United Financial Bancorp, Inc. - FORM 10-Q - August 2, 2018

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EX-32.0 - EXHIBIT 32.0 - United Financial Bancorp, Inc.ubnk20180630ex320.htm
EX-31.2 - EXHIBIT 31.2 - United Financial Bancorp, Inc.ubnk20180630ex312.htm
EX-31.1 - EXHIBIT 31.1 - United Financial Bancorp, Inc.ubnk20180630ex311.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 June 30, 2018.
Commission File Number: 001-35028
ufbancorplogorgb3a29.jpg
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.)
 
 
 
225 Asylum Street, Hartford, Connecticut
 
06103
(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, a non-accelerated filer, a smaller reporting company or emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “non-accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12B-2 of the Exchange Act. (Check one):
Large accelerated filer
ý

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


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).    Yes  ¨    No  ý
As of July 31, 2018, there were 51,124,712 shares of Registrant’s no par value common stock outstanding.

 

Table of Contents
 
 
 
Page
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
(Unaudited)
 
June 30,
2018
 
December 31,
2017
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
62,188

 
$
56,661

Short-term investments
46,987

 
32,007

Total cash and cash equivalents
109,175

 
88,668

Available-for-sale securities - at fair value
1,006,135

 
1,050,787

Held-to-maturity securities - at amortized cost
—

 
13,598

Loans held for sale
85,458

 
114,073

Loans receivable (net of allowance for loan losses of $49,163
at June 30, 2018 and $47,099 at December 31, 2017)
5,441,766

 
5,307,678

Federal Home Loan Bank of Boston stock
46,734

 
50,194

Accrued interest receivable
23,209

 
22,332

Deferred tax asset, net
30,190

 
25,656

Premises and equipment, net
67,614

 
67,508

Goodwill
115,281

 
115,281

Core deposit intangible
3,849

 
4,491

Cash surrender value of bank-owned life insurance
180,490

 
148,300

Other assets
98,695

 
105,593

Total assets
$
7,208,596

 
$
7,114,159

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
770,982

 
$
778,576

Interest-bearing
4,622,394

 
4,419,645

Total deposits
5,393,376

 
5,198,221

Mortgagors’ and investors’ escrow accounts
14,526

 
7,545

Advances from the Federal Home Loan Bank
925,413

 
1,046,458

Other borrowings
116,483

 
118,596

Accrued expenses and other liabilities
56,921

 
50,011

Total liabilities
6,506,719

 
6,420,831

 

 

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

 
—

Common stock (no par value; authorized 120,000,000 shares; 51,117,349 and 51,044,752 shares issued and outstanding, at June 30, 2018 and December 31, 2017, respectively)
539,006

 
537,576

Additional paid-in capital
4,559

 
4,713

Unearned compensation - ESOP
(5,352
)
 
(5,466
)
Retained earnings
190,304

 
168,345

Accumulated other comprehensive loss, net of tax
(26,640
)
 
(11,840
)
Total stockholders’ equity
701,877

 
693,328

Total liabilities and stockholders’ equity
$
7,208,596

 
$
7,114,159


See accompanying notes to unaudited consolidated financial statements.
3
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Net Income
(Unaudited)
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Interest and dividend income:
 
 
 
 
 
Loans
$
57,958

 
$
49,674

 
$
112,738

 
$
96,167

Securities - taxable interest
5,969

 
5,793

 
11,467

 
11,303

Securities - non-taxable interest
2,354

 
2,355

 
4,783

 
4,609

Securities - dividends
736

 
689

 
1,373

 
1,497

Interest-bearing deposits
113

 
51

 
263

 
152

Total interest and dividend income
67,130

 
58,562

 
130,624

 
113,728

Interest expense:
 
 
 
 
 
 
 
Deposits
12,864

 
7,603

 
23,891

 
14,422

Borrowed funds
6,085

 
4,631

 
12,009

 
8,681

Total interest expense
18,949

 
12,234

 
35,900

 
23,103

Net interest income
48,181

 
46,328

 
94,724

 
90,625

Provision for loan losses
2,350

 
2,292

 
4,289

 
4,580

Net interest income after provision for loan losses
45,831

 
44,036

 
90,435

 
86,045

Non-interest income:
 
 
 
 
 
 
 
Service charges and fees
6,542

 
7,184

 
12,701

 
12,829

Gain on sales of securities, net
62

 
95

 
178

 
552

Income from mortgage banking activities
846

 
1,830

 
2,575

 
3,151

Bank-owned life insurance income
1,671

 
1,149

 
3,317

 
2,356

Net loss on limited partnership investments
(960
)
 
(638
)
 
(1,550
)
 
(718
)
Other income
199

 
206

 
428

 
388

Total non-interest income
8,360

 
9,826

 
17,649

 
18,558

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
22,113

 
19,574

 
43,311

 
39,304

Service bureau fees
2,165

 
2,293

 
4,383

 
4,623

Occupancy and equipment
4,668

 
3,657

 
9,617

 
8,126

Professional fees
1,105

 
952

 
2,269

 
2,261

Marketing and promotions
1,189

 
1,237

 
1,874

 
1,949

FDIC insurance assessments
735

 
796

 
1,474

 
1,475

Core deposit intangible amortization
305

 
353

 
642

 
738

Other
6,090

 
6,467

 
11,536

 
11,775

Total non-interest expense
38,370

 
35,329

 
75,106

 
70,251

Income before income taxes
15,821

 
18,533

 
32,978

 
34,352

Provision for income taxes
175

 
2,333

 
1,545

 
4,426

Net income
$
15,646

 
$
16,200

 
$
31,433

 
$
29,926

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.32

 
$
0.62

 
$
0.60

Diluted
$
0.31

 
$
0.32

 
$
0.62

 
$
0.59

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
50,504,273

 
50,217,212

 
50,489,689

 
50,237,406

Diluted
50,974,283

 
50,839,091

 
50,985,520

 
50,887,124


See accompanying notes to unaudited consolidated financial statements.
4
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 
For the Three Months 
 Ended June 30,
 
For the Six Months 
 Ended June 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
15,646

 
$
16,200

 
$
31,433

 
$
29,926

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
Unrealized holding (losses) gains
(6,033
)
 
5,082

 
(23,023
)
 
9,062

Reclassification adjustment for gains realized in operations (1)
(62
)
 
(95
)
 
(178
)
 
(552
)
Net unrealized (losses) gains
(6,095
)
 
4,987

 
(23,201
)
 
8,510

Tax effect - benefit (expense)
1,340

 
(1,792
)
 
5,273

 
(3,057
)
Net-of-tax amount - securities available-for-sale
(4,755
)
 
3,195

 
(17,928
)
 
5,453

Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses)
2,451

 
(2,100
)
 
6,883

 
(1,942
)
Reclassification adjustment for losses recognized in interest expense (2)
84

 
363

 
429

 
803

Net unrealized gains (losses)
2,535

 
(1,737
)
 
7,312

 
(1,139
)
Tax effect - (expense) benefit
(560
)
 
625

 
(1,612
)
 
410

Net-of-tax amount - interest rate swaps
1,975

 
(1,112
)
 
5,700

 
(729
)
Pension and Post-retirement plans:
 
 
 
 
 
 
 
Reclassification adjustment for prior service costs recognized in net periodic benefit cost
2

 
1

 
4

 
3

Reclassification adjustment for losses recognized in net periodic benefit cost (3)
123

 
143

 
246

 
286

Net change in gains and prior service costs
125

 
144

 
250

 
289

Tax effect - expense
(28
)
 
(52
)
 
(55
)
 
(104
)
Net-of-tax amount - pension and post-retirement plans
97

 
92

 
195

 
185

Total other comprehensive (loss) income
(2,683
)
 
2,175

 
(12,033
)
 
4,909

Comprehensive income
$
12,963

 
$
18,375

 
$
19,400

 
$
34,835

 
(1)
Amounts are included in gain on sales of securities, net in the unaudited Consolidated Statements of Net Income. Income tax expense associated with the reclassification adjustment was $14 and $34 for the three months ended June 30, 2018 and 2017, respectively. Income tax expense associated with the reclassification adjustment was $39 and $199 for the six months ended June 30, 2018 and 2017, respectively.
(2)
Amounts are included in borrowed funds interest expense in the unaudited Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for the three months ended June 30, 2018 and 2017 was $19 and $131, respectively. Income tax benefit associated with the reclassification adjustment for the six months ended June 30, 2018 and 2017 was $95 and $289, respectively.
(3)
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 losses recognized in the net periodic benefit cost for the three months ended June 30, 2018 and 2017 was $27 and $52, respectively. Income tax benefit associated with the reclassification adjustment for losses recognized in the net periodic benefit cost for the six months ended June 30, 2018 and 2017 was $54 and $103, respectively.

See accompanying notes to unaudited consolidated financial statements.
5
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(Unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Unearned
Compensation
 - ESOP
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Shares
 
Amount
 
 
 
 
 
 
(In thousands, except share data)
Balance at December 31, 2017
51,044,752

 
$
537,576

 
$
4,713

 
$
(5,466
)
 
$
168,345

 
$
(11,840
)
 
$
693,328

Adoption of ASU No. 2016-01 (see Note 3)
—

 
—

 
—

 
—

 
177

 
(177
)
 
—

Adoption of ASU No. 2018-02 (see Note 10)
—

 
—

 
—

 
—

 
2,590

 
(2,590
)
 
—

Comprehensive income
—

 
—

 
—

 
—

 
31,433

 
(12,033
)
 
19,400

Common stock repurchased
(94,900
)
 
(1,551
)
 
—

 
—

 
—

 
—

 
(1,551
)
Stock-based compensation expense
—

 
—

 
1,417

 
—

 
—

 
—

 
1,417

ESOP shares released or committed to be released
—

 
—

 
77

 
114

 
—

 
—

 
191

Shares issued for stock options exercised
172,794

 
2,973

 
(1,538
)
 
—

 
—

 
—

 
1,435

Shares issued for restricted stock grants
8,763

 
147

 
(147
)
 
—

 
—

 
—

 
—

Shares cancelled for restricted stock forfeitures
(8,340
)
 
(139
)
 
139

 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(5,720
)
 
—

 
(102
)
 
—

 
—

 
—

 
(102
)
Dividends paid ($0.24 per common share)
—

 
—

 
—

 
—

 
(12,241
)
 
—

 
(12,241
)
Balance at June 30, 2018
51,117,349

 
$
539,006

 
$
4,559

 
$
(5,352
)
 
$
190,304

 
$
(26,640
)
 
$
701,877

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
50,786,671

 
$
531,848

 
$
7,227

 
$
(5,694
)
 
$
137,838

 
$
(15,353
)
 
$
655,866

Comprehensive income
—

 
—

 
—

 
—

 
29,926

 
4,909

 
34,835

Common stock repurchased
(80,000
)
 
(1,312
)
 
—

 
—

 
—

 
—

 
(1,312
)
Stock-based compensation expense
—

 
—

 
1,486

 
—

 
—

 
—

 
1,486

ESOP shares released or committed to be released
—

 
—

 
83

 
114

 
—

 
—

 
197

Shares issued for stock options exercised and SARs
74,522

 
1,337

 
(564
)
 
—

 
—

 
—

 
773

Shares issued for restricted stock grants
1,098

 
45

 
(45
)
 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(14,259
)
 
—

 
(197
)
 
—

 
—

 
—

 
(197
)
Dividends paid ($0.24 per common share)
—

 
—

 
—

 
—

 
(12,184
)
 
—

 
(12,184
)
Balance at June 30, 2017
50,768,032

 
$
531,918

 
$
7,990

 
$
(5,580
)
 
$
155,580

 
$
(10,444
)
 
$
679,464


See accompanying notes to unaudited consolidated financial statements.
6
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
For the Six Months 
 Ended June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
31,433

 
$
29,926

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Amortization of premiums and discounts on investments, net
2,157

 
2,053

Amortization of intangible assets and purchase accounting marks, net
681

 
654

Amortization of subordinated debt issuance costs
63

 
63

Stock-based compensation expense
1,417

 
1,486

ESOP expense
191

 
197

Provision for loan losses
4,289

 
4,580

Gains on sales of securities, net
(178
)
 
(552
)
Net unrealized loss on marketable equity securities
1

 
—

Loans originated for sale
(170,922
)
 
(208,158
)
Principal balance of loans sold
199,537

 
113,188

Increase in mortgage servicing asset
(1,946
)
 
(68
)
Gain on sales of other real estate owned
(78
)
 
(107
)
Net change in mortgage banking fair value adjustments
1,144

 
(3,139
)
(Gain) loss on disposal of equipment
68

 
(42
)
Write-downs of other real estate owned
218

 
231

Depreciation and amortization of premises and equipment
3,769

 
2,792

Net loss on limited partnership investments
1,550

 
718

Deferred income tax (benefit) expense
(928
)
 
10,177

Increase in cash surrender value of bank-owned life insurance
(2,882
)
 
(2,348
)
Income recognized from death benefits on bank-owned life insurance
(435
)
 
(8
)
Net change in:
 
 
 
Deferred loan fees and premiums
(708
)
 
(3,777
)
Accrued interest receivable
(877
)
 
(980
)
Other assets
(11,700
)
 
(23,086
)
Accrued expenses and other liabilities
7,165

 
144

Net cash provided by (used in) operating activities
63,029

 
(76,056
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of available-for-sale securities
58,652

 
184,484

Proceeds from calls and maturities of available-for-sale securities
26,065

 
64,840

Principal payments on available-for-sale securities
33,669

 
35,325

Principal payments on held-to-maturity securities
—

 
228

Purchases of available-for-sale securities
(85,557
)
 
(308,423
)
Redemption of FHLBB and other restricted stock
6,940

 
2,512

Purchase of FHLBB stock
(3,480
)
 
(2,179
)
Proceeds from sale of other real estate owned
1,635

 
761

Purchases of loans
(144,913
)
 
(72,035
)
Loan originations, net of principal repayments
4,315

 
(81,360
)
Proceeds from bank-owned life insurance death benefits
1,082

 
—

Purchases of bank-owned life insurance
(30,000
)
 
—

Proceeds from redemption of bank-owned life insurance
26,292

 
—

Purchases of premises and equipment
(3,977
)
 
(6,208
)
Proceeds from sales of equipment
—

 
707

Net cash used in investing activities
(109,277
)
 
(181,348
)

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

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Concluded
(Unaudited)
 
For the Six Months 
 Ended June 30,
 
2018
 
2017
 
(In thousands)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in non-interest-bearing deposits
(7,594
)
 
13,867

Net increase in interest-bearing deposits
202,871

 
268,829

Net increase in mortgagors’ and investors’ escrow accounts
6,981

 
1,691

Net decrease in short-term FHLBB advances
(91,000
)
 
(105,000
)
Repayments of long-term FHLBB advances
(775
)
 
(757
)
Repayments of called FHLBB advances
(30,000
)
 
(45,000
)
Proceeds from long-term FHLBB advances
950

 
95,000

Net change in other borrowings
(2,219
)
 
25,601

Proceeds from exercise of stock options
1,435

 
773

Common stock repurchased
(1,551
)
 
(1,312
)
Cancellation of shares for tax withholding
(102
)
 
(197
)
Cash dividend paid on common stock
(12,241
)
 
(12,184
)
Net cash provided by financing activities
66,755

 
241,311

Net increase (decrease) in cash and cash equivalents
20,507

 
(16,093
)
Cash and cash equivalents, beginning of period
88,668

 
90,944

Cash and cash equivalents, end of period
$
109,175

 
$
74,851

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
34,989

 
$
23,802

Income taxes, net
1,135

 
3,003

Transfer of loans to other real estate owned
1,476

 
765

Change in due to broker, investment purchases
—

 
(6
)

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
United Financial Bancorp, Inc. (the “Company” or “United”) is headquartered in Hartford, Connecticut, and through United Bank (the “Bank”) and various subsidiaries, delivers financial services to individuals, families and businesses primarily throughout Connecticut and Massachusetts through 54 banking offices, its commercial loan production offices, its mortgage loan production offices, 66 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 Wealth Management, Inc., United Bank Investment Sub, Inc., UCB Securities, Inc. II, UB Properties, LLC, United Financial Realty HC, Inc. and United Financial Business Trust I.
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, 2018 or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s 2017 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, 2017.
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 2018 presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash equivalents.
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, the 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
Recently Adopted Accounting Principles Previously Disclosed
Effective January 1, 2018, the following list identifies Account Standards Updates (“ASUs”) adopted by the Company:
•
ASU No. 2014-09, Revenue From Contracts with Customers (Topic 606)
•
ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-210): Recognition and Measurement of Financial Assets and Financial Liabilities
•
ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
•
ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
•
ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash
•
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business


9
 

•
ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
•
ASU No. 2017-09, Compensation, Stock Compensation (Topic 718): Scope of Modified Accounting
•
ASU No. 2017-12, Derivatives & Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities
•
ASU No. 2018-02, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
The adoption of these accounting standards did not have a material impact on the Company’s financial statements.
Accounting Standards Issued but Not Yet Adopted
The following list identifies ASUs applicable to the Company that have been issued but are not yet effective:
Compensation
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-07 Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting as a part of its Simplification Initiative. Under this guidance, the inclusion of share-based payments for nonemployees as payment for goods or services will be added under the scope of Topic 718. Recognition for costs of issuance of share-based payments to nonemployees is expected to be similar to how companies recognize these same costs for employees. This ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than the Company’s adoption of Topic 606. This ASU is not expected to have a significant impact to the Company’s Consolidated Financial Statements.
Receivables
In March 2017, the FASB issued ASU No. 2017-08 Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. Under the new guidance, the premium on bonds will be amortized to the bond’s earliest call date rather than the date of maturity to more closely align interest income recorded on bonds held at a premium or a discount with the economics of the underlying instrument. This ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. As of June 30, 2018, this ASU is expected to have an impact of reducing premiums on callable debt securities by approximately $9.5 million (pre-tax), with the offset being a reduction in retained earnings upon initial adoption.
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which amends the Board’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. For public business entities that are U.S. Securities and Exchange Commission filers, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The amendments in this Update may be adopted earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The impact on adoption is a one-time adjustment to retained earnings.  The Company is evaluating the provisions of ASU No. 2016-13 and will closely monitor developments and additional guidance to determine the potential impact on the Company’s Consolidated Financial Statements which is expected to increase loan loss reserves, the amount of which is uncertain at this time. The Company has implemented a committee led by the Bank’s Chief Credit Officer, which includes the Chief Financial Officer and the Chief Risk Officer, to assist in identifying, implementing and evaluating the impact of the required changes to loan loss estimation models and processes. Additionally, the committee has identified and is in the process of testing a third-party software solution and has engaged outside consultants to aide in education and process development for estimating expected losses under the new guidance.
Leases
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842), which introduces a lessee model that requires most leases to be recognized on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts with Customers. The new leases standard represents a wholesale change to lease accounting and will most likely result in significant implementation challenges during the transition period and beyond. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption will be permitted for all entities. It is required that entities recognize


10
 

and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The modified retrospective approach includes a number of optional practical expedients that entities may elect to apply. As of June 30, 2018, the Company’s future minimum lease commitments totaled $66.8 million. The Company has established a working group which includes the Director of Accounting, Director of Tax and Accounting Policy and the Controller in order to assess the impact of the requirements of the new guidance, however, the Company does not expect the present value of the future lease payments to have a material impact on the Company’s Consolidated Financial Statements.
Note 3.
Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities classified as available-for-sale and held-to-maturity at June 30, 2018 and December 31, 2017 are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
June 30, 2018
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
222,145

 
$
75

 
$
(6,260
)
 
$
215,960

Government-sponsored residential collateralized debt obligations
182,352

 
11

 
(3,296
)
 
179,067

Government-sponsored commercial mortgage-backed securities
33,262

 
4

 
(1,478
)
 
31,788

Government-sponsored commercial collateralized debt obligations
159,173

 
—

 
(7,652
)
 
151,521

Asset-backed securities
105,361

 
426

 
(749
)
 
105,038

Corporate debt securities
83,510

 
69

 
(3,554
)
 
80,025

Obligations of states and political subdivisions
252,429

 
560

 
(10,253
)
 
242,736

Total available-for-sale debt securities
$
1,038,232

 
$
1,145

 
$
(33,242
)
 
$
1,006,135

December 31, 2017
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
235,646

 
$
779

 
$
(946
)
 
$
235,479

Government-sponsored residential collateralized debt obligations
134,652

 
16

 
(1,556
)
 
133,112

Government-sponsored commercial mortgage-backed securities
33,449

 
7

 
(201
)
 
33,255

Government-sponsored commercial collateralized debt obligations
151,035

 
—

 
(3,793
)
 
147,242

Asset-backed securities
166,559

 
1,253

 
(673
)
 
167,139

Corporate debt securities
88,571

 
1,104

 
(539
)
 
89,136

Obligations of states and political subdivisions
249,531

 
1,436

 
(5,960
)
 
245,007

Total debt securities
1,059,443

 
4,595

 
(13,668
)
 
1,050,370

Marketable equity securities, by sector:
 
 
 
 
 
 
 
Industrial
109

 
100

 
—

 
209

Oil and gas
131

 
77

 
—

 
208

Total marketable equity securities
240

 
177

 
—

 
417

Total available-for-sale securities
$
1,059,683

 
$
4,772

 
$
(13,668
)
 
$
1,050,787

Held-to-maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,280

 
$
679

 
$
(88
)
 
$
12,871

Government-sponsored residential mortgage-backed securities
1,318

 
111

 
—

 
1,429

Total held-to-maturity securities
$
13,598

 
$
790

 
$
(88
)
 
$
14,300



11
 

At June 30, 2018, the net unrealized loss on securities available-for-sale of $32.1 million, net of an income tax benefit of $7.1 million, or $25.0 million, was included in accumulated other comprehensive loss on the unaudited Consolidated Statement of Condition.
Effective January 1, 2018, the Company adopted ASU No. 2017-12, Derivatives & Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, which improves and simplifies the accounting rules around hedge accounting. As allowed by the ASU, upon adoption, the Company transferred its held-to-maturity portfolio to its available-for-sale portfolio.
The amortized cost and fair value of debt securities at June 30, 2018 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.
 
Available-for-Sale
 
Amortized
Cost
 
Fair
Value
 
(In thousands)
Maturity:
 
 
 
Within 1 year
$
—

 
$
—

After 1 year through 5 years
13,836

 
13,612

After 5 years through 10 years
83,658

 
79,651

After 10 years
238,445

 
229,498

 
335,939

 
322,761

Government-sponsored residential mortgage-backed securities
222,145

 
215,960

Government-sponsored residential collateralized debt obligations
182,352

 
179,067

Government-sponsored commercial mortgage-backed securities
33,262

 
31,788

Government-sponsored commercial collateralized debt obligations
159,173

 
151,521

Asset-backed securities
105,361

 
105,038

Total available-for-sale debt securities
$
1,038,232

 
$
1,006,135


Effective January 1, 2018, the Company adopted FASB ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which required the Company to recognize the changes in fair value of marketable equity securities to be recorded in the Consolidated Statement of Net Income. The cumulative-effect adjustment resulting from the adoption of this new standard was a one time adjustment that increased retained earnings and decreased accumulated other comprehensive income as of January 1, 2018 by $177,000. For the three and six month ended June 30, 2018, there were $24,000 and $1,000, respectively, in unrealized losses recognized in other income in the Consolidated Statement of Net Income on marketable equity securities. At June 30, 2018, the fair value of marketable equity securities was $417,000, which includes gross unrealized gains of $176,000, and is included in other assets on the Consolidated Statement of Condition.
At June 30, 2018 and December 31, 2017, the Company had securities with a fair value of $467.6 million and $469.4 million, respectively, pledged as derivative collateral, collateral for reverse repurchase borrowings, collateral for municipal deposit exposure, and collateral for FHLBB borrowing capacity.
For the three months ended June 30, 2018 and 2017, gross gains of $71,000 and $521,000 were realized on the sales of available-for-sale securities, respectively. For the six months ended June 30, 2018 and 2017, gross gains of $418,000 and $2.3 million, respectively, were realized on the sales of available-for-sale securities. There were gross losses of $9,000 and $426,000 realized on the sale of available-for-sale securities for the three months ended June 30, 2018 and 2017, respectively. There were gross losses of $240,000 and $1.7 million realized on the sale of available-for-sale securities for the six months ended June 30, 2018 and 2017, respectively.
As of June 30, 2018, 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 June 30, 2018, the fair value of the obligations of states and political subdivisions portfolio was $242.7 million, with no significant geographic or issuer exposure concentrations. Of the total state and political obligations of $242.7 million, $104.4 million were representative of general obligation bonds, for which $58.0 million are general obligations of political subdivisions of the respective state, rather than general obligations of the state itself.


12
 

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, 2018 and December 31, 2017:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(In thousands)
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
138,454

 
$
(3,463
)
 
$
76,253

 
$
(2,797
)
 
$
214,707

 
$
(6,260
)
Government-sponsored residential collateralized debt obligations
121,891

 
(1,782
)
 
46,849

 
(1,514
)
 
168,740

 
(3,296
)
Government-sponsored commercial mortgage-backed securities
17,075

 
(869
)
 
13,583

 
(609
)
 
30,658

 
(1,478
)
Government-sponsored commercial collateralized debt obligations
39,753

 
(1,168
)
 
111,768

 
(6,484
)
 
151,521

 
(7,652
)
Asset-backed securities
55,883

 
(722
)
 
2,506

 
(27
)
 
58,389

 
(749
)
Corporate debt securities
59,486

 
(2,595
)
 
12,953

 
(959
)
 
72,439

 
(3,554
)
Obligations of states and political subdivisions
109,591

 
(2,441
)
 
114,843

 
(7,812
)
 
224,434

 
(10,253
)
Total available-for-sale debt securities
$
542,133

 
$
(13,040
)
 
$
378,755

 
$
(20,202
)
 
$
920,888

 
$
(33,242
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
41,961

 
$
(203
)
 
$
83,545

 
$
(743
)
 
$
125,506

 
$
(946
)
Government-sponsored residential collateralized debt obligations
82,758

 
(740
)
 
43,359

 
(816
)
 
126,117

 
(1,556
)
Government-sponsored commercial mortgage-backed securities
21,196

 
(74
)
 
10,895

 
(127
)
 
32,091

 
(201
)
Government-sponsored commercial collateralized debt obligations
27,965

 
(291
)
 
119,277

 
(3,502
)
 
147,242

 
(3,793
)
Asset-backed securities
64,259

 
(602
)
 
4,756

 
(71
)
 
69,015

 
(673
)
Corporate debt securities
25,403

 
(257
)
 
10,764

 
(282
)
 
36,167

 
(539
)
Obligations of states and political subdivisions
26,341

 
(312
)
 
116,624

 
(5,648
)
 
142,965

 
(5,960
)
Total available-for-sale securities
$
289,883

 
$
(2,479
)
 
$
389,220

 
$
(11,189
)
 
$
679,103

 
$
(13,668
)
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
2,130

 
$
(24
)
 
$
1,032

 
$
(64
)
 
$
3,162

 
$
(88
)
Total held-to-maturity securities
$
2,130

 
$
(24
)
 
$
1,032

 
$
(64
)
 
$
3,162

 
$
(88
)
Of the available-for-sale securities summarized above as of June 30, 2018, 138 securities had unrealized losses equaling 2.3% of the amortized cost basis for less than twelve months and 104 securities had unrealized losses of 5.1% of the amortized cost basis for twelve months or more. As of December 31, 2017, of the available-for sale securities, 75 securities had unrealized losses of less than 1.0% of the amortized cost basis for less than twelve months and 100 securities had unrealized losses equaling 2.8% of the amortized cost basis for twelve months or more. There was one unrealized loss of $88,000 on a debt security held-to-maturity at December 31, 2017.
Based on its detailed quarterly review of the securities portfolio, management believes that no individual unrealized loss as of June 30, 2018 represents an other-than-temporary impairment. 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


13
 

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 June 30, 2018.
Government-sponsored residential mortgage backed securities, residential collateralized debt obligations, commercial mortgage-backed securities, and commercial collateralized debt obligations.  The unrealized losses on certain securities within the Company’s government-sponsored mortgage-backed and collateralized debt obligation portfolios were caused by the continued increase in overall interest rates at the time of purchase. 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 securities.  The unrealized losses on certain securities within the Company’s asset-backed securities portfolio were largely driven by decreases in the weighted average lives of a number of these securities. Given this, the Company, when possible, avoids high premiums on this asset class. 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 at this time. 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 relates to securities with no company specific concentration. The unrealized loss was due to an upward shift in interest rates that resulted in a negative impact to the respective bonds’ pricing, relative to the time of purchase.
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 an upward shift in the rates relative to the time of purchase of certain securities.
The Company will continue to review its entire portfolio for other-than-temporarily impaired securities.
Note 4.
Loans Receivable and Allowance for Loan Losses
A summary of the Company’s loan portfolio is as follows:
 
June 30, 2018
 
December 31, 2017
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
Owner-occupied
$
418,338

 
7.6
%
 
$
445,820

 
8.3
%
Investor non-owner occupied
1,927,960

 
35.2

 
1,854,459

 
34.7

Construction
82,883

 
1.5

 
78,083

 
1.5

Total commercial real estate loans
2,429,181

 
44.3

 
2,378,362

 
44.5

 
 
 
 
 
 
 
 
Commercial business loans
841,142

 
15.4

 
840,312

 
15.7

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Residential real estate
1,252,001

 
22.9

 
1,204,401

 
22.6

Home equity
588,638

 
10.7

 
583,180

 
10.9

Residential construction
32,063

 
0.6

 
40,947

 
0.8

Other consumer
332,402

 
6.1

 
292,781

 
5.5

Total consumer loans
2,205,104

 
40.3

 
2,121,309

 
39.8

Total loans
5,475,427

 
100.0
%
 
5,339,983

 
100.0
%
Net deferred loan costs and premiums
15,502

 
 
 
14,794

 
 
Allowance for loan losses
(49,163
)
 
 
 
(47,099
)
 
 
Loans - net
$
5,441,766

 
 
 
$
5,307,678

 
 


14
 

Allowance for Loan Losses
Management has established a methodology to determine the adequacy of the allowance for loan losses (“ALL”) that assesses the risks and losses inherent in the loan portfolio. The ALL 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 ALL when management believes that the uncollectibility of principal is confirmed. Any subsequent recoveries are credited to the ALL when received. In connection with the determination of the ALL, management obtains independent appraisals for significant properties, when considered necessary.
The ALL 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 ALL is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in the Company’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers.
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, 2018, the Company had an allowance for loan losses of $49.2 million, or 0.90%, of total loans as compared to an allowance for loan losses of $47.1 million, or 0.88%, of total loans at December 31, 2017. 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: owner-occupied and investor non-owner occupied commercial real estate, commercial and residential construction, commercial business, residential real estate, home equity, and other consumer. Management uses a rolling average of historical losses based on a 12-quarter 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; experience and depth of lending; changes in weighted average risk ratings; and national and local economic trends and conditions. The general component of the allowance for loan losses also includes a reserve based upon historical loss experience for loans which were acquired and have subsequently evidenced measured credit deterioration following initial acquisition. Our acquired loan portfolio is comprised of purchased loans that show no evidence of deterioration subsequent to acquisition and therefore are not covered by the allowance for loan losses. Acquired impaired loans are loans with evidence of deterioration subsequent to acquisition and are considered in establishing the allowance for loan losses. There were no changes in the Company’s methodology pertaining to the general component of the allowance for loan losses during 2018.
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 and home equity loans – The Company 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 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.


15
 

Owner-occupied and investor non-owner occupied commercial real estate (“Owner-occupied CRE” and “Investor CRE”) – Loans in these segments 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.
Commercial and residential 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.
Other consumer – Loans in this segment generally consist of loans on high-end retail boats and small yachts, new and used automobiles, home improvement loans, loans collateralized by deposit accounts and unsecured personal loans. These loans are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.

For acquired loans accounted for under ASC 310-30, our accretable discount is estimated based upon our expected cash flows for these 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 through a provision based on our estimate of future credit losses over the remaining life of the loans.
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 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. Updated property evaluations are obtained at the 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. Loans which are placed on non-accrual status, or deemed troubled debt restructures, are considered impaired by the Company and subject to impairment testing for possible partial or full charge-off when loss can be reasonably determined. Generally, when all contractual payments on a loan are not expected to be collected, or the loan has failed to make contractual payments for a period of 90 days or more, a loan is placed on non-accrual status. In accordance with the Company's loan policy, losses on open and closed end consumer loans are recognized within a period of 120 days past due. For commercial loans, there is no threshold in terms of days past due for losses to be recognized as a result of the complexity in reasonably determining losses within a set time frame. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

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 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.


16
 

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 other consumer 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. For residential real estate and other consumer loans, the Company considers factors such as updated FICO scores, employment status, home prices, loan to value and geography. Residential real estate and other consumer 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 department further evaluate the risk rating of the individual loan, with the credit department 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.


17
 

The following table presents the Company’s loans by risk rating at June 30, 2018 and December 31, 2017:
 
Owner-Occupied CRE
 
Investor CRE
 
Construction
 
Commercial Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
(In thousands)
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1-5
$
391,166

 
$
1,900,513

 
$
109,853

 
$
806,890

 
$
1,234,870

 
$
582,329

 
$
330,875

Loans rated 6
9,492

 
11,691

 
4,129

 
22,939

 
2,460

 
102

 
—

Loans rated 7
17,680

 
15,756

 
964

 
11,313

 
14,671

 
6,207

 
1,527

Loans rated 8
—

 
—

 
—

 
—

 
—

 
—

 
—

Loans rated 9
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
418,338

 
$
1,927,960

 
$
114,946

 
$
841,142

 
$
1,252,001

 
$
588,638

 
$
332,402

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1-5
$
423,720

 
$
1,829,762

 
$
117,583

 
$
811,604

 
$
1,186,753

 
$
576,592

 
$
292,386

Loans rated 6
4,854

 
10,965

 
49

 
15,816

 
1,948

 
89

 
—

Loans rated 7
17,246

 
13,732

 
1,398

 
12,892

 
15,700

 
6,499

 
395

Loans rated 8
—

 
—

 
—

 
—

 
—

 
—

 
—

Loans rated 9
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
445,820

 
$
1,854,459

 
$
119,030

 
$
840,312

 
$
1,204,401

 
$
583,180

 
$
292,781



18
 

Activity in the allowance for loan losses for the periods ended June 30, 2018 and 2017 was as follows:
 
Owner-Occupied CRE
 
Investor CRE
 
Construction
 
Commercial
Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
Unallocated
 
Total
 
(In thousands)
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
3,927

 
$
15,983

 
$
1,633

 
$
10,981

 
$
7,785

 
$
3,217

 
$
2,544

 
$
1,845

 
$
47,915

Provision (credit) for loan losses
(76
)
 
1,238

 
(135
)
 
104

 
219

 
35

 
880

 
85

 
2,350

Loans charged off
—

 
(16
)
 
—

 
(582
)
 
(69
)
 
(75
)
 
(597
)
 
—

 
(1,339
)
Recoveries of loans previously charged off
—

 
16

 
—

 
23

 
21

 
69

 
108

 
—

 
237

Balance, end of period
$
3,851

 
$
17,221

 
$
1,498

 
$
10,526

 
$
7,956

 
$
3,246

 
$
2,935

 
$
1,930

 
$
49,163

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended June 30, 2017