UBNK Announces Q4 AND Annual Earnings Results, and Q4 Dividend
GLASTONBURY, Conn., January 27, 2015
– United Financial Bancorp, Inc. (“United Financial” or the “Company”) (NASDAQ Global Select Stock Market: “UBNK”), the holding company for United Bank (the “Bank”), today announced results for the quarter and year ended December 31, 2014. These results represent the second full fiscal quarter as the combined United Financial [merger of Rockville Financial, Inc. (“Rockville”) and legacy United Financial Bancorp, Inc. (“legacy United”)]. Rockville was the legal acquirer in the merger of equals with legacy United, in a transaction that closed on April 30, 2014, and Rockville changed its name to United Financial Bancorp, Inc. at that time.
The Company had net income of $1.4 million, or $0.03 per diluted share, for the quarter ended December 31, 2014, compared to Rockville’s net income of $1.8 million, or $0.07 per diluted share, for the quarter ended December 31, 2013. Operating net income for the fourth quarter of 2014 was $8.3 million (Non-GAAP), or $0.16 per diluted share, adjusted for $10.6 million (pre-tax) of expenses related to the merger, $3.4 million (pre-tax) net positive impact of the amortization and accretion of the purchase accounting adjustments (or fair value adjustments) as a result of the merger, $2.6 million (pre-tax) net adjustment for the Company’s announced branch optimization program and $59,000 (pre-tax) net loss on sales of securities.
Operating net income for the quarter ended September 30, 2014 was $10.4 million (Non-GAAP), or $0.20 per diluted share, adjusted for $4.5 million (pre-tax) of expenses related to the merger, $3.8 million (pre-tax) net positive impact of the amortization and accretion of the purchase accounting adjustments (or fair value adjustments) as a result of the merger, and $430,000 (pre-tax) net gains on sales of securities. Operating net income for the prior year period was $3.3 million (Non-GAAP), or $0.13 per diluted share, adjusted for $2.1 million (pre-tax) of expenses related to the merger.
Net income for the year ended December 31, 2014 was $6.8 million, or $0.16 per diluted share, and declined from $14.2 million or $0.54 per diluted share for the year ended December 31, 2013. Operating net income of $26.7 million (Non-GAAP), or $0.62 per diluted share for the year ended December 31, 2014 increased from $16.3 million or $0.62 per diluted share for the year ended December 31, 2013. Adjustments to operating net income from GAAP net income are largely related to the merger with legacy United and are itemized in the reconciliation of non-GAAP measures.
“As we close the books on 2014, I am pleased to announce that we reported impressive organic loan growth, successfully completed the conversion to one core operating system, and have materially achieved the Company’s objectives related to eliminating redundant expenses by the end of the fourth quarter,” stated William H. W. Crawford, IV, Chief Executive Officer of United Financial Bancorp, Inc. and United Bank. “Looking forward to 2015, the operational environment will be challenging; however, I am confident that our strategy to reduce expenses and improve efficiency will enhance long term shareholder value, while maintaining superior service for our customers.”
Earnings in both 2014 and 2013 were affected by non-operating income and expense. A reconciliation of these non-GAAP measures may be found on pages F-8 and F-9.
Loan Production Highlights
- Fourth quarter net income of $1.4 million, or $0.03 per diluted share, operating net income of $8.3 million, or $0.16 per diluted share
- Year-to-date 2014 net income of $6.8 million, or $0.16 per diluted share, operating net income of $26.7 million, or $0.62 per diluted share
- 3.44% GAAP tax equivalent net interest margin, compared to 3.56% in the linked quarter. On an operating basis, the fourth quarter tax equivalent net interest margin was 3.15%, compared to 3.23% in the linked quarter.
- Operating Return on Tangible Common Equity was 6.96%
- 11% annualized linked quarter organic loan growth
- $106 million of loan growth from the linked quarter
- 3% linked quarter organic commercial loan growth (11% annualized)
- Record residential mortgage originations at $122 million in the fourth quarter of 2014
- 61% of residential mortgage volume is for home purchases
The Company reported net income of $1.4 million, or $0.03 per diluted share, in the fourth quarter of 2014. The quarter’s results reflect charges related to the Company’s previously announced restructuring initiatives aimed at reducing redundant positions and eliminating non-strategic branches to better posture the Company to achieve greater operational efficiencies going forward. The completion of the core data processor conversion in the fourth quarter of 2014 allowed the Company to eliminate redundant back office positions and consultancy required to maintain the two legacy banks’ processing systems. As a result, merger and acquisition expenses totaling $10.1 million in the fourth quarter of 2014 included payments to former employees due to position eliminations, payments to consultants and advisors in order to execute the transaction and to assist in the data processing conversion, as well as other integration related expenses.
Interest income totaled $48.2 million in the fourth quarter of 2014, an increase of $1.0 million, or 2%, from the linked quarter due to organic earning asset growth across loan portfolios as well as the investment portfolio. Earning assets increased by $165 million, or 3%, organically during the quarter, while average interest-earning assets increased by $151 million, or 3% from the linked quarter. Interest income and expense results include the recognition of purchase accounting adjustments made during the fourth quarter of 2014, for which more details are provided subsequently in this release. Interest expense increased by $1.3 million, or 26%, to $6.3 million for the fourth quarter of 2014. The increase was primarily driven by the $75 million subordinated debt issuance that occurred on September 24, 2014, which had limited effect on the Company’s third quarter 2014 interest expense but included $1.1 million of expense in the fourth quarter. Average interest bearing liabilities increased by $175 million, or 5%, from the linked quarter.
The GAAP tax equivalent net interest margin for the fourth quarter of 2014 compressed by 12 basis points to 3.44% compared to 3.56% for the linked quarter, primarily as a result of the impact of the interest expense associated with the subordinated debt issuance and to a lesser extent by the diminished impact of purchase accounting adjustments on the loan yields. On a GAAP basis, the yield on interest-earning assets declined by 3 basis points in the fourth quarter of 2014 to 3.94%, while the cost of interest-bearing liabilities increased by 11 basis points during the quarter to 0.62%, which was attributable to the expense on the subordinated debt. The operating net interest margin, which excludes the impact of purchase accounting adjustments, decreased by 8 basis points to 3.15% in the fourth quarter of 2014 from 3.23% in the linked quarter due in large part from the expense related to the subordinated debt and somewhat by lower yields on loans originated during the fourth quarter.
The net benefit to interest income in the fourth quarter of 2014 from accretion of purchase accounting adjustments totaled $1.5 million, an 11% decrease from $1.7 million recognized in the third quarter of 2014. The decline between the two quarters reflects the decreased impact of loan purchase accounting marks that is expected as the purchased portfolio continues to amortize. Interest expense benefited from net accretion of discounts totaling $1.9 million in the fourth quarter of 2014, a 10% decrease from $2.1 million recognized in the linked quarter. The decrease in the interest expense benefit was due to a notably lower level of maturities related to term wholesale funding in the fourth quarter of 2014 as compared to the linked quarter. The Company continues to expect future benefits to net interest income.
Total non-interest income declined $1.1, million, or 26%, to $3.0 million for the quarter ended December 31, 2014 from $4.1 million recognized in the linked quarter. The fourth quarter results include the recognition of a $2.1 million loss related to limited partnership investments, similarly reported in the linked quarter, this was largely attributable to a tax credit investment the Company entered into in the third quarter of 2014. During the third quarter of 2014, the Company completed a tax credit investment in which expense was recognized relating to the amortization of the underlying asset, while concurrently realizing an offsetting credit benefit of $2.6 million reflected in the tax provision for the third quarter. That tax benefit is duplicated in the fourth quarter of 2014.
Significantly impacting non-interest income during the fourth quarter of 2014 was the $1.4 million reduction in other income (loss) compared to the linked quarter which largely attributable to the branch optimization program, whereby the Company recognized a $670,000 loss in the fourth quarter of 2014 representing the write-down of fixed assets. Additionally, the Company’s mortgage servicing rights valuation reflected a reduction in value of $487,000 during the fourth quarter of 2014, a $421,000 unfavorable change from the linked quarter. The decline in market interest rates throughout 2014 had the effect of reducing fee income by $1.1 million year-to-date through reduction in mortgage servicing rights valuation adjustments, largely due to the Company’s assumptions pertaining to the average life of the servicing asset at lower interest rates. While the Company produced record residential mortgage origination volume in the fourth quarter and for the full year of 2014 of $122 million and $378 million, respectively, gains on sales of loans were flat to the linked quarter and declined by $1.9 million to $3.1 million for the year ended December 31, 2014. Recognition of gains on sales of loans reflects the recognition of income at the time that secondary market contracts are executed rather than at the time those loans are delivered to the investor. Also noteworthy in the fourth quarter is the Company’s recognition of $1.1 million of gross fee income associated with loan level hedging activity that occurred during the quarter, reflecting an increase of $989,000 over the linked quarter.
Non-interest expense for the quarter ended December 31, 2014 totaled $45.1 million and increased by $10.2 million, or 29%, from the quarter ended September 30, 2014. The linked quarter increase in non-interest expense is primarily driven by the $6.1 million increase in expenses directly related to the merger; by the $2.4 million increase in occupancy expense, of which $1.9 million is attributed to the announced closure of underutilized branches; and by the $1.1 million increase in marketing and promotion expense attributed to the introduction of the Company’s new branding and marketing initiatives. These non-interest expense increases were partially offset by the $1.0 million decrease in salaries and employee benefits expense and $712,000 decrease in service bureau fees.
Operating net income declined by $2.1 million to $8.3 million, or $0.16 per diluted share, in the fourth quarter of 2014 from $10.4 million, or $0.20 per diluted share, in the linked quarter. The decline in operating net income is primarily attributable to a $1.7 million increase in the provision for loan losses and a $2.1 million increase in operating expense, partially offset by a $1.5 million increase in the tax benefit for operating results. The Company's total operating revenue was relatively flat and increased by $190,000 in comparison to the linked quarter comprised of a $106,000 increase in operating net interest income and an $84,000 increase in operating non-interest income. The slight increase in operating net interest income reflects the increase in interest income attributable to the growth in the loan and investment portfolios, partially offset by the increase in operating interest expense associated with a full quarter impact from the Company’s $75 million subordinated debt issuance in September 2014. The Company reported operating return on average assets (“ROA”) of 0.62% and operating return on tangible common equity (“ROTCE”) of 6.96% for the fourth quarter of 2014, decreased from 0.80% and 7.93% in the linked quarter, respectively.
Noteworthy is the increase in fee income derived from United Northeast Financial Advisory (“United Northeast”), the Company’s financial advisory business, which increased by $810,000 to $1.8 million for the year 2014. Specifically, Sorrento Pacific Financial, a research and consulting firm from Pennsylvania, ranks United Northeast Financial Advisory number three in their top ten list of high performing bank wealth management programs. The report cites United Northeast's year-over-year increase of 135% in fee income generated in the first half of 2014.
The provision for loan losses increased by $1.7 million to $4.3 million for the quarter ended December 31, 2014 compared to $2.6 million for the quarter ended September 30, 2014. A post-merger objective was to conduct and complete a comprehensive review of the purchased loan portfolio by year-end and ensure a consistent application of risk ratings across the portfolio. We have completed that exercise and believe asset quality for the Company remains strong and stable. As a result, net charge-offs for the fourth quarter of 2014 were $1.8 million, or 0.19% annualized as a percentage of average loans outstanding, and increased by $157,000 from $1.7 million, or 0.18% annualized as a percentage of average loans outstanding, in the linked quarter. Net charge-offs for the year-to-date 2014 were 0.12% as a percentage of average loans outstanding. Factors that continue to be considered in the provision for loan losses include the composition of the portfolio, the level of non-performing loans and charge-offs, local economic and credit conditions, the direction of real estate values and delinquency trends.
On a linked quarter basis, operating expense increased by $2.1 million, or 7%, to $32.6 million in the fourth quarter of 2014. Of the $2.1 million increase, $1.1 million is attributable to higher marketing and promotion expense, $2.0 million to increased other expenses and $487,000 to increased occupancy and equipment expense. These expense increases were partially offset by the $1.0 million, or 5.8%, decline in salaries and benefits expense and the $712,000, or 23.6%, decline in service bureau fees. Marketing and promotion expense increased $1.1 million to $1.4 million in the fourth quarter and is due to the deployment of a new branding campaign which was launched subsequent to the completion of the fourth quarter data conversion. Other expenses increased by $2.0 million to $6.0 million in the fourth quarter, largely due to a $771,000 increase in an off-balance sheet provision, to $191,000 in the fourth quarter of 2014 from a benefit of $580,000 in the linked quarter. The decline in salaries and benefits expense and the decline in service bureau fees are reflective of the Company eliminating redundant expenses associated with operating two core data processing systems from the legacy banks. The Company expects a normalized level of service bureau fees will begin in the first quarter of 2015.
Business Line Discussions
Total commercial loans grew organically during the fourth quarter of 2014 by $65 million, or 11% annualized. For the quarter ended December 31, 2014, commercial loan growth was comprised of a commercial real estate portfolio increase of $19 million, or 1%, and an increase in the commercial construction portfolio of $51 million, or 42%, partially offset by a decrease in the commercial business portfolio of $5 million, or 1%.
The Company recently announced the acquisition and expansion of our commercial loan teams in our Greater Springfield and Worcester markets. The commercial banking team acquired in Greater Springfield is led by Daniel Flynn, Executive Vice President and Chief Operating Officer for Wholesale Banking, a seasoned commercial banker with over three decades of experience in the Western Massachusetts market. The Worcester commercial banking team is led by Tom McGregor, SVP & Regional Commercial Banking Executive bringing over twenty years of commercial banking experience, focusing on commercial and asset based lending. These two leaders, with their respective teams, will augment the strong commercial banking focus at United and will not only allow the Company better access to commercial opportunities in their respective geographies, but will also service and seek to expand our existing relationships.
The Company reported record quarterly origination volume for residential mortgage loans in the fourth quarter of 2014. During the quarter, mortgage originations increased by $62 million to $122 million from $60 million in the same period of the prior year. On a linked quarter basis, residential mortgage originations increased by $6 million from $116 million in the third quarter of 2014. Purchase mortgage activity increased during this time period to $74 million, or 61%, of production in the fourth quarter of 2014 compared to $37 million, or 62%, in the prior year period. On-balance sheet, residential mortgage loans grew by $52 million (15% annualized) during the fourth quarter of 2014 compared to the linked quarter. The Company continues to take market-share throughout its footprint and in 2014 was reported as the number one purchase lender in Hartford County and number one lender overall in Tolland County. Additionally, according to the Mortgage Bankers Association, home lending fell by 36% in 2014 while United Financial grew by 35% during that same period.
Funding & Deposits
Deposits totaled $4.04 billion at December 31, 2014 and were flat to the linked quarter with a slight increase of $6 million from $4.03 billion at September 30, 2014, reflecting a $58 million, or 9%, decrease in non-interest-bearing deposits and a $64 million, or 2%, increase in interest-bearing deposits. The cost of total interest bearing deposits increased by 2 basis points to 0.50% in the quarter ended December 31, 2014 from 0.48% in the linked quarter, driven primarily by the impact of certificate of deposit specials utilized in the fourth quarter of 2014.
At the end of the third quarter of 2014, the Company issued $75 million of ten-year term subordinated debt with a coupon rate of 5.75%. The impact of the issuance on the cost of interest-bearing funding in the fourth quarter 2014 results drove the majority of the 11 basis point increase in the cost of total interest bearing liabilities as compared to the linked quarter.
The available for sale securities portfolio increased by $40 million during the quarter to $1.05 billion at December 31, 2014 from $1.01 billion at September 30, 2014. This increase is largely reflective of increased investments in cash flowing mortgage backed securities. These bond purchases represent an opportunity to shorten the investment portfolio duration and add diversification to the portfolio holdings. The available for sale securities portfolio represented 19% of total assets at December 31, 2014, unchanged from the prior quarter.
The Company maintains a disciplined approach to asset quality and will not match extremely favorable pricing or underwriting and structure pressures of competitor banks if those considerations do not meet the Company's asset quality and return standards. The asset quality metrics as of December 31, 2014 reflect the combined loan portfolios following the merger, as well as the purchase accounting marks at legal close. Non-performing assets increased $2.7 million to $34.6 million at December 31, 2014 from $31.9 million at September 30, 2014. The ratio of non-performing assets to total assets increased 3 basis points to 0.63% at December 31, 2014 from 0.60% at September 30, 2014. Non-performing loans increased $3.1 million to $32.4 million at December 31, 2014 from $29.3 million at September, 2014. Included in non-performing loans are non-accruing troubled debt restructurings (TDR). Non-accruing TDRs decreased $1.4 million to $3.8 million at December 31, 2014 from $5.2 million at September 30, 2014. The ratio of non-performing loans to total loans increased 6 basis points to 0.83% at December 31, 2014 from 0.77% at September 30, 2014. At December 31, 2014, the allowance for loan losses as a percentage of non-performing loans and of total loans outstanding was 76.67% and 0.64%, respectively, compared to 76.15% and 0.59% at September 30, 2014, respectively. The allowance for loan losses as a percentage of total covered loans outstanding was 1.11% at December 31, 2014, compared to 1.06% at September 30, 2014.
The Board of Directors declared a cash dividend on the Company’s common stock of $0.10 per share to shareholders of record at the close of business on February 6, 2015 and payable on February 17, 2015. This dividend equates to a 2.89% annualized yield based on the $13.84 average closing price of the Company’s common stock in the fourth quarter of 2014. The Company has paid dividends for 35 consecutive quarters.
Tangible Book Value
Tangible book value per share decreased to $9.65 at December 31, 2014 from $10.02 at September 30, 2014; primarily due to the impact of the Company’s stock repurchase activity in the fourth, quarter and the cash dividend payment to shareholders totaling $0.10 per share, offset in part by the after-tax GAAP net income of $1.4 million. Tangible book value was also negatively impacted during the fourth quarter 2014 by the $10.1 million (pre-tax) of merger related expenses. As stated earlier, the Company expects to recognize limited merger and acquisition expense in 2015, thus significantly reducing further negative impact to tangible book value.
Stock Repurchase Program
The Company obtained approval and initiated a third buyback plan on October 15, 2014. Under this plan, the Company is authorized to repurchase up to 2,566,283 shares, or 5% of the outstanding shares at the time the plan was approved. As of December 31, 2014, the Company had repurchased 1,934,189 shares under this plan at an average cost of $14.02 per share, and has authorization to purchase an additional 632,094 shares. The Company repurchased 3,202,429 shares during the quarter ended December 31, 2014, at an average price of $13.71 as compared to the average closing price during the period of $13.84. In total, the Company has repurchased 7,615,465 shares as of December 31, 2014, or 26% of total shares outstanding prior to the first repurchase program.
“United Financial Bancorp, Inc. significantly returned capital to its shareholders in the fourth quarter of 2014 by buying back 6% of its shares outstanding as well as issuing its quarterly dividend payment. Our total shareholder return since the closing date of the merger is 12% compared to the SNL thrift index of 7% and our total shareholder return since the date of the Company’s mutual conversion is 51% compared to the SNL thrift index of 41%,” stated William H. W. Crawford, IV, Chief Executive Officer of United Financial Bancorp, Inc. and United Bank. “We look forward to becoming a highly efficient and top performing Company, to continuing to provide exceptional service to our customers and communities, to rewarding the performance of our hard working employees and to providing strong returns to our shareholders. I would like to thank our team of dedicated employees who continue to win new business and deliver a superior customer experience every day.”
Investor Conference Call
United Financial Bancorp, Inc. will host a conference call on Wednesday, January 28, 2015 at 10:00 a.m. Eastern Time (ET) to discuss the Company’s fourth quarter results. Those wishing to participate in the call may dial toll-free 1-888-339-0797. A telephone replay of the call will be available through February 8, 2015 by calling 1-877-344-7529 and entering conference number 10058633. A podcast will be available on the Company’s website for an extended period of time, as well as on the Company’s investor relations app.
About United Financial Bancorp, Inc.
United Financial Bancorp, Inc. is the holding company for United Bank, a full service financial services firm offering a complete line of commercial, business, and consumer banking products and services to customers throughout Central and Southern Connecticut, and Western and Central Massachusetts. On April 30, 2014, United Bank and Rockville Bank completed a transformational merger of equals bringing together two financially strong, well-respected institutions and creating a leading New England bank with more than 50 branches in two states and $5 billion in assets. Through the merger, Rockville Financial, Inc. completed the acquisition of United Financial Bancorp, Inc. The combined Company, known as United Financial Bancorp, Inc. trades on the NASDAQ Global Select Stock Exchange under the ticker symbol “UBNK”.
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Forward Looking Statements
This press release may contain certain forward-looking statements about the Company. Forward-looking statements include statements regarding anticipated future events and can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “believe,” “expect,” “anticipate,” “estimate,” and “intend” or future or conditional verbs such as “will,” “would,” “should,” “could,” or “may.” Forward-looking statements, by their nature, are subject to risks and uncertainties. Certain factors that could cause actual results to differ materially from expected results include increased competitive pressures, changes in the interest rate environment, general economic conditions or conditions within the securities markets, and legislative and regulatory changes that could adversely affect the business in which the Company and its subsidiaries are engaged.