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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      Other      Maturity      Maturity      Other  

Residential real estate

   $ —         $ 884       $ 120       $ —         $ —         $ 317   

Commercial real estate

     —           282         —           539         —           —     

Installment and collateral

     —           —           —           —           —           30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ —         $ 1,166       $ 120       $ 539       $ —         $ 347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

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

(In thousands)

   Maturity      Rates      Other      Maturity      Maturity      Other  

Residential real estate

   $ —         $ 884       $ 528       $ —         $ —         $ 492   

Commercial real estate

     —           282         —           539         —           —     

Construction

     3,672         —           181         —           —           —     

Commercial business

     —           —           —           2,620         —           —     

Installment and collateral

     —           —           —           —           —           30   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 3,672       $ 1,166       $ 709       $ 3,159       $ —         $ 522   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table provides information on loans modified as TDRs within the previous 12 months and for which there was a payment default during the periods presented:

 

     June 30, 2014      June 30, 2013  
     Number of             Number of         
     Loans and      Recorded      Loans and      Recorded  

(Dollars in thousands)

   Leases      Investment      Leases      Investment  

Commercial business

     1       $ 2,610         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     1       $ 2,610         —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

The recorded investment in commercial real estate and commercial business loan TDRs segregated by risk rating exposure is as follows:

 

(In thousands)

   At June 30, 2014      At December 31, 2013  

Rating:

     

(1) - (5) Pass

   $ 549       $ 1,663   

(6) Special Mention

     2,744         17   

(7) Substandard

     4,941         34   
  

 

 

    

 

 

 
   $ 8,234       $ 1,714   
  

 

 

    

 

 

 

The majority of restructured loans were on accrual status as of June 30, 2014 and December 31, 2013. The financial impact of the troubled debt restructured loans has been minimal to date. Typically, residential loans are restructured with a modification and extension of the loan amortization and maturity at substantially the same interest rate as contained in the original credit extension. As part of the troubled debt restructuring process, the current value of the property is compared to the general ledger loan balance and if not fully supported, a write down is processed through the allowance for loan losses. Commercial real estate loans, commercial construction loans and commercial business loans also contain payment modification agreements and a like assessment of the underlying collateral value if the borrower’s cash flow may be inadequate to service the entire obligation.

 

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Loan Servicing

The Company services certain loans for third parties. The aggregate of loans serviced for others was $506.1 million and $408.0 million as of June 30, 2014 and December 31, 2013, respectively. The balances of these loans are not included on the accompanying Consolidated Statements of Condition.

The risks inherent in mortgage servicing rights relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of mortgage servicing rights at June 30, 2014 and December 31, 2013 was determined using pretax internal rates of return ranging from 8.3% to 11.7% and the Public Securities Association Standard Prepayment model to estimate prepayments on the portfolio with an average prepayment speed of 163 and 154, respectively. The fair value of mortgage servicing rights is obtained from a third party provider.

During the three and six months ended June 30, 2014, the Company received servicing income in the amount of $256,000 and $496,000, respectively, which compares to $158,000 and $263,000 for the same respective periods of 2013. This income is included in service charges and fees in the Consolidated Statements of Operations.

Mortgage servicing rights are included in goodwill and other intangible assets on the Consolidated Statements of Condition. The following table summarizes mortgage servicing rights activity for the three and six months ended June 30, 2014 and 2013. Changes in the fair value of mortgage servicing rights are included in other (loss) income in the Consolidated Statements of Operations.

 

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

(In thousands)

   2014     2013     2014     2013  

Mortgage servicing rights:

        

Balance at beginning of period

   $ 4,084      $ 2,066      $ 4,103      $ 1,052   

Cumulative effect of change in accounting principle

     —          —          —          502   

Addition of Legacy United MSRs

     764        —          764        —     

Change in fair value recognized in net income

     (435     1,012        (573     1,297   

Issuances

     184        297        318        572   

Settlements

     (43     (39     (58     (87
  

 

 

   

 

 

   

 

 

   

 

 

 

Fair value of mortgage servicing rights at end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 8. Wholesale Funding

FHLBB Advances and Stock

The Bank is a member of the FHLBB. Contractual maturities and weighted-average rates of outstanding advances from the FHLBB as of June 30, 2014 and December 31, 2013 are summarized below:

 

     June 30, 2014     December 31, 2013  

(Dollars in thousands)

   Amount      Weighted-
Average
Rate
    Amount      Weighted-
Average
Rate
 

2014

   $ 211,112         0.48   $ 118,112         0.45

2015

     31,263         1.71        35,000         2.28   

2016

     20,773         1.51        3,000         2.70   

2017

     66,000         2.72        33,000         2.56   

2018 and thereafter

     45,149         2.03        2,924         2.54   
  

 

 

      

 

 

    
   $ 374,297         1.22   $ 192,036         1.21
  

 

 

      

 

 

    

At June 30, 2014, FHLBB advances totaling $47.0 million with interest rates ranging from 3.19% to 4.49% which are scheduled to mature between 2014 and 2018 are callable at the option of the FHLBB. Advances are collateralized by first mortgage loans with an estimated eligible collateral value of $566.8 million and $272.6 million at June 30, 2014 and December 31, 2013, respectively.

In addition to the outstanding advances, the Bank has access to an unsecured line of credit with the FHLBB amounting to $10.0 million at June 30, 2014 and December 31, 2013. At June 30, 2014 and December 31, 2013, there were no advances outstanding under the line of credit.

In accordance with an agreement with the FHLBB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At June 30, 2014, the Bank could borrow immediately an additional $164.4 million from the FHLBB inclusive of the line of credit.

The Bank is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, and up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the most recent redemption provisions of the stock.

Other Borrowings

The Company assumed wholesale repurchase agreements in the Merger totaling $20 million with a weighted average interest rate of 2.59% and a weighted average term of 4.6 years. The Company pledged investment securities as collateral for these borrowings. As of June 30, 2014 and December 31, 2013, advances outstanding under reverse repurchase agreements totaled $94.2 million and $48.2 million, respectively. The outstanding advances at June 30, 2014 consisted of six individual borrowings with remaining terms of five years or less and a weighted average cost of 0.95%. The outstanding advances at December 31, 2013 had a weighted average cost of 0.42%.

The Company assumed subordinated debt as a result of the Merger in 2014 in the form of trust preferred securities issued through a private placement offering with a face amount of $7.7 million. The Company recorded a fair value acquisition discount of $2.3 million on May 1, 2014. The remaining unamortized discount was $2.2 million at June 30, 2014. This issue has a maturity date of March 15, 2036 and bears a floating rate of interest that reprices quarterly at the 3-month LIBOR rate plus 1.85%. The interest rate at June 30, 2014 was 2.08%. A special redemption provision allows the Company to redeem this issue at par on March 15, June 15, September 15, or December 15 or any year subsequent to March 15, 2011.

The Company acquired secured borrowings totaling $2.8 million in the Merger. These borrowings were two transfers of financial assets that did not meet the definition of a participating interest and did not meet sale accounting criteria; therefore, they are accounted for as secured borrowings and classified as long-term debt on the Consolidated Statements of Condition.

Other Sources of Wholesale Funding

The Bank has relationships with brokered sweep deposit providers by which funds are deposited by the counterparties at the Bank’s request. As of June 30, 2014, amounts outstanding under these agreements totaled $95.9 million at a cost of 0.46%. As of December 31, 2013, amounts outstanding under this agreement totaled $50.0 million at a cost of 0.50%. Additionally, the Company has unused committed federal funds lines of credit with four counterparties totaling $97.5 million at June 30, 2014.

 

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Note 9. Share-Based Compensation Plans

The Company maintains and operates the Rockville Financial, Inc. 2006 Stock Incentive Award Plan (the “Plan”) as approved by the Company’s Board of Directors and stockholders. The Plan allows the Company to use stock options, stock awards, stock appreciation rights and performance awards to attract, retain and reward performance of qualified employees and others who contribute to the success of the Company. The Plan allows for maximum issuances of 530,587 restricted stock shares and 1,326,467 stock options. As of June 30, 2014, 16,319 restricted stock shares and 602 stock options remained available for future grants.

The Company maintains and operates the Rockville Financial, Inc. 2012 Stock Incentive Plan (the “2012 Plan”) as approved by the Company’s Board of Directors and stockholders. The 2012 Plan allows the Company to use stock options, stock awards, and performance awards to attract, retain and reward performance of qualified employees and others who contribute to the success of the Company. The 2012 Plan allows for the issuance of a maximum of 684,395 restricted stock shares and 1,710,989 stock options. As of June 30, 2014, 80,747 restricted stock shares and 163,493 stock options remained available for future grants under the 2012 Plan.

For the six-month period ended June 30, 2014, total employee and Director share-based compensation expense recognized for stock options and restricted stock was $1.3 million with a related tax benefit of $455,000 and $2.0 million with a related tax benefit of $704,000, respectively. Of the total expense amount, for the six-month period, the Company recognized $709,000 as compensation expense, $87,000 as other non-interest expense and $2.5 million as merger related expense, reflecting costs related to employees, Directors and the accelerated vesting as a result of the Merger, respectively.

For the three-month period ended June 30, 2014, total employee and Director share-based compensation expense recognized for stock options and restricted stock was $1.1 million with a related tax benefit of $385,000 and $1.7 million with a related tax benefit of $595,000, respectively. Of the total expense amount, for the three-month period, the Company recognized compensation expense totaling $262,000, other non-interest expense totaling $28,000 and merger related expense totaling $2.5 million, reflecting costs related to employees, Directors and the accelerated vesting as a result of the Merger, respectively.

Stock Options: The following table presents the activity related to stock options under the Plans for the six months ended June 30, 2014:

 

                  Weighted-Average      Aggregate  
     Number of     Weighted-      Remaining      Intrinsic  
     Stock     Average      Contractual Term      Value  
     Options     Exercise Price      (in years)      (in thousands)  

Outstanding at December 31, 2013

     2,317,620      $ 10.74         

Granted

     397,095        13.71         

Registered shares associated with the Merger

     1,291,793        9.36         

Exercised

     (377,227     9.15         

Forfeited or expired

     —          —           
  

 

 

   

 

 

       

Outstanding at June 30, 2014

     3,629,281      $ 10.74         6.4       $ 10.3   
  

 

 

   

 

 

    

 

 

    

 

 

 

Stock options vested and exercisable at June 30, 2014

     3,236,330      $ 10.38         6.0       $ 10.3   
  

 

 

   

 

 

    

 

 

    

 

 

 

In connection with the merger, the Company registered 1,291,793 options at an exercise price of $9.36 per share (adjusted for the exchange ratio) pursuant to its Registration Statement on Form S-8 under which the Company assumed all outstanding fully vested Legacy United’s stock options. These options have terms expiring between 2014 and 2022. In addition, the Company registered an additional 375,494 Common Stock as available shares for future awards under the Legacy United Stock Plans.

The aggregate fair value of options that vested during the six months ended June 30, 2014 and 2013 was $2.2 million and $720,000, respectively. As of June 30, 2014, the unrecognized cost related to the stock options awarded was $704,000 and will be recognized over a weighted-average period of 4.1 years.

 

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There were 397,095 stock options granted in the first six months of 2014. There were 437,236 options granted in the six months ended June 30, 2013. The weighted-average estimated fair values of stock option grants and the assumptions that were used in calculating such fair values were based on estimates using the Black-Scholes option pricing model as follows:

 

     Three Months Ended     Six Months Ended  
     June 30, 2014     June 30, 2014  

Weighted per share average fair value of options granted

   $ 1.95      $ 1.95   

Assumptions:

    

Risk-free interest rate

     1.94     1.94

Expected volatility

     19.90     19.90

Expected dividend yield

     2.92     2.92

Expected life of options granted

     6.0 years        6.0 years   

As of April 30, 2014, the effective time of the merger, all outstanding Company stock options, including those held by directors and executive officers, became fully vested in accordance with the change in control provisions within the merger agreement. The expense related to the accelerated vesting recorded during the second quarter of 2014 was $1.1 million and was included in merger related expense in non-interest expenses.

Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. During the restriction period, all shares are considered outstanding and dividends are paid on the restricted stock. The Company issued 128,233 shares of restricted stock from shares available under the Company’s 2012 Plan to certain executives and directors. The weighted-average grant date fair value was $13.66 per share and the restricted stock awards vest in equal annual installments on the anniversary date over a 3 year period. The following table presents the activity for restricted stock for the six months ended June 30, 2014:

 

            Weighted-Average  
     Number      Grant-Date  
     of Shares      Fair Value  

Unvested as of December 31, 2013

     245,210       $ 11.37   

Granted

     128,233         13.66   

Vested

     251,132         11.42   

Forfeited

     —           —     
  

 

 

    

 

 

 

Unvested as of June 30, 2014

     122,311       $ 13.67   
  

 

 

    

 

 

 

The fair value of restricted shares that vested during the six months ended June 30, 2014 and 2013 was $2.9 million and $1.9 million, respectively. As of June 30, 2014, there was $1.5 million of total unrecognized compensation cost related to unvested restricted stock which is expected to be recognized over a weighted-average period of 2.4 years.

As of April 30, 2014, the effective time of the merger, all outstanding Company restricted stock awards, including those held by directors and executive officers, became fully vested in accordance with the change in control provisions within the merger agreement. The expense related to the accelerated vesting recorded during the second quarter of 2014 was $1.4 million, and is included in merger related expense in non-interest expenses.

Employee Stock Ownership Plan: In connection with its reorganization and stock offering completed in 2005, the Company established an Employee Stock Ownership Plan (“ESOP”) to provide substantially all employees of the Company the opportunity to also become shareholders. The ESOP borrowed $7.8 million from the Company to purchase 699,659 shares of common stock in the subscription offering and in the open market. The outstanding loan balance of $970,000 at June 30, 2014 will be repaid principally from the Bank’s discretionary contributions to the ESOP over the remaining year. The 699,659 ESOP shares purchased in the initial reorganization in 2005 were exchanged for shares in the second-step conversion using an exchange ratio of 1.5167.

As part of the second-step conversion and stock offering completed in 2011, the ESOP borrowed an additional $7.1 million from the Company to purchase 684,395 shares of common stock during the initial public offering and in the open market. The outstanding loan balance of $6.6 million at June 30, 2014 will be repaid principally from the Bank’s discretionary contributions to the ESOP over a remaining period of 27 years.

 

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The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation – Stock Compensation. Under this guidance, unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders’ equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be allocated. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company’s financial statements. Dividends on unallocated shares are used to pay the ESOP debt.

At June 30, 2014, the two loans had an outstanding balance of $7.6 million and the interest rate is the prime rate plus one percent. The unallocated ESOP shares are pledged as collateral on the loans. As the loans are repaid to the Company, shares will be released from collateral and will be allocated to the accounts of the participants. The ESOP compensation expense for the six months ended June 30, 2014 and 2013 was $873,000 and $838,000, respectively.

The ESOP shares as of June 30, 2014 were as follows:

 

Shares released for allocation

     1,023,495   

Unreleased shares

     722,073   
  

 

 

 

Total ESOP shares

     1,745,568   
  

 

 

 

Market value of unreleased shares at June 30, 2014 (in thousands)

   $ 9,784   

The Company merged its ESOP with its Defined Contribution, or 401(k) Plan, effective January 1, 2014. In lieu of employer matching cash contributions in 2014 to the 401(k) Plan, shares released from the pay down on the ESOP loans will be allocated to all participants in the 401(k) Plan. The Company is expected to experience cost savings on a go forward basis due to the merging of these two plans.

 

Note 10. Income Tax Provision

The provision for income taxes was $512,000 and $1.2 million for the three months ended June 30, 2014 and 2013, respectively. The Company’s estimated annualized effective tax rate for the three months ended June 30, 2014 was (10.1)% as compared to 27.5% for the same period in 2013. The provision for income taxes was $975,000 and $3.0 million for the six months ended June 30, 2014 and 2013, respectively. The Company’s estimated annualized effective tax rate for this period was (26.8)% as compared to 27.8% for the same period in 2013. The decrease in the estimated annualized effective tax rate for both the three and six months ended June 30, 2014 as compared to prior years was primarily due to a pretax loss for the quarter and year to date as a result of expenses associated with the merger of the Company and Legacy United in 2014 partially offset by unfavorable permanent differences related to non-deductible acquisition costs and compensation associated with the merger. The projected tax rate for 2014 is expected to be approximately 10%.

 

Note 11. Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss, net of taxes, consist of the following:

 

                       Accumulated  
     Net Unrealized     Net Unrealized Gain     Net Unrealized Gain     Other  
     Gain (Loss) on     (Loss) on Available     (Loss) on Interest     Comprehensive  

(In thousands)

   Benefit Plans     For Sale Securities     Rate Swaps     Income (Loss)  

December 31, 2013

   $ (2,036   $ (7,533   $ 4,803      $ (4,766

Change

     2        7,809        (3,202     4,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2014

   $ (2,034   $ 276      $ 1,601      $ (157
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Note 12. Regulatory Matters

The Company and the Bank are subject to various regulatory capital requirements administered by Federal and State banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. The regulations require the Company and the Bank to meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items, as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. At June 30, 2014, the Bank exceeded all regulatory capital requirements and is considered “well-capitalized” under regulatory guidelines.

The following is a summary of the Company’s and the Bank’s regulatory capital amounts and ratios as of June 30, 2014 and December 31, 2013 compared to the Federal Deposit Insurance Corporation’s requirements for classification as a well-capitalized institution and for minimum capital adequacy:

 

                               Minimum To Be  
                  Minimum For     Well-Capitalized  
                  Capital     Under  
                  Adequacy     Prompt Corrective  
     Actual     Purposes     Action Provisions  

(Dollars in thousands)

   Amount      Ratio     Amount      Ratio     Amount      Ratio  

United Bank:

               

June 30, 2014

               

Total capital to risk weighted assets

   $ 500,091         13.3   $ 300,581         8.0   $ 375,726         10.0

Tier 1 capital to risk weighted assets

     477,429         12.7        150,371         4.0        225,557         6.0   

Tier 1 capital to total average assets

     477,429         11.8        162,253         4.0        202,816         5.0   

December 31, 2013

               

Total capital to risk weighted assets

   $ 280,196         15.4   $ 145,368         8.0   $ 181,709         10.0

Tier 1 capital to risk weighted assets

     260,241         14.3        72,693         4.0        109,040         6.0   

Tier 1 capital to total average assets

     260,241         11.6        89,893         4.0        112,367         5.0   

United Financial Bancorp, Inc.

               

June 30, 2014

               

Total capital to risk weighted assets

   $ 546,382         14.5   $ 300,623         8.0     N/A         N/A   

Tier 1 capital to risk weighted assets

     523,720         13.9        150,386         4.0        N/A         N/A   

Tier 1 capital to total average assets

     523,720         12.9        162,268         4.0        N/A         N/A   

December 31, 2013

               

Total capital to risk weighted assets

   $ 322,623         17.7   $ 145,983         8.0     N/A         N/A   

Tier 1 capital to risk weighted assets

     302,668         16.6        73,020         4.0        N/A         N/A   

Tier 1 capital to total average assets

     302,668         13.5        89,879         4.0        N/A         N/A   

Connecticut law restricts the amount of dividends that the Bank can pay the Company based on retained earnings for the current year and the preceding two years. As of June 30, 2014, the Bank does not have the capacity to upstream dividends to the Company unless regulatory exception approval is obtained.

 

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Note 13. Net (Loss) Income Per Share

The following table sets forth the calculation of basic and diluted net (loss) income per share for the three and six months ended June 30, 2014 and 2013:

 

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

(In thousands, except share data)

   2014     2013     2014     2013  

Net (loss) income available to common stockholders

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

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding

     43,857,201        27,134,461        34,885,862        27,598,419   

Less: average number of unallocated ESOP award shares

     (678,741     (807,673     (694,767     (823,698
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average basic shares outstanding

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

Dilutive effect of stock options

     —          350,801        —          340,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average diluted shares

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

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share:

        

Basic

   $ (0.13   $ 0.13      $ (0.14   $ 0.29   

Diluted

   $ (0.13   $ 0.12      $ (0.14   $ 0.29   

No potential common shares are included in the computation of any diluted per share amount when a loss exists. Therefore, options to purchase shares of common stock totaling 684,822 shares and 550,341 shares, respectively, were outstanding during the three and six months ended June 30, 2014 but were not included in the computation of diluted earnings per share.

 

Note 14. Commitments and Contingencies

Financial Instruments With Off-Balance Sheet Risk

In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit through issuing standby letters of credit and undisbursed portions of construction loans and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the Consolidated Statements of Condition. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral obligations is deemed worthless. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Off-balance sheet financial instruments whose contract amounts represent credit risk are as follows at June 30, 2014 and December 31, 2013:

 

     June 30,      December 31,  

(In thousands)

   2014      2013  

Commitments to extend credit:

     

Commitment to grant loans

   $ 200,022       $ 63,401   

Undisbursed construction loans

     111,806         80,345   

Undisbursed home equity lines of credit

     308,717         142,851   

Undisbursed commercial lines of credit

     268,293         116,004   

Standby letters of credit

     15,474         8,872   

Unused checking overdraft lines of credit

     1,455         39   
  

 

 

    

 

 

 
   $ 905,767       $ 411,512   
  

 

 

    

 

 

 

 

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Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, accounts receivable, inventory, property, plant and equipment, deposits, and securities.

Legal Matters: The Company is not involved in any legal proceedings deemed to be material as of June 30, 2014 which have arisen in the normal course of business.

 

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

Forward-Looking Statements

This Form 10-Q contains forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. These risks and uncertainties could cause our results to differ materially from those set forth in such forward-looking statements.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements but are not the only means to identify these statements.

Risk Factors

Factors that have a material adverse effect on operations include, but are not limited to, the following:

 

    Local, regional, national and international business or economic conditions may differ from those expected;

 

    The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Board’s interest rate policies, may adversely affect our business;

 

    We have merged with Legacy United and are in the process of integration, which may not yield the desired synergies and cost saves projected;

 

    The ability to increase market share and control expenses may be more difficult than anticipated;

 

    Changes in government regulations (including those concerning taxes, banking, securities and insurance) may adversely affect us or our businesses, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Basel III update to the Basel Accords;

 

    Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board, may affect expected financial reporting;

 

    Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock;

 

    Technological changes and cyber-security matters;

 

    Changes in demand for loan products, financial products and deposit flow could impact our financial performance;

 

    The timely development and acceptance of new products and services and perceived overall value of these products and services by customers;

 

    Adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio;

 

    Strong competition within our market area may limit our growth and profitability;

 

    We have opened and plan to open additional new branches and/or loan production offices which may not become profitable as soon as anticipated, if at all;

 

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    If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease;

 

    Our stock value may be negatively affected by banking regulations and our Certificate of Incorporation restricting takeovers;

 

    Changes in the level of non-performing assets and charge-offs;

 

    Because we intend to continue to increase our commercial real estate and commercial business loan originations, our lending risk may increase, and downturns in the real estate market or local economy could adversely affect our earnings;

 

    The trading volume in our stock is less than in larger publicly traded companies which can cause price volatility, hinder your ability to sell our common stock and may lower the market price of the stock;

 

    Our ability to attract and retain qualified employees;

 

    We may not manage the risks involved in the foregoing as well as anticipated, and

 

    Severe weather, natural disasters, acts of God, war or terrorism and other external events could significantly impact our business.

Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. Except as required by applicable law or regulation, management undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand United Financial Bancorp, Inc., our operations and our present business environment. We believe accuracy, transparency and clarity are the primary goals of successful financial reporting. We remain committed to transparency in our financial reporting, providing our stockholders with informative financial disclosures and presenting an accurate view of our financial disclosures, financial position and operating results.

MD&A is provided as a supplement to—and should be read in conjunction with—our Unaudited Consolidated Financial Statements and the accompanying notes thereto contained in Part I, Item 1, of this report as well as our Annual Report on Form 10-K for the year ended December 31, 2013. The following sections are included in MD&A:

 

    Our Business – a general description of our business, our objectives and regulatory considerations

 

    Critical Accounting Estimates – a discussion of accounting estimates that require critical judgments and estimates.

 

    Operating Results – an analysis of our Company’s consolidated results of operations for the periods presented in our Unaudited Consolidated Financial Statements.

 

    Comparison of Financial Liquidity and Capital Resources – an overview of financial condition and market interest rate risk.

Our Business

Merger with Legacy United

On April 30, 2014, Rockville Financial, Inc. completed its merger with Legacy United. In connection with the merger, Rockville Financial, Inc. completed the following corporate actions:

 

    Legacy United merged with and into Rockville Financial, Inc., which. was the accounting acquirer and the surviving entity.

 

    Rockville Financial, Inc. changed its legal entity name to United Financial Bancorp, Inc.

 

    The Company’s common stock began trading on the NASDAQ Global Select Stock Exchange under t the symbol “UBNK” upon consummation of the merger.

 

    United Bank merged into Rockville Bank.

 

    Rockville Bank changed its legal entity name to United Bank.

We refer to the transactions detailed above collectively as the “Merger”.

The Merger was a stock-for-stock transaction valued at $358.1 million based on the closing price of Rockville Financial, Inc. common stock on April 30, 2014. Under the terms of the Merger, each share of Legacy United was converted into the right to receive 1.3472 shares of Rockville Financial, Inc. common stock.

 

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As of April 30, 2014, Legacy United had total assets of $2.44 billion, total net loans of $1.85 billion, total deposits of $1.94 billion and equity of $304.5 million. As part of the Merger the Company issued 26.7 million shares of common stock and recorded goodwill of $113.9 million and identifiable intangible assets of $10.6 million.

The Merger had a significant impact by more than doubling the assets and deposits of the former Rockville Financial, Inc., expanding the branch network and by entering into new markets – Western and Central Massachusetts as well as expanding our presence in Central Connecticut.

The boards of Rockville and Legacy United entered into the Merger after considering a number of factors, including, among others, the following:

 

    The board’s knowledge of the current and prospective environment in which Rockville and Legacy United operates;

 

    The board’s conclusion that the combined entity will have superior future earnings and prospects compared to the earnings and prospects of Rockville and Legacy United on a stand-alone basis; and

 

    The boards view that the merger will allow for enhanced opportunities for the clients and customers of a combined entity.

Further information about the Merger can be found in Note 2 in the Notes to Unaudited Consolidated Financial Statements located under Part I, Item I, Interim Financial Statements.

General

The financial statements do not reflect the operations of Legacy United unless specifically stated. The second quarter 2014 results of operations include the Company’s results of operations for May and June 2014 and Rockville Financial, Inc.’s results of operations for April 2014. The results of operations for the second quarter 2013 include only the results of operations of Rockville Financial, Inc. The results of operations of the Company in the first quarter 2014 and 2013 include only the results of operations of Rockville Bank.

By assets, United Financial Bancorp, Inc. is the third largest publicly traded banking institution headquartered in Connecticut with consolidated assets of $5.16 billion and stockholders’ equity of $652.6 million at June 30, 2014. The Company delivers financial services to individuals, families and businesses throughout Connecticut and Central and Eastern Massachusetts through its 57 banking offices, its commercial loan production offices, its mortgage loan production offices, 78 ATMs and internet websites (www. rockvillebank.com and www.bankatunited.com).

The Company strives to remain a leader in meeting the financial service needs of the community and to provide superior customer service to the individuals and businesses in the market areas that it has served since 1858. United Bank is a community-oriented provider of traditional banking products and services to business organizations and individuals, offering products such as residential and commercial real estate loans, commercial business loans, consumer loans and a variety of deposit products. Our business philosophy is to remain a community-oriented franchise and continue to focus on providing superior customer service to meet the financial needs of the communities in which we operate. Current strategies include (1) continuing our residential mortgage lending activities; continuing to expand our commercial real estate and commercial business lending activities; and growing our deposit base (2) increase the non-interest income component of total revenues through development of banking-related fee income and the sale of insurance and investment products and (3) continuing to improve operating efficiencies.

The Company’s results of operations depend primarily on net interest income, which is the difference between the income earned on its loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Company’s provision for loan losses, income and expenses pertaining to other real estate owned, gains and losses from sales of loans and securities and non-interest income and expenses. Non-interest income primarily consists of fee income from depositors, mortgage servicing income, mortgage origination and loan sale income and increases in cash surrender value of bank-owned life insurance (“BOLI”). Non-interest expenses consist principally of salaries and employee benefits, occupancy, service bureau fees, marketing, professional fees, FDIC insurance assessments, other real estate owned and other operating expenses.

Results of operations are also significantly affected by general economic and competitive conditions and changes in interest rates as well as government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect the Company. Uncertainty and challenges surrounding future economic growth, consumer confidence, credit availability, competition and corporate earnings remains.

 

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Our Objectives

The Company seeks to continually deliver superior value to its customers, stockholders, employees and communities through achievement of its core operating objectives which are to:

 

    Grow and retain core deposit relationships with a focus on checking, savings and money market accounts for personal, business and municipal depositors;

 

    Build high quality, profitable loan portfolios using primarily organic growth and also purchase strategies, while also continuing to maintain and improve efficiencies in its robust secondary mortgage banking business;

 

    Build and diversify revenue streams through development of banking-related fee income, in particular, through the expansion of its financial advisory services;

 

    Maintain expense discipline and improve operating efficiencies;

 

    Invest in technology to enhance superior customer service and products; and

 

    Maintain a rigorous risk identification and management process.

Significant factors management reviews to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share, return on tangible common equity and assets, net interest margin, non-interest income, operating expenses related to total average assets and efficiency ratio, asset quality, loan and deposit growth, capital management, liquidity and interest rate sensitivity levels, customer service standards, market share and peer comparisons.

Regulatory Considerations

The Company and its subsidiaries are subject to numerous examinations by federal and state banking regulators, as well as the Securities and Exchange Commission. Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for additional disclosures with respect to laws and regulations affecting the Company’s businesses.

The Company has reviewed the potential impacts associated with the Dodd-Frank Act as well as the yet to be interpreted and implemented responsibilities of the Consumer Financial Protection Bureau. Some degree of uncertainty still exists surrounding this legislation and the resultant directives, and as such the further analysis of potential burden will be difficult to assess. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply additional resources to ensure compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.

In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S. banking organizations. Under the rules, effective January 1, 2015 for the Company and Bank, the minimum capital ratios will be a) 4.5% “Common Equity Tier 1” to risk-weighted assets, b) 6.0% Tier 1 capital to risk-weighted assets and c) 8.0% total capital to risk-weighted assets. In addition, the new regulations will impose certain limitations on dividends, share buy-backs, discretionary payments on Tier 1 instruments and discretionary bonuses to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its risk-weighted assets, phased in over a 5 year period until January 1, 2019. Accordingly, while these proposed rules are slated for phase in commencing January 1, 2015, the Company has proactively planned for them, and is well positioned to meet the requirements of these complex proposals. We believe, however, that we will continue to exceed all expected well capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis.

Critical Accounting Estimates

The accounting policies followed by the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP.

 

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We believe that our most critical accounting policies, which involve the most complex subjective decisions or assessments, relate to allowance for loan losses, other-than-temporary impairment of investment securities, derivatives, goodwill, and income taxes. Effective January 1, 2014, the Company no longer considered pension and other post-retirement benefits as critical accounting estimates. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2013 Annual Report on Form 10-K. A brief description of our current policies involving significant judgment follows:

Allowance for Loan Losses: 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.

Although management believes it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation.

Other-than-Temporary Impairment of Securities: The Company maintains a securities portfolio that is classified into two major categories: available for sale and held to maturity. Securities available for sale are recorded at estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Held to maturity securities are recorded at amortized cost. Management determines the classifications of a security at the time of its purchase.

Quarterly, securities with unrealized losses are reviewed as deemed appropriate to assess whether the decline in fair value is temporary or other-than-temporary. The assessment is to determine whether the decline in value is from company-specific events, industry developments, general economic conditions, credit losses on debt or other reasons. Declines in the fair value of available for sale securities below their cost or amortized cost that are deemed to be other-than-temporary are reflected in earnings for equity securities and for debt securities that have an identified credit loss. Unrealized losses on debt securities with no identified credit loss component are reflected in other comprehensive income. In the first six months of 2014, the Company did not experience any losses which were deemed to be other-than-temporarily impaired.

Derivative Instruments and Hedging Activities: The Company uses derivatives to manage a variety of risks, including risks related to interest rates. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The rules and interpretations related to derivatives accounting are complex. Failure to apply this complex guidance correctly will result in the changes in the fair value of the derivative being reported in earnings.

The Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the standard methodology of netting the discounted future fixed cash receipts (or payment) and the expected variable cash payments (or receipts.) The variable cash payment (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rates curves.

At June 30, 2014, derivative assets and liabilities were $4.5 million and $1.8 million, respectively. Further information about our use of derivatives is provided in Note 6, “Derivatives and Hedging Activities” in Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report.

Goodwill: The Company is required to record certain assets it has acquired, including identifiable intangible assets such as core deposit intangibles and goodwill, at fair value, which my involve making estimates based on third-party valuations, such as appraisals or internal valuations based on discounted cash flow analyses or other valuation techniques. The Company evaluates goodwill for impairment annually or whenever events or changes in circumstances indicate the carrying value of the goodwill may be impaired. When goodwill is evaluated for impairment, if the carrying amount exceeds the fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.

Income Taxes: The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.

 

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Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. Some judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. In determining the valuation allowance, we use forecasted future operating results, based upon approved business plans, including a review of the eligible carry forward periods, tax planning opportunities and other relevant considerations. Management believes that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.

The reserve for tax contingencies contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions. The effective income tax rate is also affected by changes in tax law, entry into new tax jurisdictions, the level of earnings and the results of tax audits.

Operating Results

The following is a reconciliation of Non-GAAP financial measures by major category for the three and six months ended June 30, 2014 and 2013:

 

Reconciliation of Non-GAAP Financial Measures    Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(In thousands)

   2014     2013     2014     2013  

Net (loss) income

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

Adjustments:

        

Net interest income

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

(Accretion)/amortization of loan mark

     (3,388     —          (3,388     —     

Accretion/(amortization) of deposit mark

     1,150        —          1,150        —     

Accretion/(amortization) of borrowings mark

     410        —          410        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net adjustment to net interest income

     (4,948     —          (4,948     —     

Non-interest income

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

Net gain on sales of securities

     (589     (329     (857     (556
  

 

 

   

 

 

   

 

 

   

 

 

 

Net adjustment to non-interest income

     5,730        3,779        8,671        8,436   

Non-interest expense

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

Merger and acquisition expense

     (20,945     —          (22,774     —     

Core deposit intangible amortization expense

     (321     —          (321     —     

Effect of position eliminations

     —          (561     —          (561

Effect of branch lease termination agreement

     —          (809     —          (809
  

 

 

   

 

 

   

 

 

   

 

 

 

Net adjustment to non-interest expense

     (21,266     (1,370     (23,095     (1,370

Income tax (benefit) expense adjustment

     (4,346     321        (4,703     259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating net income

   $ 5,812      $ 4,019      $ 7,963      $ 8,405   
  

 

 

   

 

 

   

 

 

   

 

 

 

Executive Overview

On April 30, 2014 Rockville Financial, Inc. completed its merger with Legacy United. As such, 2014 second quarter results include one month of the pre-merger Rockville Financial, Inc. results and results of the combined entity beginning on May 1, 2014. Legacy United was a federally chartered $2.44 billion-asset bank with 35 branches throughout Central Connecticut and Western and Central Massachusetts.

A net loss of $5.6 million was recorded for the second quarter of 2014, or $0.14 per diluted share, compared to net income of $3.3 million, or $0.12 per diluted share, for the second quarter of 2013. Operating net income for the second quarter of 2014 was $5.8 million (Non-GAAP), adjusted for $21.3 million (pre-tax) of expenses related to the merger, $4.9 million (pre-tax) net impact of the amortization and accretion of the fair value adjustments on loans, deposits and borrowings as a result of the merger, and $589,000 (pre-tax) net gains on sales of securities. Operating net income for the second quarter of 2013 was $4.0 million (Non-GAAP),

 

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adjusted for $809,000 (pre-tax) for the impact of a branch lease termination agreement and $561,000 (pre-tax) for termination expense related to position eliminations, as well as income of $329,000 (pre-tax) from net gains on sales of securities. The Company is presenting operating net income as management believes it gives a more accurate picture of the results for the period and will benefit investors in their understanding of the Company.

The net loss for the six months ended June 30, 2014 was $4.6 million or $0.14 per diluted share, compared to earnings of $7.9 million, or $0.29 per diluted share, for the same period of 2013. Operating net income for the six months ended June 30, 2014 was $8.0 million (Non-GAAP), adjusted for $23.1 million (pre-tax) of expenses related to the merger, $4.9 million (pre-tax) net impact of the amortization and accretion of the fair value adjustments on loans, deposits and borrowings as a result of the merger, and $857,000 (pre-tax) net gains on sales of securities. Operating net income for the six months ended June 30, 2013 was $8.4 million (Non-GAAP), adjusted for $809,000 (pre-tax) for the impact of a branch lease termination agreement and $561,000 (pre-tax) for termination expenses related to position eliminations, as well as income of $556,000 (pre-tax) from net gains on sales of securities.

The Company’s results were significantly impacted by the merger with Legacy United, which was completed on April 30, 2014. The Company incurred $20.9 million in merger related expenses during the quarter and $22.8 million for the six months ended June 30, 2014. We expect to continue to incur additional merger related charges through the end of this year. The Company was also impacted by the shift in the mortgage market due to the change in interest rates in the second half of 2013 which resulted in a more difficult secondary mortgage market when originating new loans in a competitive local market with low interest rates for new mortgage loans. As a result, the Company recorded $1.3 million less in gains from the sale of loans in the secondary market for the six months ended June 30, 2014. Originations of adjustable rate mortgage loans have become more prevalent and the Company generally retains these loans on balance sheet, reducing the notional amount of loans sold into the secondary market. Additionally, the Company experienced a $5.4 million and $7.0 million increase in salaries and employee benefits for the three and six months ended June 30, 2014, respectively, as a result of the Merger and restructuring of the executive management team, onboarding of new revenue producing commission-based mortgage loan officers as well as increased commissions on mortgage originations and increased healthcare costs related to the Company’s self-insurance program. The Company’s results were also attributable to balance sheet growth due to the merger with Legacy United, continued solid asset quality as well as a decline in the net interest margin (Non-GAAP operating basis).

The Company’s tax-equivalent net interest margin for the three and six months ended June 30, 2014 was 3.88% and 3.62%, an increase of 40 and 14 basis points, respectively, over the same periods in the prior year. Excluding the $4.9 million net impact of the amortization and accretion of the fair value adjustments on loans, deposits and borrowings as a result of the merger, operating net interest margin for the three and six months ended June 30, 2014 was 3.36% and 3.29%, respectively. The general year over year trends impacting the margin include decreased yields on loans due to the low interest rate environment. This was partially offset by slightly higher yields on securities due to an increase in investment grade collateralized loan obligations and a re-characterization of the securities portfolio upon the acquisition of Legacy United’s securities during the second quarter 2014.

The asset quality of our loan portfolio has remained strong even as the leading economic indicators have provided mixed results as evidenced in part by the continued high unemployment and foreclosure rates throughout Connecticut and the region at June 30, 2014 and December 31, 2013. The allowance for loan losses to total loans ratio was 0.58% and 1.12%, the allowance for loan losses to non-performing loans ratio was 111.67% and 140.50%, and the ratio of non-performing loans to total loans was 0.52% and 0.80% at June 30, 2014 and December 31, 2013, respectively. Acquired loans are recorded at fair value with no carryover of the allowance for loan losses and deemed performing regardless of their payment status. As such, some asset quality measures are not comparable between periods due to the Merger. A provision for loan losses of $2.1 million was recorded for the current quarter, largely reflecting the ongoing assessment of estimated exposure on impaired loans, the increase in non-accrual loans and organic loan growth. This compares to a provision of $403,000 for the quarter ended June 30, 2013.

 

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Selected Financial Data    At or For the Three     At or For the Six  
     Months Ended     Months Ended  
     June 30,     June 30,  

(Dollars in thousands, except share data)

   2014     2013     2014     2013  

Share Data:

        

Basic net (loss) income per common share

   $ (0.13   $ 0.13      $ (0.14   $ 0.29   

Diluted net (loss) income per common share

     (0.13     0.12        (0.14     0.29   

Dividends declared per share

     0.10        0.10        0.20        0.20   

Operating Data:

        

Total revenue

   $ 43,198      $ 20,808      $ 63,315      $ 42,199   

Total expense

     46,177        15,857        64,434        30,528   

Key Ratios (annualized):

        

Return on average assets

     -0.53     0.64     -0.28     0.76

Return on average equity

     -4.19     4.26     -2.22     4.98

Tax-equivalent net interest margin

     3.88     3.48     3.62     3.48

Non-interest expense to average assets

     4.41     3.07     3.96     2.97

Cost of interest-bearing deposits

     0.46     0.57     0.50     0.59

Non-performing Assets:

        

Total non-accrual loans, excluding troubled debt restructures

   $ 14,733      $ 10,876      $ 14,733      $ 10,876   

Troubled debt restructures - non-accruing

     4,380        2,461        4,380        2,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing loans

     19,113        13,337        19,113        13,337   

Other real estate owned

     3,213        2,611        3,213        2,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total non-performing assets

   $ 22,326      $ 15,948      $ 22,326      $ 15,948   
  

 

 

   

 

 

   

 

 

   

 

 

 

Non-performing loans to total loans

     0.52     0.83     0.52     0.83

Non-performing assets to total assets

     0.44     0.73     0.44     0.73

Allowance for loan losses to non-performing loans

     111.67     137.55     111.67     137.55

Allowance for loan losses to total loans

     0.58     1.14     0.58     1.14

Non GAAP Ratio:

        

Efficiency ratio(1)

     106.89     76.21     101.77     72.34

 

(1) The efficiency ratio represents the ratio of non-interest expenses to the sum of net interest income before provision for loan losses and non-interest income.

 

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Average Balances, Interest, Average Yields\Cost and Rate\Volume Analysis

The tables below sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. A tax-equivalent yield adjustment was made for the three and six months ended June 30, 2014 and 2013. All average balances are daily average balances. Loans held for sale and non-accrual loans are included in the computation of interest-earning average balances, with non-accrual loans carrying a zero yield. The yields set forth above include the effect of deferred costs, discounts and premiums that are amortized or accreted to interest income or expense.

Average Balance Sheets for the Three Months Ended June 30, 2014 and 2013

 

     Three Months Ended June 30,  
     2014     2013  
                  Annualized                  Annualized  
     Average     Interest and      Yield/     Average     Interest and      Yield/  

(Dollars in thousands)

   Balance     Dividends      Cost     Balance     Dividends      Cost  

Interest-earning assets:

              

Residential real estate loans

   $ 1,109,696      $ 9,716         3.50   $ 650,886      $ 6,203         3.81

Commercial real estate loans

     1,365,361        18,291         5.37        695,657        8,398         4.84   

Construction loans

     89,948        1,804         8.05        45,666        406         3.57   

Commercial loans

     465,780        5,253         4.52        175,346        1,761         4.03   

Installment and collateral loans

     12,642        173         5.48        2,679        33         4.93   

Securities

     770,052        6,020         3.13        337,896        2,618         3.10   

Federal Home Loan Bank stock

     20,794        120         2.31        15,053        15         0.40   

Other earning assets

     40,602        27         0.27        30,931        21         0.27   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     3,874,875        41,404         4.28        1,954,114        19,455         3.99   
    

 

 

        

 

 

    

Allowance for loan losses

     (19,951          (18,443     

Non-interest-earning assets

     329,452             128,364        
  

 

 

        

 

 

      

Total assets

   $ 4,184,376           $ 2,064,035        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

NOW and money market accounts

   $ 1,090,279        772         0.28      $ 557,460        370         0.27   

Saving deposits (1)

     457,373        134         0.12        232,073        36         0.06   

Time deposits

     1,197,717        2,240         0.75        527,102        1,472         1.12   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     2,745,369        3,146         0.46        1,316,635        1,878         0.57   

Advances from the Federal Home Loan Bank

     310,946        569         0.73        173,077        591         1.37   

Other borrowings

     64,740        173         1.07        10,721        14         0.52   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     3,121,055        3,888         0.50     1,500,433        2,483         0.66
    

 

 

        

 

 

    

Non-interest-bearing liabilities

     531,722             253,738        
  

 

 

        

 

 

      

Total liabilities

     3,652,777             1,754,171        

Stockholders’ equity

     531,599             309,864        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 4,184,376           $ 2,064,035        
  

 

 

        

 

 

      

Net interest-earning assets (3)

   $ 753,820           $ 453,681        
  

 

 

        

 

 

      

Tax-equivalent net interest income

       37,516             16,972      

Tax-equivalent net interest rate spread (2)

          3.78          3.33

Tax-equivalent net interest margin (4)

          3.88          3.48

Average interest-earning assets to average interest-bearing liabilities

          124.15          130.24

Less tax-equivalent adjustment

       637             271      
    

 

 

        

 

 

    
     $ 36,879           $ 16,701      
    

 

 

        

 

 

    

 

(1)  Includes mortgagors’ and investors’ escrow accounts.
(2)  Net interest rate spread represents the difference between yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)  Tax-equivalent net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)  Tax-equivalent net interest rate margin represents tax-equivalent net interest income divided by average interest-earning assets.

 

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Average Balance Sheets for the Six Months Ended June 30, 2014 and 2013

 

     Six Months Ended June 30,  
     2014     2013  
                  Annualized                  Annualized  
     Average     Interest and      Yield/     Average     Interest and      Yield/  

(Dollars in thousands)

   Balance     Dividends      Cost     Balance     Dividends      Cost  

Interest-earning assets:

              

Residential real estate loans

   $ 881,638      $ 15,607         3.54   $ 663,510      $ 12,873         3.88

Commercial real estate loans

     1,076,686        26,773         5.01        696,065        16,649         4.82   

Construction loans

     68,632        2,223         6.53        46,917        821         3.53   

Commercial loans

     358,736        7,283         4.09        174,041        3,546         4.11   

Installment and collateral loans

     7,435        195         5.24        2,741        67         4.89   

Securities

     597,449        9,138         3.06        314,500        4,713         3.00   

Federal Home Loan Bank stock

     17,940        176         1.98        15,394        30         0.39   

Other earning assets

     29,268        39         0.27        32,788        42         0.26   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     3,037,784        61,434         4.06        1,945,956        38,741         4.00   
    

 

 

        

 

 

    

Allowance for loan losses

     (19,605          (18,589     

Non-interest-earning assets

     236,297             125,614        
  

 

 

        

 

 

      

Total assets

   $ 3,254,476           $ 2,052,981        
  

 

 

        

 

 

      

Interest-bearing liabilities:

              

NOW and money market accounts

   $ 890,384        1,324         0.30      $ 552,226        744         0.27   

Saving deposits (1)

     341,017        169         0.10        226,308        70         0.06   

Time deposits

     893,096        3,811         0.86        531,645        3,048         1.16   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     2,124,497        5,304         0.50        1,310,179        3,862         0.59   

Advances from the Federal Home Loan Bank

     252,228        1,153         0.92        165,793        1,174         1.43   

Other borrowings

     55,330        225         0.82        9,838        25         0.51   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     2,432,055        6,682         0.55     1,485,810        5,061         0.69
    

 

 

        

 

 

    

Non-interest-bearing liabilities

     406,143             252,009        
  

 

 

        

 

 

      

Total liabilities

     2,838,198             1,737,819        

Stockholders’ equity

     416,278             315,162        
  

 

 

        

 

 

      

Total liabilities and stockholders’ equity

   $ 3,254,476           $ 2,052,981        
  

 

 

        

 

 

      

Net interest-earning assets (3)

   $ 605,729           $ 460,146        
  

 

 

        

 

 

      

Tax-equivalent net interest income

       54,752             33,680      

Tax-equivalent net interest rate spread (2)

          3.51          3.31

Tax-equivalent net interest margin (4)

          3.62          3.48

Average interest-earning assets to average interest-bearing liabilities

          124.91          130.97

Less tax-equivalent adjustment

       965             472      
    

 

 

        

 

 

    
     $ 53,787           $ 33,208      
    

 

 

        

 

 

    

 

(1)  Includes mortgagors’ and investors’ escrow accounts.
(2)  Net interest rate spread represents the difference between yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)  Tax-equivalent net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)  Tax-equivalent net interest rate margin represents tax-equivalent net interest income divided by average interest-earning assets.

 

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Rate\Volume Analysis

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

Rate\Volume Analysis

 

     Three Months Ended     Six Months Ended  
     June 30, 2014 Compared to     June 30, 2014 Compared to  
     June 30, 2013     June 30, 2013  
     Increase (Decrease)           Increase (Decrease)        
     Due to           Due to        

(In thousands)

   Volume      Rate     Net     Volume     Rate     Net  

Interest and dividend income:

             

Loans receivable

   $ 16,989       $ 1,447      $ 18,436      $ 17,752      $ 373      $ 18,125   

Securities

     3,378         24        3,402        4,330        95        4,425   

Other earning assets(1)

     16         95        111        (1     144        143   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total earning assets

     20,383         1,566        21,949        22,081        612        22,693   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

             

NOW and money market accounts

     376         26        402        496        84        580   

Savings accounts

     51         47        98        45        54        99   

Time deposits

     1,382         (614     768        1,687        (924     763   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     1,809         (541     1,268        2,228        (786     1,442   

FHLBB advances

     274         (296     (22     482        (503     (21

Other borrowings

     132         27        159        177        23        200   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     2,215         (810     1,405        2,887        (1,266     1,621   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in tax-equivalent net interest income

   $ 18,168       $ 2,376      $ 20,544      $ 19,194      $ 1,878      $ 21,072   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Includes FHLBB stock

Comparison of Operating Results for the Three and Six Months Ended June 30, 2014 and 2013

The results from operations were impacted by costs associated with the Merger and other charges as follows:

 

    We incurred $20.9 million and $22.8 million of merger related expenses including legal fees, change in control payments, severance costs, shareholder expense and other professional services during the three and six months ended June 30, 2014, respectively. These items are recorded as non-interest expense in the Consolidated Statements of Operations.

 

    We recognized $113.9 million in additional Goodwill as of June 30, 2014.

The following discussion provides a summary and comparison of the Company’s operating results for the three and six months ended June 30, 2014 and 2013.

Net Interest Income Analysis

Net interest income is the amount that interest and fees on earning assets (loans and investments) exceeds the cost of funds, interest paid to the Company’s depositors and interest on external borrowings. Net interest margin is the difference between the income on earning assets and the cost of interest-bearing funds as a percentage of average earning assets. Growth in net interest income has resulted mainly from the merger with Legacy United combined with organic growth in interest-earning assets and liabilities.

As shown in the tables, tax-equivalent net interest income increased significantly in both the three and six month periods ended June 30, 2014. This was mainly due to the significant increase in average earning assets and liabilities and a benefit of $4.9 million to net interest income from fair value adjustments, as a result of the Merger. The fair value adjustments reflect amortization and accretion of credit and interest rate marks on the acquired loans, time deposits and borrowings.

 

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For the three months ended June 30, 2014, tax-equivalent net interest income increased $20.5 million compared to the three months ended June 30, 2013. Additionally, the net interest margin increased 40 basis points, the yield on average earning assets increased 29 basis points and the cost of interest-bearing liabilities declined 16 basis points for the three months ended June 30, 2014 compared to the same period in the prior year.

For the six months ended June 30, 2014, tax-equivalent net interest income increased $21.1 million from the comparative 2013 period. The net interest margin increased 14 basis points, the yield on average earning assets increased six basis points and the cost of interest-bearing liabilities declined 14 basis points from the comparative six month period in 2013.

Excluding the benefit of the fair value adjustments of $4.9 million, net interest margin and the yield on average earning assets would have declined 12 basis points and seven basis points, respectively and cost of interest of interest-bearing liabilities would have increased four basis points for the quarter ended June 30, 2014 compared to the quarter ended June 30, 2013. For the six months ended June 30, 2014, net interest margin and the yield on average earning assets would have declined 19 basis points and 17 basis points, respectively and cost of interest of interest-bearing liabilities would have decreased one basis point compared to the six months ended June 30, 2013.

Primarily reflecting the Merger, average earning assets increased $1.92 billion and $1.09 billion, respectively, for the three and six months ended June 30, 2014 compared to the same periods in 2013, while average interest-bearing liabilities increased $1.62 billion and $946.2 million, respectively.

The average balance of investment securities increased $432.2 million and $282.9 million, respectively, for the three and six months ended June 30, 2014, compared to the same 2013 periods and the average yield earned increased three basis points and six basis points, respectively. Upon the acquisition of Legacy United’s investment securities portfolio, the Company took action to re-characterize the acquired portfolio to a position that was closely aligned with the composition of the Rockville portfolio. The re-characterization involved the sale of longer dated investments, and the purchase of investments which will incrementally shorten the duration of the investment portfolio and that show favorable price movement to changes in rising interest rates. Further information about the re-characterization, can be found later in the document under the heading of Securities within Financial Condition, Liquidity and Capital Resources.

Since net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets, the Company manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies.

Provision for Loan Losses: The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. The loans purchased from Legacy United were recorded at fair value at the time of the Merger, with no carryover of the allowance for loan losses, and included adjustments for market interest rates and expected credit losses. Increases in probable loss of the Legacy United loans plus all new loans are included in the calculation of the required allowance for loan losses at June 30, 2014.

Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The adequacy of the loan loss allowance is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics, the level of non-performing loans and charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.

 

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Management recorded a provision of $2.1 million for the three months ended June 30, 2014 compared to $403,000 for the same period of 2013. The primary factors that influenced management’s decision to record these provision expenses were due to the ongoing assessment of estimated exposure on impaired loans, and organic growth during the period. Impaired loans totaled $24.5 million at June 30, 2014 compared to $22.1 million at December 31, 2013, an increase of $2.4 million, or 10.9%, primarily due to increases in troubled debt restructured (“TDR”) loans of $3.9 million. Loans on nonaccrual status increased $2.4 million largely reflecting a $4.3 million increase in commercial business loans. At June 30, 2014, the allowance for loan losses totaled $21.3 million, which represented 0.58% of total loans and 111.67% of non-performing loans compared to an allowance for loan losses of $19.2 million, which represented 1.12% of total loans and 140.50% of non-performing loans as of December 31, 2013. The repayment of these impaired loans is largely dependent upon the sale and value of collateral that may be impacted by current real estate conditions.

Non-interest Income:

Total non-interest income was $6.3 million and $9.5 million for the three and six months ended June 30, 2014 with non-interest income representing 16.0% and 15.0% of total net revenues, respectively. The following is a summary of non-interest income by major category for the three and six months ended June 30, 2014 and 2013:

Non-Interest Income

 

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

(Dollars in thousands)

   2014     2013      $Change     % Change     2014     2013      $Change     % Change  

Service charges and fees

   $ 3,892      $ 2,005       $ 1,887        94.1   $ 6,018      $ 3,554       $ 2,464        69.3

Net gains from sales of securities

     589        329         260        79.0        857        556         301        54.1   

Net gains from sales of loans

     1,284        1,001         283        28.3        1,740        3,061         (1,321     (43.2

BOLI income

     750        524         226        43.1        1,272        1,034         238        23.0   

Other (loss) income

     (196     249         (445     (178.7     (359     787         (1,146     (145.6
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

Total non-interest income

   $ 6,319      $ 4,108       $ 2,211        53.8      $ 9,528      $ 8,992       $ 536        6.0   
  

 

 

   

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

As displayed in the above table, non-interest income increased $2.2 million and $536,000 for the three and six months ended June 30, 2014. Most of the increase is directly attributable to the merger with Legacy United.

Service Charges and Fees: Service charges and fees were $3.9 million and $6.0 million for the three and six months ended June 30, 2014, respectively, an increase of $1.9 million and $2.5 million from the comparable 2013 periods. $1.4 million of the increase for both the three and six months ended June 30, 2014 is attributable to the Merger. The remaining $500,000 and $1.1 million increase for the three and six months ended June 30, 2014, respectively, was due primarily (a) to increases in loan servicing income resulting from increases in loan sales to the secondary market over the past year with servicing retained, (b) increases in fee income produced by the Company’s investment subsidiary, United Northeast Financial Advisors, Inc. and (c) fees derived from the Company’s loan level hedge program that is offered to certain commercial banking customers to facilitate their respective risk management strategies.

Net Gains From Sales of Securities: For the three months ended June 30, 2014, the Company recorded $589,000 in net gains on security sales compared to $329,000 in the same period in the prior year. Immediately upon the consummation of the Merger, the Company took certain steps to align the securities portfolios of Rockville and Legacy United which resulted in the Company recording approximately $542,000 of the current quarter gain on the sale of Rockville securities. The remaining increase of $47,000 for the three months ended June 30, 2014 as well as the $329,000 recorded in the prior year quarter was due to the Company’s evaluation of the portfolio for prepayment risk and reducing this exposure by executing sales.

For the six months ended June 30, 2014, the Company recorded $857,000 in net gains on security sales compared to $556,000 in the same prior year period. The increases reported for the six months ended June 30, 2014 and 2013 were due primarily to the same reasons discussed in the quarterly comparison.

Net Gains From Sales of Loans: Net gains from the sale of loans was $1.3 million and $1.7 million for the three and six months ended June 30, 2014, respectively, an increase of $283,000 for the three months and a decrease of $1.3 million for the six months ended June 30, 2014 from the comparable periods of 2013. The increase in volume was also due to additional mortgage loan officers and the strategy to foster relationships with local realtors to target purchase mortgage production and decrease reliance on the refinance

 

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business. The Company sold residential mortgage loans totaling $23.2 million in the second quarter of 2014 compared to $66.1 million in the second quarter of 2013. Mortgage loans sold for the six months ended June 30, 2014 and 2013 were $41.8 million and $129.0 million, respectively. Activity in the secondary market has not returned to 2013 levels due to higher interest rates reducing refinance activity as well as low levels of available inventory of properties for sale in the markets we serve.

BOLI Income: For the three and six months ended June 30, 2014, the Company recorded BOLI income of $750,000 and $1.3 million, respectively, an increase of $226,000 and $238,000 from the comparable periods in 2013. These increases were predominantly attributable to the Merger as the Company recorded $258,000 of income from policies associated with Legacy United. Additionally, the increase was slightly enhanced due to the additional purchase of $4.0 million of BOLI by Rockville in May 2013. The increases were partially offset by a decline in the average yield earned on the BOLI policies as a result of current market interest rates.

Other (loss) income: The Company recorded other losses of $196,000 and $359,000 for the three months and six months ended June 30, 2014, respectively, as compared to other income of $249,000 and $787,000 for the three and six months ended June 30, 2013, respectively. The decrease in other income for both the three and six months is due to (a) the change in the fair value recognized in net income for mortgage servicing rights which resulted in a $435,000 loss for the quarter and $573,000 year to date and losses on loan level swaps. These losses were offset partially by gains on the sale of other real estate owned.

Non-interest Expense:

Non-interest expense increased $30.3 million to $46.2 million for the three months ended June 30, 2013 and $33.9 million to $64.4 million for the six months ended June 30, 2014 primarily due to merger related expenses. Merger related expenses primarily included legal, accounting, consulting assistance, change in control payments, investment banker fees and vesting of equity awards. We expect that merger expenses resulting from the merger with Legacy United will continue during 2014 as we integrate the Legacy United systems into United Bank. The following table summarizes non-interest expense for the three and six months ended June 30, 2014 and 2013:

Non-Interest Expense

 

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

(Dollars in thousands)

   2014      2013      $Change     % Change     2014      2013      $Change     % Change  

Salaries and employee benefits

   $ 14,541       $ 9,112       $ 5,429        59.6   $ 24,783       $ 17,786       $ 6,997        39.3

Service bureau fees

     1,768         921         847        92.0        2,859         1,736         1,123        64.7   

Occupancy and equipment

     2,610         2,210         400        18.1        4,308         3,646         662        18.2   

Professional fees

     856         617         239        38.7        1,284         1,340         (56     (4.2

Marketing and promotions

     280         98         182        185.7        509         168         341        203.0   

FDIC insurance assessments

     632         330         302        91.5        950         624         326        52.2   

Other real estate owned

     125         214         (89     (41.6     433         460         (27     (5.9

Core deposit intangible amortization

     321         —           321        —          321         —           321        —     

Merger related expense

     20,945         —           20,945        —          22,774         —           22,774        —     

Other

     4,099         2,356         1,743        74.0        6,213         4,768         1,445        30.3   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Total non-interest expense

   $ 46,177       $ 15,858       $ 30,319        191.2      $ 64,434       $ 30,528       $ 33,906        111.1   
  

 

 

    

 

 

    

 

 

     

 

 

    

 

 

    

 

 

   

Salaries and Employee Benefits: Salaries and employee benefits was $14.5 million for the three months ended June 30, 2014, an increase of $5.4 million from the comparable 2013 period. Salaries and employee benefits was $24.8 million for the six months ended June 30, 2014, an increase of $7.0 million from the comparable 2013 period.

Salaries and employee benefits represented the largest increase in non-interest expense after merger expenses. Salary expense was the primary reason for this increase as 421 employees from Legacy United were added to the payroll upon completion of the Merger. Other factors driving the increase included (a) new hires that were part of the restructured management team and the addition of new revenue producing commission-based mortgage loan officers, (b) increased commissions and incentives on mortgage originations and product sales, (c) increased health care costs related to the Company’s self-insurance plan, and (d) to a lesser extent, to general salary increases. These increases were partially offset by decreases in pension costs due to the changes in the discount rate used in the calculation of the pension liability and 401(k) expenses.

 

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Service Bureau Fees: Service bureau fees increased $847,000 for the three months ended June 30, 2014 and $1.1 million for the six months ended June 30, 2014 compared to the 2013 periods. The increase is primarily attributable to the Merger as the Company has not converted operating systems and is operating under two platforms until system conversion date which is scheduled for the fourth quarter 2014. Approximately $700,000 of the three and six month increases were directly related to operating two platforms. Non Merger expense increases were related to increases in ATM servicing fees, Wide Area Network fees and other service bureau fees.

Occupancy and Equipment: Occupancy and equipment expense was $2.6 million and $2.2 million for the three months ended June 30, 2014 and 2013, respectively, an increase of $400,000. For the six months ended June 30, 2014 occupancy and equipment increased $662,000 to $4.3 million from the same period in the prior period.

Occupancy and equipment expense increased as we added 35 branches to our branch network with the Merger.

Increased expenses due to the Merger approximated $1.0 million for the three and six months ended June 30, 2014, respectively. In the prior year’s second quarter, the Company decided to close a retail branch facility as of November 30, 2013 and recognized approximately $809,000 of expense representing the write down of unamortized leasehold improvements and a negotiated payment for the lease buyout.

Professional Fees: For the three and six months ended June 30, 2014, the Company recorded professional fees of $856,000 and $1.3 million, respectively, an increase of $239,000 and a decrease of $56,000 from the comparable 2013 periods. The second quarter was impacted by the Merger as the Company incurred additional legal and external auditor expenses. The year to date results were also impacted by the Merger, but had the benefit of reduced consulting fees period over period as certain projects the Company had undertaken were completed or scaled back.

Marketing and Promotions: Marketing and promotion expense was $280,000 and $98,000 for the three months ended June 30, 2014 and 2013, respectively, an increase of $182,000. For the six months ended June 30, 2014 marketing and promotions increased $341,000 to $509,000 from the same period in the prior year. The increases for both the three and six months ended June 30, 2014 is attributable to the Company curtailing marketing and promotions in the prior year periods compared to the current year periods.

Core Deposit Intangible: The $321,000 increase in core deposit intangible amortization for both the three and six months ended June 30, 2014 is directly attributable to the Merger. The Company is amortizing the core deposit intangible over 10 years using the sum-of-the-years-digits method.

Other Expenses: For the three and six months ended June 30, 2014, other expenses recorded by the Company were $4.1 million and $6.2 million, respectively, an increase of $1.7 million and $1.4 million from the comparable 2013 periods. Both the three and six month periods ended June 30, 2014 were impacted by the Merger which is the main driver for the increase in the periods.

Income Tax Provision: The provision for income taxes was $512,000 and $1.2 million for the three months ended June 30, 2014 and 2013, respectively. The Company’s estimated annualized effective tax rate for the three months ended June 30, 2014 was (10.1%) as compared to 27.5% for the same period in 2013. The provision for income taxes was $975,000 and $3.0 million for the six months ended June 30, 2014 and 2013, respectively. The Company’s estimated annualized effective tax rate for this period was (26.8%) as compared to 27.8% for the same period in 2013. The decrease in the estimated annualized effective tax rate for both the three and six months ended June 30, 2014 as compared to prior years was primarily due to a pretax loss for the quarter and year to date as a result of expenses associated with the merger of the Company and Legacy United in 2014 partially offset by unfavorable permanent differences related to non-deductible acquisition costs and compensation associated with the merger. The projected tax rate for 2014 is expected to be approximately 10%.

Financial Condition, Liquidity and Capital Resources

Summary:

The Company had total assets of $5.16 billion at June 30, 2014 and $2.30 billion at December 31, 2013, an increase of $2.86 billion, or 124.3%, primarily due to the acquired assets in the Merger of $2.44 billion. Excluding the impact of the Merger, total assets increased $460.1 million as of June 30, 2014 compared to December 31, 2013. The Company utilized deposit growth and additional advances from the Federal Home Loan Bank of Boston and other borrowings to fund the growth in securities and loans.

Net loans of $3.67 billion at June 30, 2014 increased $1.97 billion or 115.9% when compared to net loans of $1.70 billion at December 31, 2013, primarily due to the acquired loans in the Merger of $1.87 billion.

 

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Total deposits of $3.98 billion at June 30, 2014 increased $2.24 billion or 128.7% when compared to total deposits of $1.74 billion at December 31, 2013, primarily due to the acquired deposits in the Merger of $1.94 billion. Non-interest-bearing deposits increased $383.3 million, or 143.8%, primarily due to the acquired non-interest bearing deposits in the Merger of $333.2 million. Interest-bearing deposits increased $1.86 billion, or 126.6%, primarily due to the acquired interest bearing deposits in the Merger of $1.61 billion. The Bank’s net loan-to-deposit ratio was 92.4% at June 30, 2014, compared to 97.8% at December 31, 2013.

At June 30, 2014, total equity of $652.6 million increased $353.2 million when compared to total equity of $299.4 million at December 31, 2013. The primary change in equity for the period-ended June 30, 2014 was the issuance of 26.7 million shares related to the Merger which resulted in $358.1 million of additional shareholders’ equity. At June 30, 2014, the tangible common equity ratio was 9.9% compared to 12.8% at December 31, 2013.

See Note 12, “Regulatory Matters” in Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report for information on the Bank and the Company’s regulatory capital levels and ratios.

Securities:

The Company maintains a securities portfolio that is primarily structured to generate interest income, manage interest-rate sensitivity and provide a source of liquidity for operating needs. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies.

The following table sets forth information regarding the amortized cost and fair value of the Company’s investment portfolio at the dates indicated:

 

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Securities

 

     June 30, 2014      December 31, 2013  
(In thousands)    Amortized      Fair      Amortized      Fair  
     Cost      Value      Cost      Value  

Available for sale:

           

Debt securities:

           

U.S. Government and government-sponsored enterprise obligations

   $ 6,959       $ 6,512       $ 6,801       $ 6,031   

Government-sponsored residential mortgage-backed securities

     369,265         371,949         96,708         95,662   

Government-sponsored residential collateralized debt obligations

     172,954         172,394         69,568         67,751   

Government-sponsored commercial mortgage-backed securities

     13,706         13,323         13,841         12,898   

Government-sponsored commercial collateralized debt obligations

     5,041         4,954         5,043         4,706   

Asset-backed securities

     190,597         190,968         107,699         106,536   

Corporate debt securities

     39,157         38,166         43,586         42,486   

Obligations of states and political subdivisions

     133,766         132,954         67,142         62,505   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     931,445         931,220         410,388         398,575   
  

 

 

    

 

 

    

 

 

    

 

 

 

Marketable equity securities, by sector:

           

Banks

     17,103         17,499         3,068         3,047   

Industrial

     109         199         109         211   

Mutual funds

     2,808         2,884         2,793         2,844   

Oil and gas

     131         231         131         226   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total marketable equity securities

     20,151         20,813         6,101         6,328   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total available for sale securities

   $ 951,596       $ 952,033       $ 416,489       $ 404,903   
  

 

 

    

 

 

    

 

 

    

 

 

 

Held to maturity:

           

Debt securities:

           

Obligations of states and political subdivisions

   $ 12,416       $ 13,134       $ 10,087       $ 10,153   

Government-sponsored residential mortgage-backed securities

     3,345         3,737         3,743         4,107   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 15,761       $ 16,871       $ 13,830       $ 14,260   
  

 

 

    

 

 

    

 

 

    

 

 

 

The available for sale securities portfolio increased by $547.1 million to $952.0 million, while the held to maturity portfolio increased by $2.0 million to $15.8 million at June 30, 2014. In connection with the Merger, we acquired securities of $378.7 million that was classified as available for sale.

Upon the acquisition of the Legacy United investment portfolio, Management took action to re-characterize the acquired portfolio to a position that was closely aligned with the composition of the Rockville portfolio, which had been strategically structured under a barbell approach. The re-characterization of the portfolio involved the sale of longer dated investments, inclusive of $213.5 million in mortgage backed securities and the purchase of investments that are closely aligned with the Company’s barbell strategy of incrementally shortening the duration of the investment portfolio by purchasing investments that show favorable price movement to changes in rising interest rates. Under the re-characterization, the barbell strategy focused on shorter duration assets consisting of $58.5 million in floating rate Volcker compliant Collateralized Loan Obligations and $83.5 million in shorter duration cash flowing US Government Agency Collateralized Mortgage Obligations, as well as $30.7 million of longer duration Municipal Bonds. Incremental portfolio growth for the quarter focused on the purchase of cash flowing securities inclusive of $119.5 million of fixed rate Government Sponsored Mortgage Backed Securities structured along the yield curve. The Company limits purchases in the municipal bonds, collateralized loan obligations and non-guaranteed corporate bonds sectors to investment grade or better rating prior to purchase. Furthermore, the Company limits its exposure to position parameters and will review the impact on the portfolio from periodic issuer disclosures as well as developing market trends.

 

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During the three and six months ended June 30, 2014, the Company recorded no write-downs for other-than-temporary impairments of its available for sale securities. The Company held $293.3 million in securities that are in an unrealized loss position at June 30, 2014. Approximately $284.5 million of this total had been in an unrealized loss position for less than twelve months with the remaining $8.8 million in an unrealized loss position for twelve months or longer. These securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the intent to sell these securities, and it is more-likely-than-not that it will not have to sell the securities before the recovery of their cost basis. To the extent that changes in interest rates, credit movements and other factors that influence the fair value of securities continue, the Company may be required to record additional impairment charges for other-than-temporary impairment in future periods. For additional information on the securities portfolio, see Note 5, “Securities” in the Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report.

The Company has the ability to use the investment portfolio, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 6, “Derivatives and Hedging Activities,” in the Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.

Lending Activities:

The Company makes commercial real estate loans, residential real estate loans secured by one-to-four family residences, residential and commercial construction loans, commercial business loans, multi-family loans, home equity loans and lines of credit and other consumer loans. The table below displays the balances of the Company’s loan portfolio as of June 30, 2014 and December 31, 2013.

Loan Portfolio Analysis

 

     June 30, 2014     December 31, 2013  

(Dollars in thousands)

   Amount     Percent     Amount     Percent  

Real estate loans:

        

Residential

   $ 1,328,982        36.0   $ 634,447        42.6

Commercial

     1,635,629        44.3        776,913        43.4   

Construction

     112,778        3.1        52,243        3.1   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total real estate loans

     3,077,389        83.4        1,463,603        89.1   

Commercial business loans

     597,931        16.2        247,932        10.7   

Installment and collateral loans

     17,795        0.4        2,257        0.2   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

     3,693,115        100.0     1,713,792        100.0
    

 

 

     

 

 

 

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     
  

 

 

     

 

 

   

As shown above, gross loans were $3.69 billion, up $1.98 billion, or 115.5%, at June 31, 2014 from year-end 2013. The amount of outstanding gross loans increased $1.87 billion, which includes $8.5 million of purchased credit impaired loans, as a direct result of the Merger on April 30, 2014. Excluding the Merger, the Company primarily experienced increases in residential real estate, construction and commercial business loans.

Commercial real estate loans represent the largest segment of our loan portfolio at 44.3% of total loans and increased $858.7 million to $1.64 billion from December 31, 2013. The Bank has experienced increased demand in commercial real estate loans given the current rate environment. Mid-sized businesses continue to look to community banks for relationship banking and personalized lending services.

Residential real estate loans continue to represent a major segment of the Company’s loan portfolio as of June 30, 2014, comprising 36.0% of total loans. The increase of $694.5 million from December 31, 2013 primarily reflects acquired balances. The Company had organic originations of both adjustable and fixed rate mortgages of $140.6 million during the first half of the year, with approximately $80.2 million originated for portfolio.

 

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The Company opportunistically sells a majority of originated fixed rate residential real estate loans with terms of 15 to 30 years. The strong mortgage origination activity was driven by our number of loan officers, the quality of referrals they receive from centers of influence in the real estate market and the responsiveness we have to prospective mortgage customers.

Construction real estate loans totaled $112.8 million at June 30, 2014, an increase of $60.5 million from December 31, 2013. Construction real estate loans consist of residential construction and commercial construction. Residential real estate construction loans are made to individuals for home construction whereby the borrower owns the parcel of land and the funds are advanced in stages until completion. Residential real estate construction loans totaled $6.8 million at June 30, 2014 compared to $6.2 million at December 31, 2013.

Commercial real estate construction loans are made for developing commercial real estate properties such as office complexes, apartment buildings and residential subdivisions. Total commercial real estate construction loans totaled $106.0 million at June 30, 2014, $61.9 million of which is residential use and $44.1 million commercial use, compared to total commercial real estate construction loans of $46.0 million at December 31, 2013, $22.3 million of which is residential use and $23.7 million is commercial use.

Commercial business loans increased to $597.9 million and included production from the Shared National Credit program. A newly formed business line within Commercial Banking “Corporate Loan Strategies” engages in the participation and purchase of credits with other “supervised” unaffiliated banks or financial institutions specifically loan syndications and participations. These loans generate earning assets to increase profitability of the Bank and diversify commercial loan portfolios by providing opportunities to participate in loans to borrowers in other regions or industries the Bank might otherwise have no access.

The Bank has employed specific parameters taking into account: geographical considerations; exposure hold levels; qualifying financial partners; and most importantly sound credit quality with strong metrics. A thorough independent analysis of the credit quality of each borrower is made for every transaction whether it is an assignment or participation.

The Company occasionally originates loans with interest reserves on certain commercial construction credits depending on various factors including, but not limited to, quality of credit, interest rate and project type. At June 30, 2014, there were no loans with an interest reserve funded by the Bank.

It is the Company’s policy to recognize income for this interest component as long as the project is progressing as agreed and if there has been no material deterioration in the financial standing of the borrower or the underlying project. If there is monetary or non-monetary loan default, the Company will cease any interest accrual. At June 30, 2014 there were no situations where additional interest reserves were advanced to keep a loan from becoming non-performing.

Asset Quality

United’s lending strategy focuses on direct relationship lending within its primary market area as the quality of assets underwritten is an important factor in the successful operation of a financial institution. Non-performing assets, loan delinquency and credit loss levels are considered to be key measures of asset quality. Management strives to maintain asset quality through its underwriting standards, servicing of loans and management of non-performing assets since asset quality is a key factor in the determination of the level of the allowance for loan losses (“ALL”). See Note 7, “Loans Receivable and Allowance for Loan Losses” contained elsewhere in this report for further information concerning the Allowance for Loan Losses.

 

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The following table details asset quality ratios for the following periods:

Asset Quality Ratios

 

     At June 30,
2014
    At December 31,
2013
 

Non-performing loans as a percentage of total loans

     0.52     0.80

Non-performing assets as a percentage of total assets

     0.43     0.59

Net charge-offs as a percentage of average loans (1)

     0.03     0.08

Allowance for loan losses as a percentage of total loans

     0.58     1.12

Allowance for loan losses to non-performing loans

     111.67     140.50

 

(1)  Calculated based on year to date net charge-offs annualized

Non-performing Assets

Generally loans are placed on non-accrual if collection of principal or interest in full is in doubt, if the loan has been restructured, or if any payment of principal or interest is past due 90 days or more. A loan may be returned to accrual status if it has demonstrated sustained contractual performance for six continuous months or if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period. There are, on occasion, circumstances that cause commercial loans to be placed in the 90 days delinquent and accruing category, for example, loans that are considered to be well secured and in the process of collection or renewal. As of June 30, 2014 and December 31, 2013, no orginated loans greater than 90 days past due were accruing. At June 30, 2014, purchased loans from Legacy United totaling $11.1 million were past due 90 days or more and still accruing.

The following table details non-performing assets for the periods presented:

Non-performing Assets

 

     At June 30, 2014     At December 31, 2013  

(Dollars in thousands)

   Amount      %     Amount      %  

Non-accrual loans:

          

Real estate loans:

          

Residential

   $ 8,366         37.47   $ 8,481         55.86

Commercial

     168         0.75        656         4.32   

Construction

     665         2.98        1,518         10.00   

Commercial business loans

     5,516         24.71        1,259         8.29   

Installment and collateral loans

     18         0.08        3         0.02   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-accrual loans, excluding troubled debt restructured loans

     14,733         65.99        11,917         78.49   

Troubled debt restructurings - non-accruing

     4,380         19.62        1,737         11.45   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-performing loans

     19,113         85.61        13,654         89.94   

Other real estate owned

     3,213         14.39        1,529         10.06   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total non-performing assets

   $ 22,326         100.00   $ 15,183         100.00
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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As displayed in the table above, non-performing assets at June 30, 2014 increased to $22.3 million compared to $15.2 million at December 31, 2013. The increase was due to increases in non-accrual loans including troubled debt restructured loans and other real estate owned. The increase in non-accrual loans primarily reflects one commercial business loan relationship totaling $4.3 million and a troubled debt restructured loan for $2.6 million, which experienced a payment default during the second quarter 2014 resulting in a change from accrual to nonaccrual status. The increase in other real estate owned was due to owned properties acquired from Legacy United totaling $2.4 million, partially offset by sales.

Residential real estate non-accrual loans decreased $115,000 primarily due to ongoing collection efforts. Current economic conditions, including factors such as continued high unemployment rates and softness in the real estate market, are impacting customers’ ability to make loan payments. There are 99 loans in the residential real estate non-performing category, including troubled debt restructured loans totaling $1.6 million, representing 0.1% of the total residential real estate portfolio. The Company continues to originate loans with superior credit characteristics and routinely updates non-performing loans in terms of FICO scores and LTV ratios. Through continued heightened account monitoring, collections and workout efforts, the Bank is committed to mortgage solution programs designed to assist homeowners to remain in their homes. As has been its practice historically, the Company does not originate subprime loans.

Commercial real estate non-accrual loans decreased $488,000, reflecting transfers of two loans into other real estate owned and a loan payoff, which were partially offset by the addition of two loans on non-accrual status. Non-accrual construction loans decreased $853,000 due to principal reductions as well as the transfer of one loan into other real estate owned.

Troubled Debt Restructuring

Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company by increasing the ultimate probability of collection.

Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the restructuring generally remain on non-accrual status for a minimum of six months before management considers such loans for return to accruing TDR status. Accruing restructured loans are placed into non-accrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Once a loan is classified as a TDR it retains that classification for the life of the loan; however, some TDRs may demonstrate acceptable performance allowing the TDR loan to be placed on accruing TDR status. The increase in TDRs is primarily attributable to the addition of three larger construction relationships and a residential real estate loan, which comprised the majority of the $3.9 million increase in the first six months of 2014, partially offset by paydowns and payoffs totaling $1.6 million.

The following tables provide detail of TDR balances and activity for the periods presented:

Troubled Debt Restructuring Balances

 

     At June 30,      At December 31,  

(In thousands)

   2014      2013  

Recorded investment in TDRs:

     

Accrual status

   $ 9,784       $ 8,478   

Non-accrual status

     4,380         1,737   
  

 

 

    

 

 

 

Total recorded investment

   $ 14,164       $ 10,215   
  

 

 

    

 

 

 

Accruing TDRs performing under modified terms for more than one year

   $ 1,182       $ 1,302   

TDR allocated reserves included in the balance of allowance for loan losses

   $ 750       $ —     

Additional funds committed to borrowers in TDR status

   $ —         $ —     

Troubled Debt Restructuring Activity

 

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

(In thousands)

   2014     2013     2014     2013  

TDRs, beginning of period

   $ 14,219      $ 6,816      $ 10,216      $ 3,760   

New TDR status

     1,287        886        5,547        3,994   

Paydowns/draws on existing TDRs, net

     (1,342     (638     (1,599     (688

Charge-offs post modification

     —          (150     —          (152
  

 

 

   

 

 

   

 

 

   

 

 

 

TDRs, end of period

   $ 14,164      $ 6,914      $ 14,164      $ 6,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

Allowance for Loan Losses

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,

 

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in management’s judgment, warrant current recognition in the loss estimation process. The Company’s Risk Management Committee meets quarterly to review and conclude on the adequacy of the reserves and to present their recommendation to executive management and the Board of Directors.

Management considers the adequacy of the ALL a critical accounting estimate. The adequacy of the ALL 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. While management believes the ALL is adequate as of June 30, 2014, actual results may prove different and the differences could be significant.

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 recognized 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.

The Company had a loan loss allowance of $21.3 million, or 0.58%, of total loans at June 30, 2014 as compared to a loan loss allowance of $19.2 million, or 1.12%, of total loans at December 31, 2013. 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.

The unallocated portion of the ALL represents general valuation allowances that are not allocated to a specific loan portfolio. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated portion of the ALL at June 30, 2014 increased $124,000 to $371,000 compared to December 31, 2013. See Note 7, “Loans Receivable and Allowance for Loan Losses” in the Notes to the Unaudited Consolidated Financial Statements contained elsewhere in this report for a table providing the activity in the Company’s allowance for loan losses for the three and six months ended June 30, 2014 and 2013.

In addition to the ALL, the Company maintains a reserve for unfunded credit commitments in other liabilities on the Consolidated Statements of Condition. The allowance for credit losses analysis includes consideration of the risks associated with unfunded loan commitments. The reserve calculation includes factors that are consistent with ALL methodology for funded loans. The combination of ALL and unfunded reserves is calculated in a manner to capture the entirety of the underlying business relationship of the customer. The amounts of unfunded commitments and the associated reserves may be subject to fluctuations due to originations, the timing and volume of loan funding, as well as changes in risk ratings. At June 30, 2014, the reserve for unfunded credit commitments was $684,000 compared to a reserve for unfunded credit commitments of $553,000 at June 30, 2013.

Sources of Funds

The primary source of the Company’s cash flows, for use in lending and meeting its general operational needs, is deposits. Additional sources of funds are from Federal Home Loan Bank of Boston advances, reverse repurchase agreements, federal funds lines, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, and earnings. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.

Deposits

The Company offers a wide variety of deposit products to consumer, business and municipal customers. Deposit customers can access their accounts in a variety of ways including branch banking, ATM’s, internet banking, mobile banking and telephone banking. Effective advertising, direct mail, well-designed product offerings, customer service and competitive pricing policies have been successful in attracting and retaining deposits. A key strategic objective is to grow the base of checking customers by retaining existing relationships while attracting new customers.

Deposits provide an important source of funding for the Bank as well as an ongoing stream of fee revenue. The Company attempts to control the flow of funds in its deposit accounts according to its need for funds and the cost of alternative sources of funding. A Retail Pricing Committee meets weekly and a Management ALCO Committee meets monthly, to determine pricing and marketing initiatives. Actions of these committees influence the flow of funds primarily by the pricing of deposits, which is affected to a large extent by competitive factors in its market area and asset/liability management strategies.

 

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The following table presents deposits by category as of the dates indicated:

Deposits

 

(In thousands)

   June 30, 2014      December 31, 2013  

Demand deposits

   $ 649,929       $ 244,996   

NOW accounts

     314,211         175,363   

Regular savings and club accounts

     559,175         219,635   

Money market and investment savings

     946,037         524,638   
  

 

 

    

 

 

 

Total core deposits

     2,469,352         1,164,632   

Time deposits

     1,508,811         570,573   
  

 

 

    

 

 

 

Total deposits

   $ 3,978,163       $ 1,735,205   
  

 

 

    

 

 

 

Deposits totaled $3.98 billion at June 30, 2014, up $2.24 billion from the balance at December 31, 2013. Core deposits increased $1.31 billion, or 112.3%, from year end as the Company’s strategy has been to increase core deposits and reduce rates paid on interest-bearing deposits, particularly on time deposits, in order to improve the net interest margin and the interest rate spread while continuing to build core relationships. This strategy included promoting commercial deposit and cash management deposit products, competitive rate shorter term deposits and money market accounts in response to the competition within our marketplace.

Time deposits included brokered certificate of deposits of $236.4 million and $87.0 million at June 30, 2014 and December 31, 2013, respectively. The Company utilizes out-of-market brokered time deposits as part of its overall funding program along with other sources. Excluding out-of-market brokered certificates of deposits, in market time deposits totaled $1.27 billion at June 30, 2014. United Bank is a member of the Certificate Deposit Account Registry Service network.

Borrowings

The Company also uses various types of short-term and long-term borrowings in meeting funding needs. While customer deposits remain the primary source for funding loan originations, management uses short-term and long-term borrowings as a supplementary funding source for loan growth and other liquidity needs when the cost of these funds are favorable compared to alternative funding, including deposits.

United Bank is a member of the Federal Home Loan Bank System, which consists of twelve district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. Members are required to own capital stock in the FHLBB in order for the Bank to access advances and borrowings which are collateralized by certain home mortgages or securities of the U.S. Government and its agencies. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the Federal Home Loan Bank of Boston.

Total Federal Home Loan Bank of Boston advances increased $188.9 million to $380.9 million at June 30, 2014 compared to $192.0 million at December 31, 2013. This increase is a result of greater utilization of FHLBB advances at lower interest rates, combined with the growth in our core deposits, which assisted the Company in funding growth in our securities and loans portfolios, and in meeting other liquidity needs while effectively managing interest rate risk. At June 30, 2014, all of the Company’s outstanding FHLBB advances were at fixed rates ranging from 0.20% to 7.15%. The average cost of FHLBB advances was 1.22% for the quarter ended June 30, 2014. FHLBB borrowings represented 7.4% and 8.3% of assets at June 30, 2014 and December 31, 2013, respectively.

In addition, borrowings under reverse purchase agreements totaled $94.2 million as of June 30, 2014. The outstanding borrowings consisted of six individual agreements with remaining terms of thirty seven months or less and a weighted-average cost of 0.95%.

Subordinated debentures totaling $7.7 million at June 30, 2014 were acquired through the Merger.

 

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Liquidity and Capital Resources

Liquidity is the ability to meet cash needs at all times with available cash or by conversion of other assets to cash at a reasonable price and in a timely manner. The Company maintains liquid assets at levels the Company considers adequate to meet its liquidity needs. The Company adjusts its liquidity levels to fund loan commitments, repay its borrowings, fund deposit outflows, pay escrow obligations on all items in the loan portfolio and to fund operations. The Company also adjusts liquidity as appropriate to meet asset and liability management objectives.

The Company’s primary sources of liquidity are deposits, amortization and prepayment of loans, the sale in the secondary market of loans held for sale, maturities and sales of investment securities and other short-term investments, periodic pay downs of mortgage-backed securities, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. The Company sets the interest rates on our deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.

A portion of the Company’s liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At June 30, 2014, $89.4 million of the Company’s assets were invested in cash and cash equivalents compared to $45.2 million at December 31, 2013. The Company’s primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from the Federal Home Loan Bank of Boston.

Liquidity management is both a daily and longer-term function of business management. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston, which provide an additional source of funds. At June 30, 2014, the Company had $380.9 million in advances from the Federal Home Loan Bank of Boston and an additional available borrowing limit of $154.4 million based on collateral requirements of the Federal Home Loan Bank of Boston inclusive of the line of credit. In addition, the Bank has relationships with brokered sweep deposit providers with outstanding balances of $97.5 million at June 30, 2014. Internal policies limit wholesale borrowings to 30% of total assets, or $1.55 billion, at June 30, 2014. In addition, the Company has uncommitted federal funds line of credit with four counterparties totaling $95.9 million at June 30, 2014. No federal funds purchased were outstanding at June 30, 2014. At June 30, 2014, the Company had outstanding commitments to originate loans of $200.0 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $704.3 million. At June 30, 2014, time deposits scheduled to mature in less than one year totaled $807.3 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company, although there can be no assurance that this will be the case. In the event a significant portion of its deposits are not retained by the Company, it will have to utilize other funding sources, such as Federal Home Loan Bank of Boston advances in order to maintain its level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

The main source of liquidity at the parent company level is dividends from United Bank. The main uses of liquidity are payments of dividends to common stockholders, repurchase of United Financial’s common stock, and corporate operating expenses. There are certain restrictions on the payment of dividends. See Note 17, “Regulatory Matters” in the Company’s 2013 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 for further information on dividend restrictions.

The Company and the Bank are subject to various regulatory capital requirements. As of June 30, 2014, the Company and the Bank are categorized as “well-capitalized” under the regulatory framework for prompt corrective action. See Note 11, “Regulatory Matters” in the Notes to the Unaudited Consolidated Financial Statements contained elsewhere in this report for discussion of capital requirements.

The liquidity position of the Company is continuously monitored and adjustments are made to balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented would have a material adverse effect on the Company. The Company has a detailed liquidity contingency plan which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

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

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, we have implemented the following strategies to manage our interest rate risk: (i) emphasizing adjustable rate loans including, adjustable rate one-to-four family, commercial and consumer loans, (ii) selling longer-term 1-4 family fixed rate mortgage loans in the secondary market, (iii) reducing and shortening the expected average life of the investment portfolio and (iv) a forward starting hedge strategy for future dated wholesale funding and (v) a loan level hedging program. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.

Quantitative Analysis

Income Simulation: Simulation analysis is used to estimate our interest rate risk exposure at a particular point in time. Beginning June 30, 2013, the Company transitioned from a dynamic method that incorporated forecasted balance sheet growth assumptions to a static method in which a stable balance sheet (both size and mix) is projected throughout the modeling horizon. This adoption was made in a continued effort to align with regulatory best practices and to highlight the current level of risk in the Company’s positions without the effects of growth assumptions. We utilize the income simulation method to analyze our interest rate sensitivity position to manage the risk associated with interest rate movements. At least quarterly, our Risk Committee of the Board of Directors reviews the potential effect changes in interest rates could have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities at June 30, 2014 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions as well as deposit characterization assumptions can have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed assets we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn effect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected life of our assets would tend to lengthen more than the expected average life of our liabilities and therefore would most likely result in a decrease to our asset sensitive position.

 

     Percentage Decrease in Estimated  
     Net Interest Income  
     Over 12 Months     Over 12 -24 Months  

300 basis point increase in rates

     2.47     1.40

50 basis point decrease in rates

     3.05        4.97   

United Bank’s Asset/Liability policy currently limits projected changes in net interest income based on a matrix of projected total risk-based capital relative to the interest rate change for each twelve month period measured compared to the flat rate scenario. As a result, the higher a level of projected risk-based capital, the higher the limit of projected net interest income volatility the Company will accept. As the level of projected risk-based capital is reduced, the policy requires that net interest income volatility also is reduced, making the limit dynamic relative to the capital level needed to support it. These policy limits are re-evaluated on a periodic basis (not less than annually) and may be modified, as appropriate. Because of the liability-sensitivity of our balance sheet, coupled with little opportunity to decrease deposit rates further due to their current low nominal level, income is projected to decrease if interest rates rise. Also included in the decreasing rate scenario is the assumption that further declines are reflective of a deeper recession as well as narrower credit spreads from Federal Open Market Committee actions. At June 30, 2014, income at risk over the next twelve months (i.e., the change in net interest income) decreased 2.47% and decreased 3.05% based on a 300 basis

 

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point average increase or a 50 basis point average decrease, respectively. While we believe the assumptions used are reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures: Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Our management has evaluated, with the participation and under the supervision of our chief executive officer (“CEO”) and chief financial officer (“CFO”), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of such date, the Company’s disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Controls: During the quarter under report, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II – OTHER INFORMATION

 

Item 1. Legal Proceedings

The Company is not involved in any legal proceedings deemed to be material as of June 30, 2014 which have arisen in the normal course of business.

 

Item 1A. Risk Factors

There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company’s annual report on Form 10-K for the period ended December 31, 2013.

 

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

The following table provides information with respect to net purchases made by United Financial Bancorp’s, Inc. of its common stock during the period ended June 30, 2014.

 

Period

   Total number
of shares
purchased
     Average(1)
price paid
per share
     Total number
of shares
purchased as
part of publicly
announced
plan
     Maximum number
of shares that may
yet be purchased
under the plan
 

April 1 - 30, 2014

     —         $ —           1,156,891         1,573,135   

May 1 - 31, 2014

     89,195         12.68         1,246,086         1,483,940   

June 1 - 30, 2014

     —           —           1,246,086         1,483,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     89,195       $ 12.68         1,246,086         1,483,940   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)  Includes dealer commission expense to purchase the securities

The Company has no intention to terminate this plan or cease any potential future purchases. As of June 30, 2014, there were 1,483,940 maximum shares that may yet be purchased under this publicly announced plan.

 

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Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

 

  2.1 Amended and Restated Plan of Conversion and Reorganization (incorporated herein by reference to Exhibit 2.1 to the Registration Statement filed on the Form S-1 for Rockville Financial New, Inc. on September 16, 2010)

 

  2.2 Agreement and Plan of Merger by and between Rockville Financial, Inc. and United Financial Bancorp, Inc. (incorporated herein by reference to Exhibit 99.1 to the Current Report on the Company’s Form 8-K filed on November 15, 2013)

 

  3.1 Certificate of Incorporation of United Financial Bancorp, Inc. (incorporated herein by reference to Exhibit 3.1 of the Company’s Current Report on Form 8-K filed on May 01, 2014)

 

  3.2 The Bylaws, as amended and restated, (incorporated herein by reference to Exhibit 3.2 to the Current Report on the Company’s Form 8-K filed on May 01, 2014)

 

  4.1 Form of Common Stock Certificate of the Company (incorporated by reference to the Exhibit 4.1 of the Company’s Current Report on Form 8-K filed on May 01, 2014)

 

  10.5 Supplemental Savings and Retirement Plan of Rockville Bank as amended and restated effective December 31, 2007 (incorporated herein by reference to Exhibit 10.5 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007)

 

  10.6 Rockville Bank Officer Incentive Compensation Plan (incorporated herein by reference to Exhibit 10.2.3 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 filed on March 31, 2006 (File No. 000-52139))

 

  10.7 Rockville Bank Supplemental Executive Retirement Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.8 to the Registration Statement filed on Form S-1 filed for Rockville Financial New, Inc. on September 16, 2010)

 

  10.7.1 First Amendment to the Supplemental Executive Retirement Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.7.1 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007)

 

  10.8 Executive Split Dollar Life Insurance Agreement for Joseph F. Jeamel, Jr. (incorporated herein by reference to Exhibit 10.11 to the Registration Statement filed on Form S-1 filed for Rockville Financial, Inc. filed on December 17, 2004 (File No. 333-121421))

 

  10.9 Rockville Bank Supplemental Executive Retirement Plan as amended and restated effective December 31, 2007 (incorporated herein by reference to Exhibit 10.9 to the Current Report on Form 8-K filed for Rockville Financial, Inc. filed on December 18, 2007)

 

  10.10 Rockville Financial, Inc. 2006 Stock Incentive Award Plan (incorporated herein by reference to Appendix B in the Definitive Proxy Statement on Form 14A for Rockville Financial, Inc. filed on July 3, 2006 (File No. 000-51239))

 

  10.11.2 Supplemental Executive Retirement Agreement of Rockville Bank for William H.W. Crawford, IV effective December 26, 2012 (incorporated by reference to Exhibit 10.11.2 to the Current Report on the Company’s Form 8-K filed on January 2, 2013)

 

  10.11.4 Employment Agreement with William H.W. Crawford, IV dated November 13, 2013 (incorporated by reference herein to Exhibit 10.11.4 to the Company’s Current Report on Form 8-K filed on November 20, 2013)

 

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  10.12 Supplemental Executive Retirement Agreement of Rockville Bank for Mark A. Kucia effective December 6, 2010 (incorporated by reference to Exhibit 10.13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 filed on March 10, 2011)

 

  10.12.1 Employment Agreement as amended and restated by and among Rockville Financial, Inc., Rockville Bank and Mark A. Kucia, effective January 9, 2012 (replaces former Exhibit 10.12.1) (incorporated herein by reference to Exhibit 10.12.1 to the Current Report on the Company’s Form 8-K filed on January 13, 2012)

 

  10.13 Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and Marino J. Santarelli effective January 9, 2012 (replaces former Exhibits 10.2 and 10.2.2) (incorporated herein by reference to Exhibit 10.2 to the Current Report on the Company’s Form 8-K filed on January 13, 2012)

 

  10.14 Rockville Financial, Inc. 2012 Stock Incentive Award Plan (incorporated herein by reference to Appendix A in the Definitive Proxy Statement on Form 14A for Rockville Financial, Inc. filed on April 4, 2012 (File No. 0001193125-12-149948))

 

  10.16 Rockville Financial, Inc. and its subsidiary Rockville Bank entered into an Advisory Agreement with Richard B. Collins dated November 14, 2013 (incorporated by reference to Exhibit 10.16 to the Company’s Form 8-K filed on November 20, 2013)

 

  10.17 Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and Eric R. Newell effective January 1, 2013 (incorporated by reference to Exhibit 10.17 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 14, 2014)

 

  10.18 Employment Agreement by and among Rockville Financial, Inc., Rockville Bank and David Paulson effective February 19, 2014 (incorporated by reference to Exhibit 10.18 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2013 filed on March 14, 2014)

 

  14. Rockville Financial, Inc., Rockville Bank, Standards of Conduct Policy - Employees (incorporated herein by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2007 filed on March 17, 2008)

 

  31.1 Rule 13a-14(a)/15d-14(a) Certification of the Chief Executive Officer filed herewith

 

  31.2 Rule 13a-14(a)/15d-14(a) Certification of the Chief Financial Officer filed herewith

 

  32. Section 1350 Certification of the Chief Executive Officer and Chief Financial Officer attached hereto

 

  101. Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to Unaudited Consolidated Financial Statements filed herewith

 

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SIGNATURES

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

 

United Financial Bancorp, Inc.
By:  

/s/ Eric R. Newell

  Eric R. Newell
  EVP, Chief Financial Officer and Treasurer
Date: August 8, 2014

 

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