Form 10-Q
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 

FORM 10-Q

(Mark One)

ý Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2006

OR

o Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ______________ to _____________

Commission File Number 000-51369

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 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 ý No o

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

Large accelerated filer o
Accelerated filer o
Non-accelerated filer ý

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

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 May 5, 2006
 

 

 
United Financial Bancorp, Inc.

INDEX
 
Page
   
 
   
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3
   
 
4
   
6
   
 
8
   
13
   
13
   
14
   
14
   
14
   
14
   
14
   
14
   
14
   
14
   
15




 
16
       
 
17
       
 
18
       
 
19







PART I.     FINANCIAL INFORMATION

ITEM 1.    Consolidated Financial Statements
 
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
(Dollars in thousands, except per share amounts)
 
   
March 31,
  
December 31,
  
   
2006
  
2005
  
   
(unaudited)
      
ASSETS
              
               
Cash and due from banks
  
$
16,473
  
$
15,841
  
Interest-bearing deposits
    
35,942
    
2
  
Liquidity and cash funds
    
385
    
—
  
Total cash and cash equivalents
    
52,800
    
15,843
  
               
Securities available for sale, at fair value
    
220,485
    
226,465
  
Securities to be held to maturity, at amortized cost (fair value $3,298 at March 31, 2006 and $3,298 at December 31, 2005)
    
3,323
    
3,325
  
Loans, net of allowance for loan losses of $6,580 at March 31, 2006 and $6,382 at December 31, 2005
    
641,008
    
630,558
  
Other real estate owned
    
—
    
1,602
  
Accrued interest receivable
    
4,202
    
3,928
  
Deferred tax asset, net
    
1,494
    
1,245
  
Stock in the Federal Home Loan Bank of Boston
    
6,684
    
6,588
  
Banking premises and equipment, net
    
8,141
    
8,236
  
Bank-owned life insurance
    
6,113
    
6,031
  
Other assets
    
3,319
    
2,692
  
               
TOTAL ASSETS
  
$
947,569
  
$
906,513
  
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
               
Liabilities:
              
Deposits:
              
Interest-bearing
  
$
593,019
  
$
560,310
  
Non-interest bearing
    
92,762
    
93,301
  
Total deposits
    
685,781
    
653,611
  
               
Federal Home Loan Bank of Boston advances
    
112,542
    
101,880
  
Repurchase agreements
    
6,388
    
8,434
  
Escrow funds held for borrowers
    
1,259
    
1,129
  
Accrued expenses and other liabilities
    
4,307
    
4,454
  
Total liabilities
    
810,277
    
769,508
  
               
               
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 at March 31, 2006 and at December 31, 2005
   
172
    
172
  
Paid-in capital
    
78,460
    
78,446
  
Retained earnings
    
67,928
    
66,944
  
Unearned ESOP shares
    
(6,012
)
  
(6,092
)
Accumulated other comprehensive (loss), net of taxes
    
(3,256
)
  
(2,465
)
Total stockholders’ equity
    
137,292
    
137,005
  
               
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
  
$
947,569
  
$
906,513
  

See notes to unaudited consolidated financial statements


1

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(Dollars in thousands, except per share amount)
       
   
Three Months Ended
March 31,
  
   
2006
  
2005
  
Interest and dividend income:
              
Loans
  
$
9,600
  
$
8,048
  
Investments
    
2,305
    
1,528
  
Other interest-earning assets
    
242
    
140
  
Total interest and dividend income
    
12,147
    
9,716
  
               
Interest expense:
              
Deposits
    
4,042
    
2,580
  
Short-term borrowings
    
576
    
268
  
Long-term debt
    
621
    
521
  
Total interest expense
    
5,239
    
3,369
  
               
Net interest income before provision for loan losses
    
6,908
    
6,347
  
               
Provision for loan losses
    
162
    
275
  
               
Net interest income after provision for loan losses
    
6,746
    
6,072
  
               
Non-interest income:
              
Fee income on depositors’ accounts
    
1,044
    
903
  
Income from bank-owned life insurance
   
81
    
81
  
Other income
   
231
    
231
  
Total non-interest income
    
1,356
    
1,215
  
               
Non-interest expense:
              
Salaries and benefits
    
3,029
    
2,638
  
Occupancy expenses
    
403
    
340
  
Marketing expenses
    
415
    
345
  
Data processing expenses
    
730
    
746
  
Contributions and sponsorships
    
31
    
73
  
Professional fees
    
256
    
111
  
Other expenses
    
1,010
    
764
  
Total non-interest expense
    
5,874
    
5,017
  
               
Income before income taxes
    
2,228
    
2,270
  
               
Income tax expense
    
873
    
904
  
               
NET INCOME
  
$
1,355
  
$
1,366
  
               
Basic and diluted earnings per share
  
$
.08
    
NA
  
Weighted-average common shares outstanding
             
for basic and diluted earnings per share
  
 
16,601
    
NA
  


NA - Not applicable
See notes to unaudited consolidated financial statements.



2

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 and 2005
(Dollars in thousands, except per share amount) 

   
Common Stock
  
Paid-In Capital
  
Retained Earnings
  
Unearned
ESOP Shares
 
Other
Comprehensive
(Loss)
  
Total
  
                           
Balances at December 31, 2004
  
$
—
  
$
—
  
$
62,667
  
$
—
  
$
(412
)
$
62,255
  
                                       
Net income
    
—
    
—
    
1,366
    
—
    
—
    
1,366
  
Net unrealized loss on securities available for sale, net of tax
 
—
    
—
    
—
    
—
    
(1,156
)
  
(1,156
)
Total comprehensive income
                                  
210
  
                                       
Balances at March 31, 2005
  
$
—
  
$
—
  
$
64,033
  
$
—
  
$
(1,568
)
$
62,465
  
                                       
                                       
                                       
Balances at December 31, 2005
  
$
172
    
78,446
  
$
66,944
  
$
(6,092
)
$
(2,465
)
$
137,005
  
                                       
Net income
    
—
    
—
    
1,355
    
—
    
—
    
1,355
  
Net unrealized loss on securities available for sale, net of tax
  
—
    
—
    
—
    
—
    
(791
)
  
(791
)
Total comprehensive income
                                  
564
  
                                       
Cash dividends declared ($.05 per share)
                
(371
)
              
(371
)
                                       
ESOP shares committed to be released
    
—
    
14
    
—
    
80
    
—
    
94
  
                                       
Balances at March 31, 2006
  
$
172
  
$
78,460
  
$
67,928
  
$
(6,012
)
$
(3,256
)
$
137,292
  
                                       
                                       

See notes to unaudited consolidated financial statements.

3


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 2006 and 2005
(Dollars in thousands) 

   
Three Months Ended
March 31,
  
   
2006
  
2005
  
Cash flows from operating activities:
              
Net income
 
$
1,355
  
$
1,366
  
Adjustments to reconcile net income to net cash provided by operating activities:
              
Provision for loan losses
   
162
    
275
  
ESOP expense
    
94
    
—
  
Amortization of premiums and discounts
    
100
    
187
  
Provision for other real estate owned
   
34
    
—
  
Depreciation and amortization
   
193
    
156
  
Deferred (prepaid) income tax expense
   
(458
)
  
(281
)
Increase in Bank-owned life insurance
   
(81
)
  
(81
)
Increase in accrued interest receivable
   
(274
)
  
(274
)
Increase in other assets
   
(329
)
  
(354
)
Decrease in accrued expenses and other liabilities
   
(348
)
  
(733
)
               
Net cash provided by operating activities
   
448
    
261
  
               
Cash flows from investing activities:
              
Cash paid to acquire Levine Financial Group
    
(100
)
  
—
  
Purchases of securities available for sale
   
(6,872
)
  
(30,879
)
Proceeds from sales, maturities and principal repayments of securities available for sale
   
12,172
    
7,688
  
Purchases of Federal Home Loan Bank of Boston stock
   
(96
)
  
—
  
Net loan originations and principal repayments
   
(9,044
)
  
3,035
  
Purchases of property and equipment
   
(97
)
  
(64
)
               
Net cash used in investing activities
   
(4,037
)
  
(20,220
)


4

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - Continued
FOR THE THREE MONTHS ENDED MARCH 31, 2006 and 2005
(Dollars in thousands)

   
Three Months Ended
March 31,
  
   
2006
  
2005
  
Cash flows from financing activities:
              
Net increase in deposits
 
$
32,170
  
$
24,389
  
Proceeds of Federal Home Loan Bank of Boston advances
   
29,612
    
—
  
Repayments of Federal Home Loan Bank of Boston advances
   
(18,949
)
  
(2,027
)
Net increase (decrease) in repurchase agreements
   
(2,046
)
  
1,938
  
Net increase in escrow funds held for borrowers
   
130
    
223
  
Cash dividends paid
   
(371
)
  
—
  
               
Net cash provided by financing activities
   
40,546
    
24,523
  
               
Increase in cash and cash equivalents
   
36,957
    
4,564
  
               
Cash and cash equivalents at beginning of year
   
15,843
    
23,233
  
               
Cash and cash equivalents at end of period
 
$
52,800
  
$
27,797
  
               
               
Supplemental Disclosure of Cash Flow Information:
              
               
Cash paid during the period:
              
Interest on deposits and other borrowings
 
$
5,240
  
$
3,385
  
Income taxes - net
   
312
    
726
  

See notes to unaudited consolidated financial statements.

5


UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2006
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 March 31, 2006 and the results of operations for the three months ended March 31, 2006 and 2005. 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, 2005 included in the Company’s Form 10-K.

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 in the prior period financial statements have been reclassified to conform to the current period presentation.
 
NOTE B - CRITICAL ACCOUNTING POLICIES
 
The accounting estimate related to the allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period requiring management to make assumptions about future losses on loans. The impact of a sudden large loss could deplete the allowance and potentially require increased provisions to replenish the allowance, which would negatively affect earnings.
 
 


6

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2006
 
NOTE C - LOANS  

The components of loans are as follows at March 31, 2006 and December 31, 2005:

   
March 31,
  
December 31,
  
   
2006
  
2005
  
           
Real estate - Residential (1-4 Family)
 
$
374,972
  
$
371,281
  
- Commercial
   
154,637
    
150,099
  
Construction
   
30,167
    
28,872
  
Commercial and industrial
   
58,734
    
59,591
  
Consumer
   
27,863
   
25,949
  
     
646,373
   
635,792
  
Other Items:
              
Net deferred loan costs
   
1,215
    
1,148
  
Allowance for loan losses
   
(6,580
)
  
(6,382
)
   
$
641,008
  
$
630,558
  

Nonaccrual loans amounted to $1,686 and $1,717 at March 31, 2006 and December 31, 2005, respectively.

NOTE D - DEPOSITS

Deposit accounts, by type, are summarized as follows at March 31, 2006 and December 31, 2005: 

   
March 31,
  
December 31,
  
   
2006
  
2005
  
Type
              
Demand
 
$
92,762
  
$
93,301
  
NOW
   
38,714
    
39,922
  
Regular Savings
   
84,646
    
87,253
  
Money Market
   
157,103
    
154,177
  
Retirement
   
54,809
    
52,694
  
Term Certificates
   
257,747
    
226,264
  
   
$
685,781
  
$
653,611
  
 
NOTE E - ACQUISITION OF LEVINE FINANCIAL GROUP
 
In March 2006, the Company acquired Levine Financial Group, Inc., a financial management company located in Northampton, Massachusetts, with $88 million in assets under management for $100 in cash and contingent purchase price of an additional $200. Earn out of the contingent purchase price is based on customer retention. Based on a preliminary purchase price allocation, the Company has recorded approximately $300 as a customer relationship intangible asset.
 
 

7

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
MARCH 31, 2006

NOTE F - SUBSEQUENT EVENT
 
On April 20, 2006, the Board of Directors declared a cash dividend of $0.05 per share. The dividend is payable on May 23, 2006 to stockholders of record as of May 9, 2006. United Mutual Holding Company intends to waive receipt of dividends paid on the shares it owns of the Company.
 
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview
 
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets, consisting primarily of loans, investment securities (including mortgage-backed securities, other securities and corporate and municipal bonds) and other interest-earning assets (primarily cash and cash equivalents), and the interest paid on our interest-bearing liabilities, consisting primarily of savings accounts, money market accounts, transaction accounts, certificates of deposit and Federal Home Loan Bank advances.
 
Our results of operations also are affected by our provisions for loan losses, noninterest income and noninterest expense. Noninterest income currently consists primarily of deposit account fees, financial services fees, increases in cash value-insurance, gains and losses on the sale of securities and miscellaneous other income. Noninterest expense currently consists primarily of compensation and employee benefits, data processing, occupancy, marketing and public relations, printing and office supplies, 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.

Critical Accounting Policies. Critical accounting policies are those that involve significant judgments and assumptions by management and that have, or could have, a material impact on our income or the carrying value of our assets. Our critical accounting policies are those related to our allowance for loan losses.

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

8

Management performs a quarterly evaluation of the adequacy of the allowance for loan losses. We consider a variety of factors in establishing this estimate including, but not limited to, current economic conditions, delinquency statistics, geographic and industry concentrations, the adequacy of the underlying collateral, the financial strength of the borrower, results of internal loan reviews and other relevant factors. This evaluation is inherently subjective as it requires material estimates by management that may be susceptible to significant change based on changes in economic and real estate market conditions.
 
The evaluation has a specific and general component. The specific component relates to loans that are delinquent or otherwise identified as a problem loan through the application of our loan review process and our loan grading system. All such loans are evaluated individually, with principal consideration given to the value of the collateral securing the loan. Specific allowances are established as required by this analysis. The general component is determined by segregating the remaining loans by type of loan, risk weighting (if applicable) and payment history. We also analyze historical loss experience, delinquency trends, general economic conditions and geographic and industry concentrations. This analysis establishes factors that are applied to the loan groups to determine the amount of the general component of the allowance for loan losses.
 
Actual loan losses may be significantly more than the allowances we have established which could have a material negative effect on our financial results.
 
Business Strategy

Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. Over the past several years, we have emphasized the origination of commercial and industrial loans and loans secured by commercial real estate, and we intend to increase our origination of these loans in the future. In addition, we intend to expand our branch network in our primary market area, which consists of Hampden and Hampshire Counties, Massachusetts. We cannot assure you that we will successfully implement our business strategy.

Highlights of our business strategy are as follows:

Remaining a Community-Oriented Financial Institution. We were established in 1882 and have been operating continuously since that time, growing through internal growth and a series of five mutual-to-mutual business combinations that occurred between 1960 and 1994. We have been, and continue to be, committed to meeting the financial needs of the communities in which we operate, and we are dedicated to providing quality personal service to our customers. We provide a broad range of individualized consumer and business financial services from our main office, ten branch offices and drive-up facility.
 
Expanding our Branch Network. We currently operate from 11 full-service banking offices and a drive-up only facility. We also maintain a financial services facility that offers insurance and investment products and financial planning services. We intend to evaluate new branch expansion opportunities, through acquisitions and de novo branching, to expand our presence within and outside our primary market area, including Northern Connecticut, and our current business plan calls for the acquisition and establishment of additional branch offices. In addition, we intend to evaluate acquisitions of other financial institutions, as opportunities present themselves.
 
Increasing our Commercial Real Estate and Commercial and Industrial Lending. We intend to continue to increase our origination of higher-yielding commercial real estate and commercial and industrial loans as a means of increasing our interest income. These loans also are generally originated with rates that are fixed for five years or less, which assists us in managing our interest rate risk. In support of this initiative we have recently supplemented our existing staff of commercial loan officers and intend to increase our resources of credit analysis and outside loan review. The additional capital raised in the offering will increase our commercial lending capacity by enabling us to originate more
 

9

loans and loans with larger balances. This will permit us to serve commercial borrowers with larger lending needs. Originating more commercial real estate and commercial and industrial loans exposes us to increased risks, as discussed in the Risk Factors section of this prospectus.
 
Maintaining High Asset Quality. We have emphasized maintaining strong asset quality by following conservative underwriting criteria, and primarily originating loans secured by real estate.
 
Increasing our Share of Lower-Cost Deposits. Our deposit gathering over the past few years has been characterized by a deliberate shift away from relatively high cost and volatile certificates of deposit to lower cost and more stable core deposits. This effort has enabled us to largely fund loan growth while maintaining a reasonable cost of funds. We attract core deposits with a targeted marketing program, a well established incentive-based cross-sales program and competitive rates. We intend to amplify these efforts to continue to attract core deposits as a prime funding source
 
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, the enactment of legislation or regulatory changes that have a less than favorable impact on the business of the Company, and significant increases in competitive pressures. 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, 2006 and December 31, 2005
 
Total assets increased $41.1 million, or 4.5%, to $947.6 million at March 31, 2006 from $906.5 million at December 31, 2005. The increase reflected growth of $32.7 million in interest bearing deposit accounts reflecting an intentional build-up in cash balances and $10.5 million in net loans, partially offset by a $6.0 million decrease in securities available for sale. The growth in assets was funded by a $32.2 million increase in deposits and $10.7 million in Federal Home Loan Bank advances.
 
Net loans increased to $641.0 million at March 31, 2006 from $630.6 million at December 31, 2005. One- to four-family residential mortgage loans increased $3.7 million, or 1.0%, to $375.0 million at March 31, 2006 from $371.3 million at December 31, 2005, 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 $4.5 million, or 3.0%, while consumer and commercial and industrial loans increased $1.1 million, or 1.2%. Construction loans increased $1.3 million, or 4.5%, to $30.2 million at March 31, 2006, reflecting the start-up of several new construction projects.
 
Securities available for sale decreased $6.0 million, or 2.6%, to $220.5 million at March 31, 2006 from $226.5 million at December 31, 2005. The decrease reflected moderate amortization in our mortgage-backed securities.
 

10

In March 2006, the Company acquired Levine Financial Group, Inc, a financial management company located in Northampton, Massachusetts, with $88 million in assets under management for $100 in cash and contingent purchase price of an additional $200. Earn out of the contingent purchase price is based on customer retention. Based on a preliminary purchase price allocation, the Company has recorded approximately $300 as a customer relationship intangible asset.
 
Total deposits increased $32.2 million, or 4.9%, to $685.8 million at March 31, 2006 from $653.6 million at December 31, 2005. The increase was a result of growth in certificate of deposit accounts of $31.5 million and retirement accounts of $2.1 million, offset by a decrease in core accounts of $1.4 million. The growth in certificates of deposit was due to our increased marketing and promotional activity in an effort to attract new customers and retain existing funds on deposit. Federal Home Loan Bank advances increased $10.7 million, or 10.5%, to $112.5 million at March 31, 2006 from $101.9 million at December 31, 2005. The increase in advances reflected the match-funding of longer-term fixed rate residential loans. Repurchase agreements decreased to $6.4 million at March 31, 2006 from $8.4 million at December 31, 2005, reflecting routine fluctuations in these overnight accounts.
 
Total stockholders’ equity increased $287,000 or 0.2% to $137.3 million at March 31, 2006 from $137.0 million at December 31, 2005. This increase reflected net income of $1.4 million for the three months ended March 31, 2006 partially offset by the payment of a cash dividend of $371,000 and an increase in the accumulated other comprehensive loss of $791,000 caused by an increase in intermediate-term interest rates in the debt securities markets. This loss was not considered by management 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 March 31,
2006 vs. 2005
  
   
Increase (Decrease) Due to
  
Net
  
   
Volume
  
Rate
  
Interest-earning assets:
                    
Loans
 
$
974
  
$
578
  
$
1,552
  
Investment securities
   
643
    
134
    
777
  
Other interest-earning assets
   
1
    
101
    
102
  
                     
Total interest-earning assets
   
1,618
    
813
    
2,431
  
                     
Interest-bearing liabilities:
                    
Savings accounts
   
(17
)
  
44
    
27
  
Money market/NOW accounts
   
53
    
563
    
616
  
Certificates of deposit
    
147
    
672
    
819
  
Total interest-bearing deposits
   
183
    
1,279
    
1,462
  
                     
FHLB Advances
   
261
   
114
    
375
  
Other interest-bearing liabilities
   
16
    
17
    
33
  
                     
Total interest-bearing liabilities
    
460
    
1,410
    
1,870
  
                     
Change in net interest income
 
$
1,158
  
$
(597
)
$
561
  

 

11

Comparison of Operating Results for the Three Months Ended March 31, 2006 and 2005
 
Net Income. The Company’s net income for the three months ended March 31, 2006 amounted to $1.4 million which was substantially the same as the prior year period.
 
Net Interest Income Before Provision for Loan Losses. Net interest income before provision for loan losses increased $561,000, or 8.8%, to $6.9 million for the three months ended March 31, 2006. The increase reflected a $134.3 million, or 17.1%, increase in the average balance of total interest-earning assets to $921.1 million with an increase in average rate to 5.46% from 5.12% which more than offset a $54.5 million or 8.6% increase in the average balance of total interest-bearing liabilities, whose average rate rose to 3.04% from 2.12% 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 initial public offering in 2005.
 
Interest Income. Interest income increased $2.4 million, or 25.0%, to $12.1 million for the three months ended March 31, 2006 from $9.7 million for the prior year period. The increase resulted from a $134.3 million, or 17.1%, increase in the average balance of total interest-earning assets, as well as a 34 basis point increase in the average yield on such assets to 5.46% for the three months ended March 31, 2006 from 5.12% for the prior year period. Interest income attributable to loans increased $1.6 million, or 19.3%, to $9.6 million for the three months ended March 31, 2006 from $8.0 million for the prior year period. The increase in interest earned on loans was due to a $66.6 million, or 11.6%, increase in the average balance of loans, coupled with a 38 basis point increase in the yield earned on such loans to 5.99% from 5.61%, 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 $879,000, or 52.7%, to $2.5 million for the three months ended March 31, 2006, from $1.7 million for the prior year period. The increase reflected the higher average balance in such assets of $64.4 million and an increase in the average yield of 108 basis points. 
 
Interest Expense. Interest expense increased $1.9 million, or 55.5%, to $5.2 million for the three months ended March 31, 2006 from $3.4 million for the prior year period. The increase in interest expense was due to a $54.5 million, or 8.6%, increase in the average balance of interest-bearing liabilities to $690.3 million for the three months ended March 31, 2006 from $635.9 million for the prior year period, coupled with the increase in the average cost of such liabilities to 3.04% for the three months ended March 31, 2006 from 2.12% for the prior year period. The interest paid on deposits increased by $1.5 million, or 56.7%, reflecting an increase in the average cost of such deposits to 2.84% from 1.90%, while the average balance of such deposits increased by $25.1 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 $408,000, or 51.7%, reflecting an increase in the average balance of such accounts to $121.5 million for the three months ended March 31, 2006 from $92.2 million for the prior year period, coupled with an increase in the average cost of such debt to 3.94% from 3.43%. 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, which continued through the current period.
 
Provision for Loan Losses. The provision for loan losses was $162,000 for the three months ended March 31, 2006 as compared to $275,000 for the three months ended March 31, 2005. Given the Company’s loan quality, measured principally by delinquency rates, charge-offs and internal loan classifications, management’s reserve methodology resulted in the lower provision for loan losses. The allowance for loan losses was $6.6 million, or 1.02% of loans outstanding at March 31, 2006.
 

 
 
Non-interest Income. Non-interest income increased $141,000, or 11.6% and amounted to $1.4 million for the three months ended March 31, 2006. This increase resulted primarily from fee income on depositors’ accounts.
 
Non-interest Expense. Non-interest expense increased $857,000 or 17.1%, to $5.9 million for the three months ended March 31, 2006 from $5.0 million for the prior year period. This n increase was largely attributable to salary and benefit increases totaling $390,000 which included a $94,000 expense related to the Company’s Employee Stock Ownership Plan (ESOP),as well as growth in occupancy and professional services costs. Occupancy costs increased $63,000, or 18.5%. Professional services costs increased $145,000, or 130.6% to $256,000 for the three month period ended March 31, 2006 mainly due to expenses incurred in connection with being a public company. Other non-interest expense increased $246,000, or 32.2%, primarily due to increases in depreciation, postage, and real estate owned expenses.
 
Income Tax Expense. Income tax expense for the three months ended March 31, 2006 was $873,000 as compared to $904,000 for the three months ended March 31, 2005. The effective tax rate was 39.2% and 39.8% for the three months ended March 31, 2006 and 2005, respectively. The lower rate was due to more funds invested by United 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, committee monitors the level of interest rate risk on a regular basis and 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 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 December 31, 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.
 

13


 

 
              
NPV as a Percentage of
Present Value of Assets (3)
Change in
Interest Rates
  
Estimated
  
Estimated Increase (Decrease)
in NPV
  
NPV Ratio
 
Increase (Decrease)
(basis points) (1)
  
NPV (2)
  
Amount
  
Percent
  
(4)
  
(basis points)
   
(Dollars in thousands)
              
                               
+300
  
$
82,555
    
$
(45,280
)
    
(35
)%
    
9.82
% 
 
  
(440
)
+200
    
97,384
      
(30,451
)
    
(24
)
    
11.32
      
(289
)
+100
    
112,584
      
(15,251
)
    
(12
)
    
12.80
      
(141
)
     0
    
127,835
      
—
      
—
      
14.21
      
—
  
-100
    
138,372
      
10,537
      
8
      
15.12
      
91
  
-200
    
139,084
      
11,248
      
9
      
15.08
      
87
  
_____________                                         
 
 
(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 December 31, 2005, in the event of a 200 basis point decrease in interest rates, we would experience a 9% increase in net portfolio value. In the event of a 300 basis point increase in interest rates, we would experience a 35% decrease in net portfolio value.
 
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the net portfolio value table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. Accordingly, although the net portfolio value table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
 
 
Liquidity
 
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, 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 March 31, 2006 our liquidity ratio was 34.04%, compared to 32.72% at December 31, 2005.
 

14

 
Capital Resources
 
United Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2006, the Bank exceeded all regulatory capital requirements. United Bank is considered “well capitalized” under regulatory requirements.
 
   
As of March 31, 2006:
  
   
Risk-based capital
18.0%
   
Core capital
11.2%
   
Tangible capital
11.2%
   
   
As of December 31, 2005:
  
   
Risk-based capital
18.3%
   
Core capital
11.6%
   
Tangible capital
11.6%

On February 16, 2006, the Company’s Board of Directors approved the adoption of a stock-based incentive plan that would provide for grants of stock options and restricted common stock awards. The number of options granted or shares awarded under the plan may not exceed 4.90% and 1.96%, respectively, of the Company’s outstanding shares (including shares issued to United Mutual Holding Company and to United Charitable Foundation). The number of options granted or shares awarded under the plan, when aggregated with any subsequently adopted stock-based benefit plans (exclusive of any shares held by the ESOP), may not exceed 25% of the number of shares of common stock held by persons other than United Mutual Holding Company. The stock-based incentive plan is subject to approval by the Company’s stockholders.
 
On April 20, 2006, the Board of Directors declared a cash dividend of $0.05 per share. The dividend is payable on May 23, 2006 to shareholders of record as of May 9, 2006. United Mutual Holding Company intends to waive receipt of dividends paid on the shares it owns of the Company.
 
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.”

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

15

 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.

At March 31, 2006, 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 1A.  Risk Factors

Not applicable.

ITEM 2.

Not applicable.

ITEM 3.

Not applicable.

ITEM 4.

Not applicable.
 
ITEM 5.

Not applicable.

ITEM 6.
 
Exhibits:
 
 

 

 

 

16

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 5, 2006
 
By:
/s/ Richard B. Collins
       
Richard B. Collins
       
President and Chief Executive Officer
         
         
Date:
May 5, 2006
 
By:
/s/ Donald F. X. Lynch
       
Donald F.X. Lynch
       
Executive Vice President and Chief
Financial Officer

17
 
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