10-K 1 ubnk2017123110-k.htm 10-K Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
þ
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Fiscal Year Ended December 31, 2017
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-35028
ufbancorplogorgb3a21.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)
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Title of Class
 
Name of each exchange where registered
Common Stock, no par value
 
NASDAQ Global Select Stock Market
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨  Yes.        þ  No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Act. ¨  Yes        þ  No
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.    þ  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 period that the registrant was required to submit and post such files).    þ  Yes        ¨  No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ
Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12B-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
¨
 
 
 
 
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12B-2 of the Act).    Yes  ¨        No  þ
The aggregate market value of voting and non-voting common equity held by non-affiliates of United Financial Bancorp, Inc. as of June 30, 2017 was $821.0 million based upon the closing price of $16.69 as of June 30, 2017, the last business day of the registrant’s most recently completed second quarter. Directors and officers of the Registrant are deemed to be affiliates solely for the purposes of this calculation.
As of January 31, 2018, there were 51,021,416 shares of Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders, expected to be filed pursuant to Regulation 14A within 120 days after the end of the 2017 fiscal year, are incorporated by reference into Part III of this Report on Form 10-K.

 
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United Financial Bancorp, Inc.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2017
Table of Contents
 
 
Page No.
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
Item 15.
Item 16.

 
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Part I
FORWARD-LOOKING STATEMENTS
This Form 10-K contains forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. These risks and uncertainties could cause our results to differ materially from those set forth in such forward-looking statements.
Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements but are not the only means to identify these statements.
Factors that have a material adverse effect on operations include, but are not limited to, the following:
•
Local, regional, national and international business or economic conditions may differ from those expected;
•
The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Board’s interest rate policies, may adversely affect our business;
•
The ability to increase market share and control expenses may be more difficult than anticipated;
•
Changes in government regulations (including those concerning taxes, banking, securities and insurance) may adversely affect us or our businesses, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Basel III update to the Basel Accords;
•
Changes in accounting policies and practices, as may be adopted by regulatory agencies or the Financial Accounting Standards Board, may affect expected financial reporting;
•
Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock;
•
Technological changes and cyber-security matters;
•
Changes in demand for loan products, financial products and deposit flow could impact our financial performance;
•
The timely development and acceptance of new products and services and perceived overall value of these products and services by customers;
•
Adverse conditions in the securities markets that lead to impairment in the value of securities in our investment portfolio;
•
Strong competition within our market area may limit our growth and profitability;
•
We have opened and plan to open additional new branches and/or loan production offices which may not become profitable as soon as anticipated, if at all;
•
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease;
•
Our stock value may be negatively affected by banking regulations;
•
Changes in the level of non-performing assets and charge-offs;
•
Because we intend to continue to increase our commercial real estate and commercial business loan originations, our lending risk may increase, and downturns in the real estate market or local economy could adversely affect our earnings;
•
The trading volume in our stock is less than in larger publicly traded companies which can cause price volatility, hinder your ability to sell our common stock and may lower the market price of the stock;
•
We may not manage the risks involved in the foregoing as well as anticipated;
•
Our ability to attract and retain qualified employees; and
•
Severe weather, natural disasters, acts of God, war or terrorism and other external events could significantly impact our business.
Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Form 10-K. Except as required by applicable law or regulation, management undertakes no obligation to update these forward-looking statements to reflect events or circumstances that occur after the date on which such statements were made.


 
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Item 1.    Business
General
United Financial Bancorp, Inc., a publicly-owned registered financial holding company, is headquartered in Hartford, Connecticut and is a Connecticut corporation. The Company completed the “second-step” conversion from a mutual holding company structure to a stock holding company structure in March 2011. United’s common stock is traded on the NASDAQ Global Select Stock Exchange under the symbol “UBNK.” The Company’s principal asset at December 31, 2017 is the outstanding capital stock of United Bank, a wholly-owned subsidiary of the Company. United had assets of $7.11 billion and equity of $693.3 million at December 31, 2017.
OnnApril 30, 2014, Rockville Financial, Inc. (“Rockville”) completed its merger with United Financial Bancorp, Inc. (“Legacy United”) and changed its legal entity name to United Financial Bancorp, Inc. In connection with this merger, Rockville Bank, the Company’s principal asset and wholly-owned subsidiary, completed its merger with Legacy United’s banking subsidiary, United Bank, and changed its name to United Bank (the “Bank”). Discussions throughout this report related to the merger with Legacy United are referred to as the “Merger.” The Merger doubled our size, adding $2.40 billion of assets and $356.4 million of stockholders’ equity, in addition to expanding our branch network and footprint into the Springfield and Worcester regions of Massachusetts.
References in this report to the Company, United, our, we, or us, mean United Financial Bancorp, Inc. and its consolidated subsidiaries.
Description of Business
The Bank is a state-chartered stock savings bank organized in Connecticut in 1858. The Company, through United Bank, delivers financial services to individuals, families and businesses primarily in Connecticut and Massachusetts, including retail, commercial and consumer banking, as well as financial advisory services. United maintains 53 retail banking locations, commercial and mortgage loan production offices and 64 ATMs. Personal and business banking customers also bank with United online through its website at www.bankatunited.com as well as its mobile and telephone banking channels.
Our Four Key Objectives
The Company seeks to organically grow through favorable risk adjusted returns; continually deliver superior value to its customers, stockholders, employees and communities, and will periodically consider mergers/acquisitions opportunities, through achievement of its four key operating objectives which are to:
1.
Align earning asset growth with organic capital and low cost core deposit generation to maintain strong capital and liquidity;
•
During the year ending December 31, 2017, loans and deposits grew 9.0% and 10.3%, respectively, from the prior year end, and capital grew 5.7% over the same time period.
•
The Company grew non-interest bearing deposit accounts 10.0% in the year ending December 31, 2017 from the prior year end.

2.
Re-mix cash flows into better yielding risk adjusted return on assets with lower funding costs relative to peers;
•
Growth focused on commercial business, owner occupied commercial real estate loans and home equity loans which increased year over year 16.0%, 7.0% and 8.6%, respectively.
•
The tax equivalent net interest margin increased five basis points over the prior year period.

3.
Invest in people, systems and technology to grow revenue and improve customer experience while maintaining attractive cost structure;
•
During 2017, the Company continued to make strategic investments in its Information Technology and Project Management human capital to preserve, enhance, and acquire systems and processes that support products and services for our current and prospective customers that have a compelling value proposition.
•
The Company’s ratio of non-interest expense to average assets improved to 2.08% for the year ended December 31, 2017 compared to 2.10% and 2.25% for the years ended December 31, 2016 and 2015, respectively.

4.
Grow operating revenue, maximize operating earnings, grow tangible book value and pay dividends. Achieve more revenue into non-interest income and core fee income;
•
During 2017, the Company continued its strategy of reducing its effective tax rate through utilization of tax exempt loans, municipal securities, and investments in bank owned life insurance, maintaining entities in our unconsolidated corporate structure that have state tax advantages, and maintaining a portfolio of tax credit investments that include alternative energy and affordable housing. These tax reduction strategies support tangible book value creation. Through effective tax planning strategies that had been put in place by the Company, we

 
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were able to limit the impact of the reduction on our deferred tax assets to $1.4 million in 2017 from the enactment of the Tax Cuts and Jobs Act that was signed into law on December 22, 2017. Absent the Tax Cut and Jobs Act the Company’s effective tax rate would have been in line with the previous year’s effective tax rate.
•
The Company continued to pay its dividend, totaling $0.48 per share in each 2017 and 2016, compared to $0.46 per share in 2015.
•
Tangible book value per share totaled $11.24 as of December 31, 2017, an increase of $0.71 per share, or 6.7%, compared to $10.53 per share at December 31, 2016, which increased $0.46, per share or 4.6%, in 2016 from December 31, 2015.
•
Revenue increased $16.5 million, or 8.2%, from 2016 and increased $4.1 million in 2016, or 2.1%, from 2015.
The Company strives to remain a leader in meeting the financial service needs of the community and to provide superior customer service to the businesses and individuals in the market areas it serves. United Bank is a community-oriented provider of traditional banking products and services to business organizations and individuals, offering products such as commercial and residential real estate loans, commercial business loans, consumer loans, a variety of deposit products and financial advisory services.
Our business philosophy is to remain a community-oriented franchise and continue to focus on organic growth supplemented through acquisitions/mergers and provide superior customer service to meet the financial needs of the communities in which we operate. Current priorities are to continue efficiency improvements, grow fee income businesses including financial advisory and mortgage banking, expand our commercial business lending activities and grow our deposit base.
Enterprise Risk Management Approach
The Company has made significant investments in its enterprise risk management approach. Management has established committees that manage strategic risks of the Company including oversight of specialized groups that bring in a broader team to address tactical and operational considerations. Board Risk Committee (“BRC”) has oversight over several management committees that report into it, including the Management Asset Liability Committee (“ALCO”) which oversees credit risk management. Credit risk management is overseen by our Chief Credit Officer in conjunction with our Chief Risk Officer.
Risk Committees & Operational Risks
Risk Management Steering Committee (“RMSC”) is responsible for ensuring overall compliance with the Company’s Risk Management Policy. RMSC reviews and approves new or revised business proposals as required by the Risk Management Policy to ensure that the initiative is within the Board approved risk tolerance levels. RMSC oversees and approves risk management practices deployed throughout the Company to assist the Board in identifying, assessing, measuring, controlling and monitoring the various risks that the Company faces. RMSC ensures that a risk management infrastructure is established to manage credit, interest rate, liquidity, market, legal, compliance, strategic, operation, and reputational risks. Further activities of the RMSC, includes reviewing the Risk Management Policy, monitoring exceptions to risk limits and making recommendations to the BRC for revisions to the Company’s risk tolerance levels. RMSC reviews and provides feedback on the annual Company-wide risk assessment report including providing corrective action plans for identified deficiencies, monitoring the Company’s risk profile and its ongoing and potential exposures to internal and external risks; reviews and recommends for approval to the Board Risk Committee the Company’s Business Continuity and Disaster Recovery Plan, Bank Secrecy Act Program, Identity Theft Prevention Program, Annual Information Security Report and the Information Security Program and related policies; as well as review and approval of the Company’s high risk vendors and Incidence Response Plan. The RMSC is chaired by the Chief Risk Officer.
The Management Risk Committee’s (“MRC”) purpose is to review, consider and discuss the macro risks facing the Company.  The Company and the industry are confronted daily with new and ever-changing risks. The degree and magnitude of these risks can change; however, MRC recognizes that these risks can and will remain in some form and can be tied to macro events beyond Management’s control. The MRC functions as a mechanism to educate managers on risk management concepts and to establish open communication channels across business lines in which to understand and manage company-wide business risks and opportunities.  As Management is responsible for identifying, measuring, controlling and monitoring risks across the Company, the MRC is charged with the responsibility for reviewing the results of key risk assessments conducted by Management in the areas of Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”), Customer Identification Program (“CIP”), Office of Foreign Assets Control (“OFAC”), Automated Clearing House (“ACH”), Internal Fraud, Operational, Vendor Management, Information Technology and Information Security recommending further enhancements to the Company’s risk management practices. Additional responsibilities include oversight of the Company’s compliance with Sarbanes-Oxley requirements, the review and approval of new or revised business proposals and staying abreast of new and changing risks facing the banking industry and the Company. Key to providing oversight of potential third-party risks, the MRC is also responsible for reviewing the adequacy of the Company’s formal Vendor Management Program and the ongoing monitoring activities of its significant vendors. The MRC

 
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members will report on key operational risks affecting their area of responsibilities and risk strategies to be deployed on an ongoing basis. The MRC is chaired by the Chief Risk Officer. The Chief Risk Officer reports directly to the Chief Executive Officer.
    
The Enterprise Risk Management Department is responsible for the development and ongoing maintenance of a formal Vendor Management Program. This comprehensive program provides the requirements for the selection, due diligence, contract review and ongoing monitoring of vendors to identify, manage and control third-party risks (operational, financial, strategic, compliance, reputational and legal). The Enterprise Risk Management Department updates the Program as necessary to maintain compliance with regulatory requirements and new regulatory guidance. It is the responsibility of Enterprise Risk to oversee the Company’s adherence with this Program and ensure proper vendor documentation is maintained. 
The Company has developed a comprehensive Business Continuity Management (“BCM”) Program framework based on our size and complexity. It’s goal is to minimize financial losses to the institution, serve customers and financial markets with minimal disruptions, and mitigate the negative effects of disruptions on business operations. We manage our Business Continuity Risk by establishing and implementing a policy and associated plans that help to ensure the availability of critical business processes. The BCM Plans reflect the following risk management objectives for the program: prioritization of business objectives and critical operations that are essential for business continuance; development and maintenance of BCM Plans to provide for the recovery and resumption of affected critical processes, including reliance on critical IT Services, Data, Applications & Equipment, Third Party Vendors, Facilities and Personnel. Periodic and as-necessary updates are made to each BCM Plan based on changes in United Bank’s organizational structure or business processes covered by any such plan, audit or independent function recommendations and lessons learned from validation exercises or actual events.

The Company has made significant investments in the creation of a Financial Intelligence Unit (“FIU”) that ensures the Company maintains compliance with the Bank Secrecy Act (“BSA”), USA PATRIOT Act and OFAC regulations. One of the main purposes of the FIU is to identify financial transactions that may involve tax evasion, money laundering or some other criminal activity. The Company has developed a robust BSA Program that includes a system of internal controls to ensure ongoing compliance based on the BSA Risk Assessment; independent audits; designation of a BSA/AML/OFAC Officer responsible for coordinating and monitoring day to day compliance; and training of all appropriate Company personnel on a periodic basis. The Company has developed a risk assessment that identifies the Company’s BSA/AML and OFAC risk profile. Our risk assessment consists of assessment of products, services, customers, entities and geographic locations. The risk assessment program is an ongoing process. The Board of Directors and senior management update the risk assessment periodically or when the Company’s risk profile changes in a material manner such as when new products and services are introduced, existing products and services change, high risk customer’s open and close accounts, or the Company expands through mergers and acquisitions. The Company maintains a comprehensive system for detecting and deterring such transactions that is commensurate with the Company’s risk for money laundering and terrorist financing. The FIU gathers information about the financial affairs of customers, to understand, and predict their intentions.

The Company has established an Information Security Program and dedicated Department to protect customers’, employees’ and stakeholders’ information from unauthorized disclosure, modification and destruction. The Program ensures that the confidentiality, integrity and availability of information are protected by implementing Company-wide risk assessments, policies, standards, controls, procedures and reviews designed to manage and control risk and to secure information through technical, administrative and physical controls.

The Information Security Program includes a cybersecurity program that consists of identifying, measuring, mitigating, monitoring and reporting cybersecurity-related risks.

Technology Governance
Technology Governance Committee (“TGC”) is responsible to act as a decision making authority over technology capital investments, technology resource allocation and utilization. The TGC approves and monitors key strategic technology projects and plans that are required to fulfill critical business outcomes. The TGC acts as a communication forum to exchange critical information to ensure that technology strategies and initiatives are optimized to achieve maximum business value. The TGC will review all strategic project progress, as well as address major project challenges and opportunities, as appropriate. Additionally, the TGC is updated regularly on key technology trends in the financial services sector that may affect technology direction, technology standards, and use of technology within the Company or in conjunction with its partners. Responsibilities include but are not limited to: (a) act as a strategic body and in the best interest of the enterprise as a whole; (b) improve communication between technology and the business units; (c) review and approve funding for all projects exceeding $30,000 for internal or external technology expense; (d) review and approve the annual Information Technology Strategic and Operational Plan; (e) participate in the annual resource planning and allocation for development, enhancements and production support; (f) participate

 
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in technology updates, presentations and/or briefings that are germane to the business and will cultivate an atmosphere of informed decision making relative to technology alternatives; (g) oversee the justification criteria for technology investment decisions and resource allocations; (h) validate and ensure that all technology projects have consistent and measurable justification; (i) ensure that technology decisions and priorities are consistent with the overall business strategy; (j) establish and adjust, as appropriate, the priority-setting process and score card; (k) provide approval for significant project scope changes and/or schedule changes, as appropriate; (l) review and approve, as required, significant unplanned expenditures related to projects contained within and/or added to the plan; (m) review and approve any major reallocation of resources made necessary by priority changes required to meet business needs; (n) be enlightened proponents of technology within the business community providing communication and support for TGC actions and decisions; and (o) support the objectives to comply with technology principles, standards and internal controls. The TGC is chaired by the Chief Information & Administration Officer, who reports directly to the Chief Executive Officer.
Asset Liability Committee & Oversight

ALCO is responsible for ensuring overall compliance with the Company’s Asset Liability Management policies and suggesting changes to the BRC and Board of Directors for approval; as well as maintaining responsibility for the development and oversight of the Company’s asset/liability management strategies, management of the investment portfolio, liquidity risk management framework, loan and deposit pricing strategies, use of off-balance sheet hedging instruments and the supervision of the accuracy and adequacy of management information systems utilized for reporting  and supplying data to the ALCO to fulfill its role on a timely basis. Further activities include but are not limited to reviewing and analyzing output from the internal Interest Rate Risk Model, interpreting economic data and outlooks for interest rates to develop strategies to respond proactively to changes in loan and deposit product offerings, reviewing asset allocation strategies and the relative risk/return profiles, reviewing capital allocation strategies and capital adequacy results, reviewing and approving strategies related to tax credit investments and performance, reviewing the Bank and Holding Company liquidity positions and respective borrowing capacities, expected loan demand, and recommend adjustments to strategy. The ALCO is further responsible for oversight of authorities delegated to the Investment Committee (“IC”), the Secondary Marketing Committee (“SMC”) and the Executive Pricing Committee (“EPC”). The ALCO is chaired by the Chief Financial Officer. The Chief Financial Officer reports directly to the Chief Executive Officer.
    
The IC is charged with the responsibility of advising ALCO, the Board and other key stakeholders of the investment policy, with implementation of investment portfolio strategy and compliance with investment policy guidelines. The IC shall formulate and propose investment policy modifications to the ALCO, BRC and Board and shall implement such changes to the policy as approved by the governing bodies. In addition, the IC shall oversee the performance monitoring of the investment assets of the Company by monitoring the management of the portfolio assets for compliance with investment guidelines, overseeing the purchase and sale of securities, reviewing duration and yield performance of the portfolio, addressing the implications of portfolio stress testing and assessing the performance of the assets relative to the Company’s peer group and market indices. The IC is also responsible for evaluating and assessing new investment strategies from a risk and reward perspective and ensuring that such strategies do not create exceptions to the existing policy. The IC meeting can occur through assembly of the ALCO; however, the IC may meet more frequently to assess the implications of market movements, regulatory changes and performance of the portfolio.   
ALCO shall serve as the strategic decision making and governing body for the secondary marketing initiative for the Company’s residential loan portfolio, with managing authority delegated to the SMC, which meets monthly. The SMC shall establish the Company’s budgeted pricing spreads through valuation mortgage servicing rights (“MSR”), setting the price offering and selling of mortgages via the secondary market at the whole loan or securities level for the purposes of achieving the Company’s targeted  gain on sale and servicing rights levels. The SMC manages the interest rate risk management of the open pipeline through the Board approved hedge instruments and a lock policy. The SMC also serves as the governor of new originations for the Company’s mortgage portfolio ensuring that the targeted asset mix is maintained at approved levels. The SMC produces monthly reporting of hedge and sale activity for ALCO as well as the Board level policy exception reporting.

ALCO is responsible for the strategic oversight of the Company’s deposit pricing strategies, with managing authority delegated to the EPC. The meeting of the EPC can occur through the assembly of the ALCO; however, the EPC may meet more often as necessary, to address pricing opportunities and assess pricing strategy related to the Company’s retail, commercial and municipal deposit programs. The EPC is responsible for a review of the Company’s retail, commercial and municipal deposit trends and a review of the Company’s structural liquidity ratios and implications related to anticipated deposit inflows or outflows.  In the event that circumstances occur that result in a stress to the Company’s liquidity profile and activation of the Contingent Liquidity Plan, elevated and more frequent levels of deposit and liquidity reporting are to be provided to the EPC and, depending on the perceived severity of the stress scenario, reporting is to be elevated to the Board of Directors.  Under normal operating conditions, the EPC is responsible for reviewing pricing for the Company’s deposit programs, deposit specials, new deposit initiatives and the competitive landscape of the Company’s deposit footprint.

 
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Credit Risk Management Oversight

The Company adheres to established underwriting practices which include, lending limits to specific borrowers, accountability throughout the approval process with established lending authorities and risk rating classification, which considers various financial performance metrics of the borrower. The Company has established an internal loan review process as well as an external loan review process via an independent third-party vendor in order to review originated loans. Findings from the external loan review are reported to the Chief Risk Officer and the Chief Credit Officer, and the full report is presented to the Board Risk Committee on a quarterly basis.

Delinquency and Watched Assets Committees are responsible for the oversight of loans which have experienced financial difficulties or have not made all contractual payments in accordance with the loan terms. Delinquencies are discussed on a monthly basis with special assets and collections in order to determine if there is any risk of loss. Adversely rated loans are presented quarterly to the Watched Asset Committee or Loans in Litigation Committee to determine loss exposure and related reserves. There are various credit management practices utilized to manage loans which are considered performing including the review of borrower financial performance, testing existing loan conditions and covenants, industry concentrations and the evaluation of economic and market risks. These credit management practices are established to determine overall risk prior to the loan becoming adversely classified.

On a quarterly basis, credit risk management provides portfolio and asset quality reporting to the Board Risk Committee. Portfolio presentation materials include discussions of the various loan portfolios, loans to one borrower reporting, concentration to various industries, concentration in various geographical regions and other underwriting metrics which are critical to managing credit risk. Asset quality reporting includes items such as, non-performing loan totals, delinquencies, Troubled Debt Restructures (“TDR’s”), watched assets, loans in litigation, charge-offs and recoveries as well as the adequacy of the allowance for loan and lease loss. The Credit Risk Management process is overseen by the Chief Credit Officer in close consultation with the Chief Risk Officer. Both the Chief Credit Officer and Chief Risk Officer report directly to the Chief Executive Officer.

Competition
The Company is subject to strong competition from banks and other financial institutions, including savings and loan associations, commercial banks, finance and mortgage companies, credit unions, consumer finance companies, brokerage firms and insurance companies. Certain of these competitors are larger financial institutions with substantially greater resources, larger lending limits, larger branch systems and a wider array of commercial banking services than United. Competition from both bank and non-bank organizations is expected to continue. Competition could intensify in the future as a result of industry consolidation, the increasing availability of products and services from non-banks, greater technological developments in the industry and banking regulatory reform.
The Company faces substantial competition for deposits and loans throughout its market area. The primary factors in competing for deposits are interest rates, personalized services, the quality and range of financial services, convenience of office locations, online banking services, automated services and office hours. Competition for deposits comes primarily from other savings institutions, commercial banks, credit unions, mutual funds and other investment alternatives. The primary factors in competing for loans are interest rates, loan origination fees, the quality and range of lending services, online services and personalized service. Competition for origination of loans comes primarily from other savings institutions, mortgage banking firms, mortgage brokers and commercial banks and from other non-traditional lending financial service providers such as internet based lenders and insurance and securities companies. Competition for deposits, for the origination of loans and for the provision of other financial services may limit the Company’s future growth.
Market Area
For our deposit gathering activities, we operate in primarily suburban market areas throughout Connecticut and Massachusetts that have a stable population and household base. Currently, we maintain 53 retail banking branches covering markets throughout Connecticut and Massachusetts, providing customers access to full-service banking opportunities including retail and commercial banking, consumer and commercial lending, and financial advisory services.
Our retail banking and lending offices are located in Connecticut throughout Hartford, Fairfield, New Haven, New London and Tolland Counties and in Massachusetts in West Springfield, Greater Springfield and Worcester regions. In addition, we maintain a commercial loan production office and a mortgage loan origination office in New Haven County, supported by two retail branches in Hamden and North Haven, Connecticut. Our market area in Connecticut is located in the north central part of the state including,

 
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in part, the eastern and western parts of the greater Hartford metropolitan area, the central part of New Haven County and Fairfield County through our Westport loan production office. Our market area in Massachusetts covers a wide geography in the western and central parts of the state.
Our Connecticut and Massachusetts markets have a mix of industry groups and employment sectors, including financial services, wholesale/retail trade, construction and manufacturing as the basis of the local economy. The Company’s primary deposit gathering area consists of the communities and surrounding towns that are served by its branch network.
Our primary lending area is much broader than our primary deposit gathering area and includes the entire state of Connecticut as well as Massachusetts and to a lesser extent New England and certain Mid-Atlantic states, although; as of December 31, 2017, most of the Company’s loan portfolios are made to borrowers in its primary deposit gathering area.
Lending Activities
General
The Company’s wholesale lending team includes bankers, cash management specialists and originators, underwriting and servicing staff in each of our disciplines in wholesale lending which includes commercial real estate, commercial business, business banking, cash management, and a shared national credits desk. Our consumer lending team includes the following disciplines which, in nearly all channels, drive lending activities: retail branches and retail lending, customer contact center which includes outbound calling, direct sales, correspondent lending, LH-Finance and United Northeast Financial Advisors (“UNFA”).
The Company’s lending activities have historically been conducted principally in Connecticut and Massachusetts; however, as we seek to enhance shareholder value through favorable risk adjusted returns, we often will lend throughout the Northeast and to a lesser extent certain Mid-Atlantic states and other select states. The Company plans to expand its lending activities outside of this footprint beginning in the second half of 2018. The Company’s experience in our geographic areas we lend in allow us to look at a wide variety of commercial, mortgage, and consumer loans. Opportunities are first reviewed initially to determine if they meet the Company’s credit underwriting guidelines. After successfully passing an initial credit review we then utilize the Company’s risk adjusted return on capital model to determine pricing and structure that supports or is accretive to the Company’s return goals. Our systematic approach is intended to create better risk adjusted return on capital. For example, we passed on over $600 million in commercial loans in 2017 because they failed to meet our hurdle rates in our risk adjusted return model. Through the Company’s Loan and Funds Management Policy, both approved by the Board of Directors, we set limits on loan size, relationship size and product concentration for both loans and deposits. Creating diversified and granular loan and deposit portfolios is how we diversify risk and create improved return on risk adjusted capital.
The Company can originate, purchase, and sell commercial loans, commercial real estate loans, residential and commercial construction loans, residential real estate loans collateralized by one-to-four family residences, home equity lines of credit and fixed rate loans, marine floor plan loans and other consumer loans. Loans originated and purchased totaled $2.05 billion in 2017, consisting primarily of commercial originations and retail production of $762.0 million and $589.2 million, respectively. Loans originated and purchased totaled $1.66 billion in 2016, consisting of commercial originations and retail production of $694.7 million and $631.6 million, respectively. At December 31, 2017, 11.8% of our total production was purchased compared to 11.6% at December 31, 2016.
Real estate collateralized the majority of the Company’s secured loans as of December 31, 2017, including loans classified as commercial loans. Interest rates charged on loans are affected principally by the Company’s current asset/liability strategy, the demand for such loans, the cost and supply of money available for lending purposes and the rates offered by competitors. These factors are, in turn, affected by general economic and credit conditions, monetary policies of the federal government, including the Federal Reserve Board, federal and state tax policies and budgetary matters.
The Company’s approach to lending is influenced in large part by its risk adjusted return models. With the high level of competition for high quality earning assets, pricing is often at levels that are not accretive to the Company’s aspirational equity return metrics. The Company utilizes a web-based risk adjusted return model that includes inputs such as internal risk ratings, the marginal cost of funding the origination, contractual loan characteristics such as interest rate and term and origination and servicing costs. This model allows the Company to understand the life-of-loan impact of the origination, leading to proactive and informed decision making that results in the origination of loans that support the Company’s aspirational return metrics. We seek to acquire, develop and preserve high quality relationships with customers, prospects and centers of influence that support our return goals and compensate our commercial bankers and branch management for improving returns on equity for their respective areas of responsibility.
Periodically, the Company will purchase loans to enhance geographical diversification and returns and gain exposure to loan types that we are unwilling to make infrastructure investments to originate ourselves. Total lending activities, including origination of loans as well as purchasing of loans in the calendar year of 2017 totaled $2.05 billion, of which 11.8% were purchased compared

 
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to $1.66 billion, of which 11.6% were purchased in the calendar year of 2016. Loans purchased by the Company are underwritten by us, are generally serviced by others (“SBO”), and undergo a robust due diligence process. Management performs a vigorous due diligence exercise on the originator including, visiting and observing first hand the servicer and its operational process and controls to ensure that the originator and servicer meet the standards of the Company. Financial modeling includes reviewing prospective yields, costs associated with purchasing loans, including servicing fees and assumed loss rates to ensure that risk adjusted returns of the target portfolio are accretive to our return goals. The Company has set portfolio and capital limits on each of its purchased portfolios and has hired staff to oversee on-going monitoring of the respective servicer and performance to ensure the portfolio performance is meeting our initial and on-going expectations. In the event that our expectations are not met, the Company has many remedies at its disposal, including replacing the servicer, ending its relationship with the originator and selling the entire target portfolio. Contractually, the Company has the ability to cross-sell dissimilar products to customers in its purchased portfolios allowing us to develop a relationship using our existing online and mobile channels that support servicing and acquisition of our current and prospective clients without the need for a brick and mortar branch.
The Company’s Board of Directors (“Board”) approves the Lending Policy on at least an annual basis. The Lending Policy addresses approval limits, appraisal requirements, debt service coverage ratios, loan concentration, loan to value and other matters relevant to sound and prudent loan underwriting.
Owner Occupied and Investor Commercial Real Estate Loans
The Company makes commercial real estate loans throughout its market area for the purpose of acquiring, developing, constructing, improving or refinancing commercial real estate where the property is the primary collateral securing the loan, and the income generated from the property is the primary repayment source. Small office buildings, industrial facilities and retail facilities normally collateralize commercial real estate loans. These portfolios also include commercial one-to-four family and multifamily properties. These properties are primarily located in Connecticut and Massachusetts, but also expand throughout the Northeast and certain Mid-Atlantic states. Beginning in 2006, the Company started its expansion of commercial real estate through the Northeast and certain Mid-Atlantic states and over that time has developed deep knowledge of markets we lend in, retained talented commercial bankers and underwriters specializing in the procurement, underwriting and monitoring of these relationships, and put in place a robust credit administration process, discussed further in this report. In addition to providing geographic diversification within the overall commercial real estate loan portfolio, originated loans meet our return hurdle rates supporting the Company’s return goals. Properties financed are high quality, income producing and have experienced sponsorships. Loans may generally be made with amortizations of up to 30 years and with interest rates that are fixed or adjust periodically. Most commercial mortgages are originated with final maturities of 20 years or less. The Company generally requires that borrowers have debt service coverage ratios (the ratio of available cash flows before debt service to debt service) of at least 1.15 times. Loans may be originated up to 80% of the appraised value. Generally, commercial mortgages require personal guarantees by the principals. Credit enhancements in the form of additional collateral or guarantees are normally considered for start-up businesses without a qualifying cash flow history. Among the reasons for management’s continued emphasis on commercial real estate lending is the desire to invest in assets with yields which are generally higher than yields on one-to-four family residential mortgage loans, and are more sensitive to changes in market interest rates.
Commercial real estate lending generally poses a greater credit risk than residential mortgage lending to owner occupants. The repayment of commercial real estate loans depends on the business and financial condition of the borrower. Economic events and changes in government regulations, which the Company and its borrowers do not control, could have an adverse impact on the cash flows generated by properties securing commercial real estate loans and on the market value of such properties. Commercial properties tend to decline in value more rapidly than residential owner-occupied properties during economic recessions and individual loans on commercial properties tend to be larger than individual loans on residential properties. The Company seeks to minimize these risks through strict adherence to its underwriting standards and portfolio management processes. At December 31, 2017, the Company’s outstanding owner occupied commercial real estate loans and investor commercial real estate loans totaled $445.8 million and $1.85 billion, respectively.
Commercial Business Loans
Commercial loans primarily provide working capital, equipment financing, financing for leasehold improvements and financing for expansion. Commercial loans are frequently collateralized by equipment, inventory, accounts receivable, and/or general business assets and are generally supported by personal guarantees. Depending on the collateral used to secure the loans, commercial business loans are typically made up to 80% of the value of the loan collateral. A significant portion of the Company’s commercial and industrial loans are also collateralized by real estate, but are not classified as commercial real estate loans because such loans are not made for the purpose of acquiring, developing, constructing, improving or refinancing the real estate securing the loan, nor is the repayment source income generated directly from such real property. Periodically, the Company participates in a shared national credit (“SNC”) program, which engages in the participation and purchase of credits with other “supervised”

 
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unaffiliated banks or financial institutions, specifically loan syndications and participations. These loans generate earning assets to increase profitability of the Company and diversify commercial loan portfolios by providing opportunities to participate in loans to borrowers in other regions or industries the Company might otherwise have no access. The Company offers both term and revolving commercial loans. Term loans have either fixed or adjustable rates of interest and, generally, terms of between three and seven years and amortize on the same basis. Additionally, two market segments the Company has focused on is franchise and educational banking. The franchise lending practice lends to certain franchisees in support of their development, acquisition and expansion needs. The Company typically offers term loans with maturities between three to eight years with amortization from seven to ten years. These loans generally are on a floating rate basis with spreads slightly higher than the standard commercial business loan spreads. The educational banking practice consists of K-12 schools and colleges/universities utilizing both taxable and tax-exempt loan products for campus improvements, expansions and working capital needs. Generally, educational terms loans have longer dated maturities that amortize up to 30 years and typically offer the Company a full deposit and cash management relationship. Both the franchise and educational lending areas focus on opportunities across New England and certain Mid-Atlantic states.  
Commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. We seek to minimize these risks through our underwriting standards and enhanced risk assessments, including a quarterly review of portions of the portfolio and a review of new commercial loans by the Chief Credit Officer.
At December 31, 2017, the Company’s outstanding commercial business loan portfolio totaled $840.3 million, or 15.7%, of our total loan portfolio and included the following business sectors: manufacturing, professional services, wholesale trade, retail trade, transportation, educational and health services, contractors and real estate rental and leasing. Industry concentrations are reported quarterly to the Board Risk Committee.
Residential Real Estate Loans
A principal activity of the Company is to originate and sell loans secured by first mortgages on one-to-four family residences. The Company originates residential real estate loans through commissioned mortgage loan officers throughout the state and retail bank branches within our branch footprint. Residential mortgages are generally underwritten according to Federal Home Loan Mortgage Association (“Freddie Mac”) and Federal National Mortgage Association (“Fannie Mae”) guidelines for loans they designate as “A” or “A-” (these are referred to as “conforming loans”). Private mortgage insurance is generally required for loans with loan-to-value ratios in excess of 80%. The Company also originates loans above conforming loan amount limits, referred to as “jumbo loans.” The Company may also sell loans to other secondary market investors, either on a servicing retained or servicing released basis. The Company is an approved originator of loans to be sold to Fannie Mae, Freddie Mac, the Connecticut Housing Finance Authority and the Massachusetts Housing Finance Authority.
Loan sales in the secondary market provide funds for additional lending and other banking activities. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagees, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. The Company sold $332.6 million and $369.8 million of residential mortgages into the secondary market in 2017 and 2016, respectively.
The experience of our mortgage loan officers and their relationships with realtors has allowed the Company to continue to successfully shift to a purchase market model from a refinancing model, with purchase volume constituting 65.7% of 2017 volume compared to 56.7% of 2016 volume.
The Company retains the ability to sell loans from portfolio when secondary market returns are attractive. Additionally, the Company is implementing multiple secondary options, in order to ensure maximum pricing on loan sales, when it is in our best interest to do so. Furthermore, we continue to move towards variable cost structures where possible through expansion of incentive base pay. As a result, we expect mortgage banking will continue to contribute to the Company’s profits.
The Company offers adjustable rate mortgages (“ARM”) which do not contain negative amortization features. After an initial term of five to ten years, the rates on these loans generally reset every year based upon a contractual spread or margin above LIBOR. ARM loans reduce the Company’s exposure to interest rate risk. However, ARM loans generally pose credit risks different from the credit risks inherent in fixed rate loans primarily because as interest rates rise, the underlying debt service payments of the borrowers rise, thereby increasing the potential for default. The Company also has interest only loans, which at December 31, 2017 represent 6.7% of the total residential real estate portfolio. Interest only loans are underwritten at the fully amortized rate (to

 
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include principal and interest) and are subject to the same higher credit standards as jumbo loans. As a result, interest only loans originated have higher credit scores and lower loan to value ratios than the existing residential portfolio. At year-end 2017, the Company’s ARM portfolio totaled $562.7 million.
The Company also originates loans to individuals for the construction and acquisition of personal residences. These loans generally provide for construction periods from 12 to 36 months followed by a permanent mortgage loan, and follow the Company’s normal mortgage underwriting guidelines.
At December 31, 2017, the Company’s outstanding residential loan portfolio totaled $1.20 billion, or 22.6% of our total loan portfolio,
Home Equity Loans
The Company offers home equity loans and home equity lines of credit, both of which are secured by one-to-four family residences. At December 31, 2017, the unadvanced amounts of home equity lines of credit totaled $412.5 million. Home equity loans are offered with fixed rates of interest and with terms up to 15 years. The loan-to-value ratio for our home equity loans and lines of credit is generally limited to no more than 90%. Our home equity lines of credit have ten year terms and adjustable rates of interest which are indexed to the Prime rate, as reported in The Wall Street Journal. Interest rates on home equity lines of credit are generally limited to a maximum rate of 18% per annum. During the year ended December 31, 2017, the Company purchased three home equity portfolios totaling $105.2 million, compared to purchased portfolios totaling $148.3 million for the year ended December 31, 2016. These loans are not serviced by the Company. The outstanding balance of the purchased home equity portfolio balance at December 31, 2017 and 2016 totaled $246.5 million and $208.8 million, respectively. The purchased home equity portfolio is secured by second liens. Purchased and originated home equity loans totaled $583.2 million, or 10.9%, of our total loan portfolio at December 31, 2017.
Construction Loans
The Company originates both residential and commercial construction loans. Typically loans are made to owner-borrowers who will occupy the properties (residential construction) and to licensed and experienced developers for the construction of single-family home developments (commercial construction). We extend loans to residential subdivision developers for the purpose of land acquisition, the development of infrastructure and the construction of homes.
Residential construction loans to owner-borrowers generally convert to a fully amortizing long-term mortgage loan upon completion of construction which generally is 12 to 36 months. Commercial construction loans also generally have terms of 12 to 36 months. Some construction-to-permanent loans have fixed interest rates for the permanent portion of the loan, but the Company originates mostly adjustable rate construction loans. The proceeds of commercial construction loans are disbursed in stages and the terms may require developers to pre-sell a certain percentage of the properties they plan to build before the Company will advance any construction financing. Company officers, appraisers and/or independent engineers inspect each project’s progress before additional funds are disbursed to verify that borrowers have completed project phases.
Construction lending, particularly commercial construction lending, poses greater credit risk than mortgage lending to owner occupants. The repayment of commercial construction loans depends on the business and financial condition of the borrower and on the economic viability of the project financed. A number of borrowers have more than one construction loan outstanding with the Company at any one time. Economic events and changes in government regulations, which the Company and its borrowers do not control, could have an adverse impact on the value of properties securing construction loans and on the borrower’s ability to complete projects financed and, if not the borrower’s residence, sell them for amounts anticipated at the time the projects commenced. Construction lending contains a unique risk characteristic as loans are originated under market and economic conditions that may change between the time of origination and the completion and subsequent purchaser financing of the property. Construction loans totaled $119.0 million, or 2.3%, of our total loan portfolio at December 31, 2017.
Other Consumer Loans
Other consumer loans totaled $292.8 million, or 5.5%, of our total loan portfolio at December 31, 2017. Our other consumer loans generally consist of loans on high-end retail boats and small yachts ranging on average from $400,000 to several million dollars in value, new and used automobiles, home improvement loans, loans collateralized by deposit accounts and unsecured personal loans. While the asset quality of these portfolios is currently strong, there is increased risk associated with consumer loans during economic downturns as increased unemployment and inflationary costs may make it more difficult for some borrowers to repay their loans. During December 2015, the Company purchased two consumer loan portfolios consisting of marine retail loans and home improvement loans totaling $229.2 million. The outstanding balance on the 2015 purchases at December 31, 2017 and 2016 was $130.9 million and $168.7 million, respectively. The marine retail loans are based on premium brands and the borrowers are financially strong. The home improvement loans are 90% backed by the U.S. Department of Housing and Urban Development

 
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and consist of loans to install energy efficient upgrades to the borrowers’ one-to-four family residences. There were no additional loan portfolio purchases of marine retail loans during 2016 or 2017. In 2017, the Company purchased an additional $80.8 million in unsecured home improvement loans. There were no additional purchases of home improvement loans in 2016.
LH-Finance, the Company’s marine lending unit, includes purchased and originated retail loans, which are classified as other consumer loans, and dealer floorplan loans, which are classified as commercial loans. The Company’s relationships are limited to well established dealers of global premium brand manufacturers. The Company’s top three manufacturer customers have been in business between 30 and 100 years. The Company has generally secured agreements with premium manufacturers to support dealer floor plan loans which may reduce the Company’s credit exposure to the dealer, despite our underwriting of each respective dealer. We have developed incentive retail pricing programs with the dealers to drive retail dealer flow. Retail loans are generally limited to premium manufacturers with established relationships with the Company which have a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, an excess cash flow. Retail loans have an average life of four years and key markets include Florida, California, and New England.
Credit Risk Management and Asset Quality
One of management’s key objectives has been and continues to be to maintain a high level of asset quality. The Company utilizes the following general practices to manage credit risk:
•
Limiting the amount of credit that individual lenders may extend;
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Establishing a process for credit approval accountability;
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Careful initial underwriting and analysis of borrower, transaction, market and collateral risks;
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Established underwriting practices;
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Ongoing servicing of the majority of individual loans and lending relationships;
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Continuous monitoring of the transactions and portfolio, market dynamics and the economy;
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Periodically reevaluating the Company’s strategy and overall exposure to economic, market and other risks; and
•
Ongoing review of new commercial loans by the Chief Credit Officer.
Credit Administration is responsible for the completion of credit analyses for all loans above a specific threshold, for determining loan loss reserve adequacy and for preparing monthly and quarterly reports regarding the credit quality of the loan portfolio, which are submitted to senior management and the Board, and to ensure compliance with the credit policy. In addition, Credit Administration and the Special Assets Team is responsible for managing non-performing and classified assets. On a quarterly basis, the criticized loan portfolio, which consists of commercial, commercial real estate and construction loans that are risk rated Special Mention or worse, are reviewed by management, focusing on the current status and strategies to improve the credit.
The loan review function is outsourced to a third party to provide an independent evaluation of the creditworthiness of the borrower and the appropriateness of the risk rating classifications. The findings are reported to the Chief Risk Officer and the Chief Credit Officer and the full report is then presented to the Board Risk Committee. This review is supplemented with selected targeted internal reviews of the commercial loan portfolio. Various techniques are utilized to monitor indicators of credit deterioration in the portfolios of residential real estate mortgages and home equity lines and loans, including the periodic tracking and analysis of loans with an updated FICO score. LTV is determined on non-accrual loans through either an updated drive-by appraisal or, less frequently, the use of computerized market data and an estimate of current value.
Classified Assets
Under our internal risk rating system, we currently classify loans and other assets considered to be of lesser quality as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by either the current net worth or the repayment capacity of the obligor or by the collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with added weaknesses which make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that are individually reviewed for impairment are those that exhibit elevated risk characteristics that differentiate themselves from the homogeneous loan categories including certain loans classified as substandard, doubtful or loss.
The loan portfolio is reviewed on a regular basis to determine whether any loans require risk classification or reclassification. Not all classified assets constitute non-performing assets.

 
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Investment Activities
The securities portfolio is managed to generate interest income, to implement interest rate risk management strategies, and to provide a readily available source of liquidity for balance sheet management. Investment decisions are made in accordance with the Company’s investment policy and include consideration of risk, return, duration and portfolio concentrations. Compliance with the Company’s investment policy rests with the Chief Financial Officer. The ALCO meets monthly and reviews and approves investment strategies.
The Company may acquire, hold and transact in various types of investment securities in accordance with applicable federal regulations, state statutes and guidelines specified in the Company’s internal investment policy. Permissible bank investments include federal funds, commercial paper, repurchase agreements, interest-bearing deposits of federally insured banks, U.S. Treasury and government-sponsored agency debt obligations, including mortgage-backed securities and collateralized mortgage obligations, collateralized loan obligations, municipal securities, investment grade corporate debt, mutual funds, common and preferred equity securities and Federal Home Loan Bank of Boston (“FHLBB”) stock.
Derivative Financial Instruments
The Company uses interest rate swap instruments for its own account and also offers them for sale to commercial customers that qualify for their own accounts, normally in conjunction with commercial loans offered by the Company to these customers. As of December 31, 2017, the Company held derivative financial instruments with a total notional amount of $1.63 billion. The Company has a policy for managing its derivative financial instruments, and the policy and program activity are overseen by ALCO. Interest rate swap counterparties are limited to a select number of national financial institutions and qualifying commercial customers. Collateral may be required based on financial condition tests. The Company works with a third-party firm which assists in marketing swap transactions, documenting transactions and providing information for bookkeeping and accounting purposes.
Sources of Funds
General
The Company uses deposits, repayments and prepayments of loans and securities, proceeds from sales of loans and securities, proceeds from maturing securities and borrowings to fund lending, investing and general operations.
Deposits
Deposits are the major source of funds for the Company’s lending and investment activities. Deposit accounts are the primary product and service interaction with the Company’s customers. The Company serves commercial, personal, non-profit and municipal deposit customers. Most of the Company’s deposits are generated from the areas surrounding its branch offices. The Company offers a wide variety of deposit accounts with a range of interest rates and terms. The Company also periodically offers promotional interest rates and terms for limited periods of time. The Company’s deposit accounts consist of interest-bearing checking (“NOW”), non-interest-bearing checking, regular savings, money market savings and time deposits. The Company emphasizes its transaction deposits – checking and NOW accounts for personal accounts and checking accounts promoted to businesses and municipalities. These accounts have the lowest marginal cost to the Company and are also often a core account for a customer relationship. The Company offers debit cards and other electronic fee producing payment services to transaction account customers. The Company is promoting remote deposit capture devices so that commercial accounts can make deposits from their place of business. In 2015, the Company introduced mobile check deposit services to customers with eligible accounts to allow for convenient and quick access to deposit checks directly into their accounts without visiting a branch. The Company’s time deposit accounts provide maturities from three months to five years. Additionally, the Company offers a variety of retirement deposit accounts to business and personal customers. Deposit service fee income also includes other miscellaneous transaction and convenience services sold to customers through the branch system as part of an overall service relationship.
Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit pricing strategy is monitored weekly by the Retail Pricing Committee, monthly by the ALCO and quarterly by the Board Risk Committee. Deposit pricing is set weekly by the Company’s EPC. When setting deposit pricing, the Company considers competitive market rates, FHLBB advance rates and rates on other sources of funds. Deposit rates and terms are based primarily on current operating strategies, market rates, liquidity requirements, rates paid by competitors and growth goals. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. To attract and retain deposits, we rely upon personalized customer service, marketing our products, long-standing relationships and competitive interest rates.

 
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Borrowings
The Company is a member of the FHLBB and uses borrowings as an additional source of funding, particularly for daily cash management and for funding longer duration assets. FHLBB advances also provide more pricing and option alternatives for particular asset/liability needs. The FHLBB provides a central credit facility primarily for member institutions. As a FHLBB member, the Company is required to own capital stock of the FHLBB, calculated periodically based primarily on its level of borrowings from the FHLBB. FHLBB borrowings are secured by a blanket lien on certain qualifying assets, principally the Company’s residential mortgage loans. Advances are made under several different credit programs with different lending standards, interest rates and range of maturities.
On September 23, 2014, the Company closed its public offering of $75.0 million of its 5.75% Subordinated Notes due October 1, 2024 (the “Notes”). The Notes were offered to the public at par. The Company is using the proceeds for general corporate purposes. Interest on the Notes are payable semi-annually in arrears on April 1 and October 1 of each year.
Additional funding sources are available through securities sold under agreements to repurchase, the Federal Reserve Bank (“FRB”), Federal Funds lines of credit and other wholesale funding providers.
Risk Management
United has a comprehensive Risk Management Program that provides a methodology to identify, assess, mitigate, monitor, manage and report inherent risks within the organization. United manages risk taking activities within the Board-approved risk framework through an enterprise-wide governance structure that outlines the responsibilities for risk management activities and oversight of the same. Risk management is fully integrated into the strategic planning process and plays a key role in the approval process for all new activities. The Management Risk Committee, Risk Management Steering Committee and the Board Risk Committee oversee United’s risk-related matters. United’s Risk Management Steering Committee is chaired by United’s Chief Risk Officer and is comprised of members of the Executive Team and the Enterprise Risk Manager. The Management Risk Committee is chaired by United’s Chief Risk Officer and is comprised of Risk Division officers and various members of line management.
As a regulated banking institution, United is examined periodically by federal and state banking authorities. The results of these examinations are presented to the full Board. Identified issues from such examinations are tracked by the Director of Internal Audit and compliance is reported to and reviewed by the Audit Committee. These examinations, in addition to the internal Compliance Department reports and Internal Audit reports, are reviewed by the Audit Committee. The Compensation Committee also incorporates risk considerations into incentive compensation plans.
The Chief Risk Officer, who reports to the Chief Executive Officer, is responsible for oversight of the Company’s Enterprise Risk Management framework, which includes but is not limited to credit risk, operational risk management, business continuity management, compliance programs, information security, financial intelligence, vendor management, fraud and risk policy. The Director of Treasury, who reports to the Chief Financial Officer, is responsible for overseeing market, liquidity and capital risk management activities and is closely monitored by the Chief Risk Officer. The Chief Credit Officer, who reports directly to the Chief Executive Officer, is responsible for overseeing credit risk as well as the Company’s loan workout and recovery activities. The Director of Internal Audit, who reports directly to the Audit Committee, is responsible for providing an independent assessment of the quality of internal controls for the Company.
Credit Risk
The Company manages and controls risk in its loan and investment portfolios through established underwriting practices, adherence to consistent standards and utilization of various portfolio and transaction monitoring activities. Written credit policies are in place that include underwriting standards and guidelines, provide limits on exposure and establish various other standards as deemed necessary and prudent. Additional approval requirements and reporting are implemented to ensure proper identification, rationale and disclosure of policy exceptions.
Credit Risk Management policies and transaction approvals are managed under the supervision of the Chief Credit Officer and are independent of the loan production and Treasury areas. The credit risk function oversees the underwriting, approval and portfolio management process, establishes and ensures adherence to credit policies and manages the collections and problem asset resolution activities in order to control and reduce classified and non-performing assets.
As part of the Credit Risk Management process, the Chief Risk Officer and Chief Credit Officer hold regular meetings with senior managers to report and discuss key credit risk topics, issues and policy recommendations affecting the Company. Important findings regarding credit quality and trends within the loan and investment portfolios are regularly reported to the Board Risk Committee.

 
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In addition to the Credit Risk Management team, there is an independent Credit Risk Review function, reporting to the Chief Risk Officer, that performs independent assessments of the risk ratings and credit underwriting process for the commercial loan portfolio. Credit Risk Review findings are reported to Executive Management and the Board by the Chief Risk Officer and the Chief Credit Officer.
Market Risk
Market risk refers to the risk of loss arising from adverse changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates and prices, such as equity prices. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Due to the nature of its operations, United is primarily exposed to interest rate risk. Accordingly, United’s interest rate sensitivity is monitored on an ongoing basis by its ALCO and by its Board Risk Committee. ALCO’s primary goals are to manage interest rate risk to maximize earnings and net economic value in changing interest rate and business environments within previously approved Board risk limits.
Liquidity Risk
Liquidity risk refers to the ability of the Company to meet a demand for funds by converting assets into cash or cash equivalents and by increasing liabilities at acceptable costs. Liquidity management involves maintaining the ability to meet day-to-day and longer-term cash flow requirements of customers, whether they are depositors wishing to withdraw funds or borrowers requiring funds to meet their credit needs. Liquidity sources include the amount of unencumbered or “free” investment portfolio securities the Company owns, deposits, borrowings, cash flow from loan and investment principal payments and pre-payments and residential mortgage loan sales. The Company also requires funds for dividends to shareholders, repurchase of shares, potential acquisitions and for general corporate purposes. Its sources of funds include dividends from the Bank, the issuance of equity and debt and borrowings from capital markets.
Both the Bank and the Company will maintain a level of liquidity necessary to achieve their business objectives under both normal and stressed conditions. Liquidity risk is monitored and managed by ALCO and reviewed regularly with the Board.
Capital Risk
United needs to maintain adequate capital in both normal and stressed environments to support its business objectives. ALCO monitors regulatory and tangible capital levels according to management targets and regulatory requirements and recommends capital conservation, generation and/or deployment strategies to the Board. ALCO also has responsibility for the Capital Management Plan and Contingent Liquidity Plan, and quarterly stress testing which are all reviewed with the Board Risk Committee. The Capital Management Plan and Contingent Liquidity Plan are approved annually by the Board.
Operational Risk
Operational risk is the risk of loss resulting from inadequate or failed internal processes, people or systems or from external events. The definition includes the risk of loss from failure to comply with laws, ethical standards and contractual obligations and includes oversight of key operational risks including cash transfer risk. United’s Chief Risk Officer oversees the management and effectiveness of United’s risk management program. The Chief Risk Officer oversees the Compliance Program, the Bank Secrecy Act Program, and the Community Reinvestment Act and Fair Lending Programs. The Chief Risk Officer is responsible for reporting on the adequacy of these risk management components and programs along with any issues or concerns to the Board.
Subsidiary Activities
United Bank, a Connecticut-chartered stock savings bank, is currently the only subsidiary of the Company and has the following wholly-owned subsidiaries.
United Bank Mortgage Company: Established in December 1998, and formerly known as SBR Mortgage Company, United Bank Mortgage Company operates as United Bank’s “passive investment company” (“PIC”), which exempts it from Connecticut income tax under current law.
United Bank Investment Corp., Inc.:    Formerly SBR Investment Corp, Inc. and established in Connecticut in January 1995, the entity, was established to maintain an ownership interest in Infinex Investments, Inc. (“Infinex”) a third-party, non-affiliated registered broker-dealer. Infinex provides broker-dealer services for a number of banks, to their customers, including the Company’s customers through United Northeast Financial Advisors, Inc.
United Northeast Financial Advisors, Inc.:    Formerly Rockville Financial Services, Inc. and established in Connecticut in May 2002, the entity currently offers brokerage and investment advisory services through a contract with Infinex. In addition, United Northeast Financial Advisors, Inc. offers customers a range of non-deposit investment products including mutual funds,

 
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debt, equity and government securities, retirement accounts, insurance products and fixed and variable annuities at all United Bank locations. United Northeast Financial Advisors, Inc. receives a portion of the commissions generated by Infinex from sales to customers. For the years ended December 31, 2017, 2016 and 2015, United Northeast Financial Advisors, Inc. received fees of $4.7 million, $3.7 million, and $1.8 million, respectively, through its relationship with Infinex.
United Bank Commercial Properties, Inc., United Bank Residential Properties, Inc.:    Established in Connecticut in May 2009, United Bank Commercial Properties, Inc. (formerly Rockville Bank Commercial Properties, Inc.) and United Bank Residential Properties, Inc. (formerly Rockville Bank Residential Properties, Inc.) were established to hold certain real estate acquired through foreclosures.
United Bank Investment Sub, Inc.:    Formerly Rockville Bank Investment Sub., Inc. and established in Connecticut in December 2012, the entity was established to hold certain government guaranteed loans acquired in the secondary market.
UCB Securities, Inc., II:    Established in the Commonwealth of Massachusetts and acquired in the merger of Rockville and Legacy United to hold certain investment securities which provide a tax advantage under current regulations.
UB Properties, LLC:    Established in the Commonwealth of Massachusetts and acquired in the merger of Rockville and Legacy United, a single member limited liability company, to hold certain real estate acquired through foreclosure.
United Financial Realty HC, Inc.: Established in Connecticut in February 2016, to segregate mortgage pools and thus provide a focused loan investment platform, facilitating securitization, capital raising and state tax advantages under current law.
United Financial Business Trust I: Established in Maryland as a business trust in February 2016. Treated as a Real Estate Investment Trust (REIT) for federal income tax purposes. United Financial Business Trust I is a subsidiary of United Financial Realty HC, Inc.
Employees
At December 31, 2017, the Company had 774 full-time equivalent employees consisting of 727 full-time and 86 part-time employees. None of the employees were represented by a collective bargaining group.
The Company maintains a comprehensive employee benefit program providing, among other benefits, group medical and dental insurance, life insurance, disability insurance, a pension plan and an employee 401(k) investment plan. The pension plan was frozen effective December 31, 2012. Under the freeze, participants in the plan stopped earning additional benefits under the plan. In connection with the pension plan being frozen, the Company provides additional benefits to the impacted employees by providing additional benefits to them through the 401(k) Plan beginning January 1, 2013 for a five year period. Additional benefits totaled $88,000, $102,000 and $133,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The pension plan currently provides benefits for full-time employees hired before January 1, 2005. Effective January 1, 2014, the Company merged its Employee Stock Ownership Plan with its 401(k) Plan.
Management considers relations with its employees to be good. See Notes 15 and 16 of the Notes to Consolidated Financial Statements contained elsewhere within this report for additional information on certain benefit programs.
SUPERVISION AND REGULATION
General
United Bank is a Connecticut-chartered stock savings bank and is a wholly-owned subsidiary of United Financial Bancorp, Inc., a stock corporation. United Bank’s deposits are insured up to applicable limits by the FDIC through the Deposit Insurance Fund (“DIF”). United Bank is subject to extensive regulation by the Connecticut Banking Department, as its chartering agency, and by the FDIC, as its deposit insurer. United Bank is required to file reports with, and is periodically examined by, the FDIC and the Connecticut Banking Department concerning its activities and financial condition. It must obtain regulatory approvals prior to entering into certain transactions, such as mergers. In March 2016, the Company elected to become a financial holding company. As a registered financial holding company and a bank holding company it is subject to inspection, examination, and supervision by the Board of Governors of the Federal Reserve System, and is regulated under the BHC Act. As a financial holding company, the Company can engage in activities that are financial in nature or incidental to a financial activity. Any change in such regulations, whether by the Connecticut Banking Department, the FDIC or the FRB, could have a material adverse impact on the Bank or the Company.

 
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Dodd-Frank Wall Street Reform and Consumer Protection Act
On July 21, 2010, the President of the United States signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This new law significantly changes the historical bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act may not be known for many months or years.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. United Bank, as a bank with $10 billion or less in assets, will continue to be examined for compliance with the consumer laws by our primary bank regulators. The Dodd-Frank Act also weakens the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorney generals the ability to enforce federal consumer protection laws.
The Dodd-Frank Act requires minimum leverage (Tier I) and risk-based capital requirements for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier I capital, such as trust preferred securities.
A provision of the Dodd-Frank Act eliminates the federal prohibitions on paying interest on demand deposits, thus allowing businesses to have interest-bearing checking accounts. Depending on competitive responses, this significant change to existing law could have an adverse impact on our interest expense. The Dodd-Frank Act also broadens the base for FDIC deposit insurance assessments. Assessments will now be based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor for each account relationship category, retroactive to January 1, 2009. The legislation also increases the required minimum reserve ratio for the DIF, from 1.15% to 1.35% of insured deposits, and directs the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets.
Under the Dodd-Frank Act we are required to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The Dodd-Frank Act also authorizes the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate their own candidates using our proxy materials. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not.
The Senate Banking Committee is expected to recommend a bill in 2018 which will roll back or eliminate key parts of the Dodd-Frank Act, however, it is expected that, at a minimum, the Dodd-Frank Act implications will continue to increase our operating and compliance costs and could increase our interest expense.
Connecticut Banking Laws And Supervision
Connecticut Banking Commissioner:    The Commissioner regulates internal organization as well as the deposit, lending and investment activities of state chartered banks, including United Bank. The approval of the Commissioner is required for, among other things, the establishment of branch offices, including those in other states, and business combination transactions. The Commissioner conducts periodic examinations of Connecticut-chartered banks. The FDIC also regulates many of the areas regulated by the Commissioner, and federal law may limit some of the authority provided to Connecticut-chartered banks by Connecticut law.
Lending Activities:    Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, any one obligor under this statutory authority may not exceed 10% and 15%, respectively, of a bank’s capital and allowance for loan losses.
Dividends:    The Company may pay cash dividends out of its net profits. For purposes of this restriction, “net profits” represents the remainder of all earnings from current operations. Further, the total amount of all dividends declared by a savings bank in any year may not exceed the sum of a bank’s net profits for the year in question combined with its retained net profits from the preceding two years. Federal law also prevents an institution from paying dividends or making other capital distributions that, if by doing so, would cause it to become “undercapitalized.” The FDIC may limit a savings bank’s ability to pay dividends. No dividends may be paid to the Company’s shareholder if such dividends would reduce stockholders’ equity below the amount of the liquidation account required by the Connecticut conversion regulations.

 
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Powers:    Connecticut law permits Connecticut chartered banks to sell insurance and fixed and variable rate annuities if licensed to do so by the applicable state insurance commissioner. With the prior approval of the Commissioner, Connecticut banks are also authorized to engage in a broad range of activities related to the business of banking, or that are financial in nature or that are permitted under the Bank Holding Company Act (“BHCA”) or the Home Owners’ Loan Act (“HOLA”), both federal statutes, or the regulations promulgated as a result of these statutes. Connecticut banks are also authorized to engage in any activity permitted for a national bank or a federal savings association upon filing notice with the Commissioner unless the Commissioner disapproves the activity.
Assessments:    Connecticut banks are required to pay annual assessments to the Connecticut Banking Department to fund the Department’s operations. The general assessments are paid pro-rata based upon a bank’s asset size.
Enforcement:    Under Connecticut law, the Commissioner has extensive enforcement authority over Connecticut banks and, under certain circumstances, affiliated parties, insiders, and agents. The Commissioner’s enforcement authority includes cease and desist orders, fines, receivership, conservatorship, removal of officers and directors, emergency closures, dissolution and liquidation.
Federal Regulations
Capital Requirements:    Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as United Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong bank holding company, rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier I capital to total assets of 4%. Tier I capital is the sum of common stockholders’ equity, non-cumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.
The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) across 17 risk-weighted categories ranging from 0% to 1250%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the FDIC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. Government are given a 0% risk weight, loans secured by one-to-four family residential properties generally have a 50% risk weight, and commercial loans have a risk weighting of 100%, however, certain investment securities risk-weighted under the simplified supervisory formula approach can carry a risk weight up to 1250%.
State non-member banks such as United Bank, must maintain a minimum ratio of total capital to risk-weighted assets of 8%, of which at least one-half must be Tier I capital. Total capital consists of Tier I capital plus Tier 2 or supplementary capital items, which include the allowance for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includible amount of Tier 2 capital cannot exceed the amount of the institution’s Tier I capital. Banks that engage in specified levels of trading activities are subject to adjustments in their risk-based capital calculation to ensure the maintenance of sufficient capital to support market risk.
The Federal Deposit Insurance Corporation Improvement Act (the “FDICIA”) required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.
As a financial and bank holding company, United Financial Bancorp, Inc. is subject to capital adequacy guidelines for bank holding companies similar to those of the FDIC for state-chartered banks. United Financial Bancorp, Inc.’s stockholders’ equity exceeds these requirements.
The current U.S. federal bank regulatory agencies’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee on Banking Supervision (“Basel Committee”). The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that meet under the auspices of the Bank for

 
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International Settlements in Basel, Switzerland to develop broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply.
In 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III.” Basel III, when implemented by the U.S. bank regulatory agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.
In July 2013, federal banking regulators approved final rules that implement changes to the regulatory capital framework for U.S. banks. The rules set minimum requirements for both the quantity and quality of capital held by community banking institutions. The final rule includes a minimum ratio of common equity Tier 1 capital to risk weighted assets of 4.5%, raises a minimum ratio of Tier 1 capital to risk-weighted assets to 6%, a minimum leverage ratio of 4% for all banking organizations and a minimum total capital to risk weighted assets ratio of 8%. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The phase in period for the capital conservation buffer began for the Company on January 1, 2016, with full compliance phased in by January 1, 2019. The initial phase in amount was 0.625%. The Company’s capital levels remain characterized as “well-capitalized” under the new rules.
Prompt Corrective Regulatory Action:    Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.
The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well-capitalized” if it has a total risk-based capital ratio of 10% or greater, a Tier I risk-based capital ratio of 8% or greater and a leverage ratio of 5% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8% or greater, a Tier I risk-based capital ratio of 6% or greater, and generally a leverage ratio of 4% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8%, a Tier I risk-based capital ratio of less than 6%, or generally a leverage ratio of less than 4%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6%, a Tier I risk-based capital ratio of less than 4%, or a leverage ratio of less than 3%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2%. As of December 31, 2017, United Bank was considered a “well-capitalized” institution.
“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.
Transactions with Affiliates:    Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). In a holding company context, at a minimum, the parent holding company of a savings bank and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such savings bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to 20% of capital stock and surplus. The term “covered transaction” includes, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same, or no less favorable, to the savings bank or its subsidiary as similar transactions with non-affiliates.
Loans to Insiders:    Further, Section 22(h) of the FRA restricts an institution with respect to loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s total capital and surplus. Loans to insiders above specified amounts must receive the prior approval of the Board. Further, under Section 22(h), loans to Directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions

 
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to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.
Enforcement:    The FDIC has extensive enforcement authority over insured savings banks, including United Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.
The FDIC has authority under Federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.
Insurance of Deposit Accounts
The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution’s financial condition consisting of (1) well-capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution’s primary federal regulator and information which the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the deposit insurance funds. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. Assessment rates for insurance fund deposits range from 2.5 basis points for the strongest institution to 45 basis points for the weakest. DIF members are also required to assist in the repayment of bonds issued by the Financing Corporation in the late 1980’s to recapitalize the Federal Savings and Loan Insurance Corporation.
As part of the Dodd-Frank bill, the FDIC insurance limit was permanently increased to $250,000 per depositor for each account relationship category. For the years ended December 31, 2017, 2016 and 2015, the total FDIC assessments were $3.1 million, $3.6 million and $3.7 million, respectively. The FDIC has exercised its authority to raise assessment rates in the past and may raise insurance premiums in the future. If such action is taken by the FDIC it could have an adverse effect on the earnings of the Company.
The FDIC may terminate insurance of deposits if it finds that the institution is in an unsafe or unsound condition to continue operations, has engaged in unsafe or unsound practices, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. The management of the Company does not know of any practice, condition or violations that might lead to termination of deposit insurance.
Federal Reserve System
The FRB regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The FRB regulations generally require that reserves be maintained against aggregate transaction accounts. The Company is in compliance with these requirements.
Federal Home Loan Bank System
The Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks composing the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. As a member of the FHLBB, we are required to acquire and hold shares of capital stock in the FHLBB. While the required percentages of stock ownership are subject to change by the FHLBB, the Company was in compliance with this requirement with an investment in FHLBB stock at December 31, 2017 and December 31, 2016. For the years ended December 31, 2017 and 2016, the Company purchased $6.3 million and $5.7 million of FHLBB stock, respectively. The FHLBB repurchased $9.6 million and $3.4 million excess capital stock from the Company during the years ended December 31, 2017 and 2016, respectively.

 
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Holding Company Regulation
General:    As a registered bank holding company and financial holding company, United Financial Bancorp, Inc. is subject to comprehensive regulation and regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank and financial holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under Connecticut banking law, no person may acquire beneficial ownership of more than 10% of any class of voting securities of a Connecticut-chartered bank, or any bank holding company of such a bank, without prior notification of, and lack of disapproval by, the Connecticut Banking Commissioner.
Under Federal Reserve Board policy, a bank holding company must serve as a source of strength for its subsidiary bank. Under this policy, the Federal Reserve Board may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. As a bank holding company, United Financial Bancorp, Inc. must obtain Federal Reserve Board approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company.
As a financial holding company with a bank subsidiary the Company must comply with the Bank Holding Company Act which prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by FRB regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the FRB includes, among other things: (i) operating a savings institution, mortgage company, finance company, credit card company or factoring company; (ii) performing certain data processing operations; (iii) providing certain investment and financial advice; (iv) underwriting and acting as an insurance agent for certain types of credit-related insurance; (v) leasing property on a full-payout, non-operating basis; (vi) selling money orders, travelers’ checks and United States savings bonds; (vii) real estate and personal property appraising; (viii) providing tax planning and preparation services; (ix) financing and investing in certain community development activities; and (x) subject to certain limitations, providing securities brokerage services for customers.
Dividends:    The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies that the Company must comply with, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The FRB also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve Board, the Federal Reserve Board may prohibit a holding company of a bank from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”
Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the consolidated net worth of the bank holding company. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order or any condition imposed by, or written agreement with, the Federal Reserve Board.
Financial Modernization:    The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a “financial holding company.” A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The act also permits the Federal Reserve Board and the Department of the Treasury to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well-capitalized, well managed, and has at least a “Satisfactory” Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. In March 2016, United Financial Bancorp, Inc. received approval from to the Federal Reserve Board of its intent to be deemed a financial holding company.

 
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Miscellaneous Regulation
Sarbanes-Oxley Act of 2002:    The Company is subject to the Sarbanes-Oxley Act of 2002 (the “Act”), which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. In general, the Sarbanes-Oxley Act mandated important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. It backed these requirements with new SEC enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.
Section 402 of the Act prohibits the extension of personal loans to directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to loans advanced by an insured depository institution, such as the Company, that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.
The Act also required that the various securities exchanges, including the NASDAQ Global Select Stock Market, prohibit the listing of the stock of an issuer unless that issuer complies with various requirements relating to their committees and the independence of their directors that serve on those committees.
Community Reinvestment Act:    Under the Community Reinvestment Act (“CRA”), as amended as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. United Bank’s latest FDIC CRA rating was “Satisfactory.”
Connecticut has its own statutory counterpart to the CRA which is also applicable to United Bank. The Connecticut version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Connecticut law requires the Commissioner to consider, but not be limited to, a bank’s record of performance under Connecticut law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. United Bank’s most recent rating under Connecticut law was “Satisfactory.”
Consumer Protection And Fair Lending Regulations:    The Company is subject to a variety of federal and Connecticut statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations.
The USA Patriot Act:    On October 26, 2001, the USA PATRIOT Act was enacted. The Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The Act also requires the federal banking regulators to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger or other acquisition application of an FDIC-insured institution. As such, if the Company or the Bank were to engage in a merger or other acquisition, the effectiveness of its anti-money-laundering controls would be considered as part of the application process. The Company has established policies, procedures and systems to comply with the applicable requirements of the law. The Patriot Act was reauthorized and modified with the enactment of the USA Patriot Improvement and Reauthorization Act of 2005.
Federal Securities Laws
United Financial Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 
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Based on the foregoing, it is anticipated that the resource allocation burdens to support Regulatory compliance will need to increase. This will require continued infrastructure build and may negatively impact profitability to a material degree.
TAXATION
Federal
General:    The Company is subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company.
Method of Accounting:    For federal income tax purposes, the Company currently reports its income and expenses on the accrual method of accounting and uses a tax year ending December 31 for filing its consolidated federal income tax returns.
Bad Debt Reserves:    Prior to the Small Business Protection Act of 1996 (the “1996 Act”), United Financial Bancorp, Inc.’s subsidiary, United Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, United Bank was required to use the specific charge-off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2017, the subsidiary had no reserves subject to recapture in excess of its base year.
Taxable Distributions and Recapture:    Bad debt reserves created prior to January 1, 1988 are subject to recapture into taxable income should the Bank fail to meet certain asset and definitional tests.
Alternative Minimum Tax:    The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”) at a rate of 20% on a base of regular taxable income plus certain tax preferences (alternative minimum taxable income or “AMTI”). The AMT is payable to the extent such AMTI is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90% of AMTI. Pursuant to the Tax Cuts and Job Act (“Tax Act”) enacted on December 22, 2017 for tax years after December 31, 2017, AMT has been repealed and any corporate AMT credit which accumulated through prior years AMT liabilities may offset the regular tax liability for any taxable year after 2017. In addition, the AMT credit is refundable for any taxable year beginning after 2017 and before 2022 in the amount equal to 50 percent (100 percent for taxable years beginning in 2021) of the excess credit for the taxable year.
Net Operating Loss Carryovers:    As a result of the Tax Act, for net operating losses incurred in tax years after December 31, 2017, a corporation may no longer carryback net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. Additionally net operating loss usage is limited by the Tax Act to 80%. The 80 percent limitation on NOL deductions applies to losses generated in tax years beginning after December 31, 2017, and the elimination of carrybacks and indefinite extension of carryforwards applies only to NOLs generated in taxable years ending after December 31, 2017. NOLs generated in 2017 and earlier would retain their 20-year life and be available to offset 100 percent of taxable income, subject to certain limitations. At December 31, 2017, United Financial Bancorp, Inc. had net operating loss carryforwards of $1.2 million for federal income tax purposes, which will begin to expire in 2023.
Corporate Dividends-Received Deduction:    The Company may exclude from its income 100% of dividends received from the Bank as a member of the same affiliated group of corporations. The Tax Act changed the corporate dividends received deduction of 80% to 65% in the case of dividends received from corporations after December 31, 2017 with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20% of the stock of a corporation distributing a dividend may deduct only 50%, previously 70% for dividends prior to December 31, 2017, of dividends received or accrued on their behalf.
The Company is not currently under audit with respect to its federal tax returns which have not been audited for the past four years.
State
The Company reports income on a calendar year basis to the State of Connecticut and the Commonwealth of Massachusetts. Generally, the income of financial institutions in Connecticut, which is calculated based on federal taxable income subject to certain adjustments, is subject to Connecticut tax. The Company and the Bank are currently subject to the corporate business tax at 7.5% of taxable income, subject to a 20% surcharge in 2017.
In 1998, the State of Connecticut enacted legislation permitting the formation of passive investment companies (“PIC”) by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business

 
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tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. United Bank established a passive investment company, United Bank Mortgage Company, in December 1998.
The Company believes it is in compliance with the state PIC requirements and that no Connecticut taxes are due from December 31, 1998 through December 31, 2017; however, the Company has not been audited by the Department of Revenue Services for such periods. If the state were to determine that the PIC was not in compliance with statutory requirements, a material amount of taxes could be due. The State of Connecticut continues to be under pressure to find new sources of revenue, and therefore could enact legislation to eliminate the passive investment company exemption. If such legislation were enacted, United Financial Bancorp, Inc. would be subject to higher state income taxes in Connecticut.
The Company also reports income on a calendar year basis to the Commonwealth of Massachusetts. Generally, Massachusetts imposes a tax of 9.0% on income taxable in Massachusetts, although Massachusetts Security Corporations are taxed at 1.32%.  Massachusetts taxable income is based on federal taxable income after modifications pursuant to state tax law.
The Company is not currently under audit with respect to its state tax returns which have not been audited for the past five years.
The Company also pays taxes in certain other states due to increased loan activity, and these taxes were immaterial to the Company’s results.
Securities and Exchange Commission Availability of Filings
United Financial Bancorp, Inc.’s common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 (“Exchange Act”) and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. Under Sections 13 and 15(d) of the Exchange Act, periodic and current reports must be filed or furnished with the SEC. You may read and copy any reports, statements or other information filed by United Financial Bancorp, Inc. with the SEC at its public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. United’s filings are also available to the public from commercial document retrieval services and at the website maintained by the SEC at http://www.sec.gov. In addition, United makes available free of charge on its Investor Relations website (unitedfinancialinc.com) its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports, as soon as reasonably practicable after such material is electronically filed with, or furnished to, the SEC. The Company’s website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.

Item 1A.    Risk Factors
You should consider carefully the following risk factors in evaluating an investment in shares of our common stock. An investment in our common stock is subject to risks inherent in our business. Before making an investment decision, you should carefully consider the risks and uncertainties described below.

We are subject to lending risk and could incur losses in our loan portfolio despite our underwriting practices.

United Bank originates commercial business loans, commercial real estate loans, consumer loans, and residential mortgage loans primarily within its market area. Commercial business loans, commercial real estate loans, and consumer loans may expose a lender to greater credit risk than loans secured by residential real estate. In addition, commercial real estate and commercial business loans may also involve relatively large loan balances to individual borrowers or groups of borrowers. These loans also have a greater credit risk than residential real estate for the following reasons:

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Commercial Business Loans: Repayment is generally dependent upon the successful operation of the borrower’s business.
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Commercial Real Estate Loans: Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.
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Consumer Loans: Consumer loans are collateralized, if at all, with assets that may not provide an adequate source of payment of the loan due to depreciation, damage or loss.
While relatively stable, an economic slowdown, at the local and national level, is possible which could adversely affect the value of the properties securing the loans or revenues from borrowers’ businesses, thereby increasing the risk of potential increases in non-performing loans. The decreases in real estate values could adversely affect the value of property used as collateral for our commercial and residential real estate loans. A stagnation in the economy coupled with a slow economic recovery may also have a negative effect on the ability of our commercial borrowers to make timely repayments of their loans, which could have an adverse impact on our earnings. If poor economic conditions were prolonged, it could result in decreased opportunities to make quality

 
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loans and our profits may decrease because our alternative investment opportunities may earn less income. The resultant market uncertainty may lead to a widespread reduction in general business activity. The resulting economic pressure brought to bear on consumers may adversely affect our business, financial condition, and results of operations.
All of these factors could have a material adverse effect on our financial condition and results of operations. See further discussion on the commercial loan portfolio in “Lending Activities” within “Item 7 -Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this Annual Report on Form 10-K.
If United Bank’s allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loss and delinquency experience on different loan categories, and we evaluate existing economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance, which would decrease our net income. Our allowance for loan losses amounted to 0.88% of total loans outstanding and 148.76% of non-performing loans at December 31, 2017. Although we are unaware of any specific problems with our loan portfolio that would require any increase in our allowance at the present time, it may need to be increased further in the future, due to our emphasis on loan growth and on increasing our portfolio of commercial business and commercial real estate loans. Our allowance for loan losses to total covered loans was 1.03% at December 31, 2017.
In addition, banking regulators and other outside third parties, periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs based on a myriad of factors and assumptions. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations and financial condition.
A new accounting standard may require us to increase our allowance for loan losses and may have a material adverse effect on our financial condition and results of operations.
The Financial Accounting Standards Board has issued Accounting Standards Update 2016-13, which will be effective for the Company for the first quarter of the fiscal year ending December 31, 2020. This standard, often referred to as “CECL” (reflecting a current expected credit loss model), will require companies to recognize an allowance for credit losses based on estimates of losses expected to be realized over the contractual lives of the loans. Under current U.S. GAAP, companies generally recognize credit losses only when it is probable that a loss has been incurred as of the balance sheet date. This new standard will require us to collect and review increased types and amounts of data for us to determine the appropriate level of the allowance for loan losses, and may require us to increase our allowance for loan losses. Any increase in our allowance for loan losses or expenses incurred to determine the appropriate level of the allowance for loan losses may have a material adverse effect on our financial condition and results of operations. We are currently evaluating the impact of adopting this standard on our consolidated financial statements, which is expected to increase loan loss reserves, the amount of which is uncertain at this time. 
Concentration of loans in our primary market area may increase risk
Our success is impacted by the general economic conditions in the geographic areas in which we operate, primarily Connecticut and Central and Western Massachusetts. Accordingly, the economic conditions in these markets have a significant impact on the ability of borrowers to repay loans. As such, a decline in real estate valuations in these markets would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond our control could reduce our ability to generate new loans and increase default rates on those loans and otherwise negatively affect our financial results.
Changes in interest rates could adversely affect our results of operations and financial condition
Our results of operations and financial condition could be significantly affected by changes in the level of interest rates and the steepness of the yield curve. Our financial results depend substantially on net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. While we have modeled rising interest rate scenarios using historic data and such scenarios result in an increase in our net interest income, our interest-bearing liabilities may reprice or mature more quickly than modeled, thus resulting in a decrease in our net interest income. Further, a flatter yield curve than we modeled would also result in a decline in net interest income.
Changes in interest rates also affect the value of our interest-earning assets and in particular our investment securities. Generally, the value of our investment securities fluctuates inversely with changes in interest rates. Decreases in the fair value of

 
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our investment securities, therefore, could have an adverse effect on our stockholders’ equity or our earnings if the decrease in fair value is deemed to be other than temporary.
Changes in interest rates may also affect the average life of our loans and mortgage related securities. Decreases in interest rates may cause an increase in prepayments of our loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. As prepayment speeds on mortgage related securities increase, the premium amortization increases prospectively, and additionally there would be an adjustment required under the application of the interest method of income recognition, and will therefore result in lower net interest income. Under these circumstances, we are also subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on our existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.
Continued or further declines in the value of certain investment securities could require write-downs, which would reduce our earnings.
The gross unrealized losses within our investment securities portfolio are due in part to an increase in credit spreads. We have concluded these unrealized losses are temporary in nature since they are not related to the underlying credit quality of the issuers or underlying assets, and we have the intent and ability to hold these investments for a time necessary to recover our cost at stated maturity (at which time, full payment is expected). However, a continued decline in the value of these securities due to deterioration in the underlying credit quality of the issuers or underlying assets or other factors could result in an other-than-temporary impairment write-down which would reduce our earnings.
The market price and trading volume of our common stock may be volatile.
The level of interest and trading in the Company’s stock depends on many factors beyond our control. The market price of our common stock may be highly volatile and subject to wide fluctuations in response to numerous factors, including, but not limited to, the factors discussed in other risk factors and the following: actual or anticipated fluctuations in operating results; changes in interest rates; changes in the legal or regulatory environment; press releases, announcements or publicity relating to the Company or its competitors or relating to trends in its industry; changes in expectations as to future financial performance, including financial estimates or recommendations by securities analysts and investors; future sales of our common stock; changes in economic conditions in our marketplace, general conditions in the U.S. economy, financial markets or the banking industry; and other developments affecting our competitors or us. These factors may adversely affect the trading price of our common stock, regardless of our actual operating performance, and could prevent stockholders from selling their common stock at a desirable price.
In the past, stockholders have brought securities class action litigation against other companies following periods of volatility in the market price of their securities. If we experience such volatility we could be the target of similar litigation in the future, which could result in substantial costs and divert management’s attention and resources.
Our success depends on our key personnel, including our executive officers, and the loss of key personnel could disrupt our business.
Our success depends on our ability to recruit and retain highly-skilled personnel. Competition for the very best people from our industry makes the hiring decision process complicated. Our ability to find seasoned individuals with specialized skill sets that match our needs, could prove difficult. The unexpected loss of services of one or more of the Company’s key personnel could have a material adverse impact on the business because we would lose the employee’s skills, knowledge of the market and years of industry experience and may have difficulty finding qualified replacement personnel.
United has opened new branches and may open additional new branches and loan production offices which may incur losses during their initial years of operation as they generate new deposit and loan portfolios.
The Company did not open any new branches in 2017 or 2016. However, United intends to continue to explore opportunities to expand and eliminate non-strategic branches to better posture the Company to achieve greater operational efficiencies going forward. Losses are expected in connection with establishing new branches for some time, as the expenses associated with them are largely fixed and are typically greater than the income earned at the outset as the branches build up their customer bases.
Strong competition within United’s market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense and increasing. In our market area, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have, and offer certain services that we do not or cannot provide. Our

 
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profitability depends upon our continued ability to compete successfully in our market area. The greater resources and deposit and loan products offered by our competitors may limit our ability to increase our interest-earning assets.
The Company continues to encounter technological change. Failure to understand and keep current on technological change could adversely affect our business.
The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company provides product and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business, financial condition and results of operations.
Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our business.
Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on our business, results of operations and financial condition.
We are exposed to fraud in many aspects of the services and products that we provide.
We offer debit cards and credit cards to our banking customers and expanded our online banking and online account opening capabilities in 2017.  Historically, we have experienced operational losses from fraud committed by third parties that obtain credentials from our customers or merchants utilized by our customers.  We have little ability to manage how merchants or our banking customers protect the credentials that our customers have to transact with us.  When customers and merchants do not adequately protect customer account credentials, our risks and potential costs increase.  As (a) our sales of these services and products expand, (b) those who are committing fraud become more sophisticated and more determined, and (c) our banking services and product offerings expand, our operational losses could increase.
We believe we have underwriting and operational controls in place to prevent or detect such fraud, but we cannot provide assurance that these controls will be effective in detecting fraud or that we will not experience fraud losses or incur costs or other damage related to such fraud, at levels that adversely affect our financial results or reputation. Our lending customers may also experience fraud in their businesses which could adversely affect their ability to repay their loans or make use of our services. Our exposure and the exposure of our customers to fraud may increase our financial risk and reputation risk as it may result in unexpected loan losses that exceed those that have been provided for in our allowance for loan losses.
Our information systems may experience an interruption or security breach.
We rely heavily on communications and information systems to conduct our business. Any failure or interruption of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure or interruption of our information systems, there can be no assurance that any such failure or interruption will not occur or, if they do occur, that they will be adequately addressed. A breach in security of our systems, including a breach resulting from our newer online capabilities such as mobile banking, increases the potential for fraud losses. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.
We rely on third-party relationships to conduct our business, which subjects us to strategic, reputation, compliance and transaction (operational) risk.
We rely on third party service providers to leverage subject matter expertise and industry best practice, provide enhanced products and services, and reduce costs. Although there are benefits in entering into third party relationships with vendors, there are risks associated with such activities. When entering a third party relationship, the risks associated with that activity are not passed to the third party but remain our responsibility. Management and the Board of Directors are ultimately responsible for the activities conducted by vendors. To that end, Management is accountable for the review and evaluation of all new and existing vendor relationships. Management is responsible for ensuring that adequate controls are in place at United and our vendors to protect the Company and its customers from the risks associated with vendor relationships.

 
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Increased risk most often arises from poor planning, oversight and control on the part of the Company and inferior performance or service on the part of the third party, and may result in legal costs or loss of business. While we have implemented a vendor management program to actively manage the risks associated with the use of third party service providers, any problems caused by third party service providers could adversely affect our ability to deliver products and services to our customers and to conduct our business. Replacing third party vendors could also take a long period of time and result in increased expenses.
United faces cybersecurity risks, including “denial of service attacks,” “hacking” and “identity theft” that could result in the disclosure of confidential information, adversely affect United’s business or reputation and create significant legal and financial exposure.
United’s computer systems and network infrastructure are subject to security risks and could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. Hacking and identity theft risks, in particular, could cause serious reputational harm. Cyber threats are rapidly evolving and United may not be able to anticipate or prevent all such attacks. United may incur increasing costs in an effort to minimize these risks and could be held liable for any security breach or loss. Although to date we have not experienced any material losses relating to cyber attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened and as a result the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As an additional layer of protection, we have purchased network and privacy liability risk insurance coverage which includes digital asset loss, business interruption loss, network security liability, privacy liability, network extortion and data breach coverage.
Despite efforts to ensure the integrity of its systems, United will not be able to anticipate all security breaches of these types, and United may not be able to implement effective preventive measures against such security breaches on a timely basis. The techniques used by cyber criminals change frequently and can originate from a wide variety of sources, including outside groups such as external service providers, organized crime affiliates, terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers or other users of United’s systems to disclose sensitive information in order to gain access to its data or that of its clients. These risks may increase in the future as the Company continues to increase its mobile-payment and other internet-based product offerings and expands its internal usage of web-based products and applications.
A successful penetration or circumvention of system security could cause serious negative consequences to United, including significant disruption of operations, misappropriation of confidential information of United or that of its customers, or damage to computers or systems of the Company or those of its customers and counterparties. A security breach could result in violations of applicable privacy and other laws, financial loss to United or to its customers, loss of confidence in United’s security measures, significant litigation exposure, and harm to United’s reputation, all of which could have a material adverse effect on the Company. United engages third party vendors to assess our readiness, and the results are reported to management and the Board Risk Committee.
Mortgage banking income may experience significant volatility.
Mortgage banking income is highly influenced by the level and direction of mortgage interest rates which may influence secondary market spreads, and real estate and refinancing activity. In lower interest rate environments, the demand for mortgage loans and refinancing activity will tend to increase. This has the effect of increasing fee income, but could adversely impact the estimated fair value of our mortgage servicing rights as the rate of loan prepayments increase. In higher interest rate environments, the demand for refinancing activity will generally be lower, and our inability to capture purchase mortgage market share may have the effect of decreasing fee income.
If the goodwill that the Company has recorded in connection with its mergers and acquisitions becomes impaired, it will have a negative impact on the Company’s profitability.
Applicable accounting standards require that the acquisition method of accounting be used for all business combinations. Under acquisition accounting, if the purchase price of an acquired company exceeds the fair value of the company’s net assets, the excess is carried on the acquirer’s balance sheet as goodwill. At December 31, 2017, the Company had approximately $115.3 million of goodwill on its balance sheet primarily reflecting the merger with Legacy United. Companies must evaluate goodwill for impairment at least annually. Write-downs of the amount of any impairment, if necessary, are to be charged to the results of operations in the period in which the impairment occurs. There can be no assurance that future evaluations of goodwill will not

 
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result in findings of impairment and related write-downs, which may have a material adverse effect on United’s financial condition and results of operations.
Our ability to make opportunistic acquisitions is subject to significant risks, including the risk that regulators will not provide the requisite approvals.
We may make opportunistic whole or partial acquisitions of other banks, branches, financial institutions or related businesses from time to time that we expect may further our business strategy, including through participation in FDIC-assisted acquisitions or assumption of deposits from troubled institutions. Any possible acquisition will be subject to regulatory approval, and there can be no assurance that we will be able to obtain such approval in a timely manner or at all. Even if we obtain regulatory approval, these acquisitions could involve numerous risks, including lower than expected performance or higher than expected costs, difficulties related to integration, difficulties and costs associated with consolidation and streamlining inefficiencies, diversion of management’s attention from other business activities, changes in relationships with customers and the potential loss of key employees. In addition, we may not be successful in identifying acquisition candidates, integrating acquired institutions, or preventing deposit erosion or loan quality deterioration at acquired institutions. Competition for acquisitions can be highly competitive, and we may not be able to acquire other institutions on attractive terms. There can be no assurance that we will be successful in completing or will even pursue future acquisitions, or if such transactions are completed, that we will be successful in integrating acquired businesses into operations. Our ability to grow may be limited if we choose not to pursue or are unable to successfully make acquisitions in the future.
A large portion of our loan portfolio is acquired and was not underwritten by us at origination.
At December 31, 2017, 21.7% of our loan portfolio was acquired and was not underwritten by us at origination, and therefore is not necessarily reflective of our historical credit risk experience. We performed extensive credit due diligence prior to each acquisition and marked the loans to fair value upon acquisition, with such fair valuation considering expected credit losses that existed at the time of acquisition. Additionally, we evaluate the expected cash flows of these loans on a quarterly basis. However, there is a risk that credit losses could be larger than currently anticipated, thus adversely affecting our earnings.
Severe weather, natural disasters, acts of war or terrorism and other external events could significantly impact our business.
Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. In addition, such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. Although management has established disaster recovery policies and procedures, the occurrence of any such event in the future could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.
We are exposed to risk of environmental liability when we take title to property.
In the course of our business, we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition or results of operations could be adversely affected.
New lines of business or new products and services may subject us to additional risks.
United may, from time to time, implement new lines of business or offer new products and services within existing lines of business. There are risks and uncertainties associated with new lines of business or new products particularly in instances where the markets are not fully developed. We may need to invest significant time and resources in developing and marketing new lines of business and/or new products and services. New lines of business and/or new products or services may not be implemented according to our initial schedule and price and profitability targets may not prove attainable. Other factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the implementation of new lines of business or development of new products or services could have a material adverse effect on our business, results of operations and financial condition.

 
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The full impact of the Tax Cuts and Jobs Act (the "Tax Act") on us and our customers is unknown at present, creating uncertainty and risk related to our customers' future demand for credit and our future results.
Increased investment and productivity activity expected to result from the decrease in tax rates on businesses generally could spur additional economic activity that would encourage additional borrowing. At the same time, some customers may elect to use their additional cash flow from lower taxes to fund their existing levels of activity, decreasing borrowing needs. The limitation of the federal income tax deductibility of business interest expense for a significant number of our customers effectively increases the cost of borrowing and makes other funding relatively more attractive. This could have a long-term negative impact on business customer borrowing. We are anticipating an increase in our after-tax net income available to stockholders in 2018 and future years as a result of the decrease in our effective tax rate. Some or all of this benefit could be lost to the extent that the banks and financial services companies we compete with elect to lower interest rates and fees and we are forced to respond in order to remain competitive. There is no assurance that presently anticipated benefits of the Tax Act for the Company will be realized.
U.S. tax reform that was enacted into legislation in December 2017 impacted the value of our deferred tax assets. Future tax reform could adversely affect us.
Among its many provisions, the enactment of the Tax Act that was signed into law on December 22, 2017 resulted in a reduction of the U.S. Federal corporate tax rate from 35% to 21%. This reduction combined with other provisions of the new law resulted in the Company decreasing the value of its deferred tax assets by $1.4 million. Further U.S. tax proposals could materially adversely affect us. We cannot predict if any such proposals will ultimately become law, or, if enacted, what its provisions or that of the regulations promulgated thereunder will be, but they could materially adversely affect our financial position and our results of operations.
Our financial performance may be adversely affected by conditions in the financial markets and economic conditions generally.
Our financial performance generally, and in particular the ability of borrowers to pay interest on and repay principal of outstanding loans and the value of collateral securing those loans, is highly dependent upon the business environment in the markets where we operate and in the United States as a whole. A favorable business environment is generally characterized by, among other factors, economic growth, efficient capital markets, low inflation, high business and investor confidence and strong business earnings. Unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, natural disasters or a combination of these or other factors.
There can be no assurance that national market and economic conditions will improve in the near term. Such conditions could adversely affect the credit quality of our loans, our results of operations and our financial condition.
We are subject to extensive government regulation and supervision, which may interfere with our ability to conduct our business and may negatively impact our financial results.
The Company is subject to extensive federal and state regulation and supervision. Banking regulations are intended to protect depositors’ funds, the DIF and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. Changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or limit the pricing we may charge on certain banking services, among other things. Additionally, recent changes to the legal and regulatory framework governing our operation, including the continued implementation of Dodd-Frank Act and Basel III will continue to affect the lending, investment, trading and operating activities of financial institutions and their holding companies. There are many additional regulations called for by the Dodd- Frank Act that have not been proposed, or if proposed, have not been adopted. The full impact of the Dodd-Frank Act on our business strategies is not completely known at this time as there is uncertainty related to regulations still pending. The 2016 national election results and more recent statements and actions by the administration and members of Congress have contributed to continuing uncertainty regarding future implementation and enforcement of the Dodd-Frank Act and other financial sector regulatory requirements. While these developments have contributed to increased market valuations of a broad range of financial services companies, including the Company, there is no assurance that any of the anticipated changes will be implemented or that expected benefits to our future financial performance will be realized. Since the global financial crisis, financial institutions generally have been subject to increased scrutiny from regulatory authorities. In general, bank regulatory agencies have increased their focus on risk management and customer compliance, and we expect this focus to continue.  Additional compliance requirements are likely and can be costly to implement.  Compliance personnel and resources may increase our costs of operations and adversely impact our earnings.

 
32
 

Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on our business, financial condition and results of operations.
While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur. See the section captioned "Supervision and Regulation" in Item 1 of this report for further information.

Item 1B.    Unresolved Staff Comments
None.
Item 2.    Properties
At December 31, 2017, the Company, headquartered in Hartford, Connecticut, conducted business throughout Connecticut and Massachusetts. The Company has 53 banking offices and 64 ATMs as well as seven loan production offices. Of the 53 banking offices, 16 are owned and 37 are leased. Branch lease expiration dates range from one year to twenty years with renewal options of five to thirty years.
During the fourth quarter of 2017, the Company relocated its headquarters to Hartford, Connecticut from Glastonbury, Connecticut.
The aggregate net book value of premises and equipment was $67.5 million at December 31, 2017.
For additional information regarding the Company’s Premises and Equipment, Net and Other Commitments and Contingencies, see Notes 8 and 20 to the Consolidated Financial Statements.
Item 3.    Legal Proceedings
In the ordinary course of business, we are involved in various threatened and pending legal proceedings. We believe that we are not a party to any pending legal, arbitration, or regulatory proceedings that would have a material adverse impact on our financial results or liquidity.
Item 4.    Mine Safety Disclosures
None.
Part II
Item 5.    Market For The Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
The Company’s Common Stock trades on the NASDAQ Global Select Stock Market under the symbol “UBNK.”
On January 31, 2018, the intra-day high and low prices per share of common stock were $17.02 and $16.64, respectively.
The following table sets forth for each quarter of 2017 and 2016 the intra-day high and low prices per share and the dividends declared per share of common stock as reported by NASDAQ Global Select Stock Market.

 
33
 

 
Common Stock Per Share
 
Market Price
 
Dividends
Declared
 
High
 
Low
 
2017:
 
 
 
 
 
First Quarter
$
18.66

 
$
15.75

 
$
0.12

Second Quarter
18.29

 
15.84

 
0.12

Third Quarter
18.50

 
16.27

 
0.12

Fourth Quarter
19.35

 
17.09

 
0.12

 
 
 
 
 
 
2016:
 
 
 
 
 
First Quarter
$
12.81

 
$
10.28

 
$
0.12

Second Quarter
13.51

 
12.16

 
0.12

Third Quarter
14.16

 
12.64

 
0.12

Fourth Quarter
18.49

 
13.51

 
0.12

United had 6,822 registered holders of record of common stock and 51,021,416 shares outstanding on January 31, 2018. The number of shareholders of record was determined by Broadridge Corporate Issuer Solutions, the Company’s transfer agent and registrar.
Dividends
The Company began paying quarterly dividends in 2006 on its common stock and paid its 47th consecutive dividend on February 14, 2018. The Company intends to continue to pay regular cash dividends to common stockholders; however, there can be no assurance as to future dividends because they are dependent on the Company’s future earnings, capital requirements, financial condition and regulatory limitations. Dividends from the Bank have been a source of cash used by the Company to pay its dividends, and these dividends from the Bank are dependent on the Bank’s future earnings, capital requirements and financial condition. During the year ended December 31, 2017, the Bank paid a dividend to the Company of $24.0 million. There were no dividends from the Bank to the Company for the year ended December 31, 2016.
See the section captioned “Supervision and Regulation” in Item 1 of this report and Note 17, “Regulatory Matters,” in the Consolidated Financial Statements for further information.
Recent Sale of Registered Securities; Use of Proceeds from Registered Securities
No registered securities were sold by the Company during the year ended December 31, 2017.
Recent Sale of Unregistered Securities
No unregistered securities were sold by the Company during the year ended December 31, 2017.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On January 26, 2016, the Company’s Board of Directors approved a fourth share repurchase plan authorizing the Company to repurchase up to 2.5% of outstanding shares, or 1,248,536 shares. There were no purchases of equity securities during the fourth quarter of 2017 made by or on behalf of the Company or any “affiliated purchaser”, as defined by Section 240.10b-18(a)(3) of the Securities and Exchange Act of 1934, of shares of the Company’s common stock.
Performance Graph:
The following graph compares the cumulative total return on the common stock for the period beginning December 31, 2012, through December 31, 2017, with (i) the cumulative total return on the S&P 500 Index and (ii) the cumulative total return on the KBW Regional Banking Index (Ticker: KRX) for that period. The KRX index is considered to be a good representation due to its equal weighting and diverse geographical exposure of the banking sector.

 
34
 

This graph assumes the investment of $100 on December 31, 2012 in our common stock. The graph assumes all dividends on UBNK stock, the S&P 500 Index and the KRX are reinvested.
chart-33ddfd36c18953489cba01.jpg
 
12/31/2012
 
12/31/2013
 
12/31/2014
 
12/31/2015
 
12/31/2016
 
12/31/2017
UBNK
100.0

 
113.5

 
118.1

 
109.8

 
160.1

 
159.9

S&P 500 Total Return Index
100.0

 
132.4

 
150.5

 
152.6

 
170.8

 
208.1

KRX Total Return Index
100.0

 
146.9

 
150.4

 
159.3

 
221.5

 
225.3


 
35
 

Item 6.    Selected Financial Data
Selected financial data for each of the years in the five-year period ended December 31, 2017 are set forth below. This information should be read in conjunction with the Consolidated Financial Statements and related Notes, and the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing elsewhere in this Annual Report on Form 10-K. On April 30, 2014, the Company acquired 100% of the outstanding common shares and completed its merger with Legacy United, adding $2.40 billion in assets, $2.16 billion in liabilities and $356.4 million in equity.
 
 
 
At December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(In thousands)
Selected Financial Condition Data:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
7,114,159

 
$
6,599,520

 
$
6,228,541

 
$
5,476,809

 
$
2,301,615

Available for sale securities
 
1,050,787

 
1,043,411

 
1,059,169

 
1,053,011

 
404,903

Held to maturity securities
 
13,598

 
14,038

 
14,565

 
15,368

 
13,830

Federal Home Loan Bank stock
 
50,194

 
53,476

 
51,196

 
31,950

 
15,053

Loans receivable, net
 
5,307,678

 
4,870,552

 
4,587,062

 
3,877,063

 
1,697,012

Cash and cash equivalents
 
88,668

 
90,944

 
95,176

 
86,952

 
45,235

Goodwill
 
115,281

 
115,281

 
115,281

 
115,240

 
1,070

Deposits
 
5,198,221

 
4,711,172

 
4,437,071

 
4,035,311

 
1,735,205

Advances from the Federal Home Loan Bank and other borrowings
 
1,165,054

 
1,169,619

 
1,099,020

 
777,314

 
240,228

Total stockholders’ equity
 
693,328

 
655,866

 
625,521

 
602,408

 
299,382

Allowance for loan losses
 
47,099

 
42,798

 
33,887

 
24,809

 
19,183

Non-performing loans (1)
 
31,662

 
34,063

 
37,802

 
32,358

 
13,654

 
(1)
Non-performing loans include loans for which the Bank does not accrue interest (non-accrual loans).

 
36
 

 
 
For the Years Ended December 31,
 
 
2017
 
2016
 
2015
 
2014
 
2013
 
 
(Dollars in thousands, except per share amounts)
Selected Operating Data:
 
 
Interest and dividend income
 
$
236,254

 
$
212,152

 
$
196,345

 
$
155,879

 
$
77,517

Interest expense
 
52,012

 
41,053

 
31,763

 
18,007

 
10,460

Net interest income
 
184,242

 
171,099

 
164,582

 
137,872

 
67,057

Provision for loan losses
 
9,396

 
13,437

 
13,005

 
9,496

 
2,046

Net interest income after provision for loan losses
 
174,846

 
157,662

 
151,577

 
128,376

 
65,011

Non-interest income
 
33,400

 
30,084

 
32,487

 
16,605

 
17,051

Non-interest expense (1)
 
141,585

 
133,973

 
128,195

 
144,432

 
62,466

Income before income taxes
 
66,661

 
53,773

 
55,869

 
549

 
19,596

Income tax expense (benefit)
 
12,043

 
4,112

 
6,229

 
(6,233
)
 
5,369

Net income
 
$
54,618

 
$
49,661

 
$
49,640

 
$
6,782

 
$
14,227

Earnings per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.09

 
$
1.00

 
$
1.01

 
$
0.16

 
$
0.55

Diluted
 
$
1.07

 
$
0.99

 
$
1.00

 
$
0.16

 
$
0.54

Dividends per share
 
$
0.48

 
$
0.48

 
$
0.46

 
$
0.40

 
$
0.40

 
(1)
Included in non-interest expense for 2015, 2014 and 2013, was merger related expense of $1.6 million, $36.9 million and $2.1 million, respectively. There were no merger related expenses in 2017 or 2016.


 
37
 

 
At or For the Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
Selected Financial Ratios and Other Data:
 
 
 
 
 
 
 
 
 
Performance Ratios:
 
 
 
 
 
 
 
 
 
Return on average assets
0.80
%
 
0.78
%
 
0.87
%
 
0.16
%
 
0.67
%
Return on average equity
8.09

 
7.77

 
8.08

 
1.28

 
4.67

Tax-equivalent net interest rate spread (1)
2.87

 
2.83

 
3.07

 
3.43

 
3.22

Tax-equivalent net interest margin (2)
3.01

 
2.96

 
3.19

 
3.54

 
3.37

Non-interest expense to average assets
2.08

 
2.10

 
2.25

 
3.37

 
2.93

Efficiency ratio (3)
61.72

 
62.29

 
61.15

 
65.40

 
74.27

Dividend payout ratio
44.14

 
48.00

 
45.28

 
265.51

 
73.47

Capital Ratios:
 
 
 
 
 
 
 
 
 
Capital to total assets at end of year
9.75

 
9.94

 
10.04

 
11.00

 
13.01

Average capital to average assets
9.91

 
10.00

 
10.79

 
12.37

 
14.28

Total capital to risk-weighted assets
12.60

 
13.00

 
12.53

 
14.57

 
17.68

Tier 1 capital to risk-weighted assets
10.40

 
10.70

 
10.33

 
12.02

 
16.58

Tier 1 capital to total average assets
8.40

 
8.60

 
8.87

 
9.10

 
13.47

Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
Allowance for loan losses as a percent of total loans
0.88

 
0.87

 
0.73

 
0.64

 
1.12

Allowance for loan losses as a percent of non-performing loans
148.76

 
125.64

 
89.64

 
76.67

 
140.50

Net charge-offs to average outstanding loans during the period
0.10

 
0.10

 
0.10

 
0.12

 
0.08

Non-performing loans as a percent of total loans
0.59

 
0.69

 
0.82

 
0.83

 
0.80

Non-performing assets as a percent of total assets
0.48

 
0.54

 
0.62

 
0.59

 
0.59

Other Data:
 
 
 
 
 
 
 
 
 
Book value per share
$
13.58

 
$
12.91

 
$
12.53

 
$
12.16

 
$
11.53

Tangible book value per share (4)
$
11.24

 
$
10.53

 
$
10.07

 
$
9.65

 
$
11.49

Number of full service offices
52

 
52

 
52

 
53

 
19

Number of limited service offices
1

 
1

 
1

 
3

 
3

 
(1)
Represents the difference between the weighted-average yield on average interest-earning assets and the weighted- average cost of interest-bearing liabilities.
(2)
Represents tax-equivalent net interest income as a percent of average interest-earning assets.
(3)
Calculations for this non-GAAP metric are provided after the reconciliation of non-GAAP financial measures and appear on page 45.
(4)
Tangible book value per share represents the ratio of stockholders’ equity less intangible assets divided by shares outstanding.


 
38
 

Item 7.     Management’s Discussion and Analysis of Financial Condition and Results of Operation
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand United Financial Bancorp, Inc., our operations and our present business environment. We believe accuracy, transparency and clarity are the primary goals of successful financial reporting. We remain committed to transparency in our financial reporting, providing our stockholders with informative financial disclosures and presenting an accurate view of our financial disclosures, financial position and operating results.
MD&A is provided as a supplement to — and should be read in conjunction with — our Consolidated Financial Statements and the accompanying Notes thereto contained in Part II, Item 8, Financial Statements and Supplementary Data of this report. The following sections are included in MD&A:
•
Our Business — a general description of our business, our objectives and the challenges and risks of our business.
•
Critical Accounting Estimates — a discussion of accounting estimates that require critical judgments and estimates.
•
Operating Results — an analysis of our Company’s consolidated results of operations for the periods presented in our Consolidated Financial Statements.
•
Financial Condition, Liquidity and Capital Resources — an overview of financial condition and market and interest rate risk.
Our Business
General
By assets, United Financial Bancorp, Inc. is the third largest publicly traded banking institution headquartered in Connecticut with consolidated assets of $7.11 billion and stockholders’ equity of $693.3 million at December 31, 2017. United’s business philosophy is to operate as a community bank with local decision-making authority. The Company delivers financial services to individuals, families, businesses and municipalities throughout Connecticut and Western and Central Massachusetts and the region through its 53 banking offices, its commercial loan and mortgage loan production offices, 64 ATMs, telephone banking, mobile banking and online banking (www.bankatunited.com).
The Company strives to remain a leader in meeting the financial service needs of the community and to provide superior customer service to the businesses and individuals in the market areas that it has served since 1858. United Bank is a community-oriented provider of traditional banking products and services to business organizations and individuals, offering products such as commercial real estate loans, commercial business loans, residential real estate and consumer loans and a variety of deposit products. Our business philosophy is to remain a community-oriented franchise and continue to focus on providing superior customer service to meet the financial needs of the communities in which we operate. Current strategies include: (1) allocating capital to lending activities that are accretive to the Company’s return on assets and return on equity; continuing to acquire and support commercial clients through lending activities and cash management and deposit services which exhibit acceptable credit adjusted spreads; and growing our deposit base through acquisition of low cost deposits; (2) increasing the non-interest income component of total revenues through development of banking-related fee income and the sale of investment products ;(3) continuing to improve operating efficiencies and maintain expense discipline; and (4) developing products and services that expand our banking network through mobile and internet channels and making opportunistic whole or partial acquisitions of other banks, loans, branches, financial institutions, or related businesses from time to time.
The Company’s results of operations depend primarily on net interest income, which is the difference between the income earned on its loan and securities portfolios and its cost of funds, consisting of the interest paid on deposits and borrowings. Results of operations are also affected by the Company’s provision for loan losses, non-interest income and non-interest expense. Non-interest income primarily consists of fee income from depositors, gain on sale of loans, mortgage servicing income and loan sale income and increases in cash surrender value of bank-owned life insurance (“BOLI”). Non-interest expense consists principally of salaries and employee benefits, occupancy, service bureau fees, marketing, professional fees, FDIC insurance assessments, and other operating expenses.
Results of operations are also significantly affected by general economic and competitive conditions and changes in interest rates as well as government policies and actions of regulatory authorities. Future changes in applicable laws, regulations or government policies may materially affect the Company.
Our Objectives
The Company seeks to grow organically and through strategic mergers/acquisitions as well as to continually deliver superior value to its customers, stockholders, employees and communities through achievement of its core operating objectives which are to:
•
Align earning asset growth with organic capital and low cost core deposit generation to maintain strong capital and liquidity;

 
39
 

•
Re-mix cash flows into better yielding risk adjusted return on assets with lower funding costs relative to peers;
•
Invest in people, systems and technology to grow revenue and improve customer experience while maintaining attractive cost structure;
•
Grow operating revenue, maximize operating earnings, grow tangible book value and pay dividends. Achieve more revenue into non-interest income and core fee income.
Significant factors management reviews to evaluate achievement of the Company’s operating objectives and its operating results and financial condition include, but are not limited to: net income and earnings per share, return on tangible equity and assets, net interest margin, non-interest income, operating expenses related to total average assets and efficiency ratio (a non-GAAP metric), asset quality, loan and deposit growth, capital management, liquidity and interest rate sensitivity levels, customer service standards, market share and peer comparisons.
Challenges and Risks
As we look forward, management has identified five key challenges and risks that are likely to present challenges for near term performance:
Net interest income.    The growth of net interest income is vital to our continued success and profitability. In 2017, our tax-equivalent net interest margin increased 5 basis points to 3.01%. This increase was mostly due to improvements in the yields of the commercial portfolio, driven by the variable/floating rate segments tied to Prime and LIBOR indices, as well as improvement in the yields of the home equity line of credit portfolio. In 2017, the Company continued to execute interest rate swaps, with a higher level of transactional volume as compared to the prior year. The loan swap fee income is generated as part of the Company’s loan level hedge program that is offered to certain commercial banking customers to facilitate their respective risk management strategies. The LIBOR based adjustable rate loans created through the loan level hedge program effected net interest margin, but better position the Company for a rising interest rate environment. The Company’s ability to decrease the cost of funding relative to 2017 is diminished due to the expectation of future short term increases and the Fed Funds rate by the Federal Open Market Committee and any improvement in the cost will be dependent on a more favorable deposit mix with more low cost demand deposit accounts.
The risk associated with our deposit pricing strategy is a potential outflow of deposits to competitors in search of higher rates. We will continue to focus on enhancing and developing new products in a cost effective manner and believe that will help mitigate the risk of deposit outflow. We believe that we are well positioned to take advantage of the pricing opportunities in our lending area.
Maintaining credit quality and rigorous risk management.    The national economy continued to improve through 2017. The Company continued to maintain its strong credit quality as delinquencies, non-performing loans and charge-offs generally outperform the average of our peer group. Our ratio of non-performing loans to total loans was 0.59%, total delinquencies to total loans was 0.56% and our allowance for loan losses to total loans was 0.88% at December 31, 2017. Net loan charge-offs remained relatively flat at $5.1 million for the year ended December 31, 2017. We expect to be able to continue to maintain strong asset quality relative to industry levels. Risk management oversight of operations is a critical component of our enterprise risk management framework.
Competition in the marketplace.    United faces competition within the financial services industry from some well-established national and local companies. We expect loan and deposit competition to remain vigorous. However, we are poised to take advantage of the continuing industry consolidation in our market and consumers’ willingness to switch financial service providers because of their skepticism of “big banks.” Therefore, we must continue to recruit and retain the best talent, expand our product offerings, expand our market area, improve operating efficiencies and develop and maintain our brand to increase market share to benefit from these opportunities.
Regulatory considerations.    The banking industry is subject to extensive federal and state regulation and supervision. Continued changes to the regulatory landscape is the norm. Recent changes to the legal and regulatory framework governing our operations, including the continued implementation of the Dodd-Frank Act and Basel III have and will continue to affect the lending, investment and operating activities of the Company. While these regulatory changes made were to ensure the long-term stability in the financial markets, Management will have to apply additional resources to ensure compliance with all applicable provisions of Basel III and the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings.
In July 2013, the three Federal bank regulatory agencies (the Federal Reserve Board, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation) approved the final Basel III rules that amended the existing capital adequacy requirements of banks and bank holding companies for smaller banks as defined. The new rules became effective for smaller banks and bank holding companies on January 15, 2015, with full phase-in to be completed by January 1, 2019. The

 
40
 

Company believes it will continue to exceed all expected well-capitalized regulatory requirements upon the complete phase-in of Basel III.
In complying with new regulations, there can be no assurance that the Company will not be impacted in a way we cannot currently predict or mitigate, but we will continue to monitor the regulatory rulings and will work to execute the most beneficial course of action for the Company’s shareholders.
Managing expansion, growth, and future acquisitions. On April 30, 2014, the Company completed its acquisition of Legacy United. The Company’s primary growth will be organic but we may use acquisition to supplement organic growth. We anticipate this growth will expand our brand into new geographic markets as we implement our business model. Since December 2015, the Company has strategically purchased various types of loan portfolios to compliment organic loan growth. The outstanding principal balances of purchased loans serviced by others at December 31, 2017 and 2016 were $470.4 million and $377.5 million, respectively. These loans extend beyond our geographic footprint with quality borrowers that we would not be able to originate in our market area.
The success of this continued expansion depends on our ability to maintain and develop an infrastructure appropriate to support and integrate such growth. Also, our success depends on the acceptance by customers of us and our services in these new markets and, in the case of expansion through acquisitions, our success depends on many factors, including the long-term recruitment and retention of key personnel and acquired customer relationships. The profitability of our expansion strategy also depends on whether the income we generate in the new markets will offset the increased expenses of operating a larger entity with increased personnel, more branch locations and additional product offerings.
All five of these challenges and risks — growing the net interest income, maintaining credit quality and rigorous risk management, competition in the marketplace, regulatory considerations and managing expansion, growth, and future acquisitions — have the potential to have a material adverse effect on United; however, we believe the Company is well positioned to appropriately address these challenges and risks.
See also Item 1A, Risk Factors in Part I of this report for additional information about risks and uncertainties facing United.
Critical Accounting Estimates
Our Consolidated Financial Statements are prepared in accordance with generally accepted accounting principles. Our significant accounting policies are discussed in Note 1 of the Notes to Consolidated Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this report. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of our Board.
Allowance For Loan Losses
Critical Estimates
Our loan portfolio is segregated between originated loans which are accounted for under the amortized cost method and acquired loans which are originally recorded at fair value, resulting in no carryover of the related allowance for loan losses. Loans accounted for under the amortized cost method are considered “covered” loans. For covered loans, we determine our allowance for loan losses by portfolio segment, which consists of owner-occupied and investor non-owner occupied commercial real estate, commercial and residential construction, commercial business, residential real estate, home equity and other consumer loans. Acquired non-impaired loans (referred to as “acquired” loans) are loans for which there is no evidence of deterioration subsequent to acquisition and therefore have no allowance for loan losses associated with them. Certain acquired loans carry an allowance for loan losses when there has been measured credit deterioration in the loans subsequent to acquisition such that a reserve is required. These acquired loans, for which an allowance is established, are also considered covered loans.
Covered loans
We establish our allowance for loan losses through a provision for credit losses. The level of the allowance for loan losses is based on our evaluation of the credit quality of our loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, and other factors that warrant recognition in determining our allowance for loan losses. We continue to monitor and modify the level of our allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio.

 
41
 

Our allowance for loan losses consists of the following elements: (i) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types; and (ii) specific valuation allowances based on probable losses on specifically identified impaired loans. The covered portfolio consists of organic performing loans, refinanced acquired loans which have undergone a full underwriting review as well as performing acquired loans which have evidenced measured credit deterioration subsequent to acquisition, but are not deemed impaired.
Impaired loans
When current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest when due under the original terms of a business, construction or commercial real estate loan greater than $100,000, such loan will be classified as impaired. Additionally, all loans modified in a troubled debt restructuring ("TDR") are considered impaired. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off immediately at the time a loan becomes impaired. We typically would obtain an appraisal through our internal loan grading process to use as the basis for the fair value of the underlying collateral.
Commercial loan portfolio
We estimate the allowance for our commercial loan portfolio by applying historical loss rates to loans based on their type and loan grade. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions, or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. Our loan grading system is described in Note 7, “Loans Receivable and Allowance for Loan Losses” found in Part II, Item 8 of this report.
Consumer loan portfolio
We estimate the allowance for loan losses for our consumer loan portfolio based on our historical net loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. Qualitative considerations include, but are not limited to, the evaluation of trends in property values and unemployment.
Judgment and Uncertainties
We determine the adequacy of the allowance for loan losses by analyzing and estimating losses inherent in the portfolio. The allowance for loan losses contains uncertainties because the calculation requires management to use historical information as well as current economic data to make judgments on the adequacy of the allowance. As the allowance is affected by changing economic conditions and various external factors, it may impact the portfolio in a way currently unforeseen.
Effect if Actual Results Differ from Assumptions
Adverse changes in management’s assessment of the factors used to determine the allowance for loan losses could lead to additional provisions. Actual loan losses could differ materially from management’s estimates if actual losses and conditions differ significantly from the assumptions utilized. These factors and conditions include general economic conditions within United’s market, industry trends and concentrations, real estate and other collateral values, interest rates and the financial condition of the individual borrower. While management believes that it has established adequate specific and general allowances for probable losses on loans, actual results may prove different and the differences could be significant.
Other-Than-Temporary Impairment of Securities
Critical Estimates
The Company maintains a securities portfolio that is classified into two major categories: available for sale and held to maturity. Securities available for sale are recorded at estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Held to maturity securities are recorded at amortized cost. Management determines the classifications of a security at the time of its purchase.
Quarterly, securities with unrealized losses are reviewed as deemed appropriate to assess whether the decline in fair value is temporary or other-than-temporary. The assessment is to determine whether the decline in value is from company-specific events, industry developments, general economic conditions, credit losses on debt or other reasons. Declines in the fair value of securities below their cost or amortized cost that are deemed to be other-than-temporary are reflected in earnings for equity securities and for debt securities that have an identified credit loss. Unrealized losses on debt securities beyond the identified credit loss component are reflected in other comprehensive income.

 
42
 

Judgments and Uncertainties
Significant judgment is involved in determining when a decline in fair value is other-than-temporary. The factors considered by management include, but are not limited to:
•
Percentage and length of time by which an issue is below book value;
•
Financial condition and near-term prospects of the issuer including their ability to meet contractual obligations in a timely manner;
•
Ratings of the security;
•
Whether the decline in fair value appears to be issuer specific or, alternatively, a reflection of general market or industry conditions;
•
Whether the decline is due to interest rates and spreads or credit risk;
•
The value of underlying collateral; and
•
Our intent and ability to retain the investment for a period of time sufficient to allow for the anticipated recovery in the market value, or more likely than not, will be required to sell a debt security before its anticipated recovery which may not be until maturity.
Effect if Actual Results Differ from Assumptions
Adverse changes in management’s assessment of the factors used to determine that a security was not other-than-temporarily impaired could lead to additional impairment charges. A decline in fair value that we determined to be temporary could become other-than-temporary and warrant an impairment charge. Additionally, a security that had no apparent risk could be affected by a sudden or acute market condition and necessitate an impairment charge.
Income Taxes
Critical Estimates
Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. The Company uses the asset and liability method of accounting for income taxes in which deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of the Company’s asset and liabilities. The realization of the net deferred tax asset generally depends upon future levels of taxable income and the existence of prior years’ taxable income, to which “carry back” refund claims could be made. A valuation allowance is maintained for deferred tax assets that management estimates are more likely than not to be unrealizable based on available evidence at the time the estimate is made. Furthermore, tax positions that could be deemed uncertain are required to be disclosed and reserved for if it is is more likely than not that the position would not be sustained upon audit examination.
Judgment and Uncertainties
Significant management judgment is required in determining income tax expense and deferred tax assets and liabilities. Some judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. In determining the valuation allowance, we use historical and forecasted future operating results, based upon approved business plans, including a review of the eligible carryforward periods, tax planning opportunities and other relevant considerations. In determining the level of reserve needed for uncertain tax positions, we consider relevant current legislation and court rulings, among other authoritative items, to determine the level of exposure inherent in tax positions of the Company.  Management believes that the accounting estimate related to the valuation allowance and uncertain tax positions are a critical accounting estimate because the underlying assumptions can change from period to period. For example, variances in future projected operating performance could result in a change in the valuation allowance and changes in tax legislation could result in the need for additional tax reserves.
Effect if Actual Results Differ from Assumptions
Should actual factors and conditions differ materially from those considered by management, the actual realization of the net deferred tax asset and tax positions taken could differ materially from the amounts recorded in the financial statements. If the Company is not able to realize all or part of our net deferred tax asset in the future or if a tax position is overturned by a taxing authority, an adjustment to the deferred tax asset valuation allowance would be charged to income tax expense in the period such determination was made.
Goodwill
Critical Estimates
Goodwill represents the amount the Company paid as a result of acquisitions in excess of the related fair value of net assets acquired. The Company evaluates goodwill for impairment annually or whenever events or changes in circumstances indicate the carrying value of the goodwill may be impaired. We complete our impairment evaluation by performing internal valuation analysis, considering other publicly available market information and using an independent valuation firm, as appropriate.

 
43
 

When goodwill is evaluated for impairment, if the carrying amount exceeds the fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows and market multiples analyses. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material.
In the fourth quarter of fiscal 2017, we completed our annual impairment testing of goodwill by performing an internal valuation analysis, and determined there was no impairment. Through year end, no events or circumstances subsequent to the annual testing date indicate that the carrying value of the Company’s goodwill may not be recoverable, therefore, no interim testing was required.
The carrying value of goodwill at December 31, 2017 was $115.3 million. For further discussion on goodwill see Note 4 of the Notes to Consolidated Financial Statements.
Judgment and Uncertainties
Fair value is determined using quantitative analysis and widely accepted valuation techniques, including estimated future cash flows, comparable transactions, control premium and market peers. These types of analyses contain uncertainties because they require management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. It is our policy to conduct impairment testing based on our current business strategy in light of present industry and economic conditions, as well as future expectations.
Effect if Actual Results Differ from Assumptions
If actual results are not consistent with our estimates or assumptions, we may be exposed to an impairment charge that could be material. Management has evaluated the effect of lowering the estimated fair value of the reporting unit and determined no goodwill impairment was necessary under accounting guidance for goodwill impairment.
Derivative Instruments and Hedging Activities
Critical Estimates
Currently, the Company uses interest rate swaps to manage its interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. The fair values of interest rate swaps are determined using the standard methodology of netting the discounted future fixed cash receipts (or payment) and the expected variable cash payments (or receipts). The variable cash payment (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rates curves.
Judgment and Uncertainties
Determining the fair value of interest rate derivatives requires the use of the standard market methodology of discounting the future expected cash receipts that would occur if variable interest rates rise based upon the forward swap curve assumption and netting the cash receipt against the contractual cash payment observed at the instrument’s effective date. The Company’s estimates of variable interest rates used in the calculation of projected receipts are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The Company further incorporates credit valuation adjustments to appropriately reflect both its own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements and requirements for collateral transfer to secure the market value of the derivative instrument(s).
Effect if Actual Results Differ from Assumptions
Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with the derivatives utilize Level 3 inputs, such as estimates of the current credit spreads to evaluate the likelihood of default by itself and its counterparties. In adjusting the fair value of its derivative contracts for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. Incorrect assumptions could result in an overstatement or understatement of the value of the derivative contract.
Operating Results

 
44
 

Income Statement Summary
 
 
 
 
Change
 
For the Years Ended December 31,
 
2017-2016
 
2016-2015
 
2017
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Net interest income
$
184,242

 
$
171,099

 
$
164,582

 
$
13,143

 
7.7
 %
 
$
6,517

 
4.0
 %
Provision for loan losses
9,396

 
13,437

 
13,005

 
(4,041
)
 
(30.1
)
 
432

 
3.3

Non-interest income
33,400

 
30,084

 
32,487

 
3,316

 
11.0

 
(2,403
)
 
(7.4
)
Non-interest expense
141,585

 
133,973

 
128,195

 
7,612

 
5.7

 
5,778

 
4.5

Income before income taxes
66,661

 
53,773

 
55,869

 
12,888

 
24.0

 
(2,096
)
 
(3.8
)
Income tax provision
12,043

 
4,112

 
6,229

 
7,931

 
192.9

 
(2,117
)
 
(34.0
)
Net income
$
54,618

 
$
49,661

 
$
49,640

 
$
4,957

 
10.0

 
$
21

 
—

Diluted earnings per share
$
1.07

 
$
0.99

 
$
1.00

 
$
0.08

 
8.1
 %
 
$
(0.01
)
 
(1.0
)%
Non-GAAP Financial Measures
The following is a reconciliation of Non-GAAP financial measures by major category for the years ended December 31, 2017, 2016, and 2015:
 
For the Years Ended 
December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Efficiency Ratio:
 
 
 
 
 
Non-Interest Expense (GAAP)
$
141,585

 
$
133,973

 
$
128,195

Non-GAAP adjustments:
 
 
 
 
 
Other real estate owned expense
(764
)
 
(343
)
 
(237
)
Lease exit/disposal cost obligation
(536
)
 
—

 
—

Merger related expense
—

 
—

 
(1,575
)
Loan portfolio acquisition fees
—

 
—

 
(1,572
)
Effect of branch lease termination agreement
—

 
—

 
195

Effect of position eliminations
—

 
(1,565
)
 
—

FHLBB prepayment penalties
—

 
(1,454
)
 
—

Non-Interest Expense for Efficiency Ratio (non-GAAP)
$
140,285

 
$
130,611

 
$
125,006

 
 
 
 
 
 
Net Interest Income (GAAP)
$
184,242

 
$
171,099

 
$
164,582

Non-GAAP adjustments:
 
 
 
 
 
Tax equivalent adjustment for tax-exempt loans and investment securities
7,822

 
6,535

 
5,362

 
 
 
 
 
 
Non-Interest Income (GAAP)
33,400

 
30,084

 
32,487

Non-GAAP adjustments:
 
 
 
 
 
Net gain on sales of securities
(782
)
 
(1,961
)
 
(939
)
Net loss on limited partnership investments
3,023

 
3,995

 
3,136

Loss on sale of premises and equipment
401

 
—

 
—

BOLI claim benefit
(806
)
 
(70
)
 
(219
)
Total Revenue for Efficiency Ratio (non-GAAP)
$
227,300

 
$
209,682

 
$
204,409

 
 
 
 
 
 
Efficiency Ratio (Non-Interest Expense for Efficiency Ratio (non-GAAP)/Total Revenue for Efficiency Ratio (non-GAAP))
61.72
%
 
62.29
%
 
61.15
%
 
 
 
 
 
 

 
45
 

Earnings Summary
Comparison of 2017 and 2016
For the year ended December 31, 2017, the Company recorded earnings of $54.6 million, or $1.07 per diluted share, compared to 2016 when the Company recorded $49.7 million in earnings, or $0.99 per diluted share. The efficiency ratio continued to be reflective of the Company’s expense management strategy and was 61.72% and 62.29% for the years ended December 31, 2017 and 2016, respectively. The Company recorded strong organic loan growth during the year, and participated in strategic loan portfolio purchases throughout 2017. Loan originations and purchases totaled $2.05 billion in 2017 compared to $1.66 billion in 2016. The loan portfolio purchases added $242.9 million of loans to the balance sheet during the year ended December 31, 2017, which supports the Company’s efforts to geographically diversify and shift the composition of the loan portfolio into favorable consumer products with more favorable risk adjusted returns.
Net interest income increased primarily due to the increase in average interest-earning assets of $387.4 million, which primarily reflects organic loan growth and the loan portfolio purchases. The Company’s tax-equivalent net interest margin for the year ended December 31, 2017 was 3.01%, an increase of 5 basis points over the prior year of 2.96%. Net interest income increased $13.1 million, or 7.7%, compared to 2016. The increase in net interest income was partially offset by an increase in total average interest- bearing liabilities of $368.8 million compared to 2016. Interest and dividend income increased by $25.4 million and the yield on interest-earning assets increased by 18 basis points mostly due to the increase in yields on investment securities, residential real estate, commercial business, construction, and home equity loans due to the current interest rate environment and strategic initiatives. These increases were partially offset by a decrease in the yields on other consumer loans, while the yields on commercial real estate loans remained flat year-over-year. Interest-bearing liabilities increased to fund new loan growth and loan portfolio purchases. The cost of interest bearing liabilities increased $11.0 million and the yield increased 14 basis points. Purchase accounting adjustments increased net interest income by $176,000 and $2.7 million for the years ended December 31, 2017 and 2016, respectively.
The asset quality of our loan portfolio has remained strong, including loans acquired from Legacy United and the purchased portfolios. Acquired loans are recorded at fair value with no carryover of the allowance for loan losses. The allowance for loan losses to total loans ratio was 0.88% and 0.87%, the allowance for loan losses to non-performing loans ratio was 148.76% and 125.64%, and the ratio of non-performing loans to total loans was 0.59% and 0.69% at December 31, 2017 and 2016, respectively. A provision for loan losses of $9.4 million was recorded for the year ended December 31, 2017 compared to $13.4 million for the year ended December 31, 2016. The Company continues to ensure consistent application of risk ratings across the entire portfolio. We believe asset quality for the Company remains strong and stable.
The Company experienced an increase in non-interest income of $3.3 million for the year ended December 31, 2017, compared to 2016. This increase was driven primarily by (a) service charges and fees; predominantly loan swap fee income and revenue generated by the Company’s investment advisory subsidiary, United Northeast Financial Advisors, Inc. and (b) an increase in BOLI income. Offsetting these were decreases in income from mortgage banking activities and net gain on sale of securities.
For the year ended December 31, 2017, non-interest expense increased $7.6 million over the comparative period in 2016. The increase in non-interest expense was primarily due to an increase in salaries and employee benefits, which was a result of more full-time employees in 2017 compared to 2016 to support growth initiatives. In addition, occupancy and equipment increased by $1.9 million compared to 2016.
The Company experienced an increase in the provision for income taxes of $7.9 million for the year ended December 31, 2017 as compared to 2016. This increase was primarily due to higher pre-tax net income and a decreased amount of tax credits recognized during the year.
Comparison of 2016 and 2015
For the year ended December 31, 2016, the Company recorded earnings of $49.7 million, or $0.99 per diluted share, compared to 2015 when the Company recorded $49.6 million in earnings, or $1.00 per diluted share. The efficiency ratio continued to be reflective of the Company’s expense management strategy and was 62.26% and 60.99% for the years ended December 31, 2016 and 2015, respectively. The Company recorded strong organic loan growth during the year as well as participating in strategic loan portfolio purchases throughout 2016. Loan originations totaled $1.33 billion in 2016 compared to $1.58 billion in 2015. The loan portfolio purchases added $154.2 million of loans to the balance sheet during the year ended December 31, 2016 and consisted of HELOCs which supports the Company’s efforts to geographically diversify and shift the composition of the loan portfolio into favorable consumer products with more favorable risk adjusted returns.
Net interest income increased primarily due to the increase in net average interest-earning assets of $666.4 million, which primarily reflects organic loan growth and the loan portfolio purchases. The Company’s tax-equivalent net interest margin for the year ended December 31, 2016 was 2.96%, a decrease of 23 basis points over the prior year of 3.19%. Net interest income increased

 
46
 

$6.5 million, or 4.0%, compared to 2015. The increase in net interest income was primarily driven by an increase in the average balance of interest earning assets of $666.4 million, partially offset by an increase in total interest bearing liabilities of $600.9 million compared to 2015. Interest and dividend income increased by $16.7 million and the yield on interest earning assets decreased by 15 basis points mostly due to the decrease in yields on residential real estate, commercial real estate, commercial business loans and construction loans due to the current interest rate environment. These decreases were partially offset by increases in the yields on home equity loans and other consumer loans. Interest bearing liabilities increased to fund new loan growth and loan portfolio purchases. The cost of interest bearing liabilities increased $9.3 million and the yield increased 10 basis points. Purchase accounting adjustments for the year ended December 31, 2016 had the effect of increasing net interest income by $2.7 million compared to $12.7 million for the year ended December 31, 2015.
The asset quality of our loan portfolio remained strong, including loans acquired from Legacy United and the purchased portfolios. Acquired loans were recorded at fair value with no carryover of the allowance for loan losses and, as such, some asset quality measures are not comparable between periods as a result. The allowance for loan losses to total loans ratio was 0.87% and 0.73%, the allowance for loan losses to non-performing loans ratio was 125.64% and 89.64%, and the ratio of non-performing loans to total loans was 0.69% and 0.82% at December 31, 2016 and 2015, respectively. A provision for loan losses of $13.4 million was recorded for the year ended December 31, 2016 compared to $13.0 million for year ended December 31, 2015. The Company continues to ensure consistent application of risk ratings across the entire portfolio. We believe asset quality for the Company remains strong and stable.
The Company experienced a decrease in non-interest income of $2.4 million for the year ended December 31, 2016, compared to 2015. This decrease is driven primarily by decreases in service charges and fees, predominantly loan swap fee income and decreases on the gain on sale of loans, which is due to a decrease in transactional volume. These decreases were offset by increases in debit card fees and wealth management fee income.
For the year ended December 31, 2016, non-interest expense increased $5.8 million over the comparative period in 2015. The increase in non-interest expense was primarily due to the increases in salaries and employee benefits, which was a direct result of severance payments associated with the Company’s previously announced retail reorganization plan and the hiring of experienced information technology personnel. In addition, the Company incurred $1.5 million in FHLBB prepayment penalties in the first quarter of 2016.

 
47
 

Average Balances, Net Interest Income, Average Yields/Costs and Rate/Volume Analysis:
The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Tax-equivalent yield adjustments of $7.8 million, $6.5 million and $5.4 million were made for the years ended December 31, 2017, 2016 and 2015, respectively. All average balances are daily average balances. Loans held for sale and non-accrual loans are included in the computation of interest-earning average balances, with non-accrual loans carrying a zero yield. The yields set forth above include the effect of deferred costs, discounts and premiums that are amortized or accreted to interest income or expense.
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
Average
Balance
 
Interest
and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest
and
Dividends
 
Yield/
Cost
 
Average
Balance
 
Interest
and
Dividends
 
Yield/
Cost
 
(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
$
1,291,852

 
$
43,422

 
3.36
%
 
$
1,214,681

 
$
39,691

 
3.27
%
 
$
1,169,083

 
$
39,543

 
3.38
%
Commercial real estate
2,175,197

 
88,716

 
4.02

 
2,055,441

 
83,996

 
4.02

 
1,776,407

 
78,438

 
4.36

Construction
129,636

 
5,714

 
4.35

 
159,677

 
6,855

 
4.22

 
172,257

 
8,139

 
4.66

Commercial business
779,262

 
30,504

 
3.86

 
646,308

 
24,064

 
3.66

 
610,424

 
28,042

 
4.53

Home equity
542,579

 
23,168

 
4.27

 
460,439

 
16,487

 
3.58

 
339,023

 
10,981

 
3.24

Other consumer
243,631

 
11,890

 
4.88

 
216,708

 
10,743

 
4.95

 
22,863

 
1,114

 
4.87

Investment securities
1,083,616

 
38,078

 
3.51

 
1,074,593

 
34,605

 
3.21

 
1,090,086

 
34,388

 
3.15

Federal Home Loan Bank Stock
51,735

 
2,195

 
4.24

 
54,344

 
1,903

 
3.50

 
37,058

 
882

 
2.38

Other earning assets
34,484

 
389

 
1.13

 
62,367

 
343

 
0.55

 
60,956

 
180

 
0.30

Total interest-earning assets
6,331,992

 
244,076

 
3.83

 
5,944,558

 
218,687

 
3.65

 
5,278,157

 
201,707

 
3.79

Allowance for loan losses
(45,480
)
 
 
 
 
 
(38,133
)
 
 
 
 
 
(28,482
)
 
 
 
 
Non-interest-earning assets
526,914

 
 
 
 
 
479,333

 
 
 
 
 
442,672

 
 
 
 
Total assets
$
6,813,426

 
 
 
 
 
$
6,385,758

 
 
 
 
 
$
5,692,347

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW and money market accounts
$
2,002,146

 
13,282

 
0.66

 
$
1,555,182

 
6,547

 
0.42

 
$
1,470,459

 
7,183

 
0.49

Savings accounts(1)
529,006

 
312

 
0.06

 
527,544

 
309

 
0.06

 
529,659

 
319

 
0.06

Time deposits
1,731,434

 
19,971

 
1.15

 
1,805,623

 
18,720

 
1.04

 
1,577,739

 
13,940

 
0.88

Total interest-bearing deposits
4,262,586

 
33,565

 
0.79

 
3,888,349

 
25,576

 
0.66

 
3,577,857

 
21,442

 
0.60

Advances from the FHLBB
978,673

 
12,763

 
1.29

 
988,847

 
9,931

 
0.99

 
664,665

 
4,749

 
0.70

Other borrowings
133,364

 
5,684

 
4.20

 
128,617

 
5,546

 
4.24

 
162,419

 
5,572

 
3.38

Total interest-bearing liabilities
5,374,623

 
52,012

 
0.96

 
5,005,813

 
41,053

 
0.82

 
4,404,941

 
31,763

 
0.72

Non-interest-bearing deposits
695,713

 
 
 
 
 
657,842

 
 
 
 
 
605,112

 
 
 
 
Other liabilities
67,810

 
 
 
 
 
83,236

 
 
 
 
 
67,801

 
 
 
 
Total liabilities
6,138,146

 
 
 
 
 
5,746,891

 
 
 
 
 
5,077,854

 
 
 
 
Stockholders’ equity
675,280

 
 
 
 
 
638,867

 
 
 
 
 
614,493

 
 
 
 
Total liabilities and stockholders’ equity
$
6,813,426

 
 
 
 
 
$
6,385,758

 
 
 
 
 
$
5,692,347

 
 
 
 
Tax-equivalent net interest income
 
 
192,064

 
 
 
 
 
177,634

 
 
 
 
 
169,944

 
 
Tax-equivalent net interest rate spread(2)
 
 
 
 
2.87
%
 
 
 
 
 
2.83
%
 
 
 
 
 
3.07
%
Net interest-earning assets(3)
$
957,369

 
 
 
 
 
$
938,745

 
 
 
 
 
$
873,216

 
 
 
 
Tax-equivalent net interest margin(4)
 
 
 
 
3.01
%
 
 
 
 
 
2.96
%
 
 
 
 
 
3.19
%
Average interest -earning assets to average interest-bearing liabilities
117.81
%
 
 
 
 
 
118.75
%
 
 
 
 
 
119.82
%
 
 
 
 
Less tax-equivalent adjustment
 
 
7,822

 
 
 
 
 
6,535

 
 
 
 
 
5,362

 
 
 
 
 
$
184,242

 
 
 
 
 
$
171,099

 
 
 
 
 
$
164,582

 
 
 
(1)
Includes mortgagors’ and investors’ escrow accounts
(2)
Tax-equivalent net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

 
48
 

(3)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)
Tax-equivalent net interest margin represents the annualized net interest income divided by average total interest-earning assets.
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
 
Year Ended 2017 Compared to 2016
 
Year Ended 2016 Compared to 2015
 
Increase (Decrease)
Due To
 
 
 
Increase (Decrease)
Due To
 
 
 
Volume
 
Rate
 
Net
 
Volume
 
Rate
 
Net
 
(In thousands)
Interest and dividend income:
 
 
 
 
 
 
 
 
 
 
 
Loans receivable
$
15,697

 
$
5,881

 
$
21,578

 
$
27,885

 
$
(12,306
)
 
$
15,579

Securities (1)
197

 
3,568

 
3,765

 
16

 
1,222

 
1,238

Other earning assets
(202
)
 
248

 
46

 
4

 
159

 
163

Total earning assets
15,692

 
9,697

 
25,389

 
27,905

 
(10,925
)
 
16,980

Interest expense:
 
 
 
 
 
 
 
 
 
 
 
NOW and money market accounts
2,242

 
4,493

 
6,735

 
397

 
(1,033
)
 
(636
)
Savings accounts
1

 
2

 
3

 
(1
)
 
(9
)
 
(10
)
Time deposits
(792
)
 
2,043

 
1,251

 
2,172

 
2,608

 
4,780

Total interest-bearing deposits
1,451

 
6,538

 
7,989

 
2,568

 
1,566

 
4,134

FHLBB Advances
(102
)
 
2,934

 
2,832

 
2,788

 
2,394

 
5,182

Other borrowed funds
200

 
(62
)
 
138

 
(1,274
)
 
1,248

 
(26
)
Total interest-bearing liabilities
1,549

 
9,410

 
10,959

 
4,082

 
5,208

 
9,290

Change in tax-equivalent net interest income
$
14,143

 
$
287

 
$
14,430

 
$
23,823

 
$
(16,133
)
 
$
7,690


(1) Includes FHLBB stock
Net Interest Income Analysis
Net interest income is the amount that interest and fees on earning assets (loans and investments) exceeds the cost of funds, interest paid to the Company’s depositors and interest on external borrowings. Net interest margin is the difference between the income on earning assets and the cost of interest-bearing funds as a percentage of average earning assets. Growth in net interest income has resulted mainly from the origination of in interest-earning assets and liabilities.
Comparison of 2017 and 2016
As shown in the tables above, tax-equivalent net interest income increased $14.4 million for the year ended December 31, 2017 compared to the year ended December 31, 2016. Additionally, the net interest margin increased five basis points to 3.01%, the yield on average earning assets increased 18 basis points to 3.83%, and the cost of interest-bearing liabilities increased 14 basis points to 0.96%, compared to 0.82% for the year ended December 31, 2016. Net interest income reflects amortization and accretion of credit and interest rate marks on the acquired loans, time deposits and borrowings which resulted in a increase in net interest income of $176,000 for the year ended December 31, 2017 compared to a $2.7 million increase in net interest income for the comparable 2016 period.
Primarily reflecting loan growth and portfolio purchases, average earning assets increased $387.4 million and average interest-bearing liabilities increased $368.8 million for the year ended December 31, 2017, compared to the year ended December 31, 2016. Average interest bearing liabilities increased due to deposit growth and borrowings which were used to fund the loan growth and portfolio purchases. The average balance of loans and investment securities increased $408.9 million and $9.0 million, respectively, while the average balance of interest-bearing deposits increased $374.2 million.
The increase in the average balance of loans primarily reflects the loan growth and portfolio purchases. The average balance of total loans at December 31, 2017 was $5.16 billion and had an average yield of 3.94%. The average balance of commercial business loans totaled $779.3 million at December 31, 2017, an increase of $133.0 million year-over-year. The average balances of residential real estate loans, home equity loans, commercial real estate loans and other consumer loans were the other significant

 
49
 

drivers of the increase in the average loan balance year-over-year, which increased $77.2 million, $82.1 million, $119.8 million and $26.9 million, respectively.
The average balance of investment securities increased $9.0 million for the year ended December 31, 2017 compared to the year ended December 31, 2016, while the average yield earned increased 30 basis points. The majority of the increase in the yield resulted from increases in the LIBOR index, which is the basis for the CLO portfolio, as well as overall portfolio management.
The average balance of interest-bearing liabilities increased $368.8 million to $5.37 billion for the year ended December 31, 2017, compared to $5.01 billion for the year ended December 31, 2016. For the year ended December 31, 2017, the average cost of total interest-bearing liabilities was 0.96%, compared to 0.82% for the year ended December 31, 2016.
Year-over-year, average balances of total interest-bearing deposits increased $374.2 million and the average cost increased 13 basis points to 0.79%. These increases were primarily due to deposit growth in NOW and money market accounts. FHLBB advances decreased $10.2 million to $978.7 million, while the average cost increased 30 basis points to 1.29% for the year ended December 31, 2017. Other borrowings increased $4.7 million and the cost decreased four basis points for the year ended December 31, 2017 compared to 2016.
Net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets. Therefore, the Company manages the risk of changes in interest rates on its net interest income through ALCO and through related interest rate risk monitoring and management policies.
Comparison of 2016 and 2015

As shown in the tables above, tax-equivalent net interest income increased $7.7 million for the year ended December 31, 2016 compared to the year ended December 31, 2015. Additionally, the net interest margin decreased 23 basis points to 2.96%, the yield on average earning assets decreased 14 basis points to 3.65%, and the cost of interest-bearing liabilities increased ten basis points to 0.82%. The fair value adjustments reflect amortization and accretion of credit and interest rate marks on the acquired loans, time deposits and borrowings which resulted in an increase in net interest income of $2.7 million for the year ended December 31, 2016 compared to a $12.7 million increase in net interest income for the comparable 2015 period.

Primarily reflecting loan growth and portfolio purchases, average earning assets increased $666.4 million and average interest-bearing liabilities increased $600.9 million for the year ended December 31, 2016, compared to the year ended December 31, 2015. Average interest bearing liabilities increased due to deposit growth and borrowings which were used to fund the loan growth and portfolio purchases. The average balance of loans increased $663.2 million and the average balance of investment securities decreased $15.5 million. The average balance of interest-bearing deposits increased $310.5 million.

The increase in the average balance of loans primarily reflects the loan growth and portfolio purchases. The average balance of total loans at December 31, 2016 was $4.75 billion and had an average yield of 3.79%. The average balance of commercial real estate loans totaled $2.06 billion at December 31, 2016, an increase of $279.0 million year-over-year. The average balances of residential real estate loans, home equity loans, commercial business loans and other consumer loans were the other significant drivers of the increase in the average loan balance year-over-year, which increased $45.6 million, $121.4 million, $35.9 million and $193.8 million, respectively.

The average balance of investment securities decreased $15.5 million for the year ended December 31, 2016 compared to the year ended December 31, 2015, while the average yield earned increased 6 basis points. The majority of this increase resulted from new investment purchases which were made in order to keep the portfolio in line with a targeted percentage of assets, coupled with the reinvestment of runoff cash flows of the portfolio.

The average balance of interest-bearing liabilities increased $600.9 million to $5.01 billion for the year ended December 31, 2016, compared to $4.40 billion for the year ended December 31, 2015. For the year ended December 31, 2016, the average cost of total interest-bearing liabilities was 0.82%, compared to 0.72% for the year ended December 31, 2015.

Year-over-year, average balances of total interest-bearing deposits increased $310.5 million and the average cost increased six basis points to 0.66%. These increases were primarily due to deposit growth in all categories except for savings accounts. FHLBB advances increased $324.2 million to $988.8 million, while the average cost increased 29 basis points to 0.99% for the year ended December 31, 2016. Other borrowings decreased $33.8 million and the cost increased 86 basis points for the year ended December 31, 2016 compared to 2015. The increase in FHLBB advances was due to funding new loan growth. The decrease in other borrowings was due to maturing repurchase agreement advances.


 
50
 

Net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets. Therefore, the Company manages the risk of changes in interest rates on its net interest income through ALCO and through related interest rate risk monitoring and management policies.
Provision for Loan Losses
The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. Acquired loans are recorded at fair value at the time of acquisition, with no carryover of the allowance for loan losses, which includes adjustments for market interest rates and expected credit losses. Included within the allowance for loan losses are reserves for acquired loans, in accordance with Bank policies, which have evidenced a deterioration subsequent to acquisition.
Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The adequacy of the loan loss allowance is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics, the level of non-performing loans and charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.
Management recorded a provision of $9.4 million for the year ended December 31, 2017. The primary factors that influenced management’s decision to record this provision were organic loan growth during the year, slowing migration to covered loans, the on-going assessment of estimated exposure on impaired loans, level of delinquencies, and general economic conditions. Impaired loans totaled $45.9 million at December 31, 2017 compared to $50.1 million at December 31, 2016, a decrease of $4.2 million or 8.4%, reflecting decreases in all impaired loan categories except residential real estate and home equity impaired loans. Commercial business, other consumer, investor non-owner occupied commercial real estate, construction, and owner-occupied commercial real estate impaired loans decreased $2.1 million, $1.8 million, $1.5 million, $1.1 million, and $1.0 million, respectively, partially offset by increases in residential real estate and home equity impaired loans of $1.7 million and $1.6 million, respectively.
The repayment of these impaired loans is largely dependent upon the sale and value of collateral that may be impacted by current real estate conditions. At December 31, 2017, the allowance for loan losses totaled $47.1 million, which represented 0.88% of total loans and 148.76% of non-performing loans compared to an allowance for loan losses of $42.8 million, which represented 0.87% of total loans and 125.64% of non-performing loans as of December 31, 2016.
Non-Interest Income Analysis
For the years ended December 31, 2017, 2016 and 2015, non-interest income represented 15.3%, 15.0% and 16.6% of total revenues, respectively. The following is a summary of non-interest income by major category for the years presented:
Non-Interest Income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
Change
 
2017-2016
 
2016-2015
 
2017
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Service charges and fees
$
24,209

 
$
20,259

 
$
21,040

 
$
3,950

 
19.5
 %
 
$
(781
)
 
(3.7
)%
Income from mortgage banking activities
5,539

 
8,227

 
9,552

 
(2,688
)
 
(32.7
)
 
(1,325
)
 
(13.9
)
Bank-owned life insurance income
5,462

 
3,394

 
3,616

 
2,068

 
60.9

 
(222
)
 
(6.1
)
Gain on sales of securities, net
782

 
1,961

 
939

 
(1,179
)
 
(60.1
)
 
1,022

 
108.8

Net loss on limited partnership investments
(3,023
)
 
(3,995
)
 
(3,136
)
 
972

 
24.3

 
(859
)
 
(27.4
)
Other income
431

 
238

 
476

 
193

 
81.1

 
(238
)
 
(50.0
)
Total non-interest income
$
33,400

 
$
30,084

 
$
32,487

 
$
3,316

 
11.0
 %
 
$
(2,403
)
 
(7.4
)%
Comparison of 2017 and 2016
As displayed in the above table, non-interest income increased $3.3 million for the year ended December 31, 2017 as compared to the year ended December 31, 2016. The Company experienced increases in all categories year-over-year except in net gain from sales of securities and income from mortgage banking activities.
Service Charges and Fees:    Service charges and fees were $24.2 million and $20.3 million for the years ended December 31, 2017 and 2016, respectively, an increase of $4.0 million from the comparable 2016 period. The most significant increases were

 
51
 

recorded in loan swap fee income, revenue generated by the Company’s investment advisory subsidiary (UNFA), and transaction fees on customer products.
Revenue generated from loan swap fee income increased due to higher transaction volume as well as the total corresponding notional value. Loan swap fee income is generated as part of the Company’s loan level hedge program that is offered to certain commercial banking customers to facilitate their respective risk management strategies. The increased revenue generated by UNFA is due to the Company’s continued strategy of acquiring proven talent with deep local relationships as well as installing Series 6 representatives in select branches to work alongside our retail employees to ensure a coordinated sales approach to meeting the financial needs of our customers. Additionally, during 2016 the Company shifted focus to assets under management (“AUM”) for ongoing revenue versus a transactional approach; the result is more recurring fee revenue driven by increasing AUM versus one-time fees generated by transactions. AUM increased approximately $150.0 million year-over-year, to $460.0 million in 2017 from $312.0 million in 2016. The increase in transaction fees for various customer products is linked to the Company implementing a new fee structure that is more in line with our competition based on a detailed study. The Company instituted the new fee structure in July 2016, therefore, only six months of the comparative period was affected by this initiative. Additionally, NSF fees increased in the current period, primarily due to a higher volume of related transactions and a modification of the fee structure.
Income From Mortgage Banking Activities:    Income from mortgage banking activities was $5.5 million for the year ended December 31, 2017, a decrease of $2.7 million, or 32.7%, from the year ended December 31, 2016. The change was primarily due to a decrease in the fair value recognized in net income for mortgage servicing rights due to a decrease in long-term rates and a decrease in gains on sale of loans, resulting from a decrease in sales volumes compared to the prior year. The Company did not immediately sell the current year originations as part of its strategy to hold the loans longer, which resulted in shifting income from gain on sale to net interest income. Loans held for sale increased to $114.1 million at December 31, 2017 from $62.5 million at December 31, 2016. These decreases were partially offset by increases in mortgage loan servicing income reflecting a serviced- for-others portfolio balance increase to $1.25 billion at December 31, 2017 from $1.05 billion at December 31, 2016 and an increase in the mortgage servicing rights derivative that was established to partly mitigate mortgage servicing rights valuation losses in a declining rate environment.
Bank-Owned Life Insurance Income (“BOLI”):    BOLI income was $5.5 million for the year ended December 31, 2017, an increase of $2.1 million, or 60.9%, from the year ended December 31, 2016. The increase is driven by the Bank’s $40 million purchase of new BOLI policies in December 2016, which generated $1.4 million of income in 2017. Furthermore, the Bank received an additional $806,000 in 2017 from death benefit settlements.
Gain on Sales of Securities, Net:    For the year ended December 31, 2017, the Company realized a net gain of $782,000 compared to a net gain of $2.0 million for the prior year, which was mainly driven by the sale of shorter-term securities, adding longer duration investments in the portfolio to optimize income as well as improving portfolio efficiency from a credit and regulatory capital perspective.
For the year ended December 31, 2016, the Company took advantage of the shape of the yield curve and sold shorter-term securities and added longer duration investments in the portfolio to optimize income and reduce higher-cost borrowings. The Company then also incurred approximately $1.5 million in prepayment penalty expense from the extinguishment of FHLBB debt as part of the optimization strategy which is recorded as a separate line item in non-interest expense.
Net Loss on Limited Partnership Investments:    The Company has investments in low income housing tax credit, new markets housing tax credit and alternative energy tax credit partnerships. In March 2017 and 2016, the Company invested an additional $3.6 million and $12.7 million in alternative energy tax credit partnerships, respectively.
For the year ended December 31, 2017, the Company recorded $3.0 million in losses on limited partnership investments compared to $4.0 million in the prior year period. The passage of the Tax Act in December 2017 contributed $1.2 million to the current year loss. In conjunction with the loss realized on the tax credit partnerships, the Company recorded an offsetting tax credit benefit of $9.6 million as reflected in the income tax provision for the year.
Other Income:    The Company recorded an increase in other income of $193,000 for the year ended December 31, 2017 compared to the prior year. The change from the prior year is primarily due to the increase in the credit value adjustments on borrower facing loan level hedges and higher gains on the sale of other real estate owned. These increases were partially offset by higher losses on sales of fixed assets, mainly due to the sale of a bank owned property.
Comparison of 2016 and 2015
As displayed in the above table, non-interest income decreased $2.4 million for the year ended December 31, 2016 as compared to the year ended December 31, 2015. The Company experienced decreases in all categories year-over-year except in net gain from sales of securities.

 
52
 

Service Charges and Fees:    Service charges and fees were $20.3 million and $21.0 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $781,000 from the comparable 2015 period. The most significant decrease was recorded in loan swap fee income, partially offset by increases in revenue generated by UNFA and transaction fees.
The decrease in loan swap fees was a direct result of lower transactional volume. The loan swap fee income is generated as part of the Company’s loan level hedge program that is offered to certain commercial banking customers to facilitate their respective risk management strategies. The increased revenue generated by UNFA is due to several factors. The Company has successfully acquired proven talent with deep local relationships as well as installing Series 6 representatives in select branches which work alongside our retail employees to ensure a cohesive sales approach to meeting the financial needs of our customers. Additionally, the Company has shifted it’s strategy in running this business line. The Company has shifted focus to AUM for ongoing revenue versus a transactional approach; the result is more recurring fee revenue driven by increasing AUM versus one-time fees generated by transactions. The increase in transaction fees was driven by a project undertaken by the Company which focused on increasing profitability by implementing a deposit fee structure more in line with our competition based on a detailed study. As a result, starting with July 2016, the Company recorded revenue increases in the areas of service charges and fees targeted by the project.
Income From Mortgage Banking Activities:    Income from mortgage banking activities was $8.2 million for the year ended December 31, 2016, a decrease of $1.3 million, or 13.9%, from the year ended December 31, 2015. This decrease was driven primarily by a decrease in gains on sales of loans, resulting from a decrease in sales volumes compared to the prior year. The Company did not immediately sell the current year originations which resulted in higher net interest income as loans held for sale increased to $62.5 million at December 31, 2016 from $10.1 million at December 31, 2015. This decrease was partially offset by the increases in (a) loan servicing income driven by gains from an increase in the number of serviced loans, (b) the change in the fair value recognized in net income for mortgage servicing rights due to an increase on long-term rates, and (c) the net increase in value of forward loan sales contracts and derivative rate lock commitments due to market interest rate changes.
Bank Owned Life Insurance Income (“BOLI”):    BOLI income was $3.4 million for the year ended December 31, 2016, a decrease of $222,000, or 6.1%, from the year ended December 31, 2015. This decrease is due to changes in the average yield earned on BOLI policies as a result of current market interest rates. Furthermore, the Company experienced a decrease in death benefits in 2016 compared to 2015. These decreases were partially offset by the additional purchase of $40.0 million of BOLI late in December 2016.
Gain on Sales of Securities, Net:    For the year ended December 31, 2016, the Company realized a net gain of $2.0 million compared to a net gain of $939,000 in the prior year resulting from (a) sales of certain securities to reduce exposure to healthcare municipal bonds due to changes in healthcare sector, (b) the Company repositioning certain securities as these securities became punitive to capital to hold on a go-forward basis due to regulatory changes, (c) sales of municipal bonds that were expected to be called, (d) reducing concentration in oil dependent securities, (e) efforts to make the portfolio more efficient to manage from an operational perspective and (f) an optimization strategy of our investment portfolio in which we took advantage of the shape of the yield curve. The Company incurred $1.5 million in prepayment penalty expense from the extinguishment of FHLBB advances as part of the optimization strategy, which is recorded as a separate line item in non-interest expense.
Net Loss on Limited Partnership Investments:    The Company has investments in low income housing tax credit, new markets housing tax credit and alternative energy tax credit partnerships. In March 2016, the Company invested an additional $12.7 million in a new alternative energy tax credit partnership.
For the year ended December 31, 2016, the Company recorded $4.0 million in losses on limited partnership investments compared to $3.1 million in the prior year period. In conjunction with the loss realized on the tax credit partnerships, the Company recorded an offsetting benefit of $10.5 million as reflected in the income tax provision for the year.
Other Income:    The Company recorded a decrease in other income of $238,000 for the year ended December 31, 2016 compared to the prior year. This decrease year-over-year is primarily due to the decline in the credit value adjustments on borrower facing loan level hedges and lower gains on the sale of other real estate owned. These decreases were partially offset by an increase in miscellaneous income, which was mainly driven by the gains recorded in the Company’s investment in a group life mortgage insurance program upon its dissolution.

 
53
 

Non-Interest Expense Analysis
For the years ended December 31, 2017, 2016 and 2015, non-interest expense represented 2.08%, 2.10% and 2.25% of average assets, respectively. The following table is a summary of non-interest expense by major category for the years presented:
Non-Interest Expense
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Years Ended December 31,
 
Change
 
2017-2016
 
2016-2015
 
2017
 
2016
 
2015
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Salaries and employee benefits
$
80,061

 
$
75,384

 
$
67,469

 
$
4,677

 
6.2
 %
 
$
7,915

 
11.7
 %
Occupancy and equipment
16,902

 
14,986

 
15,442

 
1,916

 
12.8

 
(456
)
 
(3.0
)
Service bureau fees
8,098

 
7,986

 
6,728

 
112

 
1.4

 
1,258

 
18.7

Professional fees
4,305

 
3,917

 
6,317

 
388

 
9.9

 
(2,400
)
 
(38.0
)
Marketing and promotions
4,047

 
3,049

 
2,321

 
998

 
32.7

 
728

 
31.4

FDIC insurance assessments
3,076

 
3,573

 
3,692

 
(497
)
 
(13.9
)
 
(119
)
 
(3.2
)
Core deposit intangible amortization
1,411

 
1,604

 
1,796

 
(193
)
 
(12.0
)
 
(192
)
 
(10.7
)
Merger related expense
—

 
—

 
1,575

 
—

 
—

 
(1,575
)
 
(100.0
)
FHLBB prepayment penalties
—

 
1,454

 
—

 
(1,454
)
 
(100.0
)
 
1,454

 
100.0

Other
23,685

 
22,020

 
22,855

 
1,665

 
7.6

 
(835
)
 
(3.7
)
Total non-interest expense
$
141,585

 
$
133,973

 
$
128,195

 
$
7,612

 
5.7
 %
 
$
5,778

 
4.5
 %
Comparison of 2017 and 2016
For the year ended December 31, 2017, non-interest expense increased $7.6 million to $141.6 million from $134.0 million for the year ended December 31, 2016.
Salaries and Employee Benefits:    Salaries and employee benefits represented the largest increase in non-interest expense. Salaries and employee benefits was $80.1 million for the year ended December 31, 2017, an increase of $4.7 million from the comparable 2016 period. Salary expense increased $3.3 million due to: (a) the hiring of additional staff in areas targeted for growth, (b) an increase in FICA related to higher salary expenses, (c) an increase in executive restricted stock expense as a result of stock awards granted in 2016 and 2017, increasing the number of unvested shares being expensed and (d) a decrease in deferred expenses from loan originations also contributed to the overall increase in salaries and benefits. These increases were partially offset by decreases in health insurance costs and temporary help due to the completion of projects.
Occupancy and Equipment Expense:    Occupancy and equipment expense increased $1.9 million to $16.9 million for the year ended December 31, 2017 primarily driven by: (a) the move of corporate headquarters to Hartford, CT which resulted in an increase in rent expense and depreciation on leasehold improvements, (b) expenses for maintenance contracts due to higher snow removal costs in 2017, (c) the outsourcing of property management services which began in July 2016 and (d) depreciation on various software programs.
Service Bureau Fees: Service bureau fees increased $112,000 for the year ended December 31, 2017 compared to the 2016 period. The increase is primarily attributable to the Company’s core service provider providing a higher level of custom work in the current year, partially offset by a decrease in expenses associated with the deployment of Europay, MasterCard and Visa (“EMV”) chip-enabled debit and credit cards. EMV cards are a part of the Company’s strategy in mitigating potential fraud expenses to the Company’s credit and debit card users.
Professional Fees:    Professional fees were $4.3 million and $3.9 million for the years ended December 31, 2017 and 2016, respectively, an increase of $388,000. The increase over the prior year is mainly driven by expenses related to the engagement for services assisting in projects targeted to maximize non-interest income revenue streams, legal services related to tax matters regarding a new partnership investment and corporate development opportunities.
Marketing and Promotions:    Marketing and promotions expense was $4.0 million and $3.0 million for the years ended December 31, 2017 and 2016, respectively, an increase of $998,000. The increase was primarily attributable to expenses related to production, digital advertising and social media marketing, partially offset by decreases in television and newspaper advertising. Production expenses increased, as well as digital and social media marketing, as the Company favored these online marketing channels during the year and relied less on television and newspaper advertising to reach our target market.

 
54
 

FDIC Insurance Assessments:    The expense for FDIC insurance assessments decreased $497,000 to $3.1 million for the year ended December 31, 2017 from $3.6 million for the year ended December 31, 2016. The decrease is primarily attributable to a decrease in the assessment rate and the FDIC’s Deposit Insurance Fund reserve ratio exceeding established benchmarks which became effective in the third quarter of 2016.
Core Deposit Intangible Amortization:    The $193,000 decrease in core deposit intangible amortization for the year ended December 31, 2017 is due to the amortization method used by the Company. The Company is amortizing the core deposit intangible of $10.6 million over 10 years using the sum-of-the-years-digits method.
FHLBB Prepayment Penalties:    For the year ended December 31, 2017 there were no prepayment penalties recorded by the Company. As part of the Company’s investment portfolio optimization strategy implemented in the first quarter of 2016, the Company sold investment securities and recorded gains of $1.5 million and prepaid FHLBB advances with prepayment penalties totaling $1.5 million.
Other Expenses:    Other expenses were $23.7 million and $22.0 million for the years ended December 31, 2017 and 2016, respectively, an increase of $1.7 million. The increase is primarily due to (a) computer software and maintenance expenses due to technology projects, (b) loan swap fees as the Company entered into more swaps in 2017 and (c) an increase in other real estate owned expenses. The increases were partially offset by lower expenses related to: (a) sales and use taxes associated with a state tax audit in the prior year, (b) lower collection expenses as the Company experienced higher expenditures in the prior year associated with special assets and (c) mortgage appraisal and credit reports.
Provision for Income Taxes:    The provision for income taxes was $12.0 million for the year ended December 31, 2017, compared to $4.1 million for the year ended December 31, 2016. The increase in the tax expense is primarily due to higher pre-tax net income and a decreased amount of tax credits recognized during the year. The Company’s effective tax rate for the year ended December 31, 2017 and 2016 was 18.1% and 7.6%, respectively. The rate change was a result of the Tax Act that was enacted on December 22, 2017, resulting in, amongst other tax reform items, a reduction in the Company's applicable US Federal corporate tax rate to 21% from 35%.  As a result of this rate reduction and changes in other provisions of the new law, the Company incurred $1.8 million of additional tax expense as of December 31, 2017 primarily due to the remeasurement of our deferred tax asset. The impact of tax reform is based upon reasonable estimates of new current and deferred taxes based on certain provision within the Tax Act. 
Comparison of 2016 and 2015
For the year ended December 31, 2016, non-interest expense increased $5.8 million to $134.0 million from $128.2 million for the year ended December 31, 2015.
Salaries and Employee Benefits:    Salaries and employee benefits represented the largest increase in non-interest expense. Salaries and employee benefits was $75.4 million for the year ended December 31, 2016, an increase of $7.9 million from the comparable 2015 period. Salary expense was the primary driver of the increase due to the hiring of additional staff in areas targeted for growth and severance payments of $1.4 million resulting from the Company’s announced retail organizational realignment to improve operational efficiency. Other factors driving the increase included (a) increased employee incentives on product sales and corporate goal attainment, (b) an increase in restricted stock expense related to the implementation of a new shareholder approved stock plan, and (c) increased temporary help to maintain compensation flexibility while responding to growth requirements. These increases were partially offset by (a) decreases in various employee benefit expenses and (b) increases in deferred expenses from originating loans.
Occupancy and Equipment Expense:    Occupancy and equipment expense decreased $456,000 to $15.0 million for the year ended December 31, 2016 due to the following (a) rent expense related to a change in the estimate for deferred rents resulting from the Company’s efforts to control expenses over the branch network and (b) expenses for maintenance contracts due to less snow removal costs in 2016. These decreases were partially offset by increases in (a) real estate taxes and (b) amortization of computer software associated with various projects.
Service Bureau Fees:    Service bureau fees increased $1.3 million for the year ended December 31, 2016 compared to the 2015 period. The increase is primarily attributable to (a) service bureau fees driven by the expiration of a service credit from the Company’s core operating system provider and increased expenses from that service provider and (b) expenses associated with the deployment of Europay, MasterCard and Visa (“EMV”) chip-enabled debit and credit cards. EMV cards are a part of the Company’s strategy in mitigating potential fraud expenses.
Professional Fees:    Professional fees were $3.9 million and $6.3 million for the years ended December 31, 2016 and 2015, respectively. The decrease over the prior year is mainly driven by consulting contracts associated with the acquisition of the purchased loan portfolios in the fourth quarter of 2015, as well as various engagements related to internal technology projects to

 
55
 

improve efficiencies and operating leverage throughout 2015. These decreases were partially offset by an increase in outsourced internal audit expenses.
Marketing and Promotions:    Marketing and promotions expense was $3.0 million and $2.3 million for the years ended December 31, 2016 and 2015, respectively, an increase of $728,000. The increase was primarily attributable to expenses related to television, digital advertising, and radio branding campaign partially offset by a decrease in newspaper advertising.
FDIC Insurance Assessments:    The expense for FDIC insurance assessments decreased $119,000 to $3.6 million for the year ended December 31, 2016 from $3.7 million for the year ended December 31, 2015. The decrease is primarily attributable to the Company’s lower assessment rate, which was partially offset by a higher assessment base used in the assessment calculation due to loan growth.
Core Deposit Intangible Amortization:    The $192,000 decrease in core deposit intangible amortization for the year ended December 31, 2016 is due to the amortization method used by the Company. The Company is amortizing the core deposit intangible of $10.6 million over 10 years using the sum-of-the-years-digits method.
Merger Related Expense:    The were no merger related expenses for the year ended December 31, 2016, compared to $1.6 million for the year ended December 31, 2015. Merger related expenses for 2015 were primarily the result of a change in control payment and associated expenses for an executive’s departure in the fourth quarter.
FHLBB Prepayment Penalties:    For the year ended December 31, 2016, prepayment penalties recorded by the Company were $1.5 million. There were no prepayment penalties for the year ended December 31, 2015. As part of the Company’s investment portfolio optimization strategy implemented in the first quarter of 2016, the Company sold investment securities and recorded gains of $1.5 million and prepaid FHLBB advances with prepayment penalties totaling $1.5 million.
Other Expenses:    Other expenses were $22.0 million and $22.9 million for the years ended December 31, 2016 and 2015, respectively, a decrease of $835,000. The decrease is primarily due to (a) loan swap fees as the Company entered into fewer swaps in 2016, (b) lower debit and ATM card losses as a result of the Company’s efforts to minimize fraud exposure and (c) mortgage loan servicing fees. These decreases were partially offset by increases in (a) computer software and maintenance reflecting multiple efficiency projects; (b) sales and use taxes associated with a state tax audit and (c) collection expenses with higher expenditures associated with special assets.
Provision for Income Taxes:    The provision for income taxes was $4.1 million for the year ended December 31, 2016, compared to $6.2 million for the year ended December 31, 2015. The decrease in the tax expense is primarily due to an increased amount of tax credits recognized during the year. The Company’s effective tax rate for year ended December 31, 2016 and 2015 was 7.6% and 11.1%, respectively.
Financial Condition, Liquidity and Capital Resources
Summary
The Company had total assets of $7.11 billion and $6.60 billion at December 31, 2017 and 2016, respectively. This increase of $514.6 million, or 7.8%, is primarily due to organic loan growth and loan portfolio purchases. The Company utilized deposits, including brokered deposits and additional advances from the FHLBB to fund loan growth.
Total net loans of $5.31 billion, with an allowance for loan losses of $47.1 million at December 31, 2017, increased $437.1 million, or 9.0%, when compared to total net loans of $4.87 billion, with an allowance for loan losses of $42.8 million at December 31, 2016. Total deposits of $5.20 billion at December 31, 2017 increased $487.0 million, or 10.3%, when compared to total deposits of $4.71 billion at December 31, 2016. Non-interest-bearing deposits increased $70.5 million, or 10.0%, and interest-bearing deposits increased $416.5 million, or 10.4%, during the period. The increase in deposits is mainly due to growth in NOW accounts and money market deposits, and is reflective of the Company’s new product specials and a continued focus on building commercial relationships. The Company’s gross loan-to-deposit ratio was 102.7% and 104.0% at December 31, 2017 and 2016, respectively.
At December 31, 2017, total equity of $693.3 million, increased $37.5 million, or 5.7%, when compared to total equity of $655.9 million at December 31, 2016. Changes in equity for the year ended December 31, 2017 consisted primarily of net income, partially offset by dividends paid to common shareholders, as well as increases due to the change in market value on investment securities year-over-year, which reduced accumulated other comprehensive loss from the prior year. At December 31, 2017, the return on average tangible common equity ratio was 10.0% compared to 9.8% at December 31, 2016. See Note 17, “Regulatory Matters” in the Notes to Consolidated Financial Statements contained elsewhere in this report for information on the Bank and the Company’s regulatory capital levels and ratios.

 
56
 

Securities
The Company maintains a securities portfolio that is primarily structured to generate interest income, manage interest-rate sensitivity, and provide a source of liquidity for operating needs. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies.
The following table sets forth certain financial information regarding the amortized cost and fair value of the Company’s investment portfolio at the dates indicated:
Investment Securities
 
At December 31,
 
2017
 
2016
 
2015
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(In thousands)
Available for Sale:
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government-sponsored enterprise obligations
$
—

 
$
—

 
$
—

 
$
—

 
$
10,159

 
$
10,089

Government-sponsored residential mortgage-backed securities
235,646

 
235,479

 
181,419

 
179,548

 
146,434

 
145,861

Government-sponsored residential collateralized debt obligations
134,652

 
133,112

 
184,185

 
183,260

 
287,515

 
286,967

Government-sponsored commercial mortgage-backed securities
33,449

 
33,255

 
26,949

 
26,530

 
21,144

 
20,965

Government-sponsored commercial collateralized debt obligations
151,035

 
147,242

 
164,433

 
162,927

 
128,617

 
128,972

Asset-backed securities
166,559

 
167,139

 
166,336

 
166,967

 
162,895

 
159,901

Corporate debt securities
88,571

 
89,136

 
76,787

 
75,015

 
62,356

 
59,960

Obligations of states and political subdivisions
249,531

 
245,007

 
223,733

 
216,376

 
201,217

 
201,115

Marketable equity securities
240

 
417

 
32,414

 
32,788

 
44,653

 
45,339

Total available for sale
$
1,059,683

 
$
1,050,787

 
$
1,056,256

 
$
1,043,411

 
$
1,064,990

 
$
1,059,169

 
 
 
 
 
 
 
 
 
 
 
 
Held to Maturity:
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
1,318

 
$
1,429

 
$
1,717

 
$
1,889

 
$
2,205

 
$
2,449

Obligations of states and political subdivisions
12,280

 
12,871

 
12,321

 
12,940

 
12,360

 
13,234

Total held to maturity securities
$
13,598

 
$
14,300

 
$
14,038

 
$
14,829

 
$
14,565

 
$
15,683

The Company’s securities portfolio totaled $1.06 billion at December 31, 2017 and 2016. On a tax-equivalent basis, the yield in the securities portfolio for the years ended December 31, 2017 and 2016 was 3.51% and 3.21%, respectively.
The Company designates its securities as held to maturity, available for sale or trading depending on the Company’s intent regarding its investments at the time of purchase. The Company does not currently maintain a portfolio of trading securities. As of December 31, 2017, $1.05 billion, or 98.7%, of the portfolio, was classified as available for sale and $13.6 million of the portfolio was classified as held to maturity. The Company believes that the high concentration of securities available for sale allows flexibility in the day-to-day management of the overall investment portfolio, consistent with the objectives of optimizing profitability and mitigating both credit and interest rate risk. Securities available for sale are carried at fair value. Additional information about fair value measurements can be found in Note 6, “Securities” and Note 14, “Fair Value Measurement” in the Notes to Consolidated Financial Statements contained elsewhere in this report.
The Company’s underlying investment strategy has been to use the portfolio as a source of interest income, a tool to manage interest rate risk and as a source of liquidity. The transactions in the investment portfolio during the year were made with the goals of maintaining the barbell structure of the investment portfolio, increasing credit diversification and quality, and increasing interest income where possible. The Company continued to maintain the barbell structure of the portfolio in 2017 due to rising shorter

 
57
 

term rates, combined with the overall flattening of the yield curve. The purchase of shorter duration investments such as floating rate collateralized loan obligations combined with purchases of longer duration municipal securities and corporate bonds to help the Company maintain the desired portfolio structure. Overall, in order to balance the portfolio’s price risk with favorable cash flow characteristics, the Company continues to evaluate both shorter and longer duration securities that help protect against price risk and extension risk in aggregate, while providing more consistent cash flows.
During the year ended December 31, 2017, the available for sale securities portfolio increased by $7.4 million to $1.05 billion, representing 14.8% of total assets at year-end 2017, from $1.04 billion and 15.8% of total assets at December 31, 2016. The increase is largely reflective of the deployment of additional capital in the portfolio in order to maintain the aforementioned barbell strategy. Portfolio activity during the year included repositioning in the municipal bond allocation to move up in credit quality and extending selected corporate holdings to take advantage of the relative steepness of the credit curve in various sectors. Additionally, in order to take advantage of the relative value of certain collateralized loan obligations, corporate bonds and agency mortgage backed securities; these security types were repositioned as well. The Company limits purchases in the municipal bonds, collateralized loan obligations and corporate sectors to investment grade or better rating prior to purchase. Furthermore, the Company limits its exposure to position parameters and will review the impact on the portfolio from periodic issuer disclosures, as well as developing market trends. Incremental portfolio growth for the year primarily focused on the purchase of cash flowing securities structured along the yield curve, and to a lesser extent, on municipal bonds and corporates.
During the year ended December 31, 2017, the Company recorded no write-downs for other-than-temporary impairments of its securities. The Company held $682.3 million in securities that are in an unrealized loss position at December 31, 2017. $292.0 million of this total had been in an unrealized loss position for less than twelve months with the remaining $390.3 million in an unrealized loss position for twelve months or longer. These securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the intent to sell the securities in an unrealized loss position, and it is more-likely-than-not that it will not have to sell the securities before the recovery of their cost basis. To the extent that changes in interest rates, credit spread movements and other factors that influence the fair value of securities continue, the Company may be required to record impairment charges for other-than-temporary impairment in future periods. For additional information on the securities portfolio, see Note 6, “Securities” in the Notes to Consolidated Financial Statements contained elsewhere in this report.
The Company monitors investment exposures continuously, performs credit assessments based on market data available at the time of purchase and performs ongoing credit due diligence for all collateralized loan obligations, corporate exposures and municipal securities. The Company’s investment portfolio is regularly monitored for performance enhancements and interest rate risk profiles, with dynamic strategies implemented accordingly.
The composition and maturities of the Company’s debt securities portfolio at December 31, 2017 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State agency and municipal obligations as well as common and preferred stock yields have not been adjusted to a tax-equivalent basis. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below:

 
58
 

Investment Maturity Schedule
 
At December 31, 2017
 
One Year or Less
 
More than One Year
through Five Years
 
More than Five Years
through Ten Years
 
More than Ten Years
 
Total Debt Securities
 
Fair
Value
 
Weighted-
Average
Yield
 
Fair
Value
 
Weighted-
Average
Yield
 
Fair
Value
 
Weighted-
Average
Yield
 
Fair
Value
 
Weighted-
Average
Yield
 
Fair
Value
 
Weighted-
Average
Yield
 
(Dollars in thousands)
Available for Sale
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt Securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
—

 
—
%
 
$
—

 
—
%
 
$
—

 
—
%
 
$
235,479

 
2.90
%
 
$
235,479

 
2.90
%
Government-sponsored residential collateralized debt obligations
—

 
—

 
—

 
—

 
—

 
—

 
133,112

 
2.68

 
133,112

 
2.68

Government-sponsored commercial mortgage-backed securities
—

 
—

 
2,728

 
2.22

 
14,180

 
2.51

 
16,347

 
3.19

 
33,255

 
2.82

Government-sponsored commercial collateralized debt obligations
—

 
—

 
—

 
—

 
—

 
—

 
147,242

 
2.56

 
147,242

 
2.56

Asset-backed securities
—

 
—

 
—

 
—

 
67,664

 
4.16

 
99,475

 
3.33

 
167,139

 
3.66

Corporate debt securities
—

 
—

 
8,309

 
4.91

 
80,827

 
3.55

 
—

 
—

 
89,136

 
3.68

Obligations for state and political subdivisions
—

 
—

 
1,687

 
2.77

 
6,507

 
2.80

 
236,813

 
3.86

 
245,007

 
3.83

Total debt securities
$
—

 
—
%
 
$
12,724

 
4.05
%
 
$
169,178

 
3.68
%
 
$
868,468

 
3.13
%
 
$
1,050,370

 
3.23
%
Held to Maturity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
—

 
—
%
 
$
—

 
—
%
 
$
250

 
4.33
%
 
$
1,179

 
4.82
%
 
$
1,429

 
4.74
%
Obligations of states and political subdivisions
—

 
—

 
1,171

 
2.41

 
1,032

 
3.98

 
10,668

 
4.24

 
12,871

 
4.08

Total debt securities
$
—

 
—
%
 
$
1,171

 
2.41
%
 
$
1,282

 
4.05
%
 
$
11,847

 
4.33
%
 
$
14,300

 
4.14
%
The Company has the ability to use the investment portfolio, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 13, “Derivatives and Hedging Activities” in the Notes to Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.
Bank-Owned Life Insurance (“BOLI”)
BOLI was $148.3 million and $167.8 million at December 31, 2017 and 2016, respectively. At the end of 2017, the Company surrendered $33.1 million of under-performing BOLI policies, to subsequently be re-invested into higher yielding policies in early January 2018. Additionally, in December 2017, the Company purchased an additional $10.0 million of BOLI contracts. The Company expects to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. The purchase of the life insurance policy results in an income-earning asset on the Consolidated Statements of Condition that provides monthly tax-free income to the Company. The largest risk to the BOLI program is credit risk of the insurance carriers. To mitigate this risk, quarterly credit reviews are completed on all carriers. BOLI is invested in the “general account”, “hybrid account”, and “separate account” of quality insurance companies. Of the general account carriers, all were rated “A-” or better by at least one nationally recognized statistical rating organization at December 31, 2017. BOLI is

 
59
 

included on the Consolidated Statements of Condition at its cash surrender value. Increases in BOLI’s cash surrender value are reported as a component of non-interest income in the Consolidated Statements of Net Income.
Lending Activities
The Company originates and purchases residential real estate loans secured by one-to-four family residences, commercial real estate loans, residential and commercial construction loans, commercial business loans, multi-family loans, home equity loans and lines of credit and other consumer loans primarily throughout Connecticut and Massachusetts, and to a lesser extent the Northeast and certain Mid-Atlantic states.
Loan Portfolio Analysis
The following table summarizes the composition of the Company’s total loan portfolio as of the dates presented:
 
At December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Commercial real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied
$
445,820

 
8.3
%
 
$
416,718

 
8.5
%
 
$
322,084

 
7.0
%
 
$
399,935

 
10.3
%
 
$
85,964

 
5.0
%
Investor non-owner occupied
1,854,459

 
34.7

 
1,705,319

 
34.8

 
1,673,248

 
36.3

 
1,279,001

 
32.8

 
690,949

 
40.3

Commercial construction
78,083

 
1.5

 
98,794

 
2.0

 
129,922

 
2.8

 
172,585

 
4.4

 
46,059

 
2.7

Total commercial real estate loans
2,378,362

 
44.5

 
2,220,831

 
45.3

 
2,125,254

 
46.1

 
1,851,521

 
47.5

 
822,972

 
48.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commercial business loans
840,312

 
15.7

 
724,557

 
14.8

 
603,332

 
13.1

 
613,596

 
15.7

 
247,932

 
14.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential real estate
1,204,401

 
22.6

 
1,156,227

 
23.6

 
1,179,915

 
25.6

 
1,076,098

 
27.6

 
476,599

 
27.8

Home equity
583,180

 
10.9

 
536,772

 
11.0

 
431,282

 
9.3

 
337,641

 
8.7

 
157,848

 
9.2

Residential construction
40,947

 
0.8

 
53,934

 
1.1

 
41,084

 
0.9

 
13,258

 
0.4

 
6,184

 
0.4

Other consumer
292,781

 
5.5

 
209,393

 
4.2

 
233,064

 
5.0

 
5,752

 
0.1

 
2,257

 
0.1

Total consumer loans
2,121,309

 
39.8

 
1,956,326

 
39.9

 
1,885,345

 
40.8

 
1,432,749

 
36.8

 
642,888

 
37.5

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans
5,339,983

 
100.0
%
 
4,901,714

 
100.0
%
 
4,613,931

 
100.0
%
 
3,897,866

 
100.0
%
 
1,713,792

 
100.0
%
Net deferred loan costs and premiums
14,794

 
 
 
11,636

 
 
 
7,018

 
 
 
4,006

—

 
 
2,403

 
 
Allowance for loan losses
(47,099
)
 
 
 
(42,798
)
 
 
 
(33,887
)
 
 
 
(24,809
)
—

 
 
(19,183
)
 
 
Loans, net
$
5,307,678

 
 
 
$
4,870,552

 
 
 
$
4,587,062

 
 
 
$
3,877,063

 
 
 
$
1,697,012

 
 
As shown above, at December 31, 2017 gross loans were $5.34 billion, an increase $438.3 million, or 8.9%, from December 31, 2016. The Company experienced increases in most major loan categories due to organic loan growth and loan portfolio purchases that occurred during 2017.
Total commercial real estate loans represented the largest concentration of our loan portfolio at 44.5% of total loans at December 31, 2017 and increased $157.5 million, or 7.1%, to $2.38 billion from December 31, 2016, reflecting increased production from the Company’s expanded commercial banking division. The commercial real estate loan portfolio is comprised of owner-occupied commercial real estate (“OOCRE”) and investor non-owner occupied commercial real estate (“Investor CRE”), and to a lesser extent, commercial construction. Investor CRE represents the largest segment of the Company’s loan portfolio as of December 31, 2017, comprising 34.7% of total loans and OOCRE represents 8.3% of the portfolio. The Company plans to increase the relative level of OOCRE while decreasing the relative level of Investor CRE to generate more favorable risk-adjusted returns and enhance net interest margin. Commercial real estate construction loans are made for developing commercial real estate properties such as office complexes, apartment buildings and residential subdivisions. Commercial real estate construction loans totaled $78.1 million at December 31, 2017, approximately $25.9 million of which is residential use and $52.2 million is commercial use, compared to total commercial real estate construction loans of $98.8 million at December 31, 2016, $35.4 million of which

 
60
 

was residential use and $63.4 million was commercial use. The Company originates loans with interest reserves on certain commercial construction credits depending on various factors including, but not limited to, quality of credit, interest rate and project type. At December 31, 2017, the Company had three non-performing commercial construction loans totaling $1.4 million, with no funded interest reserves.
Residential real estate loans continue to represent a significant segment of the Company’s loan portfolio as of December 31, 2017, comprising 22.6% of total loans, an increase of $48.2 million from December 31, 2016. The Company had originations of both adjustable and fixed rate mortgages of $589.2 million during the year, reflecting both refinancing activity and loans for new home purchases, and sold loans totaling $332.6 million in the secondary market. The Company currently sells the majority of all originated fixed rate residential real estate loans with terms of 30 years, but will also sell 10, 15 and 20 year loans depending on the circumstances. The mortgage origination activity resulted from low market interest rates and competitive pricing.
Residential real estate construction loans totaled $40.9 million at December 31, 2017 compared to $53.9 million at December 31, 2016. Residential real estate construction segment loans are made to individuals for home construction whereby the borrower owns the parcel of land and the funds are advanced in stages until completion. The decrease of $13.0 million in residential construction loans is due to an overall decrease of residential construction loans in 2017 as compared to 2016.
Commercial business loans increased $115.8 million to $840.3 million at December 31, 2017 from $724.6 million at December 31, 2016. The commercial division continues to experience momentum in origination activity and has a strong loan pipeline. Mid-sized businesses continue to look to community banks for relationship banking and personalized lending services. Periodically, the Company participates in a shared national credit (“SNC”) program, which engages in the participation and purchase of credits with other “supervised” unaffiliated banks or financial institutions, specifically loan syndications and participations. These loans generate earning assets to increase profitability of the Company and diversify commercial loan portfolios by providing opportunities to participate in loans to borrowers in other regions or industries the Company might otherwise have no access. The Company offers both term and revolving commercial loans. Term loans have either fixed or adjustable rates of interest and, generally, terms of between three and seven years and amortize on the same basis. Additionally, two market segments the Company has focused on is franchise and educational banking. The franchise lending practice lends to certain franchisees in support of their development, acquisition, and expansion needs. The Company typically offers term loans with maturities between three to eight years with amortization from seven to ten years. These loans generally are on a floating rate basis with spreads slightly higher than the standard commercial business loan spreads. The educational banking practice consists of K-12 schools and colleges/universities utilizing both taxable and tax-exempt loan products for campus improvements, expansions and working capital needs. Generally, educational term loans have longer dated maturities that amortize up to 30 years and typically offer the Company a full deposit and cash management relationship. Both the franchise and educational lending areas focus on opportunities across New England and certain Mid-Atlantic states.
The Company also offers home equity loans and home equity lines of credit (“HELOCs”), both of which are secured by one-to-four family residences. Home equity loans are offered with fixed rates of interest and with terms up to 15 years. At December 31, 2017 the home equity portfolio totaled $583.2 million compared to $536.8 million at December 31, 2016. During the year ended December 31, 2017, the Company purchased three HELOC portfolios totaling $105.2 million, compared to portfolios purchased totaling $148.3 million for the year ended December 31, 2016. The total principal balance of the HELOC purchased portfolios outstanding at December 31, 2017 and 2016 was $246.5 million and $208.8 million, respectively. These loans are not serviced by the Company. The purchased HELOC portfolios are secured by second liens. The Company may continue purchasing HELOCs throughout 2018 to maintain its existing exposure.
Other consumer loans totaled $292.8 million, or 5.5%, of our total loan portfolio at December 31, 2017. Other consumer loans generally consist of loans on retail high-end boats and small yachts, home improvement loans, new and used automobiles, loans collateralized by deposit accounts and unsecured personal loans. During December 2015, the Company purchased two consumer loan portfolios totaling $229.2 million which consisted of marine retail loans and home improvement loans. At December 31, 2017 and 2016, $130.9 million and $168.7 million was outstanding, respectively. The marine retail loans are collateralized by premium brand boats. The home improvement loans are 90% backed by the U.S. Department of Housing and Urban Development and consist of loans to install energy efficient upgrades to the borrowers’ one-to-four family residences. The Company’s plan seeks to marginally increase the level of consumer loans throughout 2018, given these loan types have favorable rate characteristics that will positively impact the net interest margin along with significant granularity and credit metrics that fit within the superior credit quality of its existing portfolio.
LH-finance, the Company’s marine lending unit, includes purchased and originated retail loans and dealer floorplan loans. The Company’s relationships are limited to well established dealers of global premium brand manufacturers. The Company’s top three manufacturer customers have been in business between 30 and 100 years. The Company has generally secured agreements with premium manufacturers to support dealer floor plan loans which may reduce the Company’s credit exposure to the dealer, despite our underwriting of each respective dealer. We have developed incentive retail pricing programs with the dealers to drive

 
61
 

retail dealer flow. Retail loans are generally limited to premium manufacturers with established relationships with the Company which has a vested interest in the secondary market pricing of their respective brand due to the limited inventory available for resale. Consequently, while not contractually committed, manufacturers will often support secondary resale values which can have the effect of reducing losses from non-performing retail marine loans. Retail borrowers generally have very high credit scores, substantial down payments, substantial net worth, personal liquidity, and excess cash flow. Retail loans have an average life of four years and key markets include Florida, California, and New England.
The Company has employed specific parameters taking into account: geographical considerations, exposure hold levels, qualifying financial partners, and most importantly, sound credit quality with strong metrics. A thorough independent analysis of the credit quality of each borrower is made for every transaction whether it is an assignment or participation.
Loan Maturity Schedule
The following table sets forth the loan maturity schedule at December 31, 2017:
 
Loans Maturing
 
Within One
Year
 
After One
But Within
Five Years
 
After Five
Years
 
Total
 
(In thousands)
Owner-occupied CRE
$
5,779

 
$
84,916

 
$
355,125

 
$
445,820

Investor CRE
82,524

 
763,279

 
1,008,656

 
1,854,459

Construction
16,202

 
33,138

 
69,690

 
119,030

Commercial business loans
135,995

 
462,280

 
242,037

 
840,312

Residential real estate
546

 
41,908

 
1,161,947

 
1,204,401

Home equity
9,511

 
48,713

 
524,956

 
583,180

Other consumer
1,066

 
38,561

 
253,154

 
292,781

Total
$
251,623

 
$
1,472,795

 
$
3,615,565

 
$
5,339,983

Loans Contractually Due Subsequent to December 31, 2018
The following table sets forth the scheduled repayments of fixed and adjustable rate loans at December 31, 2017 that are contractually due after December 31, 2018:
 
Due after December 31, 2018
 
Fixed
 
Adjustable
 
Total
 
(In thousands)
Owner-occupied CRE
$
120,681

 
$
319,360

 
$
440,041

Investor CRE
743,735

 
1,028,200

 
1,771,935

Construction
36,897

 
65,931

 
102,828

Commercial business loans
193,492

 
510,825

 
704,317

Residential real estate
741,932

 
461,923

 
1,203,855

Home equity
40,293

 
533,376

 
573,669

Other consumer
220,720

 
70,995

 
291,715

Total
$
2,097,750

 
$
2,990,610

 
$
5,088,360

Asset Quality
United’s lending strategy focuses on direct relationship lending within its primary market area as the quality of assets underwritten is an important factor in the successful operation of a financial institution. Non-performing assets, loan delinquency and credit loss levels are considered to be key measures of asset quality. Management strives to maintain asset quality through its underwriting standards, servicing of loans and management of non-performing assets since asset quality is a key factor in the determination of the level of the allowance for loan losses. See Note 7, “Loans Receivable and Allowance for Loan Losses” contained elsewhere in this report for further information concerning the Allowance for Loan Losses.

 
62
 

Asset Quality Ratios
The following table details asset quality ratios for the following periods:
 
At or For the Year December 31, 2017
 
At or For the Year December 31, 2016
Non-performing loans as a percentage of total loans
0.59
%
 
0.69
%
Non-performing assets as a percentage of total assets
0.48
%
 
0.54
%
Net charge-offs as a percentage of average loans
0.10
%
 
0.10
%
Allowance for loan losses as a percentage of total loans
0.88
%
 
0.87
%
Allowance for loan losses to non-performing loans
148.76
%
 
125.64
%
Non-performing Assets
Generally loans are placed on non-accrual if collection of principal or interest in full is in doubt, if the loan has been restructured in a troubled debt restructuring, or if any payment of principal or interest is past due 90 days or more. A loan may be returned to accrual status if it has demonstrated sustained contractual performance for six continuous months or if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period. There are, on occasion, circumstances that cause loans to be placed in the 90 days and accruing category, for example, loans that are considered to be well secured and in the process of collection or renewal. As of December 31, 2017 and December 31, 2016, loans totaling $953,000 and $750,000, respectively, were greater than 90 days past due and accruing. The loans reported as past due 90 days or more and still accruing represent loans that were evaluated by management and maintained on accrual status based on an evaluation of the borrower.
The following table details non-performing assets for the periods presented:
 
At December 31, 2017
 
At December 31, 2016
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Non-accrual loans:
 
 
 
 
 
 
 
Owner-occupied commercial real estate
$
1,664

 
4.9
%
 
$
2,642

 
7.3
%
Investor commercial real estate
1,821

 
5.4

 
4,016

 
11.2

Construction
1,398

 
4.1

 
1,701

 
4.7

Commercial business loans
1,477

 
4.4

 
2,000

 
5.6

Residential real estate
11,824

 
35.0

 
11,357

 
31.6

Home equity
4,968

 
14.7

 
4,043

 
11.2

Other consumer
35

 
0.1

 
1,000

 
2.8

Total non-accrual loans excluding TDRs
23,187

 
68.6

 
26,759

 
74.4

Troubled debt restructurings - non-accruing
8,475

 
25.0

 
7,304

 
20.3

Total non-performing loans
31,662

 
93.6

 
34,063

 
94.7

Other real estate owned
2,154

 
6.4

 
1,890

 
5.3

Total non-performing assets
$
33,816

 
100.0
%
 
$
35,953

 
100.0
%
Total non-performing loans to total loans
0.59
%
 
 
 
0.69
%
 
 
Total non-performing assets to total assets
0.48
%
 
 
 
0.54
%
 
 
As displayed in the above table, non-performing assets at December 31, 2017 decreased $2.1 million to $33.8 million compared to $36.0 million at December 31, 2016. Total non-accrual loans decreased $3.6 million, reflecting decreases in all categories except residential real estate and home equity non-accrual loans, offset by an increase of $1.2 million in non-accruing TDR loans, as compared to the previous year.
At December 31, 2017, commercial real estate non-accrual loans (including owner-occupied and investor non-owner occupied commercial real estate loans) decreased $3.2 million compared to December 31, 2016. The majority of the decrease was in investor non-owner occupied commercial real estate, accounting for $2.2 million of the total decrease, due to several smaller investment real estate loans which paid off or had reductions in balances during the year. Non-accrual construction loans decreased $303,000, primarily reflecting two commercial relationships totaling $1.4 million, which relate to construction for residential subdivisions. At December 31, 2016, non-accrual construction loans consisted of 11 commercial relationships and totaled $1.7 million.

 
63
 

Other consumer non-accrual loans decreased $965,000 to $35,000 at December 31, 2017. This decrease represents a decrease in non-accruing marine loans reported at December 31, 2017. The current balance represents one marine loan and two consumer loans which evidenced payments due in excess of 90 days and resulted in the loans being classified as non-accrual.
Commercial business non-accrual loans decreased $523,000 to $1.5 million at December 31, 2017, reflecting decreases due to paid off smaller commercial business loans from the previous year ended December 31, 2016.
Home equity and residential real estate non-accrual loans increased $925,000 and $467,000, respectively, from December 31, 2016. The increase in the home equity category reflects, in part, an increase in the number of maturing home equity lines of credit. The Company continues to originate loans with strong credit characteristics and routinely updates non-performing loans in terms of FICO scores and LTV ratios. Through continued heightened account monitoring, collections, and workout efforts, the Company is committed to mortgage solution programs designed to assist homeowners to remain in their homes. As has been its practice historically, the Company does not originate subprime loans.
Non-accruing TDR loans increased by $1.2 million since December 31, 2016, primarily due to an increase of $3.1 million in commercial business TDR loans, and to a lesser extent, an increase of $211,000 in home equity TDR loans, offset by decreases in all other non-accruing TDR categories. Investor non-owner occupied commercial real estate non-accrual TDR loans decreased $842,000, other consumer non-accruing TDR loans decreased $840,000, construction non-accruing TDR loans decreased $437,000, and owner-occupied commercial real estate non-accruing TDR loans decreased $21,000 from the year ended December 31, 2016. One larger commercial business relationship moved from an accruing TDR to a non-accruing TDR during the year ended December 31, 2017, which contributed towards the $3.1 million increase noted above.
If non-accrual loans had been performing in accordance with their original terms, the Company would have recorded $1.8 million, $1.3 million and $1.5 million in additional interest income during the years ended December 31, 2017, 2016 and 2015, respectively.
Troubled Debt Restructuring
Loans are considered restructured in a troubled debt restructuring (“TDR”) when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company by increasing the ultimate probability of collection.
Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the restructuring generally remain on non-accrual status for a minimum of six months before management considers such loans for return to accruing TDR status. Accruing restructured loans are placed into non-accrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Once a loan is classified as a TDR it retains that classification for the life of the loan; however, some TDRs may demonstrate acceptable performance allowing the TDR loan to be placed on accruing TDR status.
The following tables provide detail of TDR balances and activity for the periods presented:
 
At December 31,
 
2017
 
2016
 
(In thousands)
Recorded investment in TDRs
 
 
 
Accrual status
$
14,249

 
$
16,048

Non-accrual status
8,475

 
7,304

Total recorded investment
$
22,724

 
$
23,352

Accruing TDRs performing under modified terms more than one year
$
7,783

 
$
10,020

TDR allocated reserves included in the balance of allowance for loan losses
520

 
714

Additional funds committed to borrowers in TDR status
29

 
3

The decrease in TDRs of $628,000 primarily reflects $9.5 million in pay-offs and $756,000 in partial or full charge offs, partially offset by $9.6 million in new TDR loans which primarily consisted of one large investor non-owner occupied commercial real estate loan that was modified during the year. In addition, 21 home equity TDR loans, nine residential real estate TDR loans and five commercial business TDR loans were added during the 2017.

 
64
 

Troubled Debt Restructuring By Loan Type
The following tables provide detail of TDR by type for the periods indicated:
  
At December 31,
 
2017
 
2016
 
(In thousands)
Owner-occupied CRE
$
636

 
$
689

Investor CRE
6,594

 
5,933

Construction
875

 
1,624

Commercial business loans
4,204

 
5,813

Residential real estate
6,477

 
5,206

Home equity
3,578

 
2,867

Other consumer
360

 
1,220

Total
$
22,724

 
$
23,352

Troubled Debt Restructuring Activity
The following tables provide detail of TDR activity during the periods indicated:
 
Years Ended
December 31,
 
2017
 
2016
 
(In thousands)
TDRs, beginning of period
$
23,352

 
$
24,064

Current year modifications
9,594

 
6,778

Paydowns/draws on existing TDRs, net
(9,466
)
 
(7,183
)
Charge-offs post modification
(756
)
 
(307
)
TDRs, end of period
$
22,724

 
$
23,352


 
65
 

Delinquent Loans
The following table presents an age analysis of past due loans at December 31, 2017 and 2016:
 
Delinquent Loans
  
30-89 Days
 
90 Days and Over
 
Total
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
At December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
$
1,650

 
5.5
%
 
$
1,297

 
4.3
%
 
$
2,947

 
9.8
%
Investor CRE
941

 
3.1

 
1,212

 
4.0

 
2,153

 
7.1

Construction
—

 
—

 
1,398

 
4.6

 
1,398

 
4.6

Commercial business loans
4,534

 
15.0

 
1,219

 
4.0

 
5,753

 
19.0

Residential real estate
5,484

 
18.3

 
5,633

 
18.8

 
11,117

 
37.1

Home equity
1,817

 
6.0

 
3,281

 
10.9

 
5,098

 
16.9

Other consumer
1,188

 
3.9

 
491

 
1.6

 
1,679

 
5.5

Total
$
15,614

 
51.8
%
 
$
14,531

 
48.2
%
 
$
30,145

 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
At December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
$
497

 
1.4
%
 
$
1,667

 
4.7
%
 
$
2,164

 
6.1
%
Investor CRE
2,881

 
8.1

 
3,260

 
9.2

 
6,141

 
17.3

Construction
709

 
2.0

 
1,933

 
5.6

 
2,642

 
7.6

Commercial business loans
3,330

 
9.4

 
2,373

 
6.7

 
5,703

 
16.1

Residential real estate
2,848

 
8.0

 
7,863

 
22.2

 
10,711

 
30.2

Home equity
2,954

 
8.3

 
2,797

 
7.9

 
5,751

 
16.2

Other consumer
1,217

 
3.4

 
1,095

 
3.1

 
2,312

 
6.5

Total
$
14,436

 
40.6
%
 
$
20,988

 
59.4
%
 
$
35,424

 
100.0
%
At December 31, 2017 and 2016, loans reported as past due 90 days or more and still accruing totaled $953,000 and $750,000, respectively. Loans reported as 90 days or more and still accruing represent loans that were evaluated by management and maintained on accrual status based on an evaluation of the borrower.
As a percentage of total loans, loans between 30 and 90 days delinquent were 0.29% at both December 31, 2017 and 2016. All non-performing loans have been updated with a current appraised value, and if necessary, a reduction to carrying value has been made.
Potential Problem Loans
The Company performs an internal analysis of the loan portfolio in order 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 listed on the Company’s “watchlist” and 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 containing loss are normally partially or fully charged off. In addition, the Company maintains a listing of “classified loans” consisting of Substandard and Doubtful loans which totaled $67.9 million at December 31, 2017 and which are generally transferred to the Special Assets or Collections area for enhanced monitoring.
The Company closely monitors the watchlist for signs of deterioration to mitigate the growth in non-accrual loans. At December 31, 2017, watchlist loans, inclusive of the “classified loans”, totaled $101.6 million, of which $60.7 million are not considered impaired. See the section titled Classified Assets in Part I, Item 1. Business found elsewhere in this report for further discussion on classification of potential problem loans.
Allowance for Loan Losses
The allowance for loan losses and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, which includes historic default and loss experience, specific problem loans, risk rating profile, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process.

 
66
 

The Company’s senior management meet quarterly to review and conclude on the adequacy of the reserves, and to present their recommendation to the Board Risk Committee and the Board of Directors.
Management considers the adequacy of the allowance for loan losses a critical accounting estimate. The adequacy of the allowance for loan losses is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in the Company’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers. While management believes the allowance for loan losses is adequate as of December 31, 2017, actual results may prove different and the differences could be significant.
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.
The Company had a loan loss allowance of $47.1 million, or 0.88%, of total loans at December 31, 2017 as compared to a loan loss allowance of $42.8 million, or 0.87%, of total loans at December 31, 2016. The increase in the ratio from December 31, 2016 primarily reflects current year loan growth and the movement of loans from the acquired portfolio to the covered portfolio due to subsequent deterioration of credit quality in certain acquired portfolios. 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 commercial real estate, commercial and residential construction, commercial, residential real estate, home equity and other consumer. Due to the continued expansion and certain unique risk characteristics, the regional commercial real estate loans have been segmented from the total commercial real estate loan portfolio. The regional commercial real estate loans are located throughout the Northeast and Middle Atlantic states and tend to have above average debt service coverage and loan-to-value ratios. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels and trends in delinquencies; level and trend of charge-offs and recoveries; trends in volume and types of loans; effects of changes in risk selection and underwriting standards, experience and depth of lending teams; weighted-average risk rating trends; and national and local economic trends and conditions. The qualitative factors are determined based on the various risk characteristics of each loan segment. The general component of the allowance for loan and lease loss 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 are therefore not part of the covered portfolio. Acquired impaired loans are loans with evidence of deterioration subsequent to acquisition and are considered in the covered portfolio in establishing the allowance for loan loss.
For acquired loans accounted for under ASC 310-30, evidence of credit quality deterioration as of the purchase date may include statistics such as past due status, refreshed borrower credit scores and refreshed loan-to-value (“LTV”) ratios, some of which are not immediately available as of the purchase date. The Company continues to evaluate this information and other credit-related information as it becomes available. ASC 310-30 addresses accounting for differences between contractual cash flows and cash flows expected to be collected from the Company’s initial investment in loans if those differences are attributable, at least in part, to deterioration in credit quality.
Allocated component
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Updated property evaluations are obtained at the time of impairment and serve as the basis for the loss allocation if foreclosure is probable or the loan is collateral dependent.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans which are placed on non-accrual status, or deemed troubled debt restructures, are considered impaired by the Company and subject

 
67
 

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 and the period of time until resolution, in order to determine the impairment amount. The Company updates the appraised value at least annually and on a more frequent basis if current market factors indicate a potential change in valuation.
The majority of the Company’s loans are collateralized by real estate located in central and eastern Connecticut and western Massachusetts in addition to a portion of the commercial real estate loan portfolio located in the Northeast region of the United States. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions in these areas.
Unallocated component
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated portion of the allowance for loan loss at December 31, 2017 amounted to $1.7 million, an increase of $289,000 compared to December 31, 2016.
See Note 7, “Loans Receivable and Allowance for Loan Losses” in the Notes to the Consolidated Financial Statements contained elsewhere in this report for a table providing the activity in the Company’s allowance for loan losses for the years ended December 31, 2017 and 2016, by loan segment.

 
68
 

Schedule of Allowance for Loan Losses
The following table sets forth activity in the allowance for loan losses for the years indicated:
 
At or For the Years Ended December 31,
 
2017
 
2016
 
2015
 
2014
 
2013
 
(Dollars in thousands)
Balance at beginning of year
$
42,798

 
$
33,887

 
$
24,809

 
$
19,183

 
$
18,477

Provision for loan losses
9,396

 
13,437

 
13,005

 
9,496

 
2,046

Charge-offs:
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
(103
)
 
(169
)
 
(181
)
 
—

 
—

Investor CRE
(735
)
 
(1,207
)
 
(837
)
 
(750
)
 
(111
)
Construction
(507
)
 
—

 
(466
)
 
—

 
(250
)
Commercial business loans
(1,984
)
 
(1,018
)
 
(2,513
)
 
(1,406
)
 
(190
)
Residential real estate
(736
)
 
(1,043
)
 
(744
)
 
(1,557
)
 
(514
)
Home equity
(779
)
 
(742
)
 
(427
)
 
(337
)
 
(331
)
Other consumer
(1,840
)
 
(1,710
)
 
(324
)
 
(139
)
 
(124
)
Total charge-offs
(6,684
)
 
(5,889
)
 
(5,492
)
 
(4,189
)
 
(1,520
)
Recoveries:
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
32

 
56

 
—

 
—

 
—

Investor CRE
159

 
411

 
342

 
—

 
—

Construction
—

 
3

 
—

 
—

 
—

Commercial business loans
874

 
557

 
839

 
97

 
18

Residential real estate
148

 
74

 
279

 
175

 
137

Home equity
94

 
113

 
2

 
—

 
—

Other consumer
282

 
149

 
103

 
47

 
25

Total recoveries
1,589

 
1,363

 
1,565

 
319

 
180

Net charge-offs
(5,095
)
 
(4,526
)
 
(3,927
)
 
(3,870
)
 
(1,340
)
Balance at end of year
$
47,099

 
$
42,798

 
$
33,887

 
$
24,809

 
$
19,183

Ratios:
 
 
 
 
 
 
 
 
 
Allowance for loan losses to non-performing loans at end of year
148.76
%
 
125.64
%
 
89.64
%
 
76.67
%
 
140.50
%
Allowance for loan losses to total loans outstanding at end of year
0.88
%
 
0.87
%
 
0.73
%
 
0.64
%
 
1.12
%
Net charge-offs to average loans outstanding
0.10
%
 
0.10
%
 
0.10
%
 
0.12
%
 
0.08
%
The allowance for loan losses at December 31, 2017 increased $4.3 million to $47.1 million as compared to the December 31, 2016 year-end balance of $42.8 million. The Company provided $9.4 million of allowance for loan loss provisions in 2017. The Company recorded total loan charge-offs of $6.7 million and recorded $1.6 million of loan recoveries from previously charged-off loans. Net charge-offs for 2017 were $5.1 million, an increase of $569,000 as compared to 2016 net charge-offs. Management believes the allowance for loan losses at December 31, 2017 is sufficient to provide for probable losses inherent within the loan portfolio.
At December 31, 2017, the allowance for loan losses was 0.88% of the total loan portfolio and 148.76% of total non-performing loans. This compares to an allowance of 0.87% of total loans and 125.64% of total non-performing loans at December 31, 2016. The increase in the ratio from December 31, 2016 primarily reflects the increase in the covered loan portfolio due to the movement of loans from the acquired portfolio to the covered portfolio, including a reserve established for purchased loans which have demonstrated deterioration since acquisition. The portfolio purchases have no corresponding carryover of the allowance for loan losses.

 
69
 

Allocation of Allowance for Loan Losses: The following table sets forth the allowance for loan losses allocated by loan category, the percent of allowance in each category to total allowance, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
  
At December 31,
  
2017
 
2016
 
2015
 
Allowance
for Loan
Losses
 
% of
Allowance
for Loan
Losses
 
% of Loans
in Category
of Total
Loans
 
Allowance
for Loan
Losses
 
% of
Allowance
for Loan
Losses
 
% of Loans
in Category
of Total
Loans
 
Allowance
for Loan
Losses
 
% of
Allowance
for Loan
Losses
 
% of Loans
in Category
of Total
Loans
 
(Dollars in thousands)
Owner-occupied CRE
$
3,754

 
8.0
%
 
8.3
%
 
$
3,765

 
8.8
%
 
8.5
%
 
$
2,174

 
6.4
%
 
7.0
%
Investor CRE
15,916

 
33.8

 
34.7

 
14,869

 
34.7

 
34.8

 
12,859

 
37.9

 
36.3

Construction
1,601

 
3.4

 
2.3

 
1,913

 
4.5

 
3.1

 
1,895

 
5.6

 
3.7

Commercial business
10,608

 
22.5

 
15.7

 
8,730

 
20.4

 
14.8

 
5,827

 
17.2

 
13.1

Residential real estate
7,694

 
16.3

 
22.6

 
7,854

 
18.4

 
23.6

 
7,801

 
23.0

 
25.6

Home equity
3,258

 
6.9

 
10.9

 
2,858

 
6.7

 
11.0

 
2,391

 
7.1

 
9.3

Other consumer
2,523

 
5.4

 
5.5

 
1,353

 
3.2

 
4.2

 
146

 
0.4

 
5.0

Unallocated allowance
1,745

 
3.7

 
—

 
1,456

 
3.3

 
—

 
794

 
2.4

 
—

Total allowance for loan losses
$
47,099

 
100.0
%
 
100.0
%
 
$
42,798

 
100.0
%
 
100.0
%
 
$
33,887

 
100.0
%
 
100.0
%
 
  
At December 31,
  
2014
 
2013
 
Allowance
for Loan
Losses
 
% of
Allowance
for Loan
Losses
 
% of Loans
in Category
of Total
Loans
 
Allowance
for Loan
Losses
 
% of
Allowance
for Loan
Losses
 
% of Loans
in Category
of Total
Loans
 
(Dollars in thousands)
Owner-occupied CRE
$
1,281

 
5.2
%
 
10.3
%
 
$
917

 
4.8
%
 
5.0
%
Investor CRE
8,137

 
32.8

 
32.8

 
7,371

 
38.4

 
40.3

Construction
1,470

 
5.9

 
4.8

 
829

 
4.3

 
3.1

Commercial business
5,808

 
23.4

 
15.7

 
3,394

 
17.7

 
14.5

Residential real estate
5,998

 
24.2

 
27.6

 
4,571

 
23.8

 
27.8

Home equity
1,929

 
7.8

 
8.7

 
1,825

 
9.5

 
9.2

Other consumer
75

 
0.3

 
0.1

 
29

 
0.2

 
0.1

Unallocated allowance
111

 
0.4

 
—

 
247

 
1.3

 
—

Total allowance for loan losses
$
24,809

 
100.0
%
 
100.0
%
 
$
19,183

 
100.0
%
 
100.0
%
The level of allowance for loan loss assigned to each loan category reflects management’s evaluation at December 31, 2017 of credit risks, loss experience, present economic conditions, unidentified losses and other factors that may be inherent in the loan portfolio.
Sources of Funds

The primary source of the Company’s cash flows, for use in lending and meeting its general operational needs, is deposits. Additional sources of funds are from FHLBB advances, reverse repurchase agreements, federal funds lines, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, subordinated debt and earnings. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.
Deposits
The Company offers a wide variety of deposit products to consumer, business and municipal customers. Deposit customers can access their accounts in a variety of ways including branch banking, ATM’s, online banking, mobile banking and telephone banking. Effective advertising, direct mail, well-designed product offerings, customer service and competitive pricing policies

 
70
 

have been successful in attracting and retaining deposits. A key strategic objective is to grow the base of checking customers by retaining existing relationships while attracting new customers.
Deposits provide an important source of funding for the Company as well as an ongoing stream of fee revenue. The Company attempts to control the flow of funds in its deposit accounts according to its need for funds and the cost of alternative sources of funding. RPC meets weekly and ALCO meets monthly, to determine pricing and marketing initiatives. Actions of these committees influence the flow of funds primarily by the pricing of deposits, which is affected to a large extent by competitive factors in its market area and asset/liability management strategies.
Total deposits amounted to $5.20 billion at December 31, 2017, an increase of $487.0 million from December 31, 2016. Core deposits increased $454.8 million, or 15.4%, from prior year end reflecting the Company’s continued strategy to increase core deposits while continuing to build core relationships. This strategy included promoting commercial deposit and cash management deposit products, and competitive term deposits and money market accounts in response to the competition within our marketplace.
The Company has relationships with brokered sweep deposit providers by which funds are deposited by the counterparties at the Company’s request. Amounts outstanding under these agreements are reported as interest-bearing deposits and totaled $389.1 million at December 31, 2017, an increase of $21.7 million from December 31, 2016.
Time deposits included brokered certificates of deposit of $259.1 million and $215.7 million at December 31, 2017 and 2016, respectively. The Company utilizes out-of-market brokered time deposits as part of its overall funding program along with other sources. Excluding out-of-market brokered certificates of deposits, in-market time deposits totaled $1.54 billion at December 31, 2017.
The following table presents information concerning average balances and weighted average interest rates on the Company’s deposits accounts for the years indicated:
 
At December 31,
 
2017
 
2016
 
2015
 
Average Balance
 
% of Total Average Deposits
 
Weighted Average Rate
 
Average Balance
 
% of Total Average Deposits
 
Weighted Average Rate
 
Average Balance
 
% of Total Average Deposits
 
Weighted Average Rate
 
(Dollars in thousands)
Non-interest-bearing:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Demand accounts
$
695,713

 
14.03
%
 
0.00
%
 
$
657,842

 
14.47
%
 
0.00
%
 
$
605,112

 
14.46
%
 
0.00
%
Interest-bearing:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
609,714

 
12.30

 
0.58

 
408,955

 
9.00

 
0.19

 
315,217

 
7.54

 
0.13

Regular savings
529,006

 
10.67

 
0.06

 
527,544

 
11.60

 
0.06

 
529,659

 
12.66

 
0.06

Money market accounts
1,392,432

 
28.08

 
0.70

 
1,146,227

 
25.21

 
0.50

 
1,155,242

 
27.62

 
0.59

Time deposits
1,731,434

 
34.92

 
1.15

 
1,805,623

 
39.72

 
1.04

 
1,577,739

 
37.72

 
0.88

Total interest-bearing deposits
4,262,586

 
85.97

 
0.79
%
 
3,888,349

 
85.53

 
0.66
%
 
3,577,857

 
85.54

 
0.60
%
Total average deposits
$
4,958,299

 
100.00
%
 
 
 
$
4,546,191

 
100.00
%
 
 
 
$
4,182,969

 
100.00
%
 
 
Time Deposit Maturities of $250,000 or More
As of December 31, 2017, the aggregate amount of outstanding time deposits in amounts greater than or equal to $250,000 was $529.1 million. The following table sets forth the maturity of those time deposits as of December 31, 2017:
 
 
At December 31, 2017
 
(In thousands)
Three months or less
$
100,029

Over three months through six months
114,476

Over six months through one year
107,996

Over one year through three years
196,669

Over three years
9,908

Total
$
529,078


 
71
 

Borrowings
The Company also uses various types of short-term and long-term borrowings in meeting funding needs. While customer deposits remain the primary source for funding loan originations, management uses short-term and long-term borrowings as a supplementary funding source for loan growth and other liquidity needs when the cost of these funds are favorable compared to alternative funding, including deposits.
The following table presents borrowings by category as of the dates indicated:
 
At December 31,
 
 
 
 
 
2017
 
2016
 
$ Change
 
% Change
 
(Dollars in thousands)
FHLBB advances (1)
$
1,046,458

 
$
1,046,712

 
$
(254
)
 
—
 %
Subordinated debt (2)
79,956

 
79,716

 
240

 
0.3

Wholesale repurchase agreements
20,000

 
20,000

 
—

 
—

Customer repurchase agreements
14,591

 
18,897

 
(4,306
)
 
(22.8
)
Other
4,049

 
4,294

 
(245
)
 
(5.7
)
Total borrowings
$
1,165,054

 
$
1,169,619

 
$
(4,565
)
 
(0.4
)%

(1)
FHLBB advances include $504,000 and $1.7 million of purchase accounting discounts at December 31, 2017 and 2016, respectively.
(2)
Subordinated debt includes $7.7 million of acquired junior subordinated debt, net of mark to market discounts of $1.9 million and $2.0 million, and $75.0 million of Subordinated Notes, net of associated deferred costs of $853,000 and $980,000 million at December 31, 2017 and 2016, respectively.
United Bank is a member of the Federal Home Loan Bank System, which consists of twelve district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. Members are required to own capital stock in the FHLBB in order for the Bank to access advances and borrowings which are collateralized by certain home mortgages or securities of the U.S. Government and its agencies. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FHLBB.
Total FHLBB advances increased $980,000 to $1.05 billion at December 31, 2017, exclusive of the purchase accounting mark adjustment on the advances, compared to $1.04 billion at December 31, 2016. This increase is a result of greater utilization of FHLBB advances, combined with the growth in core deposits, which assisted the Company in funding loan portfolio growth and in meeting other liquidity needs while effectively managing interest rate risk. At December 31, 2017, $921.0 million of the Company’s $1.05 billion outstanding FHLBB advances were at fixed coupons ranging from 0.99% to 3.75%, with an average cost of 1.58%. Additionally, the Company has four advances with the FHLBB totaling $125.0 million that are underlying hedge instruments; the interest is based on the three-month LIBOR and adjust quarterly. The Company also has one Flipper advance with the FHLBB totaling $25.0 million, effective March 18, 2016, that converted to a fixed rate of 1.62% and is callable at the option of the FHLBB on a quarterly basis. FHLBB borrowings represented 14.7% and 15.8% of assets at December 31, 2017 and 2016, respectively.
Borrowings under wholesale purchase agreements totaled $20.0 million at December 31, 2017 and 2016. The outstanding borrowings consisted of two individual agreements with remaining terms of 3 years or less and a weighted-average cost of 2.59%. Retail repurchase agreements, which have a term of one day and are backed by the purchasers’ interest in certain U.S. Government or government-sponsored securities, totaled $14.6 million and $18.9 million at December 31, 2017 and 2016, respectively.
Subordinated debentures totaled $80.0 million and $79.7 million at December 31, 2017 and 2016, respectively.

 
72
 

Advances payable to the FHLBB include short-term advances with maturity dates of one year or less. The following table summarizes certain information concerning short-term FHLBB advances at and for the periods indicated:
 
For the Years Ended December 31,
  
2017
 
2016
 
2015
 
(In thousands)
Balance at end of period
$
418,000

 
$
510,000

 
$
445,000

Average amount outstanding during the period
424,333

 
465,000

 
327,833

Maximum amount outstanding at any month-end
489,000

 
560,000

 
445,000

Weighted-average interest rate during the period
1.20
%
 
0.63
%
 
0.35
%
Weighted-average interest rate at end of period
1.61
%
 
0.79
%
 
0.58
%
Liquidity and Capital Resources
Liquidity is the ability to meet cash needs at all times with available cash or by conversion of other assets to cash at a reasonable price and in a timely manner. The Company maintains liquid assets at levels the Company considers adequate to meet its liquidity needs. The Company adjusts its liquidity levels to fund loan commitments, repay its borrowings, fund deposit outflows, pay escrow obligations on all items in the loan portfolio and to fund operations. The Company also adjusts liquidity as appropriate to meet asset and liability management objectives.
The Company’s primary sources of liquidity are deposits, amortization and prepayment of loans, the sale in the secondary market of loans held for sale, maturities and sales of investment securities and other short-term investments, periodic pay downs of mortgage-backed securities, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions and rates offered by our competition. The Company sets the interest rates on our deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
A portion of the Company’s liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At December 31, 2017, $88.7 million of the Company’s assets were invested in cash and cash equivalents compared to $90.9 million at December 31, 2016. The Company’s primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from the FHLBB.
Liquidity management is both a daily and longer-term function of business management. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLBB, which provide an additional source of funds. At December 31, 2017, the Company had $1.05 billion in advances from the FHLBB and an additional available borrowing limit of $457.8 million based on collateral requirements of the FHLBB inclusive of the line of credit. In addition, the Company has relationships with brokered sweep deposit providers with outstanding balances of $389.1 million at December 31, 2017. Internal policies limit wholesale borrowings to 40% of total assets, or $2.85 billion, at December 31, 2017. In addition, the Company has uncommitted federal funds lines of credit with four counterparties totaling $107.5 million at December 31, 2017. No federal funds purchased were outstanding at December 31, 2017.
The Company has established access to the Federal Reserve Bank of Boston’s discount window through a borrower in custody agreement. As of December 31, 2017, the Company had pledged 26 commercial loans, with outstanding balances totaling $195.0 million. Based on the amount of pledged collateral, the Company had available liquidity of $141.0 million.
At December 31, 2017, the Company had outstanding commitments to originate loans of $110.7 million and unfunded commitments under construction loans, lines of credit, stand-by letters of credit and unused checking overdraft lines of credit of $993.5 million. At December 31, 2017, time deposits scheduled to mature in less than one year totaled $1.23 billion. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company, although there can be no assurance that this will be the case. In the event a significant portion of its deposits are not retained by the Company, it will have to utilize other funding sources, such as FHLBB advances in order to maintain its level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

 
73
 

The main sources of liquidity at the parent company level are dividends from United Bank and proceeds received from the Company’s issuance of $75.0 million of Subordinated Notes in September 2014. In 2017, the Bank paid $24.0 million to the Company in dividends. In 2016, there were no dividends from the Bank to the Company. The main uses of liquidity are payments of dividends to common stockholders, repurchases of United Financial’s common stock and corporate operating expenses. There are certain restrictions on the payment of dividends by the Bank as discussed in the Supervision and Regulation section of “Item 1 - Business” found elsewhere in this report. See Note 17, “Regulatory Matters” for further information on dividend restrictions.
The Company and the Bank are subject to various regulatory capital requirements. As of December 31, 2017, the Bank is categorized as “well-capitalized” under the regulatory framework for prompt corrective action. See Note 17, “Regulatory Matters” in the Notes to the Consolidated Financial Statements contained elsewhere in this report for discussion of capital requirements.
The liquidity position of the Company is continuously monitored and adjustments are made to balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented would have a material adverse effect on the Company. The Company has a detailed liquidity contingency plan which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.
Contractual Obligations and Commercial Commitments
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any terms or covenants established in the contract and generally have fixed expiration dates or other termination clauses.
The following tables present information indicating various contractual obligations and commitments made by the Company as of December 31, 2017 and the respective payment dates:
  
Contractual Obligations
 
Total
 
One Year
or Less
 
More than
One Year
Through
Three Years
 
More than
Three Years
Through
Five Years
 
Over Five
Years
 
(In thousands)
Federal Home Loan Bank advances (1)
$
1,045,954

 
$
929,274

 
$
83,000

 
$
3,047

 
$
30,633

Interest expense payable on Federal Home Loan Bank advances
16,343

 
14,452

 
1,509

 
76

 
306

Leases (2)
67,184

 
5,189

 
12,040

 
11,660

 
38,295

Subordinated Notes (3)
82,732

 
—

 
—

 
—

 
82,732

Interest expense payable on Subordinated Notes
34,019

 
4,582

 
9,165

 
9,164

 
11,108

Core service provider (4)
3,127

 
3,127

 
—

 
—

 
—

Other (5)
1,690

 
141

 
312

 
322

 
915

Total Contractual Obligations
$
1,251,049

 
$
956,765

 
$
106,026

 
$
24,269

 
$
163,989

 
(1)
Secured under a blanket security agreement on qualifying assets, principally, mortgage loans.
(2)
Represents non-cancelable capital and operating leases for offices and office equipment.
(3)
Consists of $7.7 million of acquired junior subordinated debt maturing March 2036 and $75.0 million in Subordinated Notes due October 2024.
(4)
Payments to the core service provider under the existing contract are primarily based on the volume of accounts served or the transactions processed. The expected payments shown in this table are based on an estimate of our current number of accounts to be served or transactions to be processed, but do not include any projection of the effect of pricing or volume changes. The current contract is in place until August 2018, and the Company is currently in the process of extending the agreement for an additional five years.
(5)
Consists of estimated benefit payments over the next ten years under unfunded nonqualified pension plans.

 
74
 

The following tables present information indicating various commercial commitments made by the Company as of December 31, 2017 and the respective payment dates:

  
Other Commitments
 
Total
 
One Year
or Less
 
More than
One Year
Through
Three Years
 
More than
Three Years
Through
Five Years
 
Over Five
Years
 
(In thousands)
Real estate loan commitments(1)
$
77,736

 
$
77,736

 
$
—

 
$
—

 
$
—

Commercial business loan commitments(1)
32,928

 
32,928

 
—

 
—

 
—

Undisbursed commercial lines of credit
412,547

 
191,478

 
75,471

 
6,546

 
139,052

Undisbursed home equity lines of credit(2)
412,484

 
105

 
15,974

 
27,121

 
369,284

Undisbursed construction loans
136,149

 
17,315

 
54,923

 
4,736

 
59,175

Standby letters of credit
14,680

 
10,222

 
4,458

 
—

 
—

Unused checking overdraft lines of credit(3)
1,544

 
—

 
—

 
—

 
1,544

Unused credit card lines
16,084

 
16,084

 
—

 
—

 
—

Total Other Commitments
$
1,104,152

 
$
345,868


$
150,826


$
38,403


$
569,055

 
General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses.
(1)
Commitments for loans are extended to customers for up to 180 days after which they expire.
(2)
Unused portions of home equity lines of credit are available to the borrower for up to 10 years.
(3)
Unused portion of checking overdraft lines of credit are available to customers in “good standing”.
Other Off-Balance Sheet Commitments
The Company invests in partnerships, including low income housing tax credit, new markets housing tax credit and alternative energy tax credit partnerships. The net carrying balance of these investments totaled $38.2 million at December 31, 2017 and is included in other assets on the Consolidated Statement of Condition. At December 31, 2017, the Company was contractually committed under these limited partnership agreements to make additional capital contributions of approximately $12.2 million, which constitutes our maximum potential obligation to these partnerships.
Recently Issued Accounting Pronouncements
See Note 2, “Recent Accounting Pronouncements” to the Notes to the Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on the Company’s Consolidated Financial Statements.
Item 7A.     Quantitative and Qualitative Disclosures about Market Risk
Management of Market and Interest Rate Risk
General:    The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, in general have longer contractual maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established a Board Risk Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Management monitors the level of interest rate risk on a regular basis and the Board Risk Committee meets at least quarterly to review our asset/liability policies and interest rate risk position.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, we have implemented the following strategies to manage our interest rate risk: (i) emphasizing adjustable rate loans including, adjustable rate one-to-four family, commercial and consumer loans, (ii) selling longer-term one-to-four family fixed rate mortgage loans in the secondary market, (iii) reducing and shortening the expected average life of the investment portfolio, (iv) a forward starting hedge strategy for future dated wholesale

 
75
 

funding and (v) a loan level hedging program. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.
Quantitative Analysis:
Income Simulation:     Simulation analysis is used to estimate our interest rate risk exposure at a particular point in time. The Company models a static balance sheet when measuring interest rate risk, in which a stable balance sheet is projected throughout the modeling horizon. Under a static approach both the size and mix of the balance sheet remains constant, with maturing loan and deposit balances replaced as “new volumes” within the same loan and deposit category, repricing at the respective scenario’s market rate. This adoption was made in a continued effort to align with regulatory best practices and to highlight the current level of risk in the Company’s positions without the effects of growth assumptions. We utilize the income simulation method to analyze our interest rate sensitivity position to manage the risk associated with interest rate movements. At least quarterly, our Risk Committee of the Board of Directors reviews the potential effect changes in interest rates could have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities at December 31, 2017 and 2016 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions as well as deposit characterization assumptions can have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed assets we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn effect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected life of our assets would tend to lengthen more than the expected average life of our liabilities and therefore would most likely result in a decrease to our asset sensitive position. As a measure of potential market risk arising from a parallel shock of magnitude to the Company’s net interest income, Management includes a 300 basis point parallel increase in rates in the quarterly simulation results. In order to observe the impact of a slower and gradual rate increase over the 12-month period, Management includes a 150 basis point ramp simulation, which assumes that interest rates increase by 25 basis points every other month. To highlight the net interest income of a falling rate environment, Management includes a 50 basis point parallel decrease in rates.
 
December 31, 2017
 
December 31, 2016
 
Percentage Increase (Decrease)
in Estimated
Net Interest Income Over
12  Months
 
Percentage Increase (Decrease)
in Estimated
Net Interest Income Over
12  Months
300 basis point increase in rates
(0.01
)%
 
1.88
 %
150 basis point ramp in rates
5.06
 %
 
6.23
 %
50 basis point decrease in rates
(4.09
)%
 
(4.92
)%
The Company’s Asset/Liability policy currently limits projected changes in net interest income based on a matrix of projected total risk-based capital relative to the interest rate change for each twelve month period measured compared to the flat rate scenario. As a result, the higher a level of projected risk-based capital, the higher the limit of projected net interest income volatility the Company will accept. As the level of projected risk-based capital is reduced, the policy requires that net interest income volatility also is reduced, making the limit dynamic relative to the capital level needed to support it. These policy limits are re-evaluated on a periodic basis (not less than annually) and may be modified, as appropriate. Also included in the decreasing rate scenario is the assumption that further declines are reflective of a deeper recession as well as narrower credit spreads from Federal Open Market Committee actions. At December 31, 2017, income at risk (i.e., the change in net interest income) decreased 0.01% and decreased 4.09% based on a 300 basis point average increase or a 50 basis point average decrease, respectively. When considering the impact of the 150 basis point ramp simulation, income at risk increased 5.06% over the 12-month simulation horizon. Because of the asset-sensitivity of our balance sheet, income is projected to increase if rates rise on a slow and gradual basis as anticipated by recent FOMC minutes. While we believe the assumptions used are reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

 
76
 

Item 8.     Financial Statements and Supplementary Data
UNITED FINANCIAL BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
 

 
77
 

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of United Financial Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting.
The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and Directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control — Integrated Framework (2013). Based on that assessment, management concluded that, as of December 31, 2017, the Company’s internal control over financial reporting is effective based on the criteria established in Internal Control — Integrated Framework (2013).

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2017 has been audited by Wolf & Company, P.C., an independent registered public accounting firm.

 
 
 
 
 
/s/ William H.W. Crawford, IV
 
 
 
/s/ Eric R. Newell
 
 
 
William H.W. Crawford, IV
 
 
 
Eric R. Newell
Chief Executive Officer & President
 
 
 
Executive Vice President, Chief Financial
 
 
 
 
Officer and Treasurer
Date: February 28, 2018

 
78
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
To the Board of Directors and Stockholders
of United Financial Bancorp, Inc.

Opinion on Internal Control over Financial Reporting
We have audited United Financial Bancorp, Inc. and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Consolidated Financial Statements of the Company and our report dated February 28, 2018 expressed an unqualified opinion.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Wolf & Company, P.C.
Boston, Massachusetts
February 28, 2018

 
79
 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON CONSOLIDATED FINANCIAL STATEMENTS
To the Stockholders and the Board of Directors of
United Financial Bancorp, Inc.

Opinion on the Consolidated Financial Statements
We have audited the accompanying Consolidated Statements of Condition of United Financial Bancorp, Inc. and subsidiaries (the “Company”) as of December 31, 2017 and 2016, and the related Consolidated Statements of Net Income, Comprehensive Income, Changes in Stockholders’ Equity and Cash Flows for each of the years in the three-year period ended December 31, 2017, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 28, 2018 expressed an unqualified opinion.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.
Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.


/s/ Wolf & Company, P.C.

We have served as the Company's auditor since 2009.
Boston, Massachusetts
February 28, 2018




 
80
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Condition
 
December 31,
 
2017
 
2016
 
(In thousands, except share data)
ASSETS
 
 
 
Cash and cash equivalents:
 
 
 
Cash and due from banks
$
56,661

 
$
47,248

Short-term investments
32,007

 
43,696

Total cash and cash equivalents
88,668

 
90,944

Available for sale securities-at fair value
1,050,787

 
1,043,411

Held to maturity securities-at amortized cost
13,598

 
14,038

Loans held for sale
114,073

 
62,517

Loans receivable (net of allowance for loan losses of $47,099 in 2017 and $42,798 in 2016)
5,307,678

 
4,870,552

Federal Home Loan Bank stock, at cost
50,194

 
53,476

Accrued interest receivable
22,332

 
18,771

Deferred tax asset-net
25,656

 
39,962

Premises and equipment-net
67,508

 
51,757

Goodwill
115,281

 
115,281

Core deposit intangible
4,491

 
5,902

Cash surrender value of bank-owned life insurance
148,300

 
167,823

Other assets
105,593

 
65,086

Total assets
$
7,114,159

 
$
6,599,520

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Deposits:
 
 
 
Non-interest-bearing
$
778,576

 
$
708,050

Interest-bearing
4,419,645

 
4,003,122

Total deposits
5,198,221

 
4,711,172

Mortgagors’ and investors’ escrow accounts
7,545

 
13,354

Advances from the Federal Home Loan Bank
1,046,458

 
1,046,712

Other borrowings
118,596

 
122,907

Accrued expenses and other liabilities
50,011

 
49,509

Total liabilities
6,420,831

 
5,943,654

Commitments and contingencies (notes 7 and 20)

 

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

 
—

Common stock (no par value; 120,000,000 shares authorized; 51,044,752 and 50,786,671 shares issued and outstanding at December 31, 2017 and 2016, respectively)
537,576

 
531,848

Additional paid-in capital
4,713

 
7,227

Unearned compensation — ESOP
(5,466
)
 
(5,694
)
Retained earnings
168,345

 
137,838

Accumulated other comprehensive loss, net of tax
(11,840
)
 
(15,353
)
Total stockholders’ equity
693,328

 
655,866

Total liabilities and stockholders’ equity
$
7,114,159

 
$
6,599,520

The accompanying notes are an integral part of these consolidated financial statements.

 
81
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Net Income
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands, except share data)
Interest and dividend income:
 
 
 
 
 
Loans
$
200,734

 
$
179,819

 
$
165,409

Securities-taxable interest
22,550

 
19,678

 
20,039

Securities-non-taxable interest
9,679

 
8,392

 
8,354

Securities-dividends
2,902

 
3,920

 
2,363

Interest-bearing deposits
389

 
343

 
180

Total interest and dividend income
236,254

 
212,152

 
196,345

Interest expense:
 
 
 
 
 
Deposits
33,565

 
25,576

 
21,442

Borrowed funds
18,447

 
15,477

 
10,321

Total interest expense
52,012

 
41,053

 
31,763

Net interest income
184,242

 
171,099

 
164,582

Provision for loan losses
9,396

 
13,437

 
13,005

Net interest income after provision for loan losses
174,846

 
157,662

 
151,577

Non-interest income:
 
 
 
 
 
Service charges and fees
24,209

 
20,259

 
21,040

Income from mortgage banking activities
5,539

 
8,227

 
9,552

Bank-owned life insurance income
5,462

 
3,394

 
3,616

Gain on sales of securities, net
782

 
1,961

 
939

Net loss on limited partnership investments
(3,023
)
 
(3,995
)
 
(3,136
)
Other income
431

 
238

 
476

Total non-interest income
33,400

 
30,084

 
32,487

Non-interest expense:
 
 
 
 
 
Salaries and employee benefits
80,061

 
75,384

 
67,469

Occupancy and equipment
16,902

 
14,986

 
15,442

Service bureau fees
8,098

 
7,986

 
6,728

Professional fees
4,305

 
3,917

 
6,317

Marketing and promotions
4,047

 
3,049

 
2,321

FDIC insurance assessments
3,076

 
3,573

 
3,692

Core deposit intangible amortization
1,411

 
1,604

 
1,796

Merger related expense
—

 
—

 
1,575

FHLBB prepayment penalties
—

 
1,454

 
—

Other
23,685

 
22,020

 
22,855

Total non-interest expense
141,585

 
133,973

 
128,195

Income before income taxes
66,661

 
53,773

 
55,869

Provision for income taxes
12,043

 
4,112

 
6,229

Net income
$
54,618

 
$
49,661

 
$
49,640

 
 
 
 
 
 
Net income per share:
 
 
 
 
 
Basic
$
1.09

 
$
1.00

 
$
1.01

Diluted
$
1.07

 
$
0.99

 
$
1.00

 
 
 
 
 
 
Weighted-average shares outstanding:
 
 
 
 
 
Basic
50,283,071

 
49,731,149

 
48,912,807

Diluted
50,922,652

 
50,089,030

 
49,385,566

The accompanying notes are an integral part of these consolidated financial statements.

 
82
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Net income
$
54,618

 
$
49,661

 
$
49,640

Other comprehensive income (loss):
 
 
 
 
 
Securities available for sale:
 
 
 
 
 
Unrealized holding gains (losses)
4,731

 
(5,063
)
 
(5,912
)
Reclassification adjustment for gains realized in income (1)
(782
)
 
(1,961
)
 
(939
)
Net unrealized gains (losses)
3,949

 
(7,024
)
 
(6,851
)
Tax effect - benefit (expense)
(1,416
)
 
2,529

 
2,462

Net-of-tax amount - securities available for sale
2,533

 
(4,495
)
 
(4,389
)
Interest rate swaps designated as cash flow hedges:
 
 
 
 
 
Unrealized losses
(313
)
 
(1,472
)
 
(3,108
)
Reclassification adjustment for losses recognized in interest expense (2)
1,487

 
2,362

 
12

Net unrealized gains (losses)
1,174

 
890

 
(3,096
)
Tax effect - benefit (expense)
(423
)
 
(321
)
 
1,116

Net-of-tax amount - interest rate swaps
751

 
569

 
(1,980
)
Pension and Other Post-retirement plans:
 
 
 
 
 
Gains (losses) arising during the period
(220
)
 
(1,358
)
 
2,106

Reclassification adjustment for prior service costs recognized in net periodic benefit cost (3)
7

 
7

 
7

Reclassification adjustment for losses recognized in net periodic benefit cost (4)
571

 
495

 
759

Net change in gains (losses) and prior service costs
358

 
(856
)
 
2,872

Tax effect - benefit (expense)
(129
)
 
308

 
(892
)
Net-of-tax amount - pension and other post-retirement plans
229

 
(548
)
 
1,980

Total other comprehensive income (loss)
3,513

 
(4,474
)
 
(4,389
)
Comprehensive income
$
58,131

 
$
45,187

 
$
45,251

 
(1)
Amounts are included in gain on sales of securities, net in the Consolidated Statements of Net Income. Income tax expense associated with the reclassification adjustment for the years ended December 31, 2017, 2016 and 2015 was $282, $707 and $338, respectively.
(2)
Amounts are included in interest expense on borrowed funds in the Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for the years ended December 31, 2017, 2016 and 2015 was $536, $851 and $4, respectively.
(3)
Amounts are included in salaries and employee benefits expense in the Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for each of the years ended December 31, 2017, 2016 and 2015 was $3.
(4)
Amounts are included in salaries and employee benefits expense in the Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for the years ended December 31, 2017, 2016 and 2015 was $206, $178 and $451, respectively.
The accompanying notes are an integral part of these consolidated financial statements.

 
83
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders’ Equity
 
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, 2014
49,537,700

 
$
514,189

 
$
16,007

 
$
(6,150
)
 
$
84,852

 
$
(6,490
)
 
$
602,408

Comprehensive income
—

 
—

 
—

 
—

 
49,640

 
(4,389
)
 
45,251

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

 
—

 
—

 
—

 
(5,171
)
Share-based compensation expense
—

 
—

 
1,076

 
—

 
—

 
—

 
1,076

ESOP shares released or committed to be released
—

 
—

 
71

 
228

 
—

 
—

 
299

Shares issued for stock options exercised
545,148

 
7,281

 
(2,516
)
 
—

 
—

 
—

 
4,765

Shares issued for restricted stock grants
259,845

 
3,491

 
(3,491
)
 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(22,430
)
 
(188
)
 
(123
)
 
—

 
—

 
—

 
(311
)
Forfeited unvested restricted stock
(1,135
)
 
(15
)
 
15

 
—

 
—

 
—

 
—

Tax effects of share-based awards
—

 
—

 
(317
)
 
—

 
—

 
—

 
(317
)
Dividends declared ($0.46 per common share)
—

 
—

 
—

 
—

 
(22,479
)
 
—

 
(22,479
)
Balance at December 31, 2015
49,941,428

 
519,587

 
10,722

 
(5,922
)
 
112,013

 
(10,879
)
 
625,521

Comprehensive income
—

 
—

 
—

 
—

 
49,661

 
(4,474
)
 
45,187

Share-based compensation expense
—

 
—

 
2,252

 
—

 
—

 
—

 
2,252

ESOP shares released or committed to be released
—

 
—

 
80

 
228

 
—

 
—

 
308

Shares issued for stock options exercised
655,689

 
8,958

 
(2,683
)
 
—

 
—

 
—

 
6,275

Shares issued for restricted stock grants
215,814

 
3,368

 
(3,368
)
 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(21,446
)
 
—

 
(327
)
 
—

 
—

 
—

 
(327
)
Forfeited unvested restricted stock
(4,814
)
 
(65
)
 
65

 
—

 
—

 
—

 
—

Tax effects of share-based awards
—

 
—

 
486

 
—

 
—

 
—

 
486

Dividends declared ($0.48 per common share)
—

 
—

 
—

 
—

 
(23,836
)
 
—

 
(23,836
)
Balance at December 31, 2016
50,786,671

 
531,848

 
7,227

 
(5,694
)
 
137,838

 
(15,353
)
 
655,866

Comprehensive income
—

 
—

 
—

 
—

 
54,618

 
3,513

 
58,131

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

 
—

 
—

 
—

 
(1,312
)
Share-based compensation expense
—

 
—

 
2,699

 
—

 
—

 
—

 
2,699

ESOP shares released or committed to be released
—

 
—

 
172

 
228

 
—

 
—

 
400

Shares issued for stock options exercised
240,638

 
4,317

 
(1,857
)
 
—

 
—

 
—

 
2,460

Shares issued for restricted stock grants
155,180

 
2,850

 
(2,850
)
 
—

 
—

 
—

 
—

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

 
—

 
—

 
—

 
—

Cancellation of shares for tax withholding
(48,495
)
 
—

 
(805
)
 
—

 
—

 
—

 
(805
)
Dividends declared ($0.48 per common share)
—

 
—

 
—

 
—

 
(24,111
)
 
—

 
(24,111
)
Balance at December 31, 2017
51,044,752

 
$
537,576

 
$
4,713

 
$
(5,466
)
 
$
168,345

 
$
(11,840
)
 
$
693,328

 
The accompanying notes are an integral part of these consolidated financial statements.

 
84
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
54,618

 
$
49,661

 
$
49,640

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Provision for loan losses
9,396

 
13,437

 
13,005

Amortization of premiums and discounts on investments, net
4,066

 
5,410

 
5,041

Amortization of intangible assets and purchase accounting marks, net
1,292

 
(1,019
)
 
(10,835
)
Amortization of subordinated debt issuance costs
126

 
126

 
126

Share-based compensation expense
2,699

 
2,252

 
1,076

ESOP expense
400

 
308

 
299

Loss on extinguishment of debt
—

 
1,454

 
—

Tax effects of share-based awards
—

 
(486
)
 
317

Gains on sales of securities, net
(782
)
 
(1,961
)
 
(939
)
Loans originated for sale
(384,195
)
 
(422,183
)
 
(406,960
)
Principal of balance of loan sold
332,639

 
369,802

 
405,044

Increase in mortgage servicing asset
(1,629
)
 
(3,030
)
 
(2,345
)
Gain on sales of other real estate owned
(409
)
 
(121
)
 
(218
)
Net change in mortgage banking fair value adjustment
(1,303
)
 
139

 
39

Loss on disposal of equipment
365

 
178

 
191

Write-downs of other real estate owned
424

 
126

 
118

Depreciation and amortization of premises and equipment
5,919

 
5,516

 
5,340

Net loss on limited partnership investments
3,023

 
3,995

 
3,136

Gain on lease terminations
—

 
—

 
(195
)
Deferred income tax (benefit) expense
12,338

 
(4,352
)
 
3,582

Increase in cash surrender value of bank-owned life insurance
(4,656
)
 
(3,324
)
 
(3,397
)
Income recognized from death benefit on bank-owned life insurance
(806
)
 
(70
)
 
(219
)
Net change in:
 
 
 
 
 
Deferred loan fees and premiums
(3,158
)
 
(4,618
)
 
(3,013
)
Accrued interest receivable
(3,561
)
 
(3,031
)
 
(1,528
)
Other assets
(14,527
)
 
(4,327
)
 
(16,172
)
Accrued expenses and other liabilities
866

 
(4,195
)
 
9,637

Net cash provided by (used in) operating activities
13,145

 
(313
)
 
50,770

Cash flows from investing activities:
 
 
 
 
 
Proceeds from sales of available for sale securities
315,339

 
268,162

 
280,564

Proceeds from calls and maturities of available for sale securities
102,289

 
27,076

 
16,655

Principal payments on available for sale securities
76,674

 
95,490

 
86,128

Principal payments on held to maturity securities
402

 
496

 
774

Purchases of available for sale securities
(501,803
)
 
(385,386
)
 
(398,794
)
Redemption of FHLBB and other restricted stock
11,223

 
3,392

 
—

Purchase of FHLBB stock
(6,324
)
 
(5,672
)
 
(19,246
)
Proceeds from sale of other real estate owned
2,569

 
2,158

 
2,683

Purchases of loans
(259,656
)
 
(176,301
)
 
(348,175
)
Loan originations, net of principal repayments
(186,957
)
 
(119,817
)
 
(366,495
)
Purchase of bank-owned life insurance
(10,000
)
 
(40,000
)
 
—

Proceeds from bank-owned life insurance death benefit
1,892

 
689

 
1,158

Surrender of bank-owned life insurance
33,075

 
—

 
—

Receivable of bank-owned life insurance
(26,713
)
 
—

 
—

Proceeds from sales of equipment
1,039

 
686

 
364

Purchases of premises and equipment
(23,131
)
 
(3,465
)
 
(3,593
)
Net cash used in investing activities
(470,082
)
 
(332,492
)
 
(747,977
)

 
85
 

United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Concluded)

 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Cash flows from financing activities:
 
 
 
 
 
Net increase in non-interest-bearing deposits
70,526

 
50,332

 
69,649

Net increase in interest-bearing deposits
417,251

 
225,103

 
335,320

Net increase (decrease) in mortgagors’ and investors’ escrow accounts
(5,809
)
 
(172
)
 
522

Net change in short-term FHLBB advances
(52,500
)
 
41,800

 
88,000

Proceeds from long-term FHLBB advances
125,000

 
105,000

 
290,000

Repayments of long-term FHLBB borrowings and penalty
(1,520
)
 
(10,989
)
 
(8,056
)
Prepayments of FHLBB Advances
—

 
(37,796
)
 
—

Repayments of called FHLBB advances
(70,000
)

—


—

Net decrease in other borrowings, excluding proceeds from subordinated debt issuance
(4,519
)
 
(27,303
)
 
(46,491
)
Proceeds from exercise of stock options
2,460

 
6,275

 
4,765

Common stock repurchased
(1,312
)
 
—

 
(5,171
)
Cancellation of shares for tax withholding
(805
)
 
(327
)
 
(311
)
Tax effects of share-based awards
—

 
486

 
(317
)
Cash dividends paid on common stock
(24,111
)
 
(23,836
)
 
(22,479
)
Net cash provided by financing activities
454,661

 
328,573

 
705,431

Net (decrease) increase in cash and cash equivalents
(2,276
)
 
(4,232
)
 
8,224

Cash and cash equivalents - beginning of year
90,944

 
95,176

 
86,952

Cash and cash equivalents - end of year
$
88,668

 
$
90,944

 
$
95,176

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid during the year for:
 
 
 
 
 
Interest
$
53,012

 
$
43,709

 
$
36,532

Income taxes, net
4,574

 
3,655

 
(6,744
)
Transfer of loans to other real estate owned
2,848

 
3,298

 
1,099

Increase (decrease) in due to broker, investment purchases
(6
)
 
6

 
(1,105
)
Decrease in due to broker, common stock buyback
—

 
—

 
(523
)
The accompanying notes are an integral part of these consolidated financial statements.

 
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United Financial Bancorp, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Note 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Financial Statement Presentation
On April 30, 2014, Rockville Financial, Inc. (“Rockville”) completed its merger with United Financial Bancorp, Inc. (“Legacy United”) and changed its legal entity name to United Financial Bancorp, Inc. (the “Company”). In connection with this merger, Rockville Bank, the Company’s principal asset and wholly-owned subsidiary, completed its merger with Legacy United’s banking subsidiary, United Bank, and changed its name to United Bank (the “Bank”). Discussions throughout this report related to the merger with Legacy United are referred to as the “Merger”. The results of operations of Legacy United or assets acquired are included only from the date of acquisition.
The consolidated 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., UB Properties, LLC, and UCB Securities, Inc. II. In addition, the Bank has a real estate investment trust subsidiary, United Financial Realty HC, Inc. of which has one wholly-owned subsidiary, United Financial Business Trust I.
The Company is a bank holding company under the Bank Holding Company Act of 1956, as amended, headquartered in Hartford, Connecticut and incorporated under the laws of Connecticut in 2004. At December 31, 2017, the Company’s principal asset was all of the outstanding capital stock of United Bank, a wholly-owned subsidiary of the Company.
The Company, through United Bank and various subsidiaries, delivers financial services to individuals, families and businesses primarily throughout Connecticut and western Massachusetts and the surrounding regions through 53 banking offices, its commercial loan and mortgage loan production offices, 64 ATMs, telephone banking, mobile banking and its online website (www.bankatunited.com).
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and to general practices in the financial services industry. The preparation of 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 could differ from those estimates. 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 valuation of derivative instruments and hedging activities, the evaluation of securities for other-than-temporary impairment and review of goodwill for impairment.
Certain reclassifications have been made to 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. All significant intercompany transactions have been eliminated.
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.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, and short term investments with original maturities of three months or less.
Securities
Securities are classified at the time of purchase as “available for sale,” “held to maturity,” or “trading.” Classification is re-evaluated at each quarter end for consistency with corporate goals and objectives. Debt securities held to maturity are those which the Company has the ability and intent to hold to maturity. Securities held to maturity are recorded at amortized cost. Amortized cost includes the amortization of premiums or accretion of discounts using the level yield method. Such amortization and accretion is included in interest income from securities. Securities classified as available for sale are recorded at fair value. Unrealized gains and losses, net of taxes, are calculated each reporting period and presented as a separate component of other comprehensive income (“OCI”). Securities bought and held for the purpose of selling in the near term are classified as trading. Trading securities, if any, are recorded at fair value with calculated gains and losses recognized in non-interest income in the respective accounting period. The Company did not have a trading portfolio during any of the periods presented. Securities transferred from available for sale to held to maturity are recorded at fair value at the time of transfer. The respective gain or loss is reclassified as a separate component

 
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of OCI and amortized as an adjustment to interest income using the level yield method. The Company did not transfer any securities from available for sale to held to maturity during any of the periods presented.
Securities are reviewed quarterly for other-than-temporary impairment (“OTTI”). All securities classified as held to maturity or available for sale that are in an unrealized loss position are evaluated for OTTI. The evaluation considers several factors including the amount of the unrealized loss, the period of time the security has been in a loss position and the financial condition and near-term prospects of the issuer and guarantor, where applicable. If the Company intends to sell the security or, if it is more likely than not the Company will be required to sell the security prior to recovery of its amortized cost basis, or for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis, the security is written down to fair value and the respective write-down is recorded in non-interest income in the Consolidated Statements of Net Income. If the Company does not intend to sell the security and if it is more likely than not that the Company will not be required to sell the security prior to recovery of its amortized cost basis, only the credit component of any impairment charge of a debt security would be recognized as a loss in non-interest income in the Consolidated Statements of Net Income. The remaining impairment would be recorded in OCI. A decline in the value of an equity security that is considered to have OTTI is recorded as a loss in non-interest income in the Consolidated Statements of Net Income.
Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Derivative Financial Instruments
Derivatives are recognized as either assets or liabilities and are recorded at fair value on the Company’s Consolidated Statements of Condition. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and resulting designation. The Company’s hedging policies permit the use of various derivative financial instruments to manage interest rate risk or to hedge specified assets and liabilities. Derivatives executed with the same counterparty are generally subject to netting arrangements; however, fair value amounts recognized for derivatives and fair value amounts recognized for the right/obligation to reclaim/return cash collateral are not offset for financial reporting purposes.
To qualify for hedge accounting, derivatives must be highly effective at reducing the risk associated with the exposure being hedged and must be designated as a hedge at the inception of the derivative contract. If derivative instruments are designated as fair value hedges, and such hedges are highly effective, both the change in the fair value of the hedge and the hedged item are included in current earnings. If derivative instruments are designated as cash flow hedges, fair value adjustments related to the effective portion are recorded in other comprehensive income and are reclassified to earnings when the hedged transaction is reflected in earnings. Ineffective portions of cash flow hedges are reflected in earnings as they occur. Actual cash receipts and/or payments and related accruals on derivatives related to hedges are recorded as adjustments to the interest income or interest expense associated with the hedged item. During the life of the hedge, the Company formally assesses whether derivatives designated as hedging instruments continue to be highly effective in offsetting changes in the fair value or cash flows of hedged items. If it is determined that a hedge has ceased to be highly effective, the Company will discontinue hedge accounting prospectively. At such time, previous adjustments to the carrying value of the hedged item are reversed into current earnings and the derivative instrument is reclassified to a trading position recorded at fair value.
For derivatives not designated as hedges, changes in fair value are recognized in earnings, in non-interest income.
Derivative Loan Commitments
Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value on the Consolidated Statements of Condition in other assets and other liabilities with changes in their fair values recorded in other non-interest income. Fair value is based on the value of servicing rights and the interest rate differential from the commitment date to the current valuation date of the underlying mortgage loans. In estimating fair value, the Company assigns a probability to a loan commitment based on an expectation that it will be exercised and the loan will be funded. Subsequent to inception, changes in the fair value of the loan commitment are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time.
Forward Loan Sale Commitments
To protect against the portfolio risks inherent in derivative loan commitments or rate locks associated with fixed rate residential lending, the Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans and long-term interest rate risk that may result from the exercise of the derivative loan commitments. These forward loan sale commitments are accounted for as derivative instruments.

 
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The Company estimates the fair value of its forward loan sales commitments using a methodology similar to that used for derivative loan commitments, excluding the valuation of servicing rights. Forward loan sale commitments are recognized at fair value on the Consolidated Statements of Condition in other assets and other liabilities with changes in fair value recorded in other non-interest income.
Federal Home Loan Bank Stock
The Company, as a member of the Federal Home Loan Bank system, is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLBB”) based primarily on its level of borrowings from the FHLBB. Based on the redemption provisions of the FHLBB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. FHLBB stock may be redeemed at par value five years following termination of FHLBB membership, subject to limitations which may be imposed by the FHLBB or its regulator, the Federal Housing Finance Board, to maintain capital adequacy of the FHLBB. While the Company currently has no intentions to terminate its FHLBB membership, the ability to redeem its investment in FHLBB stock would be subject to the conditions imposed by the FHLBB. The Company reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. Based on the capital adequacy and the liquidity position of the FHLBB, management believes there is no impairment related to the carrying amount of the Company’s FHLBB stock as of December 31, 2017 and 2016.
Loans Held For Sale
The Company primarily classifies newly originated residential real estate mortgage loans as held for sale based on intent, which is determined when loans are rate locked. Residential real estate mortgage loans not designated as held for sale are retained based upon available liquidity, interest rate risk management and other business purposes. The Company has elected the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, Financial Instruments, for closed loans intended for sale. The Company elected the fair value option in order to reduce certain timing differences and better match changes in fair values of the loans with changes in the fair value of the derivative forward loan sale contracts used to economically hedge them. Fair values are estimated using quoted loan market prices. Changes in the fair value of loans held for sale are recorded in earnings and are offset by changes in fair value related to forward sale commitments. Gains or losses on sales of loans are included in non-interest income. Direct loan origination costs and fees are deferred upon origination and are recognized as part of the gain or loss on the date of sale. Residential loans are sold by the Company without recourse. The Company currently sells these loans servicing retained, with the exception of a limited volume of government production sold servicing released.
Loans
Loans we originate and intend to hold in our portfolio are stated at current unpaid principal balances, net of deferred loan origination costs and fees. Commitment fees for which the likelihood of exercise is remote are recognized over the loan commitment period on a straight-line basis. Acquired loans are recorded at fair value with no carryover of the related allowance for loan losses at the time of acquisition.
The Company’s loan portfolio includes owner-occupied commercial real estate, investor non-owner occupied commercial real estate, commercial and residential construction, commercial business, residential real estate, home equity and other consumer loan segments. Residential real estate loans include one-to-four family owner-occupied first mortgages.
A loan is classified as a troubled debt restructure (“TDR”) when certain concessions have been made to the original contractual terms, such as reductions of interest rates or deferral of interest or principal payments, due to the borrowers’ financial difficulties. All TDR loans are initially classified as impaired and generally remain impaired as TDRs for the remaining life of the loan. Impaired and TDR classification may be removed if the borrower demonstrates compliance with the modified terms and the restructuring agreement specifies an interest rate equal to that which would be provided to a borrower with similar credit at the time of restructuring.
Interest and Fees on Loans
Interest on loans is accrued and included in interest income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued, and previously accrued income is reversed, when loan payments are 90 days or more past due or when, in the judgment of management, collectability of the loan or loan interest becomes uncertain. Past due status is based on the contractual payment terms of the loan.
Subsequent recognition of income occurs only to the extent payment is received subject to management’s assessment of the collectability of the remaining interest and principal. A non-accrual loan is restored to accrual status when the loan is brought current, collectability of interest and principal is no longer in doubt and six months of continuous payments have been received.

 
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Loan origination fees and direct loan origination costs (including loan commitment fees) are deferred, and the net amount is recognized as an adjustment of the related loan’s yield utilizing the interest method over the contractual life of the loan or the straight-line method over the expected life of the loan, where applicable.
Fair value acquisition adjustments are determined as of the date of acquisition based upon facts and circumstances, including the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.  Subsequent to acquisition, the fair value acquisition adjustments are generally amortized over the remaining life of the loan under the interest method, or a constant effective yield method.  For ASC 310-30 loans, Loans and Debt Securities Acquired with Deteriorated Credit Quality (“ASC 310-30”), the interest method is applicable to a loan or a pool of loans as determined by characteristics including but not limited to borrower type, loan purpose, geographic location and collateral type. 
In recording the acquisition date fair values of acquired impaired loans, management calculates a non-accretable difference (the credit component of the purchased loans) and an accretable difference (the yield component of the purchased loans). For changes in cash flows expected to be collected, we adjust the amount of accretable yield recognized on a prospective basis over the remaining lives of the loans.
Allowance for Loan Losses
The allowance for loan losses is a reserve established through a provision for loan losses charged to expense and represents management’s best estimate of probable losses incurred within the existing loan portfolio as of the balance sheet date. The level of the allowance reflects management’s view of trends in loan loss activity, current loan portfolio quality and present economic, political and regulatory conditions. Portions of the allowance may be allocated for specific loans; however, the allowance is available for any loan that is charged off.
The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans (or portions thereof) deemed to be uncollectible. Loan charge-offs are recognized when management believes the collectability of the principal balance outstanding is unlikely. Full or partial charge-offs on collateral dependent impaired loans are generally recognized when the collateral is deemed to be insufficient to support the carrying value of the loan.
A methodology is used to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for the purposes of establishing a sufficient allowance for loans losses, as further described below.
General component:
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the loan segments. Management uses a rolling average of historical losses based on a 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, changes in risk selection and underwriting standards; experience and depth of lending weighted average risk rating; and national and local economic trends and conditions. The 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 deterioration following initial acquisition. Our acquired loan portfolio is comprised of purchased loans that show no evidence of credit deterioration subsequent to acquisition and therefore these loans are not part of the covered portfolio. Acquired impaired loans are loans with evidence of deterioration upon acquisition and are not considered in the covered portfolio in establishing the allowance for loan loss. 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 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 owner-occupied residential real estate and repayment is dependent on the income and credit quality of the individual borrower. Within the qualitative allowance factors, national and local economic trends including unemployment rates and potential declines in property value, are key elements reviewed as a component of establishing the appropriate allocation. Overall economic conditions, unemployment rates and housing price trends will influence the underlying credit quality of these segments.
Owner-occupied and investor non-owner occupied commercial real estate (“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

 
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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.
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 non-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 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. The appraisal and the appraised value are reviewed for adequacy and then further discounted for estimated disposition costs and the period of time until resolution, in order to determine the impairment amount. The Company updates the appraised value at least annually and on a more frequent basis if current market factors indicate a potential change in valuation.
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.
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.
The allowance for loan losses has been determined in accordance with GAAP, under which the Company is required to maintain an allowance for probable losses at the balance sheet date. The Company is responsible for the timely and periodic determination of the amount of the allowance required. Management believes that the allowance for loan losses is adequate to cover specifically identifiable losses, as well as, estimated losses inherent in our portfolio that are probable, but not specifically identifiable.

 
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While management regularly evaluates the adequacy of the allowance for loan losses, future additions to the allowance may be necessary based on changes in assumptions and economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Servicing
The Company services mortgage loans for others. Mortgage servicing assets are recognized at fair value as separate assets when rights are acquired through purchase or through sale of financial assets. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions.
The Company’s servicing asset valuation is performed by an independent third party using a static valuation model representing a projection of a single interest rate/market environment into the future and discounting the resulting assumed cash flow back to present value. Discount rates, servicing costs, float earnings rates and delinquency information as well as the use of the medium PSA quotations provided by Security Industry and Financial Market Association are used to calculate the value of the servicing asset.
Capitalized servicing rights are reported in other assets at fair value, with changes in fair value recorded in income from mortgage banking activities.
Other Real Estate Owned
Real estate acquired through, or in lieu of, loan foreclosure is held for sale and is initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. At December 31, 2017 and 2016, the Company had $2.2 million and $1.9 million, respectively, of other real estate owned included in other assets on the Consolidated Statements of Condition. Revenue and expenses from operations, changes in the valuation allowance and any direct write-downs are included in non-interest expense. Gains and losses on the sale of other real estate owned are recorded in other income in the Consolidated Statements of Net Income.
Bank-Owned Life Insurance
Bank-owned life insurance (“BOLI”) represents life insurance on certain current and former employees who have consented to allow the Bank to be the beneficiary of those policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash surrender value of the policies, as well as insurance proceeds received in excess of carrying value, are recorded in non-interest income and are not subject to income tax. Management reviews the credit quality and financial strength of the insurance carriers on a quarterly and annual basis. BOLI with any individual carrier is limited to 15% of capital plus reserves.
Transfers of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets and no condition both constrains the transferee from taking advantage of that right and provides more than a trivial benefit for the transferor, and (3) the Company does not maintain effective control over the transferred assets through either: (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call.
Premises and Equipment
Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is charged to operations using the straight-line method over the estimated useful lives of the related assets which range from 3 to 39 1/2 years. Leasehold improvements are amortized over the shorter of the improvements’ estimated economic lives or the related lease terms. Expected lease terms include lease option periods to the extent that the exercise of such options are reasonably assured. Maintenance and repairs are expensed as incurred and improvements are capitalized.
Marketing and Promotions
Marketing and promotions costs are expensed as incurred.
Impairment of Long-Lived Assets Other Than Goodwill
Long-lived assets are reviewed for impairment whenever events or changes in business circumstances indicate that the remaining useful life may warrant revision or that the carrying amount of the long-lived asset may not be fully recoverable. If

 
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impairment is determined to exist, any related impairment loss is calculated based on fair value through a charge to non-interest expense. Impairment losses on assets to be disposed of, if any, are based on the estimated proceeds to be received, less costs of disposal. No write-downs of long-lived assets were recorded for any period presented herein.
Goodwill
Goodwill is recognized for the excess of the acquisition cost over the fair values of the net assets acquired. Goodwill is not amortized and is instead reviewed for impairment at least annually in the fourth quarter, or on an interim basis if an event occurs or circumstances change that would more likely than not reduce the fair value below its carrying value. Any impairment write-down is charged to non-interest expense in the Consolidated Statements of Net Income. There was no goodwill impairment in 2017, 2016 and 2015. In 2017, the Company adopted FASB ASU No. 2017-04 Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which removed Step 2 of the Goodwill Impairment Test, simplifying financial reporting. The adoption of the ASU did not have an impact on the Company’s Consolidated Financial Statements.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period of enactment. Accordingly, changes resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 have been recognized in the consolidated financial statements as of and for the year ended December 31, 2017. See Note 12, “Income Taxes”, for further information. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that all or some portion of the deferred tax assets will not be realized. A tax position that meets the more likely than not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more likely than not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. As of December 31, 2017, 2016 and 2015, the Company had recorded $688,000, $497,000 and $375,000 of uncertain tax positions, respectively.
Investments in Limited Partnerships
The Company evaluates investments including joint ventures, low income housing tax credit partnerships and other limited partnerships to determine whether consolidation is necessary. The Company applies the equity method of accounting to its investments in limited partnerships. The Company has interests in limited partnerships that own and operate affordable housing and rehabilitation projects as well as alternative energy projects. Investments in these projects serve as an element of the Company’s compliance with the Community Reinvestment Act and in serving the interest of public welfare, and the Company receives tax benefits in the form of deductions for operating losses and tax credits. The tax credits generally may be used to reduce taxes currently payable or may be carried back one year or forward 20 years to recapture or reduce taxes. The Company regularly evaluates the partnership investments for impairment. The tax credits are recorded in the years they become available to reduce income taxes through the provision for income taxes, while basis adjustments under the equity method or impairment are recorded in loss on investments in limited partnerships on the Consolidated Statements of Net Income.
Pension and Other Post-Retirement Benefits
The Company has a noncontributory defined benefit pension plan that provides benefits for full-time employees hired before January 1, 2005, meeting certain requirements as to age and length of service. The benefits are based on years of service and average compensation, as defined. The Company’s funding policy is to contribute an amount needed to meet the minimum funding standards established by the Employee Retirement Income Security Act of 1974 (“ERISA”). The compensation cost of an employees’ pension benefit is recognized on the projected unit cost method over the employee’s approximate service period.
As of December 31, 2012, the Company froze its noncontributory defined benefit pension plan, at which time participants in the plan stopped earning additional benefits under the plan. The Company began providing additional benefits to these employees under the Company’s 401(k) Plan as of January 1, 2013. See Note 16, “Pension Plans and Other Post-Retirement Benefits”, for further information on these benefits.
In addition to the qualified plans, the Company has supplemental retirement plans for certain key officers. These plans, which are nonqualified, were designed to offset the impact of changes in the pension plan that limit benefits for highly compensated employees under qualified pension plans.

 
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The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes.
The Company accounts for its defined benefit pension and supplemental retirement plans using an actuarial model that allocates pension costs over the service period of employees in the plan. The Company accounts for the over-funded or under-funded status of these plans as an asset or liability in its consolidated statements of condition and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income or loss.
The Company also provides certain health care and life insurance benefits for retired employees hired prior to March 1, 1993. Participants become eligible for the benefits if they retire after reaching age 62 with five or more years of service. Benefits are paid in fixed amounts depending on length of service at retirement. The Company accrues for the estimated costs of these benefits through charges to expense during the years that employees render service; however, the Company does not fund this plan.
Fair Values of Financial Instruments
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820, Fair Value Measurements and Disclosures, establishes a framework for measuring fair value and expands disclosures about fair value measurements. The required disclosures about fair value measurements have been included in Note 14, “Fair Value Measurement” in the Notes to Consolidated Financial Statements.
Earnings per Common Share
Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares outstanding for the period. If rights to dividends on unvested awards are non-forfeitable, these unvested awards are considered outstanding in the computation of basic earnings per share. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards and are determined using the treasury stock method.
Unearned Employee Stock Ownership Plan (“ESOP”) shares are not considered outstanding for calculating basic and diluted earnings per common share. ESOP shares committed to be released are considered to be outstanding for purposes of the earnings per share computation. ESOP shares that have not been legally released, but that relate to employee services rendered during an accounting period (interim or annual) ending before the related debt service payment is made, are considered committed to be released.
Employee Stock Ownership Plan
ESOP shares are shown as a reduction of stockholders’ equity and presented as unearned compensation - ESOP. During the period the ESOP shares are committed to be released, the Company recognizes compensation cost equal to the average fair value of the ESOP shares. When the shares are released, unearned compensation - ESOP is reduced by the cost of the ESOP shares released and the differential between the fair value and the cost is recorded in additional paid-in capital. The loan receivable from the ESOP to the Company is not reported as an asset nor is the Company’s guarantee to fund the ESOP reported as a liability on the Company’s Consolidated Statements of Condition. Effective January 1, 2014, the Company merged its ESOP with its Defined Contribution Plan, or 401(k) Plan.
Share-Based Compensation
The Company measures the cost of employee services received in exchange for an award of equity instruments based on the grant date fair value of the award. These costs are recognized on a straight-line basis over the vesting period during which an employee is required to provide services in exchange for the award; the requisite service period. The Company uses the Black-Scholes option pricing model to estimate the fair value of stock options granted. When determining the estimated fair value of stock options granted, the Company utilizes various assumptions regarding the expected volatility of the stock price, estimated forfeitures using historical data on employee terminations, the risk-free interest rate for periods within the contractual life of the stock option, and the expected dividend yield that the Company expects over the expected life of the options granted. Reductions in compensation expense associated with forfeited options are estimated at the date of grant, and this estimated forfeiture rate is adjusted monthly based on actual forfeiture experience. The Company measures the fair value of the restricted stock using the closing market price of the Company’s common stock on the date of grant. The Company expenses the grant date fair value of the Company’s stock options and restricted stock with a corresponding increase in equity.

 
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Off-balance Sheet Financial Instruments
In the ordinary course of business, the Company enters into off-balance sheet financial instruments, consisting primarily of credit related financial instruments. These financial instruments are recorded in the Consolidated Financial Statements when they are funded or related fees are incurred or received.
Segment Information
As a community oriented financial institution, substantially all of the Company’s operations involve the delivery of loan and deposit products to customers. Management makes operating decisions and assesses performance based on an ongoing review of these community-banking operations, which constitutes the Company’s only operating segment for financial reporting purposes.
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:
Accumulated Other Comprehensive Income
In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-02 Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU addresses the impact of the federal tax rate reduction on deferred taxes that were originally recorded through accumulated other comprehensive income (“AOCI”).  The impact creates a “dangling” difference in AOCI verses deferred taxes for the rate differential caused by the enactment of the Tax Cuts and Jobs Act on December 22, 2017. This ASU permits entities to reclass this “dangling” piece in AOCI to retained earnings rather than continuing to track in AOCI. The effective date for this ASU is for fiscal years beginning on or after December 15, 2018 with early adoption permitted for fiscal years whose financial statements have not yet been issued. The Company has decided not to early adopt this ASU and to apply it in accordance with the effective date provisions. The adoption of this ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Derivatives and Hedging
Effective January 1, 2018, the Company will adopt FASB 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 also creates more transparency around how economic results are presented for investors and analysts. The amendments for this ASU can be adopted immediately in any interim or annual period (including the current period). Upon adoption, the Company will transfer its held-to-maturity portfolio to its available-for-sale portfolio. Any unrealized gain or loss on the date of adoption will be recorded in accumulated other comprehensive income. 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
Effective January 1, 2018, the Company will adopt FASB 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 not expected to have an impact on the Company’s Consolidated Financial Statements.
Effective January 1, 2018, the Company will adopt FASB 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. This ASU is not expected to have a material 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 earliest call date rather than the date of maturity to more closely align interest income

 
95
 

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 December 31, 2017, this ASU is expected to have an impact of reducing premiums on callable debt securities by approximately $9.9 million (pre-tax), with the offset being a reduction in retained earnings upon initial adoption.
Income Taxes
Effective January 1, 2018, the Company will adopt FASB 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 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 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
Effective January 1, 2018, the Company will adopt FASB 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 life 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. 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.
Effective January 1, 2018, the Company will adopt FASB ASU No. 2016-01 Financial Instruments - Overall (Subtopic 825-210): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires entities to carry all investments in equity securities, including other ownership interests such as partnerships, unincorporated joint ventures, and limited liability companies, at fair value through net income. This new requirement does not apply to investments that qualify for the equity method of accounting or to those that result in consolidation of these investments. The ASU supersedes current guidance and no longer requires equity securities with readily determinable fair value to be classified into categories (i.e. trading or available

 
96
 

for sale). The ASU clarifies that when identifying observable price changes, an entity should consider relevant transactions “that are known or can reasonably be known“ and that an entity is not required to spend undue cost and effort to identify such transactions. The ASU also indicates that an entity should consider a security’s rights and obligations, such as voting rights, distribution rights and preferences, and conversion features, when evaluating whether the security issued by the same issuer is similar to the equity security held by the entity. The ASU further provides for the elimination of disclosure requirements related to financial instruments measured at amortized cost. For public business entities, the new standard will require disclosure of fair value using the exit price notion for all financial instruments measured at amortized cost. Pursuant to the ASU, recognition and measurement will take effect for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all entities, the ASU permits early adoption of the instrument-specific credit risk provision. This ASU is not expected to have a material impact on the Company’s Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842), which introduces a lessee model that requires most leases to be recognized on the balance sheet and aligns many of the underlying principles of the new lessor model with those in the new revenue recognition standard, ASC 606, Revenue From Contracts with Customers. The new leases standard represents a wholesale change to lease accounting and will most likely result in significant implementation challenges during the transition period and beyond. Classification will be based on criteria that are largely similar to those applied in current lease accounting, but without explicit bright lines. The new guidance will be effective for public business entities for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption will be permitted for all entities. It is required that entities recognize 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 December 31, 2017, the Company’s future minimum lease commitments totaled $68.7 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
Effective January 1, 2018, the Company will adopt FASB ASU No. 2014-09 Revenue From Contracts with Customers (Topic 606), which 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. 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.
Note 3.
MERGER
The Company acquired 100% of the outstanding common shares and completed its merger with Legacy United on April 30, 2014. Legacy United’s principal subsidiary was a federally chartered savings bank headquartered in West Springfield, Massachusetts, which operated 35 branch locations, two express drive-up branches, and two loan production offices, primarily in the Springfield and Worcester regions of Massachusetts and in Central Connecticut. The Company entered into the Merger agreement based on its assessment of the anticipated benefits, including enhanced market share and expansion of its banking franchise. The Merger was accounted for as a purchase and, as such, was included in the results of operations from the date of the Merger. The Merger was funded with shares of Rockville common stock and cash. As of the close of trading on April 30, 2014, all of the shareholders of Legacy United received 1.3472 shares of Rockville for each share of Legacy United common stock owned at that date. Total consideration paid at closing was valued at $356.4 million, based on the closing price of $13.16 of Rockville common stock, the value of Legacy United exercisable options and cash paid for fractional shares on April 30, 2014.
The following table summarizes the Merger on April 30, 2014:
(Dollars and shares in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Transaction Related Items
Legacy United
 
Goodwill
 
Other Identifiable Intangibles
 
Shares Issued
 
Value of Legacy United Exercisable Options
 
Total Purchase Price
Balance at April 30, 2014
 
 
 
 
 
Assets
 
Equity
 
 
 
 
 
$
2,442,525

 
$
304,505

 
$
114,211

 
$
10,585

 
26,706

 
$
4,909

 
$
356,394

The transaction was accounted for using the purchase method of accounting in accordance with ASC Topic 805, Business

 
97
 

Combinations. Accordingly, the purchase price was allocated based on the estimated fair market values of the assets and liabilities acquired. See the Company’s 2014 audited consolidated financial statements and notes thereto included in United Financial Bancorp, Inc.’s Annual Report on Form 10-K as of and for the year ended December 31, 2014 for additional information.
Note 4.
GOODWILL AND CORE DEPOSIT INTANGIBLES
The changes in the carrying amount of goodwill and core deposit intangible assets are summarized as follows:
 
Goodwill
 
Core Deposit Intangible
 
(In thousands)
Balance at December 31, 2015
$
115,281

 
$
7,506

Adjustments
—

 
—

Amortization expense
—

 
(1,604
)
Balance at December 31, 2016
$
115,281

 
$
5,902

Amortization expense
—

 
(1,411
)
Balance at December 31, 2017
$
115,281

 
$
4,491

 
 
 
 
Estimated amortization expense for the years ending December 31,
 
 
 
2018
 
 
$
1,219

2019
 
 
1,026

2020
 
 
834

2021
 
 
642

2022
 
 
449

2023 and thereafter
 
 
321

Total remaining
 
 
$
4,491

The amortizing intangible asset associated with the acquisition consists of the core deposit intangible. The core deposit intangible is being amortized using the sum of the years’ digits method over its estimated life of 10 years. Amortization expense of the core deposit intangible was $1.4 million, $1.6 million, and $1.8 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Note 5.
RESTRICTIONS ON CASH AND DUE FROM BANKS
The Company is required to maintain a percentage of transaction account balances on deposit with the Federal Reserve Bank that was offset by the Company’s average vault cash. As of December 31, 2017 and 2016, the Company was required to have cash and liquid assets of $36.3 million and $25.8 million, respectively, to meet these requirements.

 
98
 

Note 6.
SECURITIES
The amortized cost, gross unrealized gains, gross unrealized losses and fair values of investment securities at December 31, 2017 and 2016 are as follows:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
December 31, 2017
 
(In thousands)
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:
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
 
$
1,318

 
$
111

 
$
—

 
$
1,429

Obligations of states and political subdivisions
 
12,280

 
679

 
(88
)
 
12,871

Total held to maturity securities
 
$
13,598

 
$
790

 
$
(88
)
 
$
14,300

 
 
 
 
 
 
 
 
 
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:
 
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
 
$
1,717

 
$
172

 
$
—

 
$
1,889

Obligations of states and political subdivisions
 
12,321

 
654

 
(35
)
 
12,940

Total held to maturity securities
 
$
14,038

 
$
826

 
$
(35
)
 
$
14,829

At December 31, 2017, the net unrealized loss on securities available for sale of $8.9 million, net of income taxes of $3.2 million, or $5.7 million, was included in accumulated other comprehensive loss. At December 31, 2016, the net unrealized loss

 
99
 

on securities available for sale of $12.8 million, net of income taxes of $4.6 million, or $8.2 million, was included in accumulated other comprehensive loss.
The amortized cost and fair value of debt securities at December 31, 2017 by contractual maturities are presented below. Actual maturities may differ from contractual maturities because the securities may be called or repaid without any penalties. Because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary:
 
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
9,753

 
9,996

 
1,168

 
1,171

After 5 years through 10 years
87,282

 
87,334

 
1,096

 
1,032

After 10 years
241,067

 
236,813

 
10,016

 
10,668

 
338,102

 
334,143

 
12,280

 
12,871

Government-sponsored residential mortgage-backed securities
235,646

 
235,479

 
1,318

 
1,429

Government-sponsored residential collateralized debt obligations
134,652

 
133,112

 
—

 
—

Government-sponsored commercial mortgage-backed securities
33,449

 
33,255

 
—

 
—

Government-sponsored commercial collateralized debt obligations
151,035

 
147,242

 
—

 
—

Asset-backed securities
166,559

 
167,139

 
—

 
—

Total debt securities
$
1,059,443

 
$
1,050,370

 
$
13,598

 
$
14,300

At December 31, 2017, the Company had 99 securities, with a fair value of $469.4 million, pledged as derivative collateral and collateral for reverse repurchase borrowings. See Notes 11 and 13.
For the years ended December 31, 2017, 2016 and 2015, proceeds from the sale of available for sale securities and gross realized gains and losses on the sale of available for sale securities are presented below:
 
For the Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Proceeds from the sale of available for sale securities
$
315,339

 
$
268,162

 
$
280,564

Gross realized gains on the sale of available for sale securities
3,774

 
2,880

 
3,090

Gross realized losses on the sale of available for sale securities
2,992

 
919

 
2,151

As of December 31, 2017, the Company did not have any exposure to private-label mortgage-backed securities. The Company did not own any single security with an aggregate book value in excess of 10% of the Company’s stockholders’ equity at December 31, 2017 and 2016.
The Company’s Management Investment Committee reviews state exposure in the obligations of states and political subdivisions portfolio on an ongoing basis. As of December 31, 2017, the estimated fair value of this portfolio was $257.9 million, with no significant geographic exposure concentrations. Of the total state and political subdivisions of $257.9 million, $110.0 million were representative of general obligation bonds for which $61.0 million are general obligations of political subdivisions of the respective state, rather than general obligations of the state itself.

 
100
 

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 December 31, 2017 and 2016:
 
Less than 12 months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(In thousands)
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
)
 
 
 
 
 
 
 
 
 
 
 
 
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
$
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
)
Of the securities summarized above as of December 31, 2017, 75 issues had unrealized losses of less than 1% of the amortized cost basis for less than twelve months and 100 issues had unrealized losses equaling 2.8% of the amortized cost basis for twelve months or more. As of December 31, 2016, 170 issues had unrealized losses for less than twelve months and 31 issues had losses for twelve months or more.

 
101
 

Management believes that no individual unrealized loss as of December 31, 2017 represents an other-than-temporary impairment, based on its detailed quarterly review of the securities portfolio. Among other things, the other-than-temporary impairment review of the investment securities portfolio focuses on the combined factors of percentage and length of time by which an issue is below book value as well as consideration of issuer specific information (present value of cash flows expected to be collected, issuer rating changes and trends, credit worthiness and review of underlying collateral), broad market details and the Company’s intent to sell the security or if it is more likely than not that the Company will be required to sell the debt security before recovering its cost. The Company also considers whether the depreciation is due to interest rates, changes in market credit spread levels or credit risk.
The following paragraphs outline the Company’s position related to unrealized losses in its investment securities portfolio at December 31, 2017:
Government-sponsored obligations. The unrealized losses on the Company’s government-sponsored collateralized debt obligations and commercial mortgage backed securities were caused by the increase in interest rates and interest rate expectations. 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.
Obligations of states and political subdivisions. The unrealized loss on obligations of states and political subdivisions relates to securities with no geographic concentration. The unrealized loss was due to an upward shift in interest rates that resulted in a negative impact to the respective bond’s pricing, relative to the time of purchase.
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.
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.
The Company will continue to review its entire portfolio for other-than-temporarily impaired securities.

 
102
 

Note 7.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
A summary of the Company’s loan portfolio at December 31, 2017 and 2016 is as follows:
 
December 31,
 
2017
 
2016
 
Amount
 
Percent
 
Amount
 
Percent
 
(In thousands)
Commercial real estate loans
 
 
 
 
 
 
 
Owner occupied commercial real estate
$
445,820

 
8.3
%
 
$
416,718

 
8.5
%
Investor non-owner occupied commercial real estate
1,854,459

 
34.7

 
1,705,319

 
34.8

Commercial construction
78,083

 
1.5

 
98,794

 
2.0

Total commercial real estate loans
2,378,362

 
44.5

 
2,220,831

 
45.3

 
 
 
 
 
 
 
 
Commercial business loans
840,312

 
15.7

 
724,557

 
14.8

 
 
 
 
 
 
 
 
Consumer loans
 
 
 
 
 
 
 
Residential real estate
1,204,401

 
22.6

 
1,156,227

 
23.6

Home equity
583,180

 
10.9

 
536,772

 
11.0

Residential construction
40,947

 
0.8

 
53,934

 
1.1

Other consumer
292,781

 
5.5

 
209,393

 
4.3

Total consumer loans
2,121,309

 
39.8

 
1,956,326

 
39.9

 
 
 
 
 
 
 
 
Total loans
5,339,983

 
100.0
%
 
4,901,714

 
100.0
%
Net deferred loan costs and premiums
14,794

 
 
 
11,636

 
 
Allowance for loan losses
(47,099
)
 
 
 
(42,798
)
 
 
Loans - net
$
5,307,678

 
 
 
$
4,870,552

 
 
At December 31, 2017, the Company had pledged $1.43 billion and $195.0 million of eligible loan collateral to support available borrowing capacity at the FHLBB and FRB, respectively. See Note 11.
Acquired Loans: Gross loans acquired from the Legacy United merger totaled $1.88 billion. Acquired performing loans totaled $1.86 billion with a fair value of $1.83 billion. The Company’s best estimate at the acquisition date of contractual cash flows not expected to be collected on acquired performing loans was $29.1 million. Loans acquired and determined to be impaired totaled $18.5 million.
In 2015, the Company purchased loan portfolios consisting of marine finance consumer loans, home improvement loans and home equity lines of credit. The Company continued to purchase home equity lines of credit in 2016 and 2017. Furthermore, in 2017, the Company purchased two additional loan portfolios consisting of consumer home improvement loans and manufactured home loans. The outstanding principal balance of purchased loans serviced by others at December 31, 2017 and 2016 was $470.4 million and $377.5 million, respectively.
The impaired loans are accounted for in accordance with ASC 310-30. At December 31, 2017, the net recorded carrying amount of loans accounted for under ASC 310-30 was $1.7 million and the aggregate outstanding principal balance was $1.9 million.

 
103
 

Allowance for Loan Losses. Changes in the allowance for loan losses for the years ended December 31, 2017, 2016 and 2015 are as follows:
 
Owner-occupied CRE
 
Investor CRE
 
Construction
 
Commercial
Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
Unallocated
 
Total
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
3,765

 
$
14,869

 
$
1,913

 
$
8,730

 
$
7,854

 
$
2,858

 
$
1,353

 
$
1,456

 
$
42,798

Provision for loan losses
60

 
1,623

 
195

 
2,988

 
428

 
1,085

 
2,728

 
289

 
9,396

Loans charged off
(103
)
 
(735
)
 
(507
)
 
(1,984
)
 
(736
)
 
(779
)
 
(1,840
)
 
—

 
(6,684
)
Recoveries of loans previously charged off
32

 
159

 
—

 
874

 
148

 
94

 
282

 
—

 
1,589

Balance, end of year
$
3,754

 
$
15,916

 
$
1,601

 
$
10,608

 
$
7,694

 
$
3,258

 
$
2,523

 
$
1,745

 
$
47,099

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
2,174

 
$
12,859

 
$
1,895

 
$
5,827

 
$
7,801

 
$
2,391

 
$
146

 
$
794

 
$
33,887

Provision for loan losses
1,704

 
2,806

 
15

 
3,364

 
1,022

 
1,096

 
2,768

 
662

 
13,437

Loans charged off
(169
)
 
(1,207
)
 
—

 
(1,018
)
 
(1,043
)
 
(742
)
 
(1,710
)
 
—

 
(5,889
)
Recoveries of loans previously charged off
56

 
411

 
3

 
557

 
74

 
113

 
149

 
—

 
1,363

Balance, end of year
$
3,765

 
$
14,869

 
$
1,913

 
$
8,730

 
$
7,854

 
$
2,858

 
$
1,353

 
$
1,456

 
$
42,798

December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, beginning of year
$
1,281

 
$
8,137

 
$
1,470

 
$
5,808

 
$
5,998

 
$
1,929

 
$
75

 
$
111

 
$
24,809

Provision for loan losses
1,074

 
5,217

 
891

 
1,693

 
2,268

 
887

 
292

 
683

 
13,005

Loans charged off
(181
)
 
(837
)
 
(466
)
 
(2,513
)
 
(744
)
 
(427
)
 
(324
)
 
—

 
(5,492
)
Recoveries of loans previously charged off
—

 
342

 
—

 
839

 
279

 
2

 
103

 
—

 
1,565

Balance, end of year
$
2,174

 
$
12,859

 
$
1,895

 
$
5,827

 
$
7,801

 
$
2,391

 
$
146

 
$
794

 
$
33,887


 
104
 

Further information pertaining to the allowance for loan losses and impaired loans at December 31, 2017 and 2016 follows:
 
Owner-occupied CRE
 
Investor CRE
 
Construction
 
Commercial
Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
Unallocated
 
Total
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to loans individually evaluated and deemed impaired
$
60

 
$
—

 
$
—

 
$
400

 
$
60

 
$
—

 
$
—

 
$
—

 
$
520

Allowance related to loans collectively evaluated and not deemed impaired
3,694

 
15,916

 
1,601

 
10,208

 
7,634

 
3,258

 
2,523

 
1,745

 
46,579

Total allowance for loan losses
$
3,754

 
$
15,916

 
$
1,601

 
$
10,608

 
$
7,694

 
$
3,258

 
$
2,523

 
$
1,745

 
$
47,099

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans deemed impaired
$
2,300

 
$
8,414

 
$
2,273

 
$
5,681

 
$
18,301

 
$
8,547

 
$
395

 
$
—

 
$
45,911

Loans not deemed impaired
443,520

 
1,845,815

 
116,757

 
834,631

 
1,186,100

 
574,633

 
290,898

 
—

 
5,292,354

Loans acquired with deteriorated credit quality
—

 
230

 
—

 
—

 
—

 
—

 
1,488

 
—

 
1,718

Total loans
$
445,820

 
$
1,854,459

 
$
119,030

 
$
840,312

 
$
1,204,401

 
$
583,180

 
$
292,781

 
$
—

 
$
5,339,983

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance related to loans individually evaluated and deemed impaired
$
—

 
$
—

 
$
—

 
$
646

 
$
68

 
$
—

 
$
—

 
$
—

 
$
714

Allowance related to loans collectively evaluated and not deemed impaired
3,765

 
14,869

 
1,913

 
7,862

 
7,786

 
2,858

 
1,353

 
1,456

 
41,862

Allowance related to loans acquired with deteriorated credit quality
—

 
—

 
—

 
222

 
—

 
—

 
—

 
—

 
222

Total allowance for loan losses
$
3,765

 
$
14,869

 
$
1,913

 
$
8,730

 
$
7,854

 
$
2,858

 
$
1,353

 
$
1,456

 
$
42,798

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans deemed impaired
$
3,331

 
$
9,949

 
$
3,325

 
$
7,812

 
$
16,563

 
$
6,910

 
$
2,220

 
$
—

 
$
50,110

Loans not deemed impaired
413,387

 
1,694,190

 
149,403

 
715,436

 
1,139,664

 
529,862

 
205,136

 
—

 
4,847,078

Loans acquired with deteriorated credit quality
—

 
1,180

 
—

 
1,309

 
—

 
—

 
2,037

 
—

 
4,526

Total loans
$
416,718

 
$
1,705,319

 
$
152,728

 
$
724,557

 
$
1,156,227

 
$
536,772

 
$
209,393

 
$
—

 
$
4,901,714


 
105
 

Past Due and Non-Accrual Loans. The following is a summary of past due and non-accrual loans at December 31, 2017 and 2016:
 
30-59
Days
Past Due
 
60-89
Days
Past Due
 
Past Due 90
Days or
More
 
Total
Past Due
 
Past Due 90
Days or More
and Still Accruing
 
Loans on
Non-accrual
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
$
1,195

 
$
455

 
$
1,297

 
$
2,947

 
$
—

 
$
1,735

Investor CRE
849

 
92

 
1,212

 
2,153

 
206

 
1,821

Construction
—

 
—

 
1,398

 
1,398

 
—

 
1,398

Commercial business loans
1,069

 
3,465

 
1,219

 
5,753

 
650

 
4,987

Residential real estate
3,187

 
2,297

 
5,633

 
11,117

 
—

 
14,860

Home equity
1,319

 
498

 
3,281

 
5,098

 
—

 
6,466

Other consumer
947

 
241

 
491

 
1,679

 
97

 
395

Total
$
8,566

 
$
7,048

 
$
14,531

 
$
30,145

 
$
953

 
$
31,662

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
$
482

 
$
15

 
$
1,667

 
$
2,164

 
$
—

 
$
2,733

Investor CRE
2,184

 
697

 
3,260

 
6,141

 
—

 
4,858

Construction
709

 
—

 
1,933

 
2,642

 
—

 
2,138

Commercial business loans
3,289

 
41

 
2,373

 
5,703

 
38

 
2,409

Residential real estate
2,826

 
22

 
7,863

 
10,711

 
308

 
14,393

Home equity
2,232

 
722

 
2,797

 
5,751

 
56

 
5,330

Other consumer
838

 
379

 
1,095

 
2,312

 
348

 
2,202

Total
$
12,560

 
$
1,876

 
$
20,988

 
$
35,424

 
$
750

 
$
34,063

At December 31, 2017 and 2016, loans reported as past due 90 days or more and still accruing totaled $953,000 and $750,000, respectively, and represent loans that were evaluated by management and maintained on accrual status based on an evaluation of the borrower and/or related guarantors.

 
106
 

Impaired Loans. The following is a summary of impaired loans with and without a valuation allowance as of December 31, 2017 and 2016:
 
December 31, 2017
 
December 31, 2016
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
(In thousands)
Impaired loans without a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
$
2,183

 
$
2,891

 
 
 
$
3,331

 
$
4,107

 
 
Investor CRE
8,414

 
8,577

 
 
 
9,949

 
10,601

 
 
Construction
2,273

 
2,658

 
 
 
3,325

 
5,051

 
 
Commercial business loans
2,446

 
3,317

 
 
 
3,742

 
4,856

 
 
Residential real estate
16,645

 
17,929

 
 
 
15,312

 
18,440

 
 
Home equity
8,547

 
9,583

 
 
 
6,910

 
7,864

 
 
Other consumer
395

 
398

 
 
 
2,220

 
2,220

 
 
Total
40,903

 
45,353

 
 
 
44,789

 
53,139

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Impaired loans with a valuation allowance:
 
 
 
 
 
 
 
 
 
 
 
Commercial business loans
$
3,235

 
$
3,767

 
$
400

 
$
4,070

 
$
4,168

 
$
646

Residential real estate
1,656

 
1,711

 
60

 
1,251

 
1,267

 
68

Owner-occupied CRE
117

 
117

 
60

 
—

 
—

 
—

Total
5,008

 
5,595

 
520

 
5,321

 
5,435

 
714

Total impaired loans
$
45,911

 
$
50,948

 
$
520

 
$
50,110

 
$
58,574

 
$
714

The following is a summary of average recorded investment in impaired loans and interest income recognized on those loans for the years ended December 31, 2017, 2016 and 2015:
 
For the Year Ended 
 December 31, 2017
 
For the Year Ended 
 December 31, 2016
 
For the Year Ended 
 December 31, 2015
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
(In thousands)
Impaired loans:
 
 
 
 
 
 
 
 
 
 
 
Owner-occupied CRE
$
2,840

 
$
97

 
$
3,924

 
$
150

 
$
2,258

 
$
144

Investor CRE
9,736

 
370

 
11,363

 
447

 
16,166

 
550

Construction
2,429

 
87

 
4,087

 
124

 
3,784

 
299

Commercial business loans
7,562

 
258

 
12,167

 
282

 
7,835

 
431

Residential real estate
17,519

 
789

 
16,485

 
715

 
14,645

 
579

Home equity
7,788

 
281

 
5,856

 
202

 
3,568

 
37

Other consumer
1,197

 
—

 
819

 
1

 
24

 
—

Total
$
49,071

 
$
1,882

 
$
54,701

 
$
1,921

 
$
48,280

 
$
2,040

No additional funds are committed to be advanced in connection with impaired loans other than those noted below in conjunction with TDRs.


 
107
 

Troubled Debt Restructurings. The restructuring of a loan is considered a TDR if both (i) the restructuring constitutes a concession by the creditor and (ii) the debtor is experiencing financial difficulties. A TDR may include (i) a transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt, (ii) issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting debt into an equity interest, and (iii) modifications of terms of a debt.
The following table provides detail of TDR balances for the periods presented:
 
At December 31,
2017
 
At December 31,
2016
 
(In thousands)
Recorded investment in TDRs:
 
 
 
Accrual status
$
14,249

 
$
16,048

Non-accrual status
8,475

 
7,304

Total recorded investment in TDRs
$
22,724

 
$
23,352

Accruing TDRs performing under modified terms more than one year
$
7,783

 
$
10,020

Specific reserves for TDRs included in the balance of allowance for loan losses
$
520

 
$
714

Additional funds committed to borrowers in TDR status
$
29

 
$
3

Loans restructured as TDRs during 2017 and 2016 are set forth in the following table:
 
For the Year Ended 
 December 31, 2017
 
For the Year Ended 
 December 31, 2016
(Dollars in thousands)
Number
of
Contracts
 
Pre-Modification
Outstanding  Recorded
Investment
 
Post-Modification
Outstanding  Recorded
Investment
 
Number
of
Contracts
 
Pre-Modification
Outstanding  Recorded
Investment
 
Post-Modification
Outstanding  Recorded
Investment
Owner-occupied CRE
—

 
$
—

 
$
—

 
5

 
$
654

 
$
666

Investor CRE
1

 
5,038

 
5,038

 
—

 
—

 
—

Construction
—

 
—

 
—

 
2

 
67

 
67

Commercial business loans
5

 
482

 
482

 
8

 
3,033

 
5,006

Residential real estate
9

 
1,598

 
1,627

 
13

 
1,320

 
1,329

Home equity
21

 
2,476

 
2,483

 
18

 
1,572

 
1,574

Other consumer
—

 
—

 
—

 
1

 
132

 
132

Total TDRs
36

 
$
9,594

 
$
9,630

 
47

 
$
6,778

 
$
8,774


 
108
 

The following table provides information on how loans were modified as TDRs during the periods indicated:
 
 
For the Year Ended December 31, 2017
 
 
Extended
Maturity
 
Adjusted
Interest
Rates
 
Adjusted Rate and Maturity
 
Payment Deferral
 
Other
 
 
(In thousands)
Investor CRE
 
$
—

 
$
—

 
$
—

 
$
—

 
$
5,038

Commercial business loans
 
211

 
—

 
—

 
—

 
271

Residential real estate
 
266

 
—

 
234

 
929

 
169

Home equity
 
938

 
—

 
824

 
714

 
—

Total
 
$
1,415

 
$
—

 
$
1,058

 
$
1,643

 
$
5,478

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Year Ended December 31, 2016
 
 
Extended
Maturity
 
Adjusted
Interest
Rates
 
Adjusted Rate and Maturity
 
Payment Deferral
 
Other
 
 
(In thousands)
Owner-occupied CRE
 
$
510

 
$
—

 
$
86

 
$
—

 
$
58

Construction
 
23

 
—

 
44

 
—

 
—

Commercial business loans
 
2,350

 
—

 
243

 
348

 
92

Residential real estate
 
87

 
—

 
672

 
561

 
—

Home equity
 
—

 
261

 
707

 
604

 
—

Other consumer
 
—

 
—

 
132

 
—

 
—

Total
 
$
2,970

 
$
261

 
$
1,884

 
$
1,513

 
$
150

Loans restructured as TDRs during 2015 totaled $15.7 million consisting of 50 loans. The majority of the balance was concentrated in commercial business loans, consisting of eight loans, for which the maturity was extended.
TDRs that subsequently defaulted within twelve months of restructuring during the years ended December 31, 2017 and 2016 follows:
 
For the Year Ended 
 December 31, 2017
 
For the Year Ended 
 December 31, 2016
 
Number
of
Contracts
 
Recorded
Investment
 
Number
of
Contracts
 
Recorded 
Investment
 
(Dollars in thousands)
Residential real estate
3

 
$
170

 
3

 
$
456

Home equity
—

 
—

 
1

 
151

Commercial business
—

 
—

 
2

 
495

Total troubled debt restructuring
3

 
$
170

 
6

 
$
1,102

The financial impact of the TDR loans has been minimal to date. Typically, residential loans are restructured with a modification and extension of the loan amortization and maturity at substantially the same interest rate as contained in the original credit extension. As part of the TDR process, the current value of the property is compared to the Company’s carrying value and if not fully supported, a charge-off is processed through the allowance for loan losses. Commercial real estate loans, commercial construction loans, and commercial business loans also contain payment modification agreements and a like assessment of the underlying collateral value if the borrower’s cash flow may be inadequate to service the entire obligation.
Credit Quality Information. The Company utilizes a nine-grade internal loan rating system as follows:
Loans rated 1 — 5:    Loans in these categories are considered “pass” rated loans with low to average risk.

 
109
 

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/or the collateral pledged. 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. On an ongoing basis for portfolio monitoring purposes, the Company estimates the current value of property secured as collateral for impaired home equity and residential first mortgage lending products. Residential real estate, home equity, 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, construction loans and commercial real estate loans require that our internal credit area further evaluate the risk rating of the individual loan, with the credit area and Chief Credit Officer having final determination of the appropriate risk rating. These more complex loans and relationships receive an in-depth analysis and periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The credit quality of the Company’s loan portfolio is reviewed by a third-party risk assessment firm on a quarterly basis and by the Company’s internal credit management function. The internal and external analysis of the loan portfolio is utilized to identify and quantify loans with higher than normal risk. 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 fully charged off.
The following table presents the Company’s loans by risk rating at December 31, 2017 and 2016:
 
Owner-Occupied CRE
 
Investor CRE
 
Construction
 
Commercial
Business
 
Residential Real Estate
 
Home Equity
 
Other Consumer
 
(In thousands)
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

December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans rated 1 — 5
$
388,389

 
$
1,656,256

 
$
150,411

 
$
698,458

 
$
1,139,662

 
$
531,359

 
$
207,193

Loans rated 6
7,139

 
18,040

 
204

 
7,466

 
1,267

 
—

 
—

Loans rated 7
21,190

 
31,023

 
2,113

 
18,633

 
15,298

 
5,413

 
2,200

Loans rated 8
—

 
—

 
—

 
—

 
—

 
—

 
—

Loans rated 9
—

 
—

 
—

 
—

 
—

 
—

 
—

 
$
416,718

 
$
1,705,319

 
$
152,728

 
$
724,557

 
$
1,156,227

 
$
536,772

 
$
209,393


 
110
 

Related Party Loans. In the normal course of business, the Company grants loans to executive officers, Directors and other related parties. Changes in loans outstanding to such related parties for the years ended December 31, 2017 and 2016 are as follows:
 
2017
 
2016
 
(In thousands)
Balance, beginning of year
$
2,285

 
$
2,645

Loans related to parties who terminated service during the year
(776
)
 
—

Additional loans and advances
600

 
390

Repayments
(213
)
 
(750
)
Balance, end of year
$
1,896

 
$
2,285

As of December 31, 2017 and 2016, all related party loans were performing.
Related party loans were made on the same terms as those for comparable loans and transactions with unrelated parties, other than certain mortgage loans which were made to employees with over one year of service with the Company which have rates 0.50% below market rates at the time of origination.
Loan Servicing
The Company services certain residential and commercial loans for third parties. The aggregate principal balance of loans serviced for others was $1.25 billion, $1.05 billion and $863.7 million as of December 31, 2017, 2016 and 2015, respectively. The balances of these loans are not included on the accompanying Consolidated Statements of Condition. During the years ended December 31, 2017, 2016 and 2015, the Company received servicing fee income in the amount of $2.3 million, $1.7 million and $1.3 million, respectively, which are included in income from mortgage banking activities in the Consolidated Statements of Net Income.
The risks inherent in mortgage servicing assets relate primarily to changes in prepayments that result from shifts in mortgage interest rates. At December 31, 2017, the fair value of servicing rights was determined using pretax internal rates of return ranging from 9.7% to 11.7% and the Public Securities Association (“PSA”) Standard Prepayment model to estimate prepayments on the portfolio with an average prepayment speed of 180. At December 31, 2016, the fair value of servicing rights was determined using pretax internal rates of return ranging from 9.5% to 11.5% and the PSA Standard Prepayment model to estimate prepayments on the portfolio with an average prepayment speed of 166.
Mortgage servicing rights (“MSRs”) are included in other assets in the Consolidated Statements of Condition. Changes in the fair value of MSRs are included in income from mortgage banking activities in the Consolidated Statements of Net Income. The following table summarizes MSRs capitalized along with related fair value adjustments for the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Mortgage servicing rights:
 
 
 
 
 
Balance at beginning of year
$
10,104

 
$
7,074

 
$
4,729

Change in fair value recognized in income
(1,791
)
 
567

 
(586
)
Issuances/additions
3,420

 
2,463

 
2,931

Balance at end of year
$
11,733

 
$
10,104

 
$
7,074


 
111
 

Note 8.
PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2017 and 2016 are summarized as follows:
 
At December 31,
 
Estimated
 Useful Life
 
2017
 
2016
 
 
(In thousands)
 
 
Land and improvements
$
964

 
$
964

 
up to 15 years
Buildings
38,294

 
39,809

 
10 - 39.5 years
Furniture and equipment
36,867

 
29,310

 
3 - 10 years
Leasehold improvements
25,175

 
9,838

 
5 - 10 years
Assets under capitalized leases
3,869

 
4,151

 
5 - 10 years
 
105,169

 
84,072

 
 
Accumulated depreciation and amortization
(37,661
)
 
(32,315
)
 
 
Premises and equipment, net
$
67,508

 
$
51,757

 
 
Depreciation and amortization expense was $5.9 million, $5.5 million and $5.3 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Note 9.
OTHER ASSETS
The components of other assets at December 31, 2017 and 2016 are summarized below:
 
At December 31,
 
2017
 
2016
 
(In thousands)
 Current income tax receivable
$
5,705

 
$
237

 Partnership investments
38,160

 
31,271

 Mortgage servicing rights
11,733

 
10,104

 Derivative assets
11,741

 
11,734

 Other real estate owned
2,154

 
1,890

Receivable on surrendered BOLI policies
26,713

 
—

 Prepaid expenses
4,521

 
5,112

 Other
4,866

 
4,738

   Total other assets
$
105,593

 
$
65,086

Note 10.
DEPOSITS
Deposits at December 31, 2017 and 2016 were as follows:
 
December 31,
 
2017
 
2016
 
(In thousands)
Demand and NOW
$
1,573,404

 
$
1,206,722

Regular savings
504,115

 
518,820

Money markets
1,325,754

 
1,222,952

Time deposits
1,794,948

 
1,762,678

   Total deposits
$
5,198,221

 
$
4,711,172

Time deposits in denominations of $250,000 or more were $529.1 million and $474.0 million as of December 31, 2017 and 2016, respectively.

 
112
 

Contractual maturities of time deposits as of December 31, 2017 are summarized below:
 
December 31, 2017
 
(In thousands)
2018
$
1,225,234

2019
435,867

2020
95,472

2021
22,938

2022
15,437

 
$
1,794,948

Included in time deposits are brokered deposits which amounted to $259.1 million and $215.7 million at December 31, 2017 and 2016, respectively. Included in money market deposits at December 31, 2017 and 2016 are brokered deposits of $389.1 million and $367.4 million, respectively.
Note 11.
BORROWINGS
Federal Home Loan Bank Advances
Contractual maturities and weighted-average rates of outstanding advances from the FHLBB as of December 31, 2017 and 2016 are summarized below:
 
December 31, 2017
 
December 31, 2016
 
Amount
 
Weighted-
Average
Rate
 
Amount
 
Weighted-
Average
Rate
 
(Dollars in thousands)
2017
$
—

 
—
%
 
$
803,000

 
0.94
%
2018
929,274

 
1.56

 
139,792

 
1.48

2019
75,000

 
1.76

 
20,000

 
1.45

2020
8,000

 
2.33

 
33,000

 
0.86

2021
—

 
—

 
30,000

 
0.59

2022
—

 
—

 
—

 
—

Thereafter
33,680

 
1.14

 
19,182

 
0.89

 
$
1,045,954

 
1.57
%
 
$
1,044,974

 
1.01
%
The total carrying value of advances from the FHLBB at December 31, 2017 and 2016 was $1.05 billion, which includes a remaining fair value adjustment of $504,000 and $1.7 million, respectively, on advances acquired in the Merger. At December 31, 2017, two advances totaling $35.0 million with interest rates ranging from 0.99% to 3.75%, which are scheduled to mature between 2018 and 2032, are callable by the FHLBB. Advances are collateralized by first mortgage loans and investment securities with an estimated eligible collateral value of $2.28 billion and $1.41 billion at December 31, 2017 and 2016, respectively.
In addition to the outstanding advances, the Company also has access to an unused line of credit with the FHLBB amounting to $10.0 million at December 31, 2017 and 2016. In accordance with an agreement with the FHLBB, the qualified collateral must be free and clear of liens, pledges and have a discounted value equal to the aggregate amount of the line of credit and outstanding advances. At December 31, 2017, the Company could borrow immediately an additional $457.8 million from the FHLBB, inclusive of the line of credit.
The Company is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, and up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the redemption provisions of the stock. At December 31, 2017, the Company had $50.2 million in FHLBB capital stock.

 
113
 

Repurchase Agreements

The following table presents the Company’s outstanding borrowings, and related collateral, under repurchase agreements as of December 31, 2017 and 2016:
 
 
Remaining Contractual Maturity of the Agreements
 
 
Overnight
 
Up to 1 Year
 
1 - 3 Years
 
Greater than 3 Years
 
Total
 
 
(Dollars in thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Repurchase Agreements
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 
$
14,591

 
$
10,000

 
$
10,000

 
$
—

 
$
34,591

 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
Repurchase Agreements
 
 
 
 
 
 
 
 
 
 
U.S. Treasury and agency securities
 
$
18,897

 
$
—

 
$
20,000

 
$
—

 
$
38,897

As of both December 31, 2017 and 2016, advances outstanding under wholesale reverse repurchase agreements totaled $20.0 million. The outstanding advances at December 31, 2017 and 2016 consisted of two individual borrowings with remaining terms of 3 years or less and a weighted average cost of 2.59%. The Company pledged investment securities with a market value of $23.0 million and $23.8 million as collateral for these borrowings at December 31, 2017 and 2016, respectively.
Retail repurchase agreements are for a term of one day and are backed by the purchasers’ interest in certain U.S. Treasury and Agency securities. As of December 31, 2017, retail repurchase agreements totaled $14.6 million. The Company had $18.9 million of retail repurchase agreements at December 31, 2016. The Company pledged investment securities with a market value of $28.8 million and $28.5 million as collateral for these borrowings at December 31, 2017 and 2016, respectively.
Given that the repurchase agreements are secured by investment securities valued at market value, the collateral position is susceptible to change based upon variation in the market value of the securities that can arise due to fluctuations in interest rates, among other things. In the event that the interest rate changes result in a decrease in the value of the pledged securities, additional securities will be required to be pledged in order to secure the borrowings. Due to the short term nature of the majority of the repurchase agreements, Management believes the risk of further encumbered securities pose a minimal impact to the Company’s liquidity position.
Subordinated Debentures
On September 23, 2014, the Company closed its public offering of $75.0 million of its 5.75% Subordinated Notes due October 1, 2024 (the “Notes”). The Notes were offered to the public at par. The Company has used the proceeds for general corporate purposes. Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2015. The carrying value, net of issuance costs, totaled $74.1 million and $74.0 million at December 31, 2017 and 2016, respectively.
The Company assumed junior subordinated debt as a result of the Merger in the form of trust preferred securities issued through a private placement offering with a face amount of $7.7 million. The Company recorded a fair value acquisition discount of $2.3 million on May 1, 2014. The remaining unamortized discount was $1.9 million and $2.0 million at December 31, 2017 and 2016, respectively. This issue has a maturity date of March 15, 2036 and bears a floating rate of interest that reprices quarterly at the 3-month LIBOR rate plus 1.85%. The interest rate at December 31, 2017 was 1.69%. A special redemption provision allows the Company to redeem this issue at par on March 15, June 15, September 15, or December 15 of any year subsequent to March 15, 2011.
Other Borrowings
The Company has capital lease obligations for three of its leased banking branches, which were acquired in the Merger. At December 31, 2017, the balance of capital lease obligations totaled $4.0 million. See Note 8 in the Notes to Consolidated Financial Statements for further information.
Other Sources of Wholesale Funding
The Company has relationships with brokered sweep deposit providers by which funds are deposited by the counterparties at the Company’s request. Amounts outstanding under these agreements are reported as interest-bearing deposits and totaled $389.1 million at a cost of 1.32% at December 31, 2017 and $367.4 million at a cost of 0.58% at December 31, 2016. The Company

 
114
 

maintains open dialogue with the brokered sweep providers and has the ability to increase the deposit balances upon request, up to certain limits based upon internal policy requirements.
Additionally, the Company has unused federal funds lines of credit with four counterparties totaling $107.5 million at December 31, 2017.
Note 12.
INCOME TAXES
The components of the income tax expense for the years ended December 31, 2017, 2016 and 2015 are as follows:
 
2017
 
2016
 
2015
 
(In thousands)
Current tax provision (benefit):
 
 
 
 
 
Federal
$
(1,289
)
 
$
6,262

 
$
1,302

State
994

 
2,202

 
1,345

Total current
(295
)
 
8,464

 
2,647

Deferred tax provision (benefit):
 
 
 
 
 
Federal
9,518

 
(3,698
)
 
3,275

State
1,421

 
(654
)
 
307

Effect of tax rate change due to tax reform
1,399

 
—

 
—

Total deferred
12,338

 
(4,352
)
 
3,582

Total income tax expense
$
12,043

 
$
4,112

 
$
6,229

For the years ended December 31, 2017, 2016 and 2015, the provision for income taxes differs from the amount computed by applying the statutory Federal income tax rate of 35% to pre-tax income for the following reasons:
 
Years Ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Provision for income tax at statutory rate
$
23,332

 
$
18,820

 
$
19,554

Increase (decrease) resulting from:
 
 
 
 
 
State income taxes, net of federal benefit
1,298

 
1,006

 
1,074

Increase in cash surrender value of bank-owned life insurance
(1,912
)
 
(1,188
)
 
(1,266
)
Dividend received deduction
(179
)
 
(544
)
 
(471
)
Tax exempt interest net of disallowed interest expense
(4,778
)
 
(3,726
)
 
(3,826
)
Employee Stock Ownership Plan
60

 
28

 
25

Excess parachute payments
—

 
—

 
442

Investment tax credits
(9,581
)
 
(10,541
)
 
(8,649
)
Effect of tax rate change due to tax reform
1,399

 
—

 
—

Gain on surrender of BOLI
2,377

 
—

 
—

Other, net
27

 
257

 
(654
)
Total provision for income taxes
$
12,043

 
$
4,112

 
$
6,229

 
 
 
 
 
 
Effective income tax rate
18.1
%
 
7.6
%
 
11.1
%


 
115
 

The tax effects of temporary differences that give rise to deferred tax assets and deferred tax liabilities at December 31, 2017 and 2016 are presented below:
 
 
December 31,
 
2017
 
2016
 
(In thousands)
Deferred tax assets:
 
 
 
Loans
$
12,939

 
$
17,980

Investment security losses
54

 
97

Net unrealized losses on securities available for sale
2,160

 
4,816

Net unrealized losses on interest rate swaps
511

 
1,254

Pension, deferred compensation and post-retirement liabilities
2,228

 
3,010

Stock incentive award plan
1,251

 
1,939

Deposits - purchase accounting adjustment
54

 
369

Accrued expenses
—

 
8,799

Tax attributes - tax credits and net operating losses
23,489

 
7,938

Other
1,773

 
3,715

Gross deferred tax assets
44,459

 
49,917

Valuation allowance
(565
)
 
(2,594
)
Gross deferred tax assets, net of valuation allowance
43,894

 
47,323

 
 
 
 
Deferred tax liabilities:
 
 
 
Other purchase accounting adjustments
(1,583
)
 
(2,542
)
Partnerships
(12,251
)
 
(4,819
)
Deferred loan origination fees
(4,070
)
 
—

Other
(334
)
 
—

Gross deferred tax liabilities
(18,238
)
 
(7,361
)
Net deferred tax asset
$
25,656

 
$
39,962

The Company assesses the realizability of our deferred tax assets and whether it is more likely than not that all or a portion of the deferred tax assets will be realized. The Company considers projections of future taxable income during the periods in which deferred tax assets and liabilities are scheduled to reverse. Additionally, in determining the availability of operating loss carrybacks and other tax attributes, both projected future taxable income and tax planning strategies are considered in making this assessment. Based upon the level of available historical taxable income, projections for the Company’s future taxable income over the periods which the Company’s deferred tax assets are realizable, the Company believes it is more likely than not that it will realize the full federal benefit of these deductible differences at December 31, 2017 and 2016.
Net operating losses may be carried back to the preceding two taxable years for Federal income tax purposes and forward to the succeeding 20 taxable years for Federal and Connecticut state income tax purposes, subject to certain limitations. At December 31, 2017, the Company had net operating loss carryforwards of $1.2 million for Federal income tax purposes, which will begin to expire in 2023. These losses, subject to an annual limitation, were obtained through the acquisition of Legacy United Bank. As of December 31, 2017 and 2016, the Company had a valuation allowance of $565,000 and $2.6 million, respectively, against its state deferred tax asset absent net operating loss carryforwards, in connection with the creation of a Connecticut Passive Investment Company pursuant to legislation enacted in 1998. As of December 31, 2017 and 2016, the Company had $201.6 million and $197.5 million, respectively, in Connecticut net operating loss carryforwards that will begin to expire in 2023 and for which a 100% valuation allowance has been established. Under the Passive Investment Company legislation, Connecticut Passive Investment Companies are not subject to the Connecticut Corporate Business Tax and dividends paid by the passive investment company to the Company are exempt from the Connecticut Corporate Business Tax. The change in the valuation allowance was recognized through the effective tax rate.
As of December 31, 2017, the Company generated Federal and State tax credits of $11.6 million as compared to $12.5 million in Federal and State tax credits in 2016. These investment tax credits arose from either the acquisition of Legacy United

 
116
 

Bank or through direct investment. These credit benefits are recognized through the effective tax rate in the year in which they are generated.
Retained earnings at December 31, 2017 includes a contingency reserve for loan losses of approximately $3.8 million, which represents the tax positions that existed at December 31, 1987, and is maintained in accordance with provisions of the Internal Revenue Code applicable to mutual savings banks. Amounts transferred to the reserve have been claimed as deductions from taxable income, and, if the reserve is used for purposes other than to absorb losses on loans, a Federal income tax liability could be incurred. It is not anticipated that the Company will incur a Federal income tax liability relating to this reserve balance, and accordingly, deferred income taxes of approximately $827,000 at December 31, 2017 have not been recognized.
As of December 31, 2017 and 2016, there were $688,000 and $497,000, respectively, recorded in uncertain tax benefit positions related to federal and state income tax matters based upon tax positions that related to the current year. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2017, 2016 and 2015. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 and after.
On December 22, 2017, the Tax Act was enacted resulting in, amongst other tax reform items, a reduction in the Company's applicable U.S. Federal corporate tax rate from 35% to 21%. As a result of this rate reduction and changes in other provisions of the new law, the Company incurred a provisional adjustment of $1.8 million of additional tax expense as of December 31, 2017. The impact of tax reform is based upon reasonable estimates of new current and deferred taxes based on certain provisions within the Tax Act. Additionally, the impact is the result of adjustments to current and deferred taxes that existed prior to the Tax Act's enactment date.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. The Company anticipates an immaterial impact for tax reform upon completion of the Company’s tax return for the 2017 tax year as a result of estimates related to accrued expenses and partnership investments.
Note 13.
DERIVATIVES AND HEDGING ACTIVITIES
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers. The Company manages a matched book with respect to its derivative instruments in order to minimize its net risk exposure resulting from such transactions.

 
117
 

Information about interest rate swap agreements and non-hedging derivative assets and liabilities as of December 31, 2017 and 2016 is as follows:
 
Notional
Amount
 
Weighted-
Average
Remaining
Maturity
 
 
Weighted-Average Rate
 
Estimated
Fair Value
Net
Received
 
Paid
 
 
(In thousands)
 
(In years)
 
 
 
 
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Forward starting interest rate swaps on future borrowings
$
50,000

 
7.88
 
TBD

(1
)
2.45
%
 
$
(292
)
Interest rate swaps
175,000

 
4.57
 
1.35
%
 
2.41
%
 
(1,736
)
Fair value hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
10,000

 
0.47
 
1.00
%
 
1.51
%
(2
)
(28
)
Non-hedging derivatives:
 
 
 
 
 
 
 
 
 
Forward loan sale commitments
137,670

 
0.00
 
 
 
 
 
(92
)
Derivative loan commitments
24,430

 
0.00
 
 
 
 
 
530

Interest rate swap
7,500

 
8.54
 
 
 
 
 
(615
)
Loan level swaps - dealer (3)
603,447

 
7.31
 
3.25
%
 
3.99
%
 
(3,183
)
Loan level swaps - borrowers (3)
603,447

 
7.31
 
3.99
%
 
3.25
%
 
3,174

Forward starting loan level swaps - dealer (3)
8,000

 
9.70
 
TBD

(4
)
5.11
%
 
105

Forward starting loan level swaps - borrower (3)
8,000

 
9.70
 
5.11
%
 
TBD

(4
)
(105
)
Total
$
1,627,494

 
 
 
 
 
 
 
$
(2,242
)
December 31, 2016
 
 
 
 
 
 
 
 
 
Cash flow hedges:
 
 
 
 
 
 
 
 
 
Forward starting interest rate swaps on future borrowings
$
100,000

 
7.36
 
TBD

(1
)
2.43
%
 
$
(483
)
Interest rate swaps
240,000

 
3.24
 
0.91
%
 
1.74
%
 
(2,719
)
Fair value hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
35,000

 
0.72
 
1.04
%
 
0.82
%
(2
)
1

Non-hedging derivatives:
 
 
 
 
 
 
 
 
 
Forward loan sale commitments
61,991

 
0.00
 
 
 
 
 
153

Derivative loan commitments
30,239

 
0.00
 
 
 
 
 
421

Interest rate swap
7,500

 
9.54
 
 
 
 
 
(660
)
Loan level swaps - dealer (3)
468,417

 
7.75
 
2.42
%
 
3.84
%
 
(4,888
)
Loan level swaps - borrowers (3)
468,417

 
7.75
 
3.84
%
 
2.42
%
 
4,869

Total
$
1,411,564

 
 
 
 
 
 
 
$
(3,306
)
 
(1)
The receiver leg of the cash flow hedge is floating rate and indexed to the 3-month USD-LIBOR-BBA, as determined two London banking days prior to the first day of each calendar quarter, commencing with the earliest effective trade. The earliest effective trade date for the cash flow hedge is November 15, 2018.
(2)
The paying leg is one month LIBOR plus a fixed spread; above rate in effect as of December 31, 2017 and 2016, respectively.
(3)
The Company offers a loan level hedging product to qualifying commercial borrowers that seek to mitigate risk to rising interest rates. As such, the Company enters into equal and offsetting trades with dealer counterparties.
(4)
The floating leg of the forward starting loan level hedge is indexed to the one month USD-LIBOR-BBA, as determined one London banking day prior to the tenth day of each calendar month, commencing with the effective trade date on September 10, 2020.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using cash flow hedges are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty

 
118
 

in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company has not recorded any hedge ineffectiveness since inception.
Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to reclassify $993,000 from accumulated other comprehensive loss to interest expense during the next 12 months.
The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a maximum period of approximately 60 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
As of December 31, 2017, the Company had seven outstanding interest rate swaps with a notional value of $225.0 million that were designated as cash flow hedges of interest rate risk.
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the year ended December 31, 2017, the amount recognized as interest expense related to hedge ineffectiveness was $19,000. During the year ended December 31, 2016, the amount recognized as interest expense related to hedge ineffectiveness was negligible.
As of December 31, 2017, the Company had one outstanding interest rate swap with a notional of $10.0 million that was designated as a fair value hedge of interest rate risk.
Non-Designated Hedges
Loan Level Interest Rate Swaps
Qualifying derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
As of December 31, 2017, the Company had 87 borrower-facing interest rate swaps with an aggregate notional amount of $603.4 million and 87 broker-facing interest rate swaps also with an aggregate notional value amount of $603.4 million related to this program.
As of December 31, 2017, the Company had five risk participation agreements with three counterparties related to a loan level interest rate swap with five of its commercial banking customers. Of these agreements, three were entered into in conjunction with credit enhancements provided to the borrowers by the counterparties; therefore, if the borrowers default, the counterparties are responsible for a percentage of the exposure. Two agreements were entered into in conjunction with credit enhancements provided to the borrower by the Company, whereby the Company is responsible for a percentage of the exposure to the counterparties. At December 31, 2017, the notional amount of these risk participation agreements was $13.0 million, reflecting the counterparties participation of 34.3%. The risk participation agreements are a guarantee of performance on a derivative and accordingly, are recorded

 
119
 

at fair value on the Company’s Consolidated Statements of Condition. At December 31, 2017, the notional amount of the remaining three risk participation agreements was $24.8 million, reflecting the counterparty participation level of 36.7%.
Forward Starting Loan Level Swaps
As of December 31, 2017, the Company had one borrower-facing forward starting loan level swap with a notional amount of $8.0 million, and one broker derivative with an aggregate notional amount of $8.0 million related to this program. This swap is related to the permanent financing of a project that is currently in the construction phase.
Mortgage Servicing Rights Interest Rate Swap
As of December 31, 2017, the Company had one receive-fixed interest rate derivative with a notional amount of $7.5 million and a maturity date in July 2026. The derivative was executed to protect against a portion of the devaluation of the Company’s mortgage servicing right asset that occurs in a falling rate environment. The instrument is marked to market through the income statement.
Derivative Loan Commitments
Additionally, the Company enters into mortgage loan commitments that are also referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, the Company utilizes To Be Announced (“TBA”) as well as cash (“mandatory delivery” and “best efforts”) forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from loans held for sale and the exercise of the derivative loan commitments.
With TBA and mandatory cash contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor/counterparty at a specified price on or before a specified date. If the market improves (rates decline) and the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Conversely if the market declines (rates worsen) the investor/counterparty is obligated to pay a “pair-off” fee to the Company based on then-current market prices. The Company expects that these forward loan sale commitments, TBA and mandatory, will experience changes in fair value opposite to the change in fair value of derivative loan commitments.
With best effort cash contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally best efforts cash contracts have no pair off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these best efforts forward loan sale commitments will experience a net neutral shift in fair value with related derivative loan commitments.
Fair Values of Derivative Instruments on the Company’s Consolidated Statements of Financial Condition
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Condition as of December 31, 2017 and 2016:

 
120
 

 
Derivative Assets
 
Derivative Liabilities
  
 
 
Fair Value
 
 
 
Fair Value
 
Balance Sheet Location
 
Dec 31,
2017
 
Dec 31,
2016
 
Balance Sheet Location
 
Dec 31,
2017
 
Dec 31,
2016
 
 
 
(In thousands)
 
 
 
(In thousands)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swap - cash flow hedges
Other Assets
 
$
36

 
$
246

 
Other Liabilities
 
$
2,064

 
$
3,448

Interest rate swap - fair value hedges
Other Assets
 
—

 
18

 
Other Liabilities
 
28

 
17

Total derivatives designated as hedging instruments
 
 
$
36

 
$
264

 
 
 
$
2,092

 
$
3,465

 
 
 
 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Forward loan sale commitments
Other Assets
 
$
12

 
$
204

 
Other Liabilities
 
$
104

 
$
51

Derivative loan commitments
Other Assets
 
530

 
421

 
 
 
—

 
—

Interest rate swap
 
 
—

 
—

 
Other Liabilities
 
615

 
660

Interest rate swap - with customers
Other Assets
 
7,117

 
7,864

 
Other Liabilities
 
3,943

 
2,995

Interest rate swap - with counterparties
Other Assets
 
3,941

 
2,981

 
Other Liabilities
 
7,124

 
7,869

Forward starting loan level swap
Other Assets
 
105

 
—

 
Other Liabilities
 
105

 
—

Total derivatives not designated as hedging
 
 
$
11,705

 
$
11,470

 
 
 
$
11,891

 
$
11,575

Effect of Derivative Instruments in the Company’s Consolidated Statements of Net Income and Changes in Stockholders’ Equity
The tables below present the effect of derivative instruments in the Company’s Consolidated Statements of Net Income and Changes in Stockholders’ Equity designated as hedging instruments for the years ended December 31, 2017, 2016 and 2015:
 
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Loss Recognized
in OCI on Derivatives
(Effective Portion)
For the Years Ended December 31,
2017
 
2016
 
2015
 
 
(In thousands)
Interest Rate Swaps
 
$
(313
)
 
$
(1,472
)
 
$
(3,108
)
 
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Loss Reclassified from AOCI into Income (Effective Portion)
For the Years Ended December 31,
2017
 
2016
 
2015
 
 
(In thousands)
Interest Rate Swaps
 
$
(1,487
)
 
$
(2,362
)
 
$
(12
)
 
 
 
 
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized
in Income on Derivatives
For the Years Ended December 31,
Derivatives in Fair Value Hedging Relationships
Location on Gain (Loss)
Recognized in Income
 
 
2017
 
2016
 
2015
 
 
 
(In thousands)
Interest Rate Swaps
Interest income
 
$
(29
)
 
$
(23
)
 
$
106

 
 
 
 
 
 
 
 
 
 
 
Amount of Gain (Loss) Recognized
in Income on Hedged Items
For the Years Ended December 31,
2017
 
2016
 
2015
 
 
 
(In thousands)
Interest Rate Swaps
Interest income
 
$
(30
)
 
$
25

 
$
(106
)

 
121
 

The table below presents the effect of derivative instruments in the Company’s Consolidated Statements of Net Income for derivatives not designated as hedging instruments for the years ended December 31, 2017, 2016 and 2015:
 
 
Amount of Gain (Loss) Recognized
for the Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Derivative loan commitments
 
$
109

 
$
198

 
$
10

Mortgage servicing rights derivative
 
45

 
—

 
—

Forward loan sale commitments
 
(245
)
 
166

 
(1
)
Interest rate swaps
 
10

 
(772
)
 
231

 
 
$
(81
)
 
$
(408
)
 
$
240

Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness or fails to maintain a well-capitalized rating, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.
As of December 31, 2017, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $10.6 million. As of December 31, 2017, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and has posted collateral with a market value of $221.3 million against its obligations under these agreements. A degree of netting occurs on occasions where the Company has exposure to a counterparty and the counterparty has exposure to the Company. If the Company had breached any of these provisions at December 31, 2017, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.
Note 14.
FAIR VALUE MEASUREMENT
Fair value estimates are made as of a specific point in time based on the characteristics of the assets and liabilities and relevant market information. The fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1:    Quoted prices are available in active markets for identical assets and liabilities as of the reporting date. The quoted price is not adjusted because of the size of the position relative to trading volume.
Level 2:    Pricing inputs are observable for assets and liabilities, either directly or indirectly but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.
Level 3:    Pricing inputs are unobservable for assets and liabilities and include situations where there is little, if any, market activity and the determination of fair value requires significant judgment or estimation.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the determination of which category within the fair value hierarchy is appropriate for any given asset and liability is based on the lowest level of input that is significant to the fair value of the asset and liability.
When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and could be material. Derived fair value estimates may not be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.
Fair value estimates for financial instrument fair value disclosures are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company.

 
122
 

Loans Held for Sale: The Company has elected the fair value option for its portfolio of residential real estate and government mortgage loans held for sale to reduce certain timing differences and better match changes in fair value of the loans with changes in the fair value of the derivative loan sale contracts used to economically hedge them.
The aggregate principal amount of the residential real estate and government mortgage loans held for sale was $113.2 million and $61.9 million at December 31, 2017 and 2016, respectively. The aggregate fair value of these loans as of the same dates was $114.1 million and $62.5 million, respectively.
There were no residential real estate mortgage loans held for sale 90 days or more past due at December 31, 2017 and 2016.
Changes in the fair value of mortgage loans held for sale are reported as a component of income from mortgage banking activities in the Consolidated Statements of Net Income. The following table presents the gains (losses) in fair value related to mortgage loans held for sale for the periods indicated:
 
 
Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Mortgage loans held for sale
 
$
1,401

 
$
(192
)
 
$
(50
)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables detail the assets and liabilities carried at fair value on a recurring basis as of December 31, 2017 and 2016 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. There were no transfers in and out of Level 1, Level 2 and Level 3 measurements during years ended December 31, 2017 and 2016.

 
123
 

 
Total
Fair Value
 
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
235,479

 
$
—

 
$
235,479

 
$
—

Government-sponsored residential collateralized debt obligations
133,112

 
—

 
133,112

 
—

Government-sponsored commercial mortgage-backed securities
33,255

 
—

 
33,255

 
—

Government-sponsored commercial collateralized debt obligations
147,242

 
—

 
147,242

 
—

Asset-backed securities
167,139

 
—

 
—

 
167,139

Corporate debt securities
89,136

 
—

 
89,136

 
—

Obligations of states and political subdivisions
245,007

 
—

 
245,007

 
—

Marketable equity securities
417

 
417

 
—

 
—

Total available for sale securities
$
1,050,787

 
$
417

 
$
883,231

 
$
167,139

Mortgage loan derivative assets
$
542

 
$
—

 
$
542

 
$
—

Mortgage loan derivative liabilities
104

 
—

 
104

 
—

Loans held for sale
114,073

 
—

 
114,073

 
—

Mortgage servicing rights
11,733

 
—

 
—

 
11,733

Interest rate swap assets
11,199

 
—

 
11,199

 
—

Interest rate swap liabilities
13,879

 
—

 
13,879

 
—

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Available for sale securities:
 
 
 
 
 
 
 
Government-sponsored residential mortgage-backed securities
$
179,548

 
$
—

 
$
179,548

 
$
—

Government-sponsored residential collateralized debt obligations
183,260

 
—

 
183,260

 
—

Government-sponsored commercial mortgage-backed securities
26,530

 
—

 
26,530

 
—

Government-sponsored commercial collateralized debt obligations
162,927

 
—

 
162,927

 
—

Asset-backed securities
166,967

 
—

 
13,087

 
153,880

Corporate debt securities
75,015

 
—

 
73,423

 
1,592

Obligations of states and political subdivisions
216,376

 
—

 
216,376

 
—

Marketable equity securities
32,788

 
375

 
32,413

 
—

Total available for sale securities
$
1,043,411

 
$
375

 
$
887,564

 
$
155,472

Mortgage loan derivative assets
$
625

 
$
—

 
$
625

 
$
—

Mortgage loan derivative liabilities
51

 
—

 
51

 
—

Loans held for sale
62,517

 
—

 
62,517

 
—

Mortgage servicing rights
10,104

 
—

 
—

 
10,104

Interest rate swap assets
11,109

 
—

 
11,109

 
—

Interest rate swap liabilities
14,989

 
—

 
14,989

 
—


 
124
 

The following table presents additional information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value:
 
For the Years Ended December 31,
 
2017
 
2016
 
(In thousands)
Balance of available for sale securities, at beginning of period
$
155,472

 
$
146,070

Purchases
14,030

 
6,857

Principal payments and net accretion
(3,108
)
 
(1,030
)
Total realized gains (losses) on sales included in income
191

 
(143
)
Total unrealized gains included in other comprehensive income
554

 
3,718

Balance at end of period
$
167,139

 
$
155,472

 
 
 
 
Balance of mortgage servicing rights at beginning of period
$
10,104

 
$
7,074

Issuances
3,420

 
2,463

Change in fair value recognized in income
(1,791
)
 
567

Balance at end of period
$
11,733

 
$
10,104

The following valuation methodologies are used for assets that are recorded at fair value on a recurring basis.
Available for Sale Securities: Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. Level 1 securities are those traded on active markets for identical securities including U.S. treasury securities, equity securities and mutual funds. Level 2 securities include U.S. Government agency obligations, U.S. Government-sponsored enterprises, mortgage-backed securities, obligations of states and political subdivisions, corporate and other debt securities. Level 3 securities include private placement securities and thinly traded equity securities. All fair value measurements are obtained from a third party pricing service and are not adjusted by management.
Matrix pricing is used for pricing most obligations of states and political subdivisions, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on securities relationships to other benchmark quoted securities. The grouping of securities is completed according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal bond yield curves.
The valuation of the Company’s asset-backed securities is determined utilizing an approach that combines advanced analytics with structural and fundamental cash flow analysis based upon observed market based yields. The third party provider’s model analyzes each instrument’s underlying collateral given observable collateral characteristics and credit statistics to extrapolate future performance and project cash flows, by incorporating expectations of default probabilities, recovery rates, prepayment speeds, loss severities and a derived discount rate. The Company has determined that due to the liquidity and significance of unobservable inputs, that asset-backed securities are classified in Level 3 of the valuation hierarchy.
At December 31, 2016 the Company held one pooled trust preferred security which was subsequently sold in 2017. The security’s fair value was based on unobservable issuer-provided financial information and discounted cash flow models derived from the underlying structured pool and therefore was classified as Level 3.
Loans Held for Sale: The fair value of residential and government mortgage loans held for sale is estimated using quoted market prices for loans with similar characteristics provided by government-sponsored entities. Any changes in the valuation of mortgage loans held for sale is based upon the change in market interest rates between closing the loan and the measurement date and an immaterial portion attributable to changes in instrument-specific credit risk. The Company has determined that loans held for sale are classified in Level 2 of the valuation hierarchy.
Mortgage Servicing Rights: A mortgage servicing right (“MSR”) asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is provided by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are recorded monthly, as the cash flows derived from the valuation model change the fair value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

 
125
 

Derivatives: Derivative instruments related to commitments for loans to be sold are carried at fair value. Fair value is determined through quotes obtained from actively traded mortgage markets. Any change in fair value for rate lock commitments to the borrower is based upon the change in market interest rates between making the rate lock commitment and the measurement date and, for forward loan sale commitments to the investor, is based upon the change in market interest rates from entering into the forward loan sales contract and the measurement date. Both the loan commitments to the borrowers and the forward loan sale commitments to investors are derivatives pursuant to the requirements of FASB ASC 815-10; however, the Company has not designated them as hedging instruments. Accordingly, they are marked to fair value through earnings.
The Company’s intention is to sell the majority of its fixed rate mortgage loans with original terms of 30 years on a servicing retained basis as well as certain 10, 15 and 20 year loans. The servicing value has been included in the pricing of the rate lock commitments. The Company estimates a fallout rate of approximately 11% based upon historical averages in determining the fair value of rate lock commitments. Although the use of historical averages is based upon unobservable data, the Company believes that this input is insignificant to the valuation and, therefore, has concluded that the fair value measurements meet the Level 2 criteria. The Company continually reassesses the significance of the fallout rate on the fair value measurement and updates the fallout rate accordingly.
Hedging derivatives include interest rate swaps as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.
The following table presents additional quantitative information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value at December 31, 2017:
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
Fair
Value
 
Valuation Technique
 
Unobservable Inputs
 
Range
(Weighted Average)
Asset-backed securities
 
$
167,139

 
Discounted Cash Flow
 
Discount Rates
 
2.8% - 6.8% (3.98%)
 
 
 
 
 
 
Cumulative Default %
 
3.8% - 15.2% (10.25%)
 
 
 
 
 
 
Loss Given Default
 
1.1% - 5.3% (3.20%)
 
 
 
 
 
 
 
 
 
Mortgage servicing rights
 
$
11,733

 
Discounted Cash Flow
 
Discount Rate
 
9.0% - 18.0% (10.66%)
 
 
 
 
 
 
Cost to Service
 
$50 - $110 ($64.19)
 
 
 
 
 
 
Float Earnings Rate
 
0.25% (0.25%)
Asset-backed securities: Given the level of market activity for the asset backed securities in the portfolio, the discount rates utilized in the fair value measurement were derived by analyzing current market yields for comparable securities and research reports issued by brokers and dealers in the financial services industry. Adjustments were then made for credit and structural differences between these types of securities.  There is an inverse correlation between the discount rate and the fair value measurement.  When the discount rate increases, the fair value decreases.
Other significant unobservable inputs to the fair value measurement of the asset backed securities in the portfolio included prospective defaults and recoveries.  The cumulative default percentage represents the lifetime defaults assumed.  The loss given default percentage represents the percentage of current and projected defaults assumed to be lost.  There is an inverse correlation between the default percentages and the fair value measurement.  When default percentages increase, the fair value decreases. 
Mortgage servicing rights: The discount rate utilized in the fair value measurement was derived by analyzing recent and historical pricing for MSRs. Adjustments were then made for various loan and investor types underlying these MSRs.  There is an inverse correlation between the discount rate and the fair value measurement.  When the discount rate increases, the fair value decreases.
Other significant unobservable inputs to the fair value measurement of MSRs include cost to service, an input that is not as simple as taking total costs and dividing by a number of loans.  It is a figure informed by marginal cost and pricing for MSRs by competing firms, taking other assumptions into consideration.  It is different for different loan types.  There is an inverse correlation between the cost to service and the fair value measurement.  When the cost assumption increase, the fair value decreases.

 
126
 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. There were no liabilities measured at fair value on a non-recurring basis at December 31, 2017 and 2016. The following tables detail the assets carried at fair value on a non-recurring basis at December 31, 2017 and 2016 and indicate the fair value hierarchy of the valuation technique utilized by the Company to determine fair value:
 
Total Fair
Value
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(In thousands)
December 31, 2017
 
 
 
 
 
 
 
Impaired loans
$
4,488

 
$
—

 
$
—

 
$
4,488

Other real estate owned
2,154

 
—

 
—

 
2,154

Total
$
6,642

 
$
—

 
$
—

 
$
6,642

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Impaired loans
$
5,100

 
$
—

 
$
—

 
$
5,100

Other real estate owned
1,890

 
—

 
—

 
1,890

Total
$
6,990

 
$
—

 
$
—

 
$
6,990

The following is a description of the valuation methodologies used for assets that are recorded at fair value on a non-recurring basis:
Impaired Loans: Accounting standards require that a creditor recognize the impairment of a loan if the present value of expected future cash flows discounted at the loan’s effective interest rate (or, alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment in the impaired loan. Non-recurring fair value adjustments to collateral dependent loans are recorded, when necessary, to reflect partial write-downs and the specific reserve allocations based upon observable market price or current appraised value of the collateral less selling costs and discounts based on management’s judgment of current conditions. Based on the significance of management’s judgment, the Company records collateral dependent impaired loans as non-recurring Level 3 fair value measurements.
Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure, as other real estate owned (“OREO”) in its financial statements. Upon foreclosure, the property securing the loan is recorded at fair value as determined by real estate appraisals less the estimated selling expense. Appraisals are based upon observable market data such as comparable sales within the real estate market. Assumptions are also made based on management’s judgment of the appraisals and current real estate market conditions and therefore these assets are classified as non-recurring Level 3 assets in the fair value hierarchy.
Gains (losses) on assets recorded at fair value at year-end on a non-recurring basis are as follows:
 
 
For the Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Impaired loans
 
$
121

 
$
(541
)
 
$
(274
)
Other real estate owned
 
(255
)
 
(126
)
 
(118
)
Total
 
$
(134
)
 
$
(667
)
 
$
(392
)
Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used by management to estimate the fair value of each additional class of financial instruments for which it is practicable to estimate that value.

 
127
 

Cash and Cash Equivalents: Carrying value is assumed to represent fair value for cash and due from banks and short-term investments, which have original maturities of 90 days or less.
Loans Receivable - net: The fair value of the net loan portfolio is determined by discounting the estimated future cash flows using the prevailing interest rates and appropriate credit and prepayment risk adjustments as of period-end at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value of non-performing loans is estimated using the Company’s prior credit experience.
Federal Home Loan Bank of Boston (“FHLBB”) stock: FHLBB stock is a non-marketable equity security which is assumed to have a fair value equal to its carrying value due to the fact that it can only be redeemed by the FHLB Boston at par value.
Accrued Interest Receivable: Carrying value is assumed to represent fair value.
Deposits and Mortgagors’ and Investors’ Escrow Accounts: The fair value of demand, non-interest- bearing checking, savings and certain money market deposits is determined as the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the estimated future cash flows using rates offered for deposits of similar remaining maturities as of period-end.
FHLBB Advances and Other Borrowings: The fair value of borrowed funds is estimated by discounting the future cash flows using market rates for similar borrowings.

 
128
 

As of December 31, 2017 and 2016, the carrying value and estimated fair values of the Company’s financial instruments are as described below:
 
Carrying
Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 (In thousands)
December 31, 2017
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
88,668

 
$
88,668

 
$
—

 
$
—

 
$
88,668

Available for sale securities
1,050,787

 
417

 
883,231

 
167,139

 
1,050,787

Held to maturity securities
13,598

 
—

 
14,300

 
—

 
14,300

Loans held for sale
114,073

 
—

 
114,073

 
—

 
114,073

Loans receivable-net
5,307,678

 
—

 
—

 
5,297,381

 
5,297,381

FHLBB stock
50,194

 
—

 
—

 
50,194

 
50,194

Accrued interest receivable
22,332

 
—

 
—

 
22,332

 
22,332

Derivative assets
11,741

 
—

 
11,741

 
—

 
11,741

Mortgage servicing rights
11,733

 
—

 
—

 
11,733

 
11,733

Financial liabilities:
 
 
 
 
 
 
 
 

Deposits
5,198,221

 
—

 
—

 
5,191,159

 
5,191,159

Mortgagors’ and investors’ escrow accounts
7,545

 
—

 
—

 
7,545

 
7,545

FHLBB advances and other borrowings
1,165,054

 
—

 
1,200,453

 
—

 
1,200,453

Derivative liabilities
13,983

 
—

 
13,983

 
—

 
13,983

 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
90,944

 
$
90,944

 
$
—

 
$
—

 
$
90,944

Available for sale securities
1,043,411

 
375

 
887,564

 
155,472

 
1,043,411

Held to maturity securities
14,038

 
—

 
14,829

 
—

 
14,829

Loans held for sale
62,517

 
—

 
62,517

 
—

 
62,517

Loans receivable-net
4,870,552

 
—

 
—

 
4,895,638

 
4,895,638

FHLBB stock
53,476

 
—

 
—

 
53,476

 
53,476

Accrued interest receivable
18,771

 
—

 
—

 
18,771

 
18,771

Derivative assets
11,734

 
—

 
11,734

 
—

 
11,734

Mortgage servicing rights
10,104

 
—

 
—

 
10,104

 
10,104

Financial liabilities:
 
 
 
 
 
 
 
 
 
Deposits
4,711,172

 
—

 
—

 
4,711,774

 
4,711,774

Mortgagors’ and investors’ escrow accounts
13,354

 
—

 
—

 
13,354

 
13,354

FHLBB advances and other borrowings
1,169,619

 
—

 
1,167,066

 
—

 
1,167,066

Derivative liabilities
15,040

 
—

 
15,040

 
—

 
15,040

Certain financial instruments and all nonfinancial investments are exempt from disclosure requirements. Accordingly, the aggregate fair value of amounts presented above may not necessarily represent the underlying fair value of the Company.

 
129
 

Note 15.
SHARE-BASED COMPENSATION PLANS
The Company maintains and operates several stock incentive award plans to attract, retain and reward performance of qualified employees and directors who contribute to the success of the Company. These plans include those assumed by the Company in 2014 as a result of merger activity. Active plans, as of January 1, 2017 are:
•Rockville Financial, Inc. 2006 Stock Incentive Award Plan (the “2006 Plan”);
•Rockville Financial, Inc. 2012 Stock Incentive Plan (the “2012 Plan”);
•United Financial Bancorp, Inc. 2008 Equity Incentive Plan; and
•2015 Omnibus Stock Incentive Plan (the “2015 Plan”).
The 2015 Plan became effective on October 29, 2015 upon approval by the Company’s Shareholders. As of the effective date of the 2015 Plan, no other awards may be granted from the previously approved or assumed plans. The 2015 Plan allows the Company to use stock options, stock awards, and performance awards to attract, retain and reward performance of qualified employees and directors who contribute to the success of the Company. The 2015 Plan reserves a total of up to 4,050,000 shares (the “Cap”) of Company common stock for issuance upon the grant or exercise of awards made pursuant to the 2015 Plan. Of these shares, the Company may grant shares in the form of restricted stock, performance shares and other share-based awards and may grant stock options. However, the number of shares issuable will be adjusted by a “fungible ratio” of 2.35. This means that for each share award other than a stock option share or a stock appreciation right share, each 1 share awarded shall be deemed to be 2.35 shares awarded. As of December 31, 2017, 2,520,877 shares remained available for future grants under the 2015 Plan.
Total employee and Director share-based compensation expense recognized for stock options and restricted stock was $2.7 million with a related tax benefit recorded of $595,000 for the year ended December 31, 2017. Of the total expense, the amount for Director share-based compensation expense recognized (in the Consolidated Statements of Net Income as other non-interest expense) was $400,000, and the amount for officer share-based compensation expense recognized (in the Consolidated Statements of Net Income as salaries and employee benefit expense) was $2.3 million.
Total employee and Director share-based compensation expense recognized for stock options and restricted stock was $2.3 million with a related tax benefit recorded of $797,000 for the year ended December 31, 2016. Of the total expense, the amount for Director share-based compensation expense recognized (in the Consolidated Statements of Net Income as other non-interest expense) was $425,000, and the amount for officer share-based compensation expense recognized (in the Consolidated Statements of Net Income as salaries and employee benefit expense) was $1.8 million.
Total employee and Director share-based compensation expense recognized for stock options and restricted stock was $1.1 million, with a related tax benefit recorded of $388,000 for the year ended December 31, 2015. Of the total expense, the amount for Director share-based compensation expense recognized (in the Consolidated Statements of Net Income as other non-interest expense) was $252,000, the amount for officer share-based compensation expense recognized (in the Consolidated Statements of Net Income as salaries and benefits expense) was $707,000, and merger and acquisition expense recognized (in the Consolidated Statements of Net Income as non-interest expense) was $117,000 due to acceleration of vesting as a result of an executive officer exercising a merger related change in control agreement.
The fair values of stock option and restricted stock awards, measured at grant date, are amortized to compensation expense on a straight-line basis over the vesting period.

 
130
 

Stock Options:
The following table presents the activity related to the Company’s stock options outstanding, including options that have stock appreciation rights (“SARs”), under the Plans for the year ended December 31, 2017:
 
 
Number of
Stock
Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term
(in years)
 
Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 2016
1,936,453

 
$
11.21

 
 
 
 
Granted
—

 
—

 
 
 
 
Exercised
(240,638
)
 
10.26

 
 
 
1.8

Forfeited, expired, or canceled
(820
)
 
13.73

 
 
 
 
Outstanding at December 31, 2017
1,694,995

 
$
11.34

 
4.3
 
$
10.7

Stock options vested and exercisable at December 31, 2017
1,675,712

 
$
11.32

 
4.3
 
$
10.6

As of December 31, 2017, the unrecognized cost related to outstanding stock options was $27,000 and will be recognized over a weighted-average period of 1.46 years.
Stock options provide grantees the option to purchase shares of common stock at a specified exercise price and expire ten years from the date of grant.
There were no stock options granted in 2017 or 2016.
Options exercised may include awards that were originally granted as tandem SARs. Therefore, if the SAR component is exercised, it will not equate to the number of shares issued due to the conversion of the SAR option value to the actual share value at exercise date. There were no options with a SAR component included in total options exercised during the year ended December 31, 2017.
Restricted Stock:
Restricted stock provides grantees with rights to shares of common stock upon completion of a service period and in certain cases obtaining a performance metric. During the restriction period, all shares are considered outstanding and dividends are paid on the restricted stock. During the year ended December 31, 2017, the Company issued 155,180 shares of restricted stock from shares available under the Company’s 2015 Plan to certain employees.
The following table presents the activity for unvested restricted stock for the year ended December 31, 2017:
 
 
Number of
Shares
 
Weighted-Average
Grant-Date
Fair Value
Unvested as of December 31, 2016
438,806

 
$
14.23

Granted
155,180

 
18.15

Vested
(159,744
)
 
14.56

Forfeited
(9,242
)
 
13.71

Unvested as of December 31, 2017
425,000

 
$
15.55

The fair value of restricted shares that vested during the years ended December 31, 2017, 2016 and 2015 was $2.8 million, $1.5 million, and $780,000, respectively. The weighted-average grant date fair value of restricted stock granted during the years ended December 31, 2017, 2016 and 2015 was $18.15, $15.61 and $13.08, respectively.
As of December 31, 2017, there was $4.9 million of total unrecognized compensation cost related to unvested restricted stock which is expected to be recognized over a weighted-average period of 2.2 years.
Of the remaining unvested restricted stock, 207,262 shares will vest in 2018, 137,190 shares will vest in 2019, 75,474 shares will vest in 2020, and 5,074 will vest in 2021. All unvested restricted stock shares are expected to vest.

 
131
 

Employee Stock Ownership Plan:
In connection with the reorganization and stock offering completed in 2005, the Company established an ESOP for eligible employees of the Company, and authorized the Company to lend funds to the ESOP to purchase 699,659 or 3.6% of the shares issued in the initial public offering. Upon completion of the 2005 reorganization, the ESOP borrowed $4.4 million from the Company to purchase 437,287 shares of common stock. Additional shares of 59,300 and 203,072 were subsequently purchased by the ESOP in the open market at a total cost of $817,000 and $2.7 million in 2006 and 2005, respectively, with additional funds borrowed from the Company. The interest rate for the original ESOP loan was the prime rate plus one percent, or 4.25% as of December 31, 2014. As the loan was repaid to the Company, shares were released from collateral and allocated to the accounts of the participants. There is no outstanding balance as the loan was paid in full on December 31, 2014.
As part of the second-step conversion and stock offering completed in 2011, the Bank authorized the Company to lend funds to the ESOP to purchase 684,395 shares, 276,017 shares of which were purchased during the public offering at a cost of $10.00 per share. In March 2011, the remaining shares totaling 408,378 were subsequently purchased by the ESOP in the open market at an average cost of $10.56 per share, or $4.3 million. The interest rate for the second ESOP loan is the prime rate plus one percent, or 5.50% as of December 31, 2017. As of December 31, 2017, the outstanding balance for the loan was $6.0 million, with a remaining term of 23 years. Principal payments of $1.0 million have been made on the loan since inception. Dividends paid in 2017 totaling $263,000 on all unallocated ESOP shares were offset to the interest payable on the note owed by the Company.
The total ESOP expense was $400,000, $308,000 and $299,000 for the years ended December 31, 2017, 2016 and 2015, respectively. At December 31, 2017, there were 159,692 allocated and 524,703 unallocated ESOP shares and the unallocated shares had an aggregate fair value of $9.3 million.
Effective January 1, 2014, the Company merged its ESOP with its Defined Contribution Plan, or 401(k) Plan. In addition to employer matching cash contributions to the 401(k) Plan, shares released from the pay down on the ESOP loans will be allocated to all participants in the 401(k) Plan.
Note 16.
PENSION PLANS AND OTHER POST-RETIREMENT BENEFITS
Defined Benefit, Supplemental and Other Post-retirement Plans
Legacy Rockville offered a noncontributory defined benefit pension plan through December 31, 2012 for eligible employees who met certain minimum service and age requirements hired before January 1, 2005. Pension plan benefits were based upon employee earnings during the period of credited service. The pension plan was frozen effective December 31, 2012. Employees hired on or after January 1, 2005 receive no benefits under the plan. All other employees accrue no additional retirement benefits on or after January 1, 2013, and the amount of their qualified retirement income will not exceed the amount of benefits determined as of December 31, 2012.
The Company also has supplemental retirement plans (the “Supplemental Plans”) that provide benefits for certain key officers. Benefits under the Supplemental Plans are based on a predetermined formula and are reduced by other benefits. The liability arising from these plans is being accrued over the participants’ remaining periods of service so that at the expected retirement dates, the present value of the annual payments will have been expensed.
The Company also provides an unfunded post-retirement medical, health and life insurance benefit plan for retirees and employees hired prior to March 31, 1993.

 
132
 

The following table sets forth changes in the benefit obligation, changes in plan assets and the funded status of the pension plan and post-retirement benefit plans for the years ended December 31, 2017, 2016 and 2015:
 
Qualified
Pension Plan
December 31,
 
Supplemental
Executive
Retirement Plans
December 31,
 
Other Post-
Retirement
Benefits
December 31,
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
(In thousands )
Change in Benefit Obligation:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Benefit obligation at beginning of year
$
28,475

 
$
27,115

 
$
30,571

 
$
1,000

 
$
929

 
$
1,368

 
$
2,041

 
$
1,841

 
$
2,218

Service cost
—

 
—

 
60

 
24

 
22

 
24

 
21

 
13

 
23

Interest cost
1,162

 
1,186

 
1,162

 
39

 
39

 
40

 
79

 
76

 
80

Plan participants’ contributions
—

 
—

 
—

 
—

 
—

 
—

 
28

 
27

 
28

Actuarial loss (gain)
2,379

 
1,088

 
(3,821
)
 
72

 
37

 
(79
)
 
(10
)
 
180

 
(413
)
Benefits paid and administration expenses
(971
)
 
(914
)
 
(857
)
 
(33
)
 
(27
)
 
(31
)
 
(100
)
 
(96
)
 
(95
)
Curtailments, settlements, special termination benefits
—

 
—

 
—

 
—

 
—

 
(393
)
 
—

 
—

 
—

Benefit obligation at end of year
$
31,045

 
$
28,475

 
$
27,115

 
$
1,102

 
$
1,000

 
$
929

 
$
2,059

 
$
2,041

 
$
1,841

Change in Plan Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fair value of plan assets at beginning of year
$
26,425

 
$
25,240

 
$
26,519

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Actual return (loss) on plan assets
3,824

 
1,571

 
(422
)
 
—

 
—

 
—

 
—

 
—

 
—

Employer contributions
625

 
528

 
—

 
33

 
27

 
424

 
72

 
69

 
67

Plan participants’ contributions
—

 
—

 
—

 
—

 
—

 
—

 
28

 
27

 
28

Benefits paid and administration expenses
(971
)
 
(914
)
 
(857
)
 
(33
)
 
(27
)
 
(31
)
 
(100
)
 
(96
)
 
(95
)
Settlements
—

 
—

 
—

 
—

 
—

 
(393
)
 
—

 
—

 
—

Fair value of plan assets at end of year
$
29,903

 
$
26,425

 
$
25,240

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Funded Status:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Underfunded status at end of year
$
(1,142
)
 
$
(2,050
)
 
$
(1,875
)
 
$
(1,102
)
 
$
(1,000
)
 
$
(929
)
 
$
(2,059
)
 
$
(2,041
)
 
$
(1,841
)
Amounts Recognized in the Consolidated Statements of Condition
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued expenses and other liabilities
$
(1,142
)
 
$
(2,050
)
 
$
(1,875
)
 
$
(1,102
)
 
$
(1,000
)
 
$
(929
)
 
$
(2,059
)
 
$
(2,041
)
 
$
(1,841
)

 
133
 

The components of accumulated other comprehensive loss related to pensions and other post-retirement benefits and related tax effects at December 31, 2017, 2016 and 2015 are summarized below:
 
Qualified
Pension Plan
December 31,
 
Supplemental
Executive
Retirement Plans
December 31,
 
Other Post-
Retirement
Benefits
December 31,
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
(In thousands )
Amounts Recognized in Accumulated Other Comprehensive Loss Consist of:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prior service cost
$
—

 
$
—

 
$
—

 
$
71

 
$
78

 
$
85

 
$
—

 
$
—

 
$
—

Net loss (gain)
7,285

 
7,696

 
7,050

 
187

 
117

 
79

 
35

 
45

 
(134
)
Total accumulated other comprehensive loss (income)
7,285

 
7,696

 
7,050

 
258

 
195

 
164

 
35

 
45

 
(134
)
Deferred tax (asset) liability
(2,625
)
 
(2,773
)
 
(2,540
)
 
(93
)
 
(70
)
 
(59
)
 
(12
)
 
(16
)
 
48

Net impact on accumulated other comprehensive loss
$
4,660

 
$
4,923

 
$
4,510

 
$
165

 
$
125

 
$
105

 
$
23

 
$
29

 
$
(86
)
The following table sets forth the components of net periodic benefit costs and other amounts recognized in other comprehensive income (loss) for the retirement plans for the years ended December 31, 2017, 2016 and 2015:
 
Qualified Pension Plan
 
Supplemental
Executive
Retirement Plans
 
Other Post- Retirement
Benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
(In thousands)
Components of Net Periodic Benefit Cost:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
—

 
$
—

 
$
60

 
$
24

 
$
22

 
$
24

 
$
21

 
$
13

 
$
23

Interest cost
1,162

 
1,186

 
1,162

 
39

 
39

 
40

 
79

 
76

 
80

Expected return on plan assets
(1,603
)
 
(1,624
)
 
(1,824
)
 
—

 
—

 
—

 
—

 
—

 
—

Amortization of net actuarial losses
569

 
495

 
738

 
2

 
—

 
3

 
—

 
—

 
18

Amortization of prior service cost
—

 
—

 
—

 
7

 
7

 
7

 
—

 
—

 
—

Settlement charge
—

 
—

 
—

 
—

 
—

 
39

 
—

 
—

 
—

Net periodic benefit cost
128

 
57

 
136

 
72

 
68

 
113

 
100

 
89

 
121

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss (gain)
158

 
1,140

 
(1,574
)
 
72

 
37

 
(80
)
 
(10
)
 
180

 
(413
)
Amortization of net loss
(569
)
 
(495
)
 
(738
)
 
(2
)
 
—

 
(3
)
 
—

 
—

 
(18
)
Amortization of prior service cost
—

 
—

 
—

 
(7
)
 
(7
)
 
(7
)
 
—

 
—

 
—

Loss recognized due to settlement
—

 
—

 
—

 
—

 
—

 
(39
)
 
—

 
—

 
—

Total recognized in other comprehensive income (loss)
(411
)
 
645

 
(2,312
)
 
63

 
30

 
(129
)
 
(10
)
 
180

 
(431
)
Total recognized in net periodic benefit cost and other comprehensive income (loss)
$
(283
)
 
$
702

 
$
(2,176
)
 
$
135

 
$
98

 
$
(16
)
 
$
90

 
$
269

 
$
(310
)
Amounts in accumulated other comprehensive loss that are expected to be recognized as components of net periodic benefit cost during 2018 are $486,000, $14,000 and $0 for the qualified pension plan, supplemental executive retirement plan and other post-retirement benefits plan, respectively.

 
134
 

Weighted-average assumptions used to determine pension benefit obligations at December 31, follow:
 
Qualified
Pension
 
Supplemental
Retirement
Plans
 
Other Post-Retirement
Benefits
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Discount rate
3.60
%
 
4.15
%
 
3.50
%
 
4.00
%
 
3.50
%
 
4.00
%
Expected return on plan assets
6.50
%
 
6.50
%
 
—
%
 
—
%
 
—
%
 
—
%
Weighted-average assumptions used to determine net benefit pension expense for the years ended December 31, follow:
 
Qualified Pension
 
Supplemental Retirement Plans
 
Other Post-Retirement Benefits
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
 
2017
 
2016
 
2015
Discount rate
4.15
%
 
4.45
%
 
3.85
%
 
4.00
%
 
4.30
%
 
3.70
%
 
4.00
%
 
4.25
%
 
3.70
%
Expected return on plan assets
6.50
%
 
7.00
%
 
7.00
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
 
—
%
Rate of compensation increase
—
%
 
—
%
 
—
%
 
—
%
 
4.00
%
 
4.00
%
 
4.00
%
 
4.00
%
 
4.00
%
The accumulated post-retirement benefit obligation for the other post-retirement benefits was $2.1 million and $2.0 million as of December 31, 2017 and 2016, respectively.
The Company does not intend to apply for the government subsidy under Medicare Part-D for post-retirement prescription drug benefits. Therefore, the impact of the subsidy is not reflected in the development of the liabilities for the plan. As of December 31, 2013, prescription drug benefits are included in the post-retirement benefits offered to employees hired prior to March 1, 1993.
The expected long-term rate of return is based on current and expected asset allocations, as well as the long-term historical risks and returns with each asset class within the plan portfolio. A lower expected rate of return on plan assets increases pension costs.
The discount rate assumption used to measure the post-retirement benefit obligations is set by reference to high-quality bond indices, as well as certain yield curves. The Principal Discount Yield Curve was used as a benchmark. A higher discount rate decreases the present value of benefit obligations and decreases pension expense.
Assumed Healthcare Trend Rates
The Company’s accumulated other post-retirement benefit obligations take into account certain cost-sharing provisions. The annual rate of increase in the cost of covered benefits (i.e., healthcare cost trend rate) is assumed to be 7% for Pre-65 & 6% for Post-65 at December 31, 2017. Assumed healthcare cost trend rates have a significant effect on the amounts reported for the healthcare plans. A one percentage point change in the assumed healthcare cost trend rate would have the following effects: 
 
 
1%
Increase
 
1%
Decrease
 
 
(In thousands)
Effect on post-retirement benefit obligation
 
$
2,284

 
$
1,871

Effect on total service and interest
 
102

 
81


 
135
 

Plan Assets
The fair value of major categories of pension plan assets as of December 31, 2017 and 2016 are as follows:
 
Total
Fair Value
 
Percent
 
(In thousands)
December 31, 2017
 
 
 
Fixed income funds
$
16,264

 
54
%
Domestic equity funds
6,234

 
21

International equity funds
4,187

 
14

Hedge funds
2,909

 
10

Money market funds
309

 
1

Total
$
29,903

 
100
%
 
 
 
 
December 31, 2016
 
 
 
Fixed income funds
$
10,255

 
39
%
Domestic equity funds
8,124

 
31

International equity funds
5,125

 
19

Hedge funds
2,710

 
10

Money market funds
211

 
1

Total
$
26,425

 
100
%
All plan assets are measured at fair value in Level 1 based on quoted market prices in an active exchange market.
The Company’s investment goal is to obtain a competitive risk adjusted return on the Pension Plan assets commensurate with prudent investment practices and the plan’s responsibility to provide retirement benefits for its participants, retirees and their beneficiaries. The 2017 targeted allocation for fixed income, domestic equity securities, international equity securities, and hedge funds was 65%, 21%, 14% and 0%, respectively. The Pension Plan’s investment policy does not explicitly designate allowable or prohibited investments; instead, it provides guidance regarding investment diversification and other prudent investment practices to limit the risk of loss. The Plan’s asset allocation targets are strategic and long-term in nature and are designed to take advantage of the risk reducing impacts of asset class diversification.
Plan assets are periodically rebalanced to their asset class targets to reduce risk and to retain the portfolio’s strategic risk/return profile. Investments within each asset category are further diversified with regard to investment style and concentration of holdings.
Contributions
There were $625,000 in contributions to the Qualified Pension Plan in 2017 and $528,000 in contributions during 2016. The Company expects to make $1.5 million in contributions to the Qualified Pension Plan in 2018.

 
136
 

Estimated Future Benefit Payments
The benefit payments expected to be paid are as follows:
 
Qualified
Pension
Plan
 
Supplemental
Executive
Retirement
Plans
 
Other Post-
Retirement
Benefits
 
(In thousands)
Years Ending December 31,
 
 
 
 
 
2018
$
1,120

 
$
41

 
$
100

2019
1,220

 
41

 
110

2020
1,330

 
41

 
120

2021
1,360

 
41

 
120

2022
1,400

 
41

 
120

Years 2023-2027
7,470

 
325

 
590

Multi-Employer Defined Benefit Plan
As a result of the Merger, the Company participates in the Pentegra Defined Benefit Plan for Financial Institutions (the “Pentegra DB Plan”), a tax-qualified defined-benefit pension plan. The Pentegra DB Plan’s Employer Identification Number is 13-5645888 and the Plan Number is 333. The Pentegra DB Plan operates as a multi-employer plan for accounting purposes and as a multi-employer plan under the Employee Retirement Income Security Act of 1974 and the Internal Revenue Code. There are no collective bargaining agreements in place that require contributions to the Pentegra DB Plan.
The Pentegra DB Plan is a single plan under Internal Revenue Code Section 413(c) and, as a result, all of the assets stand behind all of the liabilities. Accordingly, under the Pentegra DB Plan, contributions made by a participating employer may be used to provide benefits to participants of other participating employers.
The funded status (market value of plan assets divided by funding target) of the Pentegra DB Plan as of July 1, 2017 and 2016 was 114.3% and 114.8%, respectively, per the actuarial valuation reports. Market value of plan assets reflects contributions received through June 30, 2017.
The Company’s contributions to the Pentegra DB Plan will not be more than 5% of the total contributions to the Pentegra DB Plan. A $50,000 contribution, recorded as pension expense, was made in 2017, 2016, and 2015. The Company will make the future required contributions and incur applicable pension expense going forward.
401(k) Plan
The Company has a tax-qualified 401(k) plan for the benefit of its eligible employees. The Company matches 100% of the first 3% and 50% of the next 2% of each eligible employee’s pre-tax contributions based on eligible compensation. Participants are fully vested in all contributions.
For employees who have met the Plan’s age and service requirements, the Company may also make a discretionary contribution equal to a uniform percentage of eligible compensation per participant. The discretionary contribution may be made in stock or cash and may be directed to the Employee Stock Ownership portion of the plan. Effective January 1, 2014, the Company merged its Employee Stock Ownership Plan with its 401(k) Plan.
In connection with the pension plan being frozen at December 31, 2012, the Company provides additional transitional benefits to the impacted employees through the 401(k) Plan beginning January 1, 2013 for a five year period. These transitional benefits will no longer be paid after January 1, 2018.
The Company recorded expenses of $1.9 million, $1.7 million, and $2.1 million related to the plan for the years ended December 31, 2017, 2016 and 2015, respectively.

 
137
 

Note 17.
REGULATORY MATTERS

Minimum regulatory capital requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve qualitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0% and a minimum leverage ratio of 4.0% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer and certain deductions from and adjustments to regulatory capital and risk-weighted assets are being phased in over several years. The required minimum conservation buffer is 1.25% as of December 31, 2017 and will increase to 1.875% on January 1, 2018 and 2.5% on January 1, 2019. Management believes that the Company’s capital levels will remain characterized as “well-capitalized” throughout the phase-in periods.
As of December 31, 2017 and 2016, the notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework from prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. Management believes, as of December 31, 2017 and 2016, that the Company and the Bank meet all capital adequacy requirements to which they are subject. The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2017 and 2016 are also presented in the following table:

 
138
 

 
Actual
 
Minimum For
Capital
Adequacy
Purposes
 
Minimum
To Be Well-
Capitalized Under
Prompt Corrective
Action Provisions
 
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
 
(Dollars in thousands)
United Bank:
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets
$
642,179

 
11.6
%
 
$
442,882

 
8.0
%
 
$
553,603

 
10.0
%
Common equity tier 1 capital to risk weighted assets
593,155

 
10.7

 
249,458

 
4.5

 
360,328

 
6.5

Tier 1 capital to risk weighted assets
593,155

 
10.7

 
332,610

 
6.0

 
443,480

 
8.0

Tier 1 capital to total average assets
593,155

 
8.7

 
272,715

 
4.0

 
340,894

 
5.0

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets
$
619,020

 
12.1
%
 
$
409,269

 
8.0
%
 
$
511,587

 
10.0
%
Common equity tier 1 capital to risk weighted assets
574,632

 
11.2

 
230,879

 
4.5

 
333,492

 
6.5

Tier 1 capital to risk weighted assets
574,632

 
11.2

 
307,839

 
6.0

 
410,451

 
8.0

Tier 1 capital to total average assets
574,632

 
9.0

 
255,392

 
4.0

 
319,240

 
5.0

 
 
 
 
 
 
 
 
 
 
 
 
United Financial Bancorp, Inc.:
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets
$
701,794

 
12.6
%
 
$
445,583

 
8.0
%
 
N/A

 
N/A

Common equity tier 1 capital to risk weighted assets
577,770

 
10.4

 
249,997

 
4.5

 
N/A

 
N/A

Tier 1 capital to risk weighted assets
577,770

 
10.4

 
333,329

 
6.0

 
N/A

 
N/A

Tier 1 capital to total average assets
577,770

 
8.4

 
275,129

 
4.0

 
N/A

 
N/A

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Total capital to risk weighted assets
$
668,816

 
13.0
%
 
$
411,579

 
8.0
%
 
N/A

 
N/A

Common equity tier 1 capital to risk weighted assets
549,428

 
10.7

 
231,068

 
4.5

 
N/A

 
N/A

Tier 1 capital to risk weighted assets
549,428

 
10.7

 
308,090

 
6.0

 
N/A

 
N/A

Tier 1 capital to total average assets
549,428

 
8.6

 
255,548

 
4.0

 
N/A

 
N/A

    
Our ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. The Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. The FDIC may limit a savings bank’s ability to pay dividends. No dividends may be paid to the Company’s shareholder if such dividends would reduce stockholders’ equity below the amount of the liquidation account required by the Connecticut conversion regulations. Connecticut law restricts the amount of dividends that the Bank can pay based on net income included in retained earnings for the current year and the preceding two years. As of December 31, 2017 and 2016, $108.3 million and $79.8 million, respectively, was available for the payment of dividends. Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, any one obligor under this statutory authority may not exceed 10% and 15%, respectively, of a bank’s capital and allowance for loan losses.

 
139
 

The following table provides a reconciliation of the Company’s total consolidated equity to the capital amounts for the Bank reflected in the preceding table:
 
December 31,
 
2017
 
2016
 
(In thousands)
Total consolidated equity
$
693,328

 
$
655,866

Adjustments:
 
 
 
Additional Bank-only equity
20,081

 
26,119

Accumulated other comprehensive loss
11,840

 
15,353

Disallowed goodwill and other intangible assets
(117,847
)
 
(117,161
)
Disallowed deferred tax assets
(11,398
)
 
(3,327
)
Other
(2,849
)
 
(2,218
)
Tier 1 capital
593,155

 
574,632

Allowance for loan losses and off-balance sheet credit losses
48,944

 
44,327

Unrealized gains on available-for-sale securities includible in total risk-based capital
80

 
61

Total risk-based capital
$
642,179

 
$
619,020

Note 18.
ACCUMULATED OTHER COMPREHENSIVE LOSS
The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:
 
 
December 31,
 
 
2017
 
2016
Benefit plans:
 
 
 
 
Unrecognized net actuarial loss
 
$
(7,578
)
 
$
(7,936
)
Tax effect
 
2,730

 
2,859

Net-of-tax amount
 
(4,848
)
 
(5,077
)
Securities available for sale:
 
 
 
 
Net unrealized loss
 
(8,896
)
 
(12,845
)
Tax effect
 
3,201

 
4,617

Net-of-tax amount
 
(5,695
)
 
(8,228
)
Interest rate swaps:
 
 
 
 
Net unrealized loss
 
(2,028
)
 
(3,202
)
Tax effect
 
731

 
1,154

Net-of-tax amount
 
(1,297
)
 
(2,048
)
 
 
$
(11,840
)
 
$
(15,353
)

 
140
 

Note 19.
NET INCOME PER SHARE
The following table sets forth the calculation of basic and diluted net income per share for the years ended December 31, 2017, 2016 and 2015:
 
Years Ended December 31,
(In thousands, except share data)
2017
 
2016
 
2015
Net income
$
54,618

 
$
49,661

 
$
49,640

Adjusted weighted-average common shares outstanding
50,820,019

 
50,290,934

 
49,495,381

Less: average number of unvested ESOP award shares
536,948

 
559,785

 
582,574

Weighted-average basic shares outstanding
50,283,071

 
49,731,149

 
48,912,807

Dilutive effect of stock options
639,581

 
357,881

 
472,759

Weighted-average diluted shares
50,922,652

 
50,089,030

 
49,385,566

Net income per share:
 
 
 
 
 
Basic
$
1.09

 
$
1.00

 
$
1.01

Diluted
$
1.07

 
$
0.99

 
$
1.00

There were no anti-dilutive options for the year ended December 31, 2017. For the years ending December 31, 2016 and 2015, the weighted-average number of anti-dilutive stock options excluded from the diluted net income per share calculation were 258,000 and 638,000, respectively. Stock options were anti-dilutive because the strike price was greater than the average fair value of the Company’s common stock for the periods presented.
Note 20.
OTHER COMMITMENTS AND CONTINGENCIES
Leases:    The Company leases certain of its branches and other office facilities under non-cancelable capital and operating lease agreements. Many of these leases contain renewal options and escalation clauses which provide for increased rental expense. In addition to rental payments, the branch leases require payments for executory costs. The Company also leases certain equipment under non-cancelable operating leases.
Future minimum rental commitments under the terms of these leases, by year and in the aggregate, are as follows as of December 31, 2017:
 
 
 
(In thousands)
2018
$
5,200

2019
5,767

2020
6,296

2021
6,091

2022
5,591

Thereafter
39,742

 
$
68,687

Total rental expense charged to operations for all cancelable and non-cancelable operating leases was $5.3 million, $4.6 million and $5.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

 
141
 

The Company, as a landlord, leases space to third party tenants under non-cancelable operating leases. In addition to base rent, the leases require payments for executory costs. Future minimum rents receivable under the non-cancelable leases are as follows as of December 31, 2017:
 
(In thousands)
2018
$
862

2019
989

2020
1,004

2021
796

2022
295

 
$
3,946

Rental income is recorded as a reduction to occupancy and equipment expense in the accompanying Consolidated Statements of Net Income and amounted to $573,000, $553,000 and $490,000 for the years ended December 31, 2017, 2016 and 2015, respectively.
Legal Matters:    The Company is involved in various legal proceedings that have arisen in the normal course of business. The Company is not involved in any legal proceedings deemed to be material as of December 31, 2017.
Financial Instruments with Off-Balance Sheet Risk:    In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit through issuing standby letters of credit and undisbursed portions of construction loans and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the statements of financial condition. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral obligations is deemed worthless. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Off-balance sheet financial instruments whose contract amounts represent credit risk are as follows at December 31, 2017 and 2016:
 
December 31,
 
2017
 
2016
 
(In thousands)
Commitments to extend credit:
 
 
 
Commitment to grant loans
$
110,664

 
$
197,070

Undisbursed construction loans
136,149

 
90,149

Undisbursed home equity lines of credit
412,484

 
364,421

Undisbursed commercial lines of credit
412,547

 
382,018

Standby letters of credit
14,680

 
13,588

Unused credit card lines
16,084

 
12,327

Unused checking overdraft lines of credit
1,544

 
1,465

Total
$
1,104,152

 
$
1,061,038

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, accounts receivable, inventory, property, plant and equipment, deposits, and securities.

 
142
 

Other Commitments
The Company invests in partnerships, including low income housing tax credit, new markets housing tax credit, and alternative energy tax credit partnerships. The net carrying balance of these investments totaled $38.2 million at December 31, 2017 and is included in other assets in the Consolidated Statement of Condition. At December 31, 2017, the Company was contractually committed under these limited partnership agreements to make additional capital contributions of $12.2 million, which constitutes our maximum potential obligation to these partnerships.
Note 21.
SELECTED QUARTERLY CONSOLIDATED INFORMATION (UNAUDITED)
The Company’s quarterly results of operations were as follows:
 
2017
 
2016
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
Fourth Quarter
 
Third Quarter
 
Second Quarter
 
First Quarter
 
(In thousands, except per share data)
Interest and dividend income
$
61,727

 
$
60,799

 
$
58,562

 
$
55,166

 
$
53,621

 
$
53,336

 
$
51,621

 
$
53,574

Interest expense
14,878

 
14,031

 
12,234

 
10,869

 
10,449

 
10,307

 
10,125

 
10,172

Net interest income
46,849

 
46,768

 
46,328

 
44,297

 
43,172

 
43,029

 
41,496

 
43,402

Provision for loan losses
2,250

 
2,566

 
2,292

 
2,288

 
3,359

 
3,766

 
3,624

 
2,688

Net interest income after provision for loan losses
44,599

 
44,202

 
44,036

 
42,009

 
39,813

 
39,263

 
37,872

 
40,714

Non-interest income
7,346

 
8,073

 
9,476

 
8,505

 
8,936

 
7,889

 
6,532

 
6,727

Other non-interest expense
37,002

 
34,909

 
34,979

 
34,695

 
33,293

 
32,236

 
34,681

 
33,763

Income before income taxes
14,943

 
17,366

 
18,533

 
15,819

 
15,456

 
14,916

 
9,723

 
13,678

Provision for income taxes
5,442

 
2,175

 
2,333

 
2,093

 
906

 
757

 
665

 
1,784

Net income
$
9,501

 
$
15,191

 
$
16,200

 
$
13,726

 
$
14,550

 
$
14,159

 
$
9,058

 
$
11,894

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.30

 
$
0.32

 
$
0.27

 
$
0.29

 
$
0.28

 
$
0.18

 
$
0.24

Diluted
$
0.19

 
$
0.30

 
$
0.32

 
$
0.27

 
$
0.29

 
$
0.28

 
$
0.18

 
$
0.24

Stock Price (per share):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
High
$
19.35

 
$
18.50

 
$
18.29

 
$
18.66

 
$
18.49

 
$
14.16

 
$
13.51

 
$
12.81

Low
$
17.09

 
$
16.27

 
$
15.84

 
$
15.75

 
$
13.51

 
$
12.64

 
$
12.16

 
$
10.28

 
The fourth quarter of 2017 was significantly impacted by the Tax Act, resulting in a $2.8 million negative net income impact, of which, $1.6 million flowed directly through the provision for income taxes. The quarter was also impacted by accelerated lease expense recognized on a property that the Company no longer occupies, causing an increase in non-interest expense as compared to previous quarters as well as the Company’s move to it’s new headquarters in Hartford, CT.
The second quarter of 2016 was significantly impacted by the Company’s announced reorganization plan which included $1.4 million of severance costs.

 
143
 

Note 22.
PARENT COMPANY FINANCIAL INFORMATION
The following represents the Company’s Condensed Statements of Condition as of December 31, 2017 and 2016 and Condensed Statements of Net Income and Cash Flows for the years ended December 31, 2017, 2016 and 2015 which should be read in conjunction with the Consolidated Financial Statements and related notes:
Condensed Statements of Condition
 
At December 31,
 
2017
 
2016
 
(In thousands)
Assets:
 
 
 
Cash and due from banks
$
24,365

 
$
16,567

Investment in United Bank
713,409

 
681,985

Due from United Bank
13,101

 
11,405

Other assets
24,210

 
27,308

Total Assets
$
775,085

 
$
737,265

Liabilities and Stockholders’ Equity:
 
 
 
Subordinated debentures
$
79,956

 
$
79,716

Accrued expenses and other liabilities
1,801

 
1,683

Stockholders’ equity
693,328

 
655,866

Total Liabilities and Stockholders’ Equity
$
775,085

 
$
737,265

Condensed Statements of Net Income
 
 
For the Years Ended December 31,
 
 
2017
 
2016
 
2015
 
 
(In thousands)
Interest and dividend income on investments
 
$
25

 
$
159

 
$
103

Interest expense on subordinated debentures
 
(4,794
)
 
(4,738
)
 
(4,682
)
Net interest expense
 
(4,769
)
 
(4,579
)
 
(4,579
)
Non-interest income
 
830

 
—

 
434

General and administrative expense
 
(5,350
)
 
(4,982
)
 
(4,714
)
Loss before tax benefit and equity in undistributed net loss of United Bank
 
(9,289
)
 
(9,561
)
 
(8,859
)
Income tax benefit
 
3,987

 
3,338

 
3,094

Loss before equity in undistributed net income of United Bank
 
(5,302
)
 
(6,223
)
 
(5,765
)
Equity in undistributed net income of United Bank
 
59,920

 
55,884

 
55,405

Net income
 
$
54,618

 
$
49,661

 
$
49,640


 
144
 

Condensed Statements of Cash Flows
 
For the Years ended December 31,
 
2017
 
2016
 
2015
 
(In thousands)
Cash flows from operating activities:
 
 
 
 
 
Net income
$
54,618

 
$
49,661

 
$
49,640

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
 
 
Amortization of purchase accounting marks, net
114

 
100

 
75

Amortization of subordinated debt issuance costs, net
126

 
127

 
127

Share-based compensation expense
2,699

 
2,252

 
1,076

ESOP expense
400

 
308

 
299

Undistributed income of United Bank
(59,920
)
 
(55,884
)
 
(55,405
)
Deferred tax provision
7,166

 
4,237

 
188

Tax provision (benefit) of stock-based awards
—

 
(486
)
 
317

Net change in:
 
 
 
 
 
Due from United Bank
(1,696
)
 
(2,031
)
 
6,491

Other assets
3,941

 
6,879

 
(32,849
)
Accrued expenses and other liabilities
118

 
(19
)
 
(53
)
Net cash provided by (used in) operating activities
7,566

 
5,144

 
(30,094
)
Cash flows from investing activities:
 
 
 
 
 
Dividends from United Bank
24,000

 
—

 
30,913

Net cash provided by investing activities
24,000

 
—

 
30,913

Cash flows from financing activities:
 
 
 
 
 
Common stock repurchased
(1,312
)
 
—

 
(5,171
)
Proceeds from the exercise of stock options
2,460

 
6,275

 
4,765

Cancellation of shares for tax withholding
(805
)
 
(327
)
 
(311
)
Tax effects of share-based awards
—

 
486

 
(317
)
Cash dividends paid on common stock
(24,111
)
 
(23,836
)
 
(22,479
)
Net cash used in financing activities
(23,768
)
 
(17,402
)
 
(23,513
)
Net increase (decrease) in cash and cash equivalents
7,798

 
(12,258
)
 
(22,694
)
Cash and cash equivalents — beginning of year
16,567

 
28,825

 
51,519

Cash and cash equivalents — end of year
$
24,365

 
$
16,567

 
$
28,825

Supplemental disclosures of cash flow information:
 
 
 
 
 
Cash paid (refunded) for income taxes, net
$
4,574

 
$
3,655

 
$
(6,744
)

 
145
 

Item 9.    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with accountants on accounting and financial disclosure as defined in Item 304 of Regulation S-K.
Item 9A.    Controls and Procedures
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures:
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Exchange Act Rule 13a-15(e). Based on this evaluation, our Chief Executive Officer and our Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.
Management’s Report on Internal Control Over Financial Reporting:
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Our internal control over financial reporting includes those policies and procedures that:
•
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that our receipts and expenditures are being made only in accordance with authorizations of the Company’s management and Directors; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on management’s assessment and those criteria, management believes that the Company maintained effective internal control over financial reporting as of December 31, 2017.
The Company’s independent registered public accounting firm has audited and issued a report on the Company’s internal control over financial reporting, which appears on page 73.
Item 9B.    Other Information
Not applicable.

 
146
 

Part III
Item 10.    Directors, Executive Officers and Corporate Governance
The information required by this Item is incorporated into this Form 10-K by reference to the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders, to be filed within 120 days following December 31, 2017.
Item 11.    Executive Compensation
The information required by this Item is incorporated into this Form 10-K by reference to the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders, to be filed within 120 days following December 31, 2017.
Item 12.    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated into this Form 10-K by reference to the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders, to be filed within 120 days following December 31, 2017.
Item 13.    Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated into this Form 10-K by reference to the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders, to be filed within 120 days following December 31, 2017.
Item 14.    Principal Accountant Fees and Services
The information required by this Item is incorporated into this Form 10-K by reference to the Company’s definitive proxy statement for its 2018 Annual Meeting of Shareholders, to be filed within 120 days following December 31, 2017.

 
147
 

Part IV
Item 15.    Exhibits, Financial Statements and Financial Statement Schedules
a) The Consolidated Financial Statements, including notes thereto, and financial schedules required in response to this item are set forth in Part II, Item 8 of this Form 10-K, and can be found on the following pages:
2
Financial Statement Schedules
Schedules to the Consolidated Financial Statements required by Article 9 of Regulation S-X and all other schedules to the Consolidated Financial Statements have been omitted because they are either not required, are not applicable or are included in the Consolidated Financial Statements or notes thereto, which can be found in this report in Part II, Item 8.
3
Exhibits:
 
 
 
 
 
 
2.1
  
 
2.2
  
 
3.1
  
 
3.1.1
 
 
3.2
  
 
10.5
  
 
10.6
  
 
10.9
  
 
10.10
  
 
10.11.2
  
 
10.11.4
  

 
148
 

 
 
 
 
 
10.12
  
 
10.12.1
  
 
10.14
  
 
10.17
  
 
10.18
  
 
10.19
 
 
10.20
 
 
10.21
 
 
10.22
 
 
14.0        
  
 
21.0        
  
 
23.1
  
 
31.1
  
 
31.2
  
 
32.0
  
 
101.      
  
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition; (ii) the Consolidated Statements of Net Income; (iii) the Consolidated Statements of Comprehensive Income; (iv) the Consolidated Statements of Changes in Stockholders’ Equity; (v) the Consolidated Statements of Cash Flows; and (vi) the Notes to Consolidated Financial Statements filed herewith
Item 16.   Form 10-K Summary
None.

 
149
 














SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
United Financial Bancorp, Inc.
 
 
By:
 
/s/ William H.W. Crawford, IV
 
 
William H.W. Crawford, IV
 
 
Chief Executive Officer and President
 
 
 
 
and
 
 
By:
 
/s/ Eric R. Newell
 
 
Eric R. Newell
 
 
Executive Vice President, Chief
 
 
Financial Officer and Treasurer
Date: February 28, 2018

 
150
 

Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. 
 
 
 
 
 
Signatures
  
Title
 
Date
 
 
 
/s/    William H.W. Crawford, IV
  
Chief Executive Officer and President
(Principal Executive Officer)
 
February 28, 2018
William H.W. Crawford, IV
  
 
 
 
 
/s/    Eric R. Newell
  
Executive Vice President, Chief Financial Officer and
Treasurer (Principal Financial and Accounting Officer)
 
February 28, 2018
Eric R. Newell
  
 
 
 
 
/s/    Paula A. Aiello
  
Director
 
February 28, 2018
Paula A. Aiello
  
 
 
 
 
/s/    Michael A. Bars
  
Director
 
February 28, 2018
Michael A. Bars
  
 
 
 
 
/s/    Michael F. Crowley
  
Director
 
February 28, 2018
Michael F. Crowley
  
 
 
 
 
/s/    Kristen A. Johnson
  
Director
 
February 28, 2018
Kristen A. Johnson
  
 
 
 
 
/s/    Carol A. Leary
  
Director
 
February 28, 2018
Carol A. Leary
  
 
 
 
 
/s/    Raymond H. Lefurge, Jr.
  
Vice Chairman
 
February 28, 2018
Raymond H. Lefurge, Jr.
  
 
 
 
 
 
 
/s/    Kevin E. Ross
  
Director
 
February 28, 2018
Kevin E. Ross
  
 
 
 
 
/s/    Robert A. Stewart, Jr.
  
Chairman
 
February 28, 2018
Robert A. Stewart, Jr.
  
 

 
151