United Financial Bancorp, Inc. - FORM 10-Q - November 7, 2017

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EX-32.0 - EXHIBIT 32.0 - United Financial Bancorp, Inc.ubnk20170930ex320.htm
EX-31.2 - EXHIBIT 31.2 - United Financial Bancorp, Inc.ubnk20170930ex312.htm
EX-31.1 - EXHIBIT 31.1 - United Financial Bancorp, Inc.ubnk20170930ex311.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, 2017.
Commission File Number: 001-35028
ufbancorplogorgb3a19.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, 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
¨
 
 
 
 
 
 
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 October 31, 2017, there were 50,850,948 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)
 
September 30,
2017
 
December 31,
2016
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
59,456

 
$
47,248

Short-term investments
39,061

 
43,696

Total cash and cash equivalents
98,517

 
90,944

Available-for-sale securities - at fair value
1,068,055

 
1,043,411

Held-to-maturity securities - at amortized cost
13,693

 
14,038

Loans held for sale
89,419

 
62,517

Loans receivable (net of allowance for loan losses of $46,368
at September 30, 2017 and $42,798 at December 31, 2016)
5,174,672

 
4,870,552

Federal Home Loan Bank of Boston stock
46,758

 
53,476

Accrued interest receivable
20,893

 
18,771

Deferred tax asset, net
30,999

 
39,962

Premises and equipment, net
61,063

 
51,757

Goodwill
115,281

 
115,281

Core deposit intangible
4,827

 
5,902

Cash surrender value of bank-owned life insurance
171,300

 
167,823

Other assets
81,019

 
65,086

Total assets
$
6,976,496

 
$
6,599,520

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
725,130

 
$
708,050

Interest-bearing
4,427,892

 
4,003,122

Total deposits
5,153,022

 
4,711,172

Mortgagors’ and investors’ escrow accounts
9,641

 
13,354

Advances from the Federal Home Loan Bank
950,554

 
1,046,712

Other borrowings
118,260

 
122,907

Accrued expenses and other liabilities
54,366

 
49,509

Total liabilities
6,285,843

 
5,943,654

 

 

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

 
—

Common stock (no par value; authorized 120,000,000 shares; 50,821,391 and 50,786,671 shares issued and outstanding, at September 30, 2017 and December 31, 2016, respectively)
533,001

 
531,848

Additional paid-in capital
8,145

 
7,227

Unearned compensation - ESOP
(5,523
)
 
(5,694
)
Retained earnings
164,685

 
137,838

Accumulated other comprehensive loss, net of tax
(9,655
)
 
(15,353
)
Total stockholders’ equity
690,653

 
655,866

Total liabilities and stockholders’ equity
$
6,976,496

 
$
6,599,520


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 September 30,
 
For the Nine Months 
 Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except share and per share data)
Interest and dividend income:
 
 
 
 
 
Loans
$
51,809

 
$
45,331

 
$
147,976

 
$
134,359

Securities - taxable interest
5,604

 
4,808

 
16,907

 
14,830

Securities - non-taxable interest
2,499

 
2,140

 
7,108

 
6,201

Securities - dividends
736

 
990

 
2,233

 
2,934

Interest-bearing deposits
151

 
67

 
303

 
207

Total interest and dividend income
60,799

 
53,336

 
174,527

 
158,531

Interest expense:
 
 
 
 
 
 
 
Deposits
9,185

 
6,279

 
23,607

 
18,927

Borrowed funds
4,846

 
4,028

 
13,527

 
11,677

Total interest expense
14,031

 
10,307

 
37,134

 
30,604

Net interest income
46,768

 
43,029

 
137,393

 
127,927

Provision for loan losses
2,566

 
3,766

 
7,146

 
10,078

Net interest income after provision for loan losses
44,202

 
39,263

 
130,247

 
117,849

Non-interest income:
 
 
 
 
 
 
 
Service charges and fees
6,161

 
5,726

 
18,413

 
14,679

Gain on sales of securities, net
158

 
48

 
710

 
1,867

Income from mortgage banking activities
1,204

 
2,198

 
4,355

 
5,389

Bank-owned life insurance income
1,167

 
899

 
3,523

 
2,531

Net loss on limited partnership investments
(864
)
 
(850
)
 
(1,582
)
 
(3,290
)
Other income (loss)
247

 
(132
)
 
635

 
(28
)
Total non-interest income
8,073

 
7,889

 
26,054

 
21,148

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
20,005

 
18,301

 
59,309

 
56,105

Service bureau fees
1,983

 
1,960

 
6,029

 
6,219

Occupancy and equipment
3,740

 
3,580

 
11,866

 
11,330

Professional fees
1,048

 
1,125

 
3,309

 
2,893

Marketing and promotions
1,087

 
656

 
3,036

 
2,271

FDIC insurance assessments
780

 
819

 
2,255

 
2,800

Core deposit intangible amortization
337

 
385

 
1,075

 
1,219

FHLBB prepayment penalties
—

 
—

 
—

 
1,454

Other
5,929

 
5,410

 
17,704

 
16,389

Total non-interest expense
34,909

 
32,236

 
104,583

 
100,680

Income before income taxes
17,366

 
14,916

 
51,718

 
38,317

Provision for income taxes
2,175

 
757

 
6,601

 
3,206

Net income
$
15,191

 
$
14,159

 
$
45,117

 
$
35,111

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.30

 
$
0.28

 
$
0.90

 
$
0.71

Diluted
$
0.30

 
$
0.28

 
$
0.89

 
$
0.70

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
50,263,602

 
49,800,105

 
50,246,234

 
49,617,136

Diluted
50,889,987

 
50,141,175

 
50,888,175

 
49,917,049


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 September 30,
 
For the Nine Months 
 Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net income
$
15,191

 
$
14,159

 
$
45,117

 
$
35,111

Other comprehensive income:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
Unrealized holding gains (losses)
1,076

 
(274
)
 
10,138

 
23,253

Reclassification adjustment for gains realized in operations (1)
(158
)
 
(48
)
 
(710
)
 
(1,867
)
Net unrealized gains (losses)
918

 
(322
)
 
9,428

 
21,386

Tax effect - (expense) benefit
(330
)
 
120

 
(3,387
)
 
(7,691
)
Net-of-tax amount - securities available-for-sale
588

 
(202
)
 
6,041

 
13,695

Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized (losses) gains
(131
)
 
2,854

 
(2,073
)
 
(8,582
)
Reclassification adjustment for expense (benefit) recognized in interest expense (2)
301

 
(664
)
 
1,104

 
(1,844
)
Net unrealized gains (losses)
170

 
2,190

 
(969
)
 
(10,426
)
Tax effect - (expense) benefit
(61
)
 
(788
)
 
349

 
3,757

Net-of-tax amount - interest rate swaps
109

 
1,402

 
(620
)
 
(6,669
)
Pension and Post-retirement plans:
 
 
 
 
 
 
 
Reclassification adjustment for prior service costs recognized in net periodic benefit cost
2

 
2

 
5

 
5

Reclassification adjustment for losses recognized in net periodic benefit cost (3)
142

 
123

 
428

 
371

Net change in losses and prior service costs
144

 
125

 
433

 
376

Tax effect - expense
(52
)
 
(46
)
 
(156
)
 
(136
)
Net-of-tax amount - pension and post-retirement plans
92

 
79

 
277

 
240

Total other comprehensive income
789

 
1,279

 
5,698

 
7,266

Comprehensive income
$
15,980

 
$
15,438

 
$
50,815

 
$
42,377

 
(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 $57 and $17 for the three months ended September 30, 2017 and 2016, respectively. Income tax expense associated with the reclassification adjustment was $256 and $673 for the nine months ended September 30, 2017 and 2016, respectively.
(2)
Amounts are included in borrowed funds interest expense in the unaudited Consolidated Statements of Net Income. Income tax expense (benefit) associated with the reclassification adjustment for three months ended September 30, 2017 and 2016 was $108 and $(239), respectively. Income tax expense (benefit) associated with the reclassification adjustment for the nine months ended September 30, 2017 and 2016 was $398 and $(664), 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 net periodic benefit cost for the three months ended September 30, 2017 and 2016 was $51 and $44, respectively. Income tax benefit associated with the reclassification adjustment for losses recognized in the net periodic benefit cost for the nine months ended September 30, 2017 and 2016 was $154 and $134, 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, 2016
50,786,671

 
$
531,848

 
$
7,227

 
$
(5,694
)
 
$
137,838

 
$
(15,353
)
 
$
655,866

Comprehensive income
—

 
—

 
—

 
—

 
45,117

 
5,698

 
50,815

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

 
—

 
—

 
—

 
(1,312
)
Stock-based compensation expense
—

 
—

 
2,052

 
—

 
—

 
—

 
2,052

ESOP shares released or committed to be released
—

 
—

 
125

 
171

 
—

 
—

 
296

Shares issued for stock options exercised
143,149

 
2,527

 
(981
)
 
—

 
—

 
—

 
1,546

Shares issued for restricted stock grants
3,617

 
65

 
(65
)
 
—

 
—

 
—

 
—

Shares cancelled for restricted stock forfeitures
(9,242
)
 
(127
)
 
127

 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(22,804
)
 
—

 
(340
)
 
—

 
—

 
—

 
(340
)
Dividends paid ($0.36 per common share)
—

 
—

 
—

 
—

 
(18,270
)
 
—

 
(18,270
)
Balance at September 30, 2017
50,821,391

 
$
533,001

 
$
8,145

 
$
(5,523
)
 
$
164,685

 
$
(9,655
)
 
$
690,653

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
49,941,428

 
$
519,587

 
$
10,722

 
$
(5,922
)
 
$
112,013

 
$
(10,879
)
 
$
625,521

Comprehensive income
—

 
—

 
—

 
—

 
35,111

 
7,266

 
42,377

Stock-based compensation expense
—

 
—

 
1,543

 
—

 
—

 
—

 
1,543

ESOP shares released or committed to be released
—

 
—

 
45

 
171

 
—

 
—

 
216

Shares issued for stock options exercised and SARs
489,361

 
6,357

 
(1,893
)
 
—

 
—

 
—

 
4,464

Shares issued for restricted stock grants
39,328

 
460

 
(460
)
 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(7,171
)
 
—

 
(90
)
 
—

 
—

 
—

 
(90
)
Tax benefit from stock-based awards
—

 
—

 
257

 
—

 
—

 
—

 
257

Dividends paid ($0.36 per common share)
—

 
—

 
—

 
—

 
(18,048
)
 
—

 
(18,048
)
Balance at September 30, 2016
50,462,946

 
$
526,404

 
$
10,124

 
$
(5,751
)
 
$
129,076

 
$
(3,613
)
 
$
656,240


See accompanying notes to unaudited consolidated financial statements.
6
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
For the Nine Months 
 Ended September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
45,117

 
$
35,111

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Amortization of premiums and discounts on investments, net
3,059

 
4,163

Amortization (accretion) of intangible assets and purchase accounting marks, net
1,053

 
(1,006
)
Amortization of subordinated debt issuance costs
95

 
95

Stock-based compensation expense
2,052

 
1,543

ESOP expense
296

 
216

Loss on extinguishment of debt
—

 
1,454

Tax benefit from stock-based awards
—

 
(257
)
Provision for loan losses
7,146

 
10,078

Gain on sales of securities, net
(710
)
 
(1,867
)
Loans originated for sale
(292,973
)
 
(355,361
)
Principal balance of loans sold
266,071

 
282,176

Increase in mortgage servicing asset
(1,047
)
 
(22
)
Gain on sales of other real estate owned
(296
)
 
(136
)
Net gain in mortgage banking fair value adjustments
(2,336
)
 
(2,144
)
(Gain) loss on disposal of equipment
(42
)
 
168

Write-downs of other real estate owned
342

 
4

Depreciation and amortization
4,206

 
4,108

Net loss on limited partnership investments
1,582

 
3,290

Deferred income tax expense (benefit)
5,769

 
(3,502
)
Increase in cash surrender value of bank-owned life insurance
(3,515
)
 
(2,461
)
Income recognized from death benefit on BOLI
(8
)
 
(70
)
Net change in:
 
 
 
Deferred loan fees and premiums
(3,661
)
 
(3,195
)
Accrued interest receivable
(2,122
)
 
(2,148
)
Other assets
(17,644
)
 
(41,393
)
Accrued expenses and other liabilities
5,297

 
25,281

Net cash provided by (used in) operating activities
17,731

 
(45,875
)
Cash flows from investing activities:
 
 
 
Proceeds from sales of available-for-sale securities
214,048

 
241,452

Proceeds from calls and maturities of available-for-sale securities
86,859

 
12,491

Principal payments on available-for-sale securities
57,234

 
66,210

Principal payments on held-to-maturity securities
317

 
380

Purchases of available-for-sale securities
(376,506
)
 
(288,390
)
Redemption of FHLBB and other restricted stock
10,514

 
3,392

Purchase of FHLBB stock
(2,179
)
 
(5,043
)
Proceeds from sale of other real estate owned
1,475

 
1,237

Purchases of loans
(173,356
)
 
(92,162
)
Loan originations, net of principal repayments
(135,468
)
 
(18,656
)
Proceeds from BOLI death benefit
12

 
689

Purchases of premises and equipment
(14,219
)
 
(1,879
)
Proceeds from sales of equipment
707

 
17

Net cash used in investing activities
(330,562
)
 
(80,262
)

(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 Nine Months 
 Ended September 30,
 
2017
 
2016
 
(In thousands)
Cash flows from financing activities:
 
 
 
Net increase in non-interest-bearing deposits
17,080

 
30,147

Net increase in interest-bearing deposits
425,354

 
229,329

Net decrease in mortgagors’ and investors’ escrow accounts
(3,713
)
 
(4,481
)
Net decrease in short-term FHLBB advances
(144,000
)
 
(28,200
)
Repayments of long-term FHLBB advances
(1,138
)
 
(10,614
)
Repayments of called FHLBB advances
(45,000
)
 
—

Prepayments of long-term FHLBB borrowings and penalty
—

 
(37,796
)
Proceeds from long-term FHLBB advances
95,000

 
105,000

Net change in other borrowings
(4,803
)
 
(24,761
)
Proceeds from exercise of stock options
1,546

 
4,464

Common stock repurchased
(1,312
)
 
—

Cancellation of shares for tax withholding
(340
)
 
(90
)
Tax benefit from stock-based awards
—

 
257

Cash dividend paid on common stock
(18,270
)
 
(18,048
)
Net cash provided by financing activities
320,404

 
245,207

Net increase in cash and cash equivalents
7,573

 
119,070

Cash and cash equivalents, beginning of period
90,944

 
95,176

Cash and cash equivalents, end of period
$
98,517

 
$
214,246

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
37,084

 
$
31,705

Income taxes, net
5,159

 
3,300

Transfer of loans to other real estate owned
2,075

 
3,163

Change in due to broker, investment purchases
(6
)
 
3,009


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 53 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 Northeast Financial Advisors, 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, 2017 or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s 2016 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, 2016.
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 2017 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
Accounting Standards Issued but Not Yet Adopted
The following list identifies Account Standards Updates (“ASUs”) applicable to the Company that have been issued but are not yet effective:
Derivatives and Hedging
In August 2017, the Financial Accounting Standards Board (“FASB”) issued 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. This new standard refines and expands hedge accounting for both financial and commodity risks. It creates more transparency around how economic results are presented for investors and analysts. The amendments for this ASU can be


9
 

adopted immediately in any interim or annual period (including the current period). The mandatory effective date for calendar year-end public companies is January 1, 2019. This ASU is not expected to have an impact on the Company’s hedging activities.
Compensation
In May 2017, the FASB issued ASU No. 2017-09 Compensation, Stock Compensation (Topic 718): Scope of Modified Accounting. This update amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Accounting Standards Codification (“ASC”) 718. Specifically, an entity would not apply modification accounting if the fair value, vesting conditions and classification of the awards are the same immediately before and after the modification. This ASU is effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted for entities whose financial statements have not yet been issued or made available for issuance. This ASU is not expected to have an impact on the Company’s Consolidated Financial Statements.
In March 2017, the FASB issued ASU No. 2017-07 Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. Under the new guidance, employers will present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Employers are required to include all other components of net benefit cost in a separate line item from the service cost. Employers will have to disclose the line used to present the other components of net periodic benefit cost, if the components are not presented separately in the income statement. ASU 2017-07 is effective for public companies for fiscal years beginning after December 15, 2017. Early adoption is permitted in the first financial statements issued for a fiscal year, provided all provisions of the ASU are adopted. This ASU is not expected to have a significant impact on 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 purchased at a premium will be amortized to the bond’s 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 September 30, 2017, this ASU is expected to have an impact of reducing approximately $12.5 million (pre-tax) of premiums on callable debt securities, with the offset being a reduction in retained earnings upon initial adoption.
Intangibles
In January 2017, the FASB issued ASU No. 2017-04 Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The guidance removes Step 2 of the Goodwill Impairment Test, which requires hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The new guidance will simplify financial reporting since it eliminates the need to determine the fair value of individual assets and liabilities of a reporting unit to measure the goodwill impairment. Currently, failing Step 1 of the goodwill impairment test did not necessarily result in impairment. However, under the new guidance, failing Step 1 will always result in impairment. This ASU will be applied prospectively, and is effective for public business entities for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for any impairment test performed after January 1, 2017. This ASU is not expected to have an impact on the Company’s Consolidated Financial Statements at the time of adoption.
Income Taxes
In October 2016, the FASB issued ASU No. 2016-16 Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory as a part of FASB’s simplification initiative. Currently, the tax effects of intra-entity asset transfers (intercompany sales) are deferred until the transferred asset is sold to a third party or otherwise recovered through use. Under the new ASU, the selling (transferring) entity is required to recognize a current tax expense or benefit upon transfer of the asset. Similarly, the purchasing (receiving) entity is required to recognize a deferred tax asset (DTA) or deferred tax liability (DTL), as well as the related deferred tax benefit or expense, upon receipt of the asset. The new guidance does not apply to intra-entity transfers of inventory. The new guidance will be effective for public business entities in fiscal years beginning after December 15, 2017, including interim periods within those years. Early adoption is permitted. The modified retrospective approach will be required for transition to the new guidance, with a cumulative-effect adjustment recorded in retained earnings as of the beginning of the period of adoption. The cumulative-effect adjustment would consist of the net impact from (1) the write-off of any unamortized tax expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any necessary valuation allowance. This ASU is expected to have an impact on the Company’s deferred tax recognition due to transfers between separate companies in the


10
 

consolidated group, however, it is not expected to have a material financial statement impact on the Company’s Consolidated Financial Statements.
Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments as part of the consensus of the Emerging Issues Task Force. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU clarifies whether the following items should be categorized as operating, investing or financing on the statement of cash flows; 1) debt prepayments and extinguishment costs, 2) settlement of zero-coupon debt, 3) settlement of contingent consideration, 4) insurance proceeds, 5) settlement of corporate-owned like insurance (COLI) and bank-owned life insurance (BOLI) policies, 6) distributions from equity method investees, 7) beneficial interests in securitization transactions, and 8) receipts and payments with aspects of more than one class of cash flows. ASU 2016-15 is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustment should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. This ASU is expected to have an impact on the classifications in the Company’s Consolidated Statement of Cash Flows.
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 US 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 US 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 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 is in the process of evaluating third-party software solutions 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). This ASU consists of three sections: Section A- Leases: Amendments to the FASB Accounting Standards Codification; Section B - Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification; and Section C - Background Information and Basis for Conclusions. This ASU 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 whole-sale 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 (i.e. calendar periods beginning on January 1, 2019), and interim periods therein. Early adoption will be permitted for all entities. It is required that entities recognize 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 September 30, 2017, the Company’s future minimum lease commitments totaled $65.9 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.
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09 Revenue From Contracts with Customers (Topic 606). This ASU consists of three sections: Section A-Summary and Amendments That Create Revenue from Contracts with Customers (Topic 606) and Other Assets and Deferred Costs-Contracts with Customers (Subtopic 340-40); Section B-Conforming Amendments to Other Topics and Subtopics in the Codification and Status Tables; and Section C-Background Information and Basis for Conclusions.


11
 

This ASU provides a revenue recognition framework for entities that either enter into a contract with customers to transfer goods or services or enter into a contract for the transfer of non-financial assets (unless the contracts are outside the scope of the standard). The standard permits the use of either the retrospective or cumulative effect transition method. Many amendments were made to help clarify the intention and scope of this ASU. This ASU is currently effective for periods after December 15, 2017, and interim and annual reporting periods thereafter. Since many of the Company’s revenue streams are scoped out of this revenue standard, the Company does not expect a material impact on its Consolidated Financial Statements. This ASU will continue to be evaluated as more issues relevant to the banking industry are addressed.
Note 3.
Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities at September 30, 2017 and December 31, 2016 are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
September 30, 2017
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
226,636

 
$
1,204

 
$
(709
)
 
$
227,131

Government-sponsored residential collateralized debt obligations
172,917

 
557

 
(645
)
 
172,829

Government-sponsored commercial mortgage-backed securities
22,808

 
11

 
(65
)
 
22,754

Government-sponsored commercial collateralized debt obligations
153,490

 
182

 
(2,474
)
 
151,198

Asset-backed securities
135,606

 
2,264

 
(141
)
 
137,729

Corporate debt securities
88,339

 
1,263

 
(1,514
)
 
88,088

Obligations of states and political subdivisions
262,019

 
1,276

 
(5,848
)
 
257,447

Total debt securities
1,061,815

 
6,757

 
(11,396
)
 
1,057,176

Marketable equity securities, by sector:
 
 
 
 
 
 
 
Banks
9,417

 
1,074

 
—

 
10,491

Industrial
109

 
80

 
—

 
189

Oil and gas
131

 
68

 
—

 
199

Total marketable equity securities
9,657

 
1,222

 
—

 
10,879

Total available-for-sale securities
$
1,071,472

 
$
7,979

 
$
(11,396
)
 
$
1,068,055

Held-to-maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,290

 
$
845

 
$
(51
)
 
$
13,084

Government-sponsored residential mortgage-backed securities
1,403

 
132

 
—

 
1,535

Total held-to-maturity securities
$
13,693

 
$
977

 
$
(51
)
 
$
14,619




12
 

 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
December 31, 2016
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
181,419

 
$
365

 
$
(2,236
)
 
$
179,548

Government-sponsored residential collateralized debt obligations
184,185

 
438

 
(1,363
)
 
183,260

Government-sponsored commercial mortgage-backed securities
26,949

 
23

 
(442
)
 
26,530

Government-sponsored commercial collateralized debt obligations
164,433

 
296

 
(1,802
)
 
162,927

Asset-backed securities
166,336

 
1,619

 
(988
)
 
166,967

Corporate debt securities
76,787

 
533

 
(2,305
)
 
75,015

Obligations of states and political subdivisions
223,733

 
127

 
(7,484
)
 
216,376

Total debt securities
1,023,842

 
3,401

 
(16,620
)
 
1,010,623

Marketable equity securities, by sector:
 
 
 
 
 
 
 
Banks
32,174

 
482

 
(243
)
 
32,413

Industrial
109

 
58

 
—

 
167

Oil and gas
131

 
77

 
—

 
208

Total marketable equity securities
32,414

 
617

 
(243
)
 
32,788

Total available-for-sale securities
$
1,056,256

 
$
4,018

 
$
(16,863
)
 
$
1,043,411

Held-to-maturity:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
12,321

 
$
654

 
$
(35
)
 
$
12,940

Government-sponsored residential mortgage-backed securities
1,717

 
172

 
—

 
1,889

Total held-to-maturity securities
$
14,038

 
$
826

 
$
(35
)
 
$
14,829

At September 30, 2017, the net unrealized loss on securities available-for-sale of $3.4 million, net of an income tax benefit of $1.2 million, or $2.2 million, was included in accumulated other comprehensive loss on the unaudited Consolidated Statement of Condition.
The amortized cost and fair value of debt securities at September 30, 2017 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.


13
 

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

 
$
—

 
$
—

 
$
—

After 1 year through 5 years
8,909

 
9,146

 
1,171

 
1,190

After 5 years through 10 years
86,544

 
86,864

 
1,098

 
1,047

After 10 years
254,905

 
249,525

 
10,021

 
10,847

 
350,358

 
345,535

 
12,290

 
13,084

Government-sponsored residential mortgage-backed securities
226,636

 
227,131

 
1,403

 
1,535

Government-sponsored residential collateralized debt obligations
172,917

 
172,829

 
—

 
—

Government-sponsored commercial mortgage-backed securities
22,808

 
22,754

 
—

 
—

Government-sponsored commercial collateralized debt obligations
153,490

 
151,198

 
—

 
—

Asset-backed securities
135,606

 
137,729

 
—

 
—

Total debt securities
$
1,061,815

 
$
1,057,176

 
$
13,693

 
$
14,619

At September 30, 2017 and December 31, 2016, the Company had securities with a fair value of $497.3 million and $510.0 million pledged as derivative collateral, collateral for reverse repurchase borrowings, collateral for municipal deposit exposure, and collateral for Federal Home Loan Bank of Boston (“FHLBB”) borrowing capacity.
For the three months ended September 30, 2017 and 2016, gross gains of $235,000 and $325,000 were realized on the sales of available-for-sale securities, respectively. There were gross losses of $77,000 and $277,000 realized on the sales of available-for-sale securities for the three months ended September 30, 2017 and 2016, respectively. For the nine months ended September 30, 2017 and 2016, gross gains of $2.5 million and $2.6 million, respectively, were realized on the sales of available-for-sale securities. There were gross losses of $1.8 million and $743,000 realized on the sale of available-for-sale securities for the nine months ended September 30, 2017 and 2016, respectively.
As of September 30, 2017, 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, 2017, the fair value of the obligations of states and political subdivisions portfolio was $270.5 million, with no significant geographic or issuer exposure concentrations. Of the total state and political obligations of $270.5 million, $110.6 million were representative of general obligation bonds, for which $67.0 million are general obligations of political subdivisions of the respective state, rather than general obligations of the state itself.














14
 

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, 2017 and December 31, 2016:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(In thousands)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
100,725

 
$
(709
)
 
$
—

 
$
—

 
$
100,725

 
$
(709
)
Government-sponsored residential collateralized debt obligations
80,375

 
(588
)
 
3,027

 
(57
)
 
83,402

 
(645
)
Government-sponsored commercial mortgage-backed securities
18,800

 
(65
)
 
—

 
—

 
18,800

 
(65
)
Government-sponsored commercial collateralized debt obligations
125,645

 
(2,295
)
 
6,797

 
(179
)
 
132,442

 
(2,474
)
Asset-backed securities
18,442

 
(62
)
 
2,347

 
(79
)
 
20,789

 
(141
)
Corporate debt securities
24,229

 
(428
)
 
1,627

 
(1,086
)
 
25,856

 
(1,514
)
Obligations of states and political subdivisions
85,636

 
(1,441
)
 
83,023

 
(4,407
)
 
168,659

 
(5,848
)
Total available-for-sale securities
$
453,852

 
$
(5,588
)
 
$
96,821

 
$
(5,808
)
 
$
550,673

 
$
(11,396
)
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
—

 
$
—

 
$
1,047

 
$
(51
)
 
$
1,047

 
$
(51
)
Total held-to-maturity securities
$
—

 
$
—

 
$
1,047

 
$
(51
)
 
$
1,047

 
$
(51
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
156,000

 
$
(2,236
)
 
$
—

 
$
—

 
$
156,000

 
$
(2,236
)
Government-sponsored residential collateralized debt obligations
109,468

 
(1,082
)
 
6,691

 
(281
)
 
116,159

 
(1,363
)
Government-sponsored commercial mortgage-backed securities
23,808

 
(442
)
 
—

 
—

 
23,808

 
(442
)
Government-sponsored commercial collateralized debt obligations
128,238

 
(1,802
)
 
—

 
—

 
128,238

 
(1,802
)
Asset-backed securities
23,415

 
(163
)
 
20,326

 
(825
)
 
43,741

 
(988
)
Corporate debt securities
43,990

 
(885
)
 
3,335

 
(1,420
)
 
47,325

 
(2,305
)
Obligations of states and political subdivisions
156,891

 
(5,620
)
 
41,136

 
(1,864
)
 
198,027

 
(7,484
)
Total debt securities
641,810

 
(12,230
)
 
71,488

 
(4,390
)
 
713,298

 
(16,620
)
Marketable equity securities
19,002

 
(243
)
 
—

 
—

 
19,002

 
(243
)
Total available-for-sale securities
$
660,812

 
$
(12,473
)
 
$
71,488

 
$
(4,390
)
 
$
732,300

 
$
(16,863
)
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-Maturity:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states and political subdivisions
$
—

 
$
—

 
$
1,070

 
$
(35
)
 
$
1,070

 
$
(35
)
Total held-to-maturity securities
$
—

 
$
—

 
$
1,070

 
$
(35
)
 
$
1,070

 
$
(35
)


15
 

Of the available-for-sale securities summarized above as of September 30, 2017, 106 securities had unrealized losses equaling 1.2% of the amortized cost basis for less than twelve months and 43 securities had unrealized losses of 5.7% of the amortized cost basis for twelve months or more. There was one unrealized loss of $51,000 on a debt security held-to-maturity at September 30, 2017. As of December 31, 2016, of the available-for sale securities, 170 securities had unrealized losses equaling 1.9% of the amortized cost basis for less than twelve months and 31 securities had unrealized losses equaling 5.8% of the amortized cost basis for twelve months or more. There was one unrealized loss of $35,000 on a debt security held-to-maturity at December 31, 2016.
Based on its detailed quarterly review of the securities portfolio, management believes that no individual unrealized loss as of September 30, 2017 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 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, 2017.
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 prepayment speeds relative to the prepayment expectations 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 slight increases in the spreads of certain managers over comparable securities’ managers relative to the time of purchase.  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 are 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; the security reprices quarterly at the 3-month LIBOR rate and the security’s spread is low, as compared to market spreads on similar newly issued securities that 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 an upward shift in rates 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.


16
 

Note 4.
Loans Receivable and Allowance for Loan Losses
A summary of the Company’s loan portfolio is as follows:
 
September 30, 2017
 
December 31, 2016
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
Owner-occupied
$
442,989

 
8.5
%
 
$
416,718

 
8.5
%
Investor non-owner occupied
1,777,716

 
34.1

 
1,705,319

 
34.8

Construction
82,688

 
1.6

 
98,794

 
2.0

Total commercial real estate loans
2,303,393

 
44.2

 
2,220,831

 
45.3

 
 
 
 
 
 
 
 
Commercial business loans
821,372

 
15.8

 
724,557

 
14.8

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Residential real estate
1,211,783

 
23.3

 
1,156,227

 
23.6

Home equity
561,814

 
10.8

 
536,772

 
11.0

Residential construction
39,460

 
0.8

 
53,934

 
1.1

Other consumer
267,921

 
5.1

 
209,393

 
4.2

Total consumer loans
2,080,978

 
40.0

 
1,956,326

 
39.9

Total loans
5,205,743

 
100.0
%
 
4,901,714

 
100.0
%
Net deferred loan costs and premiums
15,297

 
 
 
11,636

 
 
Allowance for loan losses
(46,368
)
 
 
 
(42,798
)
 
 
Loans - net
$
5,174,672

 
 
 
$
4,870,552

 
 
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 September 30, 2017, the Company had an allowance for loan losses of $46.4 million, or 0.89%, of total loans as compared to an allowance for loan losses of $42.8 million, or 0.87%, of total loans at December 31, 2016. Management believes that the


17
 

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 2017.
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 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 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.
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 are secured or unsecured and repayment is dependent on the credit quality of the individual borrower. A significant portion of these loans are secured by boats.

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.



18
 

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.
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


19
 

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, 2017 and December 31, 2016:
 
Owner-Occupied CRE
 
Investor CRE
 
Construction
 
Commercial Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
(In thousands)
September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1-5
$
420,714

 
$
1,745,193

 
$
120,400

 
$
787,044

 
$
1,195,036

 
$
556,040

 
$
267,010

Loans rated 6
4,770

 
10,216

 
—

 
17,201

 
926

 
—

 
—

Loans rated 7
17,505

 
22,307

 
1,748

 
17,127

 
15,821

 
5,774

 
911

Loans rated 8
—

 
—

 
—

 
—

 
—

 
—

 
—

Loans rated 9
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
442,989

 
$
1,777,716

 
$
122,148

 
$
821,372

 
$
1,211,783

 
$
561,814

 
$
267,921

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016