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
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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;
Establishing a process for credit approval accountability;
Careful initial underwriting and analysis of borrower, transaction, market and collateral risks;
Established underwriting practices;
Ongoing servicing of the majority of individual loans and lending relationships;
Continuous monitoring of the transactions and portfolio, market dynamics and the economy;
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:

Commercial Business Loans: Repayment is generally dependent upon the successful operation of the borrower’s business.
Commercial Real Estate Loans: Repayment is dependent on income being generated in amounts sufficient to cover operating expenses and debt service.
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.

 
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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.

 
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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


 
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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).

 
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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.


 
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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.


 
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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;

 
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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

 
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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.

 
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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