form10q-85801_ubnk.htm

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 June 30, 2007
  
     
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 ý
Non-accelerated filer o

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
17,071,853 shares outstanding as of August 1, 2007

 


United Financial Bancorp, Inc.

INDEX
 
Page
   
 
     
 
     
   
 
1
     
   
 
2
     
   
 
3
     
   
 
4
     
 
5
     
 
 
9
     
21
     
21
     
22
     
22
     
22
     
22
     
22
     
23
     
23
     
24
     
     
25


 


     
Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
26
     
Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
27
     
Statement of Chief Executive Officer Furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
28
     
Statement of Chief Financial Officer Furnished Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
29

 

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)
 
   
June 30,
    
December 31,
  
   
2007
    
2006
  
   
(unaudited)
        
ASSETS
            
             
Cash and due from banks
   $
16,534
     $
15,459
  
Interest-bearing deposits
    
4,027
      
9,960
  
        Total cash and cash equivalents
    
20,561
      
25,419
  
                 
Short-term investments
    
1,004
      
-
  
Securities available for sale, at fair value
    
161,169
      
190,237
  
Securities to be held to maturity, at amortized cost (fair value $3,621 at
          
   June 30, 2007 and $3,227 at December 31, 2006)
    
3,686
      
3,241
  
Loans, net of allowance for loan losses of  $7,721 at June 30, 2007 and
                
   $7,218 at December 31, 2006
    
797,236
      
756,180
  
Other real estate owned
    
-
      
562
  
Accrued interest receivable
    
4,295
      
4,320
  
Stock in the Federal Home Loan Bank of Boston
    
9,885
      
9,274
  
Banking premises and equipment, net
    
10,614
      
8,821
  
Bank-owned life insurance
    
6,515
      
6,304
  
Other assets
    
7,782
      
5,075
  
                 
        TOTAL ASSETS
   $
1,022,747
     $
1,009,433
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Liabilities:
                
Deposits:
                
    Interest-bearing
   $
620,980
     $
588,496
  
    Non-interest-bearing
    
104,773
      
97,190
  
        Total deposits
    
725,753
      
685,686
  
Federal Home Loan Bank of Boston advances
    
142,519
      
169,806
  
Repurchase agreements
    
7,990
      
10,425
  
Escrow funds held for borrowers
    
1,113
      
1,121
  
Accrued expenses and other liabilities
    
6,776
      
4,684
  
        Total liabilities
    
884,151
      
871,722
  
                 
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 June 30, 2007 and at December 31, 2006
    
172
      
172
  
Paid-in capital
    
76,700
      
75,520
  
Retained earnings
    
71,337
      
70,406
  
Unearned compensation
     (5,550 )     (5,772 )
Treasury stock, at cost (134,142 shares at June 30, 2007 and 51,445 shares
          
   at December 31, 2006)
     (1,873 )     (664 )
Accumulated other comprehensive loss, net of taxes
     (2,190 )     (1,951 )
        Total stockholders’ equity
    
138,596
      
137,711
  
                 
        TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
   $
1,022,747
     $
1,009,433
  
                 

See notes to unaudited consolidated financial statements

 
1




UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(Dollars in thousands, except per share amounts) 
 
   
Three Months Ended
    
Six Months Ended
  
   
June 30,   
    
June 30,   
  
   
2007
    
2006
    
2007
    
2006
  
Interest and dividend income:
                        
   Loans
   $
12,350
     $
10,076
     $
24,305
     $
19,676
  
   Investments
    
1,854
      
2,261
      
3,836
      
4,566
  
   Other interest-earning assets
    
309
      
288
      
684
      
529
  
      Total interest and dividend income
    
14,513
      
12,625
      
28,825
      
24,771
  
                                 
Interest expense:
                                
   Deposits
    
5,477
      
4,664
      
10,658
      
8,706
  
   Borrowings
    
1,901
      
1,196
      
4,076
      
2,393
  
      Total interest expense
    
7,378
      
5,860
      
14,734
      
11,099
  
                                 
Net interest income before provision for loan losses
    
7,135
      
6,765
      
14,091
      
13,672
  
                                 
Provision for loan losses
    
320
      
300
      
604
      
462
  
                                 
Net interest income after provision for loan losses
    
6,815
      
6,465
      
13,487
      
13,210
  
                                 
Non-interest income:
                                
   Fee income on depositors’ accounts
    
1,097
      
1,037
      
2,135
      
1,982
  
   Loss on sale of securities
     (43 )    
-
       (29 )    
-
  
   Wealth management income
    
170
      
136
      
291
      
193
  
   Other income
    
211
      
269
      
436
      
524
  
      Total non-interest income
    
1,435
      
1,442
      
2,833
      
2,699
  
                                 
Non-interest expense:
                                
   Salaries and benefits
    
3,735
      
3,130
      
7,573
      
6,159
  
   Occupancy expenses
    
481
      
410
      
972
      
813
  
   Marketing expenses
    
449
      
350
      
771
      
765
  
   Data processing expenses
    
653
      
558
      
1,295
      
1,190
  
   Professional fees
    
263
      
223
      
652
      
479
  
   Other expenses
    
994
      
1,166
      
1,959
      
2,205
  
      Total non-interest expense
    
6,575
      
5,837
      
13,222
      
11,611
  
                                 
Income before income taxes
    
1,675
      
2,070
      
3,098
      
4,298
  
                                 
Income tax expense
    
697
      
780
      
1,286
      
1,653
  
                                 
Net income
   $
978
     $
1,290
     $
1,812
     $
2,645
  
                                 
Earnings per share:
                                
   Basic
   $
0.06
     $
0.08
     $
0.11
     $
0.16
  
   Diluted
   $
0.06
     $
0.08
     $
0.11
     $
0.16
  
                                 
Weighted average shares outstanding:
                                
   Basic
    
16,226,449
      
16,608,783
      
16,249,929
      
16,604,775
  
   Diluted
    
16,309,877
      
16,608,783
      
16,321,394
      
16,604,775
  

See notes to unaudited consolidated financial statements.

 
2

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2007 and 2006
(Dollars in thousands, except per share amounts) 
                                       
Accumulated
        
   
Common
                                  
Other
        
   
Shares
    
Common
    
Paid-In
    
Retained
    
Unearned
    
Treasury
    
Comprehensive
        
   
Outstanding
    
Stock
    
Capital
    
Earnings
    
Compensation
    
Stock
    
Loss
    
Total
  
                                                 
Balances at December 31, 2005
    
17,205,995
     $
172
     $
78,446
     $
66,944
     $ (6,092 )   $
-
     $ (2,465 )   $
137,005
  
                                                                 
Net income
    
-
      
-
      
-
      
2,645
      
-
      
-
      
-
      
2,645
  
Other comprehensive loss
    
-
      
-
      
-
      
-
      
-
      
-
       (1,363 )     (1,363 )
     Total comprehensive income
                                                            
1,282
  
                                                                 
Cash dividends declared ($0.10 per share)
    
-
      
-
      
-
       (741 )    
-
      
-
      
-
       (741 )
ESOP shares committed to be released
    
-
      
-
      
30
      
-
      
160
      
-
      
-
      
190
  
                                                                 
Balances at June 30, 2006
    
17,205,995
     $
172
     $
78,476
     $
68,848
     $ (5,932 )   $
-
     $ (3,828 )   $
137,736
  
                                                                 
                                                                 
Balances at December 31, 2006
    
17,154,550
     $
172
     $
75,520
     $
70,406
     $ (5,772 )   $ (664 )   $ (1,951 )   $
137,711
  
                                                                 
Net income
    
-
      
-
      
-
      
1,812
      
-
      
-
      
-
      
1,812
  
Other comprehensive loss
    
-
      
-
      
-
      
-
      
-
      
-
       (239 )     (239 )
     Total comprehensive income
                                                            
1,573
  
                                                                 
Cash dividends declared ($0.12 per share)
    
-
      
-
      
-
       (881 )    
-
      
-
      
-
       (881 )
Treasury stock purchases
     (82,697 )    
-
      
-
      
-
      
-
       (1,209 )    
-
       (1,209 )
Stock-based compensation
    
-
      
-
      
1,077
      
-
      
-
      
-
      
-
      
1,077
  
ESOP shares committed to be released
    
-
      
-
      
103
      
-
      
222
      
-
      
-
      
325
  
                                                                 
Balances at June 30, 2007
    
17,071,853
     $
172
     $
76,700
     $
71,337
     $ (5,550 )   $ (1,873 )   $ (2,190 )   $
138,596
  
                                                                 

The components of other comprehensive loss and related tax effects are as follows:
        
             
   
Six Months Ended June 30,
  
   
2007
    
2006
  
             
Change in unrealized holding losses on available-for-sale securities
   $ (385 )   $ (2,229 )
Reclassification adjustment for losses realized in income
    
29
      
-
  
   Net change in unrealized losses
     (356 )     (2,229 )
                 
Tax effect
     (117 )     (866 )
                 
   Other comprehensive loss
   $ (239 )   $ (1,363 )
                 

See notes to unaudited consolidated financial statements.

 
3

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 2007 and 2006
(Dollars in thousands) 
             
   
2007
    
2006
  
Cash flows from operating activities:
            
Net income
   $
1,812
     $
2,645
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
   Provision for loan losses
    
604
      
462
  
   ESOP expense
    
325
      
190
  
   Stock-based compensation
    
1,077
      
-
  
   Amortization of premiums and discounts
    
64
      
201
  
   Depreciation and amortization
    
442
      
363
  
   Amortization of intangible assets
    
15
      
-
  
   Provision for other real estate owned
    
-
      
34
  
   Net (gain) loss on sale of other real estate owned
     (14 )    
21
  
   Net loss on sale of securities
    
29
      
-
  
   Net loss on sale of loans
    
5
      
-
  
   Increase in cash surrender value of bank-owned life insurance
     (211 )     (154 )
   Decrease (increase) in accrued interest receivable
    
25
       (123 )
   Increase in other assets
     (490 )     (1,123 )
   Decrease in accrued expenses and other liabilities
     (1,820 )     (60 )
Net cash provided by operating activities
    
1,863
      
2,456
  
                 
Cash flows from investing activities:
                
   Purchases of securities available for sale
     (21,947 )     (11,831 )
   Proceeds from sales of securities available for sale
    
5,424
      
-
  
   Proceeds from  maturities, calls and principal repayments of securities available for sale
    
45,146
      
23,104
  
   Purchases of securities held to maturity
     (675 )    
-
  
   Proceeds from  maturities, calls and principal repayments of securities held to maturity
    
225
      
25
  
   Investment in short term time deposits
     (1,004 )    
-
  
   Purchases of Federal Home Loan Bank of Boston stock
     (611 )     (569 )
   Proceeds from sales of other real estate owned
    
576
      
1,568
  
   Net loan originations and principal repayments
     (43,545 )     (59,784 )
   Proceeds from sales of loans
    
1,881
      
-
  
   Purchases of property and equipment
     (298 )     (652 )
   Cash paid to acquire Levine Financial Group
     (55 )     (100 )
Net cash used in investing activities
     (14,883 )     (48,239 )
                 
Cash flows from financing activities:
                
   Net increase in deposits
    
40,067
      
43,339
  
   Proceeds of Federal Home Loan Bank of Boston advances
    
53,000
      
65,307
  
   Repayments of Federal Home Loan Bank of Boston advances
     (80,287 )     (52,197 )
   Net decrease in repurchase agreements
     (2,435 )     (1,625 )
   Net decrease in escrow funds held for borrowers
     (8 )     (165 )
   Treasury stock purchases
     (1,209 )    
-
  
   Cash dividends paid
     (881 )     (741 )
   Payments on capitalized lease obligation
     (85 )    
-
  
Net cash provided by financing activities
    
8,162
      
53,918
  
(Decrease) increase in cash and cash equivalents
     (4,858 )    
8,135
  
Cash and cash equivalents at beginning of period
    
25,419
      
15,843
  
Cash and cash equivalents at end of  period
   $
20,561
     $
23,978
  
                 
Supplemental Disclosure of Cash Flow Information:
                
Cash paid during the period:
                
   Interest on deposits, borrowings and other interest bearing liabilities
   $
14,854
     $
11,143
  
   Income taxes – net
    
2,463
      
867
  
Non-cash item:
                
   Capitalized lease asset and obligation
   $
1,932
     $
-
  
                 
See notes to unaudited consolidated financial statements.

 
4

UNITED FINANCIAL BANCORP, INC. AND SUBSIDIARY
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2007
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 (“GAAP”) and with general practices within the banking industry. In the opinion of management, the accompanying unaudited interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, which are necessary for the fair presentation of the Company’s financial condition as of June 30, 2007 and the results of operations for the three and six months ended June 30, 2007 and 2006. 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, 2006 included in the Company’s Annual Report on Form 10-K, which was filed by the Company with the Securities and Exchange Commission.

Certain amounts in the prior period financial statements have been reclassified to conform to the current period presentation.

NOTE B – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (“FASB”) released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The cumulative effect, if any, of applying FIN 48 is recorded as an adjustment to the beginning balance of retained earnings. FIN 48 also requires disclosure of the entity’s policy on classification of interest and penalties. The Company adopted FIN 48 on January 1, 2007. The adoption of this standard had no material effect on the Company’s results of operations or financial condition. The Company’s policy is to report interest and penalties as part of other non-interest expenses in the Consolidated Statement of Operations.

In June 2006, the EITF released Issue 06-05, “Accounting for Purchases of Life Insurance-Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, “Accounting for Purchases of Life Insurance”. On September 7, 2006, the EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the policy in determining the amount that could be realized under the insurance contract. Amounts that are recoverable by the policyholder at the discretion of the insurance company should be excluded from the amount that could be realized. Amounts that are recoverable by the policyholder in periods beyond one year from the surrender of the policy should be discounted utilizing an appropriate rate of interest. The Company adopted EITF 06-05 on January 1, 2007. The Company’s implementation of this Interpretation had no material effect on its results of operations or financial condition.

 
5


NOTE C – CRITICAL ACCOUNTING POLICIES

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.

The allowance for loan losses is a critical accounting estimate because it is highly susceptible to change from period to period. Arriving at an appropriate level for the allowance for loan losses necessarily involves a high degree of judgment. While management uses available information to recognize losses on loans, future additions to the allowance for loans may be necessary based on changes in the factors considered in evaluating the adequacy of the allowance, including prior loss experience, current economic conditions and their effect on borrowers, the character and size of the portfolio, trends in nonperforming loans and delinquency rates and the performance of individual loans in relation to contractual terms.

The assessment of whether a valuation allowance for the Company’s deferred tax assets is required is also a critical accounting estimate.  In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of such assets will not be realized.  This assessment is made each reporting period based upon an estimate of future taxable income during the periods in which existing temporary differences become deductible.

NOTE D – EARNINGS PER SHARE

Earnings per share have been computed in accordance with SFAS No. 128, “Earnings Per Share.”  Basic earnings per share have been calculated by dividing net income by weighted average shares outstanding before any dilution and are adjusted to exclude the weighted average number of unallocated shares held by the ESOP and unvested restricted stock awards.  Diluted earnings per share have been calculated by dividing net income by weighted average shares outstanding after giving effect to the potential dilution that could occur if potential common shares were converted into common stock using the treasury stock method.

The calculation of basic and diluted earnings per common share for the periods indicated is presented below.
                         
   
Three Months Ended June 30,
    
Six Months Ended June 30,
  
   
2007
    
2006
    
2007
    
2006
  
                         
Net income
   $
978
     $
1,290
     $
1,812
     $
2,645
  
Weighted average common shares applicable to
                                
   basic EPS
    
16,226,449
      
16,608,783
      
16,249,929
      
16,604,775
  
Effect of dilutive potential common shares (1, 2)
    
83,428
      
-
      
71,465
      
-
  
Weighted average common shares applicable to
                                
   diluted EPS
    
16,309,877
      
16,608,783
      
16,321,394
      
16,604,775
  
                                 
Earnings per share:
                                
   Basic
   $
0.06
     $
0.08
     $
0.11
     $
0.16
  
   Diluted
   $
0.06
     $
0.08
     $
0.11
     $
0.16
  
  
                                

(1)    For the three and six months ended June 30, 2007, options to purchase 739,500 shares were outstanding but not included in the computation of earnings per share because they were antidilutive.
  
         
(2)    Includes incremental shares related to stock options and restricted stock.
                  
                                 

 
6

NOTE E – LOANS

The components of loans were as follows at June 30, 2007 and December 31, 2006:

   
June 30,
    
December 31,
  
   
2007
    
2006
  
             
One-to-four family residential real estate
   $
329,199
     $
319,108
  
Commercial real estate
    
198,938
      
175,564
  
Construction
    
52,191
      
54,759
  
Home equity loans
    
116,939
      
112,739
  
Commercial and industrial
    
75,544
      
69,762
  
Consumer
    
30,751
      
30,181
  
   Total loans
    
803,562
      
762,113
  
                 
Net deferred loan costs and fees
    
1,395
      
1,285
  
Allowance for loan losses
     (7,721 )     (7,218 )
   Loans, net
   $
797,236
     $
756,180
  
                 

NOTE F – NON-PERFORMING ASSETS

The table below sets forth the amounts and categories of non-performing assets at the dates indicated.
 
             
   
At June 30,
    
At December 31,
  
   
2007
    
2006
  
             
Non-accrual loans:
            
   Residential mortgages
   $
268
     $
-
  
   Commercial mortgages
    
2,384
      
1,144
  
   Home equity
    
52
      
20
  
   Commercial and industrial
    
268
      
123
  
   Other consumer
    
-
      
1
  
      Total non-accrual loans
    
2,972
      
1,288
  
                 
Accruing loans 90 days or more past due
    
-
      
-
  
                 
Total non-performing loans
    
2,972
      
1,288
  
                 
Other real estate owned
    
-
      
562
  
      Total non-performing assets
   $
2,972
     $
1,850
  
                 
Ratios:
                
   Total non-performing loans to total loans
     0.37 %     0.17 %
   Total non-performing assets to total assets
     0.29 %     0.18 %
   Allowance for loan losses to non-performing loans
     259.79 %     560.40 %

 
7
 

NOTE G – ALLOWANCE FOR LOAN LOSSES

A summary of the activity in the allowance for loan losses is as follows:
 
 
             
   
For the Six Months Ended June 30,
  
   
2007
    
2006
  
             
             
Balance at beginning of period
   $
7,218
     $
6,382
  
Provision for loan losses
    
604
      
462
  
Charge-offs
     (107 )     (58 )
Recoveries
    
6
      
39
  
Balance at end of period
   $
7,721
     $
6,825
  
                 
Ratios:
                
Net charge-offs to average loans
                
   outstanding
     0.03 %     0.01 %
Allowance for loan losses to non-performing
                
   loans at end of period
     259.79 %     294.82 %
Allowance for loan losses to total
                
   loans at end of period
     0.96 %     0.98 %
                 

NOTE H – COMMITMENTS

Financial instruments with off-balance sheet risk at June 30, 2007 and December 31, 2006 were as follows:

             
   
June 30,
    
December 31,
  
   
2007
    
2006
  
             
Unused lines of credit
   $
142,173
     $
135,374
  
Amounts due mortgagors
    
36,525
      
34,742
  
Standby letters of credit
    
973
      
879
  
Commitments to originate loans
    
23,977
      
42,551
  

 
8


NOTE I – DEPOSITS

Deposit accounts, by type, are summarized as follows at June 30, 2007 and December 31, 2006:

   
June 30,
    
December 31,
  
   
2007
    
2006
  
             
Demand
   $
104,773
     $
97,190
  
NOW
    
42,258
      
37,523
  
Regular savings
    
63,431
      
65,475
  
Money market
    
176,633
      
165,984
  
Certificates of deposit
    
338,658
      
319,514
  
    $
725,753
     $
685,686
  

 
NOTE J – CONTINGENCIES
 
The Company is a defendant in certain claims and legal actions arising in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the ultimate disposition of these matters is not expected to have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
 
 
NOTE K – SECOND STAGE CONVERSION
 
On June 29, 2007 the Company filed a Form S-1 Registration Statement with the Securities and Exchange Commission in connection with the previously announced mutual-to-stock conversion of United Mutual Holding Company. The transaction is subject to the approvals of regulators, depositors and shareholders, and is expected to close in the fourth quarter of 2007.

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, 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.

 
9

 
Comparison of Financial Condition at June 30, 2007 and December 31, 2006
 
Total assets increased $13.3 million, or 1.3%, to $1.0 billion at June 30, 2007, due in large part to strong growth in net loans. Net loans increased $41.1 million, or 5.4%, to $797.2 million at June 30, 2007 from $756.2 million at December 31, 2006.  Loan growth reflected a sound local economy, a resilient real estate market, continued demand in our primary market areas for our products and successful business development efforts. The increase in loans was also attributable to the Company’s practice of originating a significant portion of residential loans for investment. The increases were offset to some extent by a decrease in securities available for sale of $29.1 million, or 15.3%, to $161.2 million at June 30, 2007 from $190.2 million at December 31, 2006 due to sales, calls and maturities of certain debt instruments and repayments of mortgage-backed securities, partially offset by purchases of mortgage-backed securities. The cash flows from investment securities were used to pay down short-term Federal Home Loan Bank advances. Cash and cash equivalents decreased $4.9 million to $20.6 million at June 30, 2007 reflecting the use of interest-bearing deposits to pay down short-term Federal Home Loan Bank advances.
 
The growth in loans was funded by an increase in total deposits of $40.1 million, or 5.8%, to $725.8 million at June 30, 2007 from $685.7 million at December 31, 2006. Deposit growth was evident in all categories excluding savings accounts, with increases of 9.1% in transaction accounts, 6.4% in money market accounts and 6.0% in certificates of deposit. These results were mainly attributable to the December 2006 opening of our second branch in Westfield, Massachusetts, the introduction of new products and services, competitive pricing and targeted promotional activities. Savings account balances decreased $2.0 million, or 3.1%, as customers continued to transfer balances to higher yielding money market and certificate of deposit accounts. Core deposits increased $20.9 million, or 5.7%, to $387.1 million, or 53.3% of deposits at June 30, 2007. Federal Home Loan Bank advances decreased $27.3 million, or 16.1%, to $142.5 million at June 30, 2007 from $169.8 million at December 31, 2006 due to repayment of higher cost short-term advances. Repurchase agreements decreased $2.4 million, or 23.4%, to $8.0 million at June 30, 2007 from $10.4 million at December 31, 2006, reflecting routine fluctuations in these overnight accounts.
 
Total stockholders’ equity increased $885,000, or 0.6%, to $138.6 million at June 30, 2007 from $137.7 million at December 31, 2006 as a result of net income of $1.8 million for the six months ended June 30, 2007, stock-based compensation totaling $1.1 million and ESOP compensation expense of $325,000. These items were partially offset by share repurchases totaling $1.2 million, payments of cash dividends amounting to $881,000, and an increase of $239,000 in the net unrealized loss on securities available for sale.
 

Comparison of Operating Results for the Three Months Ended June 30, 2007 and 2006

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


 
10

Our results of operations also are affected by provisions for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of deposit account fees, wealth management fees, increases in the cash surrender value of bank-owned life insurance and miscellaneous other income. Non-interest expense consists primarily of compensation and employee benefits, data processing, occupancy, marketing and public relations, professional services, postage, printing, 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.

Net Income.  The Company’s net income was $978,000, or $0.06 per diluted share, for the second quarter of 2007 compared to net income of $1.3 million, or $0.08 per diluted share, for the same period in 2006. The Company’s lower net income and earnings per share were due in large part to net interest margin contraction, increased non-interest expenses and a higher effective tax rate in 2007 compared to 2006, partially offset by growth in average interest-earning assets and core deposits.
 
Average balances and yields.  The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.
 

 
11

   
Three Months Ended June 30,         
  
   
2007      
    
2006      
  
         
Interest
                
Interest
        
   
Average
    
and
    
Yield/
    
Average
    
and
    
Yield/
  
   
Balance
    
Dividends
    
Cost
    
Balance
    
Dividends
    
Cost
  
   
   (Dollars in thousands)         
  
                                     
Interest-earning assets:
                                    
Loans:
                                    
  Residential real estate
   $
340,716
     $
4,809
       5.65 %   $
300,282
     $
4,189
       5.58 %
  Commercial real estate
    
236,840
      
3,898
       6.58 %    
181,412
      
2,882
       6.35 %
  Home equity loans
    
118,140
      
1,938
       6.56 %    
96,529
      
1,542
       6.39 %
  Commercial and industrial
    
71,990
      
1,323
       7.35 %    
62,586
      
1,126
       7.20 %
  Consumer and other
    
30,065
      
382
       5.08 %    
28,599
      
337
       4.71 %
    Total loans
    
797,751
      
12,350
       6.19 %    
669,408
      
10,076
       6.02 %
Investment securities
    
166,163
      
1,854
       4.46 %    
220,844
      
2,261
       4.10 %
Other interest-earning assets
    
21,605
      
309
       5.72 %    
24,475
      
288
       4.71 %
    Total interest-earning assets
    
985,519
      
14,513
       5.89 %    
914,727
      
12,625
       5.52 %
Noninterest-earning assets
    
32,990
                      
30,540
                  
    Total assets
   $
1,018,509
                     $
945,267
                  
                                                 
Interest-bearing liabilities:
                                                
Savings accounts
   $
65,304
      
149
       0.91 %   $
81,625
      
169
       0.83 %
Money market accounts
    
180,940
      
1,442
       3.19 %    
160,432
      
1,255
       3.13 %
NOW accounts
    
34,959
      
47
       0.54 %    
35,753
      
23
       0.26 %
Certificates of deposit
    
335,626
      
3,839
       4.58 %    
316,150
      
3,217
       4.07 %
    Total interest-bearing deposits
    
616,829
      
5,477
       3.55 %    
593,960
      
4,664
       3.14 %
FHLB advances
    
149,853
      
1,779
       4.75 %    
111,316
      
1,122
       4.03 %
Other interest-bearing liabilities
    
10,997
      
122
       4.44 %    
6,898
      
74
       4.29 %
    Total interest-bearing liabilities
    
777,679
      
7,378
       3.79 %    
712,174
      
5,860
       3.29 %
Demand deposits
    
98,343
                      
92,671
                  
Other noninterest-bearing liabilities
    
3,591
                      
2,782
                  
    Total liabilities
    
879,613
                      
807,627
                  
Stockholders' equity
    
138,896
                      
137,640
                  
    Total liabilities and stockholders' equity
   $
1,018,509
                     $
945,267
                  
                                                 
Net interest income
           $
7,135
                     $
6,765
          
Interest rate spread(1)
                     2.10 %                     2.23 %
Net interest-earning assets(2)
   $
207,840
                     $
202,553
                  
Net interest margin(3)
                     2.90 %                     2.96 %
Average interest-earning assets to
                                                
     average interest-bearing liabilities
                     126.73 %                     128.44 %
 
 
(1)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing   liabilities.
 
(2)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
 
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.


 
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.
 

 
12

                   
   
Three Months Ended June 30
  
   
2007 vs. 2006      
  
   
Increase (Decrease) Due to   
  
   
Volume
    
Rate
    
Net
  
   
(In thousands)      
  
                   
Interest-earning assets:
                  
Loans:
                  
  Residential real estate
   $
570
     $
50
     $
620
  
  Commercial real estate
    
910
      
106
      
1,016
  
  Home equity loans
    
353
      
43
      
396
  
  Commercial and industrial
    
173
      
24
      
197
  
  Consumer and other
    
17
      
28
      
45
  
     Total loans
    
2,023
      
251
      
2,274
  
Investment securities
     (597 )    
190
       (407 )
Other interest-earning assets
     (36 )    
57
      
21
  
     Total interest-earning assets
    
1,390
      
498
      
1,888
  
                         
Interest-bearing liabilities:
                        
Savings accounts
     (36 )    
16
       (20 )
Money market accounts
    
163
      
24
      
187
  
NOW accounts
     (1 )    
25
      
24
  
Certificates of deposit
    
206
      
416
      
622
  
     Total interest-bearing deposits
    
332
      
481
      
813
  
FHLB advances
    
434
      
223
      
657
  
Other interest-bearing liabilities
    
46
      
2
      
48
  
     Total interest-bearing liabilities
    
812
      
706
      
1,518
  
                         
Change in net interest income
   $
578
     $ (208 )   $
370
  
                         
 
Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses increased $370,000, or 5.5%, to $7.1 million for the three months ended June 30, 2007, reflecting growth in average earning assets, partially offset by net interest margin compression.   Net interest margin contracted 6 basis points to 2.90% for the three-month period ended June 30, 2007 compared to 2.96% for the same period in 2006. Net interest margin was affected by the flat yield curve, the increasingly competitive pricing conditions for loans and deposits and a shift in deposit demand towards higher-yielding money market and time deposit accounts.

Interest Income.  Interest income increased $1.9 million, or 15.0%, to $14.5 million for the three months ended June 30, 2007 from $12.6 million for the prior year period reflecting expansion in total average interest-earning asset balances and an increase in the yield on average interest-earning assets. Total average interest-earning asset balances increased $70.8 million, or 7.7%, to $985.5 million for the three months ended June 30, 2007 due in large part to strong loan growth, funded largely by deposit growth and cash flows from the investment securities portfolio. Total average loans increased $128.3 million, or 19.2%, to $797.8 million for the second quarter of 2007 as a result of origination activity, partially offset by prepayments and normal amortization. Total average investment securities decreased by $54.7 million, or 24.8%, to $166.2 million due to maturities, calls, sales and principal repayments of existing securities, partially offset by purchases of bonds. The yield on average interest-earning assets increased 37 basis points to 5.89% for the second quarter of 2007 in connection with the higher interest rate environment and the use of cash flows from the investment portfolio to fund higher yielding loans. The increase in market rates contributed to the repricing of a portion of the Company’s existing assets and to higher rates for new assets. Since a significant amount of the Company’s average interest-earning assets are fixed rate and the impact of Federal Reserve Board actions was less pronounced on the long end of the yield curve, the effect of the expansion in market rates was limited.
 

 
13

 
Interest Expense.  Interest expense increased $1.5 million, or 25.9%, to $7.4 million for the three months ended June 30, 2007 from $5.9 million for the prior year period due to an increase in the rate paid for interest-bearing liabilities and an increase in the average balance of such liabilities. The average rate paid on interest-bearing liabilities rose 50 basis points to 3.79% for the three months ended June 30, 2007 reflecting the impact of higher market rates related to interest rate increases initiated by the Federal Reserve Board and the competitive rate environment for deposits. Since a large portion of the Company’s interest-bearing liabilities are short-term, the impact of the increase in market rates was significant.  Average interest-bearing liabilities increased $65.5 million, or 9.2%, to $777.7 million for the three months ended June 30, 2007 from $712.2 million for the prior year period reflecting growth in interest-bearing deposits and FHLB advances. Total average interest-bearing deposits increased $22.9 million, or 3.9%, to $616.8 million for the second quarter of 2007 mainly attributable to an increase in money market and certificate of deposit balances, partially offset by a reduction in savings deposits.  The decline in savings account balances reflected a shift in deposit demand towards money market and certificate of deposit products to take advantage of more attractive rates. Total average FHLB advances increased $38.5 million, or 34.6%, to $149.9 million to support loan growth.
 
Provision for Loan Losses. The provision for loan losses was $320,000 for the three months ended June 30, 2007 as compared to $300,000 for the three months ended June 30, 2006. The allowance for loan losses is based on management’s estimate of the probable losses inherent in the portfolio, considering the impact of certain factors.  Among the factors management may consider are prior loss experience, current economic conditions and their effect on borrowers, the character and size of the portfolio, trends in nonperforming loans and delinquency rates and the performance of individual loans in relation to contractual terms. The provision for loan losses reflects adjustments to the allowance based on management’s review of the loan portfolio in light of those conditions. The allowance for loan losses was $7.7 million, or 0.96%, of loans outstanding at June 30, 2007.
 
Non-interest Income.  Non-interest income decreased $8,000, or 0.6%, to $1.4 million for the three months ended June 30, 2007 due to losses of $43,000 from the sale of lower yielding available-for-sale securities in the second quarter of 2007, partially offset by growth in fee income on deposit and wealth management accounts. Fee income on deposit accounts rose $60,000, or 5.8%, as a result of growth in transaction account balances and activity. Wealth management income expanded $34,000, or 25.0%, as a result of new accounts opened due to successful business development efforts and the acquisition of the Levine Financial Group in March 2006.
 
Non-interest Expense.  Non-interest expense increased $738,000, or 12.6%, to $6.6 million for the three months ended June 30, 2007 from $5.8 million for the prior year period primarily reflecting increases in salaries and benefits and occupancy. Total salaries and benefits increased $605,000, or 19.3% mainly due to stock-based compensation associated with restricted stock and stock options granted in August 2006 and staffing costs for the two new branches opened in 2006. Occupancy costs grew $71,000, or 17.3%, principally attributable to the two new branches opened in 2006.
 
Income Tax Expense. Income tax expense decreased $83,000 to $697,000 for three months ended June 30, 2007 from $780,000 for the comparable 2006 period.  This decrease was mainly due to lower income before income taxes, somewhat offset by an increase in the effective tax rate to 41.6% for the second quarter of 2007 compared to 37.7% for the same period last year. The higher effective tax rate was principally due to the disallowed deduction for stock-based compensation associated with incentive stock options.
 

 
14


 
Comparison of Operating Results for the Six Months Ended June 30, 2007 and 2006
 
Net Income.  The Company’s net income for the six months ended June 30, 2007 amounted to $1.8 million, or $0.11 per diluted share, compared to $2.6 million, or $0.16 per diluted share, for the same period in 2006.  The Company’s lower net income and earnings per share were due in large part to net interest margin contraction, increased provision for loan losses and non-interest expenses as well as a higher effective tax rate in the 2007 period. These items were partially offset by growth in average earning assets and expansion in non-interest income.
 
Average balances and yields.  The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. No tax-equivalent yield adjustments were made, as the effect thereof was not material. All average balances are daily average balances.  Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield.
 

 
15

   
Six Months Ended June 30,         
  
   
2007      
    
2006      
  
         
Interest
                
Interest
        
   
Average
    
and
    
Yield/
    
Average
    
and
    
Yield/
  
   
Balance
    
Dividends
    
Cost
    
Balance
    
Dividends
    
Cost
  
   
   (Dollars in thousands) 
  
                                     
                                     
Interest-earning assets:
                                    
Loans:
                                    
  Residential real estate
   $
338,814
     $
9,555
       5.64 %   $
298,182
     $
8,272
       5.55 %
  Commercial real estate
    
231,046
      
7,601
       6.58 %    
175,528
      
5,662
       6.45 %
  Home equity loans
    
116,934
      
3,812
       6.52 %    
92,943
      
2,937
       6.32 %
  Commercial and industrial
    
70,363
      
2,581
       7.34 %    
60,887
      
2,145
       7.05 %
  Consumer and other
    
29,929
      
756
       5.05 %    
27,658
      
660
       4.77 %
    Total loans
    
787,086
      
24,305
       6.18 %    
655,198
      
19,676
       6.01 %
Investment securities
    
173,287
      
3,836
       4.43 %    
224,091
      
4,566
       4.08 %
Other interest-earning assets
    
24,944
      
684
       5.48 %    
23,251
      
529
       4.55 %
    Total interest-earning assets
    
985,317
      
28,825
       5.85 %    
902,540
      
24,771
       5.49 %
Noninterest-earning assets
    
32,128
                      
30,737
                  
    Total assets
   $
1,017,445
                     $
933,277
                  
                                                 
Interest-bearing liabilities:
                                                
Savings accounts
   $
65,114
      
289
       0.89 %   $
83,230
      
344
       0.83 %
Money market accounts
    
177,586
      
2,799
       3.15 %    
160,974
      
2,437
       3.03 %
NOW accounts
    
34,547
      
91
       0.53 %    
35,607
      
44
       0.25 %
Certificates of deposit
    
329,837
      
7,479
       4.53 %    
301,664
      
5,881
       3.90 %
    Total interest-bearing deposits
    
607,084
      
10,658
       3.51 %    
581,475
      
8,706
       2.99 %
FHLB advances
    
160,232
      
3,802
       4.75 %    
111,975
      
2,240
       4.00 %
Other interest-bearing liabilities
    
11,812
      
274
       4.64 %    
7,882
      
153
       3.88 %
    Total interest-bearing liabilities
    
779,128
      
14,734
       3.78 %    
701,332
      
11,099
       3.17 %
Demand deposits
    
96,333
                      
91,182
                  
Other noninterest-bearing liabilities
    
3,386
                      
3,059
                  
    Total liabilities
    
878,847
                      
795,573
                  
Stockholders' equity
    
138,598
                      
137,704
                  
    Total liabilities and stockholders' equity
   $
1,017,445
                     $
933,277
                  
                                                 
Net interest income
           $
14,091
                     $
13,672
          
Interest rate spread(1)
                     2.07 %                     2.32 %
Net interest-earning assets(2)
   $
206,189
                     $
201,208
                  
Net interest margin(3)
                     2.86 %                     3.03 %
Average interest-bearing assets to
                                                
     average interest-bearing liabilities
                     126.46 %                     128.69 %

(1)
Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(2)
Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.

 
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.

 
16
 
   
Six Months Ended June 30   
  
   
2007 vs. 2006      
  
   
Increase (Decrease) Due to   
  
   
Volume
    
Rate
    
Net
  
   
(In thousands)      
  
                   
Interest-earning assets:
                  
Loans:
                  
  Residential real estate
   $
1,144
     $
139
     $
1,283
  
  Commercial real estate
    
1,825
      
114
      
1,939
  
  Home equity loans
    
779
      
96
      
875
  
  Commercial and industrial
    
345
      
91
      
436
  
  Consumer and other
    
56
      
40
      
96
  
     Total loans
    
4,149
      
480
      
4,629
  
Investment securities
     (1,099 )    
369
       (730 )
Other interest-earning assets
    
41
      
114
      
155
  
     Total interest-earning assets
    
3,091
      
963
      
4,054
  
                         
Interest-bearing liabilities:
                        
Savings accounts
     (79 )    
24
       (55 )
Money market accounts
    
258
      
104
      
362
  
NOW accounts
     (1 )    
48
      
47
  
Certificates of deposit
    
582
      
1,016
      
1,598
  
     Total interest-bearing deposits
    
760
      
1,192
      
1,952
  
FHLB advances
    
1,091
      
471
      
1,562
  
Other interest-bearing liabilities
    
87
      
34
      
121
  
     Total interest-bearing liabilities
    
1,938
      
1,697
      
3,635
  
                         
Change in net interest income
   $
1,153
     $ (734 )   $
419
  
                         
 
Net Interest Income Before Provision for Loan Losses.  Net interest income before provision for loan losses increased $419,000, or 3.1%, to $14.1 million for the six months ended June 30, 2007 from $13.7 million for the comparable 2006 period reflecting growth in average earning assets, substantially offset by net interest margin compression. Net interest margin contracted 17 basis points to 2.86% for the six-month period ended June 30, 2007 compared to 3.03% for the same period in 2006.  Net interest margin was affected by the flat yield curve, the increasingly competitive pricing conditions for loans and deposits and a shift in deposit demand towards higher-yielding money market and time deposit accounts.
 
Interest Income.  Interest income increased $4.1 million, or 16.4%, to $28.8 million for the six months ended June 30, 2007 from $24.8 million for the prior year period reflecting expansion in total average interest-earning asset balances and an increase in the yield on average interest-earning assets. Total average interest-earning asset balances increased $82.8 million, or 9.2%, to $985.3 million for the six months ended June 30, 2007 due in large part to strong loan growth, funded largely by deposit growth and cash flows from the investment securities portfolio. Total average loans increased $131.9 million, or 20.1%, to $787.1 million for the first six months of 2007 as a result of origination activity, partially offset by prepayments and normal amortization. Total average investment securities decreased by $50.8 million, or 22.7%, to $173.3 million primarily due to maturities, calls, sales and amortization of existing securities, partially offset by purchases of bonds. The yield on average interest-earning assets increased 36 basis points to 5.85% for the six months ended June 30, 2007 in connection with the higher interest rate environment and the use of cash flows from the investment portfolio to fund higher yielding loans. The increase in market rates contributed to the repricing of a portion of the Company’s existing assets and to increased rates for new assets.  Since a significant amount of the Company’s average interest earning assets are fixed rate and the impact of Federal Reserve Board actions was less pronounced on the long end of the yield curve, the effect of the expansion in market rates was limited.
 

 
17

 
Interest Expense.  Interest expense increased $3.6 million, or 32.8%, to $14.7 million for the six months ended June 30, 2007 from $11.1 million for the prior year period due to an expansion in average interest-bearing liabilities and an increase in the rate paid for such liabilities. Average interest-bearing liabilities increased $77.8 million, or 11.1%, to $779.1 million for the six months ended June 30, 2007 reflecting growth in interest-bearing deposits and FHLB advances. Total average interest-bearing deposits increased $25.6 million, or 4.4%, to $607.1 million for the first six months of 2007 mainly attributable to growth in money market and certificate of deposit balances, partially offset by a reduction in savings balances. The decline in savings deposits was mainly attributable to a shift in market demand to money market and certificate of deposit products to take advantage of more attractive rates. Total average FHLB advances increased $48.3 million, or 43.1%, to $160.2 million to support loan growth. The average rate paid on interest-bearing liabilities rose 61 basis points to 3.78% for the six months ended June 30, 2007 reflecting interest rate increases initiated by the Federal Reserve Board. Since a large portion of the Company’s interest-bearing liabilities are short-term, the impact of the expansion in market rates was significant.
 
Provision for Loan Losses. The provision for loan losses was $604,000 for the six months ended June 30, 2007 as compared to $462,000 for the same period in 2006 reflecting an increase in reserves for classified loans and higher net charge-offs. The allowance for loan losses was $7.7 million, or 0.96%, of loans outstanding at June 30, 2007.

Non-interest Income.  Non-interest income increased $134,000, or 5.0%, to $2.8 million for the six months ended June 30, 2007 reflecting growth in fee income on depositors’ accounts and wealth management accounts. Fee income on depositors’ accounts rose $153,000, or 7.7%, as a result of growth in transaction account balances and activity.  Wealth management income increased $98,000, or 50.8%, as a result of new accounts opened due to successful business development efforts and the acquisition of the Levine Financial Group in March 2006.
 
Non-interest Expense.  Non-interest expense increased $1.6 million, or 13.9%, to $13.2 million for the six months ended June 30, 2007 from $11.6 million for the prior year period. Total salaries and benefits increased $1.4 million, or 23.0%, mainly due to stock-based compensation associated with restricted stock and stock options granted in August 2006 and staffing costs for the two new branches opened in 2006. Occupancy costs grew $159,000, or 19.6%, principally attributable to the two new branches opened in 2006. Data processing costs expanded $105,000, or 8.8%, reflecting a larger loan and deposit base and new branches opened in 2006. Professional services increased $173,000, or 36.1%, as a result of costs incurred in connection with Sarbanes Oxley Section 404 compliance and a comprehensive review of the Company’s employee benefits package.
 
Income Tax Expense. Income tax expense decreased $367,000 to $1.3 million for six months ended June 30, 2007 from $1.7 million for the comparable 2006 period. This decrease was mainly due to lower income before income taxes, somewhat offset by an increase in the effective tax rate to 41.5% for the six months ended June 30, 2007 compared to 38.5% for the same period last year. The higher effective tax rate was principally due to the disallowed deduction for stock-based compensation associated with incentive stock options.
 

 
18


Market Risk, Liquidity and Capital Resources

Market Risk

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

We have sought to manage our IRR in order to minimize the exposure of our earnings and capital to changes in interest rates. As part of our ongoing asset-liability management, we currently use the following strategies to manage our IRR: (i) using alternative funding sources, such as advances from the Federal Home Loan Bank of Boston, to “match fund” certain longer-term one- to four-family residential mortgage loans; (ii) continued emphasis on increasing core deposits; (iii) offering adjustable rate and shorter-term home equity loans, commercial real estate loans, construction loans and commercial and industrial loans; (iv) offering a variety of consumer loans, which typically have shorter-terms and (v) using cash flows from the investment portfolio to fund loan growth and (vi) investing in mortgage-backed securities with variable rates or fixed rates with shorter durations. 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 NII to changes in market interest rates.

Net interest income at-risk measures the risk of a decline in earnings due to potential short-term and long term changes in interest rates. The table below represents an analysis of our IRR as measured by the estimated changes in NII, resulting from an instantaneous and sustained parallel shift in the yield curve (+200 and -200 basis points) at June 30, 2007 and December 31, 2006.
 
Net Interest Income At-Risk    
         
   
Estimated Increase
  
Estimated Increase
Change in Interest Rates
  
(Decrease) in NII
  
(Decrease) in NII
(Basis Points)
  
(June 30, 2007)
  
(December 31, 2006)
-200
  
6.0%
  
12.1%
Stable
  
0.0%
  
0.0%
+200
  
(7.5)%
  
(10.9)%
         
 
The preceding income simulation analysis does not represent a forecast of NII and should not be relied upon as being indicative of expected operating results. These hypothetical estimates are based upon numerous assumptions, which are subject to change, including: the nature and timing of interest rate levels including the yield curve shape, prepayments on loans and securities, deposit decay rates, pricing decisions on loans and deposits, reinvestment/replacement of asset and liability cash flows, and others. Also, as market conditions vary prepayment/refinancing levels likely deviating from those assumed, the varying impact of interest rate changes on caps and floors embedded in adjustable rate loans, early withdrawal of deposits, changes in product preferences, and other internal/external variables.

 
19

 
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 cash flows from the investment portfolio. 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. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs of our customers as well as unanticipated contingencies. We seek to maintain a liquidity ratio of 10% or greater. At June 30, 2007 our liquidity ratio was 21.16%, compared to 27.01% at December 31, 2006.
 
We regularly adjust our investments in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4)  the objectives of our asset/liability management program. Excess liquid assets are generally invested in interest-earning deposits and short- and intermediate-term securities.
 
Our most liquid assets are cash and cash equivalents. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2007, cash and cash equivalents totaled $20.6 million.  Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $161.2 million at June 30, 2007.

At June 30, 2007, we had $24.0 million in loan commitments outstanding. In addition to commitments to originate loans, we had $142.2 million in unused lines of credit to borrowers. Certificates of deposit due within one year of June 30, 2007 totaled $302.3 million, or 41.7% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other certificates of deposit and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before June 30, 2008. We believe however, based on past experience, that a significant portion of our certificates of deposit will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.

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, 2007, the Bank exceeded all regulatory capital requirements. United Bank is considered “well capitalized” under regulatory requirements.
 

 
20

       
As of June 30, 2007:
      
       
    Total risk-based capital
    15.48 %
         
    Tier 1 risk-based capital
    14.44 %
         
    Tier 1 leverage capital
    10.79 %
         
As of December 31, 2006:
        
         
    Total risk-based capital
    15.86 %
         
    Tier 1 risk-based capital
    14.83 %
         
    Tier 1 leverage capital
    10.82 %
         
 

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit, standby letters of credit and unused lines of credit. While these contractual obligations represent our future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans made by us. For additional information, see Note I, “Commitments,” to our Consolidated Financial Statements.


ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 4.  Controls and Procedures

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

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

 
21
 

PART II.  OTHER INFORMATION

ITEM 1.   Legal Proceedings

At June 30, 2007, 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

As of June 30, 2007, there have been no material changes to the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2006.

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

 (a) No Company unregistered securities were sold by the Company during the quarter ended June 30, 2007.

 (b) Not applicable

 (c) The following table provides certain information with regard to shares repurchased by the Company in the second quarter of 2007.

               
(c)
    
(d)
  
               
Total Number of
    
Maximum Number
  
               
Shares
    
(or Approximate
  
   
(a)
    
(b)
    
(or Units)
    
Dollar Value) of
  
   
Total Number
    
Average Price
    
Purchased as Part
    
Shares (or Units) that
  
   
of Shares
    
Paid Per
    
of Publicly
    
May Yet Be
  
   
(or Units)
    
Share
    
Announced Plans
    
Purchased Under the
  
Period
  
Purchased
    
(or Unit)
    
or Programs
    
Plans or Programs
  
                         
April 1 - 30, 2007
    
21,068
     $
14.86
      
21,068
      
776,571
  
                                 
May 1 - 31, 2007
    
3,213
      
14.80
      
3,213
      
773,358
  
                                 
June 1 - 30, 2007
    
-
      
-
      
-
      
773,358
  
    Total
    
24,281
     $
14.85
      
24,281
    
N/A
  


ITEM 3.   Defaults Upon Senior Securities

Not applicable.

 
22


ITEM 4.   Submission of Matters to a Vote of Security Holders

 
The annual meeting of the stockholders of the Company was held on April 19, 2007.
  
               
1.
The following individuals were elected as directors, each for a three-year term by the following vote:
               
     
FOR
  
WITHHELD
    
 
Michael F. Crowley
  
15,755,457
  
164,217
    
 
Carol Moore Cutting
15,743,047
  
176,627
    
 
Carol A. Leary
  
15,747,153
  
172,521
    
               
 
The terms of office of the following directors continued after the annual meeting of stockholders:
               
     
TERM EXPIRING
      
 
Richard B. Collins
  
2008 
      
 
G. Todd Marchant
  
2008 
      
 
Michael F. Werenski
  
2008 
      
 
Kevin E. Ross
  
2009 
      
 
Robert A. Stewart, Jr.
  
2009 
      
 
Thomas H. Themistos
  
2009 
      
               
2.
The appointment of Grant Thornton LLP as independent registered public accounting firm for the fiscal year ending December 31, 2007 was ratified by the stockholders by the following vote:
               
 
FOR
  
AGAINST
  
ABSTENTIONS
  
               
 
15,835,491
  
66,411
  
17,772 
  
               
 
ITEM 5.Other Information

Not applicable.

 
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ITEM 6.  Exhibits.
   
3.1
Charter of United Financial Bancorp, Inc., as amended (1)
3.2
Resolution and Consent of Sole Stockholder Amending the Charter of United Financial Bancorp, Inc. (1)
3.3
Bylaws of United Financial Bancorp, Inc. (3)
4
Form of Common Stock Certificate of United Financial Bancorp, Inc. (1)
10.1
Form of Employee Stock Ownership Plan (1)
10.2
Executive Supplemental Compensation Agreement by and between United Bank and Richard B. Collins (1)
10.3
Executive Supplemental Compensation Agreement by and between United Bank and Keith E. Harvey (1)
10.4
Executive Supplemental Compensation Agreement by and between United Bank and John J. Patterson (1)
10.5
United Bank 2004 and 2005 Incentive Plans (1)
10.9
Directors Fee Continuation Plan (1)
10.10
Form of Employment Agreement by and between United Bank and Richard B. Collins (1)
10.11
Form of Change in Control Agreement by and between United Bank and certain executive officers (1)
10.12
United Bank 2006 Stock-Based Incentive Plan (2)
11
Statement Regarding Computation of Per Share Earnings (refer to Note D of Part I,
 
Item 1- Consolidated Financial Statements)
21
Subsidiaries of Registrant (1)
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
Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
   
(1)
Incorporated by reference to the Registration Statement on Form S-1 of United Financial Bancorp, Inc. (file no. 333-123371), originally filed with the Securities and Exchange Commission on March 16, 2005.
(2)
Incorporated by reference to Appendix B of the Registrant’s definitive Proxy Statement for the Company’s 2006 Annual Meeting filed with the Securities and Exchange Commission on June 12, 2006.
(3)
Incorporated by reference to the Registrant’s Form 10-Q filed with the Securities and Exchange Commission on May 9, 2007.

 
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SIGNATURES

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


 
United Financial Bancorp, Inc.
     
     
Date: August 8, 2007
By:
/s/ Richard B. Collins
   
Richard B. Collins
   
Chairman, President and Chief Executive Officer
     
     
Date: August 8, 2007
By:
/s/ Mark A. Roberts
   
Mark A. Roberts
   
Executive Vice President and Chief Financial Officer


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