United Financial Bancorp, Inc. - FORM 10-Q

United Financial Bancorp, Inc. - FORM 10-Q - August 8, 2014

Attached files

Attached files

file	filename
EX-31.1 - EX-31.1 - United Financial Bancorp, Inc.	d735144dex311.htm
EX-32 - EX-32 - United Financial Bancorp, Inc.	d735144dex32.htm
EX-31.2 - EX-31.2 - United Financial Bancorp, Inc.	d735144dex312.htm
EXCEL - IDEA: XBRL DOCUMENT - United Financial Bancorp, Inc.	Financial_Report.xls

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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):

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


		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

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.

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.

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.

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’
(In thousands , except share data) (Unaudited)	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.

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.

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.

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

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:

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

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.

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

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

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

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.

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

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.

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.

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.

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.

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.


			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		—

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.

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.

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.

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.

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.


	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.

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

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 securities. The 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.

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.

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.

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

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.

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

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

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.

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

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

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.

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

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.

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

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

Three Months Ended June 30,

2014

2013

Adjusted

Extended

Interest

Extended

Rate and

(In thousands)

Maturity

Rates

&nb

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company