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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2014.

Commission File Number: 001-35028

 

 

UNITED FINANCIAL BANCORP, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Connecticut   27-3577029

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

45 Glastonbury Boulevard, Glastonbury, Connecticut   06033
(Address of principal executive offices)   (Zip Code)

(860) 291-3600

(Registrant’s telephone number, including area code)

 

 

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.    x  Yes    ¨  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 prior that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12B-2 of the Exchange Act. (Check one):

 

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

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).    Yes  ¨    No  x

As of July 31, 2014, there were 52,819,537 shares of Registrant’s no par value common stock outstanding.

 

 

 


Table of Contents

Table of Contents

 

          Page  

Part I - FINANCIAL INFORMATION

  

Item 1.

  

Interim Financial Statements - Unaudited

  
  

Consolidated Statements of Condition as of June 30, 2014 and December 31, 2013

     3   
  

Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013

     4   
  

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2014 and 2013

     5   
  

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2014 and 2013

     6   
  

Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013

     7   
  

Notes to Unaudited Consolidated Financial Statements

     9   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     44   

Item 3.

  

Quantitative and Qualitative Disclosures about Market Risk

     68   

Item 4.

  

Controls and Procedures

     69   

Part II - OTHER INFORMATION

  

Item 1.

  

Legal Proceedings

     69   

Item 1A.

  

Risk Factors

     69   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     69   

Item 3.

  

Defaults Upon Senior Securities

     70   

Item 4.

  

Mine Safety Disclosures

     70   

Item 5.

  

Other Information

     70   

Item 6.

  

Exhibits

     70   

SIGNATURES

     72   

Exhibits

  

 

2


Table of Contents

Part 1 - FINANCIAL INFORMATION

Item 1 - Interim Financial Statements - Unaudited

United Financial Bancorp, Inc. and Subsidiaries

Consolidated Statements of Condition

 

     June 30,     December 31,  

(In thousands, except share data) (Unaudited)

   2014     2013  

ASSETS

    

Cash and due from banks

   $ 66,269      $ 20,308   

Short-term investments

     23,157        24,927   
  

 

 

   

 

 

 

Total cash and cash equivalents

     89,426        45,235   

Available for sale securities - at fair value

     952,033        404,903   

Held to maturity securities - at amortized cost

     15,761        13,830   

Loans held for sale

     19,656        422   

Loans receivable (net of allowance for loan losses of $21,343 at June 30, 2014 and $19,183 at December 31, 2013)

     3,674,936        1,697,012   

Federal Home Loan Bank of Boston stock

     30,419        15,053   

Accrued interest receivable

     13,728        5,706   

Deferred tax asset, net

     22,656        10,697   

Premises and equipment, net

     52,149        24,690   

Goodwill and other intangible assets

     129,796        5,173   

Derivative assets

     4,533        7,851   

Cash surrender value of bank-owned life insurance

     120,851        64,470   

Other real estate owned

     3,213        1,529   

Other assets

     30,321        5,044   
  

 

 

   

 

 

 
   $ 5,159,478      $ 2,301,615   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Liabilities:

    

Deposits:

    

Non-interest-bearing

   $ 649,929      $ 266,609   

Interest-bearing

     3,328,234        1,468,596   
  

 

 

   

 

 

 

Total deposits

     3,978,163        1,735,205   

Mortgagors’ and investors’ escrow accounts

     11,983        6,342   

Federal Home Loan Bank advances and other borrowings

     483,466        240,228   

Accrued expenses and other liabilities

     33,223        20,458   
  

 

 

   

 

 

 

Total liabilities

     4,506,835        2,002,233   
  

 

 

   

 

 

 

Commitments and contingencies (note 14)

    

Stockholders’ equity:

    

Preferred stock (no par value; 2,000,000 authorized; no shares issued)

     —          —     

Common stock (no par value; authorized 60,000,000 shares; 52,809,600 and 29,456,290 shares issued and 52,809,600 and 25,968,404 outstanding at June 30, 2014 and December 31, 2013, respectively)

     560,516        243,776   

Additional paid-in capital

     15,331        15,808   

Unearned compensation - ESOP

     (6,651     (7,151

Retained earnings

     83,604        96,078   

Accumulated other comprehensive loss, net of tax

     (157     (4,766

Treasury stock, at cost (3,487,886 shares at December 31, 2013)

     —          (44,363
  

 

 

   

 

 

 

Total stockholders’ equity

     652,643        299,382   
  

 

 

   

 

 

 
   $ 5,159,478      $ 2,301,615   
  

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

3


Table of Contents

United Financial Bancorp, Inc. and Subsidiaries

Consolidated Statements of Operations

 

     For the Three Months      For the Six Months  
     Ended June 30,      Ended June 30,  

(In thousands, except share data) (Unaudited)

   2014     2013      2014     2013  

Interest and dividend income:

         

Loans

   $ 35,237      $ 16,801       $ 52,081      $ 33,956   

Securities - taxable interest

     3,981        1,640         5,884        2,864   

Securities - non-taxable interest

     1,053        650         1,824        1,300   

Securities - dividends

     468        72         641        107   

Interest-bearing deposits

     28        21         39        42   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest and dividend income

     40,767        19,184         60,469        38,269   
  

 

 

   

 

 

    

 

 

   

 

 

 

Interest expense:

         

Deposits

     3,146        1,878         5,304        3,862   

Borrowed funds

     742        605         1,378        1,199   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total interest expense

     3,888        2,483         6,682        5,061   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income

     36,879        16,701         53,787        33,208   

Provision for loan losses

     2,080        403         2,530        794   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net interest income after provision for loan losses

     34,799        16,298         51,257        32,414   
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-interest income:

         

Service charges and fees

     3,892        2,005         6,018        3,554   

Net gain from sales of securities

     589        329         857        556   

Net gain from sales of loans

     1,284        1,001         1,740        3,061   

Bank-owned life insurance

     750        524         1,272        1,034   

Other (loss) income

     (196     249         (359     787   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest income

     6,319        4,108         9,528        8,992   
  

 

 

   

 

 

    

 

 

   

 

 

 

Non-interest expense:

         

Salaries and employee benefits

     14,541        9,112         24,783        17,786   

Service bureau fees

     1,768        921         2,859        1,736   

Occupancy and equipment

     2,610        2,210         4,308        3,646   

Professional fees

     856        617         1,284        1,340   

Marketing and promotions

     280        98         509        168   

FDIC insurance assessments

     632        330         950        624   

Other real estate owned

     125        214         433        460   

Core deposit intangible amortization

     321        —           321        —     

Merger related expense

     20,945        —           22,774        —     

Other

     4,099        2,356         6,213        4,768   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total non-interest expense

     46,177        15,858         64,434        30,528   
  

 

 

   

 

 

    

 

 

   

 

 

 

(Loss) income before income taxes

     (5,059     4,548         (3,649     10,878   

Provision for income taxes

     512        1,249         975        3,028   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income

   $ (5,571   $ 3,299       $ (4,624   $ 7,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

Net (loss) income per share:

         

Basic

   $ (0.13   $ 0.13       $ (0.14   $ 0.29   

Diluted

   $ (0.13   $ 0.12       $ (0.14   $ 0.29   

Weighted-average shares outstanding:

         

Basic

     43,178,460        26,326,788         34,191,095        26,774,721   

Diluted

     43,178,460        26,677,589         34,191,095        27,115,459   

See accompanying notes to unaudited consolidated financial statements.

 

 

4


Table of Contents

United Financial Bancorp, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

 

     For the Three Months     For the Six Months  
     Ended June 30,     Ended June 30,  

(In thousands) (Unaudited)

   2014     2013     2014     2013  

Net (loss) income

   $ (5,571   $ 3,299      $ (4,624   $ 7,850   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss):

        

Securities available for sale:

        

Unrealized holding gains (losses)

     7,637        (10,504     12,880        (12,400

Reclassification adjustment for gains realized in net income(1)

     (589     (329     (857     (556
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized gains (losses)

     7,048        (10,833     12,023        (12,956

Tax effect - (expense) benefit

     (2,472     3,792        (4,214     4,535   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - securities available for sale

     4,576        (7,041     7,809        (8,421
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest rate swaps designated as cash flow hedges:

        

Unrealized (losses) gains

     (2,366     5,004        (4,887     5,842   

Tax effect - benefit (expense)

     802        (1,753     1,685        (2,046
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - interest rate swaps

     (1,564     3,251        (3,202     3,796   
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined benefit pension plans:

        

Reclassification adjustment for losses recognized in net periodic benefit cost(2)

     —          196        —          392   

Tax effect - expense

     —          (68     —          (137
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - pension plans

     —          128        —          255   
  

 

 

   

 

 

   

 

 

   

 

 

 

Post-retirement plans:

        

Reclassification adjustment for prior service costs recognized in net periodic benefit cost(3)

     3        6        8        13   

Reclassification adjustment for losses recognized in net periodic benefit cost(4)

     —          2        —          4   

Prior service cost arising during the period

     —          106        —          106   

(Losses) gains arising during the period

     (2     16        (5     32   
  

 

 

   

 

 

   

 

 

   

 

 

 

Change in gains or losses and prior service costs

     1        130        3        155   

Tax effect - expense

     (1     (46     (1     (54
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - post-retirement plans

     —          84        2        101   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net-of-tax amount - pension and post-retirement plans

     —          212        2        356   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss)

     3,012        (3,578     4,609        (4,269
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (2,559   $ (279   $ (15   $ 3,581   
  

 

 

   

 

 

   

 

 

   

 

 

 

Notes: (In thousands)

 

(1) Amounts are included in net gain from sales of securities in the unaudited Consolidated Statements of Operations in total non-interest income. Income tax benefit associated with the reclassification adjustment for the three months ended June 30, 2014 and 2013 was $206 and $115, and $300 and $195 for the six months ended June 30, 2014 and 2013, respectively.
(2) Amounts are included in salaries and employee benefits in the unaudited Consolidated Statements of Operations in total non-interest expense. Income tax expense associated with the reclassification adjustment for the three and six months ended June 30, 2013 was $68 and $137.
(3) Amounts are included in salaries and employee benefits in the unaudited Consolidated Statements of Operations in total non-interest expense. Income tax expense associated with the reclassification adjustment for the three and six months ended June 30, 2014 was $1 and $3, respectively. Income tax expense associated with the reclassification adjustment for the three and six months ended June 30, 2013 was $2 and $4, respectively.
(4) Amounts are included in salaries and employee benefits in the unaudited Consolidated Statements of Operations in total non-interest expense. Income tax expense associated with the reclassification adjustment for the three and six months ended June 30, 2013 was $1 for each period.

See accompanying notes to unaudited consolidated financial statements.

 

5


Table of Contents

United Financial Bancorp, Inc. and Subsidiaries

Consolidated Statements of Changes in Stockholders’ Equity

 

                                  Accumulated                    
                Additional     Unearned           Other                 Total  

(In thousands , except share data)

(Unaudited)

  Common Stock     Paid-in     Compensation     Retained     Comprehensive     Treasury Stock     Stockholders’  
  Shares     Amount     Capital     - ESOP     Earnings     Loss     Shares     Amount     Equity  

Balance at December 31, 2013

    29,456,290      $ 243,776      $ 15,808      $ (7,151   $ 96,078      $ (4,766     3,487,886      $ (44,363   $ 299,382   

Comprehensive loss

    —          —          —          —          (4,624     4,609        —          —          (15

Issuance of common stock for acquisition of United Financial Bancorp , Inc.

    26,706,401        358,069        —          —          —          —          —          —          358,069   

Cancellation of treasury shares

    (3,476,270     (44,226     —          —          —          —          (3,476,270     44,226        —     

Common stock repurchased

    (89,195     (1,131     —          —          —          —          —          —          (1,131

Share-based compensation expense

    —          —          3,334        —          —          —          —          —          3,334   

ESOP shares released or committed to be released

    —          —          373        500        —          —          —          —          873   

Shares issued for stock options exercised

    180,973        2,598        (1,751     —          —          —          —          —          847   

Shares issued for restricted stock grants

    128,233        1,752        (1,752     —          —          —          —          —          —     

Cancellation of shares for tax withholding

    (96,832     (322     (986     —          —          —          —          —          (1,308

Reissuance of common shares in connection with stock options exercised

    —          —          (55     —          —          —          (11,616     137        82   

Tax benefit from stock-based awards

    —          —          360        —          —          —          —          —          360   

Dividends paid ($0.20 per common share)

    —          —          —          —          (7,850     —          —          —          (7,850
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

    52,809,600      $ 560,516      $ 15,331      $ (6,651   $ 83,604      $ (157     —        $ —        $ 652,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    29,487,363      $ 243,776      $ 13,418      $ (8,306   $ 91,811      $ (4,047     1,330,466      $ (16,041   $ 320,611   

Comprehensive income

    —          —          —          —          7,850        (4,269     —          —          3,581   

Adoption of MSR fair value accounting

    —          —          —          —          502        —          —          —          502   

Share-based compensation expense

    —          —          1,652        —          —          —          —          —          1,652   

ESOP shares released or committed to be released

    —          —          263        575        —          —          —          —          838   

Cancellation of shares for tax withholding

    (2,038     —          (26     —          —          —          —          —          (26

Reissuance of treasury shares in connection with restricted stock grants

    —          —          (633     —          (9     —          (53,834     633        (9

Reissuance of treasury shares in connection with stock options exercised

    —          —          (61     —          —          —          (24,266     285        224   

Treasury stock purchased

    —          —          —          —          —          —          1,902,482        (24,807     (24,807

Forfeited unvested restricted stock

    (4,666     —          —          —          —          —          —          —          —     

Dividends paid ($0.20 per common share)

    —          —          —          —          (5,574     —          —          —          (5,574
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

    29,480,659      $ 243,776      $ 14,613      $ (7,731   $ 94,580      $ (8,316     3,154,848      $ (39,930   $ 296,992   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

6


Table of Contents

United Financial Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

 

     For the Six Months  
     Ended June 30,  

(In thousands) (Unaudited)

   2014     2013  

Cash flows from operating activities:

    

Net (loss) income

   $ (4,624   $ 7,850   

Adjustments to reconcile net income to net cash used in operating activities:

    

Amortization of premiums and discounts on investments, net

     911        290   

Accretion of intangible assets and purchase accounting marks

     (4,620     —     

Share-based compensation expense

     3,334        1,652   

ESOP expense

     873        838   

Loss on extinguishment of debt

     288        —     

Tax benefit from stock-based awards

     360        —     

Provision for loan losses

     2,530        794   

Net gain from sales of securities

     (857     (556

Loans originated for sale

     (60,989     (99,233

Proceeds from sales of loans held for sale

     43,497        113,968   

Decrease in mortgage servicing asset

     312        —     

(Gain) loss on sales of other real estate owned

     (171     69   

Net gain from sales of loans

     (1,740     (3,061

Write-downs of other real estate owned

     134        146   

Depreciation and amortization

     1,458        1,370   

Deferred income tax expense (benefit)

     5,804        (601

Increase in cash surrender value of bank-owned life insurance

     (1,272     (1,034

Net change in:

    

Deferred loan fees and premiums

     (761     (939

Accrued interest receivable

     (1,753     (1,170

Other assets

     (10,136     (6,489

Accrued expenses and other liabilities

     (3,593     536   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (31,015     14,430   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Proceeds from sales of available for sale securities

     242,077        33,557   

Proceeds from calls and maturities of available for sale securities

     10,600        —     

Principal payments on available for sale securities

     22,847        15,199   

Principal payments on held to maturity securities

     403        1,550   

Purchases of available for sale securities

     (464,724     (170,620

Purchases of held to maturity securities

     (2,342     —     

Cash acquired from United Financial Bancorp, Inc.

     25,410        —     

Redemption of FHLBB stock

     1,968        814   

Proceeds from sale of other real estate owned

     2,428        2,301   

Proceeds from portfolio loan sales

     —          18,000   

Purchases of loans

     (4,601     (6,127

Loan originations, net of principal repayments

     (105,717     (34,919

Purchase of bank-owned life insurance

     —          (4,000

Purchases of premises and equipment

     (3,504     (3,570
  

 

 

   

 

 

 

Net cash used in investing activities

     (275,155     (147,815
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Net increase in non-interest-bearing deposits

     50,120        9,220   

Net increase in interest-bearing deposits

     250,324        73,241   

(Continued)

See accompanying notes to unaudited consolidated financial statements.

 

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United Financial Bancorp, Inc. and Subsidiaries

Consolidated Statements of Cash Flows - Concluded

 

     For the Six Months  
     Ended June 30,  

(In thousands) (Unaudited)

   2014     2013  

Net decrease in mortgagors’ and investors’ escrow accounts

     3,583        254   

Net increase in short-term FHLBB advances

     59,888        182,000   

Proceeds from long-term FHLBB advances

     18,549        —     

Repayments of FHLBB borrowings and penalty

     (12,466     (72,035

Net (decrease) increase in repurchase agreements

     (10,277     18,999   

Proceeds from exercise of stock options and stock purchase plan

     929        224   

Common stock repurchased

     (1,131     (24,807

Cancellation of shares for tax withholding

     (1,308     (26

Reissuance of treasury shares

     —          (9

Deposits forfeited on other real estate owned property

     —          6   

Cash dividend paid on common stock

     (7,850     (5,574
  

 

 

   

 

 

 

Net cash provided by financing activities

     350,361        181,493   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     44,191        48,108   

Cash and cash equivalents, beginning of period

     45,235        35,315   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 89,426      $ 83,423   
  

 

 

   

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

    

Cash paid during the year for:

    

Interest

   $ 2,749      $ 5,032   

Income taxes, net

     5        6,767   

Transfer of loans to other real estate owned

     1,691        2,287   

Increase (decrease) in due to broker, investment purchases

     (5,859     410   

See accompanying notes to unaudited consolidated financial statements.

 

 

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United Financial Bancorp, Inc. and Subsidiaries

Notes to Unaudited Consolidated Financial Statements

 

Note 1. Summary of Significant Accounting Policies

Nature of Operations. On April 30, 2014, Rockville Financial, Inc. (“Rockville”) completed its merger with United Financial Bancorp, Inc. (“Legacy United”) and changed its legal entity name to United Financial Bancorp, Inc. (the “Company”). In connection with this merger, Rockville Bank, the Company’s principal asset and wholly-owned subsidiary, completed its merger with Legacy United’s banking subsidiary, United Bank, and changed its name to United Bank (the “Bank”). Discussions throughout this report related to the merger with Legacy United are referred to as the “Merger.”

The financial statements for prior periods do not reflect the operations of Legacy United.

The Company, through United Bank and various subsidiaries, delivers financial services to individuals, families and businesses primarily throughout Connecticut, the Springfield region of Western Massachusetts, and the Worcester region of Central Massachusetts through 57 banking offices, its commercial loan production offices, its mortgage loan production offices, 78 ATMs, telephone banking, mobile banking and its internet websites (www.rockvillebank.com and www.bankatunited.com).

Basis of Presentation. The consolidated interim financial statements and the accompanying notes presented in this report include the accounts of the Company, the Bank and the Bank’s wholly-owned subsidiaries, United Bank Mortgage Company, United Bank Investment Corp., Inc., United Bank Commercial Properties, Inc., United Bank Residential Properties, Inc., United Northeast Financial Advisors, Inc., United Bank Investment Sub, Inc., and UCB Securities, Inc. II.

The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included in the interim unaudited consolidated financial statements. Interim results are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or any future period. These interim unaudited consolidated financial statements should be read in conjunction with the Company’s 2013 audited consolidated financial statements and notes thereto included in Rockville Financial, Inc.’s Annual Report on Form 10-K for the year ended December 31, 2013.

Common Share Repurchases. The Company is chartered in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances.

Reclassifications. Certain reclassifications have been made in prior periods’ consolidated financial statements to conform to the 2014 presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash equivalents. All significant intercompany transactions have been eliminated.

Use of Estimates. The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results in the future could vary from the amounts derived from management’s estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, realizability of deferred tax assets, the evaluation of securities for other-than-temporary impairment, the valuation of derivative instruments and hedging activities and goodwill impairment valuations.

 

Note 2. Merger

The Company acquired 100% of the outstanding common shares and completed its merger with Legacy United on April 30, 2014. Legacy United was a federally chartered savings bank headquartered in West Springfield, Massachusetts, which operated 35 branch locations, two express drive-up branches, and two loan production offices, primarily in the Springfield and Worcester regions of Massachusetts and in Central Connecticut. The Company entered into the Merger agreement based on its assessment of the anticipated benefits, including enhanced market share and expansion of its banking franchise. The Merger was accounted for as a purchase and, as such, was included in our results of operations from the date of the Merger. The Merger was funded

 

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with shares of Rockville common stock and cash. As of the close of trading on April 30, 2014, all of the shareholders of Legacy United received 1.3472 shares of Rockville for each share of Legacy United common stock owned at that date. Total consideration paid at closing was valued at $358.1 million, based on the closing price of $13.16 of Rockville common stock, the value of Legacy United exercisable options and cash paid for fractional shares on April 30, 2014. The following table summarizes the Merger at April 30, 2014.

 

(Dollars and shares in thousands)

                               
            Transaction Related Items  
                              Value of        
                              Legacy        
Legacy United           Other           United     Total  
Balance at April 30, 2014           Identifiable     Shares     Exercisable     Purchase  
Assets     Equity     Goodwill     Intangibles     Issued     Options     Price  
$ 2,442,525      $ 304,505      $ 113,866      $ 10,585        26,706      $ 6,642      $ 358,098   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The transaction was accounted for using the purchase method of accounting in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805, Business Combinations. Accordingly, the purchase price was allocated based on the estimated fair market values of the assets and liabilities acquired. Consideration paid and fair values of Legacy United’s assets acquired and liabilities assumed at the date of the merger are summarized in the following table:

 

(In thousands)                         
                       As Recorded  
     Legacy United      Adjustments          at Acquisition  

Assets:

          

Cash and cash equivalents

   $ 25,439       $ —           $ 25,439   

Securities

     351,836         668      a      352,504   

Loans receivable, net

     1,877,460         (12,002   b      1,865,458   

Federal Home Loan Bank Stock

     17,334         —             17,334   

Current and deferred tax asset

     21,443         (1,151   c      20,292   

Premises and equipment, net

     25,126         292      d      25,418   

Goodwill

     40,992         (40,992   e      —     

Core deposit intangible

     2,945         7,640      f      10,585   

Cash surrender value of bank-owned life insurance

     55,105         —             55,105   

Other assets

     24,845         754      g      25,599   
  

 

 

    

 

 

      

 

 

 

Total assets acquired

     2,442,525         (44,791        2,397,734   
  

 

 

    

 

 

      

 

 

 

Liabilities:

          

Deposits

     1,936,553         7,112      h      1,943,665   

Mortgagors’ and investors’ escrow accounts

          

Federal Home Loan Bank and other borrowings

     181,653         6,012      i      187,665   

Accrued expenses and other liabilities

     19,814         2,358      j      22,172   
  

 

 

    

 

 

      

 

 

 

Total liabilities assumed

     2,138,020         15,482           2,153,502   
  

 

 

    

 

 

      

 

 

 

Net assets acquired

   $ 304,505       $ (60,273        244,232   
  

 

 

    

 

 

      

 

 

 

Consideration paid

             358,098   
          

 

 

 

Goodwill

           $ 113,866   
          

 

 

 

Explanation of adjustments:

 

  a. Represents the adjustment of the book value of securities to their estimated fair values.

 

  b. Loans acquired were recorded at fair value without a carryover of the allowance for loan losses. Fair value was determined by segregating the loans based on common risk characteristics, using market participant assumptions in estimating cash flows expected to be collected, adjusting for an estimate of future credit losses and then applying a market-based discount rate to those cash flows.

 

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  c. Represents adjustments for deferred tax effects related to fair value adjustments and asset write-offs.

 

  d. Represents the adjustment of the book value of acquired branch premises and equipment, which includes capital leases.

 

  e. Represents the write-off of Legacy United’s goodwill.

 

  f. Represents the fair value adjustment of the acquired core deposit base (total deposits less time deposits). The core deposit intangible will be amortized over an estimated life of 10 years based on the sum of the years’ digits method of amortization.

 

  g. Represents the fair value adjustment of investments in partnerships and other real estate owned.

 

  h. Represents the fair value adjustment of time deposits, which were valued using a discounted cash flow method. For non-brokered time deposits, the Company’s market rate as of the acquisition date was applied. Brokered time deposits were based on the National Average CD rates from bankrate.com.

 

  i. Represents fair value adjustments for Federal Home Loan Bank of Boston (“FHLBB”) advances and trust preferred subordinated debentures. Fair value of FHLBB advances was determined by calculating the contractual cash flows and discounting such cash flows based on the remaining terms and respective FHLBB regular rate for such borrowings, adjusted for prepayment and unwind costs. The fair value of the trust preferred subordinated debentures was determined using a comparable yield analysis.

 

  j. Represents fair value adjustments including capital lease obligations and other liabilities.

The Company expects that some adjustments of the estimated fair values assigned to the assets acquired and liabilities assumed at the acquisition date will be recorded after June 30, 2014, although such adjustments are not expected to be significant.

In connection with the acquisition, the Company recorded goodwill of $113.9 million, a core deposit intangible asset of $10.6 million and income of $4.6 million (before tax) in purchase accounting adjustment amortization during the quarter.

The goodwill associated with the acquisition of Legacy United is not tax deductible. In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill will not be amortized, but will be subject to at least an annual fair value-based impairment test.

The amortizing intangible asset associated with the acquisition consists of the core deposit intangible. The core deposit intangible is being amortized using the sum of the years’ digits method over its estimated life of 10 years. Amortization expense of the core deposit intangible was approximately $321,000 for the two months ended June 30, 2014. Estimated annual amortization expense of the core deposit intangible asset, absent any impairment charges, for the remainder of this year and beyond, is summarized as follows:

 

     (In thousands)  

For the years ending December 31,

  

2014 (remaining six months)

   $ 962   

2015

     1,796   

2016

     1,604   

2017

     1,411   

2018

     1,219   

2019 and thereafter

     3,272   
  

 

 

 

Total

   $ 10,264   
  

 

 

 

The results of Legacy United are included in the results of the Company subsequent to April 30, 2014. The pro forma information below is theoretical in nature and not necessarily indicative of future consolidated results of operations of the Company or the consolidated results of operations which would have resulted had the Company acquired the stock of Legacy United during the periods presented.

 

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The Company’s unaudited pro forma Condensed Consolidated Statements of Operations for the six months ended June 30, 2014 and 2013, assuming Legacy United had been acquired as of December 31, 2013 and 2012, respectively, are as follows (in thousands, except share and per share amounts):

 

     For the Six Months Ended June 30,  
     2014     2013  

Interest and dividend income

   $ 93,735      $ 92,241   

Interest expense

     8,647        8,555   
  

 

 

   

 

 

 

Net interest income

     85,088        83,686   

Provision for loan losses

     3,130        2,636   

Non-interest income

     12,465        14,805   

Non-interest expense

     92,509        63,625   
  

 

 

   

 

 

 

Income before income taxes

     1,914        32,230   

Income taxes

     2,880        9,580   
  

 

 

   

 

 

 

Net (loss) income

   $ (966   $ 22,650   
  

 

 

   

 

 

 

Basic (loss) earnings per share

   $ (0.02   $ 0.42   

Diluted (loss) earnings per share

   $ (0.02   $ 0.42   

Weighted-average shares outstanding

     51,896,996        54,238,798   

The Company’s pro forma statements of operations for the six-month period ended June 30, 2013 showed earnings per share of $0.42 compared to a loss of ($0.02) per share for the six-month period ended June 30, 2014.

The pro forma loss for the six-month period ended June 30, 2014 was due to the inclusion of merger and conversion costs of $22.8 million that are not included in the pro forma results for the six-month period ended June 30, 2013. The Company recorded certain merger-related costs in connection with legal fees, change in control payments, severance costs, shareholder expenses, and other professional services.

The Company has determined that it is impractical to report the amounts of revenue and earnings of Legacy United since the acquisition date. Due to the integration of their operations with those of the Company, the Company does not record revenue and earnings separately for these operations. The revenue and earnings of these operations are included in the Consolidated Statements of Operations.

 

Note 3. Recent Accounting Pronouncements

Transfers and Servicing. In June 2014, the FASB issued ASU No. 2014-11, Transfers and Servicing (Topic 860) – Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. The ASU requires disclosure of information on transfers accounted for as sales in transactions that are economically similar to repurchase agreements, as well as increased transparency about the types of collateral pledged in repurchase agreements and similar transactions accounted for as secured borrowings. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Compensation – Stock Compensation. In June 2014, FASB issued ASU No. 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. The ASU requires a performance target that affects vesting and that could be achieved after the requisite service period to be treated as a performance condition. The amendments in this ASU provide explicit guidance for those awards. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

Receivables – Troubled Debt Restructurings by Creditors. In January 2014, FASB issued ASU No. 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) – Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure which clarifies when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real property recognized. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

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Investments – Equity Method and Joint Ventures. In January 2014, FASB issued ASU No. 2014-01, Investments – Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects which provides guidance on accounting for investments in affordable housing projects that qualify for the low income housing credit. The guidance (a) amends the criteria for when investments in qualified affordable housing projects can be accounted for using a different method other than the equity method or cost and (b) identifies a proportional method as that different method. The provisions in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.

 

Note 4. Fair Value Measurements

Fair value estimates are made as of a specific point in time based on the characteristics of the assets and liabilities and relevant market information. In accordance with FASB ASC 820, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:

 

  Level 1: Quoted prices are available in active markets for identical assets and liabilities as of the reporting date. The quoted price is not adjusted because of the size of the position relative to trading volume.

 

  Level 2: Pricing inputs are observable for assets and liabilities, either directly or indirectly, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.

 

  Level 3: Pricing inputs are unobservable for assets and liabilities and include situations where there is little, if any, market activity and the determination of fair value requires significant judgment or estimation.

The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the determination of which category within the fair value hierarchy is appropriate for any given asset and liability is based on the lowest level of input that is significant to the fair value of the asset and liability.

When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and could be material. Derived fair value estimates may not be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.

Fair value estimates for financial instrument fair value disclosures are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company.

Assets and Liabilities Measured at Fair Value on a Recurring Basis: The following tables detail the assets and liabilities carried at fair value on a recurring basis as of June 30, 2014 and December 31, 2013 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. There were no transfers in and out of Level 1, Level 2 and Level 3 measurements during the six months ended June 30, 2014. There was one transfer to Level 3 from Level 2 of $1.6 million for mortgage servicing rights during the six months ended June 30, 2013.

 

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            Quoted Prices                
            in Active      Other      Significant  
            Markets for      Observable      Unobservable  
     Total      Identical Assets      Inputs      Inputs  

(In thousands)

   Fair Value      (Level 1)      (Level 2)      (Level 3)  

June 30, 2014

           

Available for Sale Securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 6,512       $ —         $ 6,512       $ —     

Government-sponsored residential mortgage-backed securities

     371,949         —           371,949         —     

Government-sponsored residential collateralized debt obligations

     172,394         —           172,394         —     

Government-sponsored commercial mortgage-backed securities

     13,323         —           13,323         —     

Government-sponsored commercial collateralized debt obligations

     4,954         —           4,954         —     

Asset-backed securities

     190,968         —           57,410         133,558   

Corporate debt securities

     38,166         —           36,562         1,604   

Obligations of states and political subdivisions

     132,954         —           132,954         —     

Marketable equity securities

     20,813         3,314         17,430         69   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 952,033       $ 3,314       $ 813,488       $ 135,231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage loan derivative assets

   $ 605       $ —         $ 605       $ —     

Mortgage loan derivative liabilities

     208         —           208         —     

Mortgage servicing rights

     4,554         —           —           4,554   

Interest rate swap assets

     3,928         —           3,928         —     

Interest rate swap liabilities

     1,549         —           1,549         —     

December 31, 2013

           

Available for Sale Securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 6,031       $ —         $ 6,031       $ —     

Government-sponsored residential mortgage-backed securities

     95,662         —           95,662         —     

Government-sponsored residential collateralized-debt obligations

     67,751         —           67,751         —     

Government-sponsored commercial mortgage-backed securities

     12,898         —           12,898         —     

Government-sponsored commercial collateralized-debt obligations

     4,706         —           4,706         —     

Asset-backed securities

     106,536         —           35,095         71,441   

Corporate debt securities

     42,486         —           41,016         1,470   

Obligations of states and political subdivisions

     62,505         —           62,505         —     

Marketable equity securities

     6,328         3,280         2,996         52   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 404,903       $ 3,280       $ 328,660       $ 72,963   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage loan derivative assets

   $ 146       $ —         $ 146       $ —     

Mortgage loan derivative liabilities

     107         —           107         —     

Mortgage servicing rights

     4,103         —           —           4,103   

Interest rate swap assets

     7,705         —           7,705         —     

Interest rate swap liabilities

     428         —           428         —     

 

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The following table presents additional information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value.

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In thousands)

   2014     2013     2014     2013  

Available for Sale Securities:

        

Balance at beginning of period

   $ 72,438      $ 45,255      $ 72,963      $ 8,312   

Purchases

     63,173        10,183        63,173        46,944   

Principal payments

     (1,052     —          (2,114     —     

Total unrealized gains (losses) included in other comprehensive income/loss

     672        (619     1,209        (437
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 135,231      $ 54,819      $ 135,231      $ 54,819   
  

 

 

   

 

 

   

 

 

   

 

 

 

Mortgage Servicing Rights:

        

Balance at beginning of period

   $ 4,084      $ 2,066      $ 4,103      $ —     

Transfers to Level 3

     —          —          —          1,554   

Addition of Legacy United mortgage servicing rights

     764        —          764        —     

Issuances

     184        297        318        572   

Settlements

     (43     (39     (58     (87

Change in fair value recognized in net income

     (435     1,012        (573     1,297   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 4,554      $ 3,336      $ 4,554      $ 3,336   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following valuation methodologies are used for certain assets that are recorded at fair value on a recurring basis.

Available for Sale Securities: All fair value measurements are obtained from a third party pricing service and are not adjusted by management. Matrix pricing is used for pricing most obligations of states and political subdivisions, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on securities relationships to other benchmark quoted securities. The grouping of securities is completed according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal bond yield curves. The matrix based pricing approach is further applied to the Company’s mortgage-backed securities, corporate debt, and preferred equity securities.

The valuation of the Company’s asset-backed securities is obtained from a third party pricing provider and is determined utilizing an approach that combines advanced analytics with structural and fundamental cash flow analysis based upon observed market based yields. The third party provider’s model analyzes each instrument’s underlying collateral given observable collateral characteristics and credit statistics to extrapolate future performance and project cash flows, by incorporating expectations of default probabilities, recovery rates, prepayment speeds, loss severities and a derived discount rate. The Company has determined that due to the liquidity and significance of unobservable inputs, that some asset-backed securities are classified in Level 3 of the valuation hierarchy with the remainder in Level 2.

The Company holds one pooled trust preferred security. The security’s fair value is based on unobservable issuer-provided financial information and discounted cash flow models derived from the underlying structured pool and therefore is classified as Level 3.

Mortgage Servicing Rights: A mortgage servicing right asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is provided by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

Derivatives: Derivative instruments related to commitments for loans to be sold are carried at fair value. Fair value is determined through quotes obtained from actively traded mortgage markets. Any change in fair value for rate lock commitments to the borrower is based upon the change in market interest rates between making the rate lock commitment and the measurement date and, for forward loan sale commitments to the investor, is based upon the change in market interest rates from entering into the forward loan sales contract and the measurement date. Both the rate lock commitments to the borrowers and the forward loan sale commitments to investors are derivatives pursuant to the requirements of FASB ASC 815-10; however, the Company has not designated them as hedging instruments. Accordingly, they are marked to fair value through earnings.

 

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The Company’s intention is to sell the majority of its fixed rate mortgage loans with original terms of 30 years on a servicing retained basis as well as certain 10, 15 and 20 year loans. The servicing value has been included in the pricing of the rate lock commitments. The Company estimates a fallout rate based upon historical averages in determining the fair value of rate lock commitments. Although the use of historical averages is based upon unobservable data, the Company believes that this input is insignificant to the valuation and, therefore, has concluded that the fair value measurements meet the Level 2 criteria. The Company continually reassesses the significance of the fallout rate on the fair value measurement and updates the fallout rate accordingly.

Hedging derivatives include interest rate swaps as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis: The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from application of lower of amortized cost or fair value accounting or write-downs of individual assets. The following tables detail the assets carried at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013 and indicate the fair value hierarchy of the valuation technique utilized by the Company to determine fair value. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013.

 

            Quoted Prices in      Other      Significant  
            Active Markets for      Observable      Unobservable  
     Total      Identical Assets      Inputs      Inputs  

(In thousands)

   Fair Value      (Level 1)      (Level 2)      (Level 3)  

June 30, 2014

           

Impaired loans

   $ 3,391       $ —         $ —         $ 3,391   

Other real estate owned

     3,213         —           —           3,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,604       $ —         $ —         $ 6,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Impaired loans

   $ 509       $ —         $ —         $ 509   

Other real estate owned

     1,529         —           —           1,529   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,038       $ —         $ —         $ 2,038   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following is a description of the valuation methodologies used for certain assets that are recorded at fair value on a non-recurring basis.

Impaired Loans: Accounting standards require that a creditor recognize the impairment of a loan if the present value of expected future cash flows discounted at the loan’s effective interest rate (or, alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment in the impaired loan. Non-recurring fair value adjustments to collateral dependent loans are recorded, when necessary, to reflect partial write-downs and the specific reserve allocations based upon observable market price or current appraised value of the collateral less selling costs and discounts based on management’s judgment of current conditions. Based on the significance of management’s judgment, the Company records collateral dependent impaired loans as non-recurring Level 3 fair value measurements.

Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure, as other real estate owned (“OREO”) in its financial statements. Upon foreclosure, the property securing the loan is recorded at fair value as determined by real estate appraisals less the estimated selling expense. Appraisals are based upon observable market data such as comparable sales within the real estate market. Assumptions are also made based on management’s judgment of the appraisals and current real estate market conditions and therefore these assets are classified as non-recurring Level 3 assets in the fair value hierarchy.

 

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Gains (losses) on assets recorded at fair value on a non-recurring basis are as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In thousands)

   2014     2013     2014     2013  

Impaired loans

   $ (367   $ (173   $ (647   $ (612

Other real estate owned

     139        (89     171        (69
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (228   $ (262   $ (476   $ (681
  

 

 

   

 

 

   

 

 

   

 

 

 

Disclosures about Fair Value of Financial Instruments:

The following methods and assumptions were used by management to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Cash Equivalents: Carrying value is assumed to represent fair value for cash and due from banks and short-term investments, which have original maturities of 90 days or less.

Securities: Refer to the above discussion on securities.

Loans Held for Sale: The fair value of residential mortgage loans held for sale is estimated using quoted market prices provided by government-sponsored entities.

Loans Receivable – net: The fair value of the net loan portfolio is determined by discounting the estimated future cash flows using the prevailing interest rates and appropriate credit and prepayment risk adjustments as of period-end at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of nonperforming loans is estimated using the Bank’s prior credit experience.

Federal Home Loan Bank of Boston (“FHLBB”) stock: FHLBB stock is a non-marketable equity security which is assumed to have a fair value equal to its carrying value due to the fact that it can only be redeemed by the FHLBB at par value.

Accrued Interest Receivable: Carrying value is assumed to represent fair value.

Derivative Assets: Refer to the above discussion on derivatives.

Mortgage Servicing Rights: Refer to the above discussion on mortgage servicing rights.

Deposits and Mortgagors’ and Investors’ Escrow Accounts: The fair value of demand, non-interest-bearing checking, savings and certain money market deposits and mortgagors’ and investors’ escrow accounts are determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits of similar remaining maturities as of period-end.

FHLBB Advances and Other Borrowings: The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.

Derivative Liabilities: Refer to the above discussion on derivatives.

 

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As of June 30, 2014 and December 31, 2013, the carrying value and estimated fair values of the Company’s financial instruments are as described below.

 

     Carrying      Fair Value  

(In thousands)

   Value      Level 1      Level 2      Level 3      Total  

June 30, 2014

              

Financial assets:

              

Cash and cash equivalents

   $ 89,426       $ 89,426       $ —         $ —         $ 89,426   

Available for sale securities

     952,033         3,314         813,488         135,231         952,033   

Held to maturity securities

     15,761         —           16,871         —           16,871   

Loans held for sale

     19,656         —           19,656         —           19,656   

Loans receivable-net

     3,674,936         —           —           3,731,558         3,731,558   

FHLBB stock

     30,419         —           —           30,419         30,419   

Accrued interest receivable

     13,728         —           —           13,728         13,728   

Mortgage loan derivative assets

     605         —           605         —           605   

Mortgage servicing rights

     4,554         —           —           4,554         4,554   

Interest rate swaps

     3,928         —           3,928         —           3,928   

Financial liabilities:

              

Deposits

     3,978,163         —           —           3,818,659         3,818,659   

Mortgagors’ and investors’ escrow accounts

     11,983         —           —           11,983         11,983   

FHLBB advances and other borrowings

     483,466         —           —           484,623         484,623   

Interest rate swaps

     1,549         —           1,549         —           1,549   

Mortgage loan derivative liabilities

     208         —           208         —           208   

December 31, 2013

              

Financial assets:

              

Cash and cash equivalents

     45,235         45,235         —           —           45,235   

Available for sale securities

     404,903         3,280         328,660         72,963         404,903   

Held to maturity securities

     13,830         —           14,260         —           14,260   

Loans held for sale

     422         —           422         —           422   

Loans receivable-net

     1,697,012         —           —           1,702,686         1,702,686   

FHLBB stock

     15,053         —           —           15,053         15,053   

Accrued interest receivable

     5,706         —           —           5,706         5,706   

Mortgage loan derivative assets

     146         —           146         —           146   

Mortgage servicing rights

     4,103         —           —           4,103         4,103   

Interest rate swaps

     7,705         —           7,705         —           7,705   

Financial liabilities:

              

Deposits

     1,735,205         —           —           1,626,071         1,626,071   

Mortgagors’ and investors’ escrow accounts

     6,342         —           —           6,342         6,342   

FHLBB advances and other borrowings

     240,228         —           —           242,458         242,458   

Interest rate swaps

     428         —           428         —           428   

Mortgage loan derivative liabilities

     107         —           107         —           107   

Certain financial instruments and all nonfinancial investments are exempt from disclosure requirements. Accordingly, the aggregate fair value of amounts presented above may not necessarily represent the underlying fair value of the Company.

 

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Note 5. Securities

The amortized cost, gross unrealized gains, gross unrealized losses and fair values of available for sale and held to maturity securities at June 30, 2014 and December 31, 2013 are as follows:

 

            Gross      Gross         
            Unrealized      Unrealized      Fair  

(In thousands)

   Amortized Cost      Gains      Losses      Value  

June 30, 2014

           

Available for sale:

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 6,959       $ 59       $ 506       $ 6,512   

Government-sponsored residential mortgage-backed securities

     369,265         3,530         846         371,949   

Government-sponsored residential collateralized debt obligations

     172,954         535         1,095         172,394   

Government-sponsored commercial mortgage-backed securities

     13,706         —           383         13,323   

Government-sponsored commercial collateralized debt obligations

     5,041         —           87         4,954   

Asset-backed securities

     190,597         1,265         894         190,968   

Corporate debt securities

     39,157         300         1,291         38,166   

Obligations of states and political subdivisions

     133,766         423         1,235         132,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     931,445         6,112         6,337         931,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities, by sector:

           

Banks

     17,103         396         —           17,499   

Industrial

     109         90         —           199   

Mutual funds

     2,808         80         4         2,884   

Oil and gas

     131         100         —           231   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     20,151         666         4         20,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 951,596       $ 6,778       $ 6,341       $ 952,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

           

Debt securities:

           

Obligations of states and political subdivisions

   $ 12,416       $ 718       $ —         $ 13,134   

Government-sponsored residential mortgage-backed securities

     3,345         392         —           3,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total held to maturity securities

   $ 15,761       $ 1,110       $ —         $ 16,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

           

Available for sale:

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 6,801       $ 39       $ 809       $ 6,031   

Government-sponsored residential mortgage-backed securities

     96,708         1,493         2,539         95,662   

Government-sponsored residential collateralized debt obligations

     69,568         26         1,843         67,751   

Government-sponsored commercial mortgage-backed securities

     13,841         —           943         12,898   

Government-sponsored commercial collateralized debt obligations

     5,043         —           337         4,706   

Asset-backed securities

     107,699         259         1,422         106,536   

Corporate debt securities

     43,586         808         1,908         42,486   

Obligations of states and political subdivisions

     67,142         —           4,637         62,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     410,388         2,625         14,438         398,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities, by sector:

           

Banks

     3,068         —           21         3,047   

Industrial

     109         102         —           211   

Mutual funds

     2,793         68         17         2,844   

Oil and gas

     131         95         —           226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     6,101         265         38         6,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 416,489       $ 2,890       $ 14,476       $ 404,903   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

           

Debt securities:

           

Government-sponsored residential mortgage-backed securities

   $ 3,743       $ 364       $ —         $ 4,107   

Obligations of states and political subdivisions

     10,087         108         42         10,153   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,830       $ 472       $ 42       $ 14,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014, the net unrealized gain on securities available for sale of $437,000, net of an income tax expense of $161,000, or $276,000, is included in accumulated other comprehensive loss. The amortized cost and fair value of debt securities at June 30, 2014 by contractual maturities are presented below. Actual maturities may differ from contractual maturities because the securities may be called or repaid without any penalties. Because mortgage-backed collateralized debt obligations and asset-backed securities are not due at a single maturity date, they are not included in the maturity categories in the following maturity summary.

 

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     Available for Sale      Held to Maturity  
     Amortized      Fair      Amortized      Fair  

(In thousands)

   Cost      Value      Cost      Value  

Maturity:

           

Within 1 year

   $ 318       $ 317       $ —         $ —     

After 1 year through 5 years

     11,934         12,096         —           —     

After 5 years through 10 years

     49,369         49,584         1,212         1,233   

After 10 years

     118,261         115,635         11,204         11,901   
  

 

 

    

 

 

    

 

 

    

 

 

 
     179,882         177,632         12,416         13,134   

Mortgage-backed securities

     369,265         371,949         3,345         3,737   

Government-sponsored residential collateralized debt obligations

     172,954         172,394         —           —     

Government-sponsored commercial mortgage-backed securities

     13,706         13,323         —           —     

Government-sponsored commercial collateralized debt obligations

     5,041         4,954         —           —     

Asset-backed securities

     190,597         190,968         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

   $ 931,445       $ 931,220       $ 15,761       $ 16,871   
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014, the Company had 35 encumbered securities with a fair value of $127.6 million pledged as derivative collateral and collateral for reverse repurchase borrowings. At December 31, 2013, the Company had eighteen encumbered securities with a fair value of $52.0 million pledged as collateral for reverse repurchase borrowings.

For the three months ended June 30, 2014 and 2013, gross gains of $1.0 million and $329,000, respectively, were realized on the sales of available for sale securities. There were gross losses of $446,000 realized on the sale of available for sale securities for the three months ended June 30, 2014 compared to no realized losses for the three months ended June 30, 2013. For the six months ended June 30, 2014 and 2013, gross gains of $1.3 million and $620,000, respectively, were realized on the sales of available for sale securities. There were gross losses of $446,000 realized on the sale of available for sale securities for the six months ended June 30, 2014 compared to $65,000 of realized losses for the six months ended June 30, 2013.

As of June 30, 2014, the Company did not own any securities of a single private label issuer, other than securities guaranteed by the U.S. Government or government-sponsored enterprises, which had an aggregate book value in excess of 10% of the Company’s stockholders’ equity.

The Company’s Management Investment Committee reviews exposure in the obligations of states and political subdivisions portfolio on an ongoing basis. As of June 30, 2014, the estimated fair value of this portfolio was $146.1 million, with no significant geographic exposure concentrations. Of the total revenue and general obligations of $146.1 million, $59.8 million were representative of general obligation bonds for which $47.7 million are obligations of political subdivisions of the respective states. For all municipal debt purchases, the Management Investment Committee under the direction of the ALCO (“Asset/Liability Committee”) approved various conditions prior to purchase and quarterly thereafter, including the requirement that underlying ratings be A/A2 or higher. Generally, the Company does not utilize enhanced National Recognized Statistical Rating Organizations ratings, which include credit support provided by a state credit enhancement program. The Company analyzes the issuers’ credit trends and other factors that may impact the ability to service its debt and will proactively sell a position that shows potential weaknesses. At June 30, 2014, one security, with an estimated fair value of $1.1 million and an underlying rating of A2, was enhanced by the Texas Permanent School Fund, an AAA rated entity.

 

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The following table summarizes gross unrealized losses and fair value, aggregated by category and length of time the securities have been in a continuous unrealized loss position, as of June 30, 2014 and December 31, 2013:

 

     Less Than 12 Months      12 Months or More      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

(In thousands)

   Value      Loss      Value      Loss      Value      Loss  

June 30, 2014

                 

Available for sale:

                 

Debt Securities:

                 

U.S. Government and government-sponsored enterprise obligations

   $ —         $ —         $ 4,487       $ 506       $ 4,487       $ 506   

Government-sponsored residential mortgage-backed securities

     27,887         136         30,024         710         57,911         846   

Government-sponsored residential collateralized debt obligations

     87,170         456         17,650         639         104,820         1,095   

Government-sponsored commercial mortgage-backed securities

     —           —           13,323         383         13,323         383   

Government-sponsored commercial collateralized debt obligations

     —           —           4,954         87         4,954         87   

Asset-backed securities

     49,712         273         39,843         621         89,555         894   

Corporate debt securities

     50         —           10,096         1,291         10,146         1,291   

Obligations of states and political subdivisions

     28,630         198         52,601         1,037         81,231         1,235   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     193,449         1,063         172,978         5,274         366,427         6,337   

Marketable equity securities

     —           —           183         4         183         4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 193,449       $ 1,063       $ 173,161       $ 5,278       $ 366,610       $ 6,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Available for sale:

                 

Debt Securities:

                 

U.S. Government and government-sponsored enterprise obligations

   $ 4,184       $ 809       $ —         $ —         $ 4,184       $ 809   

Government-sponsored residential mortgage-backed securities

     58,474         2,539         —           —           58,474         2,539   

Government-sponsored residential collateralized debt obligations

     56,339         1,843         —           —           56,339         1,843   

Government-sponsored commercial mortgage-backed securities

     12,899         943         —           —           12,899         943   

Government-sponsored commercial collateralized debt obligations

     4,707         337         —           —           4,707         337   

Asset-backed securities

     70,802         1,422         —           —           70,802         1,422   

Corporate debt securities

     17,567         531         1,470         1,377         19,037         1,908   

Obligations of states and political subdivisions

     56,441         3,967         6,064         670         62,505         4,637   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     281,413         12,391         7,534         2,047         288,947         14,438   

Marketable equity securities

     3,047         21         1,272         17         4,319         38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 284,460       $ 12,412       $ 8,806       $ 2,064       $ 293,266       $ 14,476   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Of the securities summarized above as of June 30, 2014, 125 issues had unrealized losses equaling 0.5% of the amortized cost basis for less than twelve months and 122 issues had an unrealized loss of 3.0% of the amortized cost basis for twelve months or more. As of December 31, 2013, 109 issues had unrealized losses equaling 4.2% of the cost basis for less than twelve months and 90 issues had unrealized losses equaling 19.0% of the amortized cost basis for twelve months or more.

As of June 30, 2014, there were no held to maturity securities with unrealized losses. As of December 31, 2013, two held to maturity securities had unrealized losses equaling 1.0% of the amortized cost basis for less than twelve months. Management believes that no individual unrealized loss as of June 30, 2014 represents an other-than-temporary impairment, based on its detailed quarterly review of the securities portfolio. Among other things, the other-than-temporary impairment review of the investment securities portfolio focuses on the combined factors of percentage and length of time by which an issue is below book value as well as consideration of issuer specific (present value of cash flows expected to be collected, issuer rating changes and trends, credit worthiness and review of underlying collateral), broad market details and the Company’s intent to sell the security or if it is more likely than not that the Company will be required to sell the debt security

 

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before recovering its cost. The Company also considers whether the depreciation is due to interest rates or credit risk. The following paragraphs outline the Company’s position related to unrealized losses in its investment securities portfolio at June 30, 2014. Because the Company does not intend to sell the securities and it is not more likely than not that the Company will be required to sell the securities before the recovery of their amortized cost basis, which may be at maturity, the Company does not consider any of its securities to be other-than-temporarily impaired at June 30, 2014.

U.S. Government and government-sponsored enterprises and residential mortgage-backed securities. The unrealized losses on the Company’s U.S. Government and government-sponsored securities were caused by increases in the rate spread to comparable government securities. The Company does not expect these securities to settle at a price less than the par value of the securities.

U.S. Government and government-sponsored collateralized debt obligations and commercial mortgage- backed securities. The unrealized losses on the Company’s U.S. Government and government-sponsored collateralized debt obligations and commercial mortgage backed securities were caused by increases in the rate spread to comparable government securities. The Company does not expect these securities to settle at a price less than the par value of the securities.

Obligations of states and political subdivisions. The unrealized loss on obligations of states and political subdivisions relates to twenty securities, with no geographic concentration. The unrealized loss was due to a shift in the municipal bond curve that resulted in a negative impact to the respective bonds’ pricing, relative to the time of purchase.

Corporate debt securities. The unrealized losses on corporate debt securities are primarily related to one pooled trust preferred security, Preferred Term Security XXVIII, Ltd. The unrealized loss on this security is caused by the low interest rate environment because it reprices quarterly to the three month LIBOR and market spreads on similar securities have increased. No loss of principal or break in yield is projected. Based on the existing credit profile, management does not believe that this security will suffer from any credit related losses. The unrealized loss on the remainder of the corporate credit portfolio has been driven primarily by a steepening yield curve.

Asset-backed securitiesThe unrealized losses on the Company’s asset-backed securities were largely driven by increases in the spreads of the respective sectors’ asset classes over comparable securities. The majority of these securities have resetting coupons that adjust on a quarterly basis and the market spreads on similar securities have increased. Based on the credit profiles and asset qualities of the individual securities, management does not believe that the securities will suffer from any credit related losses. The Company does not expect these securities to settle at a price less than the par value of the securities.

The Company will continue to review its entire portfolio for other-than-temporarily impaired securities with additional attention being given to high risk securities such as the one pooled trust preferred security that the Company owns.

 

Note 6. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers. The Company manages a matched book with respect to these derivative instruments in order to minimize its net risk exposure resulting from such transactions.

 

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Information about interest rate swap agreements and non-hedging derivative assets and liabilities as of June 30, 2014 and December 31, 2013 is as follows:

 

            Weighted-                     
            Average                  Estimated  
     Notional      Remaining      Weighted-Average Rate     Fair Value  
     Amount      Maturity      Received     Paid     Asset (Liability)  
     (In thousands)      (In years)                  (In thousands)  

June 30, 2014

            

Cash flow hedge:

            

Forward starting interest rate swap on future borrowings

   $ 125,000         7.90         TBD  (1)      2.41   $ 2,487   

Interest rate swap

     25,000         3.00         0.23     0.90     16   

Fair value hedge:

            

Interest rate swap

     35,000         3.23         1.04     0.22 % (2)      (24

Non-hedging derivatives:

            

Forward loan sale commitments

     35,524         0.1             (208

Derivative loan commitments

     23,857         0.1             605   

Loan level swaps - dealer(3)

     44,901         8.21         1.99     4.42     (1,520

Loan level swaps - borrowers(3)

     44,901         8.21         4.42     1.99     1,420   
  

 

 

           

 

 

 

Total

   $ 334,183              $ 2,776   
  

 

 

           

 

 

 

December 31, 2013

            

Cash flow hedge:

            

Forward starting interest rate swap on future borrowings

   $ 100,000         7.00         TBD  (1)      2.40   $ 7,389   

Fair value hedge:

            

Interest rate swap

     20,000         4.02         1.10     0.22 % (2)      (183

Non-hedging derivatives:

            

Forward loan sale commitments

     2,695         —               19   

Derivative loan commitments

     2,271         —               20   

Loan level swaps - dealer(3)

     25,205         8.52         2.04     4.58     (240

Loan level swaps - borrowers(3)

     25,205         8.52         4.58     2.04     310   
  

 

 

           

 

 

 

Total

   $ 175,376              $ 7,315   
  

 

 

           

 

 

 

 

(1)  The receiver leg of the cash flow hedges is floating rate and indexed to the 3-month USD-LIBOR-BBA, as determined two London banking days prior to the first day of each calendar quarter, commencing with the earliest effective trade. The earliest effective trade date for the cash flow hedges is July 1, 2015.
(2)  The paying leg is one month LIBOR plus a fixed spread; above rate in effect as of the date indicated.
(3)  The Company offers a loan level hedging product to qualifying commercial borrowers that seek to mitigate risk to rising interest rates. As such, the Company enters into equal and offsetting trades with dealer counterparties.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three and six months ended June 30, 2014, the Company did not record any hedge ineffectiveness.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company does not expect to reclassify any amounts from accumulated other comprehensive loss to interest expense during the next 12 months as the Company’s earliest effective date is July 2015.

 

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The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of 24 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).

As of June 30, 2014, the Company had five outstanding interest rate derivatives with a notional value of $150.0 million that were designated as cash flow hedges of interest rate risk.

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting gain or loss on the related derivatives. During the three and six months ended June 30, 2014, the Company recognized net losses of $1,460 and $921 in interest expense related to hedge ineffectiveness. The Company also recognized a net reduction to interest expense of $23,415 for the six months ended June 30, 2014 and a $101 net reduction to interest expense for the three months ended June 30, 2014.

As of June 30, 2014, the Company had three outstanding interest rate derivatives with a notional amount of $35.0 million that were designated as a fair value hedge of interest rate risk.

Non-Designated Hedges

Qualifying derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers, which the Company implemented during the second quarter of 2013. The Company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.

As of June 30, 2014, the Company had six borrower-facing interest rate derivatives with an aggregate notional amount of $44.9 million and six broker derivatives also with an aggregate notional value amount of $44.9 million related to this program.

Derivative Loan Commitments

Additionally, the Company enters into mortgage loan commitments that are also referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.

Forward Loan Sale Commitments

To protect against the price risk inherent in derivative loan commitments, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

 

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With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments.

Fair Values of Derivative Instruments on the Balance Sheet

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Condition as of June 30, 2014 and December 31, 2013.

Fair Values of Derivative Instruments

 

          Fair Value  

(In thousands)

  

Balance Sheet Location

   June 30, 2014     December 31, 2013  

Derivatives designated as hedging instruments:

       

Interest rate swap - cash flow hedge

   Derivative Assets    $ 2,503      $ 7,389   

Interest rate swap - fair value hedge

   Derivative Assets      5        5   

Interest rate swap - fair value hedge

   Other Liabilities      (29     (188
     

 

 

   

 

 

 

Total derivatives designated as hedging instruments

      $ 2,479      $ 7,206   
     

 

 

   

 

 

 

Derivatives not designated as hedging instruments:

       

Forward loan sale commitment

   Other Liabilities    $ (208   $ 19   

Derivative loan commitment

   Derivative Assets      605        20   

Interest rate swap - non designated hedge

   Derivative Assets      1,420        310   

Interest rate swap - non designated hedge

   Other Liabilities      (1,520     (240
     

 

 

   

 

 

 

Total derivatives not designated as hedging instruments

      $ 297      $ 109   
     

 

 

   

 

 

 

 

Cash Flow Hedges                          

(In thousands)

                         
     Amount of Gain (Loss) Recognized in OCI (Effective Portion)  
Derivatives in Cash Flow    Three Months Ended June 30,      Six Months Ended June 30,  
Hedging Relationships    2014     2013      2014     2013  

Interest Rate Swaps

   $ (2,366   $ 5,004       $ (4,887   $ 5,842   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (2,366   $ 5,004       $ (4,887   $ 5,842   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Effect of Derivative Instruments in the Statements of Operations

The tables below present information pertaining to the Company’s derivatives in the Consolidated Statements of Operations designated as hedging instruments for the three and six months ended June 30, 2014 and 2013.

 

Fair Value Hedges                              
          Amount of Gain Recognized in Income  
Derivatives in Fair Value    Location of Gain (Loss)    Three Months Ended June 30,     Six Months Ended June 30,  

Hedging Relationships

   Recognized in Income    2014     2013     2014     2013  

(In thousands)

                             

Interest Rate Swaps

   Interest expense    $ 128      $ 219      $ 159      $ 219   
     

 

 

   

 

 

   

 

 

   

 

 

 
          Amount of Loss Recognized in Income  
          Three Months Ended June 30,     Six Months Ended June 30,  
          2014     2013     2014     2013  

Interest Rate Swaps

   Interest expense    $ (128   $ (219   $ (159   $ (219
     

 

 

   

 

 

   

 

 

   

 

 

 

The table below presents information pertaining to the Company’s derivatives not designated as hedging instruments in the Consolidated Statements of Operations as of June 30, 2014 and 2013.

 

     Amount of Gain (Loss) Recognized in Income  
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In thousands)

   2014     2013     2014     2013  

Derivatives not designated as hedging instruments:

        

Derivative loan commitment

   $ 340      $ (689   $ 585      $ (337

Forward loan sale commitments

     209        188        (227     343   

Interest rate swaps

     (104     3        (170     3   
  

 

 

   

 

 

   

 

 

   

 

 

 
   $ 445      $ (498   $ 188      $ 9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain a provision where if the counterparty defaults on any of its indebtedness or fails to maintain a well-capitalized rating, then the counterparty could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty. As of June 30, 2014, the counterparties related to these agreements posted $2.8 million of collateral to the Company.

The Company has agreements with certain of its derivative counterparties that contain a provision where if the Company fails to maintain its status as a well-capitalized institution, then the Company could be required to terminate its derivative positions with the counterparty.

As of June 30, 2014, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.7 million. As of June 30, 2014, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral of $771,000 against its obligations under these agreements. A degree of netting occurs on occasions where the Company has exposure to a counterparty and the counterparty has exposure to the Company. If the Company had breached any of these provisions at June 30, 2014, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.

 

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Note 7. Loans Receivable and Allowance for Loan Losses

A summary of the Company’s loan portfolio is as follows:

 

(In thousands)

   At June 30,
2014
    At December 31,
2013
 

Real estate loans:

    

Residential

   $ 1,328,982      $ 634,447   

Commercial

     1,635,629        776,913   

Construction

     112,778        52,243   
  

 

 

   

 

 

 

Total real estate loans

     3,077,389        1,463,603   

Commercial business loans

     597,931        247,932   

Installment loans

     15,698        883   

Collateral loans

     2,097        1,374   
  

 

 

   

 

 

 

Total loans

     3,693,115        1,713,792   

Net deferred loan costs and premiums

     3,164        2,403   

Allowance for loan losses

     (21,343     (19,183
  

 

 

   

 

 

 

Loans - net

   $ 3,674,936      $ 1,697,012   
  

 

 

   

 

 

 

Acquired Loans: Gross loans acquired from the Legacy United merger totaled $1.89 billion; $1.87 billion of loans were not considered impaired and $15.5 million of loans were determined to be impaired. The impaired loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). At June 30, 2014, the net recorded carrying amount of loans accounted for under ASC 310-30 was $8.7 million and the outstanding balance was $15.4 million.

Information about the acquired loan portfolio subject to purchased credit impairment accounting guidance (ASC 310-30) as of April 30, 2014 is as follows:

 

(In thousands)

      
     April 30, 2014  

Contractually required principal and interest at acquisition

   $ 15,488   

Contractual cash flows not expected to be collected (nonaccretable)

     4,763   
  

 

 

 

Expected cash flows at acquisition (1)

     10,725   

Interest component of expected cash flows (accretable)

     2,235   
  

 

 

 

Fair value of acquired loans

   $ 8,490   
  

 

 

 

 

(1) Prepayments were not factored into the expected cash flows

 

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The following table summarizes activity in the accretable yields for the total acquired loan portfolio for the three months ended June 30, 2014.

 

(In thousands)

      
     2014  

Balance at beginning of period

   $ —     

Acquisition

     (18,994

Accretion

     3,388   
  

 

 

 

Balance at end of period

   $ (15,606
  

 

 

 

Allowance for Loan Losses: Management has established a methodology to determine the adequacy of the allowance for loan losses that assesses the risks and losses inherent in the loan portfolio. The allowance for loan losses is established as embedded losses are estimated to have occurred through the provisions for losses charged against operations and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on past loan loss experience, known and inherent losses and size of the loan portfolios, an assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, review of regulatory authority examination reports and other relevant factors. An allowance is maintained for impaired loans to reflect the difference, if any, between the carrying value of the loan and the present value of the projected cash flows, observable fair value or collateral value. Loans are charged-off against the allowance for loan losses when management believes that the uncollectibility of principal is confirmed. Any subsequent recoveries are credited to the allowance for loan losses when received. In connection with the determination of the allowance for loan losses, management obtains independent appraisals for significant properties, when considered necessary.

The allowance for loan losses and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, which includes historic default and loss experience, specific problem loans, risk rating profile, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process.

The adequacy of the allowance for loan losses is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in the Company’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers.

The Company’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. The Company recognizes full or partial charge-offs on collateral dependent impaired loans when the collateral is deemed to be insufficient to support the carrying value of the loan. The Company does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.

At June 30, 2014, the Company has a loan loss allowance of $21.3 million, or 0.58%, of total loans as compared to a loan loss allowance of $19.2 million, or 1.12%, of total loans at December 31, 2013. The decrease in the coverage ratio primarily resulted from purchase accounting adjustments as there is no carryover of the allowance for loan losses on acquired loans. Management believes that the allowance for loan losses is adequate and consistent with asset quality indicators and that it represents the best estimate of probable losses inherent in the loan portfolio.

There are three components for the allowance for loan loss calculation:

General component

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial and consumer. Due to the continued expansion and some more unique risk characteristics, the regional commercial real estate loans have been segmented from the total commercial real estate loan portfolio. The regional commercial real estate loans are located throughout the Middle Atlantic and New England states and tend to have above average debt service coverage and loan-to-value

 

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ratios. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels and trends in delinquencies; level and trend of charge-offs and recoveries; trends in volume and types of loans; effects of changes in risk selection and underwriting standards, changes in risk selection and underwriting standards; experience and depth of lending weighted-average risk rating; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment.

For acquired loans accounted for under ASC 310-30, 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. ASC 310-30 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 a deterioration in credit quality.

Allocated component

The allocated component relates to loans that are classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due.

Impairment is measured on a loan-by-loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Residential and consumer loans are evaluated for impairment if payments are 90 days or more delinquent. Updated property evaluations are obtained at time of impairment and serve as the basis for the loss allocation if foreclosure is probable or the loan is collateral dependent.

Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Credit Quality Information

The Company utilizes a nine grade internal loan rating system for residential and commercial real estate, construction, commercial and installment and collateral loans as follows:

Loans rated 1 – 5: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 6: Loans in this category are considered “special mention.” These loans reflect signs of potential weakness and are being closely monitored by management.

Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor and there is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

 

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At the time of loan origination, a risk rating based on this nine point grading system is assigned to each loan based on the loan officer’s assessment of risk. More complex loans, such as commercial business loans and commercial real estate loans require that our internal independent credit area further evaluate the risk rating of the individual loan, with the credit area and Chief Risk Officer having final determination of the appropriate risk rating. These more complex loans and relationships receive an in-depth analysis and periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The credit quality of the Company’s loan portfolio is reviewed by a third-party risk assessment firm on a quarterly basis and by the Company’s internal credit management function. The internal and external analysis of the loan portfolio is utilized to identify and quantify loans with higher than normal risk and confirm both the accuracy and responsiveness of the risk grading systems. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated Special Mention, Substandard or Doubtful are reviewed by management not less than on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being a loss are normally fully charged off.

The following table presents the Company’s loans by risk rating at June 30, 2014 and December 31, 2013.

 

     Residential      Commercial             Commercial      Installment
and
 

(In thousands)

   Real Estate      Real Estate      Construction      Business      Collateral  

June 30, 2014

              

Loans rated 1-5

   $ 1,312,861       $ 1,558,123       $ 105,139       $ 556,047       $ 17,750   

Loans rated 6

     2,092         31,692         1,233         15,690         —     

Loans rated 7

     14,029         45,814         6,406         26,194         45   

Loans rated 8

     —           —           —           —           —     

Loans rated 9

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,328,982       $ 1,635,629       $ 112,778       $ 597,931       $ 17,795   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

              

Loans rated 1-5

   $ 620,924       $ 755,001       $ 49,020       $ 236,065       $ 2,214   

Loans rated 6

     2,147         9,792         543         4,521         —     

Loans rated 7

     11,376         12,120         2,680         7,346         43   

Loans rated 8

     —           —           —           —           —     

Loans rated 9

     —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 634,447       $ 776,913       $ 52,243       $ 247,932       $ 2,257   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Activity in the allowance for loan losses for the periods ended June 30, 2014 and 2013 were as follows:

 

(In thousands)

   Residential
Real Estate
    Commercial
Real Estate
    Construction     Commercial
Business
    Installment
and
Collateral
    Unallocated     Total  

Three Months Ended June 30, 2014

              

Balance, beginning of period

   $ 6,491      $ 8,554      $ 622      $ 3,442      $ 26      $ 365      $ 19,500   

Provision (credit) for loan losses

     735        (688     242        1,777        8        6        2,080   

Loans charged off

     (316     —          —          (51     (16     —          (383

Recoveries of loans previously charged off

     90        —          —          49        7        —          146   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 7,000      $ 7,866      $ 864      $ 5,217      $ 25      $ 371      $ 21,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2013

              

Balance, beginning of period

   $ 6,117      $ 8,023      $ 1,012      $ 2,679      $ 73      $ 633      $ 18,537   

Provision (credit) for loan losses

     66        326        (24     455        (47     (373     403   

Loans charged off

     (218     (74     (248     (66     (8     —          (614

Recoveries of loans previously charged off

     9        —          —          —          10        —          19   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,974      $ 8,275      $ 740      $ 3,068      $ 28      $ 260      $ 18,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2014

              

Balance, beginning of period

   $ 6,396      $ 8,288      $ 829      $ 3,394      $ 29      $ 247      $ 19,183   

Provision (credit) for loan losses

     991        (422     35        1,801        1        124        2,530   

Loans charged off

     (495     —          —          (51     (20     —          (566

Recoveries of loans previously charged off

     108        —          —          73        15        —          196   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 7,000      $ 7,866      $ 864      $ 5,217      $ 25      $ 371      $ 21,343   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2013

              

Balance, beginning of period

   $ 6,194      $ 8,051      $ 807      $ 2,916      $ 29      $ 480      $ 18,477   

Provision (credit) for loan losses

     227        369        182        229        7        (220     794   

Loans charged off

     (468     (145     (249     (86     (23     —          (971

Recoveries of loans previously charged off

     21        —          —          9        15        —          45   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,974      $ 8,275      $ 740      $ 3,068      $ 28      $ 260      $ 18,345   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Further information pertaining to the allowance for loan losses and impaired loans at June 30, 2014 and December 31, 2013 follows:

 

(In thousands)

   Residential
Real Estate
     Commercial
Real Estate
     Construction      Commercial
Business
     Installment
and
Collateral
     Unallocated      Total  

June 30, 2014

                    

Allowance related to loans deemed impaired

   $ 79       $ —         $ —         $ 750       $ —         $ —         $ 829   

Allowance related to loans not deemed impaired

     6,921         7,866         864         4,467         25         371         20,514   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 7,000       $ 7,866       $ 864       $ 5,217       $ 25       $ 371       $ 21,343   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans deemed impaired

   $ 11,945       $ 6,433       $ 2,302       $ 3,826       $ 41       $ —         $ 24,547   

Loans not deemed impaired

     1,317,037         1,624,856         108,430         591,747         17,754         —           3,659,824   

Loans acquired with deteriorated credit quality

     —           4,340         2,046         2,358         —           —           8,744   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 1,328,982       $ 1,635,629       $ 112,778       $ 597,931       $ 17,795       $ —         $ 3,693,115   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                    

Allowance related to loans deemed impaired

   $ 94       $ —         $ —         $ —         $ —         $ —         $ 94   

Allowance related to loans not deemed impaired

     6,302         8,288         829         3,394         29         247         19,089   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total allowance for loan losses

   $ 6,396       $ 8,288       $ 829       $ 3,394       $ 29       $ 247       $ 19,183   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loans deemed impaired

   $ 10,594       $ 7,446       $ 2,639       $ 1,424       $ 29       $ —         $ 22,132   

Loans not deemed impaired

     623,853         769,467         49,604         246,508         2,228         —           1,691,660   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 634,447       $ 776,913       $ 52,243       $ 247,932       $ 2,257       $ —         $ 1,713,792   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Management has established the allowance for loan loss in accordance with GAAP at June 30, 2014 based on the current risk assessment and level of loss that is believed to exist within the portfolio. This level of reserve is deemed an appropriate estimate of probable loan losses inherent in the loan portfolio as of June 30, 2014 based upon the analysis conducted and given the portfolio composition, delinquencies, charge offs and risk rating changes experienced during the first six months of 2014 and the three-year evaluation period utilized in the analysis. Based on the qualitative assessment of the portfolio and in thorough consideration of non-performing loans, management believes that the allowance for loan losses properly supports the level of associated loss and risk.

 

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The following is a summary of past due and non-accrual loans at June 30, 2014 and December 31, 2013:

 

                                 Past Due         
                                 90 Days or         
                   Past Due 90             More and      Loans on  
     30-59 Days      60-89 Days      Days or      Total Past      Still      Non-  

(In thousands)

   Past Due      Past Due      More      Due      Accruing      accrual  

June 30, 2014

                 

Real estate loans:

                 

Residential

   $ 1,351       $ 2,608       $ 7,065       $ 11,024       $ 2,523       $ 10,113   

Commercial

     11,130         1,392         5,499         18,021         5,813         168   

Construction

     1,460         —           781         2,241         116         665   

Commercial business loans

     8,300         323         5,344         13,967         2,281         8,126   

Installment and collateral

     203         76         355         634         346         41   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,444       $ 4,399       $ 19,044       $ 45,887       $ 11,079       $ 19,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2013

                 

Real estate loans:

                 

Residential

   $ 6,674       $ 1,327       $ 4,262       $ 12,263       $ —         $ 10,192   

Commercial

     513         —           656         1,169         —           656   

Construction

     —           —           1,306         1,306         —           1,518   

Commercial business loans

     3         —           704         707         —           1,259   

Installment and collateral

     15         21         3         39         —           29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,205       $ 1,348       $ 6,931       $ 15,484       $ —         $ 13,654   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2014, loans reported as past due 90 days or more and still accruing represent Legacy United purchased loans based on their contractual repayment terms. These loans, however, are classified as accruing in accordance with accounting guidance for acquired loans. There are no originated loans past due 90 days or more and still accruing at June 30, 2014.

The following is a summary of impaired loans with and without a valuation allowance as of June 30, 2014 and December 31, 2013.

 

     June 30, 2014      December 31, 2013  
            Unpaid                    Unpaid         
     Recorded      Principal      Related      Recorded      Principal      Related  

(In thousands)

   Investment      Balance      Allowance      Investment      Balance      Allowance  

Impaired loans without a valuation allowance:

                 

Real estate loans:

                 

Residential

   $ 10,557       $ 12,234          $ 9,991       $ 11,565      

Commercial

     6,433         6,436            7,446         7,526      

Construction

     2,302         2,356            2,639         8,542      

Commercial business loans

     1,216         1,609            1,424         2,243      

Installment and collateral loans

     41         45            29         32      
  

 

 

    

 

 

       

 

 

    

 

 

    

Total

     20,549         22,680            21,529         29,908      
  

 

 

    

 

 

       

 

 

    

 

 

    

Impaired loans with a valuation allowance:

                 

Real estate loans:

                 

Residential

     1,388         1,502       $ 79         603         667       $ 94   

Commercial business loans

     2,610         2,610         750         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     3,998         4,112         829         603         667         94   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired loans

   $ 24,547       $ 26,792       $ 829       $ 22,132       $ 30,575       $ 94   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following is a summary of average recorded investment in impaired loans with and without a valuation allowance and interest income recognized on those loans for the three and six months ended June 30, 2014 and 2013.

 

     For the Three Months      For the Three Months  
     Ended June 30, 2014      Ended June 30, 2013  
                   Interest                    Interest  
                   Income                    Income  
     Average      Interest      Recognized      Average      Interest      Recognized  
     Recorded      Income      on a Cash      Recorded      Income      on a Cash  

(In thousands)

   Investment      Recognized      Basis      Investment      Recognized      Basis  

Impaired loans without a valuation allowance:

                 

Real estate loans:

                 

Residential

   $ 9,677       $ 92       $ 77       $ 8,523       $ 87       $ 87   

Commercial

     7,747         21         19         2,714         41         41   

Construction

     2,809         19         13         1,970         15         15   

Commercial business loans

     1,210         7         6         1,490         12         12   

Installment and collateral loans

     36         —           —           33         1         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     21,479         139         115         14,730         156         156   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a valuation allowance:

                 

Real estate loans:

                 

Residential

     1,551         31         13         1,514         23         23   

Construction

     —           —           —           394         —           —     

Commercial business loans

     1,305         1         —           166         —           —     

Installment and collateral loans

     —           —           —           5         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,856         32         13         2,079         23         23   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 24,335       $ 171       $ 128       $ 16,809       $ 179       $ 179   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     For the Six Months      For the Six Months  
     Ended June 30, 2014      Ended June 30, 2013  
                   Interest                    Interest  
                   Income                    Income  
     Average      Interest      Recognized      Average      Interest      Recognized  
     Recorded      Income      on a Cash      Recorded      Income      on a Cash  

(In thousands)

   Investment      Recognized      Basis      Investment      Recognized      Basis  

Impaired loans without a valuation allowance:

                 

Real estate loans:

                 

Residential

   $ 9,781       $ 179       $ 164       $ 8,739       $ 199       $ 199   

Commercial

     7,646         62         60         2,399         45         45   

Construction

     2,752         34         28         2,041         17         17   

Commercial business loans

     1,281         19         18         1,655         31         31   

Installment and collateral loans

     33         1         —           37         1         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     21,493         295         270         14,871         293         293   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Impaired loans with a valuation allowance:

                 

Real estate loans:

                 

Residential

     1,235         57         36         1,242         30         30   

Construction

     —           —           —           428         —           —     

Commercial business loans

     870         6         5         222         4         4   

Installment and collateral loans

     —           —           —           3         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2,105         63         41         1,895         34         34   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 23,598       $ 358       $ 311       $ 16,766       $ 327       $ 327   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings: The restructuring of a loan is considered a “troubled debt restructuring” if both (i) the restructuring constitutes a concession by the creditor and (ii) the debtor is experiencing financial difficulties. A troubled debt restructuring may include (i) a transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt, (ii) issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting debt into an equity interest, and (iii) modifications of terms of a debt.

 

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The following table provides detail of TDR balances for the periods presented:

 

(Dollars in thousands)

   At June 30, 2014      At December 31, 2013  

Recorded investment in TDRs:

     

Accrual status

   $ 9,784       $ 8,479   

Non-accrual status

     4,380         1,737   
  

 

 

    

 

 

 

Total recorded investment in TDRs

   $ 14,164       $ 10,216   
  

 

 

    

 

 

 

Accruing TDRs performing under modified terms more than one year

   $ 1,182       $ 1,302   

Specific reserves for TDRs included in the balance of allowance for loan losses

   $ 750       $ —     

Additional funds committed to borrowers in TDR status

     —           —     

Loans restructured as troubled debt restructurings during the three and six months ended June 30, 2014 and 2013 are set forth in the following table:

 

     Three Months Ended June 30,      Six Months Ended June 30,  
            Pre-Modification      Post-Modification             Pre-Modification      Post-Modification  
     Number      Outstanding      Outstanding      Number      Outstanding      Outstanding  
     of      Recorded      Recorded      of      Recorded      Recorded  

(Dollars in thousands)

   Contracts      Investment      Investment      Contracts      Investment      Investment  

June 30, 2014

                 

Residential real estate

     2       $ 1,004       $ 1,004         6       $ 1,412       $ 1,412   

Commercial real estate

     1         282         282         1         282         282   

Construction

     —           —           —           13         3,853         3,853   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructuring

     3       $ 1,286       $ 1,286         20       $ 5,547       $ 5,547   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2013

                 

Residential real estate

     1       $ 317       $ 317         2       $ 492       $ 492   

Commercial real estate

     1         539         539         1         539         539   

Construction

     2         30         30         2         30         30   

Commercial business

     —           —           —           1         2,620         2,620   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total troubled debt restructuring

     4       $ 886       $ 886         6       $ 3,681       $ 3,681   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

The following table provides information on how loans were modified as TDRs:

 

     Three Months Ended June 30,   
     2014      2013  
            Adjusted                              
     Extended      Interest             Extended      Rate and         

(In thousands)

   Maturity      Rates    &nb