UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2005
OR
[ ] Transition Report Pursuant To Section 13 or 15(d) Of The Securities And
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 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 August 4, 2005
United Financial Bancorp, Inc.
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)................ 1
Consolidated Statements of Condition
June 30, 2005 and December 31, 2004 ..................... 1
Consolidated Statements of Earnings
Three and six months ended June 30, 2005 and 2004 ....... 2
Consolidated Statements of Stockholders' Equity
Six months ended June 30, 2005 and 2004.................. 3
Consolidated Statements of Cash Flows
Six months ended June 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..................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 16
Item 4. Controls and Procedures........................................ 17
PART II. OTHER INFORMATION................................................. 17
Item 1. Legal Proceedings............................................. 17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds... 17
Item 3. Defaults Upon Senior Securities............................... 17
Item 4. Submission of Matters to a Vote of Security Holders........... 17
Item 5. Other Information............................................. 17
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
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION (unaudited)
(Dollars in thousands)
--------------------------------------------------------------------------------
June 30, December 31,
2005 2004
--------- --------------
ASSETS
Cash and due from banks.................................................... $ 15,687 $ 15,772
Interest bearing deposits.................................................. 103,625 7,180
Liquidity and cash funds................................................... 4,223 281
----------- ---------------
Total cash and cash equivalents...................................... 123,535 23,233
Securities available for sale, at market value............................. 210,859 152,329
Securities to be held to maturity, at amortized cost (fair value $3,379 in
2005 and $2,498 in 2004)................................................ 3,380 2,498
Loans, net of allowance for loan losses of $6,214 in 2005 and $5,750 in 2004 588,104 569,243
Banking premises and equipment, net........................................ 7,710 7,671
Accrued interest receivable................................................ 3,455 2,862
Deferred tax asset......................................................... 1,587 1,551
Stock in the Federal Home Loan Bank of Boston.............................. 6,175 6,021
Bank-owned life insurance.................................................. 5,867 5,705
Other assets............................................................... 2,015 895
----------- ---------------
TOTAL ASSETS......................................................... $ 952,687 $ 772,008
=============== ===============
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Deposits:
Interest bearing......................................................... $ 565,818 $ 527,426
Non-interest bearing..................................................... 89,167 86,246
------------ ---------------
Total deposits....................................................... 654,985 613,672
Federal Home Loan Bank of Boston advances................................ 103,630 86,694
Subscriptions payable..................................................... 116,547 --
Repurchase agreements.................................................... 7,970 4,317
Escrow funds held for borrowers.......................................... 924 954
Accrued expenses and other liabilities................................... 3,748 4,116
------------ ---------------
Total liabilities.................................................... 887,804 709,753
Commitments and contingencies............................................
Stockholder's 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;
100 shares issued in 2004 and 2005..................................... -- --
Paid-in capital.......................................................... -- --
Retained earnings........................................................ 65,632 62,667
Accumulated other comprehensive loss..................................... (749) (412)
------------ ---------------
Total stockholder's equity........................................... 64,883 62,255
------------ ---------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY........................... $ 952,687 $ 772,008
============ ===============
1
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS (unaudited)
(Dollars in thousands)
--------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2005 2004 2005 2004
------ ----- ----- -----
Interest and dividend income:
Loans...................................................... $ 8,418 $ 7,197 $ 16,525 $ 14,273
Investment interest and dividends.......................... 1,859 1,473 3,387 3,314
Other interest-earning assets.............................. 115 239 256 280
--------- -------- --------- --------
Total interest and dividend income...................... 10,392 8,909 20,168 17,867
Interest expense:
Interest on deposits....................................... 2,901 2,194 5,481 4,430
Interest on short-term borrowings.......................... 228 75 322 154
Interest on long-term debt................................. 690 666 1,385 1,285
--------- -------- --------- --------
Total interest expense.................................. 3,819 2,935 7,188 5,869
--------- -------- --------- --------
Net interest income before provision for loan losses.... 6,573 5,974 12,980 11,998
Provision for loan losses.................................... 275 113 550 225
--------- -------- --------- --------
Net interest income after provision for loan losses..... 6,298 5,861 12,430 11,773
Non-interest income:
Fee income on depositors' accounts......................... 1,005 889 1,908 1,677
Gain on sale of loans...................................... -- 1 -- 10
Net gain on sale of securities............................. -- 2 -- 112
Income from bank-owned life insurance...................... 81 75 162 150
Other income .............................................. 175 206 357 372
--------- -------- --------- --------
Total non-interest income............................... 1,261 1,173 2,427 2,321
--------- -------- --------- --------
Non-interest expense:
Salaries and employee benefits............................. 2,508 2,166 5,101 4,536
Occupancy expense.......................................... 399 437 739 848
Advertising expenses....................................... 335 394 680 618
Data processing expenses................................... 645 645 1,391 1,262
Professional fees.......................................... 108 50 219 143
Other expenses............................................. 902 1,107 1,796 2,361
--------- -------- --------- --------
Total non-interest expense.............................. 4,897 4,799 9,926 9,768
--------- -------- --------- --------
Income before income taxes.............................. 2,662 2,235 4,931 4,326
Income tax expense........................................... 1,063 893 1,966 1,723
--------- -------- --------- --------
NET INCOME.............................................. $ 1,599 $ 1,342 $ 2,965 $ 2,603
========= ======== ========= ========
2
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004
(Dollars in thousands)
--------------------------------------------------------------------------------
Accumulated
Other
Comprehensive
Common Stock Paid-In Capital Retained Earnings Income (Loss) Total
--------------- ---------------- ----------------- ------------- -------------
Balances at December 31, 2003........ $ -- $ -- $ 57,289 $ (239) $ 57,050
Impact of reorganization............... (150) (150)
Net income........................... -- -- 2,603 -- 2,603
Net unrealized loss on securities
available for sale, net of
reclassification adjustment and tax
effects............................ -- -- -- (1,565) (1,565)
-------------
Total comprehensive income..... 888
-------------- --------------- ------------- ------------- -------------
Balances at June 30, 2004............ $ -- $ -- $ 59,742 (1,804) 57,938
=============== =============== ============== ============= =============
Balances at December 31, 2004........ $ -- $ -- $ 62,667 $ (412) $ 62,255
Net income........................... -- -- 2,965 -- 2,965
Net unrealized loss on securities
available for sale, net of
reclassification adjustment and tax
effects............................ -- -- -- (337) (337)
-------------
Total comprehensive income..... 2,628
-------------- --------------- -------------- ------------- -------------
Balances at June 30, 2005............ $ -- $ -- $ 65,632 $ (749) $ 64,883
=============== =============== ============== ============= =============
3
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004
(Dollars in thousands)
--------------------------------------------------------------------------------
Six Months Ended
----------------------------------
June 30,
----------------------------------
2005 2004
----------------- ---------------
Cash flows from operating activities:
Net income.................................................... $ 2,965 $ 2,603
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses.................................. 550 225
Provision (credit) for other real estate owned............. (18) (52)
Depreciation and amortization.............................. 311 323
Deferred income tax expense (benefit)...................... (36) (230)
Amortization of premiums and discounts..................... (226) (625)
Net gain on sale of available for sale securities.......... -- (112)
Gain on sale of loans...................................... -- (10)
Gain on sale of property and equipment..................... (4) --
Increase in Bank-owned life insurance...................... (162) (150)
(Increase) decrease in accrued interest receivable......... (593) 106
(Increase) decrease in other assets, net................... (206) 379
Increase (decrease) in accrued expenses and other
liabilities............................................. (368) (482)
----------- ----------
Net cash provided by operating activities................ 2,213 1,975
Cash flows from investing activities:
Purchases of securities available for sale.................... (77,613) (32,224)
Purchases of securities held to maturity...................... (909) --
Proceeds from sales, maturities and principal repayments of
securities available for sale............................... 18,974 49,456
Proceeds from maturities and principal repayments of
securities to be held to maturity........................... 25 28
Purchases of Federal Home Loan Bank of Boston stock........... (154) (1,936)
Proceeds from sales of other real estate owned................ -- 8
Net loan originations and principal collections............... (19,393) (45,262)
Proceeds from sales of loans.................................. -- 4,794
Purchases of property and equipment........................... (362) (51)
Proceeds from sale of property and equipment.................. 16 --
----------- ----------
Net cash used in investing activities.................... (79,416) (25,187)
4
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) - Continued
FOR THE SIX MONTHS ENDED JUNE 30, 2005 and 2004
(Dollars in thousands)
--------------------------------------------------------------------------------
Six Months Ended
June 30,
---------------------------------
2005 2004
-------------- --------------
Cash flows from financing activities:
Net increase in deposits...................................... $ 41,313 $ 8,216
Proceeds of stock subscription orders......................... 116,547 --
Net increase in repurchase agreements........................ 3,653 (479)
Net increase in escrow funds held for borrowers............... (29) (207)
Proceeds of FHLBB advances.................................... 44,626 175,980
Repayments of FHLBB advances.................................. (27,691) (162,118)
Deferred stock offering costs................................. (914) --
Impact of reorganization...................................... -- (150)
-------------- --------------
Net cash provided by financing activities................ 177,505 21,242
-------------- --------------
Increase in cash and cash equivalents........................... 100,302 (1,971)
Cash and cash equivalents at beginning of year.................. 23,233 16,144
-------------- --------------
Cash and cash equivalents at end of period..................... $ 123,535 $ 14,173
============== ==============
Supplemental Disclosure of Cash Flow Information:
-------------------------------------------------
Cash paid during the period:
Interest on deposits and other borrowings....................... $ 7,179 $ 5,863
Income taxes - net.............................................. 2,027 343
5
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 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
June 30, 2005 and the results of operations for the three months and six months
ended June 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 filing on Form S-1.
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. intends to sell
up to 49% of its common stock to eligible Bank depositors and, if necessary, to
the general public. The Company's Form S-1, including the prospectus distributed
to interested parties, was declared effective by the Securities and Exchange
Commission on May 16, 2005. The Company's solicitation of subscriptions of its
initial public offering (IPO) ended on June 20, 2005. The Company received
subscription orders of approximately $135,155, of which $116,547 was in cash. As
of June 30, 2005, the Company has deferred offering costs in connection with
this IPO of $914. These costs will be deducted from the proceeds upon the sale
and issuance of the common stock.
6
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2005
--------------------------------------------------------------------------------
NOTE B - REORGANIZATION AND CHANGE IN CORPORATE FORM - Continued
As part of the IPO, the Company intends to issue shares of common stock equal to
4.5% of the number of shares of common stock sold in the offering to a newly
formed charitable foundation to further support its ongoing commitment to the
community. In addition, the Bank's Board of Directors has adopted an Employee
Stock Ownership Plan (the "ESOP") which will purchase 8% of the common stock
sold in connection with the offering and issued to the charitable foundation. In
early July 2005, the Company received regulatory approval to sell $76,700 in
common stock. See note F.
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 six months ended June:
2005 2004
-------------- --------------
Change in unrealized holding (losses) gains on available for sale
securities....................................................... $ (556) $ (2,694)
Reclassification adjustment for gains realized in income......... -- (112)
-------------- --------------
Net unrealized (losses) gains.................................... (556) (2,582)
Tax effect....................................................... (219) (1,017)
-------------- --------------
Other Comprehensive income (loss) $ (337) $ (1,565)
============== ==============
7
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2005
--------------------------------------------------------------------------------
NOTE D - LOANS
The components of loans are as follows at June 30, 2005 and December 31, 2004:
June 30, December 31,
2005 2004
-------------- ----------------
Real estate- Residential (1-4 Family)........................... $ 353,124 $ 330,834
- Commercial......................................... 137,476 137,787
Construction.................................................... 29,564 29,836
Commercial and industrial....................................... 53,402 56,291
Consumer........................................................ 19,709 19,322
-------------- ---------------
593,275 574,070
============== ===============
Other Items:
Net deferred loan costs......................................... 1,043 923
Allowance for loan losses....................................... (6,214) (5,750)
-------------- ----------------
$ 588,104 $ 569,243
============== ================
Nonaccrual loans amounted to approximately $2,875 and $3,784 at June 30, 2005
and December 31, 2004, respectively.
NOTE E - DEPOSITS
Deposit accounts, by type, are summarized as follows at June 30, 2005 and
December 31, 2004:
June 30, December 31,
2005 2004
---------------- ------------------
Type
----
Demand........................................... $ 89,167 $ 86,246
NOW.............................................. 47,204 39,917
Regular Savings.................................. 99,640 94,586
Money Market..................................... 137,916 139,754
Retirement....................................... 52,369 48,496
Term Certificates................................ 228,689 204,673
---------------- ------------------
$ 654,985 $ 613,672
================ ==================
8
UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
JUNE 30, 2005
--------------------------------------------------------------------------------
NOTE F - SUBSEQUENT EVENTS
On July 12, 2005, the Company completed its IPO of stock, accepting orders for
7,672,153 shares of common stock at a purchase price of $10.00 per share,
representing 44.6% of the Company's outstanding shares. Of this amount, 641,300
shares were purchased by the Company's newly-formed ESOP which was financed by a
loan from the Company. The remaining 55.4% of the Company's shares are held by
United Mutual Holding Company (53.4%) and the United Charitable Foundation
(2.0%). The completion of the IPO resulted in an increase in the Company's
stockholders' equity of $68,409.
As noted above, the Company issued to its newly-formed charitable foundation in
July 2005 IPO shares with a value of $3,441 and cash of $150 in connection with
this transaction. These amounts will be recognized as expenses in the quarter
ending September 30, 2005.
Also as noted above, the Company has formed an ESOP, which purchased
641,300 shares in the IPO 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 and, accordingly, 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 $321 during the second half 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.
9
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 June 30, 2005 and December 31, 2004
Total assets increased $180.7 million, or 23.4%, to $952.7 million at
June 30, 2005 from $772.0 million at December 31, 2004. The increase reflected
growth of $58.5 million in securities available for sale and $96.4 million in
cash received from stock subscriptions which was invested in short term
deposits. The growth in assets was funded by $116.5 million in subscription
orders in the IPO, $41.3 million increase in deposits and $16.9 million in
Federal Home Loan Bank advances.
Net loans increased to $588.1 million at June 30, 2005 from $569.2
million at December 31, 2004. One- to four-family residential mortgage loans
increased $22.3 million, or 6.7%, to $353.1 million at June 30, 2005 from $330.8
million at December 31, 2004, reflecting continued demand in our primary market
area for residential mortgage loans.
Commercial real estate loans decreased $311,000, or 0.2%, while
commercial and industrial loans decreased $2.9 million, or 5.1%. The decrease in
these loans was primarily the result of a payoff of a large participation loan.
Construction loans decreased $272,000, or 0.9%, to $29.6 million at June 30,
2005, reflecting completion of construction projects.
Securities available for sale increased $58.5 million, or 38.4%, to
$210.9 million at June 30, 2005 from $152.3 million at December 31, 2004. The
investments purchased were mortgage-backed securities and short term agency
securities which reflect the ongoing philosophy of the Company's investing
strategies.
Total cash and cash equivalents increased $100.3 million, or 431.7%, to
$123.5 million at June 30, 2005 from $23.2 million at December 31, 2004,
reflecting the collection of subscription orders in connection with the
Company's IPO.
Total deposits increased $41.3 million, or 6.7%, to $655.0 million at
June 30, 2005 from $613.7 million at December 31, 2004. The increase was a
result of growth in certificate of deposit accounts of $24.0 million, retirement
accounts of $3.9 million and core accounts of $13.4 million. Federal Home Loan
Bank advances increased $16.9 million, or 19.5%, to $103.6 million at June 30,
10
2005 from $86.7 million at December 31, 2004. The increase in advances reflected
the funding of a leveraged securities transaction. Repurchase agreements
increased to $8.0 million at June 30, 2005 from $4.3 million at December 31,
2004, reflecting routine fluctuations in these overnight accounts.
Total stockholder's equity increased $2.6 million, or 4.2%, to $64.9
million at June 30, 2005 from $62.3 million at December 31, 2004. This increase
reflected net income of $3.0 million for the six months ended June 30, 2005
partially offset by an increase in the accumulated other comprehensive loss of
$337,000 caused by an increase in intermediate-term interest rates in the debt
securities markets.
Rate/Volume Analysis
The following table presents the effects of changing rates and volumes
on our net interest income for the periods indicated. The rate column shows the
effects attributable to changes in rate (changes in rate multiplied by prior
volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The net column represents the sum
of the prior columns. For purposes of this table, changes attributable to both
rate and volume, which cannot be segregated, have been allocated
proportionately, based on the changes due to rate and the changes due to volume.
Three Months Ended June 30, Six Months Ended June 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........................ $ 770 $ 451 $ 1,221 $ 1,748 $ 504 $ 2,252
Investment securities........ 94 292 386 (194) 267 73
Other interest-earning assets 115 (239) (124) 182 (206) (24)
--------- ---------- --------- ---------- --------- -----------
Total interest-earning
assets................... 979 504 1,483 1,736 565 2,301
--------- ---------- --------- ---------- --------- -----------
Interest-bearing liabilities:
Savings accounts............. 7 (1) 6 15 (4) 11
Money market/NOW accounts.... (18) 271 253 (21) 436 415
Certificates of deposit...... 227 221 448 352 274 626
--------- ---------- --------- ---------- --------- -----------
Total interest-bearing
deposits................. 216 491 707 346 706 1,052
FHLB Advances................ 109 50 159 160 89 249
Other interest-bearing
liabilities................ 21 (3) 18 22 (4) 18
--------- ---------- --------- ---------- --------- -----------
Total interest-bearing
liabilities.............. 344 539 884 528 791 1,319
--------- ---------- --------- ---------- --------- -----------
Change in net interest income... $ 635 $ (36) $ 599 $ 1,208 $ (226) $ 982
========= ========== ========= ========== ========= ===========
Comparison of Operating Results for the Three Months Ended June 30, 2005
and 2004
Net Income. Net income increased $257,000, or 19.2%, to $1.6 million
for the three months ended June 30, 2005 from $1.3 million for the three months
ended June 30, 2004. The increase primarily resulted from increased net interest
income and noninterest income, partially offset by a higher provision for loan
losses and higher noninterest expense.
Net Interest Income Before Provision for Loan Losses. Net interest
income before provision for loan losses increased $599,000, or 10.0%, to $6.6
million for the three months ended June 30, 2005. The increase reflected a $76.0
11
million, or 10.5%, increase in the average balance of total interest earning
assets to $802.9 million for the three months ended June 30, 2005, which more
than offset a 13 basis point decrease in our interest rate spread to 2.87% from
3.00%.
Interest Income. Interest income increased $1.5 million, or 16.6%, to
$10.4 million for the three months ended June 30, 2005 from $8.9 million for the
prior year period. The increase resulted from a $76.0 million, or 10.5%,
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 5.18% for the
three months ended June 30, 2005 from 4.90% for the prior year period. Interest
income attributable to loans increased $1.2 million, or 17.0%, to $8.4 million
for the three months ended June 30, 2005 from $7.2 million for the prior year
period. The increase in interest earned on loans was due to a $54.3 million, or
10.3%, increase in the average balance of loans, coupled with a 33 basis point
increase in the yield earned on such loans to 5.80% from 5.47%, as the continued
low market interest rate environment combined with strong demand for residential
financing in our primary market area resulted in our loan originations more than
offsetting loan prepayments. Interest earned on investment securities, including
mortgage-backed securities, increased $386,000, or 26.2%, to $1.9 million for
the three months ended June 30, 2005, from $1.5 million for the prior year
period. The increase reflected the higher average balance in such securities of
$11.4 million and an increase in the average yield of 59 basis points.
Interest Expense. Interest expense increased $884,000, or 30.1%, to
$3.8 million for the three months ended June 30, 2005 from $2.9 million for the
prior year period. The increase in interest expense was due to a $44.6 million,
or 7.2%, increase in the average balance of interest-bearing liabilities to
$661.8 million for the three months ended June 30, 2005 from $617.2 million for
the prior year period, coupled with the increase in the average cost of such
liabilities to 2.31% for the three months ended June 30, 2005 from 1.90% for the
prior year period. The interest paid on deposits increased by $707,000, or
32.2%, reflecting an increase in the average cost of such deposits to 2.08% from
1.66%, while the average balance of such deposits increased by $29.0 million, or
5.5%. 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 $177,000, or 23.9%, reflecting
an increase in the average balance of such accounts to $105.1 million for the
three months ended June 30, 2005 from $89.5 million for the prior year period,
coupled with an increase in the average cost of such advances to 3.49% from
3.31%.
Provision for Loan Losses. The provision for loan losses was $275,000
for the three months ended June 30, 2005 as compared to $113,000 for the three
months ended June 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 higher adversely classified loans and higher nonperforming
loans in 2005 as compared to 2004.
Nonaccrual loans as of June 30, 2005 amounted to $2.9 million, an
increase of $500,000, or 20.8% over nonaccrual balances of $2.4 million at June
30, 2004. Of the June 30, 2005 amount, $1.8 million was due to two delinquent
credits, both of which were collateralized by either residential real estate,
commercial real estate or non-real estate assets. We expect that the collateral
for these loans as well as the implementation of our normal collection
procedures will result in a resolution of these delinquencies without loss to
the Company. The allowance for loan losses was $6.2 million, or 1.05% of loans
outstanding on June 30, 2005.
Noninterest Income. Noninterest income increased $88,000, or 7.5%, to
$1.3 million for the three months ended June 30, 2005. Fee income on depositors'
accounts increased $116,000 to $1.0 million for the three months ended June 30,
2005, reflecting growth in deposits to $655.0 million at June 30, 2005.
12
Noninterest Expense. Noninterest expense increased 2.0% to $4.9 million
for the three months ended June 30, 2005 from $4.8 million for the prior year
period. The increase reflected salary and employee benefits 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 increased to $1.1 million for
the three months ended June 30, 2005 from $893,000 for the prior year. The
effective tax rate was 39.9% and 40.0% for the three months ended June, 2005 and
2004, respectively.
Comparison of Operating Results for the Six Months Ended June 30, 2005 and 2004
Net Income. Net income increased $362,000, or 13.9%, to $3.0 million
for the six months ended June 30, 2005 from $2.6 million for the six months
ended June 30, 2004. The increase in net income reflected an increase in net
interest income, which more than offset increased non-interest expense.
Net Interest Income Before Provision for Loan Losses. Net interest
income before provision for loan losses increased $982,000, or 8.2%, to $13.0
million for the six months ended June 30, 2005. The increase reflected a $62.1
million, or 8.6%, increase in the average balance of total interest earning
assets to $781.0 million for the six months ended June 30, 2005, which more than
offset a 10 basis point decrease in our interest rate spread to 2.95% from
3.05%.
Interest Income. Interest income increased $2.3 million, or 12.9%, to
$20.2 million for the six months ended June 30, 2005 from $17.9 million for the
prior year period. The increase resulted from a $62.1 million, or 8.6%, increase
in the average balance of total interest-earning assets, as well as a 19 basis
point increase in the average yield on such assets to 5.16% for the six months
ended June 30, 2005 from 4.97% for the prior year period. Interest income
attributable to loans increased $2.2 million, or 15.8%, to $16.5 million for the
six months ended June 30, 2005 from $14.3 million for the prior year period. The
increase in interest earned on loans was due to a $61.5 million, or 11.9%,
increase in the average balance of loans, coupled with a 19 basis point increase
in the yield earned on such loans to 5.72% from 5.53%. Interest earned on
investment securities, including mortgage-backed securities, increased $73,000,
or 2.2%, to $3.4 million for the six months ended June 30, 2005, from $3.3
million for the prior year period. The increase reflected a lower average
balance in such securities of $10.9 million partially offset by an increase in
the average yield of 29 basis points.
Provision for Loan Losses. The provision for loan losses was $550,000
for the six months ended June 30, 2005 as compared to $225,000 for the six
months ended June 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 higher adversely classified loans and higher nonperforming
loans in 2005 as compared to 2004.
Nonaccrual loans as of June 30, 2005 amounted to $2.9 million, an
increase of $500,000, or 20.8% over nonaccrual balances of $2.4 million at June
30, 2004. Of the June 30, 2005 amount, $1.8 million was due to two delinquent
credits, both of which are collateralized by either residential real estate,
commercial real estate or non-real estate assets. We expect that the collateral
for these loans as well as the implementation of our normal collection
procedures will result in a resolution of these delinquencies without loss to
the Company. The allowance for loan losses was $6.2 million, or 1.05% of loans
outstanding on June 30, 2005.
Noninterest Income. Noninterest income increased $106,000, or 4.6%, to
$2.4 million for the six months ended June 30, 2005. Fee income on depositors'
13
accounts increased $231,000 to $1.9 million for the six months ended June 30,
2005, reflecting growth in deposits to $655.0 million at June 30, 2005,
partially offset by lower securities gains of $112,000 in the current year
period.
Noninterest Expense. Noninterest expense increased 1.6% to $9.9 million
for the six months ended June 30, 2005 from $9.8 million for the prior year
period. The increase reflected salary and employee benefits 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 increased to $2.0 million for
the six months ended June 30, 2005 from $1.7 million for the prior year. The
effective tax rate was 39.9% and 39.8% for the six months ended June 2005 and
2004, respectively.
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 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 March 31, 2005, the latest data
available, the estimated changes in our net portfolio value that would result
from the designated instantaneous changes in the United States Treasury yield
curve. Computations of prospective effects of hypothetical interest rate changes
are based on numerous assumptions, including relative levels of market interest
rates, loan prepayments and deposit decay, and should not be relied upon as
indicative of actual results.
14
NPV as a Percentage of
Present Value of Assets (3)
Estimated Increase ---------------------------------
(Decrease) in NPV
Change in Interest ------------------------- Increase
Rates (basis Estimated NPV Ratio (Decrease)
points) (1) NPV (2) Amount Percent (4) (basis points)
------------------ ------------ ------------ ---------- ------------- ----------------
(Dollars in thousands)
+300 $ 53,371 $ (39,595) (43)% 6.90% (438)
+200 66,758 (26,207) (28) 8.45 (284)
+100 80,283 (12,683) (14) 9.94 (134)
0 92,965 -- -- 11.28 --
-100 101,848 8,882 10 12.17 89
-200 103,096 10,131 11 12.23 95
---------------------
(1) Assumes an instantaneous uniform change in interest rates at all
maturities.
(2) NPV is the discounted present value of expected cash flows from
assets, liabilities and off-balance sheet contracts.
(3) Present value of assets represents the discounted present value of
incoming cash flows on interest-earning assets.
(4) NPV Ratio represents NPV divided by the present value of assets.
The table above indicates that at March 31, 2005, in the event of a 200
basis point decrease in interest rates, we would experience an 11% increase in
net portfolio value. In the event of a 200 basis point increase in interest
rates, we would experience a 28% decrease in net portfolio value. These changes
in net portfolio value are within the limitations established in our asset and
liability management policies.
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.
The above results may change significantly as a result of our
deployment of the proceeds of the IPO.
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 June 30, 2005, our liquidity ratio
averaged 43.46%. This higher than normal liquidity ratio reflects the receipt of
15
approximately $116 million during the quarter ended June 30, 2005, in
subscriptions to purchase common stock in connection with the Company's IPO.
This ratio is expected to decrease significantly as the Company refunded $58.4
million of over subscriptions in July 2005. In addition, the Company expects to
gradually invest proceeds from the IPO into longer-term interest-earning assets
in future periods, thereby reducing the liquidity ratio.
Capital Resources
United Bank is subject to various regulatory capital requirements,
including a risk-based capital measure. The risk-based capital guidelines
include both a definition of capital and a framework for calculating
risk-weighted assets by assigning balance sheet assets and off-balance sheet
items to broad risk categories. At June 30, 2005, United Bank exceeded all
regulatory capital requirements. United Bank is considered "well capitalized"
under regulatory guidelines.
For Capital To Be Well Capitalized Under
Actual Adequacy Purposes Regulatory Framework
------------------------------- ------------------------------ ------------------------------
Amount Ratio Amount Ratio Amount Ratio
-------------- ------------- -------------- ------------- -------------- -------------
As of June 30, 2005:
Risk-based capital............ $ 71,796 12.4% > $ 46,180 > 8.0% > $ 57,725 > 10.0%
- - - -
Core capital.................. 65,582 6.9% > 38,150 > 4.0% > 57,225 > 6.0%
- - - -
Tangible capital.............. 65,582 6.9% > 14,306 > 1.5% > 47,687 > 5.0%
- - - -
As of December 31, 2004:
Risk-based capital............ $ 68,285 12.8% > $ 42,879 > 8.0% > $ 53,598 > 10.0%
- - - -
Core capital.................. 62,535 8.1% > 30,901 > 4.0% > 46,351 > 6.0%
- - - -
Tangible capital.............. 62,535 8.1% > 11,622 > 1.5% > 38,626 > 5.0%
- - - -
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
16
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 June 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.
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
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
United Financial Bancorp, Inc.
Date: August 04, 2005 By: /s/ Richard B. Collins
--------------- -------------------------------------
Richard B. Collins
President and Chief Executive Officer
Date: August 04, 2005 By: /s/ Donald F. X. Lynch
--------------- -------------------------------------
Donald F.X. Lynch
Executive Vice President and Chief
Financial Officer
18