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Section 1: 10-Q (10-Q)

Document
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, 2018.
Commission File Number: 001-35028
395661563_ufbancorplogorgb3a31.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 every Interactive Data File required to be submitted 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 such files).    Yes  ý    No  ¨
Indicate by check mark 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”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý

Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨  
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, 2018, there were 51,021,188 shares of Registrant’s no par value common stock outstanding.

 

Table of Contents

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
 



Table of Contents

Part 1 - FINANCIAL INFORMATION
Item 1 - Interim Financial Statements
United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
 
September 30,
2018
 
December 31,
2017
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and due from banks
$
48,786

 
$
56,661

Short-term investments
29,809

 
32,007

Total cash and cash equivalents
78,595

 
88,668

Available-for-sale securities - at fair value
972,035

 
1,050,787

Held-to-maturity securities - at amortized cost

 
13,598

Loans held for sale
86,948

 
114,073

Loans receivable (net of allowance for loan losses of $49,909
at September 30, 2018 and $47,099 at December 31, 2017)
5,495,277

 
5,307,678

Federal Home Loan Bank of Boston stock
42,032

 
50,194

Accrued interest receivable
25,485

 
22,332

Deferred tax asset, net
31,473

 
25,656

Premises and equipment, net
67,612

 
67,508

Goodwill
115,281

 
115,281

Core deposit intangible
3,561

 
4,491

Cash surrender value of bank-owned life insurance
181,928

 
148,300

Other assets
107,271

 
105,593

Total assets
$
7,207,498

 
$
7,114,159

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
759,210

 
$
778,576

Interest-bearing
4,741,153

 
4,419,645

Total deposits
5,500,363

 
5,198,221

Mortgagors’ and investors’ escrow accounts
9,597

 
7,545

Advances from the Federal Home Loan Bank
812,948

 
1,046,458

Other borrowings
113,644

 
118,596

Accrued expenses and other liabilities
61,128

 
50,011

Total liabilities
6,497,680

 
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; 51,146,888 and 51,044,752 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively)
539,528

 
537,576

Additional paid-in capital
5,121

 
4,713

Unearned compensation - ESOP
(5,295
)
 
(5,466
)
Retained earnings
200,478

 
168,345

Accumulated other comprehensive loss, net of tax
(30,014
)
 
(11,840
)
Total stockholders’ equity
709,818

 
693,328

Total liabilities and stockholders’ equity
$
7,207,498

 
$
7,114,159


See accompanying notes to unaudited consolidated financial statements.
3
 

Table of Contents

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,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except share and per share data)
Interest and dividend income:
 
 
 
 
 
Loans
$
61,061

 
$
51,809

 
$
173,799

 
$
147,976

Securities - taxable interest
5,822

 
5,604

 
17,289

 
16,907

Securities - non-taxable interest
2,347

 
2,499

 
7,130

 
7,108

Securities - dividends
748

 
736

 
2,121

 
2,233

Interest-bearing deposits
213

 
151

 
476

 
303

Total interest and dividend income
70,191

 
60,799

 
200,815

 
174,527

Interest expense:
 
 
 
 
 
 
 
Deposits
15,767

 
9,185

 
39,658

 
23,607

Borrowed funds
5,995

 
4,846

 
18,004

 
13,527

Total interest expense
21,762

 
14,031

 
57,662

 
37,134

Net interest income
48,429

 
46,768

 
143,153

 
137,393

Provision for loan losses
2,007

 
2,566

 
6,296

 
7,146

Net interest income after provision for loan losses
46,422

 
44,202

 
136,857

 
130,247

Non-interest income:
 
 
 
 
 
 
 
Service charges and fees
6,623

 
6,514

 
19,324

 
19,343

(Loss) gain on sales of securities, net
(58
)
 
158

 
120

 
710

Income from mortgage banking activities
1,486

 
1,204

 
4,061

 
4,355

Bank-owned life insurance income
1,460

 
1,167

 
4,777

 
3,523

Net loss on limited partnership investments
(221
)
 
(864
)
 
(1,771
)
 
(1,582
)
Other income
265

 
247

 
693

 
635

Total non-interest income
9,555

 
8,426

 
27,204

 
26,984

Non-interest expense:
 
 
 
 
 
 
 
Salaries and employee benefits
22,643

 
20,005

 
65,954

 
59,309

Service bureau fees
2,209

 
2,336

 
6,592

 
6,959

Occupancy and equipment
4,487

 
3,740

 
14,104

 
11,866

Professional fees
1,013

 
1,048

 
3,282

 
3,309

Marketing and promotions
1,119

 
1,087

 
2,993

 
3,036

FDIC insurance assessments
655

 
780

 
2,129

 
2,255

Core deposit intangible amortization
288

 
337

 
930

 
1,075

Other
6,529

 
5,929

 
18,065

 
17,704

Total non-interest expense
38,943

 
35,262

 
114,049

 
105,513

Income before income taxes
17,034

 
17,366

 
50,012

 
51,718

Provision for income taxes
726

 
2,175

 
2,271

 
6,601

Net income
$
16,308

 
$
15,191

 
$
47,741

 
$
45,117

 
 
 
 
 
 
 
 
Net income per share:
 
 
 
 
 
 
 
Basic
$
0.32

 
$
0.30

 
$
0.94

 
$
0.90

Diluted
$
0.32

 
$
0.30

 
$
0.94

 
$
0.89

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
50,624,832

 
50,263,602

 
50,535,569

 
50,246,234

Diluted
51,104,776

 
50,889,987

 
51,026,105

 
50,888,175


See accompanying notes to unaudited consolidated financial statements.
4
 

Table of Contents

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,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
16,308

 
$
15,191

 
$
47,741

 
$
45,117

Other comprehensive (loss) income:
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
Unrealized holding (losses) gains
(6,761
)
 
1,076

 
(29,784
)
 
10,138

Reclassification adjustment for losses (gains) realized in operations (1)
58

 
(158
)
 
(120
)
 
(710
)
Net unrealized (losses) gains
(6,703
)
 
918

 
(29,904
)
 
9,428

Tax effect - benefit (expense)
1,473

 
(330
)
 
6,746

 
(3,387
)
Net-of-tax amount - securities available-for-sale
(5,230
)
 
588

 
(23,158
)
 
6,041

Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
 
 
Unrealized gains (losses)
2,138

 
(131
)
 
9,021

 
(2,073
)
Reclassification adjustment for losses recognized in interest expense (2)
117

 
301

 
546

 
1,104

Net unrealized gains (losses)
2,255

 
170

 
9,567

 
(969
)
Tax effect - (expense) benefit
(496
)
 
(61
)
 
(2,108
)
 
349

Net-of-tax amount - interest rate swaps
1,759

 
109

 
7,459

 
(620
)
Pension and Post-retirement plans:
 
 
 
 
 
 
 
Reclassification adjustment for prior service costs recognized in net periodic benefit cost
1

 
2

 
5

 
5

Reclassification adjustment for losses recognized in net periodic benefit cost (3)
124

 
142

 
370

 
428

Net change in gains and prior service costs
125

 
144

 
375

 
433

Tax effect - expense
(28
)
 
(52
)
 
(83
)
 
(156
)
Net-of-tax amount - pension and post-retirement plans
97

 
92

 
292

 
277

Total other comprehensive (loss) income
(3,374
)
 
789

 
(15,407
)
 
5,698

Comprehensive income
$
12,934

 
$
15,980

 
$
32,334

 
$
50,815

 
(1)
Amounts are included in gain (loss) on sales of securities, net in the unaudited Consolidated Statements of Net Income. Income tax benefit (expense) associated with the reclassification adjustment was $13 and $(57) for the three months ended September 30, 2018 and 2017, respectively. Income tax expense associated with the reclassification adjustment was $26 and $256 for the nine months ended September 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 September 30, 2018 and 2017 was $26 and $108, respectively. Income tax benefit associated with the reclassification adjustment for the nine months ended September 30, 2018 and 2017 was $120 and $398, 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 September 30, 2018 and 2017 was $27 and $51, 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, 2018 and 2017 was $82 and $154, respectively.

See accompanying notes to unaudited consolidated financial statements.
5
 

Table of Contents

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
(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

 

 

 

 
47,741

 
(15,407
)
 
32,334

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

 

 

 

 
(1,551
)
Stock-based compensation expense

 

 
2,160

 

 

 

 
2,160

ESOP shares released or committed to be released

 

 
118

 
171

 

 

 
289

Shares issued for stock options exercised
203,828

 
3,520

 
(1,783
)
 

 

 

 
1,737

Shares issued for restricted stock grants
8,763

 
147

 
(147
)
 

 

 

 

Shares cancelled for restricted stock forfeitures
(9,698
)
 
(164
)
 
164

 

 

 

 

Cancellation of shares for tax withholding
(5,857
)
 

 
(104
)
 

 

 

 
(104
)
Dividends paid ($0.36 per common share)

 

 

 

 
(18,375
)
 

 
(18,375
)
Balance at September 30, 2018
51,146,888

 
$
539,528

 
$
5,121

 
$
(5,295
)
 
$
200,478

 
$
(30,014
)
 
$
709,818

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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


See accompanying notes to unaudited consolidated financial statements.
6
 

Table of Contents

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 
For the Nine Months 
 Ended September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
47,741

 
$
45,117

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Amortization of premiums and discounts on investments, net
3,084

 
3,059

Amortization of intangible assets and purchase accounting marks, net
1,161

 
1,053

Amortization of subordinated debt issuance costs
95

 
95

Stock-based compensation expense
2,160

 
2,052

ESOP expense
289

 
296

Provision for loan losses
6,296

 
7,146

Gains on sales of securities, net
(120
)
 
(710
)
Net unrealized gain on marketable equity securities
(19
)
 

Loans originated for sale
(271,783
)
 
(292,973
)
Principal balance of loans sold
298,908

 
266,071

Increase in mortgage servicing asset
(2,667
)
 
(1,047
)
Gain on sales of other real estate owned
(173
)
 
(296
)
Net change in mortgage banking fair value adjustments
809

 
(2,336
)
(Gain) loss on disposal of equipment
68

 
(42
)
Write-downs of other real estate owned
362

 
342

Depreciation and amortization of premises and equipment
5,713

 
4,206

Net loss on limited partnership investments
1,771

 
1,582

Deferred income tax (benefit) expense
(1,262
)
 
5,769

Increase in cash surrender value of bank-owned life insurance
(4,342
)
 
(3,515
)
Income recognized from death benefits on bank-owned life insurance
(435
)
 
(8
)
Net change in:
 
 
 
Deferred loan fees and premiums
(1,809
)
 
(3,661
)
Accrued interest receivable
(3,153
)
 
(2,122
)
Other assets
(17,526
)
 
(17,644
)
Accrued expenses and other liabilities
11,497

 
5,297

Net cash provided by operating activities
76,665

 
17,731

Cash flows from investing activities:
 
 
 
Proceeds from sales of available-for-sale securities
58,653

 
214,048

Proceeds from calls and maturities of available-for-sale securities
35,790

 
86,859

Principal payments on available-for-sale securities
50,355

 
57,234

Principal payments on held-to-maturity securities

 
317

Purchases of available-for-sale securities
(85,557
)
 
(376,506
)
Redemption of FHLBB and other restricted stock
12,413

 
10,514

Purchase of FHLBB stock
(4,251
)
 
(2,179
)
Proceeds from sale of other real estate owned
2,232

 
1,475

Purchases of loans
(206,217
)
 
(173,356
)
Loan originations, net of principal repayments
10,657

 
(135,468
)
Proceeds from bank-owned life insurance death benefits
1,082

 
12

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

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

 

Purchases of premises and equipment
(5,934
)
 
(14,219
)
Proceeds from sales of equipment

 
707

Net cash used in investing activities
(134,485
)
 
(330,562
)

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

Table of Contents

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Concluded
(Unaudited)
 
For the Nine Months 
 Ended September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from financing activities:
 
 
 
Net increase (decrease) in non-interest-bearing deposits
(19,366
)
 
17,080

Net increase in interest-bearing deposits
321,690

 
425,354

Net increase (decrease) in mortgagors’ and investors’ escrow accounts
2,052

 
(3,713
)
Net decrease in short-term FHLBB advances
(203,000
)
 
(144,000
)
Repayments of long-term FHLBB advances
(1,174
)
 
(1,138
)
Repayments of called FHLBB advances
(30,000
)
 
(45,000
)
Proceeds from long-term FHLBB advances
950

 
95,000

Net change in other borrowings
(5,112
)
 
(4,803
)
Proceeds from exercise of stock options
1,737

 
1,546

Common stock repurchased
(1,551
)
 
(1,312
)
Cancellation of shares for tax withholding
(104
)
 
(340
)
Cash dividend paid on common stock
(18,375
)
 
(18,270
)
Net cash provided by financing activities
47,747

 
320,404

Net increase (decrease) in cash and cash equivalents
(10,073
)
 
7,573

Cash and cash equivalents, beginning of period
88,668

 
90,944

Cash and cash equivalents, end of period
$
78,595

 
$
98,517

 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Cash paid during the year for:
 
 
 
Interest
$
56,138

 
$
37,084

Income taxes, net
1,276

 
5,159

Transfer of loans to other real estate owned
2,075

 
2,075

Change in due to broker, investment purchases

 
(6
)

See accompanying notes to unaudited consolidated financial statements.
8
 

Table of Contents

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
 

Table of Contents

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 Consolidated 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:
Disclosure
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The Update was issued as a part of FASB’s disclosure project to improve the effectiveness of disclosures in the notes to financial statements. The amendments in this Update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. The amendments in this Update are effective for fiscal years ending after December 15, 2020. Early adoption is permitted and amendments should be applied on a retrospective basis to all periods presented. This ASU will affect the Company’s disclosure only and will not have a financial statement impact.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement as a result of a broader disclosure project. The Update amends the disclosure requirements for fair value measurements to improve the effectiveness of the disclosure. The Update removes and modifies certain disclosure requirements, as well as adds requirements for public business entities. The ASU is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. An entity is permitted to early adopt any removed or modified disclosures upon issuance of the Update and delay adoption of the additional disclosures until their effective date. This ASU will affect the Company’s disclosures only and will not have a financial statement impact.
Compensation
In June 2018, the 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. 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 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, 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


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fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. All entities may adopt the amendments in this Update 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). 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 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.
In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements, which revised the transition approach to no longer require leases to be recognized at the beginning of the earliest period presented using a modified retrospective approach. Instead, adopters can take the prospective approach upon transition which allows entities to not recast comparative periods upon transition. There are also a number of optional practical expedients that entities may elect to apply.
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 continually assess the impact of the requirements of the new guidance. Upon adoption of this ASU on January 1, 2019, the Company expects to record an increase in assets of approximately $50.0 million and an increase in liabilities of approximately $56.0 million on the Consolidated Statements of Condition as a result of recognizing the right-of-use assets and lease liabilities.


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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 September 30, 2018 and December 31, 2017 are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
(In thousands)
September 30, 2018
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
215,541

 
$
67

 
$
(8,034
)
 
$
207,574

Government-sponsored residential collateralized debt obligations
174,481

 

 
(4,355
)
 
170,126

Government-sponsored commercial mortgage-backed securities
28,771

 

 
(1,579
)
 
27,192

Government-sponsored commercial collateralized debt obligations
157,592

 

 
(8,678
)
 
148,914

Asset-backed securities
99,348

 
321

 
(731
)
 
98,938

Corporate debt securities
83,486

 
49

 
(3,213
)
 
80,322

Obligations of states and political subdivisions
251,616

 
397

 
(13,044
)
 
238,969

Total available-for-sale debt securities
$
1,010,835

 
$
834

 
$
(39,634
)
 
$
972,035

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

At September 30, 2018, the net unrealized loss on securities available-for-sale of $38.8 million, net of an income tax benefit of $8.5 million, or $30.3 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.


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The amortized cost and fair value of debt securities at September 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
13,820

 
13,564

After 5 years through 10 years
85,884

 
81,973

After 10 years
235,398

 
223,754

 
335,102

 
319,291

Government-sponsored residential mortgage-backed securities
215,541

 
207,574

Government-sponsored residential collateralized debt obligations
174,481

 
170,126

Government-sponsored commercial mortgage-backed securities
28,771

 
27,192

Government-sponsored commercial collateralized debt obligations
157,592

 
148,914

Asset-backed securities
99,348

 
98,938

Total available-for-sale debt securities
$
1,010,835

 
$
972,035


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 increased accumulated other comprehensive losses of January 1, 2018 by $177,000. For the three and nine months ended September 30, 2018, there were $20,000 and $19,000, respectively, in unrealized gains recognized in other income in the Consolidated Statement of Net Income on marketable equity securities. At September 30, 2018, the fair value of marketable equity securities was $437,000, which includes gross unrealized gains of $196,000, and is included in other assets on the Consolidated Statement of Condition.
At September 30, 2018 and December 31, 2017, the Company had securities with a fair value of $485.0 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.
There were no gains realized on sales of available-for-sale securities for the three months ended September 30, 2018. For the three months ended September 30, 2017, gross gains of $235,000 were realized on the sales of available-for-sale securities. For the nine months ended September 30, 2018 and 2017, gross gains of $418,000 and $2.5 million, respectively, were realized on the sales of available-for-sale securities. There were gross losses of $58,000 and $77,000 realized on the sale of available-for-sale securities for the three months ended September 30, 2018 and 2017, respectively. There were gross losses of $298,000 and $1.8 million realized on the sale of available-for-sale securities for the nine months ended September 30, 2018 and 2017, respectively.
As of September 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 September 30, 2018, the fair value of the obligations of states and political subdivisions portfolio was $239.0 million, with no significant geographic or issuer exposure concentrations. Of the total state and political obligations of $239.0 million, $103.1 million were representative of general obligation bonds, for which $57.0 million are general obligations of political subdivisions of the respective state, rather than general obligations of the state itself.


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The following table summarizes gross unrealized losses and fair value, aggregated by category and length of time the securities have been in a continuous unrealized loss position, as of September 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)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
122,253

 
$
(4,011
)
 
$
84,143

 
$
(4,023
)
 
$
206,396

 
$
(8,034
)
Government-sponsored residential collateralized debt obligations
109,280

 
(1,963
)
 
60,846

 
(2,392
)
 
170,126

 
(4,355
)
Government-sponsored commercial mortgage-backed securities
16,905

 
(1,025
)
 
10,287

 
(554
)
 
27,192

 
(1,579
)
Government-sponsored commercial collateralized debt obligations
30,175

 
(1,143
)
 
118,740

 
(7,535
)
 
148,915

 
(8,678
)
Asset-backed securities
51,847

 
(650
)
 
6,489

 
(81
)
 
58,336

 
(731
)
Corporate debt securities
56,939

 
(2,131
)
 
17,334

 
(1,082
)
 
74,273

 
(3,213
)
Obligations of states and political subdivisions
109,945

 
(3,506
)
 
120,383

 
(9,538
)
 
230,328

 
(13,044
)
Total available-for-sale debt securities
$
497,344

 
$
(14,429
)
 
$
418,222

 
$
(25,205
)
 
$
915,566

 
$
(39,634
)
 
 
 
 
 
 
 
 
 
 
 
 
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 September 30, 2018, 131 securities had unrealized losses equaling 2.8% of the amortized cost basis for less than twelve months and 117 securities had unrealized losses of 5.7% 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 September 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


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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, 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 securitiesThe 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, as well as the market prices of certain securities reflecting the likelihood that they will be called at par prior to the maturity date.
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:
 
September 30, 2018
 
December 31, 2017
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
Owner-occupied
$
434,906

 
7.9
%
 
$
445,820

 
8.3
%
Investor non-owner occupied
1,888,848

 
34.1

 
1,854,459

 
34.7

Construction
78,235

 
1.4

 
78,083

 
1.5

Total commercial real estate loans
2,401,989

 
43.4

 
2,378,362

 
44.5

 
 
 
 
 
 
 
 
Commercial business loans
861,030

 
15.6

 
840,312

 
15.7

 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
Residential real estate
1,283,126

 
23.2

 
1,204,401

 
22.6

Home equity
579,907

 
10.5

 
583,180

 
10.9

Residential construction
32,750

 
0.6

 
40,947

 
0.8

Other consumer
369,781

 
6.7

 
292,781

 
5.5

Total consumer loans
2,265,564

 
41.0

 
2,121,309

 
39.8

Total loans
5,528,583

 
100.0
%
 
5,339,983

 
100.0
%
Net deferred loan costs and premiums
16,603

 
 
 
14,794

 
 
Allowance for loan losses
(49,909
)
 
 
 
(47,099
)
 
 
Loans - net
$
5,495,277

 
 
 
$
5,307,678

 
 


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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, 2018, the Company had an allowance for loan losses of $49.9 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.


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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 business, 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.


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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 business 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.


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The following table presents the Company’s loans by risk rating at September 30, 2018 and December 31, 2017:
 
Owner-Occupied CRE
 
Investor CRE
 
Construction
 
Commercial Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
(In thousands)
September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1-5
$
409,023

 
$
1,860,775

 
$
107,796

 
$
816,742

 
$
1,265,194

 
$
574,188

 
$
367,499

Loans rated 6
9,684

 
14,001

 
2,231

 
29,448

 
2,614

 
275

 

Loans rated 7
16,199

 
14,072

 
958

 
14,840

 
15,318

 
5,444

 
2,282

Loans rated 8

 

 

 

 

 

 

Loans rated 9

 

 

 

 

 

 

 
$
434,906

 
$
1,888,848

 
$
110,985

 
$
861,030

 
$
1,283,126

 
$
579,907

 
$
369,781

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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



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Activity in the allowance for loan losses for the periods ended September 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 September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
3,851

 
$
17,221

 
$
1,498

 
$
10,526

 
$
7,956

 
$
3,246

 
$
2,935

 
$
1,930

 
$
49,163

Provision (credit) for loan losses
28

 
(90
)
 
98

 
80

 
106

 
10

 
1,725

 
50

 
2,007

Loans charged off

 

 

 
(323
)
 
(64
)
 
(80
)
 
(1,273
)
 

 
(1,740
)
Recoveries of loans previously charged off
87

 
18

 

 
247

 
2

 
34

 
91

 

 
479

Balance, end of period
$
3,966

 
$
17,149

 
$
1,596

 
$
10,530

 
$
8,000

 
$
3,210

 
$
3,478

 
$
1,980

 
$
49,909

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of period
$
3,686

 
$
15,537

 
$
1,702

 
$
9,859

 
$
7,828

 
$
3,006

 
$
1,908

 
$
1,536

 
$
45,062

Provision (credit) for loan losses
(82
)
 
147

 
219

 
842

 
264

 
443

 
669

 
64

 
2,566

Loans charged off

 
(85
)
 

 
(499
)
 
(248
)
 
(304
)
 
(530
)
 

 
(1,666
)
Recoveries of loans previously charged off