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EX-31.2 - EXHIBIT 31.2 - United Financial Bancorp, Inc.ubnk2015093015ex312.htm
EX-32.0 - EXHIBIT 32.0 - United Financial Bancorp, Inc.ubnk2015093015ex320.htm
EX-31.1 - EXHIBIT 31.1 - United Financial Bancorp, Inc.ubnk2015093015ex311.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
ý
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2015.
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.    ý  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  ý    No  ¨
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12B-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated filer
ý
 
 
 
 
Non-accelerated filer
¨  (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).    Yes  ¨    No  ý
As of October 30, 2015, there were 49,540,490 shares of Registrant’s no par value common stock outstanding.

 


Table of Contents
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
Consolidated Statements of Net Income for the three and nine months ended September 30, 2015 and 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 
Exhibits
 




Part 1 - FINANCIAL INFORMATION
Item 1 - Interim Financial Statements
United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Condition
(In thousands, except share data) (Unaudited)
September 30,
2015
 
December 31,
2014
ASSETS
 
 
 
Cash and due from banks
$
38,534

 
$
43,416

Short-term investments
59,776

 
43,536

Total cash and cash equivalents
98,310

 
86,952

Available-for-sale securities - at fair value
1,080,393

 
1,053,011

Held-to-maturity securities - at amortized cost
14,715

 
15,368

Loans held for sale
13,511

 
8,220

Loans receivable (net of allowance for loan losses of $30,832
at September 30, 2015 and $24,809 at December 31, 2014)
4,185,032

 
3,877,063

Federal Home Loan Bank of Boston stock
40,814

 
31,950

Accrued interest receivable
15,477

 
14,212

Deferred tax asset, net
31,554

 
33,833

Premises and equipment, net
55,919

 
57,665

Goodwill
115,281

 
115,240

Core deposit intangible
7,939

 
9,302

Cash surrender value of bank-owned life insurance
125,186

 
122,622

Other real estate owned
258

 
2,239

Other assets
58,633

 
49,132

Total assets
$
5,843,022

 
$
5,476,809

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
622,535

 
$
602,359

Interest-bearing
3,640,436

 
3,432,952

Total deposits
4,262,971

 
4,035,311

Mortgagors’ and investors’ escrow accounts
8,108

 
13,004

Advances from the Federal Home Loan Bank
746,549

 
580,973

Other borrowings
147,316

 
196,341

Accrued expenses and other liabilities
56,626

 
48,772

Total liabilities
5,221,570

 
4,874,401

 

 

Stockholders’ equity:
 
 
 
Preferred stock (no par value; 2,000,000 authorized; no shares issued)

 

Common stock (no par value; authorized 120,000,000 and 60,000,000 shares; 49,517,538 and 49,537,700 shares issued and outstanding, at September 30, 2015 and December 31, 2014, respectively)
513,831

 
514,189

Additional paid-in capital
14,000

 
16,007

Unearned compensation - ESOP
(5,979
)
 
(6,150
)
Retained earnings
107,788

 
84,852

Accumulated other comprehensive loss, net of tax
(8,188
)
 
(6,490
)
Total stockholders’ equity
621,452

 
602,408

Total liabilities and stockholders’ equity
$
5,843,022

 
$
5,476,809


See accompanying notes to unaudited consolidated financial statements.
3
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Net Income
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
(In thousands, except share data) (Unaudited)
2015
 
2014
 
2015
 
2014
Interest and dividend income:
 
 
 
 
 
 
 
Loans
$
41,878

 
$
40,119

 
$
123,658

 
$
92,329

Securities - taxable interest
4,907

 
5,180

 
14,947

 
11,064

Securities - non-taxable interest
2,080

 
1,495

 
6,353

 
3,319

Securities - dividends
708

 
381

 
1,554

 
893

Interest-bearing deposits
52

 
26

 
119

 
65

Total interest and dividend income
49,625

 
47,201

 
146,631

 
107,670

Interest expense:
 
 
 
 
 
 
 
Deposits
5,319

 
3,990

 
15,643

 
9,294

Borrowed funds
2,663

 
1,018

 
7,099

 
2,396

Total interest expense
7,982

 
5,008

 
22,742

 
11,690

Net interest income
41,643

 
42,193

 
123,889

 
95,980

Provision for loan losses
3,252

 
2,633

 
9,225

 
5,163

Net interest income after provision for loan losses
38,391

 
39,560

 
114,664

 
90,817

Non-interest income:
 
 
 
 
 
 
 
Service charges and fees
5,960

 
3,657

 
15,434

 
9,179

Gain (loss) on sales of securities, net
(59
)
 
430

 
639

 
1,287

Income from mortgage banking activities
2,257

 
978

 
7,618

 
2,769

Bank-owned life insurance income
893

 
873

 
2,557

 
2,145

Net loss on limited partnership investments
(991
)
 
(2,176
)
 
(2,337
)
 
(2,176
)
Other income (loss)
(242
)
 
314

 
113

 
400

Total non-interest income
7,818

 
4,076

 
24,024

 
13,604

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
16,994

 
17,791

 
50,161

 
42,574

Service bureau fees
1,828

 
3,016

 
5,114

 
5,875

Occupancy and equipment
3,343

 
3,278

 
11,600

 
7,586

Professional fees
1,581

 
1,081

 
3,280

 
2,365

Marketing and promotions
587

 
367

 
1,843

 
876

FDIC insurance assessments
750

 
785

 
2,651

 
1,735

Other real estate owned
25

 
136

 
202

 
569

Core deposit intangible amortization
433

 
481

 
1,363

 
802

Merger related expense

 
4,008

 

 
26,782

Other
6,335

 
3,979

 
16,676

 
10,192

Total non-interest expense
31,876

 
34,922

 
92,890

 
99,356

Income before income taxes
14,333

 
8,714

 
45,798

 
5,065

Provision (benefit) for income taxes
952

 
(1,271
)
 
6,060

 
(296
)
Net income
$
13,381

 
$
9,985

 
$
39,738

 
$
5,361

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.27

 
$
0.19

 
$
0.81

 
$
0.13

Diluted
$
0.27

 
$
0.19

 
$
0.81

 
$
0.13

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
48,931,203

 
52,162,635

 
48,829,193

 
40,301,620

Diluted
49,429,809

 
52,750,658

 
49,339,271

 
40,636,247


See accompanying notes to unaudited consolidated financial statements.
4
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
(In thousands) (Unaudited)
2015
 
2014
 
2015
 
2014
Net income
$
13,381

 
$
9,985

 
$
39,738

 
$
5,361

Other comprehensive income (loss):
 
 
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
7,771

 
(3,858
)
 
2,719

 
9,022

Reclassification adjustment for (gains) losses realized in operations (1)
59

 
(430
)
 
(639
)
 
(1,287
)
Net unrealized gains (losses)
7,830

 
(4,288
)
 
2,080

 
7,735

Tax effect - benefit (expense)
(2,820
)
 
1,544

 
(756
)
 
(2,670
)
Net-of-tax amount - securities available for sale
5,010

 
(2,744
)
 
1,324

 
5,065

Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses)
(4,898
)
 
36

 
(5,533
)
 
(4,851
)
Reclassification adjustment for expense realized in operations (2)

 

 
12

 

Net unrealized gains (losses)
(4,898
)
 
36

 
(5,521
)
 
(4,851
)
Tax effect - benefit (expense)
1,764

 
(13
)
 
1,989

 
1,672

Net-of-tax amount - interest rate swaps
(3,134
)
 
23

 
(3,532
)
 
(3,179
)
Defined benefit pension plans:
 
 
 
 
 
 
 
Reclassification adjustment for losses (gains) recognized in net periodic benefit cost (3)
185

 

 
554

 

Tax effect - benefit (expense)
(71
)
 

 
(64
)
 

Net-of-tax amount - pension plans
114

 

 
490

 

Post-retirement plans:
 
 
 
 
 
 
 
Reclassification adjustment for prior service costs recognized in net periodic benefit cost (4)
2

 
8

 
5

 
16

Reclassification adjustment for losses (gains) recognized in net periodic benefit cost (4)
6

 

 
16

 
(7
)
Losses arising during the period

 
(3
)
 

 
(1
)
Change in losses and prior service costs
8

 
5

 
21

 
8

Tax effect - benefit (expense)
(3
)
 
(1
)
 
(1
)
 
(2
)
Net-of-tax amount - post-retirement plans
5

 
4

 
20

 
6

Net-of-tax amount - pension and post-retirement plans
119

 
4

 
510

 
6

Total other comprehensive income (loss)
1,995

 
(2,717
)
 
(1,698
)
 
1,892

Comprehensive income
$
15,376

 
$
7,268

 
$
38,040

 
$
7,253

 
(1)
Amounts are included in gain (loss) on sales of securities, net in the unaudited Consolidated Statements of Net Income. Income tax (expense) benefit associated with the reclassification adjustment was $21 and $(162) for the three months ended September 30, 2015 and 2014, respectively, and $(230) and $(463) for the nine months ended September 30, 2015 and 2014, respectively.
(2)
Amounts are included in borrowed funds expense in the unaudited Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for the nine months ended September 30, 2015 was $4.
(3)
Amounts are included in salaries and employee benefits in the unaudited Consolidated Statements of Net Income. Income tax expense associated with the reclassification adjustment for the three and nine months ended September 30, 2015 was $67 and $200, respectively.
(4)
Amounts are included in salaries and employee benefits expense in the unaudited Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for prior period service costs for the three months ended September 30, 2015 and 2014 was $1 and $1, respectively, and $2 and $2, for the nine months ended September 30, 2015 and 2014, respectively. Income tax benefit (expense) associated with the reclassification adjustment of the losses (gains) recognized in net periodic benefit cost for the three and nine months ended September 30, 2015 and 2014, was $2 and $0, respectively and $6, and $(2), respectively.

See accompanying notes to unaudited consolidated financial statements.
5
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(In thousands, except share data)
(Unaudited)
Common Stock
 
Additional
Paid-in
Capital
 
Unearned
Compensation
 - ESOP
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury Stock
 
Total
Stockholders’
Equity
Shares
 
Amount
 
 
 
 
 
Shares
 
Amount
 
Balance at December 31, 2014
49,537,700

 
$
514,189

 
$
16,007

 
$
(6,150
)
 
$
84,852

 
$
(6,490
)
 

 
$

 
$
602,408

Comprehensive income

 

 

 

 
39,738

 
(1,698
)
 

 

 
38,040

Common stock repurchased
(377,700
)
 
(5,171
)
 

 

 

 

 

 

 
(5,171
)
Share-based compensation expense

 

 
689

 

 

 

 

 

 
689

ESOP shares released or committed to be released

 

 
51

 
171

 

 

 

 

 
222

Shares issued for stock options exercised and SARs
349,387

 
4,657

 
(2,047
)
 

 

 

 

 

 
2,610

Shares issued for restricted stock grants
27,330

 
340

 
(340
)
 

 

 

 

 

 

Cancellation of shares for tax withholding
(18,044
)
 
(184
)
 
(67
)
 

 

 

 

 

 
(251
)
Tax benefit from stock-based awards

 

 
(293
)
 

 

 

 

 

 
(293
)
Dividends paid ($0.34 per common share)

 

 

 

 
(16,802
)
 

 

 

 
(16,802
)
Forfeited unvested restricted stock
(1,135
)
 

 

 

 

 

 

 

 

Balance at September 30, 2015
49,517,538

 
$
513,831

 
$
14,000

 
$
(5,979
)
 
$
107,788

 
$
(8,188
)
 

 
$

 
$
621,452

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 income

 

 

 

 
5,361

 
1,892

 

 

 
7,253

Issuance of common stock for acquisition of United Financial Bancorp, Inc.
26,706,401

 
356,365

 

 

 

 

 

 

 
356,365

Cancellation of treasury shares
(3,476,270
)
 
(44,226
)
 

 

 

 

 
(3,476,270
)
 
44,226

 

Common stock repurchased
(304,895
)
 
(3,853
)
 

 

 

 

 

 

 
(3,853
)
Share-based compensation expense

 

 
3,608

 

 

 

 

 

 
3,608

ESOP shares released or committed to be released

 

 
530

 
751

 

 

 

 

 
1,281

Shares issued for stock options exercised
213,585

 
3,009

 
(1,923
)
 

 

 

 
(11,616
)
 
137

 
1,223

Shares issued for restricted stock grants
133,943

 
1,752

 
(1,752
)
 

 

 

 

 

 

Cancellation of shares for tax withholding
(97,370
)
 
(322
)
 
(992
)
 

 

 

 

 

 
(1,314
)
Tax benefit from stock-based awards

 

 
549

 

 

 

 

 

 
549

Dividends paid ($0.30 per common share)

 

 

 

 
(13,128
)
 

 

 

 
(13,128
)
Balance at September 30, 2014
52,631,684

 
$
556,501

 
$
15,828

 
$
(6,400
)
 
$
88,311

 
$
(2,874
)
 

 
$

 
$
651,366


See accompanying notes to unaudited consolidated financial statements.
6
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
For the Nine Months 
 Ended September 30,
(In thousands) (Unaudited)
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
39,738

 
$
5,361

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Amortization of premiums and discounts on investments, net
3,934

 
1,762

Accretion of intangible assets and purchase accounting marks
(9,034
)
 
(7,968
)
Amortization of subordinated debt issuance costs
95

 
3

Share-based compensation expense
689

 
3,608

ESOP expense
222

 
1,281

Loss on extinguishment of debt

 
288

Tax benefit from stock-based awards
293

 
(549
)
Provision for loan losses
9,225

 
5,163

Gain on sales of securities, net
(639
)
 
(1,287
)
Loans originated for sale
(290,795
)
 
(103,368
)
Principal balance of loans sold
285,504

 
99,841

(Increase) decrease in mortgage servicing asset
(1,266
)
 
39

Gain on sales of other real estate owned
(166
)
 
(209
)
Net change in mortgage banking fair value adjustments
(836
)
 
(486
)
Loss on disposal of equipment
193

 

Write-downs of other real estate owned
118

 
134

Depreciation and amortization
3,997

 
2,537

Loss on limited partnerships
2,337

 
2,176

Deferred income tax expense
3,447

 
5,631

Increase in cash surrender value of bank-owned life insurance
(2,557
)
 
(2,145
)
Net change in:
 
 
 
Deferred loan fees and premiums
(2,240
)
 
(932
)
Accrued interest receivable
(1,265
)
 
(2,737
)
Other assets
(16,834
)
 
(18,376
)
Accrued expenses and other liabilities
11,002

 
(442
)
Net cash provided by (used in) operating activities
35,162

 
(10,675
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of available-for-sale securities
195,335

 
308,603

Proceeds from calls and maturities of available-for-sale securities
16,655

 
15,043

Principal payments on available-for-sale securities
67,277

 
44,475

Principal payments on held-to-maturity securities
630

 
601

Purchases of available-for-sale securities
(308,253
)
 
(622,303
)
Purchases of held-to-maturity securities

 
(2,342
)
Cash acquired from United Financial Bancorp, Inc.

 
25,410

Redemption of FHLBB stock

 
2,297

Purchase of FHLBB stock
(8,864
)
 

Proceeds from sale of other real estate owned
2,232

 
3,359

Purchases of loans
(11,348
)
 
(8,298
)
Loan originations, net of principal repayments
(297,971
)
 
(203,691
)
Purchases of premises and equipment
(3,186
)
 
(10,036
)
Proceeds from sale of equipment
192

 


(Continued)
See accompanying notes to unaudited consolidated financial statements.
7
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Concluded
 
For the Nine Months 
 Ended September 30,
(In thousands) (Unaudited)
2015
 
2014
Net cash used in investing activities
(347,301
)
 
(446,882
)
Cash flows from financing activities:
 
 
 
Net increase in non-interest-bearing deposits
20,176

 
60,050

Net increase in interest-bearing deposits
210,249

 
292,715

Net decrease in mortgagors’ and investors’ escrow accounts
(4,896
)
 
(1,751
)
Net increase in short-term FHLBB advances
57,200

 
73,790

Repayments of long-term FHLBB advances
(6,977
)
 
(15,239
)
Proceeds from long-term FHLBB advances
116,800

 

Net change in other borrowings
(49,148
)
 
30,506

Proceeds from issuance of subordinated debt, net of issuance costs

 
73,759

Proceeds from exercise of stock options and SARs
2,610

 
1,223

Common stock repurchased
(5,171
)
 
(3,853
)
Cancellation of shares for tax withholding
(251
)
 
(1,314
)
Tax benefit from share-based awards
(293
)
 
549

Cash dividend paid on common stock
(16,802
)
 
(13,128
)
Net cash provided by financing activities
323,497

 
497,307

Net increase in cash and cash equivalents
11,358

 
39,750

Cash and cash equivalents, beginning of period
86,952

 
45,235

Cash and cash equivalents, end of period
$
98,310

 
$
84,985

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid (refunded) during the year for:
 
 
 
Interest
$
25,757

 
$
14,773

Income taxes, net
(6,719
)
 
3,599

Transfer of loans to other real estate owned
318

 
2,018

Decrease in due to broker, investment purchases
(1,105
)
 
(5,893
)
(Decrease) increase in due to broker, common stock buyback
(523
)
 
995


See accompanying notes to unaudited consolidated financial statements.
8
 


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 consolidated financial statements for periods prior to April 30, 2014 do not reflect the operations of Legacy United.
The Company, headquartered in Glastonbury, Connecticut, through United Bank and various subsidiaries, delivers financial services to individuals, families and businesses primarily throughout Connecticut and Massachusetts through 52 banking offices, its commercial loan production offices, its mortgage loan production offices, 63 ATMs, telephone banking, mobile banking and online banking (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., UCB Securities, Inc. II and UB Properties, LLC.
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, 2015 or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s 2014 audited consolidated financial statements and notes thereto included in United Financial Bancorp, Inc.’s Annual Report on Form 10-K as of and for the year ended December 31, 2014.
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. Notwithstanding the foregoing, prior to June 30, 2014, the Consolidated Statement of Condition refers to repurchased shares as “treasury stock.”
Reclassifications
Certain reclassifications have been made in prior periods’ consolidated financial statements to conform to the 2015 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.
Recent Accounting Pronouncements
Interest-Imputation of Interest.
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2015-03, (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, as part of its simplification initiative. The ASU changes the presentation of debt issuance costs in financial statements. Under the ASU, an entity presents such costs in


9
 


the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. For public business entities, the guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Entities would apply the new guidance retrospectively to all prior periods (i.e., the balance sheet for each period is adjusted). This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Business Combinations
In September 2015, the FASB issued ASU No. 2015-16 Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments which aims to simplify accounting for adjustments made to provisional amounts recognized in a business combination. The requirement to retrospectively apply measurement-period adjustments to provisional amounts was eliminated. The new guidance requires that the acquiring company recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. In addition, an entity is required to present separately, on the face of the income statement or disclose in the notes, the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU with earlier application permitted for financial statements that have not yet been made available for issuance. This ASU is not expected to have an impact on the Company’s historical Consolidated Financial Statements.
Intangibles-Goodwill and Other-Internal-Use Software
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill and Other-Internal Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. The ASU provides criteria for customers in a cloud computing arrangement to determine whether the arrangement includes a license of software. When a cloud computing arrangement includes a license of software, the customer will capitalize the fee attributable to the software license portion of the arrangement when the criteria for capitalization of internal-use software are met. When a cloud computing arrangement does not include a license of software, the customer will account for the arrangement as a service contract and expense the cost as the services are received. The ASU supersedes the guidance that required companies to analogize to lease accounting when determining the asset acquired in a software licensing arrangement. Entities may elect to adopt the ASU either prospectively for all arrangements entered into or materially modified after the effective date, or retrospectively. For public business entities, the standard is effective for annual and interim periods in fiscal years beginning after December 15, 2015. For all other entities, the standard is effective for annual periods beginning after December 15, 2015, and interim periods in fiscal years beginning after December 15, 2016. Early adoption is permitted for all entities. Entities that elect prospective transition should disclose the nature of, and reason for, the change in accounting policy, the transition method, and a qualitative description of the financial statement line items affected by the change. Entities that elect retrospective transition should also disclose quantitative information about the effects of the accounting change. This information should include the cumulative effect of the change on retained earnings or other components of equity or net assets in the statement of financial position as of the beginning of the earliest period presented. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.


10
 


Note 3.
Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities at September 30, 2015 and December 31, 2014 are as follows:
(In thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
September 30, 2015
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Government and government-sponsored enterprise obligations
$
10,156

 
$
41

 
$
(127
)
 
$
10,070

Government-sponsored residential mortgage-backed securities
109,138

 
1,111

 
(127
)
 
110,122

Government-sponsored residential collateralized debt obligations
297,566

 
3,874

 
(148
)
 
301,292

Government-sponsored commercial mortgage-backed securities
53,825

 
1,538

 
(12
)
 
55,351

Government-sponsored commercial collateralized debt obligations
130,740

 
2,000

 
(16
)
 
132,724

Asset-backed securities
164,764

 
572

 
(1,331
)
 
164,005

Corporate debt securities
66,947

 
44

 
(2,097
)
 
64,894

Obligations of states and political subdivisions
201,447

 
326

 
(2,508
)
 
199,265

Total debt securities
1,034,583

 
9,506

 
(6,366
)
 
1,037,723

Marketable equity securities, by sector:
 
 
 
 
 
 
 
Banks
39,612

 
414

 
(573
)
 
39,453

Industrial
109

 
24

 

 
133

Mutual funds
2,847

 
87

 
(3
)
 
2,931

Oil and gas
131

 
22

 

 
153

Total marketable equity securities
42,699

 
547

 
(576
)
 
42,670

Total available-for-sale securities
$
1,077,282

 
$
10,053

 
$
(6,942
)
 
$
1,080,393

Held to maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,369

 
$
823

 
$

 
$
13,192

Government-sponsored residential mortgage-backed securities
2,346

 
258

 

 
2,604

Total held-to-maturity securities
$
14,715

 
$
1,081

 
$

 
$
15,796




11
 


(In thousands)
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
December 31, 2014
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
U.S. Government and government-sponsored enterprise obligations
$
6,965

 
$
94

 
$
(237
)
 
$
6,822

Government-sponsored residential mortgage-backed securities
165,199

 
2,379

 
(159
)
 
167,419

Government-sponsored residential collateralized debt obligations
237,128

 
1,365

 
(360
)
 
238,133

Government-sponsored commercial mortgage-backed securities
67,470

 
1,081

 
(253
)
 
68,298

Government-sponsored commercial collateralized debt obligations
129,547

 
737

 
(598
)
 
129,686

Asset-backed securities
181,198

 
272

 
(2,715
)
 
178,755

Corporate debt securities
43,907

 
35

 
(1,697
)
 
42,245

Obligations of states and political subdivisions
194,857

 
1,572

 
(657
)
 
195,772

Total debt securities
1,026,271

 
7,535

 
(6,676
)
 
1,027,130

Marketable equity securities, by sector:
 
 
 
 
 
 
 
Banks
22,645

 
277

 
(340
)
 
22,582

Industrial
109

 
76

 

 
185

Mutual funds
2,824

 
89

 
(3
)
 
2,910

Oil and gas
131

 
73

 

 
204

Total marketable equity securities
25,709

 
515

 
(343
)
 
25,881

Total available-for-sale securities
$
1,051,980

 
$
8,050

 
$
(7,019
)
 
$
1,053,011

Held to maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,397

 
$
1,006

 
$

 
$
13,403

Government-sponsored residential mortgage-backed securities
2,971

 
339

 

 
3,310

Total held-to-maturity securities
$
15,368

 
$
1,345

 
$

 
$
16,713


At September 30, 2015, the net unrealized gain on securities available for sale of $3.1 million, net of an income tax expense of $1.1 million, or $2.0 million, was included in accumulated other comprehensive loss in the unaudited Consolidated Statement of Condition. The amortized cost and fair value of debt securities at September 30, 2015 by contractual maturities are presented below. Actual maturities may differ from contractual maturities because some securities may be called or repaid without any penalties. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.


12
 


 
Available for Sale
 
Held to Maturity
(In thousands)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Maturity:
 
 
 
 
 
 
 
Within 1 year
$
350

 
$
350

 
$

 
$

After 1 year through 5 years
11,526

 
11,360

 
1,196

 
1,222

After 5 years through 10 years
62,814

 
62,183

 

 

After 10 years
203,860

 
200,336

 
11,173

 
11,970

 
278,550

 
274,229

 
12,369

 
13,192

Government-sponsored residential mortgage-backed securities
109,138

 
110,122

 
2,346

 
2,604

Government-sponsored residential collateralized debt obligations
297,566

 
301,292

 

 

Government-sponsored commercial mortgage-backed securities
53,825

 
55,351

 

 

Government-sponsored commercial collateralized debt obligations
130,740

 
132,724

 

 

Asset-backed securities
164,764

 
164,005

 

 

Total debt securities
$
1,034,583

 
$
1,037,723

 
$
14,715

 
$
15,796

At September 30, 2015, the Company had 91 securities with a fair value of $364.7 million pledged as derivative collateral, collateral for reverse repurchase borrowings and collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowing capacity. At December 31, 2014, the Company had 219 securities with a fair value of $336.3 million pledged as derivative collateral, collateral for reverse repurchase borrowings, and collateral for FHLBB borrowing capacity.
For the three months ended September 30, 2015 and 2014, gross gains of $185,000 and $629,000, respectively, were realized on the sales of available-for-sale securities. There were gross losses of $244,000 and $199,000 realized on the sale of available-for-sale securities for the three months ended September 30, 2015 and 2014. For the nine months ended September 30, 2015 and 2014, gross gains of $2.4 million and $1.9 million, respectively, were realized on the sales of available-for-sale securities. There were gross losses of $1.8 million and $645,000 realized on the sale of available-for-sale securities for the nine months ended September 30, 2015 and 2014, respectively.
As of September 30, 2015, the Company did not have any exposure to private-label mortgage-backed securities. The Company also did not own any single security with an aggregate book value in excess of 10% of the Company’s stockholders’ equity.
As of September 30, 2015, the fair value of the obligations of states and political subdivisions portfolio was $212.5 million, with no significant geographic/issuer exposure concentrations. Of the total revenue and general obligations of $212.5 million, $101.1 million were representative of general obligation bonds for which $78.2 million are general obligations of political subdivisions of the respective state, rather than general obligations of the state itself. 


13
 


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 September 30, 2015 and December 31, 2014:
 
Less Than 12 Months
 
12 Months or More
 
Total
(In thousands)
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government-sponsored enterprise obligations
$

 
$

 
$
4,866

 
$
(127
)
 
$
4,866

 
$
(127
)
Government-sponsored residential mortgage-backed securities
29,768

 
(103
)
 
7,437

 
(24
)
 
37,205

 
(127
)
Government-sponsored residential collateralized debt obligations
27,326

 
(136
)
 
3,700

 
(12
)
 
31,026

 
(148
)
Government-sponsored commercial mortgage-backed securities

 

 
2,994

 
(12
)
 
2,994

 
(12
)
Government-sponsored commercial collateralized debt obligations
3,564

 
(16
)
 

 

 
3,564

 
(16
)
Asset-backed securities
57,609

 
(499
)
 
34,197

 
(832
)
 
91,806

 
(1,331
)
Corporate debt securities
45,670

 
(447
)
 
9,522

 
(1,650
)
 
55,192

 
(2,097
)
Obligations of states and political subdivisions
127,048

 
(2,023
)
 
19,241

 
(485
)
 
146,289

 
(2,508
)
Total debt securities
290,985

 
(3,224
)
 
81,957

 
(3,142
)
 
372,942

 
(6,366
)
Marketable equity securities
24,294

 
(376
)
 
5,408

 
(200
)
 
29,702

 
(576
)
Total available-for-sale securities
$
315,279

 
$
(3,600
)
 
$
87,365

 
$
(3,342
)
 
$
402,644

 
$
(6,942
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government-sponsored enterprise obligations
$

 
$

 
$
4,757

 
$
(237
)
 
$
4,757

 
$
(237
)
Government-sponsored residential mortgage-backed securities
1,492

 
(11
)
 
19,785

 
(148
)
 
21,277

 
(159
)
Government-sponsored residential collateralized debt obligations
35,769

 
(124
)
 
17,443

 
(236
)
 
53,212

 
(360
)
Government-sponsored commercial mortgage-backed securities
14,118

 
(15
)
 
16,337

 
(238
)
 
30,455

 
(253
)
Government-sponsored commercial collateralized debt obligations
62,477

 
(551
)
 
4,991

 
(47
)
 
67,468

 
(598
)
Asset-backed securities
128,808

 
(2,080
)
 
20,146

 
(635
)
 
148,954

 
(2,715
)
Corporate debt securities
30,634

 
(501
)
 
5,054

 
(1,196
)
 
35,688

 
(1,697
)
Obligations of states and political subdivisions
55,029

 
(419
)
 
18,568

 
(238
)
 
73,597

 
(657
)
Total debt securities
328,327

 
(3,701
)
 
107,081

 
(2,975
)
 
435,408

 
(6,676
)
Marketable equity securities
12,716

 
(340
)
 
140

 
(3
)
 
12,856

 
(343
)
Total available-for-sale securities
$
341,043

 
$
(4,041
)
 
$
107,221

 
$
(2,978
)
 
$
448,264

 
$
(7,019
)
Of the securities summarized above as of September 30, 2015, 119 issues had unrealized losses equaling 1.1% of the amortized cost basis for less than twelve months and 75 issues had an unrealized loss of 3.7% of the amortized cost basis for twelve months or more. There were no unrealized losses on debt securities held to maturity at September 30, 2015. As of December 31, 2014, 155 issues had unrealized losses equaling 1.2% of the cost basis for less than twelve months and 78 issues had unrealized losses equaling 2.7% of the amortized cost basis for twelve months or more.


14
 


Management believes that no individual unrealized loss as of September 30, 2015 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 information (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, market changes, or credit risk.
The following paragraphs outline the Company’s position related to unrealized losses in its investment securities portfolio at September 30, 2015.
U.S. Government and government-sponsored enterprises. The unrealized losses on the Company’s U.S. Government and government-sponsored securities were caused by spread widening to the government curve. 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 mortgage 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 the pickup of prepayment speeds given the overall drop in the government curve over the period, which encouraged further refinancing. The Company monitors this risk, and therefore, strives to minimize premiums within this security class. The Company does not expect these securities to settle at a price less than the par value of the securities.
Asset-backed securitiesThe unrealized losses on the Company’s asset-backed securities were largely driven by increases in the spreads of the respective sectors’ asset classes over comparable securities. The majority of these securities have resetting coupons that adjust on a quarterly basis and the market spreads on similar securities have increased. Based on the credit profiles and asset qualities of the individual securities, management does not believe that the securities have suffered 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. 
Corporate debt securities. The unrealized losses on corporate debt securities is primarily related to one pooled trust preferred security, Preferred Term Security XXVIII, Ltd (“PRETSL XXVIII”). The unrealized loss on this security is caused by the low interest rate environment, as the security reprices quarterly to the three month LIBOR and market spreads on similar newly issued securities have increased. No loss of principal is projected. Based on the existing credit profile, management does not believe that this security has suffered from any credit related losses. The unrealized loss on the remainder of the corporate credit portfolio has been driven primarily by overall wider credit spreads.
Obligations of states and political subdivisions. The unrealized loss on obligations of states and political subdivisions relates to several securities, with no geographic concentration. The unrealized loss was largely due to a shift in the credit spreads of the long end of the municipal bond spread curve that resulted in a negative impact to the respective bonds’ pricing, relative to the time of purchase.
Marketable equity securities. The unrealized loss on marketable equity securities largely pertains to widening credit spreads for trust preferred and preferred equity investments (similar to the corporate debt investments mentioned above) that resulted in a negative impact to the respective securities’ pricing, relative to the time of purchase.
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.


15
 


Note 4.
Loans Receivable and Allowance for Loan Losses
A summary of the Company’s loan portfolio is as follows:
(In thousands)
September 30,
2015
 
December 31,
2014
Real estate loans:
 
 
 
Residential
$
1,525,966

 
$
1,413,739

Commercial
1,878,231

 
1,678,936

Construction
180,622

 
185,843

Total real estate loans
3,584,819

 
3,278,518

Commercial business loans
619,563

 
613,596

Installment and collateral loans
5,236

 
5,752

Total loans
4,209,618

 
3,897,866

Net deferred loan costs and premiums
6,246

 
4,006

Allowance for loan losses
(30,832
)
 
(24,809
)
Loans - net
$
4,185,032

 
$
3,877,063

Acquired Loans
Gross loans acquired from the Legacy United merger on April 30, 2014 totaled $1.88 billion. Acquired performing loans totaled $1.86 billion with a fair value of $1.83 billion. Loans acquired and determined to be impaired totaled $18.5 million.
The impaired loans are accounted for in accordance with Accounting Standards Codification (“ASC”) Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”). At September 30, 2015, the net recorded carrying amount of loans accounted for under ASC 310-30 was $5.7 million and the aggregate outstanding principal balance was $9.3 million.
Information about the acquired loan portfolio subject to Purchased Credit Impaired (“PCI”) 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
$
18,540

Contractual cash flows not expected to be collected (nonaccretable)
(6,415
)
Expected cash flows at acquisition (1)
12,125

Interest component of expected cash flows (accretable)
(2,235
)
Fair value of acquired PCI loans
$
9,890

(1)
Prepayments were not factored into the expected cash flows
The following table summarizes the activity in the the accretable yield balance for PCI loans for the three and nine months ended September 30, 2015 and 2014:
(In thousands)
 
For the Three Months 
 Ended September 30,
 
For the Nine Months 
 Ended September 30,
 
 
2015
 
2014
 
2015
 
2014
Balance at beginning of period
 
$
(570
)
 
$
(1,908
)
 
$
(1,587
)
 
$

Acquisition
 

 

 

 
(2,235
)
Accretion
 
1

 
260

 
178

 
587

Reclassification to nonaccretable balance
 
42

 

 
882

 

Paid off
 
114

 

 
114

 

Balance at end of period
 
$
(413
)
 
$
(1,648
)
 
$
(413
)
 
$
(1,648
)
A reclassification of $882,000 from the accretable balance to the nonaccretable balance occurred during the nine months ended September 30, 2015 due to the impact on the accretable marks caused by reductions in expected cash flows for the ASC 310-30 loans.


16
 


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 is 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 September 30, 2015, the Company had a loan loss allowance of $30.8 million, or 0.73%, of total loans as compared to a loan loss allowance of $24.8 million, or 0.64%, of total loans at December 31, 2014. 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 loan segments. Management uses a rolling average of historical losses based on a three-year loss history 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. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate – The Bank establishes maximum loan-to-value and debt-to-income ratios and minimum credit scores as an integral component of the underwriting criteria. Loans in these segments are collateralized by owner-occupied residential real estate and repayment is dependent on the income and credit quality of the individual borrower. Within the qualitative allowance factors, national and local economic trends including unemployment rates and potential declines in property value, are key elements reviewed as a component of establishing the appropriate allocation. Overall economic conditions, unemployment rates and housing price trends will influence the underlying credit quality of these segments.
Commercial real estate – Loans in this segment are primarily income-producing properties throughout Connecticut, western Massachusetts, and other select markets in the Northeast. The underlying cash flows generated by the properties could be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually, continually monitors the cash flows of these loans and performs stress testing.


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Construction loans – Loans in this segment primarily include commercial real estate development and residential subdivision loans for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial business loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy and its effect on business profitability and cash flow could have an effect on the credit quality in this segment.
Installment and collateral loans – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
For acquired loans, our allowance for loan losses is estimated based upon our evaluation of the credit quality of the acquired loan portfolio or expected cash flows for the acquired PCI loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans, in excess of any existing purchase accounting discounts.
Allocated component
The allocated component relates to loans that are classified as impaired. 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, less estimated costs to sell, 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 installment and collateral 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.
A loan is considered impaired when, based on current information and events, it is probable that the Company 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. 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.
When a loan is determined to be impaired the Company makes a determination if the repayment of the obligation is collateral dependent. As a majority of impaired loans are collateralized by real estate, appraisals on the underlying value of the property securing the obligation are utilized in determining the specific impairment amount that is allocated to the loan as a component of the allowance calculation. If the loan is collateral dependent, an updated appraisal is obtained within a short period of time from the date the loan is determined to be impaired; typically no longer than 30 days for a residential property and 90 days for a commercial real estate property. The appraisal and the appraised value are reviewed for adequacy and then further discounted for estimated disposition costs and the period of time until resolution, in order to determine the impairment amount. The Company updates the appraised value at least annually and on a more frequent basis if current market factors indicate a potential change in valuation.
The majority of the Company’s loans are collateralized by real estate located in central and eastern Connecticut and western Massachusetts in addition to a portion of the commercial real estate loan portfolio located in the Northeast region of the United States. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions in these areas.
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.


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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. For residential real estate and installment and collateral loans, the Company considers factors such as updated FICO scores, employment status, home prices, loan to value and geography. Residential real estate and installment loans are pass rated unless their payment history reveals signs of deterioration, which may result in modifications to the original contractual terms. In situations which require modification to the loan terms, the internal loan grade will typically be reduced to substandard. More complex loans, such as commercial business loans and commercial real estate loans require that our internal credit area further evaluate the risk rating of the individual loan, with the credit area and Chief Credit 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 throughout the year 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. 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 loss are normally fully charged off.
The following table presents the Company’s loans by risk rating at September 30, 2015 and December 31, 2014:
(In thousands)
Residential Real Estate
 
Commercial Real Estate
 
Construction
 
Commercial Business
 
Installment and Collateral
September 30, 2015
 
 
 
 
 
 
 
 
 
Loans rated 1-5
$
1,504,201

 
$
1,795,507

 
$
166,986

 
$
589,901

 
$
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