         $ 61,518   

Securities available for sale

     221,813         —           220,247         1,566         221,813   

Securities held to maturity

     115,897         —           118,311         —           118,311   

Stock in Federal Home Loan Bank of Boston

     15,365         —           —           15,365         15,365   

Net loans

     1,112,941         —           —           1,150,955         1,150,955   

Financial Liabilities:

              

Deposits (with no stated maturity)

     808,235         —           —           808,235         808,235   

Time deposits

     421,740         —           —           429,676         429,676   

Federal Home Loan Bank of Boston advances

     106,417         —           —           110,201         110,201   

Repurchase agreements

     37,260         —           —           37,347         37,347   

Subordinated debentures

     5,539         —           5,539         —           5,539   

NOTE L – 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 March 31, 2012 and 2011. The following table presents the components of the net periodic benefit cost for the indicated periods:

 

      For the Three Months Ended March 31,  
      2012      2011  
      SERP      Director
Retirement
Plan
     SERP      Director
Retirement
Plan
 

Periodic benefit cost:

           

Service cost

   $ 79       $ 23       $ 84       $ 23   

Interest cost

     44         14         46         14   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total pension cost

     123         37         130         37   

Prior service cost amortization

     29         9         35         9   

Net loss amortization

     —           3         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net periodic benefit cost

   $ 152       $ 49       $ 165       $ 49   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, 2011 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 2012.

 

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

Forward-Looking Statements

This report may contain forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. Forward-looking statements are generally preceded by terms such as “expects,” “believes,” “anticipates,” “intends” or similar expressions. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements provided that the Company notes factors that could cause the Company’s actual results to differ materially from the anticipated results expressed in the Company’s forward-looking statements. Factors that may cause actual results to differ materially from those projected in the forward-looking statements include, but are not limited to, general economic conditions, changes in market interest rates and real estate values, changes in the size, composition or risks in the loan portfolio, loan or deposit demand, changes in asset quality, including levels of delinquent, classified and charged-off loans, legislative, accounting or regulatory changes, and significant increases in competitive pressures. Additional factors are discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 under “Item 1A. Risk Factors”. These

 

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risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Forward-looking statements speak only as of the date they are made and the Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date of the forward-looking statements or to reflect the occurrence of unanticipated events. Accordingly, past results and trends should not be used by investors to anticipate future results or trends.

Comparison of Financial Condition at March 31, 2012 and December 31, 2011

Total assets increased $36.4 million, or 2.2%, to $1.66 billion at March 31, 2012 from $1.62 billion at December 31, 2011 reflecting growth in net loans, interest-bearing deposits and securities available for sale, partially offset by a decrease in held to maturity investment securities. Net loans increased $17.3 million, or 1.6%, to $1.13 billion at March 31, 2012 from $1.11 billion at December 31, 2011 reflecting growth in our commercial loan portfolios. Commercial mortgages increased $16.8 million, or 3.7%, and commercial and industrial loans increased $5.4 million, or 3.1%, primarily attributable to business development efforts, competitive products and pricing and the establishment of a loan production office in Beverly, Massachusetts during the second quarter of 2011. These increases were offset by a decrease in our consumer portfolio, which reflects a modest run-off in residential mortgages of $2.8 million, or 0.9%, home equity loans and lines of credit of $1.2 million, or 0.9% and consumer loans of $799,000, or 5.3%. The decrease in residential mortgages was driven by payments and on sales of 30-year fixed rate loan originations totaling $4.1 million, offset to a large extent by originations of 10 and 15-year fixed rate loans. Interest-bearing deposits increased $14.7 million, or 35.4%, to $56.1 million at March 31, 2012 from $41.4 million at December 31, 2011 mainly due to strong deposit growth. Securities available for sale increased $11.3 million, or 5.1%, to $233.1 million at March 31, 2012 from $221.8 million at December 31, 2011 primarily due to purchases of fixed-rate agency mortgage-backed securities totaling $25.9 million, partially offset by repayments of government-sponsored agency debt and mortgage-backed securities of $14.1 million. Securities held to maturity decreased $8.3 million, or 7.1%, to $107.6 million at March 31, 2012 from $115.9 million at December 31, 2011 as a result of repayments of government-sponsored agency debt and mortgage-backed securities.

Total deposits increased $28.7 million, or 2.3%, to $1.26 billion at March 31, 2012 compared to $1.23 billion at December 31, 2011 primarily due to growth in core deposit accounts of $33.2 million, or 4.1%, to $841.4 million at March 31, 2012 from $808.2 million at December 31, 2011. The growth in core deposit account balances was driven by the success of sales and marketing initiatives, 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 $4.5 million, or 1.1%, to $417.2 million at March 31, 2012 compared to $421.7 million at December 31, 2011 resulting from customers’ preference for savings and money market accounts due to the low rate environment. Short-term borrowings increased $6.3 million, or 36.5%, to $23.6 million at March 31, 2012 from $17.3 million at December 31, 2011 mainly due to growth in overnight repurchase agreements. At March 31, 2012, the Company continued to have considerable liquidity including significant unused borrowing capacity at the FHLBB and the Federal Reserve Bank of Boston and access to funding through the repurchase agreement and brokered deposit markets.

Total stockholders’ equity decreased $113,000, or 0.05%, to $227.2 million at March 31, 2012 from $227.4 million at December 31, 2011 as a result of repurchases of common stock totaling $2.1 million, cash dividend payments amounting to $1.3 million and a decrease in accumulated other comprehensive income of $203,000. These decreases were partially offset by net income of $2.8 million, stock-based compensation credits totaling $362,000 and ESOP compensation of $283,000.

Credit Quality and Reserve Coverage

The Company actively manages credit risk through its underwriting practices, loan review activities and collection operations, and does not offer nor has it historically offered residential mortgage and other consumer loans to subprime or Alternative-A-paper borrowers. All loans where the interest payment is 90 days or more in arrears as of the closing date of each month are placed on non-accrual status. Non-accrual loans totaled $9.0 million, or 0.79% of total loans, at March 31, 2012 compared to $8.5 million, or 0.75% of total

 

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loans, at December 31, 2011. The increase within non-accrual loans was primarily attributable to the addition of two non-performing commercial and industrial loans totaling $2.3 million offset by decreases of $643,000 in commercial mortgages and $249,000 in residential mortgages. Classified loans decreased $9.0 million, or 15.2%, to $50.2 million at March 31, 2012 and include thirteen relationships which represent 56% of the total. Of the $2.4 million in other real estate owned, $1.6 million is under a sales contract with a closing expected in the second quarter of 2012. Refer to “Note G – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for additional disclosures about credit quality.

At March 31, 2012 and December 31, 2011, the ratio of the allowance for loan losses to total loans was 0.99%. Excluding the impact of acquired loans totaling $154.7 million at March 31, 2012 and $168.0 million at December 31, 2011, the ratio of the allowance for loan losses to total loans would have been 1.15% at March 31, 2012 and 1.17% at December 31, 2011. Net charge-offs totaled $457,000, or 0.16% of average loans outstanding on an annualized basis, for the three months ended March 31, 2012 as compared to net charge-offs of $327,000, or 0.12% of average loans outstanding on an annualized basis, for the same period in 2011 and consisted primarily of commercial loans. Refer to “Note G – Loans” in the Notes to the Unaudited Consolidated Financial Statements in this report for disclosures about the allowance for loan losses.

Comparison of Operating Results for the Three Months Ended March 31, 2012 and 2011

Overview

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

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

Net Income. Net income increased $420,000, or 17.3%, to $2.8 million for the first quarter of 2012 compared to net income of $2.4 million for the same period in 2011 due to an increase in net interest income of $309,000, growth in non-interest income of $424,000 and a decrease in provision for loan losses of $158,000, offset in part by higher non-interest expense of $335,000. Diluted earnings per share increased $0.03, or 18.8%, to $0.19 for the three months ended March 31, 2012 compared to $0.16 for the same period last year due to improved earnings and a decrease in weighted average shares outstanding as a result of share repurchase activity.

 

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

 

      Three Months Ended March 31,  
      2012     2011  
      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)

   $ 315,439       $ 3,712         4.71   $ 313,619       $ 3,927         5.01

Commercial real estate

     491,552         6,943         5.65     455,123         6,765         5.95

Home equity

     135,891         1,231         3.62     137,805         1,307         3.79

Commercial and industrial

     175,687         1,993         4.54     165,028         2,221         5.38

Consumer and other

     14,974         196         5.24     19,221         267         5.56
  

 

 

    

 

 

      

 

 

    

 

 

    

Total loans(2)

     1,133,543         14,075         4.97     1,090,796         14,487         5.31

Investment securities

     338,405         2,855         3.37     341,804         3,191         3.73

Other interest-earning assets

     54,067         41         0.30     61,346         40         0.26
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-earning assets

     1,526,015         16,971         4.45     1,493,946         17,718         4.74

Noninterest-earning assets(3)

     102,056              85,102         
  

 

 

         

 

 

       

Total assets

   $ 1,628,071            $ 1,579,048         
  

 

 

         

 

 

       

Interest-bearing liabilities:

                

Savings accounts

   $ 254,668         368         0.58   $ 211,758         406         0.77

Money market accounts

     303,684         442         0.58     262,220         494         0.75

NOW accounts

     48,478         40         0.33     39,589         43         0.43

Certificates of deposit

     418,420         1,903         1.82     456,692         2,354         2.06
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing deposits

     1,025,250         2,753         1.07     970,259         3,297         1.36

FHLB advances

     105,302         822         3.12     147,880         1,303         3.52

Other interest-bearing liabilities

     51,899         296         2.28     52,152         327         2.51
  

 

 

    

 

 

      

 

 

    

 

 

    

Total interest-bearing liabilities

     1,182,451         3,871         1.31     1,170,291         4,927         1.68

Demand deposits

     206,035              175,037         

Other noninterest-bearing liabilities

     11,731              10,653         
  

 

 

         

 

 

       

Total liabilities

     1,400,217              1,355,981         

Stockholders’ equity

     227,854              223,067         
  

 

 

         

 

 

       

Total liabilities and stockholders’ equity

   $ 1,628,071            $ 1,579,048         
  

 

 

         

 

 

       

Net interest income

      $ 13,100            $ 12,791      
     

 

 

         

 

 

    

Interest rate spread(4)

           3.14           3.06

Net interest-earning assets(5)

   $ 343,564            $ 323,655         
  

 

 

         

 

 

       

Net interest margin(6)

           3.43           3.42

Average interest-earning assets to average interest-bearing liabilities

           129.06           127.66

 

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

 

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

 

      Three Months Ended
March 31, 2012 vs. 2011
 
      Increase (Decrease) Due to    

 

 
      Volume     Rate     Net  
           (In thousands)        

Interest-earning assets:

      

Loans:

      

Residential real estate(1)

   $ 23      $ (238   $ (215

Commercial real estate

     524        (346     178   

Home equity

     (18     (58     (76

Commercial and industrial

     136        (364     (228

Consumer and other

     (57     (14     (71
  

 

 

   

 

 

   

 

 

 

Total loans

     608        (1,020     (412

Investment securities

     (32     (304     (336

Other interest-earning assets

     (5     6        1   
  

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     571        (1,318     (747
  

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

      

Savings accounts

     73        (111     (38

Money market accounts

     71        (123     (52

NOW accounts

     9        (12     (3

Certificates of deposit

     (187     (264     (451
  

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (34     (510     (544

FHLB advances

     (344     (137     (481

Other interest-bearing liabilities

     (2     (29     (31
  

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (380     (676     (1,056
  

 

 

   

 

 

   

 

 

 

Change in net interest income

   $ 951      $ (642   $ 309   
  

 

 

   

 

 

   

 

 

 

 

(1) Includes loans held for sale.

Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $309,000, or 2.4%, to $13.1 million for the first quarter of 2012 from $12.8 million for the same period in 2011 as a result of higher average interest-earning assets and modest expansion in interest rate spread. Total average interest-earning assets increased $32.1 million, or 2.1%, to $1.53 billion for the three months ended March 31, 2012, mainly due to growth in commercial loan balances, partially offset by a decrease in investment securities and interest-earning cash balances. The interest rate spread increased 8 basis point to 3.14% for the three months ended March 31, 2012 from 3.06% for the same period in 2011.

Interest Income. Interest income decreased $747,000, or 4.2%, to $17.0 million for the three months ended March 31, 2012 from $17.7 million for the prior year period due to a lower yield on average interest-earning assets, partially offset by growth in average interest-earning assets. The yield on average interest-earning assets decreased by 29 basis points to 4.45% for the first quarter of 2012 in connection with the lower interest rate environment. The decrease in market rates contributed to the downward repricing of a portion of the Company’s existing assets and to lower rates for new assets.

 

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Interest Expense. Interest expense decreased $1.1 million, or 21.4%, to $3.9 million for the three months ended March 31, 2012 from $4.9 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 37 basis points to 1.31% for the three months ended March 31, 2012 reflecting the repricing of savings, money market, NOW accounts and certificate of deposit balances in response to the lower interest rate environment. Average interest-bearing liabilities increased $12.2 million, or 1.0%, to $1.18 billion for the three months ended March 31, 2012 from $1.17 billion for the prior year period reflecting growth of $55.0 million, or 5.7%, in interest-bearing deposits attributable to attractive products, competitive pricing and excellent customer service, partially offset by a decrease of $42.6 million, or 28.8%, in average FHLBB advances as a result of payoffs.

Provision for Loan Losses. The allowance for loan losses is based on management’s estimate of the probable losses inherent in the portfolio, considering the impact of 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 non-performing loans, classified and impaired loans, and delinquency rates and the performance of individual loans in relation to contractual terms. The provision for loan losses reflects adjustments to the allowance based on management’s review of the loan portfolio in light of those conditions. The provision for loan losses decreased by $158,000, or 19.6%, to $650,000 for the three months ended March 31, 2012 from $808,000 for the same period in 2011, driven by reductions in loan loss reserve factors and classified loans. The decrease in loan loss reserve factors reflects improving asset quality trends and positive changes in economic conditions. The allowance for loan losses was $11.3 million, or 0.99% of loans outstanding at March 31, 2012. Excluding the impact of acquired loans, the ratio of the allowance for loan losses to total loans would have been 1.15%.

Non-interest Income. Non-interest income increased $424,000, or 19.7%, to $2.6 million for the first quarter of 2012 from $2.1 million for the same period in 2011. Fee income on depositor’s accounts increased $116,000, or 9.0%, driven by higher overdraft fees and growth in ATM and debit card income. Bank-owned life insurance income increased $109,000, or 32.9%, due to the purchase of an additional $10.0 million investment in the second quarter of 2011. Net gains from loan sales increased $85,000 due to an increase in the volume and pricing.

Non-interest Expense. Non-interest expense increased $335,000, or 3.1%, to $11.3 million for the first quarter of 2012 from $10.9 million in the same period last year mainly driven by increases in other expenses and salaries and benefits, partially offset by a decrease in professional fees. Other expenses expanded $278,000, or 23.1%, reflecting increases of $180,000 in depreciation and $104,000 in mortgage servicing rights write-downs. The increase in depreciation expenses was due to an adjustment in the first quarter of 2011 related to the Company’s acquisition of CNB Financial Corp. in November 2009. Salaries and benefits increased $173,000, or 2.8%, primarily due to annual wage increases, staffing costs related to the new loan production office opened in Beverly, Massachusetts in the second quarter of 2011 and a higher incentive compensation accrual, offset in part by lower stock-based compensation. These increases were partially offset by a decrease of $155,000, or 23.4%, in professional fees related to lower legal and consulting activities and a decrease of $61,000, or 18.5%, in FDIC premium expense, which reflects the positive impact of the new assessment calculation that became effective April 1, 2011.

Income Tax Expense. Income tax expense increased $136,000, or 17.8%, to $899,000 for the first quarter of 2012 from $763,000 in the same period last year primarily due to higher pretax income. The effective tax rate in the first quarters of 2012 and 2011 was 23.9%.

 

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Market Risk, Liquidity and Capital Resources

Market Risk

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

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

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII for the following twelve months, resulting from an instantaneous and sustained parallel shift in the yield curve of +200 and -100 basis points at March 31, 2012 and December 31, 2011.

 

Net Interest Income At-Risk

Change in Interest Rates

(Basis Points)

  

Estimated Increase (Decrease)

in NII

(March 31, 2012)

  

Estimated Increase (Decrease)

in NII

(December 31, 2011)

-100

   (4.1)%    (3.9)%

Stable

   0.0%    0.0%

+200

   (0.1)%    (0.3)%

The preceding income simulation analysis is for the Bank and its subsidiaries 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.

 

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Economic Value of Equity Simulation Analysis. The computation of amounts by which the net present value of an institution’s cash flows from assets, liabilities and off-balance sheet items (the institution’s economic value of equity or “EVE”) would change in the event of a range of assumed changes in market interest rates. The model has 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, an economic value of equity 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 tables below set forth, at the dates indicated, the estimated changes in our economic value of equity 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.

 

    

March 31, 2012

                   

EVE as a Percentage of Present

Value of Assets (3)

Change in

Interest Rates

(basis points) (1)

  

Estimated

EVE (2)

   Estimated Increase (Decrease) in         Increase
     

EVE

        (Decrease)
     

Amount

  

Percent

  

EVE Ratio (4)

  

(basis points)

          (Dollars in thousands)          

+300

   $  169,124    $  (54,193)    (24)%    10.83%    (247)

+200

       199,239        (24,078)    (11)        12.39         (90)

+100

       217,547          (5,771)    (3)      13.21           (9)

      0

       223,317            —      —          13.30       —  

-100

       226,414         3,097     1       13.27           (2)

 

    

December 31, 2011

                   

EVE as a Percentage of Present

Value of Assets (3)

Change in

Interest Rates

(basis points) (1)

  

Estimated

EVE (2)

  

Estimated Increase (Decrease) in

EVE

  

EVE Ratio (4)

  

Increase

(Decrease)

(basis points)

     

Amount

  

Percent

     
          (Dollars in thousands)          

+300

   $  183,875    $  (53,540)    (23)%    12.06%    (241)

+200

       213,647        (23,768)    (10)        13.61         (86)

+100

       231,936          (5,479)    (2)      14.42           (6)

      0

       237,415            —      —          14.47       —  

-100

       239,393         1,978       14.38         (10)

 

(1) Assumes an instantaneous uniform change in interest rates at all maturities.
(2) EVE 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) EVE ratio represents EVE divided by the present value of assets.

The tables above indicate that at March 31, 2012 and December 31, 2011, in the event of a 300 basis point increase in interest rates, we would experience a 24% and 23%, respectively, decrease in economic value of equity. In the event of a 100 basis point decrease in interest rates at March 31, 2012 and December 31, 2011, we would experience a 1% increase in economic value of equity.

 

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Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in economic value of equity 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 economic value of equity 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 economic value of equity 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 security 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, mortgage prepayments and loan and investment sales 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 (defined as the sum of cash and liquid assets divided by the sum of total deposits and short-term interest-bearing liabilities) of 10% or greater. At March 31, 2012, our liquidity ratio was 22.18%, compared to 21.00% at December 31, 2011.

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 March 31, 2012, cash and cash equivalents totaled $75.5 million. Securities classified as available for sale and held to maturity, which provide additional sources of liquidity, totaled $233.1 million and $107.6 million, respectively, at March 31, 2012. In addition, at March 31, 2012, we had the ability to borrow a total of approximately $212.6 million from the FHLBB. On that date, we had $103.4 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 March 31, 2012, we had $42.6 million in loan commitments outstanding. In addition to commitments to originate loans, we had $255.0 million in unused lines of credit to borrowers, $3.4 million in standby letters of credit and $25.5 million to be disbursed under existing construction loan commitments. Certificates of deposit due within one year of March 31, 2012 totaled $232.3 million, or 18.5% 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, FHLBB advances, borrowings from the Federal Reserve Bank and repurchase agreements. 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 March 31, 2013. 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 three months ended March 31, 2012, we originated $80.0 million of loans and purchased $25.9 million of securities. In the comparable 2011 period, we originated $72.4 million of loans and purchased $34.2 million of securities.

Financing activities consist primarily of activity in deposit accounts and FHLBB advances. We experienced a net increase in total deposits of $28.7 million and $30.6 million for the three months ended March 31, 2012 and 2011, 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. FHLBB advances decreased by $1.8 million and $11.8 million during the three months ended March 31, 2012 and 2011, respectively, reflecting the use of cash flows received from the loan and investment portfolios and excess deposit funds to pay down FHLBB advances.

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. 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 $12.0 million at March 31, 2012 and December 31, 2011, was approximately $97.2 million at March 31, 2012 and $107.1 million at December 31, 2011. At March 31, 2012 and December 31, 2011, the Bank had no borrowings 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 $82.0 million at March 31, 2012.

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 and to its holders of its subordinated debenture. United Financial also repurchases shares of its common stock. At March 31, 2012, United Financial on an unconsolidated basis had liquid assets of $20.8 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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Table of Contents

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 March 31, 2012. 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

   $ 232,324       $ 148,384       $ 36,529       $ —         $ 417,237   

Federal Home Loan Bank advances

     14,646         48,594         19,137         21,000         103,377   

Repurchase agreements

     23,561         —           —           20,000         43,561   

Subordinated debentures

     —           —           —           7,732         7,732   

Standby letters of credit

     3,385         —           —           —           3,385   

Operating leases

     1,022         1,887         1,487         3,425         7,821   

Capitalized leases

     423         847         848         6,091         8,209   

Future benefits to be paid under retirement plans

     1,064         2,999         1,289         4,679         10,031   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 276,425       $ 202,711       $ 59,290       $ 62,927       $ 601,353   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Commitments:

              

Commitments to extend credit

   $ 326,430       $ —         $ —         $ —         $ 326,430   

Commitment to invest in venture capital fund

     300         —           —           —           300   

Commitment to invest in low income tax credit fund

     3,595         413         —           —           4,008   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 330,325       $ 413       $ —         $ —         $ 330,738   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Capital Resources

The 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 March 31, 2012, 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 March 31, 2012:

      

Total risk-based capital

     15.37     8.00     10.00

Tier 1 risk-based capital

     14.46     4.00     6.00

Tier 1 (core) capital

     10.98     4.00     5.00

Tangible equity

     10.98     1.50     N/A   

As of December 31, 2011:

      

Total risk-based capital

     17.09     8.00     10.00

Tier 1 risk-based capital

     16.17     4.00     6.00

Tier 1 (core) capital

     12.23     4.00     5.00

Tangible equity

     12.23     1.50     N/A   

 

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Table of Contents
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

The Bank, as successor in interest to Commonwealth National Bank, is involved in litigation relating to its foreclosure on a certain loan property. The litigants claim that Commonwealth National Bank acted in bad faith and in violation of applicable law and that its actions resulted in a sale of the underlying property for less than its market value, thereby causing damage to the parties. A trial was held in the third quarter of 2011 and the judge ruled in the Bank’s favor. The litigants have appealed the decision. The Bank believes these claims and the appeal are without merit and is vigorously defending the litigation. No estimate of any reasonably possible loss or range of loss to the Bank can be made at this time.

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

 

ITEM 1A. Risk Factors

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, 2011, which could materially affect our business, financial condition or future results, should be carefully considered. At March 31, 2012, the risk factors for the Company have not changed materially from those reported in our Annual Report on Form 10-K.

 

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

(a) No unregistered securities were sold by the Company during the quarter ended March 31, 2012.

(b) Not applicable.

(c) The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2012.

 

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)
 

January 1 - 31, 2012

     —         $ —           —           330,103   

February 1 - 29, 2012

     29,900         16.00         29,900         300,203   

March 1 - 31, 2012

     99,300         15.86         99,300         200,903   
  

 

 

       

 

 

    

Total

     129,200       $ 15.90         129,200      
  

 

 

       

 

 

    

 

(1) On October 26, 2010, the Board of Directors approved a plan to repurchase up to 5%, or approximately 807,803 shares, of the Company’s common stock. Under the plan, the Company intends to repurchase shares from time to time, depending on market conditions until it is completed. As of March 31, 2012, the Company has repurchased 606,900 shares at a cost of approximately $9.1 million and an average price of $15.06 per share, under this plan.

 

ITEM 3. Defaults Upon Senior Securities

Not applicable.

 

ITEM 4. Mine Safety Disclosures

Not applicable.

 

ITEM 5. Other Information

Not applicable.

 

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Table of Contents
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)
    4.0   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
  32.0   Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.0   The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Earnings, (iii) the Consolidated Statement of Changes in Equity and Comprehensive Income, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements, tagged as blocks of text.*

 

(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.
* Furnished, not filed

 

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Table of Contents

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: May 7, 2012     By:  

/s/ Richard B. Collins

      Richard B. Collins
      Chairman, President and Chief Executive Officer
Date: May 7, 2012     By:  

/s/ Mark A. Roberts

      Mark A. Roberts
      Executive Vice President and Chief Financial Officer

 

40