UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-Q


(Mark One)




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




For
the quarterly period ended March 31, 2010




OR




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





For
the transition period from ______________ to _____________





Commission
File Number 000-52947





United Financial Bancorp,
Inc.


(Exact
name of registrant as specified in its charter)





Maryland
            74-3242562(State
      or other jurisdiction of
            (I.R.S.
      Employerincorporation
      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 x   No
 ̈.





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).   Yes
 ̈   No
 ̈.





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





Large
      accelerated filer  ̈
            Accelerated
      filer x
            Non-accelerated
      filer ̈ (Do
      not check if a smaller reporting company)
            Smaller
      reporting company  ̈





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





Indicate
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


16,721,879
shares outstanding as of May 4, 2010








United
Financial Bancorp, Inc.





INDEXPagePART
      I. FINANCIAL INFORMATIONItem
      1.
            Financial
      StatementsConsolidated
      Statements of ConditionMarch
      31, 2010 (unaudited) and December 31, 2009
            1Consolidated
      Statements of EarningsThree
      Months Ended March 31, 2010 and 2009 (unaudited)
            2Consolidated
      Statements of Stockholders’ Equity and Comprehensive
IncomeThree
      Months Ended March 31, 2010 and 2009 (unaudited)
            3Consolidated
      Statements of Cash FlowsThree
      Months Ended March 31, 2010 and 2009 (unaudited)
            4Notes
      to Unaudited Consolidated Financial Statements
            6Item
      2.
            Management's
      Discussion and Analysis of Financial Conditionand
      Results of Operations
            21Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            33Item
      4.
            Controls
      and Procedures
            33PART
      II. OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            33Item
      1A.
            Risk
      Factors
            33Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            34Item
      3.
            Defaults
      Upon Senior Securities
            34Item
      4.
            [Removed
      and Reserved]
            34Item
      5.
            Other
      Information
            34Item
      6.
            Exhibits
            35SIGNATURES
            36





PART
I.                      FINANCIAL
INFORMATION


ITEM
1.                      Financial
Statements





UNITED
FINANCIAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CONDITION


(Dollars
in thousands, except per share amounts)







March
      31,
              
              
              December
      31,2010
              
              
              2009(unaudited)
              
              
              (audited)ASSETSCash
      and due from banks
              
              $
              13,932
              
              
              $
              14,565Interest-bearing
      deposits
              
              
              7,735
              
              
              
              7,312Total
      cash and cash equivalents
              
              
              21,667
              
              
              
              21,877Short-term
      investments
              
              
              1,100
              
              
              
              1,096Securities
      available for sale, at fair value
              
              
              225,043
              
              
              
              243,304Securities
      held to maturity, at amortized cost  (fair value of $71,658
      atMarch
      31, 2010 and $63,063 at December 31, 2009)
              
              
              71,498
              
              
              
              63,174Loans,
      net of allowance for loan losses of  $9,610 at March 31,
      2010and
      $9,180 at December 31, 2009
              
              
              1,093,830
              
              
              
              1,115,416Other
      real estate owned
              
              
              1,976
              
              
              
              1,545Accrued
      interest receivable
              
              
              5,281
              
              
              
              5,209Deferred
      tax asset, net
              
              
              11,214
              
              
              
              11,295Stock
      in the Federal Home Loan Bank of Boston
              
              
              15,365
              
              
              
              15,365Banking
      premises and equipment, net
              
              
              15,808
              
              
              
              15,935Bank-owned
      life insurance
              
              
              28,793
              
              
              
              28,476Goodwill
              
              
              7,717
              
              
              
              7,844Other
      intangible assets
              
              
              586
              
              
              
              613Other
      assets
              
              
              12,805
              
              
              
              9,891TOTAL
      ASSETS
              
              $
              1,512,683
              
              
              $
              1,541,040LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilities:Deposits:Interest-bearing
              
              $
              904,085
              
              
              $
              884,553Non-interest-bearing
              
              
              161,107
              
              
              
              154,374Total
      deposits
              
              
              1,065,192
              
              
              
              1,038,927Short-term
      borrowings
              
              
              33,995
              
              
              
              75,488Long-term
      debt
              
              
              168,203
              
              
              
              179,988Subordinated
      debentures
              
              
              5,380
              
              
              
              5,357Escrow
      funds held for borrowers
              
              
              2,143
              
              
              
              1,977Capitalized
      lease obligations
              
              
              5,109
              
              
              
              5,141Accrued
      expenses and other liabilities
              
              
              8,429
              
              
              
              8,916Total
      liabilities
              
              
              1,288,451
              
              
              
              1,315,794Stockholders’
      equity:Preferred
      stock, par value $0.01 per share, authorized 50,000,000
      shares;none
      issued
              
              
              -
              
              
              
              -Common
      stock, par value $0.01 per share, authorized 100,000,000
      shares;18,706,933
      shares issued at March 31, 2010 and December 31, 2009
              
              
              187
              
              
              
              187Paid-in
      capital
              
              
              178,422
              
              
              
              178,666Retained
      earnings
              
              
              78,117
              
              
              
              77,456Unearned
      compensation
              
              
              (11,268
              )
              
              
              (11,441
              )Treasury
      stock, at cost (1,962,971 shares at March 31, 2010 and
      1,868,335shares
      at December 31, 2009)
              
              
              (26,203
              )
              
              
              (24,980
              )Accumulated
      other comprehensive income, net of taxes
              
              
              4,977
              
              
              
              5,358Total
      stockholders’ equity
              
              
              224,232
              
              
              
              225,246TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
              
              $
              1,512,683
              
              
              $
              1,541,040




See notes
to unaudited consolidated financial statements


1


UNITED
FINANCIAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF EARNINGS (unaudited)


(Dollars
in thousands, except per share amounts)







Three
      Months EndedMarch
      31,2010
              
              
              2009Interest
      and dividend income:Loans
              
              $
              15,457
              
              
              $
              12,051Investments
              
              
              3,292
              
              
              
              3,871Other
      interest-earning assets
              
              
              8
              
              
              
              8Total
      interest and dividend income
              
              
              18,757
              
              
              
              15,930Interest
      expense:Deposits
              
              
              3,375
              
              
              
              3,825Borrowings
              
              
              1,886
              
              
              
              1,950Total
      interest expense
              
              
              5,261
              
              
              
              5,775Net
      interest income before provision for loan losses
              
              
              13,496
              
              
              
              10,155Provision
      for loan losses
              
              
              733
              
              
              
              540Net
      interest income after provision for loan losses
              
              
              12,763
              
              
              
              9,615Non-interest
      income:Fee
      income on depositors’ accounts
              
              
              1,371
              
              
              
              1,107Net
      gain on sale of loans
              
              
              88
              
              
              
              125Impairment
      charge on security
              
              
              (145
              )
              
              
              -Wealth
      management income
              
              
              138
              
              
              
              132Income
      from bank-owned life insurance
              
              
              346
              
              
              
              314Other
      income
              
              
              239
              
              
              
              173Total
      non-interest income
              
              
              2,037
              
              
              
              1,851Non-interest
      expense:Salaries
      and benefits
              
              
              6,078
              
              
              
              4,664Occupancy
      expenses
              
              
              927
              
              
              
              665Marketing
      expenses
              
              
              560
              
              
              
              342Data
      processing expenses
              
              
              1,067
              
              
              
              844Professional
      fees
              
              
              541
              
              
              
              423Merger
      related expenses
              
              
              979
              
              
              
              -FDIC
      insurance assessments
              
              
              415
              
              
              
              340Amortization
      of intangible assets
              
              
              28
              
              
              
              6Other
      expenses
              
              
              1,423
              
              
              
              871Total
      non-interest expense
              
              
              12,018
              
              
              
              8,155Income
      before income taxes
              
              
              2,782
              
              
              
              3,311Income
      tax expense
              
              
              1,031
              
              
              
              1,188Net
      income
              
              $
              1,751
              
              
              $
              2,123Earnings
      per share:Basic
              
              $
              0.11
              
              
              $
              0.14Diluted
              
              $
              0.11
              
              
              $
              0.14Weighted
      average shares outstanding (1):Basic
              
              
              15,618,540
              
              
              
              15,709,006Diluted
              
              
              15,662,592
              
              
              
              15,722,382




(1)
            Prior
      period basic and diluted share data were revised as required by the
      Earnings Per Share Topic of FASB ASC and in accordance with the provisions
      of "Determining Whether Instruments Issued in Share-Based Payment
      Transactions are Participating Securities" which require that share-based
      compensation awards that qualify as participating securities (entitled to
      receive non-forfeitable dividends) be included in basic earnings per share
      using the two-class method. This revision had no impact on earnings per
      share as previously reported.





See notes to unaudited consolidated
financial statements.


2





UNITED
FINANCIAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY AND


COMPREHENSIVE
INCOME (unaudited)


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 and 2009


(Dollars
in thousands, except per share amounts)





AccumulatedCommon
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              OtherShares
              
              
              Common
              
              
              Paid-In
              
              
              Retained
              
              
              Unearned
              
              
              Treasury
              
              
              ComprehensiveOutstanding
              
              
              Stock
              
              
              Capital
              
              
              Earnings
              
              
              Compensation
              
              
              Stock
              
              
              Income
      (Loss)
              
              
              TotalBalances
      at December 31, 2008
              
              
              17,501,949
              
              
              $
              178
              
              
              $
              164,358
              
              
              $
              75,888
              
              
              $
              (12,144
              )
              
              $
              (3,497
              )
              
              $
              2,931
              
              
              $
              227,714Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,123
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,123Other
      comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,517
              
              
              
              1,517Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3,640Cash
      dividends paid ($0.07 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,091
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,091
              )Treasury
      stock purchases
              
              
              (1,000,579
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (13,624
              )
              
              
              -
              
              
              
              (13,624
              )Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              621
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              621ESOP
      shares committed to be released
              
              
              -
              
              
              
              -
              
              
              
              67
              
              
              
              -
              
              
              
              186
              
              
              
              -
              
              
              
              -
              
              
              
              253Balances
      at March 31, 2009
              
              
              16,501,370
              
              
              $
              178
              
              
              $
              165,046
              
              
              $
              76,920
              
              
              $
              (11,958
              )
              
              $
              (17,121
              )
              
              $
              4,448
              
              
              $
              217,513Balances
      at December 31, 2009
              
              
              16,838,598
              
              
              $
              187
              
              
              $
              178,666
              
              
              $
              77,456
              
              
              $
              (11,441
              )
              
              $
              (24,980
              )
              
              $
              5,358
              
              
              $
              225,246Prior
      service costs on pension and otherpost
      retirement benefit plans
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (472
              )
              
              
              (472
              )Net
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,751
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,751Other
      comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              91
              
              
              
              91Total
      comprehensive income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              1,842Cash
      dividends paid ($0.07 per share)
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,090
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,090
              )Treasury
      stock purchases
              
              
              (164,338
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,124
              )
              
              
              -
              
              
              
              (2,124
              )Reissuance
      of treasury shares in connectionwith
      restricted stock grants
              
              
              69,702
              
              
              
              -
              
              
              
              (901
              )
              
              
              -
              
              
              
              -
              
              
              
              901
              
              
              
              -
              
              
              
              -Stock-based
      compensation
              
              
              -
              
              
              
              -
              
              
              
              591
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              591ESOP
      shares committed to be released
              
              
              -
              
              
              
              -
              
              
              
              66
              
              
              
              -
              
              
              
              173
              
              
              
              -
              
              
              
              -
              
              
              
              239Balances
      at March 31, 2010
              
              
              16,743,962
              
              
              $
              187
              
              
              $
              178,422
              
              
              $
              78,117
              
              
              $
              (11,268
              )
              
              $
              (26,203
              )
              
              $
              4,977
              
              
              $
              224,232


The
components of other comprehensive income and related tax effects are as
follows:




Three
      Months Ended March 31,2010
              
              
              2009Change
      in unrealized holding gains on available-for-sale
    securities
              
              $
              27
              
              
              $
              2,461Reclassification
      adjustment for losses realized in income
              
              
              145
              
              
              
              -Net
      change in unrealized gains
              
              
              172
              
              
              
              2,461Tax
      effect
              
              
              (81
              )
              
              
              (944
              )Other
      comprehensive income
              
              $
              91
              
              
              $
              1,517




See notes to unaudited consolidated
financial statements.


3


UNITED
FINANCIAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 and 2009


(Dollars
in thousands)







2010
              
              
              2009Cash
      flows from operating activities:Net
      income
              
              $
              1,751
              
              
              $
              2,123Adjustments
      to reconcile net income to net cash used in operating
      activities:Provision
      for loan losses
              
              
              733
              
              
              
              540ESOP
      expense
              
              
              239
              
              
              
              253Stock-based
      compensation
              
              
              591
              
              
              
              621Amortization
      of premiums and discounts
              
              
              273
              
              
              
              93Depreciation
      and amortization
              
              
              360
              
              
              
              250Amortization
      of intangible assets
              
              
              28
              
              
              
              6Net
      (gain) loss on sale of other real estate owned
              
              
              (23
              )
              
              
              7Impairment
      charges on securities
              
              
              145
              
              
              
              -Net
      gain on sale of loans
              
              
              (88
              )
              
              
              (125
              )Increase
      in cash surrender value of bank-owned life insurance
              
              
              (317
              )
              
              
              (295
              )(Increase)
      decrease in accrued interest receivable
              
              
              (72
              )
              
              
              131Increase
      in other assets
              
              
              (2,792
              )
              
              
              (218
              )Decrease
      in accrued expenses and other liabilities
              
              
              (892
              )
              
              
              (3,896
              )Net
      cash used in operating activities
              
              
              (64
              )
              
              
              (510
              )Cash
      flows from investing activities:Purchases
      of securities available for sale
              
              
              -
              
              
              
              (4,599
              )Proceeds
      from maturities, calls and principal repayments of
    securitiesavailable
      for sale
              
              
              18,303
              
              
              
              16,782Purchases
      of securities held to maturity
              
              
              (11,601
              )
              
              
              (2,043
              )Proceeds
      from maturities, calls and principal repayments of
      securitiesheld
      to maturity
              
              
              3,134
              
              
              
              -Investment
      in short term time deposits
              
              
              (4
              )
              
              
              (8
              )Proceeds
      from sales of other real estate owned
              
              
              271
              
              
              
              268Net
      loan originations, purchases and principal repayments
              
              
              10,396
              
              
              
              (1,830
              )Proceeds
      from sales of loans
              
              
              9,725
              
              
              
              10,927Purchases
      of property and equipment
              
              
              (230
              )
              
              
              (134
              )Cash
      paid to acquire Levine Financial Group
              
              
              -
              
              
              
              (92
              )Net
      cash provided by investing activities
              
              
              29,994
              
              
              
              19,271




(Continued)





4


UNITED
FINANCIAL BANCORP, INC. AND SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS (unaudited)


FOR THE
THREE MONTHS ENDED MARCH 31, 2010 and 2009 (Concluded)


(Dollars
in thousands)




2010
              
              
              2009Cash
      flows from financing activities:Net
      increase in deposits
              
              
              26,265
              
              
              
              12,658Net
      change in short-term borrowings
              
              
              (35,393
              )
              
              
              (16,578
              )Repayment
      of long-term debt
              
              
              (17,862
              )
              
              
              (2,717
              )Net
      increase in escrow funds held for borrowers
              
              
              166
              
              
              
              485Payments
      on capitalized lease obligations
              
              
              (102
              )
              
              
              (63
              )Treasury
      stock purchases
              
              
              (2,124
              )
              
              
              (13,163
              )Cash
      dividends paid
              
              
              (1,090
              )
              
              
              (1,091
              )Net
      cash used in financing activities
              
              
              (30,140
              )
              
              
              (20,469
              )Decrease
      in cash and cash equivalents
              
              
              (210
              )
              
              
              (1,708
              )Cash
      and cash equivalents at beginning of period
              
              
              21,877
              
              
              
              13,572Cash
      and cash equivalents at end of period
              
              $
              21,667
              
              
              $
              11,864Supplemental Disclosure of Cash Flow
      Information:Cash
      paid during the period:Interest
      on deposits, borrowings and other interest bearing
    liabilities
              
              $
              5,983
              
              
              $
              5,741Income
      taxes – net
              
              
              41
              
              
              
              4,600Non-cash
      items:Transfer
      of loans to other real estate owned
              
              
              677
              
              
              
              -Trade
      date accounting for treasury stock purchases
              
              
              -
              
              
              
              461




See notes to unaudited consolidated
financial statements.





5





UNITED
FINANCIAL BANCORP, INC. AND SUBSIDIARY


NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


MARCH
31, 2010


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 “Bank”). UCB
Securities, Inc. is a subsidiary of the Bank and is engaged in the buying,
selling and holding of securities.  UB Properties, LLC is a subsidiary
of the Bank formed to hold real estate assets acquired through
foreclosure.  All significant intercompany accounts and transactions
have been eliminated in consolidation.  These entities are
collectively referred to herein as the “Company”.





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 March 31, 2010 and the results of operations for the three
months ended March 31, 2010 and 2009. The interim results of operations
presented herein are not necessarily indicative of the results to be expected
for the entire year or any other period. These financial statements should be
read in conjunction with the consolidated financial statements and the notes
thereto for the year ended December 31, 2009 included in the Company’s Annual
Report on Form 10-K, which was filed with the Securities and Exchange Commission
on March 12, 2010.





NOTE
B – RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS





In August
2009, the FASB issued Accounting Standard Update 2009-05 (ASU 2009-05)
“Measuring Liabilities at Fair Value”, in accordance with and as required by the
Fair Value Measurements and Disclosures Topic of FASB ASC. This ASU was issued
in response to the credit crisis and will reduce potential differences in
measuring liabilities at fair value and thus promote comparability of companies’
financial statements.  This update is effective for interim and fiscal
periods beginning after October 1, 2009. The adoption of ASU 2009-05 on January
1, 2010 had no material effect on the Company’s Consolidated Financial
Statements.





In
January 2010, the FASB issued Accounting Standard Update 2010-06 (ASU 2010-06)
“Improving Disclosures about Fair Value Measurements”, in accordance with and as
required by the Fair Value Measurements and Disclosures Topic of FASB ASC. This
ASU was issued in response to the recommendations of a number of constituents
that the FASB improve disclosure requirements related to Fair Value Measurements
and Disclosures.  This update is effective for interim and fiscal
periods beginning after December 15, 2009, except for the disclosures about
purchases, sales, issuances, and settlements in the roll forward of activity in
Level 3 fair value measurements. The adoption of this new guidance has been
applied to the Company’s Consolidated Financial Statements as disclosed in Note
M.  The disclosure exceptions are effective for fiscal years beginning
after December 15, 2010, and for the interim periods within those fiscal
years.  The adoption of ASU 2010-06 disclosure provisions effective
for the Company on January 1, 2010 had no material effect on the Company’s
Consolidated Financial Statements.





6


In
February 2010, the FASB issued Accounting Standard Update 2010-09 (ASU 2010-09)
“Amendments to Certain Recognition and Disclosure Requirements”, in accordance
with and as required by the Subsequent Events Topic of FASB ASC
855.  This ASU was issued in response to a number of constituents
informing the FASB that the requirements
to disclose the date that the financial statements are issued potentially
conflict with existing Securities and Exchange Commission’s (SEC)
guidance.  This update provides that an entity that is an SEC filer is
not required to disclose the date through which subsequent events have been
evaluated.  This change alleviates potential conflicts between FASB
ASC 855 and the SEC’s requirements.  The adoption of this new guidance
has been applied to the Company’s Consolidated Financial Statements as disclosed
in Note O.





NOTE
C – CRITICAL ACCOUNTING POLICIES





Critical
accounting policies are those that involve significant judgments and assumptions
by management and that have, or could have, a material impact on our income or
the carrying value of our assets.  Our critical accounting policies
are those related to our allowance for loan losses, the evaluation of the
investment portfolio for other-than-temporary impairment (“OTTI”), income taxes,
goodwill and identifiable intangible assets and fair value of financial
instruments.





Allowance for
Loan Losses.The allowance for loan
losses is the amount estimated by management as necessary to cover credit losses
inherent in the loan portfolio at the balance sheet date.  The
allowance is established through the provision for loan losses which is charged
against income.  The methodology for determining the allowance for
loan losses is considered a critical accounting policy by management due to the
high degree of judgment involved, the subjectivity of the assumptions utilized
and the potential for changes in the economic environment that could result in
adjustments to the amount of the recorded allowance for loan
losses.





As a
substantial amount of our loan portfolio is collateralized by real estate,
appraisals of the underlying value of property securing loans and discounted
cash flow valuations of properties are critical in determining the amount of the
allowance required for specific loans.  Assumptions for appraisals and
discounted cash flow valuations are instrumental in determining the value of
properties.  Inaccurate assumptions could significantly affect the
valuation of a property securing a loan and the related allowance
determined.  The assumptions supporting such appraisals and discounted
cash flow valuations are reviewed by management to determine that the resulting
values reasonably reflect amounts realizable on the related loans.





Management
performs a quarterly evaluation of the adequacy of the allowance for loan
losses.  We consider a variety of factors in establishing this
estimate including, but not limited to, current economic conditions, delinquency
statistics, geographic and industry concentrations, the adequacy of the
underlying collateral, the financial strength of the borrower, results of
internal loan reviews and other relevant factors.  This evaluation is
inherently subjective as it requires material estimates by management that may
be susceptible to significant change based on, among other things, changes in
economic and real estate market conditions.





The
allowance has a specific and general component. The specific component relates
to loans that are delinquent or otherwise identified as potential problem loans
through the application of our loan review process and our loan grading system.
All such loans are evaluated individually, with principal consideration given to
the value of the collateral securing the loans. Specific allowances are
established as required by this analysis. The general component is determined by
segregating the remaining loans by type of loan, credit grade and payment
history.  We also analyze historical loss experience, delinquency
trends, general economic conditions and geographic and industry concentrations
in establishing factors that are applied to the loan groups to determine the
amount of the general component of the allowance for loan losses.





7


Although
management uses available information to establish the appropriate level of the
allowance for loan losses, future additions or reductions to the allowance may
be necessary based on estimates that are susceptible to change as a result of
changes in economic conditions and other factors.  As a result, our
allowance for loan losses may not be sufficient to cover actual loan losses, and
future provisions for loan losses could materially adversely affect the
Company’s operating results. In addition, the Office of Thrift Supervision, our
primary federal regulator, as an integral part of its examination process,
periodically reviews the Company’s allowance for loan losses. Such an agency may
require the Company to recognize adjustments to the allowance based on their
judgments about information available to them at the time of their
examination.





Evaluation of the
Investment Portfolio for Other-Than-Temporary Impairment.The
evaluation of the investment portfolio for other-than-temporary impairment is
also a critical accounting estimate.  In evaluating the investment
portfolio for other-than-temporary impairment, management considers the issuer’s
credit rating, credit outlook, payment status and financial condition, the
length of time the security has been in a loss position, the size of the loss
position, our intent and ability to hold the securities to expected recovery of
value and other meaningful information.  If a decline in the fair
value of an investment security below its cost is judged to be
other-than-temporary the cost basis of the investment security is written down
to fair value as a new cost basis and the amount of the credit related
impairment write-down is included in the results of operations and the
non-credit related impairment for securities not expected to be sold is
recognized in other comprehensive income (loss).  A number of factors
or combinations of factors could cause us to conclude in one or more future
reporting periods that an unrealized loss that exists with respect to these
securities constitutes an impairment that is other than temporary. These factors
include, but are not limited to, failure to make scheduled principal and/or
interest payments, an increase in the severity of the unrealized loss on a
particular security, an increase in the continuous duration of the unrealized
loss without an improvement in value or changes in market conditions and/or
industry or issuer specific factors that would render us unable to forecast a
full recovery in value.





Income Taxes.The Company uses the asset and liability method of accounting for income
taxes in which deferred tax assets and liabilities are established for the
temporary differences between the financial reporting basis and the tax bases of
the Company’s asset and liabilities. The realization of the net deferred tax
asset generally depends upon future levels of taxable income and the existence
of prior years’ taxable income, to which “carry back” refund claims could be
made. A valuation allowance is maintained for deferred tax assets that
management estimates are more likely than not to be unrealizable based on
available evidence at the time the estimate is made. At March 31, 2010 and
December 31, 2009 the Company has not recorded a valuation allowance.
Significant management judgment is required in determining income tax expense
and deferred tax assets and liabilities.  In determining the need for
a valuation allowance, the Company uses historical and forecasted future
operating results, based upon approved business plans, including a review of the
eligible carryforward periods, tax planning opportunities and other relevant
considerations. These underlying assumptions can change from period to period.
For example, tax law changes or variances in future projected operating
performance could result in a change in the valuation allowance. Should actual
factors and conditions differ materially from those considered by management,
the actual realization of the net deferred tax asset could differ materially
from the amounts recorded in the financial statements. If the Company is not
able to realize all or part of our net deferred tax asset in the future, an
adjustment to the deferred tax asset valuation allowance would be charged to
income tax expense in the period such determination was made.





Goodwill and
Identifiable Intangible Assets. Goodwill and identifiable intangible
assets are recorded as a result of business acquisitions and combinations. These
assets are evaluated for impairment annually or whenever events or changes in
circumstances indicate the carrying value of these assets may not be
recoverable. If the carrying amount exceeds fair value, an impairment charge is
recorded to income. The fair value is based on observable market prices, when
practicable. Other valuation techniques may be used when market prices are
unavailable, including estimated discounted cash flows and market multiples
analyses. These types of analyses contain uncertainties because they require
management to make assumptions and to apply judgment to estimate industry
economic factors and the profitability of future business strategies. In the
event of future changes in fair value, the Company may be exposed to an
impairment charge that could be material.


8





Fair Valuation of
Financial Instruments.The Company uses fair value measurements to record
fair value adjustments to certain financial instruments and to determine fair
value disclosures. Securities available for sale are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company may be required to
record at fair value other assets on a nonrecurring basis, or to establish a
loss allowance or write-down based on the fair value of impaired assets.
Further, the notes to financial statements include information about the extent
to which fair value is used to measure assets and liabilities, the valuation
methodologies used and its impact to earnings. Additionally, for financial
instruments not recorded at fair value, the notes to financial statements
disclose the estimate of their fair value. Due to the judgments and
uncertainties involved in the estimation process, the estimates could result in
materially different results under different assumptions and
conditions.





NOTE
D – EARNINGS PER SHARE




Earnings
per share (“EPS”) have been computed as required by the Earnings Per Share Topic
of FASB ASC. 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 Bank’s Employee Stock Ownership Plan (the “ESOP”). 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 EndedMarch
      31,2010
              
              
              2009Net
      income
              
              $
              1,751
              
              
              $
              2,123Weighted average common shares
      applicable to basic EPS(3)
              
              
              15,618,540
              
              
              
              15,709,006Effect of dilutive potential
      common shares(1) (2)
              
              
              44,052
              
              
              
              13,376Weighted average common shares
      applicable to diluted EPS(3)
              
              
              15,662,592
              
              
              
              15,722,382Earnings
      per share:Basic
              
              $
              0.11
              
              
              $
              0.14Diluted
              
              $
              0.11
              
              
              $
              0.14


(1)
        Options to purchase 1,470,776 and 1,295,863 shares for three
      months ended March 31, 2010 and 2009, respectively, were outstanding but
      not included in the computation of earnings per share because they were
      antidilutive.(2)
        Includes incremental shares related to dilutive stock
      options.(3)  
      Prior period basic and diluted share data were revised as required by the
      Earnings Per Share Topic of FASB ASC and in accordance with the provisions
      of "Determining Whether Instruments Issued in Share-Based Payment
      Transactions are Participating Securities" which require that share-based
      compensation awards that qualify as participating securities (entitled to
      receive non-forfeitable dividends) be included in basic EPS using the
      two-class method.  This revision had no impact on earnings per
      share as previously reported.





9





NOTE
E – INVESTMENT SECURITIES





The
amortized cost and fair value of securities classified as available for sale and
held to maturity are as follows:




Amortized
              
              
              UnrealizedCost
              
              
              Gains
              
              
              Losses
              
              
              Fair
      ValueSecurities Available for
    SaleMarch
      31, 2010:Debt
      Securities:Government-sponsored
      enterprises
              
              $
              314
              
              
              $
              11
              
              
              $
              -
              
              
              $
              325Government-sponsored
      and government-guaranteed
      mortgage-backed securities
              
              
              198,481
              
              
              
              9,518
              
              
              
              (121
              )
              
              
              207,878Private
      label mortgage-backed securities
              
              
              3,934
              
              
              
              75
              
              
              
              (55
              )
              
              
              3,954Municipal
      bonds
              
              
              11,004
              
              
              
              186
              
              
              
              (262
              )
              
              
              10,928Corporate
      bonds
              
              
              1,448
              
              
              
              372
              
              
              
              -
              
              
              
              1,820Subtotal
              
              
              215,181
              
              
              
              10,162
              
              
              
              (438
              )
              
              
              224,905Marketable
      equity securities
              
              
              97
              
              
              
              41
              
              
              
              -
              
              
              
              138Total
              
              $
              215,278
              
              
              $
              10,203
              
              
              $
              (438
              )
              
              $
              225,043December
      31, 2009:Debt
      Securities:Government-sponsored
      enterprises
              
              $
              342
              
              
              $
              11
              
              
              $
              -
              
              
              $
              353Government-sponsored
      and government-guaranteed
      mortgage-backed securities
              
              
              215,819
              
              
              
              9,216
              
              
              
              (199
              )
              
              
              224,836Private
      label mortgage-backed securities
              
              
              4,999
              
              
              
              97
              
              
              
              (60
              )
              
              
              5,036Municipal
      bonds
              
              
              11,004
              
              
              
              189
              
              
              
              (260
              )
              
              
              10,933Corporate
      bonds
              
              
              1,449
              
              
              
              279
              
              
              
              (16
              )
              
              
              1,712Subtotal
              
              
              233,613
              
              
              
              9,792
              
              
              
              (535
              )
              
              
              242,870Marketable
      equity securities
              
              
              97
              
              
              
              337
              
              
              
              -
              
              
              
              434Total
              
              $
              233,710
              
              
              $
              10,129
              
              
              $
              (535
              )
              
              $
              243,304




Amortized
              
              
              UnrealizedCost
              
              
              Gains
              
              
              Losses
              
              
              Fair
      ValueSecurities Held to MaturityMarch
      31, 2010:Government-sponsored
      and government-guaranteed
      mortgage-backed securities
              
              $
              62,152
              
              
              $
              358
              
              
              $
              (270
              )
              
              $
              62,240Private
      label mortgage-backed securities
              
              
              687
              
              
              
              6
              
              
              
              -
              
              
              
              693IRB
              
              
              1,035
              
              
              
              -
              
              
              
              -
              
              
              
              1,035State
      of Israel bonds
              
              
              150
              
              
              
              -
              
              
              
              -
              
              
              
              150Municipal
      bonds
              
              
              7,474
              
              
              
              78
              
              
              
              (12
              )
              
              
              7,540Total
              
              $
              71,498
              
              
              $
              442
              
              
              $
              (282
              )
              
              $
              71,658December
      31, 2009:Government-sponsored
      and government-guaranteed
      mortgage-backed securities
              
              $
              53,769
              
              
              $
              180
              
              
              $
              (418
              )
              
              $
              53,531Private
      label mortgage-backed securities
              
              
              737
              
              
              
              13
              
              
              
              -
              
              
              
              750IRB
              
              
              1,039
              
              
              
              -
              
              
              
              -
              
              
              
              1,039State
      of Israel bonds
              
              
              150
              
              
              
              -
              
              
              
              -
              
              
              
              150Municipal
      bonds
              
              
              7,479
              
              
              
              114
              
              
              
              -
              
              
              
              7,593Total
              
              $
              63,174
              
              
              $
              307
              
              
              $
              (418
              )
              
              $
              63,063




10


The
scheduled maturities of debt securities available for sale and held to maturity
at March 31,2010, are shown below. Actual
maturities will differ from contractual maturities because issuers generally
have the right to call or prepay obligations with or without call or prepayment
penalties.




At
      March 31, 2010Securities
              
              
              SecuritiesAvailable
      for Sale
              
              
              Held
      to MaturityAmortized
              
              
              
              
              
              AmortizedCost
              
              
              Fair
      Value
              
              
              Cost
              
              
              Fair
      ValueDue
      in one year or less
              
              $
              2,925
              
              
              $
              2,930
              
              
              $
              460
              
              
              $
              464Due
      from one year to five years
              
              
              5,403
              
              
              
              5,561
              
              
              
              604
              
              
              
              628Due
      from five years to ten years
              
              
              22,362
              
              
              
              23,369
              
              
              
              18,566
              
              
              
              18,694Due
      after ten years
              
              
              184,491
              
              
              
              193,045
              
              
              
              51,868
              
              
              
              51,872$
              215,181
              
              
              $
              224,905
              
              
              $
              71,498
              
              
              $
              71,658





The
Company’s portfolio of mortgage-backed securities, which represent interests in
pools ofresidential mortgage
loans, consists primarily of securities issued by the Federal Home Loan Mortgage
Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie
Mae), and the Government National Mortgage Association (Ginnie Mae), all of
which are federal government owned or sponsored enterprises. The Company also
owns $4.4 million of private label residential mortgage-backed securities as a
result of its acquisition of CNB Financial on November 30, 2009.





Gross
unrealized losses and fair values at March 31,2010 andDecember
31, 2009 aggregated by investment category and the length of time that
individual securities have been in a continuous unrealized loss position
follow:




Less
      than 12 months
              
              
              12
      months or longer
              
              
              TotalUnrealized
              
              
              
              
              
              Unrealized
              
              
              Number
      of
              
              
              
              
              
              UnrealizedFair
      Value
              
              
              Losses
              
              
              Fair
      Value
              
              
              Losses
              
              
              Securities
              
              
              Fair
      Value
              
              
              LossesAt March 31, 2010:Securities Available for
    SaleDebt
      Securities:Government-sponsored
      andgovernment-guaranteed
      mortgage-backed
      securities
              
              $
              13,670
              
              
              $
              (119
              )
              
              $
              871
              
              
              $
              (2
              )
              
              
              16
              
              
              $
              14,541
              
              
              $
              (121
              )Private
      label mortgage-backedsecurities
              
              
              2,092
              
              
              
              (55
              )
              
              
              -
              
              
              
              -
              
              
              
              2
              
              
              
              2,092
              
              
              
              (55
              )Municipal
      bonds
              
              
              1,766
              
              
              
              (161
              )
              
              
              928
              
              
              
              (101
              )
              
              
              8
              
              
              
              2,694
              
              
              
              (262
              )Total
              
              $
              17,528
              
              
              $
              (335
              )
              
              $
              1,799
              
              
              $
              (103
              )
              
              
              26
              
              
              $
              19,327
              
              
              $
              (438
              )Securities Held to MaturityGovernment-sponsored
      andgovernment-guaranteed
      mortgage-backed
      securities
              
              $
              31,609
              
              
              $
              (270
              )
              
              $
              -
              
              
              $
              -
              
              
              
              13
              
              
              $
              31,609
              
              
              $
              (270
              )Municipal
      bonds
              
              
              2,981
              
              
              
              (12
              )
              
              
              -
              
              
              
              -
              
              
              
              16
              
              
              
              2,981
              
              
              
              (12
              )Total
              
              $
              34,590
              
              
              $
              (282
              )
              
              $
              -
              
              
              $
              -
              
              
              
              29
              
              
              $
              34,590
              
              
              $
              (282
              )




11


Less
      than 12 months
              
              
              12
      months or longer
              
              
              TotalUnrealized
              
              
              
              
              
              Unrealized
              
              
              Number
      of
              
              
              
              
              
              UnrealizedFair
      Value
              
              
              Losses
              
              
              Fair
      Value
              
              
              Losses
              
              
              Securities
              
              
              Fair
      Value
              
              
              LossesAt December 31, 2009:Securities Available for
    SaleDebt
      Securities:Government-sponsored
      andgovernment-guaranteed
      mortgage-backed
      securities
              
              $
              14,428
              
              
              $
              (197
              )
              
              $
              1,068
              
              
              $
              (2
              )
              
              
              16
              
              
              $
              15,496
              
              
              $
              (199
              )Private
      label mortgage-backedsecurities
              
              
              2,301
              
              
              
              (60
              )
              
              
              -
              
              
              
              -
              
              
              
              2
              
              
              
              2,301
              
              
              
              (60
              )Municipal
      bonds
              
              
              2,076
              
              
              
              (166
              )
              
              
              935
              
              
              
              (94
              )
              
              
              9
              
              
              
              3,011
              
              
              
              (260
              )Corporate
      bonds
              
              
              -
              
              
              
              -
              
              
              
              308
              
              
              
              (16
              )
              
              
              1
              
              
              
              308
              
              
              
              (16
              )Total
              
              $
              18,805
              
              
              $
              (423
              )
              
              $
              2,311
              
              
              $
              (112
              )
              
              
              28
              
              
              $
              21,116
              
              
              $
              (535
              )Securities Held to MaturityGovernment-sponsored 
      andgovernment-guaranteed
      mortgage-backed
      securities
              
              $
              36,742
              
              
              $
              (418
              )
              
              $
              -
              
              
              $
              -
              
              
              
              15
              
              
              $
              36,742
              
              
              $
              (418
              )Municipal
      bonds
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Total
              
              $
              36,742
              
              
              $
              (418
              )
              
              $
              -
              
              
              $
              -
              
              
              
              15
              
              
              $
              36,742
              
              
              $
              (418
              )




Management
has determined that no declines in the fair value of the Company’s securities
portfolio are deemed to represent an other-than temporary impairment as of March
31, 2010. In its evaluation, management considered the types of securities,
including if the securities were U.S. Government issued, the credit rating on
the securities, credit outlook, payment status and financial condition, the
length of time the security has been in a loss position, the size of the loss
position, our intent and ability to hold the securities to expected recovery of
value and other meaningful information. The Company does not intend to sell any
debt securities and is unlikely to be required to sell any security before its
maturity or market price recovery. At March 31, 2010, management has recorded an
impairment charge of $145,000 on one of its private company stock which is
carried at cost and is included in other assets.





NOTE
F – LOANS





The
components of the loan portfolio were as follows at March 31, 2010 and December
31, 2009:




March
      31,
              
              
              December
      31,2010
              
              
              2009Residential
      mortgages
              
              $
              328,140
              
              
              $
              343,300Commercial
      mortgages
              
              
              413,118
              
              
              
              409,680Construction
              
              
              49,082
              
              
              
              48,808Home
      equity
              
              
              136,652
              
              
              
              137,371Commercial
      and industrial
              
              
              151,270
              
              
              
              159,437Automobile
              
              
              14,137
              
              
              
              14,729Consumer
              
              
              8,688
              
              
              
              8,916Total
      loans
              
              
              1,101,087
              
              
              
              1,122,241Net
      deferred loan costs and fees
              
              
              2,353
              
              
              
              2,355Allowance
      for loan losses
              
              
              (9,610
              )
              
              
              (9,180
              )Loans,
      net
              
              $
              1,093,830
              
              
              $
              1,115,416


12


NOTE
G – NON-PERFORMING ASSETS





The table
below sets forth the amounts and categories of non-performing assets at March
31, 2010 and December 31, 2009:




March
      31,
              
              
              December
      31,2010
              
              
              2009Non-accrual
      loans:Residential
      mortgages
              
              $
              943
              
              
              $
              1,190Commercial
      mortgages (1)
              
              
              10,086
              
              
              
              10,717Construction
              
              
              4,346
              
              
              
              3,280Home
      equity
              
              
              528
              
              
              
              492Commercial
      and industrial
              
              
              510
              
              
              
              571Automobile
              
              
              -
              
              
              
              4Other
      consumer
              
              
              47
              
              
              
              33Total
      non-accrual loans
              
              
              16,460
              
              
              
              16,287Other
      real estate owned
              
              
              1,976
              
              
              
              1,545Total
      non-performing assets
              
              $
              18,436
              
              
              $
              17,832Ratios:Total
      non-performing loans to total loans
              
              
              1.49
              %
              
              
              1.45
              %Total
      non-performing assets to total assets
              
              
              1.22
              %
              
              
              1.16
              %(1)Includes a $3.5
      million troubled debt restructured commercial mortgage loan which was
      restructured in the first quarter of 2010. There were no additional
      commitments to this borrower. As of March 31, 2010 there were no other
      troubled debt restructured loans.





NOTE
H – FAIR VALUE OF IMPAIRED LOANS ACQUIRED





Loans
acquired with evidence of credit quality deterioration since origination and for
which it is probable at purchase that the Company will be unable to collect all
contractually required payments are accounted for as required by and in
accordance with the Receivables Topic of FASB ASC, “Loans and Debt Securities
Acquired with Deteriorating Credit Quality” and under AICPA Statement of
Position 03-3, “Accounting for Certain Loans or Debt Securities Acquired in a
Transfer” (SOP 03-3). Evidence of credit quality deterioration as of the
purchase date may include statistics such as past due status, refreshed borrower
credit scores and refreshed loan-to-value (LTV), some of which are not
immediately available as of the purchase date. The Company continues to evaluate
this information and other credit-related information as it becomes available.
SOP 03-3 addresses accounting for differences between contractual cash flows and
cash flows expected to be collected from the Company’s initial investment in
loans if those differences are attributable, at least in part, to credit
quality.




13


The
initial fair values for loans within the scope of SOP 03-3 are determined by
discounting both principal and interest cash flows expected to be collected
using an observable discount rate for similar instruments with adjustments that
management believes a market participant would consider in determining fair
value. The Company estimates the cash flows expected to be collected at
acquisition using internal credit risk, interest rate and prepayment risk models
that incorporate management’s best estimate of current key assumptions, such as
default rates, loss severity and payment speeds.




As of
November 30, 2009, the CNB Financial acquired commercial loans within the scope
of SOP 03-3 had an unpaid principal balance of $5.2 million and a fair value of
$3.1 million.  At March 31, 2010, the unpaid principal balance on
these commercial loans was $4.8 million and the carrying value on these loans
was $2.7 million. The following table provides details on loans obtained in
connection with the CNB Financial acquisition within the scope of SOP
03-3.




Acquired loan information for CNB
      Financial:As
      of November 30, 2009:Contractually
      required payments
              
              $
              5,178Less:
      Nonaccretable difference
              
              
              (2,099
              )Cash
      flows expected to be collected (1)
              
              
              3,079Less:
      Accretable yield
              
              
              (13
              )Fair
      value of loans acquired
              
              $
              3,066(1) The Bank has not
      factored any prepayments into the expected cash flows.




Under SOP
03-3, the excess of cash flows expected at acquisition over the estimated fair
value is referred to as the accretable yield and is recognized in interest
income over the remaining life of the loans. The difference between
contractually required payments at acquisition and the cash flows expected to be
collected at acquisition is referred to as the nonaccretable difference. Changes
in the expected cash flows from the date of acquisition will either impact the
accretable yield or result in a charge to the provision for credit losses.
Subsequent decreases to expected principal cash flows will result in a charge to
provision for credit losses and a corresponding increase to allowance for loan
losses. Subsequent increases in expected principal cash flows will result in
recovery of any previously recorded allowance for loan losses, to the extent
applicable, and a reclassification from nonaccretable difference to accretable
yield for any remaining increase. All changes in expected interest cash flows
will result in reclassifications to/from nonaccretable differences. There were
no changes in expected cash flows from the date of acquisition that resulted in
adjustments to the accretable or nonaccretable differences or provision for
credit losses.




Loans in
the SOP 03-3 population that are modified subsequent to acquisition are reviewed
to compare modified contractual cash flows to the SOP 03-3 carrying value. If
modified cash flows are lower than the carrying value, the loan is removed from
the SOP 03-3 pool at its carrying value, as well as the related allowance for
loan losses, and classified as a troubled debt restructure.  At March
31, 2010 the Company did not have any troubled debt restructured acquired
loans.




14





NOTE
I – ALLOWANCE FOR LOAN LOSSES





A summary
of the activity in the allowance for loan losses is as follows:





For
      the Three Months EndedMarch
      31,2010
              
              
              2009Balance
      at beginning of period
              
              $
              9,180
              
              
              $
              8,250Provision
      for loan losses
              
              
              733
              
              
              
              540Charge-offs:Commercial
      mortgages
              
              
              (90
              )
              
              
              -Construction
              
              
              (88
              )
              
              
              (65
              )Home
      equity
              
              
              (48
              )
              
              
              -Commercial
      and industrial
              
              
              (68
              )
              
              
              (39
              )Automobile
              
              
              (3
              )
              
              
              (5
              )Other
      consumer
              
              
              (11
              )
              
              
              (1
              )Total
      charge-offs
              
              
              (308
              )
              
              
              (110
              )Recoveries:Commercial
      and industrial
              
              
              5
              
              
              
              47Automobile
              
              
              -
              
              
              
              1Total
      recoveries
              
              
              5
              
              
              
              48Net
      charge-offs
              
              
              (303
              )
              
              
              (62
              )Balance
      at end of period
              
              $
              9,610
              
              
              $
              8,728Ratios:Net
      charge-offs to average loansoutstanding
      (annualized)
              
              
              0.11
              %
              
              
              0.03
              %Allowance
      for loan losses to non-performingloans
      at end of period
              
              
              58.38
              %
              
              
              201.43
              %Allowance
      for loan losses to totalloans
      at end of period
              
              
              0.87
              %
              
              
              1.01
              %







NOTE
J – COMMITMENTS





Financial
instruments with off-balance sheet risk at March 31, 2010 and December 31, 2009
were as follows:




March
      31,
              
              
              December
      31,2010
              
              
              2009Unused
      lines of credit
              
              $
              227,035
              
              
              $
              226,543Amounts
      due mortgagors
              
              
              28,201
              
              
              
              30,225Standby
      letters of credit
              
              
              3,215
              
              
              
              6,155Commitments
      to originate loans
              
              
              3,479
              
              
              
              16,120




The
Company also has a commitment to invest up to $1.0 million in a venture capital
fund. As of March 31, 2010 the Company has contributed $300,000 to the
fund.





15





NOTE
K – DEPOSITS





Deposit accounts, by type, are
summarized as follows atMarch 31, 2010and December 31,
2009:




March
      31,
              
              
              December
      31,2010
              
              
              2009Demand
              
              $
              161,107
              
              
              $
              154,374NOW
              
              
              39,338
              
              
              
              42,262Savings
              
              
              165,946
              
              
              
              174,270Money
      market
              
              
              231,222
              
              
              
              189,763Certificates
      of deposit
              
              
              467,579
              
              
              
              478,258$
              1,065,192
              
              
              $
              1,038,927




NOTE
L – 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
M - FAIR VALUES OF ASSETS AND LIABILITIES





In
accordance with and as required by the Fair Value Measurements and Disclosures
Topic of FASB ASC, the Company groups its financial assets and financial
liabilities measured at fair value in three levels, based on the markets in
which the assets and liabilities are traded and the reliability of the
assumptions used to determine fair value, as follows:




Level 1 –
Valuations for assets and liabilities traded in active exchange markets, such as
the New York Stock Exchange. Level 1 also includes U.S. Treasury, other U.S.
government and government-sponsored enterprises and agency mortgage-backed
securities that are traded by dealers or brokers in active
markets.  Valuations are obtained from readily available pricing
sources for market transactions involving identical assets or
liabilities.




Level 2 –
Valuations for assets and liabilities traded in less active dealer or broker
markets. Valuations are obtained from third party pricing services for identical
or comparable assets or liabilities.




Level 3 –
Valuations for assets and liabilities that are derived from other valuation
methodologies, including option pricing models, discounted cash flow models and
similar techniques, and not based on market exchange, dealer, or broker-traded
transactions.  Level 3 valuations incorporate certain assumptions and
projections in determining the fair value assigned to such assets and
liabilities.







16







Assets
measured at fair value on a recurring basis, are summarized below:




TotalLevel
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Fair
      ValueAt March 31, 2010Securities
      available for sale:Government-sponsored
      enterprises
              
              $
              325
              
              
              $
              -
              
              
              $
              -
              
              
              $
              325Government-sponsored
      and government-guaranteed
      mortgage-backed securities
              
              
              -
              
              
              
              207,878
              
              
              
              -
              
              
              
              207,878Private
      label mortgage-backed securities
              
              
              -
              
              
              
              3,954
              
              
              
              -
              
              
              
              3,954Municipal
      bonds
              
              
              -
              
              
              
              10,626
              
              
              
              302
              
              
              
              10,928Corporate
      bonds
              
              
              -
              
              
              
              -
              
              
              
              1,820
              
              
              
              1,820Marketable
      equity securities
              
              
              138
              
              
              
              -
              
              
              
              -
              
              
              
              138Mortgage
      servicing rights
              
              
              -
              
              
              
              -
              
              
              
              450
              
              
              
              450Total
              
              $
              463
              
              
              $
              222,458
              
              
              $
              2,572
              
              
              $
              225,493At December 31, 2009Securities
      available for saleGovernment-sponsored
      enterprises
              
              $
              353
              
              
              $
              -
              
              
              $
              -
              
              
              $
              353Government-sponsored
      and government-guaranteed
      mortgage-backed securities
              
              
              -
              
              
              
              224,836
              
              
              
              -
              
              
              
              224,836Private
      label mortgage-backed securities
              
              
              -
              
              
              
              5,036
              
              
              
              -
              
              
              
              5,036Municipal
      bonds
              
              
              -
              
              
              
              10,631
              
              
              
              302
              
              
              
              10,933Corporate
      bonds
              
              
              -
              
              
              
              -
              
              
              
              1,712
              
              
              
              1,712Marketable
      equity securities
              
              
              434
              
              
              
              -
              
              
              
              -
              
              
              
              434Mortgage
      servicing rights
              
              
              -
              
              
              
              -
              
              
              
              313
              
              
              
              313Total
              
              $
              787
              
              
              $
              240,503
              
              
              $
              2,327
              
              
              $
              243,617




The
Company had no liabilities measured at fair value on a recurring basis at March
31, 2010 and December 31, 2009.




The table
below presents the changes in Level 3 assets measured at fair value on a
recurring basis for the three months ended March 31, 2010.




Balance
      at December 31, 2009
              
              $
              2,327Total
      realized/unrealized losses included in net income
              
              
              (3
              )Change
      in unrealized gain
              
              
              109Purchases,
      sales, issuances and settlements
              
              
              139Transfers
      in and out of Level 3
              
              
              -Balance
      at March 31, 2010
              
              $
              2,572





The fair
value of a financial instrument is the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. If a quoted market price is available for an
instrument, the fair value to be disclosed for that instrument is the product of
the number of trading units of the instrument times that market
price.





17


Also, the
Company may be required, from time to time, to measure at fair value certain
other financial and non-financial assets on a nonrecurring basis in accordance
with GAAP. These adjustments to fair value usually result from application of
lower-of-cost-or-fair value accounting or write-downs of individual assets. The
following table summarizes the fair value hierarchy used to determine the
adjustment and the carrying value of the related individual assets for the three
months ended March 31, 2010.




Three
      Months EndedMarch
      31, 2010At
      March 31, 2010
              
              
              TotalLevel
      1
              
              
              Level
      2
              
              
              Level
      3
              
              
              Gains/(Losses)Assets:Loans
              
              $
              -
              
              
              $
              16,460
              
              
              $
              -
              
              
              $
              (607
              )Other
      real estate owned
              
              
              -
              
              
              
              1,976
              
              
              
              -
              
              
              
              -Other
      assets
              
              
              -
              
              
              
              -
              
              
              
              545
              
              
              
              (145
              )Total
      assets
              
              $
              -
              
              
              $
              18,436
              
              
              $
              545
              
              
              $
              (752
              )




The
amount of loans represents the carrying value and related write-down and
valuation allowance of impaired loans for which adjustments are based on the
estimated fair value of the underlying collateral. The other real estate owned
amount represents the carrying value for which adjustments are also based on the
estimated fair value of the property. Included in other assets is private
company stock which is carried at cost. Management has determined that several
impairment indicators exist and that the investment is impaired. In its
evaluation, management considers the investee's earnings performance, credit
rating, asset quality, regulatory, economic, or technological environment
operating environment, and the investee's ability to continue as a going
concern. The cost basis of the individual security was written down to fair
value as a new cost basis and the amount of the write-down is accounted for as a
realized loss and is included in earnings.  As a result, management
has recorded an impairment charge of $145,000 at March 31, 2010.





The
Company is required to provide supplemental financial statement disclosures of
the estimated fair value of its financial instruments.  Financial
instruments include cash and cash equivalents, investment and mortgage-backed
securities, loans, deposits, borrowings and certain off-balance sheet items such
as loan commitments.  Other assets significant to the Company,
including bank premises and equipment, deferred tax assets, as well as core
deposit and other intangible assets are not considered financial instruments and
are excluded from the fair value disclosures. In addition, the tax ramifications
related to the realization of unrealized gains and losses can have a significant
effect on fair value estimates and have not been considered in the
estimates.





Fair
value estimates are made at a specific point in time, based on relevant market
information and information about the financial instrument. These estimates do
not reflect any premium or discount that could result from offering for sale at
one time the Company’s entire holdings of a particular financial instrument.
Because a market may not readily exist for a significant portion of the
Company’s financial instruments, fair value estimates are based on judgments
regarding future expected loss experience, current economic conditions, risk
characteristics of various financial instruments, and other factors. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision. Changes
in assumptions could significantly affect the estimates.





The
following methods and assumptions were used by the Company in estimating fair
values of its financial instruments:





Cash and Cash
Equivalents and Short-term Investments.For cash and short
term investments having maturities of 90 days or less, the carrying amounts
reported in the balance sheets approximate fair values. The carrying amount of
short-term investments held at March 31, 2010 andat
December 31, 2009 also approximates fair value.


18





Investment
Securities and FHLBB Stock.The fair value of securities to be
held to maturity and securities available for sale is estimated based on quoted
market prices, where available.  If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.  Ownership of Federal Home Loan Bank of Boston (FHLBB)
stock is restricted to member banks; therefore, the stock is not
traded.  The estimated fair value of FHLBB stock is equal to its
carrying value, which represents the price at which the FHLBB is obligated to
redeem its stock.





Loans.For
valuation purposes, the loan portfolio was segregated into its significant
categories, which are residential mortgage, commercial real estate, commercial
and consumer loans. These categories were further segregated, where appropriate,
into components based on significant financial characteristics such as type of
interest rate (fixed or adjustable). Fair values were estimated for each
component using a valuation method selected by management. The fair values of
residential mortgage, commercial real estate, commercial and consumer loans were
estimated by discounting the anticipated cash flows from the respective
portfolios. Estimates of the timing and amount of these cash flows were based on
factors such as future loan prepayments. The discount rates reflected current
market rates for loans with similar terms to borrowers of similar credit
quality. The fair value of home equity lines of credit was based on the
outstanding loan balances, as required by the Financial Instruments Topic of
FASB ASC.





Deposits.The
fair value of deposits with no stated maturity, such as demand deposits, NOW,
regular savings, and money market deposit accounts, is equal to the amount
payable on demand.  The fair value estimates do not include the
benefit that results from the generally lower cost of funding provided by the
deposit liabilities compared to the cost of borrowing funds in the
market.  The fair value estimate of time deposits is based on the
discounted value of contractual cash flows.  The discount rate is
estimated using the rates currently offered for deposits of similar remaining
maturities.





Federal Home Loan
Bank of Boston Advances.The fair value estimate of the
borrowings from the FHLBB is determined by discounting the anticipated future
cash payments by using the rates currently available to the Bank for debt with
similar terms and remaining maturities.





Repurchase
Agreements.The Company enters into overnight repurchase
agreements with its customers. Since these agreements are short-term
instruments, the fair value of these agreements approximates their recorded
balance. The Company also secures term repurchase agreements through other
financial institutions. The fair value of these agreements are determined by
discounting the anticipated future cash payments using rates currently available
to the Bank for debt with similar terms and remaining maturities.





Subordinated
Debentures.The Company has outstanding subordinated debt in
the form of trust preferred securities issued through a private placement
offering. The fair value estimate is determined by discounting the anticipated
future cash payments by using the rates currently available to the Company for
debt with similar terms and remaining maturities.





Off-Balance Sheet
Instruments.The fair value of off-balance-sheet mortgage
lending commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties’ credit standing.  In the case of the commitments
discussed in Note I, the fair value equals the carrying amounts which are not
significant.





19







The fair
value of the Company’s financial instruments is as follows at dates
indicated:




At
      March 31, 2010
              
              
              At
      December 31, 2009Carrying
              
              
              Estimated
              
              
              Carrying
              
              
              EstimatedValue
              
              
              Fair
      Value
              
              
              Value
              
              
              Fair
      ValueFinancial
      Assets:Cash
      and cash equivalents
              
              $
              21,667
              
              
              $
              21,667
              
              
              $
              21,877
              
              
              $
              21,877Short-term
      investments
              
              
              1,100
              
              
              
              1,100
              
              
              
              1,096
              
              
              
              1,096Securities
      available for sale
              
              
              225,043
              
              
              
              225,043
              
              
              
              243,304
              
              
              
              243,304Securities
      held to maturity
              
              
              71,498
              
              
              
              71,658
              
              
              
              63,174
              
              
              
              63,063Stock
      in Federal Home Loan Bank of Boston
              
              
              15,365
              
              
              
              15,365
              
              
              
              15,365
              
              
              
              15,365Net
      loans
              
              
              1,093,830
              
              
              
              1,087,625
              
              
              
              1,115,416
              
              
              
              1,109,232Financial
      Liabilities:Deposits
      (with no stated maturity)
              
              
              597,613
              
              
              
              597,613
              
              
              
              560,669
              
              
              
              560,669Time
      deposits
              
              
              467,579
              
              
              
              473,675
              
              
              
              478,258
              
              
              
              483,843Federal
      Home Loan Bank of Boston advances
              
              
              160,136
              
              
              
              164,655
              
              
              
              208,173
              
              
              
              211,954Repurchase
      agreements
              
              
              42,062
              
              
              
              40,905
              
              
              
              47,303
              
              
              
              46,068Subordinated
      debentures
              
              
              5,380
              
              
              
              5,380
              
              
              
              5,357
              
              
              
              5,357




NOTE
N – PENSION AND POSTRETIREMENT BENEFIT
PLANS





The
Company maintains a Senior Executive Retirement Plan (SERP) and a Director
Retirement Plan. These plans had no assets at March 31, 2010 and 2009. The
following table presents the components of the net periodic benefit cost for the
indicated periods:




For
      the Three Months Ended March 31,2010
              
              
              2009Director
              
              
              
              
              
              DirectorRetirement
              
              
              
              
              
              RetirementSERP
              
              
              Plan
              
              
              SERP
              
              
              PlanPeriodic benefit cost:Service
      cost
              
              $
              80
              
              
              $
              17
              
              
              $
              69
              
              
              $
              15Interest
      cost
              
              
              44
              
              
              
              10
              
              
              
              35
              
              
              
              9Total
      pension cost
              
              
              124
              
              
              
              27
              
              
              
              104
              
              
              
              24Prior
      service cost amortization
              
              
              29
              
              
              
              9
              
              
              
              19
              
              
              
              9Net
      periodic benefit cost
              
              $
              153
              
              
              $
              36
              
              
              $
              123
              
              
              $
              33




Benefits
expected to be paid over the next five years as presented in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2009 have not
changed. These plans are funded on a pay-as-you-go-basis and the Company does
not expect to make any contributions to these plans in 2010.





NOTE
O – SUBSEQUENT EVENTS




In
connection with the preparation of these financial statements, the Company has
evaluated events and transactions through the date the financial statements were
issued.





Cash dividend
declared.On April 15, 2010, the Company’s Board of Directors
declared a cash dividend of $0.07 per share. The dividend is payable on May 27,
2010 to stockholders of record as of May 6, 2010.





20


ITEM
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations





Forward-Looking
Statements




This
report may contain, and from time to time, the Company may disclose,
forward-looking statements relating to such matters as anticipated financial
performance, business prospects, technological developments, new products, and
similar matters. Forward-looking statements are generally preceded by terms such
as “expects,” “believes,” “anticipates,” “intends” or similar expressions. 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, changes in market interest rates, risks in the loan
portfolio, loan demand, legislative or regulatory changes, and significant
increases in competitive pressures. Additional factors are
discussed in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009 under “Item 1A. Risk Factors”.  These risks and
uncertainties should be considered in evaluating forward-looking statements and
undue reliance should not be placed on such
statements.Forward-looking statements speak only as of the
date they are made and the Company does not undertake to update forward-looking
statements to reflect circumstances or events that occur after the date of the
forward-looking statements or to reflect the occurrence of unanticipated events.
Accordingly, past results and trends should not be used by investors to
anticipate future results or trends.




Comparison
of Financial Condition at March 31, 2010 and December 31, 2009




Total
assets decreased $28.4 million, or 1.8%, to $1.513 billion at March 31, 2010
from $1.541 billion at December 31, 2009 mainly due to decreases in net loans
and available for sale investment securities, partially offset by an increase in
held to maturity investment securities.  Net loans decreased $21.6
million, or 1.9%, to $1.094 billion at March 31, 2010 from $1.115 billion at
December 31, 2009 reflecting the sale of $9.7 million in lower coupon, fixed
rate residential mortgages.  The residential real estate and
commercial loan portfolios were also affected by slower origination volume, loan
prepayments and normal amortization. Securities available for sale decreased
$18.3 million, or 7.5%, to $225.0 million at March 31, 2010 from $243.3 million
at December 31, 2009, as a result of repayments, primarily of
government-sponsored and guaranteed mortgage-backed
securities.  Securities held to maturity increased $8.3 million to
$71.5 million at March 31, 2010 due to purchases of mortgage-backed securities
classified as held to maturity totaling $11.6 million, partially offset by
repayments of $3.1 million.




Total
deposits increased $26.3 million, or 2.5%, to $1.065 billion at March 31, 2010
compared to $1.039 billion at December 31, 2009 primarily due to growth in core
deposits accounts of $36.9 million, or 6.6%, to $597.6 million at March 31, 2010
from $560.7 million at December 31, 2009 (primarily in demand and money market
accounts). The strong growth in core account balances was driven by the success
of sales and marketing inititives in our new Worcester markets, competitive
products and pricing, attention to excellence in customer service and targeted
promotional activities. The increase in core deposits was partially offset by a
decrease in certificates of deposit of $10.7 million, or 2.2%, to $467.6 million
at March 31, 2010 compared to $478.3 million at December 31, 2009 in connection
with planned runoff in the brokered deposit portfolio. Short-term
borrowings were reduced by $41.5 million, or 55.0% to $34.0 million at March 31,
2010 compared to $75.5 million at December 31, 2009 as a result of paydowns of
FHLBB advances using cash flows from the loan and investment portfolios and
increased deposit levels.  Long-term debt decreased $11.8 million, or
6.5%, to $168.2 million at March 31, 2010 compared to $180.0 million at December
31, 2009 largely attributable to maturities and payments.  At March
31, 2010, the Company continued to have considerable liquidity including
significant unused borrowing capacity at the FHLBB and the Federal Reserve Bank
and access to funding through the repurchase agreement and brokered deposit
markets.




21





Total
stockholders’ equity decreased $1.0 million, or 0.5%, to $224.2 million at March
31, 2010 from $225.2 million at December 31, 2009 as a result of repurchases of
our common stock totaling $2.1 million, cash dividend payments amounting to $1.1
million and a decrease of $381,000 in other comprehensive income. These
decreases were partially offset by net income of $1.8 million for the three
months ended March 31, 2010, stock-based compensation expense totaling $591,000
and ESOP compensation expense of $239,000.




Credit
Quality





The
Company actively manages credit risk through its underwriting practices and
collection operations and it does not offer nor has it historically offered
residential mortgage and other consumer loans to subprime or Alt-A
borrowers.  Non-performing loans totaled $16.5 million, or 1.49%, of
total loans, at March 31, 2010 and $16.3 million, or 1.45%, of total loans, at
December 31, 2009.  The non-performing loan totals for these two
periods include a $3.5 million commercial real estate loan which was impaired at
December 31, 2009 and restructured during the first quarter of
2010.  It was classified as a troubled debt restructure and has been
placed on non-accrual status as of March 31, 2010.  This loan will be
returned to accruing status if the borrower remains current on the new payments
for a period of six months. Management expects that several impaired loans with
active workout plans will be substantially paid down or paid in full by the end
of the second quarter of 2010.  See also “Note G – Non-Performing
Assets” in the Notes to the Unaudited Consolidated Financial Statements in this
report.





Delinquent Loans.The following table sets forth our loan delinquencies by type and by
amount at the dates indicated.




Loans
      Delinquent For60
      - 89 Days
                
                
                90
      Days and Over
                
                
                TotalNumber
                
                
                Amount
                
                
                Number
                
                
                Amount
                
                
                Number
                
                
                Amount(Dollars
      in thousands)At March 31, 2010Residential
      mortgages
                
                
                3
                
                
                $
                307
                
                
                
                3
                
                
                $
                943
                
                
                
                6
                
                
                $
                1,250Commercial
      mortgages
                
                
                3
                
                
                
                548
                
                
                
                14
                
                
                
                6,571
                (1)
                
                
                17
                
                
                
                7,119Construction
                
                
                -
                
                
                
                -
                
                
                
                7
                
                
                
                4,346
                
                
                
                7
                
                
                
                4,346Home
      equity
                
                
                6
                
                
                
                251
                
                
                
                3
                
                
                
                528
                
                
                
                9
                
                
                
                779Commercial
      and industrial
                
                
                2
                
                
                
                11
                
                
                
                14
                
                
                
                510
                
                
                
                16
                
                
                
                521Automobile
                
                
                1
                
                
                
                2
                
                
                
                -
                
                
                
                -
                
                
                
                1
                
                
                
                2Other
      consumer
                
                
                2
                
                
                
                1
                
                
                
                1
                
                
                
                47
                
                
                
                3
                
                
                
                48Total
                
                
                17
                
                
                $
                1,120
                
                
                
                42
                
                
                $
                12,945
                
                
                
                59
                
                
                $
                14,065At December 31, 2009Residential
      mortgages
                
                
                13
                
                
                $
                1,355
                
                
                
                5
                
                
                $
                1,190
                
                
                
                18
                
                
                $
                2,545Commercial
      mortgages
                
                
                8
                
                
                
                2,298
                
                
                
                13
                
                
                
                10,717
                
                
                
                21
                
                
                
                13,015Construction
                
                
                3
                
                
                
                424
                
                
                
                5
                
                
                
                3,280
                
                
                
                8
                
                
                
                3,704Home
      equity
                
                
                3
                
                
                
                157
                
                
                
                4
                
                
                
                492
                
                
                
                7
                
                
                
                649Commercial
      and industrial
                
                
                3
                
                
                
                54
                
                
                
                15
                
                
                
                571
                
                
                
                18
                
                
                
                625Automobile
                
                
                -
                
                
                
                -
                
                
                
                3
                
                
                
                4
                
                
                
                3
                
                
                
                4Other
      consumer
                
                
                3
                
                
                
                11
                
                
                
                1
                
                
                
                33
                
                
                
                4
                
                
                
                44Total
                
                
                33
                
                
                $
                4,299
                
                
                
                46
                
                
                $
                16,287
                
                
                
                79
                
                
                $
                20,586
  (1)Does not include a
      $3.5 million commercial mortgage loan which was restructured in the first
      quarter of 2010 and was placed on non-accrual status. Although this loan
      is reported as a non-performing asset, the borrower is current with
      respect to restructured payment
terms.




22


Classified
Assets.The following table shows the aggregate amount of our
classified assets at the date indicated for both loans and foreclosed assets.
The total amount of loans in the table below at March 31, 2010 includes twenty
one relationships which represent 63% of the classified loans. Construction
loans for one- to-four family or condominium development represent 23% of the
total classified asset total. Of the $2.0 million in other real estate owned,
$820,000 are under contract with closings expected in the second quarter of
2010.




At
      March 31,
              
              
              At
      December 31,2010
              
              
              2009(In
      thousands)Classified
      Loans:Special
      mention
              
              $
              32,306
              
              
              $
              33,507Substandard
              
              
              45,564
              
              
              
              45,354Doubtful
              
              
              115
              
              
              
              136Loss
              
              
              -
              
              
              
              -Total
      classified loans
              
              $
              77,985
              
              
              $
              78,997Foreclosed
      Assets:Other
      real estate owned
              
              
              1,976
              
              
              
              1,545Total
      classified assets
              
              $
              79,961
              
              
              $
              80,542




Comparison
of Operating Results for the Three Months Ended March 31, 2010 and
2009





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 FHLBB advances.





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, gain on sale of loans and securities, wealth
management fees, increases in the cash surrender value of bank-owned life
insurance and miscellaneous other income. Non-interest expense consists
primarily of salaries and benefits, data processing, occupancy, marketing,
professional fees, FDIC insurance assessment, postage, printing, office
supplies, and other operating expenses.  In 2010, our non-interest
expenses also include merger related expenses relating to our acquisition of CNB
Financial on November 30, 2009.  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 $1.8 million, or $0.11
per diluted share, for the first quarter of 2010 compared to net income of $2.1
million, or $0.14 per diluted share, for the same period in
2009.  Excluding acquisition related costs totaling $979,000 ($808,000
net of tax benefit), net income would have been $2.6 million, or $0.16 per
diluted share, for the first quarter of 2010.  The improved quarterly
operating results (excluding acquisition related expenses) were primarily due to
growth in net interest income, driven by net interest margin expansion and an
increase in average interest earning assets, as well as an increase in fee
income.  These items were partially offset by a higher provision for
loan losses, a $145,000 non-cash, non-deductible charge for
other-than-temporary-impairment of an investment security and an increase in
non-interest expense.  The improvement in earnings per share
(excluding acquisition related costs) was influenced by growth in earnings
(excluding acquisition related costs) and the positive impact of stock
repurchases.




23


Average Balances
and Yields.  The following
table sets forth average balances, 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.




Three
      Months Ended March 31,2010
              
              
              2009Interest
              
              
              
              
              
              
              
              
              InterestAverage
              
              
              and
              
              
              Yield/
              
              
              Average
              
              
              and
              
              
              Yield/Balance
              
              
              Dividends
              
              
              Cost
              
              
              Balance
              
              
              Dividends
              
              
              Cost(Dollars
      in thousands)Interest-earning
      assets:Loans:Residential
      real estate
              
              $
              341,337
              
              
              $
              4,632
              
              
              
              5.43
              %
              
              $
              355,060
              
              
              $
              4,943
              
              
              
              5.57
              %Commercial
      real estate
              
              
              455,852
              
              
              
              7,069
              
              
              
              6.20
              %
              
              
              282,593
              
              
              
              4,187
              
              
              
              5.93
              %Home
      equity
              
              
              138,530
              
              
              
              1,443
              
              
              
              4.17
              %
              
              
              121,371
              
              
              
              1,418
              
              
              
              4.67
              %Commercial
      and industrial
              
              
              152,627
              
              
              
              1,977
              
              
              
              5.18
              %
              
              
              82,804
              
              
              
              1,113
              
              
              
              5.38
              %Consumer
      and other
              
              
              23,983
              
              
              
              336
              
              
              
              5.60
              %
              
              
              27,752
              
              
              
              390
              
              
              
              5.62
              %Total
      loans
              
              
              1,112,329
              
              
              
              15,457
              
              
              
              5.56
              %
              
              
              869,580
              
              
              
              12,051
              
              
              
              5.54
              %Investment
      securities
              
              
              302,916
              
              
              
              3,292
              
              
              
              4.35
              %
              
              
              313,799
              
              
              
              3,871
              
              
              
              4.93
              %Other
      interest-earning assets
              
              
              19,011
              
              
              
              8
              
              
              
              0.17
              %
              
              
              14,661
              
              
              
              8
              
              
              
              0.22
              %Total
      interest-earning assets
              
              
              1,434,256
              
              
              
              18,757
              
              
              
              5.23
              %
              
              
              1,198,040
              
              
              
              15,930
              
              
              
              5.32
              %Noninterest-earning
      assets(1)
              
              
              94,953
              
              
              
              
              
              
              
              
              
              
              
              53,185Total
      assets
              
              $
              1,529,209
              
              
              
              
              
              
              
              
              
              
              $
              1,251,225Interest-bearing
      liabilities:Savings
      accounts
              
              $
              170,489
              
              
              
              397
              
              
              
              0.93
              %
              
              $
              105,664
              
              
              
              288
              
              
              
              1.09
              %Money
      market accounts
              
              
              206,325
              
              
              
              449
              
              
              
              0.87
              %
              
              
              171,175
              
              
              
              626
              
              
              
              1.46
              %NOW
      accounts
              
              
              38,650
              
              
              
              50
              
              
              
              0.52
              %
              
              
              30,344
              
              
              
              35
              
              
              
              0.46
              %Certificates
      of deposit
              
              
              467,551
              
              
              
              2,479
              
              
              
              2.12
              %
              
              
              367,031
              
              
              
              2,876
              
              
              
              3.13
              %Total
      interest-bearing deposits
              
              
              883,015
              
              
              
              3,375
              
              
              
              1.53
              %
              
              
              674,214
              
              
              
              3,825
              
              
              
              2.27
              %FHLB
      advances
              
              
              202,644
              
              
              
              1,552
              
              
              
              3.06
              %
              
              
              204,501
              
              
              
              1,737
              
              
              
              3.40
              %Other
      interest-bearing liabilities
              
              
              53,981
              
              
              
              334
              
              
              
              2.47
              %
              
              
              31,780
              
              
              
              213
              
              
              
              2.68
              %Total
      interest-bearing liabilities
              
              
              1,139,640
              
              
              
              5,261
              
              
              
              1.85
              %
              
              
              910,495
              
              
              
              5,775
              
              
              
              2.54
              %Demand
      deposits
              
              
              155,358
              
              
              
              
              
              
              
              
              
              
              
              111,099Other
      noninterest-bearing liabilities
              
              
              9,425
              
              
              
              
              
              
              
              
              
              
              
              8,948Total
      liabilities
              
              
              1,304,423
              
              
              
              
              
              
              
              
              
              
              
              1,030,542Stockholders'
      equity
              
              
              224,786
              
              
              
              
              
              
              
              
              
              
              
              220,683Total
      liabilities and stockholders' equity
              
              $
              1,529,209
              
              
              
              
              
              
              
              
              
              
              $
              1,251,225Net
      interest income
              
              
              
              
              
              $
              13,496
              
              
              
              
              
              
              
              
              
              
              $
              10,155Interest
      rate spread(2)
              
              
              
              
              
              
              
              
              
              
              3.38
              %
              
              
              
              
              
              
              
              
              
              
              2.78
              %Net
      interest-earning assets(3)
              
              $
              294,616
              
              
              
              
              
              
              
              
              
              
              $
              287,545Net
      interest margin(4)
              
              
              
              
              
              
              
              
              
              
              3.76
              %
              
              
              
              
              
              
              
              
              
              
              3.39
              %Average
      interest-earning assets toaverage
      interest-bearing liabilities
              
              
              
              
              
              
              
              
              
              
              125.85
              %
              
              
              
              
              
              
              
              
              
              
              131.58
              %


(1)
            Includes
      bank-owned life insurance, the income on which is classified as
      non-interest income.


(2)
            Net
      interest rate spread represents the difference between the yield on
      average interest-earning assets and the cost of average interest-bearing
      liabilities.


(3)
            Net
      interest-earning assets represents total interest-earning assets less
      total interest-bearing liabilities.


(4)
            Net
      interest margin represents annualized net interest income divided by
      average total interest-earning
assets.





24





Rate/Volume
Analysis.  The following table presents the effects of changing
rates and volumes on our net interest income for the periods indicated. The rate
column shows the effects attributable to changes in rate (changes in rate
multiplied by prior volume). The volume column shows the effects attributable to
changes in volume (changes in volume multiplied by prior rate). The net column
represents the sum of the prior columns. For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately, based on the changes due to rate and the changes due
to volume.




Three
      Months Ended March 31,2010
      vs. 2009Increase
      (Decrease) Due toVolume
              
              
              Rate
              
              
              Net(In
      thousands)Interest-earning
      assets:Loans:Residential
      real estate
              
              $
              (188
              )
              
              $
              (123
              )
              
              $
              (311
              )Commercial
      real estate
              
              
              2,679
              
              
              
              203
              
              
              
              2,882Home
      equity
              
              
              188
              
              
              
              (163
              )
              
              
              25Commercial
      and industrial
              
              
              906
              
              
              
              (42
              )
              
              
              864Consumer
      and other
              
              
              (53
              )
              
              
              (1
              )
              
              
              (54
              )Total
      loans
              
              
              3,532
              
              
              
              (126
              )
              
              
              3,406Investment
      securities
              
              
              (130
              )
              
              
              (449
              )
              
              
              (579
              )Other
      interest-earning assets
              
              
              1
              
              
              
              (1
              )
              
              
              -Total
      interest-earning assets
              
              
              3,403
              
              
              
              (576
              )
              
              
              2,827Interest-bearing
      liabilities:Savings
      accounts
              
              
              156
              
              
              
              (47
              )
              
              
              109Money
      market accounts
              
              
              111
              
              
              
              (288
              )
              
              
              (177
              )NOW
      accounts
              
              
              11
              
              
              
              4
              
              
              
              15Certificates
      of deposit
              
              
              671
              
              
              
              (1,068
              )
              
              
              (397
              )Total
      interest-bearing deposits
              
              
              949
              
              
              
              (1,399
              )
              
              
              (450
              )FHLB
      advances
              
              
              (16
              )
              
              
              (169
              )
              
              
              (185
              )Other
      interest-bearing liabilities
              
              
              139
              
              
              
              (18
              )
              
              
              121Total
      interest-bearing liabilities
              
              
              1,072
              
              
              
              (1,586
              )
              
              
              (514
              )Change
      in net interest income
              
              $
              2,331
              
              
              $
              1,010
              
              
              $
              3,341




Net Interest
Income Before Provision for Loan Losses.Net interest income
before provision for loan losses increased $3.3 million, or 32.9%, to $13.5
million for the first quarter of 2010 from $10.2 million for the same period in
2009 as a result of net interest margin expansion and an increase in average
interest earning assets. Net interest margin increased 37 basis points to 3.76%
for the three months ended March 31, 2010, from 3.39% for the same period in
2009 due to acquisition of higher yielding loans, net of acquisition accounting
adjustments totaling $732,000 and improved spreads.  These items were
partially offset by an increased cost to fund share repurchases, growth in
excess cash balances held in low yielding Federal Reserve Bank and FHLBB
accounts and an increase in non-performing loans.


25


Interest
Income.  Interest income increased $2.8 million, or 17.7%, to
$18.8 million for the three months ended March 31, 2010 from $15.9 million for
the prior year period due to an increase in average interest-earning assets,
partially offset by a decrease in the yield on earning assets.  Total
average interest-earning asset balances increased $236.2 million, or 19.7%, to
$1.434 billion for the first quarter of 2010, due in large part to the
acquisition of CNB Financial in the fourth quarter of 2009 and to a lesser
extent organic loan origination activity.  These items were partially
offset by 2009 loan and investment security sales and prepayments and normal
amortization of the existing loan and mortgage-backed securities portfolio.
 The yield on average interest-earning assets decreased by 9 basis points
to 5.23% for the first quarter of 2010 in connection with the lower interest
rate environment, partially offset by accretion of certain loan fair value
accounting adjustments totaling $302,000 in the first quarter of
2010.  The decrease in market rates contributed to the downward
repricing of a portion of the Company’s existing assets and to lower rates for
new assets.




Interest
Expense.Interest expense decreased $514,000, or 8.9%, to $5.3
million for the three months ended March 31, 2010 from $5.8 million for the
prior year period reflecting a decrease in the average rate paid on
interest-bearing liabilities, partially offset by an increase in average
interest-bearing liabilities. The average rate paid on interest-bearing
liabilities declined 69 basis points to 1.85% for the three months ended March
31, 2010 reflecting the repricing of savings, money market and certificate of
deposit balances in response to interest rate cuts initiated by the Federal
Reserve Board as well as a $430,000 reduction in interest expense associated
with the amortization of certain deposits and borrowings fair value accounting
adjustments. Average interest-bearing liabilities increased $229.1 million, or
25.2%, to $1.140 billion for the three months ended March 31, 2010 from $910.5
million for the prior year period reflecting growth in interest-bearing deposits
and other interest-bearing liabilities due in large part to the acquisition of
CNB Financial in the fourth quarter of 2009.




Provision for
Loan Losses.The provision for loan losses increased $193,000, or 35.7%,
to $733,000 for the three months ended March 31, 2010 compared to $540,000 for
the same period in 2009. The increase in the provision for the first
quarter of 2010 reflects the impact of an increase in non-accrual and classified
loans and the continuing shift to a more commercially oriented loan portfolio.
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 $9.6 million, or 0.87%, of
loans outstanding at March 31, 2010. In accordance with generally accepted
accounting principles, the Company recorded the loans acquired from CNB
Financial at fair value and recognized the credit mark on loans purchased from
other financial institutions as a component of fair value. At March 31, 2010,
the remaining balance of the loan fair value adjustments was $6.4 million, or
2.4% of the total $262.9 million in outstanding purchased loans. Excluding the
$240.5 million outstanding balance of loans acquired from CNB Financial and
$22.4 million outstanding balance of loans purchased from other financial
institutions, the ratio of the allowance for loan losses to total loans would
have been 1.15%.


26





Non-interest
Income.  Non-interest income increased $186,000, or 10%, to
$2.0 million for the three months ended March 31, 2010, mainly attributable to
growth in deposit service charges of $264,000 or 23.8%, as a result of growth in
accounts and transactions, as well as increases of $32,000 in income from
bank-owned life insurance and $66,000 in other income.  These
increases were partially offset by the other-than-temporary impairment charge of
an equity security of $145,000 and a decrease in gains on sales of loans of
$37,000 or 29.6%.




Non-interest
Expense.  Non-interest expense increased $3.9 million, or
47.4%, to $12.0 million for the first quarter of 2010 from $8.2 million in the
same period last year.  Excluding acquisition related costs totaling
$979,000, total non-interest expense would have been $11.0 million, an increase
of $2.9 million or 35.4% from the same period last year.  Salaries and
benefits increased $1.4 million, or 30.3%, mainly due to costs incurred to
operate our new Worcester operations and, to a lesser extent, staffing costs
related to our Chicopee branch, which opened in the second quarter of 2009 and
annual wage increases.  Occupancy costs grew $262,000, or 39.4%,
principally attributable to expenses incurred to operate our new Worcester
facilities, and to a lesser extent, the opening of our new Chicopee
branch.  Marketing expenses increased $218,000, or 63.7%, in
connection with advertising and promotional expenses relating to our Worcester
operations.  Data processing costs increased $223,000, or 26.4%,
reflecting expenses relating to our new Worcester accounts and a larger loan and
deposit account base in our Springfield market.  Other expenses
increased $552,000, or 63.4%, during the first quarter of 2010, largely related
to additional costs for the Worcester operations.




Income Tax
Expense.Income tax expense
decreased $157,000 to $1.0 million for three months ended March 31, 2010 from
the comparable 2009 period as a result of lower pretax income, partially offset
by an increase in the effective tax rate from 35.9% in 2009 to 37.1% in
2010.







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 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 FHLBB, to
“match fund” certain longer-term 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 ) investing in mortgage-backed
securities with variable rates or fixed rates with shorter durations. Reducing
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.




27





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
for the following twelve months, resulting from an instantaneous and sustained
parallel shift in the yield curve of +200 and -100 basis points at March 31,
2010 and December 31, 2009.




Net
      Interest Income At-RiskEstimated
      Increase (Decrease)
              
              Estimated
      Increase (Decrease)Change
      in Interest Rates
              
              in
      NII
              
              in
      NII(Basis
      Points)
              
              (March
      31, 2010)
              
              (December
      31, 2009)-100
              
              (2.0)%
              
              (2.8)%Stable
              
              0.0%
              
              0.0%+200
              
              1.7%
              
              0.5%


The
preceding income simulation analysis is for United Bank and its subsidiary only
and 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, market conditions, prepayment/refinancing levels, 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 and other factors may vary
significantly from assumptions used.




Net Portfolio
Value Simulation Analysis.  The Office of
Thrift Supervision requires the computation of amounts by which the net present
value of an institution’s cash flow from assets, liabilities and off balance
sheet items (the institution’s net portfolio value or “NPV”) would change in the
event of a range of assumed changes in market interest rates. The Office of
Thrift Supervision provides all institutions that file a Consolidated
Maturity/Rate Schedule as a part of their quarterly Thrift Financial Report an
interest rate sensitivity report of net portfolio value. The Office of Thrift
Supervision simulation model uses a discounted cash flow analysis and an
option-based pricing approach to measuring the interest rate sensitivity of net
portfolio value. Historically, the Office of Thrift Supervision model estimated
the economic value of each type of asset, liability and off-balance sheet
contract under the assumption that the United States Treasury yield curve
increases or decreases instantaneously by 100 to 300 basis points in 100 basis
point increments. However, given the low level of market interest rates, a net
portfolio value calculation for an interest rate decrease of greater than 100
basis points was not prepared. A basis point equals one-hundredth of one
percent, and 200 basis points equals two percent. An increase in interest rates
from 3% to 5% would mean, for example, a 200 basis point increase in the “Change
in Interest Rates” column below. The Office of Thrift Supervision provides us
the results of the interest rate sensitivity model, which is based on
information we provide to the Office of Thrift Supervision to estimate the
sensitivity of our net portfolio value.





28





The
tables below set forth, at the dates indicated, the estimated changes in our net
portfolio value that would result from the designated instantaneous changes in
the United States Treasury yield curve. Computations of prospective effects of
hypothetical interest rate changes are based on numerous assumptions, including
relative levels of market interest rates, loan prepayments and deposit decay,
and should not be relied upon as indicative of actual results. This data is for
the Bank and its subsidiary only and does not include any yield curve changes in
the assets of United Financial Bancorp, Inc.




March
      31, 2010NPV
      as a Percentage of PresentValue
      of Assets (3)Estimated
      Increase (Decrease) inChange
      in
              
              
              
              
              NPV
              
              
              
              
              IncreaseInterest
      Rates
              
              Estimated
              
              
              
              
              
              
              
              
              
              
              (Decrease)(basis
      points) (1)
              
              NPV (2)
              
              
              Amount
              
              
              Percent
              
              NPV
      Ratio (4)
              
              
              (basis
      points)(Dollars
      in thousands)+300
              
              
              $
              140,236
              
              
              $
              (53,374
              )
              
              
              (28
              )%
              
              
              10.16
              %
              
              
              (278
              )+200
              
              
              
              161,985
              
              
              
              (31,625
              )
              
              
              (16
              )
              
              
              11.40
              
              
              
              (153
              )+100
              
              
              
              181,394
              
              
              
              (12,216
              )
              
              
              (6
              )
              
              
              12.41
              
              
              
              (52
              )0
              
              
              
              193,610
              
              
              
              
              
              
              
              
              
              
              
              12.93-100
              
              
              
              209,468
              
              
              
              15,858
              
              
              
              8
              
              
              
              13.70
              
              
              
              77




December
      31, 2009NPV
      as a Percentage of PresentValue
      of Assets (3)Estimated
      Increase (Decrease) inChange
      in
                
                
                
                
                NPV
                
                
                
                
                IncreaseInterest
      Rates
                
                Estimated
                
                
                
                
                
                
                
                
                
                
                (Decrease)(basis
      points) (1)
                
                NPV (2)
                
                
                Amount
                
                
                Percent
                
                NPV
      Ratio (4)
                
                
                (basis
      points)(Dollars
      in thousands)+300
                
                
                $
                138,536
                
                
                $
                (53,844
                )
                
                
                (28
                )%
                
                
                9.83
                %
                
                
                (278
                )+200
                
                
                
                160,423
                
                
                
                (31,957
                )
                
                
                (17
                )
                
                
                11.07
                
                
                
                (155
                )+100
                
                
                
                179,607
                
                
                
                (12,773
                )
                
                
                (7
                )
                
                
                12.07
                
                
                
                (55
                )0
                
                
                
                192,380
                
                
                
                
                
                
                
                
                
                
                
                12.62-100
                
                
                
                206,234
                
                
                
                13,854
                
                
                
                7
                
                
                
                13.27
                
                
                
                65
 (1)      Assumes
      an instantaneous uniform change in interest rates at all
      maturities.(2)      NPV
      is the discounted present value of expected cash flows from assets,
      liabilities and off-balance sheet contracts.(3)      Present
      value of assets represents the discounted present value of incoming cash
      flows on interest-earning assets.(4)      NPV
      ratio represents NPV divided by the present value of
    assets.


The
tables above indicate that at March 31, 2010 and December 31, 2009, in the event
of a 300 basis point increase in interest rates, we would experience a 28%
decrease in net portfolio value. In the event of a 100 basis point decrease in
interest rates at March 31, 2010 and December 31, 2009, we would experience an
8% and 7%, respectively, increase in net portfolio value.


29





Certain
shortcomings are inherent in the methodology used in the above interest rate
risk measurement. Modeling changes in net portfolio value require making certain
assumptions that may or may not reflect the manner in which actual yields and
costs respond to changes in market interest rates. In this regard, the net
portfolio value table presented assumes that the composition of our
interest-sensitive assets and liabilities existing at the beginning of a period
remains constant over the period being measured and assumes that a particular
change in interest rates is reflected uniformly across the yield curve
regardless of the duration or repricing of specific assets and liabilities.
Accordingly, although the net portfolio value table provides an indication of
our interest rate risk exposure at a particular point in time, such measurements
are not intended to and do not provide a precise forecast of the effect of
changes in market interest rates on our net interest income and will differ from
actual results.





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, advances from
the FHLBB, loan and mortgage-backed securities repayments and maturities and
sales of loans and other investment securities. While maturities and scheduled
amortization of loans and securities are predictable sources of funds, deposit
flows and mortgage prepayments are greatly influenced by market 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 March 31, 2010 our liquidity
ratio was 17.98%, compared to 19.49% at December 31, 2009.




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 March
31, 2010, cash and cash equivalents totaled $21.7 million. Securities classified
as available-for-sale and held-to-maturity, which provide additional sources of
liquidity, totaled $225.0 million and $71.5 million, respectively, at March 31,
2010. In addition, at March 31, 2010, we had the ability to borrow a total of
approximately $375.5 million from the FHLBB. On that date, we had $157.7 million
in advances outstanding.





Our cash
flows are derived from operating activities, investing activities and financing
activities as reported in our Consolidated Statements of Cash Flows included in
our Consolidated Financial Statements.





At March
31, 2010, we had $3.5 million in loan commitments outstanding. In addition to
commitments to originate loans, we had $227.0 million in unused lines of credit
to borrowers and $28.2 million to be disbursed under existing construction loan
commitments. Certificates of deposit due within one year of March 31, 2010
totaled $311.6 million, or 29.3% 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 FHLBB 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
March 31, 2010. 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.





30





Our
primary investing activities are the origination of loans and the purchase of
securities.  For the three months ended March 31, 2010, we originated
$39.3 million of loans and purchased $11.6 million of securities. In the
comparable 2009 period, we originated $60.0 million of loans and purchased $6.6
million of securities.





Financing
activities consist primarily of activity in deposit accounts and FHLBB advances.
We experienced a net increase in total deposits of $26.3 million and $12.7
million for the three months ended March 31, 2010 and 2009, respectively.
Deposit flows are affected by the overall level of interest rates, the interest
rates and products offered by us and our local competitors and other
factors.





Liquidity
management is both a daily and long-term function of business management. If we
require funds beyond our ability to generate them internally, borrowing
agreements exist with the FHLBB, which provides an additional source of funds.
FHLBB advances decreased by $48.0 million and $21.7 million during the three
months ended March 31, 2010 and 2009, respectively, reflecting the use of cash
flows received from the loan and investment portfolios and excess deposit funds
to pay down short term FHLBB advances. We have also used FHLBB advances to
“match-fund” certain longer-term one- to four-family residential mortgage loans
and commercial real estate loans. The Bank’s unused borrowing capacity with the
FHLBB, excluding its $12.4 million line of credit, was approximately $205.9
million at March 31, 2010 and $185.8 million at December 31, 2009. At March 31,
2010 and December 31, 2009, the Bank had no borrowing against the line of
credit. We also have access to funding through the repurchase agreement and
brokered CD markets and have received approval from the Federal Reserve Bank to
access its discount window. The Bank’s unused borrowing capacity with the
Federal Reserve Bank was approximately $56.1 million at March 31,
2010.





United
Financial is a separate legal entity from the Bank and must provide for its own
liquidity. In addition to its operating expenses, United Financial is
responsible for paying any dividends declared to its
shareholders.  United Financial also has repurchased shares of its
common stock.  At March 31, 2010, United Financial had liquid assets
of $11.7 million.





Off-Balance
Sheet Arrangements and Aggregate Contractual Obligations





Commitments





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. We consider commitments to extend credit in
determining our allowance for loan losses.





31


Contractual
Obligations





In the
ordinary course of our operations, we enter into certain contractual
obligations. Such obligations include operating leases for premises and
equipment.  The following table summarizes our significant fixed and
determinable contractual obligations and other funding needs by payment date at
March 31, 2010.  The payment amounts represent those amounts due to
the recipient and do not include any unamortized premiums or discounts or other
similar carrying amount adjustments.




Payments
      Due by Period (In Thousands)Less
      Than
              
              
              One
      to Three
              
              
              Three
      to Five
              
              
              More
      thanOne
      Year
              
              
              Years
              
              
              Years
              
              
              Five
      Years
              
              
              TotalContractual Obligations:Certificates
      of deposit
              
              $
              311,593
              
              
              $
              110,995
              
              
              $
              44,569
              
              
              $
              -
              
              
              $
              467,157Federal
      Home Loan Bank advances
              
              
              11,395
              
              
              
              61,119
              
              
              
              50,599
              
              
              
              34,554
              
              
              
              157,667Repurchase
      agreements
              
              
              22,062
              
              
              
              -
              
              
              
              -
              
              
              
              20,000
              
              
              
              42,062Subordinated
      debentures
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              7,732
              
              
              
              7,732Standby
      letters of credit
              
              
              3,215
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,215Operating
      leases
              
              
              1,064
              
              
              
              1,776
              
              
              
              1,646
              
              
              
              4,865
              
              
              
              9,351Capitalized
      leases
              
              
              406
              
              
              
              812
              
              
              
              813
              
              
              
              6,661
              
              
              
              8,692Future
      benefits to be paid underretirement
      plans
              
              
              199
              
              
              
              3,540
              
              
              
              171
              
              
              
              4,650
              
              
              
              8,560Total
              
              $
              349,934
              
              
              $
              178,242
              
              
              $
              97,798
              
              
              $
              78,462
              
              
              $
              704,436Commitments:Commitments
      to extend credit
              
              $
              261,930
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              261,930Commitment
      to invest in venturecapital
      fund
              
              
              700
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              700Total
              
              $
              262,630
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              262,630




Capital
Resources




United
Bank is subject to various regulatory capital requirements, including a
risk-based capital measure. The risk-based capital guidelines include both a
definition of capital and a framework for calculating risk-weighted assets by
assigning balance sheet assets and off-balance sheet items to broad risk
categories. At March 31, 2010, the Bank exceeded all regulatory capital
requirements and was considered “well capitalized” under regulatory
requirements.




To
      Be Well CapitalizedFor
      Capital
              
              Under
      RegulatoryActual
              
              Adequacy
      Purposes
              
              FrameworkAs
      of March 31, 2010:Total
      risk-based capital
              
              16.96%
              
              8.00%
              
              10.00%Tier
      1 risk-based capital
              
              16.13%
              
              4.00%
              
              6.00%Tier
      1 (core) capital
              
              12.60%
              
              4.00%
              
              5.00%Tangible
      equity
              
              12.60%
              
              1.50%
              
              N/AAs
      of December 31, 2009:Total
      risk-based capital
              
              16.53%
              
              8.00%
              
              10.00%Tier
      1 risk-based capital
              
              15.73%
              
              4.00%
              
              6.00%Tier
      1 (core) capital
              
              12.14%
              
              4.00%
              
              5.00%Tangible
      equity
              
              12.14%
              
              1.50%
              
              N/A




32


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 15d-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.







PART
II.  OTHER INFORMATION







ITEM
1.   Legal Proceedings





At March
31, 2010, the Company was not involved in any legal proceedings, the outcome of
which would be material to the Company’s Consolidated Financial
Statements.







ITEM
1A.  Risk Factors





In
addition to the other information set forth in this report, you should carefully
consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual
Report on Form 10-K for the year ended December 31, 2009, which could
materially affect our business, financial condition or future results. At March
31, 2010, the risk factors for the Company have not changed materially from
those reported in our Annual Report on Form 10-K. In addition, the risks
described in our Annual Report on Form 10-K are not the only risks that we face.
Additional risks and uncertainties not currently known to us or that we
currently deem to be immaterial also may materially adversely affect our
business, financial condition and/or operating results.







33





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





(a)
No unregistered securities were sold by the Company during the quarter ended
March 31, 2010.


(b)
Not applicable


(c)
The following table provides certain information with regard to shares
repurchased by the Company in the first quarter of 2010.




(c)
                
                
                (d)Total
      Number of
                
                
                Maximum
      NumberShares
                
                
                (or
      Approximate(a)
                
                
                (b)
                
                
                (or
      Units)
                
                
                Dollar
      Value) ofTotal
      Number
                
                
                Average
      Price
                
                
                Purchased
      as Part
                
                
                Shares
      (or Units) thatof
      Shares
                
                
                Paid
      Per
                
                
                of
      Publicly
                
                
                May
      Yet Be(or
      Units)
                
                
                Share
                
                
                Announced
      Plans
                
                
                Purchased
      Under thePeriod
                
                Purchased
                
                
                (or
      Unit)
                
                
                or
      Programs
                
                
                Plans or Programs(1)January
      1 - 31, 2010
                
                
                130,641
                
                
                $
                12.90
                
                
                
                130,641
                
                
                
                601,884February
      1 - 28, 2010
                
                
                33,697
                
                
                
                13.01
                
                
                
                33,697
                
                
                
                568,187March
      1 - 31, 2010
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                568,187Total
                
                
                164,338
                
                
                $
                12.92
                
                
                
                164,338
  (1)   On
      October 16, 2009, the Board of Directors approved a plan to repurchase up
      to 5%, or approximately 798,055 shares, of the Company’s common stock.
      Under the plan, the Company intends to repurchase shares from time to
      time, depending on market conditions and will continue until it is
      completed.




ITEM
3.  Defaults Upon Senior Securities





Not
applicable.





ITEM 4.[Removed
and Reserved]




ITEM
5.  Other Information





Not
applicable.


34





ITEM
6.  Exhibits.




3.1
            Articles
      of Incorporation of United Financial Bancorp, Inc. (1)3.2
            Amended
      and Restated Bylaws of United Financial Bancorp, Inc.
  (2)4
            Form
      of Common Stock Certificate of United Financial Bancorp, Inc.
      (1)31.1
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Executive
    Officer31.2
            Rule
      13a-14(a)/15d-14(a) Certification of Chief Financial
    Officer32
            Section
      1350 Certification of Chief Executive Officer and Chief Financial
      Officer(1)
            Incorporated
      by reference to the Registration Statement on Form S-1 of United Financial
      Bancorp, Inc. (File No. 333-144245), originally filed with the Securities
      and Exchange Commission on June 29, 2007.(2)
            Incorporated
      by reference to the Form 10-K of United Financial Bancorp, Inc. filed with
      the Securities and Exchange Commission on March 13,
  2009.





35








SIGNATURES





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








United
      Financial Bancorp, Inc.Date:
      May
      7, 2010
            By:
            /s/ Richard B. CollinsRichard
      B. CollinsChairman,
      President and Chief Executive OfficerDate:
      May
      7, 2010
            By:
            /s/ Mark A. RobertsMark
      A. RobertsExecutive
      Vice President and Chief Financial
Officer








36