--------------------------------------------------------------------------------
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 September 30, 2005
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 000-51369
United Financial Bancorp, Inc.
------------------------------
(Exact name of registrant as specified in its charter)
Federal 83-0395247
------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
95 Elm Street, West Springfield, Massachusetts 01089
----------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (413) 787-1700
--------------
Indicate by check 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 is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X|
Indicate by check whether the Registrant is an accelerated filer. 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
17,205,995 shares outstanding as of November 14, 2005
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United Financial Bancorp, Inc.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited).......................................... 1
Consolidated Statements of Condition
September 30, 2005 and December 31, 2004 ............................................... 1
Consolidated Statements of Earnings
Three and nine months ended September 30, 2005 and 2004 ................................ 2
Consolidated Statements of Stockholders' Equity
Nine months ended September 30, 2005 and 2004........................................... 3
Consolidated Statements of Cash Flows
Nine months ended September 30, 2005 and 2004........................................... 4
Notes to Unaudited Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................................... 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................... 16
Item 4. Controls and Procedures................................................................. 16
PART II. OTHER INFORMATION............................................................................ 16
Item 1. Legal Proceedings....................................................................... 16
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............................. 16
Item 3. Defaults Upon Senior Securities......................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders..................................... 16
Item 5. Other Information....................................................................... 16
Item 6. Exhibits................................................................................ 17
SIGNATURES............................................................................................ 18
Exhibit 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002........................................ 19
Exhibit 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002........................................ 20
Exhibit 32.1 Statement of Chief Executive Officer Furnished Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002................................. 21
Exhibit 32.2 Statement of Chief Financial Officer Furnished Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002................................. 22
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(Dollars in thousands)
================================================================================
September 30, December 31,
2005 2004
------------- ------------
ASSETS
Cash and due from banks ...................................................................... $ 18,876 $ 15,772
Interest bearing deposits .................................................................... 1,327 7,180
Liquidity and cash funds ..................................................................... 2,619 281
------------ ------------
Total cash and cash equivalents ........................................................ 22,822 23,233
Securities available for sale, at market value ............................................... 232,479 152,329
Securities to be held to maturity, at amortized cost (fair value $3,371 in 2005 and
$2,498 in 2004) ............................................................................ 3,378 2,498
Loans, net of allowance for loan losses of $6,470 in 2005 and $5,750 in 2004 ................. 610,330 569,243
Banking premises and equipment, net .......................................................... 8,165 7,671
Accrued interest receivable .................................................................. 4,035 2,862
Deferred tax asset ........................................................................... 3,285 1,551
Stock in the Federal Home Loan Bank of Boston ................................................ 6,588 6,021
Bank-owned life insurance .................................................................... 5,948 5,705
Other assets ................................................................................. 1,076 895
------------ ------------
TOTAL ASSETS ........................................................................... $ 898,106 $ 772,008
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Interest bearing ........................................................................... $ 553,150 $ 527,426
Non-interest bearing ....................................................................... 95,082 86,246
------------ ------------
Total deposits ......................................................................... 648,232 613,672
Federal Home Loan Bank of Boston advances .................................................. 103,492 86,694
Repurchase agreements ...................................................................... 5,019 4,317
Escrow funds held for borrowers ............................................................ 1,149 954
Accrued expenses and other liabilities ..................................................... 4,388 4,116
------------ ------------
Total liabilities ...................................................................... 762,280 709,753
Commitments and contingencies ..............................................................
Stockholders' equity:
Preferred stock, par value $0.01 per share, authorized 5,000,000 shares;
none issued .............................................................................. -- --
Common stock, par value $0.01 per share, authorized 60,000,000 shares;
17,205,995 shares issued in 2005 and 100 shares issued in 2004 ........................... 172 --
Paid-in capital ............................................................................ 78,409 --
Unearned ESOP shares ....................................................................... (6,252) --
Retained earnings .......................................................................... 65,367 62,667
Accumulated other comprehensive loss ....................................................... (1,870) (412)
------------ ------------
Total stockholders' equity ............................................................. 135,826 62,255
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................. $ 898,106 $ 772,008
============ ============
See notes to unaudited consolidated financial statements
1
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(Dollars in thousands)
================================================================================
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ------------------------
2005 2004 2005 2004
--------- --------- --------- ---------
Interest and dividend income:
Loans ............................................................... $ 8,938 $ 7,663 $ 25,462 $ 21,936
Investments ......................................................... 2,265 1,607 5,653 5,105
Other interest-earning assets ....................................... 376 66 632 161
--------- --------- --------- ---------
Total interest and dividend income ............................... 11,579 9,336 31,747 27,202
Interest expense:
Deposits ............................................................ 3,224 2,205 8,705 6,635
Short-term borrowings ............................................... 463 7 785 161
Long-term debt ...................................................... 613 845 1,999 2,129
--------- --------- --------- ---------
Total interest expense ........................................... 4,300 3,057 11,489 8,925
--------- --------- --------- ---------
Net interest income before provision for loan losses ............. 7,279 6,279 20,258 18,277
Provision for loan losses ............................................. 275 113 825 338
--------- --------- --------- ---------
Net interest income after provision for loan losses .............. 7,004 6,166 19,433 17,939
Non-interest income:
Fee income on depositors' accounts .................................. 1,092 1,015 3,000 2,692
Gain on sale of loans ............................................... -- 1 -- 11
Net gain on sale of securities ...................................... 3 5 3 117
Income from bank-owned life insurance ............................... 81 75 243 225
Other income ........................................................ 165 161 522 533
--------- --------- --------- ---------
Total non-interest income ........................................ 1,341 1,257 3,768 3,578
--------- --------- --------- ---------
Non-interest expense:
Salaries and benefits ............................................... 2,810 2,343 7,911 6,879
Occupancy expenses .................................................. 349 322 1,088 1,170
Marketing expenses .................................................. 239 254 919 873
Data processing expenses ............................................ 658 646 2,049 1,907
Contributions and sponsorships ...................................... 3,699 57 3,746 169
Professional fees ................................................... 189 103 407 246
Other expenses ...................................................... 768 902 2,516 3,151
--------- --------- --------- ---------
Total non-interest expense ....................................... 8,712 4,627 18,636 14,395
--------- --------- --------- ---------
Income (loss) before income taxes ................................ (367) 2,796 4,565 7,122
Income tax expense (benefit) .......................................... (194) 1,129 1,772 2,852
--------- --------- --------- ---------
NET INCOME (LOSS) ................................................ $ (173) $ 1,667 $ 2,793 $ 4,270
========= ========= ========= =========
Basic and Diluted Earnings per share NM NA NM NA
NM - Not meaningful
NA - Not applicable
See notes to unaudited consolidated financial statements.
2
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004
(Dollars in thousands)
================================================================================
Accumulated
Other
Paid-In Unearned Retained Comprehensive
Common Stock Capital ESOP Shares Earnings (Loss) Total
------------ --------- ----------- -------- ------------- ---------
Balances at December 31, 2003 .................... $ -- $ -- $ -- $ 57,289 $ (239) $ 57,050
Impact of reorganization ......................... -- -- -- (150) -- (150)
Net income ....................................... -- -- -- 4,270 -- 4,270
Net unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effects ............................... -- -- -- -- 49 49
---------
Total comprehensive income ............... 4,319
--------- --------- --------- --------- --------- ---------
Balances at September 30, 2004 ................... $ -- $ -- $ -- $ 61,409 $ (190) $ 61,219
========= ========= ========= ========= ========= =========
Balances at December 31, 2004 .................... $ -- $ -- $ -- $ 62,666 $ (412) $ 62,254
Net income ....................................... -- -- -- 2,793 -- 2,793
Net unrealized loss on securities
available for sale, net of
reclassification adjustment
and tax effects ............................... -- -- -- -- (1,458) (1,458)
---------
Total comprehensive income ............... 1,335
---------
Issuance of common stock in initial public
offering, net of expenses of $1,900 ........... 77 74,745 -- -- -- 74,822
Issuance of common stock to MHC .................. 92 -- -- (92) -- --
Issuance of common stock to United
Charitable Foundation including
additional tax benefit due to higher
basis for tax purposes ........................ 3 3,646 -- -- -- 3,649
Shares purchased for ESOP ........................ -- -- (6,413) -- -- (6,413)
ESOP shares committed to be released ............. -- 18 161 -- -- 179
--------- --------- --------- --------- --------- ---------
Balances at September 30, 2005 ................... $ 172 $ 78,409 $ (6,252) $ 65,367 $ (1,870) $ 135,826
========= ========= ========= ========= ========= =========
See notes to unaudited consolidated financial statements.
3
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004
(Dollars in thousands)
================================================================================
Nine Months Ended
-----------------------------
September 30,
-----------------------------
2005 2004
---------- ----------
Cash flows from operating activities:
Net income ............................................................... $ 2,793 $ 4,270
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses ............................................ 825 338
Stock contribution to United Charitable Foundation ................... 3,441 --
ESOP expense ......................................................... 179 --
Amortization of premiums and discounts ............................... 364 858
Provision (credit) for other real estate owned ....................... (18) (52)
Depreciation and amortization ........................................ 483 485
Deferred (prepaid) income tax expense ................................ (1,527) 6
Net gain on sale of available for sale securities .................... (3) (117)
Gain on sale of loans ................................................ -- (11)
Gain on sale of property and equipment ............................... (4) (2)
Increase in Bank-owned life insurance ................................ (243) (225)
(Increase) decrease in accrued interest receivable ................... (1,173) 53
(Increase) decrease in other assets .................................. (181) 469
Increase in accrued expenses and other liabilities ................... 271 37
---------- ----------
Net cash provided by operating activities ......................... 5,207 6,109
Cash flows from investing activities:
Purchases of securities available for sale ............................... (117,761) (45,011)
Purchases of securities held to maturity ................................. (909) --
Proceeds from sales, maturities and principal repayments of
securities available for sale ........................................ 35,798 73,620
Proceeds from maturities and principal repayments of securities to
be held to maturity ................................................... 25 28
Purchases of Federal Home Loan Bank of Boston stock ...................... (568) (2,072)
Proceeds from sales of other real estate owned ........................... 18 8
Decrease in Co-Operative Central Bank Deposit ............................ -- 1,522
Net loan originations and principal collections .......................... (41,912) (66,720)
Proceeds from sales of loans ............................................. -- 4,909
Purchases of property and equipment ...................................... (989) (114)
Proceeds from sale of property and equipment ............................. 16 14
---------- ----------
Net cash used in investing activities ............................. (126,282) (33,816)
4
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - Continued
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 and 2004
(Dollars in thousands)
================================================================================
Nine Months Ended
September 30,
------------------------------
2005 2004
----------- -----------
Cash flows from financing activities:
Net increase in deposits ....................................... $ 34,560 $ 14,377
Proceeds of stock subscription orders, net ..................... 74,822 --
Net increase (decrease) in repurchase agreements ............... 703 (162)
Net increase in escrow funds held for borrowers ................ 195 101
Proceeds of FHLBB advances ..................................... 130,824 187,980
Repayments of FHLBB advances ................................... (114,027) (166,100)
Acquisition of common stock by ESOP ............................ (6,413) --
Impact of reorganization ....................................... -- (150)
----------- -----------
Net cash provided by financing activities ............... 120,664 36,046
----------- -----------
Increase (decrease) in cash and cash equivalents ................. (411) 8,339
Cash and cash equivalents at beginning of year ................... 23,233 16,144
----------- -----------
Cash and cash equivalents at end of period ....................... $ 22,822 $ 24,483
=========== ===========
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash paid during the period:
Interest on deposits and other borrowings ........................ $ 11,506 $ 8,884
Income taxes - net ............................................... 1,943 343
See notes to unaudited consolidated financial statements.
5
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
Dollars in Thousands (except per share amounts)
================================================================================
NOTE A - BASIS OF PRESENTATION
The consolidated financial statements include the accounts of United Financial
Bancorp, Inc. and its wholly-owned subsidiary, United Bank. The consolidated
financial statements also include the accounts of United Bank's wholly-owned
subsidiary, UCB Securities, Inc., which is engaged in buying, selling and
holding investment securities. These entities are collectively referred to
herein as "the Company". All significant intercompany accounts and transactions
have been eliminated in consolidation.
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
with general practices within the banking industry. In the opinion of
management, the accompanying unaudited interim consolidated financial statements
reflect all adjustments, consisting of normal recurring adjustments, which are
necessary for the fair presentation of the Company's financial condition as of
September 30, 2005 and the results of operations for the three months and nine
months ended September 30, 2005 and 2004. The interim results of operations
presented herein are not necessarily indicative of the results to be expected
for the entire year. These financial statements should be read in conjunction
with the consolidated financial statements and the notes thereto for the year
ended December 31, 2004 included in the Company's Registration Statement on Form
S-1 (File No. 333-123371).
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities as of the date of the balance
sheet as well as revenues and expenses for the reporting period. Actual results
could differ from these estimates. A material estimate that is susceptible to
change in the near term is the allowance for loan losses. While management uses
available information to recognize losses on loans, future additions to the
allowance for loans may be necessary based on changes in economic conditions.
Certain amounts have been reclassified in the prior period financial statements
to conform to the current period presentation.
NOTE B - REORGANIZATION AND CHANGE IN CORPORATE FORM
During 2004, the Company received both regulatory and depositor approval to
reorganize from a state-chartered cooperative bank to a multi-tier
federally-chartered holding company. As a result, United Financial Bancorp,
Inc., a stock holding company, was formed to be the parent company of United
Bank and United Mutual Holding Company, a mutual holding company, was formed to
be the parent company of United Financial Bancorp, Inc.
In December 2004, the Board of Directors of United Mutual Holding Company
adopted a plan pursuant to which United Financial Bancorp, Inc. intended to sell
up to 49% of its common stock to eligible Bank depositors and, if necessary, to
the general public. The Company's initial public offering concluded on July 11,
2005 after the receipt of regulatory approval. The Company raised $74,822 in the
offering, selling 7.5 million shares of common stock at $10 per share. This
represented 44.6% of the stock issued. In addition, 344,100 shares or 2.0% of
the shares outstanding were contributed to the newly formed United Charitable
Foundation ("the Foundation") to further support its ongoing commitment to the
community. United Mutual Holding Company holds the remaining 53.4% of the
outstanding shares.
6
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2005
================================================================================
NOTE B - REORGANIZATION AND CHANGE IN CORPORATE FORM - Continued
The Company established the Foundation in connection with the reorganization and
funded it with 344,100 shares of the Company's common stock. This contribution
resulted in the recognition of expense equal to $3,441 based on the offering
price of $10 per share. The Company expects to realize an additional tax benefit
of $208 that was recorded as an increase to stockholders' equity because the
basis for the contribution for tax purposes was based on the trading price of
Company stock on its first day of trading.
In addition, the Bank's Board of Directors adopted an Employee Stock Ownership
Plan (the "ESOP") which purchased 8% of the common stock sold in connection with
the offering and issued to the charitable foundation. The ESOP purchased 641,300
shares in the initial public offering financed by a loan from the Company. The
loan calls for equal annual payments of principal and interest over the next 20
years with the first payment due in December 2005. Based on the terms of the
loan, 32,065 shares would be allocated to participants in 2005. Compensation
expense shall be recognized ratably during the remainder of the year based on
the market value of the shares as they are committed to be released. Assuming
that the per share cost of $10 was equal to market value, the Company would
recognize related compensation expense of $161 during the fourth quarter of
2005. The actual amount of expense to be recognized would vary based on changes
in the market value of the Company's stock with each change of $1.00 per share
resulting in a change of $32 in compensation expense. Due to the completion of
the IPO on July 11, 2005, earnings per share data for the periods ended
September 30, 2005 are not considered meaningful and are not shown.
NOTE C - OTHER COMPREHENSIVE INCOME (LOSS)
Accounting principles generally require that recognized revenue, expenses, gains
and losses be included in net income. Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income.
The components of other comprehensive income (loss) and related tax effects are
as follows for the nine months ended September 30:
2005 2004
---------- ----------
Unrealized holding (losses) gains arising during the period ..... $ (2,394) $ 199
Reclassification adjustment for gains realized in income ........ (3) (117)
---------- ----------
Net unrealized (losses) gains ................................... (2,397) 82
Tax effect ...................................................... (939) 33
---------- ----------
Other comprehensive income (loss) ............................... $ (1,458) $ 49
========== ==========
7
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UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
SEPTEMBER 30, 2005
================================================================================
NOTE D - LOANS
The components of loans are as follows at September 30, 2005 and December 31,
2004:
September 30, December 31,
2005 2004
------------- ------------
Real estate - Residential (1-4 Family) .... $ 361,209 $ 330,834
- Commercial .................. 140,927 137,787
Construction .............................. 33,239 29,836
Commercial and industrial ................. 57,005 56,291
Consumer .................................. 23,345 19,322
----------- -----------
615,725 574,070
Other Items:
Net deferred loan costs ................... 1,075 923
Allowance for loan losses ................. (6,470) (5,750)
----------- -----------
$ 610,330 $ 569,243
=========== ===========
Nonaccrual loans amounted to approximately $2,627 and $3,784 at September 30,
2005 and December 31, 2004, respectively.
NOTE E - DEPOSITS
Deposit accounts, by type, are summarized as follows at September 30, 2005 and
December 31, 2004:
September 30, December 31,
2005 2004
------------- ------------
Type
----
Demand ..................................... $ 95,082 $ 86,246
NOW ........................................ 43,062 39,917
Regular Savings ............................ 92,264 94,586
Money Market ............................... 143,998 139,754
Retirement ................................. 52,200 48,496
Term Certificates .......................... 221,626 204,673
---------- ----------
$ 648,232 $ 613,672
========== ==========
8
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ITEM 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
From time to time, the Company may publish forward looking statements
relating to such matters as anticipated financial performance, business
prospects, technological developments, new products, and similar matters. The
Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward looking statements provided that the Company notes that a variety of
factors could cause the Company's actual results to differ materially from the
anticipated results expressed in the Company's forward looking statements.
Factors that may cause actual results to differ materially from those projected
in the forward looking statements include, but are not limited to, general
economic conditions that are less favorable than expected, changes in market
interest rates that result in reduced interest margins, risks in the loan
portfolio, including prepayments, that are greater than expected, legislation or
regulatory changes that have a less than favorable impact on the business of the
Company are enacted, and competitive pressures increase significantly. 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 September 30, 2005 and December 31, 2004
Total assets increased $126.1 million, or 16.3%, to $898.1 million at
September 30, 2005 from $772.0 million at December 31, 2004. The increase
reflected growth of $80.1 million in securities available for sale and $41.1
million in net loans. The growth in assets was funded by $73.6 million increase
in total stockholders' equity as a result of the IPO, $34.6 million increase in
deposits and $16.8 million in Federal Home Loan Bank advances.
Net loans increased to $610.3 million at September 30, 2005 from $569.2
million at December 31, 2004. One- to four-family residential mortgage loans
increased $30.4 million, or 9.2%, to $361.2 million at September 30, 2005 from
$330.8 million at December 31, 2004, reflecting continued demand in our primary
market area for residential mortgage loans and the Company's practice of
originating such loans for portfolio.
Commercial real estate loans increased $3.1 million, or 2.3%, while
commercial and industrial loans increased $714,000, or 1.3%. The modest
increases in these loans was net of the payoff of a large participation loan.
Construction loans increased $3.4 million, or 11.4%, to $33.2 million at
September 30, 2005, reflecting the start-up of several new construction
projects.
Securities available for sale increased $80.1 million, or 52.6%, to $232.5
million at September 30, 2005 from $152.3 million at December 31, 2004. The
investments purchased were mostly mortgage-backed and short term agency
securities. This significant growth and the relative increase in shorter-term
securities resulted largely from the July 2005 completion of the Company's IPO
which raised $68.4 in investable funds.
Total deposits increased $34.6 million, or 5.6%, to $648.2 million at
September 30, 2005 from $613.7 million at December 31, 2004. The increase was a
result of growth in certificate of deposit accounts of $17.0 million, retirement
accounts of $3.7 million and core accounts of $13.9 million. Federal Home Loan
Bank advances increased $16.8 million, or 19.4%, to $103.5 million at September
30, 2005 from $86.7 million at December 31, 2004. The increase in advances
reflected the match-funding of longer-term fixed rate residential loans.
Repurchase agreements increased to $5.0 million at September 30, 2005 from $4.3
million at December 31, 2004, reflecting routine fluctuations in these overnight
accounts.
9
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Total stockholders' equity increased $73.6 million or 118.2%, to $135.8
million at September 30, 2005 from $62.3 million at December 31, 2004. This
increase reflected the proceeds received from the IPO and net income of $2.8
million for the nine months ended September 30, 2005 partially offset by an
increase in the accumulated other comprehensive loss of $1.5 million caused by
an increase in intermediate-term interest rates in the debt securities markets.
Management does not consider the increase in other comprehensive loss to be
other than temporary.
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 September 30, Nine Months Ended September 30,
2005 vs. 2004 2005 vs. 2004
----------------------------------- -------------------------------------
Increase (Decrease) Due Increase (Decrease) Due
to to
----------------------- -----------------------
Volume Rate Net Volume Rate Net
------- ------- ------- --------- ------- -------
(In thousands)
Interest-earning assets:
Loans ......................................... $ 774 $ 501 $ 1,275 $ 2,526 $ 1,000 $ 3,526
Investment securities ......................... 590 68 658 140 408 548
Other interest-earning assets ................. 106 204 310 245 226 471
------- ------- ------- ------- ------- -------
Total interest-earning assets .............. 1,470 773 2,243 2,912 1,633 4,545
------- ------- ------- ------- ------- -------
Interest-bearing liabilities:
Savings accounts .............................. (7) 13 6 8 8 16
Money market/NOW accounts ..................... (22) 459 437 (43) 895 852
Certificates of deposit ....................... 245 331 576 597 605 1,202
------- ------- ------- ------- ------- -------
Total interest-bearing deposits ............ 216 803 1,019 562 1,508 2,070
FHLB Advances ................................. 123 82 205 283 174 457
Other interest-bearing liabilities ............ 21 (2) 19 43 (6) 37
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ......... 360 883 1,243 888 1,676 2,564
------- ------- ------- ------- ------- -------
Change in net interest income .................... $ 1,110 $ (110) $ 1,000 $ 2,023 $ (42) $ 1,981
======= ======= ======= ======= ======= =======
Comparison of Operating Results for the Three Months Ended September 30, 2005
and 2004
Net Income (Loss). The Company's net loss for the three months ended
September 30, 2005 amounted to $173,000. The Company recorded an after-tax
expense of $2.2 million to establish and fund the new United Charitable
Foundation. Excluding this charge, net income would have been $2.0 million for
the quarter compared to $1.7 million for the three-month period ended September
30, 2004.
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses increased $1.0 million, or 15.9%, to $7.3
million for the three months ended September 30, 2005. The increase reflected a
$130.2 million, or 17.6%, increase in the average balance of total interest-
earning assets to $871.4 million with an increase in average rate to 5.32% from
5.04%, which more than offset a $38.2 million or 6.1% increase in the average
balance
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of total interest-bearing liabilities whose average rate rose to 2.59% from
1.96% for the same period. The increase in average interest-earning assets as
compared to average interest-bearing liabilities was primarily due to the
capital raised in the Company's IPO.
Interest Income. Interest income increased $2.2 million, or 24.0%, to
$11.6 million for the three months ended September 30, 2005 from $9.3 million
for the prior year period. The increase resulted from a $130.2 million, or
17.6%, increase in the average balance of total interest-earning assets, as well
as a 28 basis point increase in the average yield on such assets to 5.32% for
the three months ended September 30, 2005 from 5.04% for the prior year period.
Interest income attributable to loans increased $1.3 million, or 16.6%, to $8.9
million for the three months ended September 30, 2005 from $7.7 million for the
prior year period. The increase in interest earned on loans was due to a $53.7
million, or 9.7%, increase in the average balance of loans, coupled with a 31
basis point increase in the yield earned on such loans to 5.82% from 5.51%, as
the continued demand for residential financing in our primary market area
resulted in our loan originations more than offsetting loan prepayments and
normal amortization. Interest earned on investment securities and other
interest-earning assets, including mortgage-backed securities, increased
$968,000, or 58.0%, to $2.6 million for the three months ended September 30,
2005, from $1.7 million for the prior year period. The increase reflected the
higher average balance in such assets of $76.5 million derived primarily from
the IPO proceeds and an increase in the average yield of 40 basis points.
Interest Expense. Interest expense increased $1.2 million, or 40.7%, to
$4.3 million for the three months ended September 30, 2005 from $3.1 million for
the prior year period. The increase in interest expense was due to a $38.2
million, or 6.1%, increase in the average balance of interest-bearing
liabilities to $663.4 million for the three months ended September 30, 2005 from
$625.2 million for the prior year period, coupled with the increase in the
average cost of such liabilities to 2.59% for the three months ended September
30, 2005 from 1.96% for the prior year period. The interest paid on deposits
increased by $1.0 million, or 46.2%, reflecting an increase in the average cost
of such deposits to 2.34% from 1.67%, while the average balance of such deposits
increased by $22.3 million, or 4.2%. The interest paid on savings accounts,
money market and NOW accounts, and certificates of deposit all increased.
Interest paid on Federal Home Loan Bank advances and repurchase agreements
increased by $224,000, or 26.3%, reflecting an increase in the average balance
of such accounts to $112.5 million for the three months ended September 30, 2005
from $96.6 million for the prior year period, coupled with an increase in the
average cost of such debt to 3.81% from 3.45%. The increase in the average cost
of liabilities reflected the series of interest rate increases initiated by the
Federal Reserve Board beginning in June 2004 and which continued through the
current period.
Provision for Loan Losses. The provision for loan losses was $275,000 for
the three months ended September 30, 2005 as compared to $113,000 for the three
months ended September 30, 2004. While the Company's loan quality, measured
principally by delinquency rates, charge-offs and in loan classifications,
continues to be outstanding, the shift of the mix of the portfolio in recent
years toward commercial loans indicated the need for the increase in the
allowance for loan losses in 2005 as measured by the Company's reserve
methodology. The allowance for loan losses was $6.5 million, or 1.05% of loans
outstanding on September 30, 2005.
Noninterest Income. Noninterest income increased $84,000, or 6.7% and
amounted to $1.3 million for the three months ended September 30, 2005. Fee
income on depositors' accounts increased $77,000 to $1.1 million for the three
months ended September 30, 2005, reflecting growth in the number of deposit
accounts.
Noninterest Expense. Noninterest expense increased 88.3% to $8.7 million
for the three months ended September 30, 2005 from $4.6 million for the prior
year period. This was an increase of $4.1 million, of which $3.6 million was a
result of the establishment and funding of the United Charitable Foundation. The
remainder of the increase of $494,000 occurred in salary and benefit increases
as well as
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increased staffing, which was partially offset by higher expenses in the 2004
period related to the conversion of United Bank to a federal charter.
Income Tax Expense (Benefit). The Company recognized an income tax benefit
in the amount of $194,000 for the three months ended September 30, 2005 as a
result of an operating loss of $367,000. Income tax expense for the three months
ended September 30, 2004 was $1.1 million. Federal and state income tax
regulations generally provide that deductions for charitable contributions are
limited to 10% of taxable income and that contributions that exceed that limit
may be carried forward into the subsequent five tax periods. The Company
believes that it is more likely than not that it will have sufficient taxable
income in the next five tax periods to allow it to fully deduct the
contributions which it expensed in the quarter ended September 30, 2005 and, as
such, has recognized a deferred tax asset for these future deductions.
Comparison of Operating Results for the Nine Months Ended September 30, 2005 and
2004
Net Income. Net income for the nine-month period ended September 30, 2005
amounted to $2.8 million. Excluding the charge to establish and fund the United
Charitable Foundation, net income would have been $5.0 million compared to $4.3
million for the nine months ended September 30, 2004.
Net Interest Income Before Provision for Loan Losses. Net interest income
before provision for loan losses increased $2.0 million, or 10.8%, to $20.3
million for the nine months ended September 30, 2005. The increase reflected a
$76.9 million, or 10.6%, increase in the average balance of total interest
earning assets to $803.5 million for the nine months ended September 30, 2005,
which more than offset a 12 basis point decrease in our interest rate spread to
2.94% from 3.06%.
Interest Income. Interest income increased $4.5 million, or 16.7%, to
$31.7 million for the nine months ended September 30, 2005 from $27.2 million
for the prior year period. The increase resulted from a $76.9 million, or 10.6%,
increase in the average balance of total interest-earning assets, as well as a
28 basis point increase in the average yield on such assets to 5.27% for the
nine months ended September 30, 2005 from 4.99% for the prior year period.
Interest income attributable to loans increased $3.5 million, or 16.1%, to $25.5
million for the nine months ended September 30, 2005 from $21.9 million for the
prior year period. The increase in interest earned on loans was due to a $58.9
million, or 11.2%, increase in the average balance of loans, coupled with a 24
basis point increase in the yield earned on such loans to 5.78% from 5.54%.
Interest earned on investment securities and other interest-earning assets,
including mortgage-backed securities, increased $1.0 million, or 19.4%, to $6.3
million for the nine months ended September 30, 2005, from $5.3 million for the
prior year period. The increase reflected a higher average balance in such
assets of $18.0 million, and an increase in the average yield of 33 basis
points.
Interest Expense. Interest expense increased $2.6 million, or 28.7%, to
$11.5 million for the nine months ended September 30, 2005 from $8.9 million for
the prior year period. The increase in interest expense was due to a $37.1
million, or 6.0%, increase in the average balance of interest-bearing
liabilities to $654.0 million for the nine months ended September 30, 2005 from
$616.9 million for the prior year period, coupled with the increase in the
average cost of such liabilities to 2.33% for the nine months ended September
30, 2005 from 1.93% for the prior year period. The interest paid on deposits
increased by $2.1 million, or 31.2%, reflecting an increase in the average cost
of such deposits to 2.10% from 1.68%, while the average balance of such deposits
increased by $24.4 million, or 4.6%. The interest paid on savings accounts,
money market and NOW accounts, and certificates of deposit all increased.
Interest paid on Federal Home Loan Bank advances and repurchase agreements
increased by $494,000, or 21.6%, reflecting an increase in the average balance
of such accounts to $103.6 million for the nine months ended September 30, 2005
from $90.9 million for the prior year period, coupled with an increase in the
average cost of such debt to 3.58% from 3.36%. The increase in the average cost
of liabilities reflected the series of
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increases in interest rate initiated by the Federal Reserve Board beginning in
June 2004 and which continued through the current period.
Provision for Loan Losses. The provision for loan losses was $825,000 for
the nine months ended September 30, 2005 as compared to $338,000 for the nine
months ended September 30, 2004. The increase in the provision was due to an
increase in our loan portfolio of commercial real estate loans and commercial
and industrial loans, and slightly higher adversely classified loans and higher
nonperforming loans in 2005 as compared to 2004. While the Company's loan
quality, measured principally by delinquency rates, charge-offs and in loan
classifications, continues to be outstanding, the shift of the mix of the
portfolio in recent years toward commercial loans indicated the need for the
increase in the allowance for loan losses in 2005 as measured by the Company's
reserve methodology.
Nonaccrual loans as of September 30, 2005 amounted to $2.6 million, an
increase of $477,000, or 22.2% over nonaccrual balances of $2.1 million at
September 30, 2004. The allowance for loan losses was $6.5 million, or 1.05% of
loans outstanding on September 30, 2005.
Noninterest Income. Noninterest income increased $190,000, or 5.3%, to
$3.8 million for the nine months ended September 30, 2005. Fee income on
depositors' accounts increased $308,000 to $3.0 million for the nine months
ended September 30, 2005, reflecting growth in depositors, partially offset by
lower securities gains of $114,000 in the current year period.
Noninterest Expense. Noninterest expense increased 29.5% to $18.6 million
for the nine months ended September 30, 2005 from $14.4 million for the prior
year period. This was an increase of $4.2 million, of which $3.6 million was a
result of the establishment and funding of the United Charitable Foundation. The
remaining increase of $650,000 reflected salary and benefit increases as well as
increased staffing, which was partially offset by higher expenses in the 2004
period related to the conversion of United Bank to a federal charter.
Income Tax Expense. Income tax expense amounted to $1.8 million for the
nine months ended September 30, 2005 compared to $2.9 million for the prior
year. The effective tax rate was 38.8% and 40.0% for the nine months ended
September, 2005 and 2004, respectively. The lower rate was due to more funds
invested by the Bank's subsidiary which enjoys a more favorable state tax rate.
Liquidity, Market Risk, 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.
Our assets, consisting primarily of mortgage loans, have longer maturities than
our liabilities, consisting primarily of deposits. As a result, a principal part
of our business strategy is to manage interest rate risk and reduce the exposure
of our net interest income to changes in market interest rates. Accordingly, our
Board of Directors has established an Asset/Liability Management Committee which
is responsible for evaluating the interest rate risk 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 interest rate risk
management consultant, senior management monitors the level of interest rate
risk on a regular basis and the Asset/Liability Management Committee generally
meets at least on a monthly basis to review our asset/liability policies and
interest rate risk position.
We have sought to manage our interest rate risk 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
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use the following strategies to manage our interest rate risk: (i) using
alternative funding sources, such as advances from the Federal Home Loan Bank of
Boston, to "match fund" longer-term one- to four-family residential mortgage
loans; (ii) investing in variable-rate mortgage-backed securities; (iii)
continued emphasis on increasing core deposits; (iv) offering adjustable rate
and shorter-term commercial real estate loans and commercial and industrial
loans; and (v) offering a variety of consumer loans, which typically have
shorter-terms. Shortening 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 net interest income to changes in market interest rates. By
following these strategies, we believe that we are well-positioned to react to
increases in market interest rates.
The table below, sets forth, as of June 30, 2005, the latest data
available from regulatory authorities, the estimated changes in our net
portfolio value that would result from the designated instantaneous and parallel
changes in the United States Treasury rates. 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.
NPV as a Percentage of
Present Value of Assets (3)
Estimated Increase (Decrease) ---------------------------------
Change in in NPV Increase
Interest Rates Estimated ----------------------------- (Decrease)
(basis points) (1) NPV (2) Amount Percent NPV Ratio (4) (basis points)
------------------ ----------- ---------- ------- ------------- --------------
(Dollars in thousands)
+300 $ 64,322 $ (38,006) (37)% 6.84% (351)
+200 77,559 (24,770) (24) 8.10 (224)
+100 90,757 (11,572) (11) 9.32 (102)
0 102,329 -- -- 10.34 --
-100 106,575 4,247 4 10.68 34
-200 104,117 1,788 2 10.41 7
----------
(1) Assumes an instantaneous and parallel uniform change in interest
rates at all maturities.
(2) NPV is the discounted present value of expected cash flows from
assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of
incoming cash flows on interest-earning assets.
(4) NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at June 30, 2005, in the event of a 200
basis point decrease in interest rates, we would experience a 2% increase in net
portfolio value. In the event of a 300 basis point increase in interest rates,
we would experience a 37% decrease in net portfolio value. We expect the above
results to have changed on September 30, 2005 as a result of our completion of
the IPO in July 2005.
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in net portfolio value require
making certain assumptions that may or may not reflect the manner in which
actual yields and costs respond to changes in market interest rates. In this
regard, the net portfolio value table presented assumes that the composition of
our interest-sensitive assets and liabilities existing at the beginning of a
period remains constant over the period being measured and assumes that a
particular change in interest rates is reflected uniformly across the yield
curve regardless of the duration or repricing of specific assets and
liabilities. Accordingly, although the net portfolio value table provides an
indication of our interest rate risk exposure at a particular point in time,
such measurements are not intended to and do not provide a precise forecast of
the effect of changes in market interest rates on our net interest income and
will differ from actual results.
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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,
loan repayments and maturities and sales of securities. While maturities and
scheduled amortization of loans and securities are predictable sources of funds,
deposit flows and mortgage prepayments are greatly influenced by general
interest rates, economic conditions and competition.
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 Asset/Liability Management Committee is responsible for establishing and
monitoring our liquidity targets and strategies in order to ensure that
sufficient liquidity exists for meeting the borrowing needs of our customers as
well as unanticipated contingencies. We seek to maintain a liquidity ratio of
10% or greater. For the quarter ended September 30, 2005, our liquidity ratio
was 34.63%. This higher than normal liquidity ratio reflected that the recently
acquired proceeds from the IPO are presently invested in shorter-term
securities. The Company expects to gradually convert these investments into
longer-term interest-earning assets in future periods.
Capital Resources
United Bank ("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 September 30, 2005, the Bank exceeded all
regulatory capital requirements. The Bank is considered "well capitalized" under
regulatory guidelines.
Company Bank
------- ----
As of September 30, 2005:
Risk-based capital .................... 25.0% 18.3%
Core capital .......................... 15.3% 11.4%
Tangible capital ...................... 15.3% 11.4%
As of December 31, 2004:
Risk-based capital .................... NM 12.8%
Core capital .......................... NM 8.1%
Tangible capital ...................... NM 8.1%
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included above in Item 2,
Management's Discussion and Analysis of Financial Condition and Results of
Operations, under the caption "Liquidity, Market Risk, 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.
There has been no change in the Company's internal control over financial
reporting identified in connection with the quarterly evaluation that occurred
during the Company's last fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
At September 30, 2005, the Company was not involved in any legal
proceedings, the outcome of which would be material to the Company's financial
condition or results of operations.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable.
ITEM 5. Other Information
Not applicable.
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ITEM 6. Exhibits.
Exhibits:
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Written statement of Chief Executive Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Written statement of Chief Financial Officer furnished pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
17
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
United Financial Bancorp, Inc.
Date: November 14, 2005 By: /s/ Richard B. Collins
----------------- --------------------------------------
Richard B. Collins
President and Chief Executive Officer
Date: November 14, 2005 By: /s/ Donald F. X. Lynch
----------------- --------------------------------------
Donald F.X. Lynch
Executive Vice President and Chief
Financial Officer
18