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UNFB United Financial Bancorp

Filed: 2 Aug 19, 4:13pm
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
 
 Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2019.

Commission File Number: 001-35028
ufbancorplogorgb3a36.jpg
United Financial Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Connecticut 27-3577029
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
     
225 Asylum Street,Hartford,Connecticut 06103
(Address of principal executive offices) (Zip Code)
(860) 291-3600
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Common Stock, no par valueUBNKNASDAQ Global Select Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
    
Non-accelerated filerSmaller reporting company
    
  Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ý
As of July 31, 2019, there were 51,152,668 shares of Registrant’s no par value common stock outstanding.

 


Table of Contents
 




Part 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Condition
(Unaudited)
 June 30,
2019
 December 31,
2018
 (In thousands, except share data)
ASSETS   
Cash and due from banks$67,939
 $36,434
Short-term investments46,807
 61,530
Total cash and cash equivalents114,746
 97,964
Available-for-sale securities - at fair value840,500
 973,347
Loans held for sale38,809
 78,788
Loans receivable (net of allowance for loan losses of $53,206
at June 30, 2019 and $51,636 at December 31, 2018)
5,719,892
 5,622,589
Federal Home Loan Bank of Boston stock, at cost34,335
 41,407
Accrued interest receivable24,938
 24,823
Deferred tax asset, net27,366
 32,706
Premises and equipment, net62,304
 68,657
Operating lease right-of-use assets43,171
 
Finance lease right-of-use assets4,266
 
Goodwill116,709
 116,769
Core deposit intangible5,219
 6,027
Cash surrender value of bank-owned life insurance195,993
 193,429
Other assets107,707
 100,368
Total assets$7,335,955
 $7,356,874
    
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Liabilities:   
Deposits:   
Non-interest-bearing$843,926
 $799,785
Interest-bearing4,882,622
 4,870,814
Total deposits5,726,548
 5,670,599
Mortgagors’ and investors’ escrow accounts14,541
 4,685
Advances from the Federal Home Loan Bank of Boston651,964
 797,271
Other borrowings90,025
 102,355
Operating lease liabilities55,197
 
Finance lease liabilities4,518
 
Accrued expenses and other liabilities73,140
 69,446
Total liabilities6,615,933
 6,644,356
 
 
Stockholders’ equity:   
Preferred stock (no par value; 2,000,000 authorized; no shares issued)
 
Common stock (no par value; authorized 120,000,000 shares; 51,094,995 and 51,104,783 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively)
539,604
 539,476
Additional paid-in capital3,485
 1,933
Unearned compensation - ESOP(5,124) (5,238)
Retained earnings193,781
 206,761
Accumulated other comprehensive loss, net of tax(11,724) (30,414)
Total stockholders’ equity720,022
 712,518
Total liabilities and stockholders’ equity$7,335,955
 $7,356,874

See accompanying notes to unaudited consolidated financial statements.
3
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Net Income (Loss)
(Unaudited)
 For the Three Months 
 Ended June 30,
 For the Six Months 
 Ended June 30,
 2019 2018 2019 2018
 (In thousands, except share and per share data)
Interest and dividend income:     
Loans$65,650
 $57,958
 $130,414
 $112,738
Securities - taxable interest6,117
 5,969
 12,592
 11,467
Securities - non-taxable interest644
 2,354
 1,738
 4,783
Securities - dividends653
 736
 1,309
 1,373
Interest-bearing deposits341
 113
 566
 263
Total interest and dividend income73,405
 67,130
 146,619
 130,624
Interest expense:       
Deposits20,564
 12,864
 40,495
 23,891
Borrowed funds5,831
 6,085
 12,177
 12,009
Total interest expense26,395
 18,949
 52,672
 35,900
Net interest income47,010
 48,181
 93,947
 94,724
Provision for loan losses2,472
 2,350
 4,515
 4,289
Net interest income after provision for loan losses44,538
 45,831
 89,432
 90,435
Non-interest income:       
Service charges and fees7,538
 6,542
 13,723
 12,701
Gain on sales of securities, net137
 62
 874
 178
(Loss) income from mortgage banking activities(410) 846
 181
 2,575
Bank-owned life insurance income1,521
 1,671
 3,467
 3,317
Net loss on limited partnership investments(7,898) (960) (8,501) (1,550)
Other (loss) income(48) 199
 76
 428
Total non-interest income840
 8,360
 9,820
 17,649
Non-interest expense:       
Salaries and employee benefits21,923
 22,113
 44,125
 43,311
Service bureau fees2,198
 2,165
 4,235
 4,383
Occupancy and equipment5,111
 4,668
 10,651
 9,617
Professional fees2,414
 1,105
 3,707
 2,269
Marketing and promotions782
 1,189
 1,640
 1,874
FDIC insurance assessments769
 735
 1,428
 1,474
Core deposit intangible amortization388
 305
 808
 642
Other5,872
 6,090
 12,050
 11,536
Total non-interest expense39,457
 38,370
 78,644
 75,106
Income before income taxes5,921
 15,821
 20,608
 32,978
Provision for income taxes9,169
 175
 11,199
 1,545
Net (loss) income$(3,248) $15,646
 $9,409
 $31,433
        
Net (loss) income per share:       
Basic$(0.06) $0.31
 $0.19
 $0.62
Diluted$(0.06) $0.31
 $0.19
 $0.62
Weighted-average shares outstanding:       
Basic50,620,236
 50,504,273
 50,617,661
 50,489,689
Diluted50,620,236
 50,974,283
 50,763,678
 50,985,520

See accompanying notes to unaudited consolidated financial statements.
4
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Unaudited)
 For the Three Months 
 Ended June 30,
 For the Six Months 
 Ended June 30,
 2019 2018 2019 2018
 (In thousands)
Net (loss) income$(3,248) $15,646
 $9,409
 $31,433
Other comprehensive income (loss):       
Securities available-for-sale:       
Unrealized holding gains (losses)13,574
 (6,033) 37,344
 (23,023)
Reclassification adjustment for gains realized in operations (1)(137) (62) (874) (178)
Net unrealized gains (losses)13,437
 (6,095) 36,470
 (23,201)
Tax effect - (expense) benefit(2,961) 1,340
 (8,036) 5,273
Net-of-tax amount - securities available-for-sale10,476
 (4,755) 28,434
 (17,928)
Interest rate swaps designated as cash flow hedges:       
Unrealized (losses) gains(7,916) 2,451
 (12,489) 6,883
Reclassification adjustment for (gains) losses recognized in interest expense (2)
(68) 84
 (291) 429
Net unrealized (losses) gains(7,984) 2,535
 (12,780) 7,312
Tax effect - benefit (expense)1,759
 (560) 2,815
 (1,612)
Net-of-tax amount - interest rate swaps(6,225) 1,975
 (9,965) 5,700
Pension and Post-retirement plans:       
Reclassification adjustment for prior service costs recognized in net periodic benefit cost2
 2
 4
 4
Reclassification adjustment for losses recognized in net periodic benefit cost (3)140
 123
 279
 246
Net change in gains and prior service costs142
 125
 283
 250
Tax effect - expense(32) (28) (62) (55)
Net-of-tax amount - pension and post-retirement plans110
 97
 221
 195
Total other comprehensive income (loss)4,361
 (2,683) 18,690
 (12,033)
Comprehensive income$1,113
 $12,963
 $28,099
 $19,400
 
(1)Amounts are included in gain on sales of securities, net in the unaudited Consolidated Statements of Net Income. Income tax expense associated with the reclassification adjustment was $30 and $14 for the three months ended June 30, 2019 and 2018, respectively, and $193 and $39 for the six months ended June 30, 2019 and 2018, respectively.
(2)Amounts are included in borrowed funds interest expense in the unaudited Consolidated Statements of Net Income. Income tax (expense) benefit associated with the reclassification adjustment for the three months ended June 30, 2019 and 2018 was $(15) and $19, respectively. Income tax (expense) benefit associated with the reclassification adjustment for the six months ended June 30, 2019 and 2018 was $(64) and $95, respectively.
(3)Amounts are included in salaries and employee benefits expense in the unaudited Consolidated Statements of Net Income. Income tax benefit associated with the reclassification adjustment for losses recognized in the net periodic benefit cost for the three months ended June 30, 2019 and 2018 was $31 and $27, respectively. Income tax benefit associated with the reclassification adjustment for losses recognized in the net periodic benefit cost for the six months ended June 30, 2019 and 2018 was $61 and $54, respectively.

See accompanying notes to unaudited consolidated financial statements.
5
 


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


 Six-Month Period Ended June 30, 2019
 Common Stock 
Additional
Paid-in
Capital
 
Unearned
Compensation
 - ESOP
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Shares Amount     
 (In thousands, except share data)
Balance at December 31, 201851,104,783
 $539,476
 $1,933
 $(5,238) $206,761
 $(30,414) $712,518
Adoption of ASU No. 2017-08 (See Note 3)
 
 
 
 (10,187) 
 (10,187)
Comprehensive income
 
 
 
 9,409
 18,690
 28,099
Stock-based compensation expense
 
 1,069
 
 
 
 1,069
ESOP shares released or committed to be released
 
 50
 114
 
 
 164
Shares issued for stock options exercised81,909
 1,239
 (387) 
 
 
 852
Shares issued for restricted stock grants1,483
 20
 (20) 
 
 
 
Shares canceled for restricted stock forfeitures(74,700) (1,131) 1,131
 
 
 
 
Cancellation of shares for tax withholding(18,480) 
 (291) 
 
 
 (291)
Dividends paid ($0.24 per common share)
 
 
 
 (12,202) 
 (12,202)
Balance at June 30, 201951,094,995
 $539,604
 $3,485
 $(5,124) $193,781
 $(11,724) $720,022
              
 Three-Month Period Ended June 30, 2019
Balance at March 31, 201951,100,720
 $539,776
 $2,432
 $(5,181) $203,156
 $(16,085) $724,098
Comprehensive income
 
 
 
 (3,248) 4,361
 1,113
Stock-based compensation expense
 
 489
 
 
 
 489
ESOP shares released or committed to be released
 
 21
 57
 
 
 78
Shares issued for stock options exercised30,396
 432
 (48) 
 
 
 384
Shares issued for restricted stock grants1,483
 20
 (20) 
 
 
 
Shares canceled for restricted stock forfeitures(37,408) (624) 624
 
 
 
 
Cancellation of shares for tax withholding(196) 
 (13) 
 
 
 (13)
Dividends paid ($0.12 per common share)
 
 
 
 (6,127) 
 (6,127)
Balance at June 30, 201951,094,995
 $539,604
 $3,485
 $(5,124) $193,781
 $(11,724) $720,022







See accompanying notes to unaudited consolidated financial statements.
6
 


              
 Six-Month Period Ended June 30, 2018
 Common Stock 
Additional
Paid-in
Capital
 
Unearned
Compensation
 - ESOP
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Stockholders’
Equity
Shares Amount     
 (In thousands, except share data)
Balance at December 31, 201751,044,752
 $537,576
 $4,713
 $(5,466) $168,345
 $(11,840) $693,328
Adoption of ASU No. 2016-01

 
 
 
 177
 (177) 
Adoption of ASU No. 2018-02
 
 
 
 2,590
 (2,590) 
Comprehensive income
 
 
 
 31,433
 (12,033) 19,400
Common stock repurchased(94,900) (1,551) 
 
 
 
 (1,551)
Stock-based compensation expense
 
 1,417
 
 
 
 1,417
ESOP shares released or committed to be released
 
 77
 114
 
 
 191
Shares issued for stock options exercised172,794
 2,973
 (1,538) 
 
 
 1,435
Shares issued for restricted stock grants8,763
 147
 (147) 
 
 
 
Shares canceled for restricted stock forfeitures(8,340) (139) 139
 
 
 
 
Cancellation of shares for tax withholding(5,720) 
 (102) 
 
 
 (102)
Dividends paid ($0.24 per common share)
 
 $
 
 (12,241) $
 (12,241)
Balance at June 30, 201851,117,349
 $539,006
 $4,559
 $(5,352) $190,304
 $(26,640) $701,877
              
 Three-Month Period Ended June 30, 2018
Balance at March 31, 201850,976,667
 $536,537
 $5,052
 $(5,409) $180,777
 $(23,957) $693,000
Comprehensive income
 
 
 
 15,646
 (2,683) 12,963
Stock-based compensation expense
 
 699
 
 
 
 699
ESOP shares released or committed to be released
 
 39
 57
 
 
 96
Shares issued for stock options exercised149,986
 2,608
 (1,353) 
 
 
 1,255
Shares canceled for restricted stock forfeitures(8,340) (139) 139
 
 
 
 
Cancellation of shares for tax withholding(964) 
 (17) 
 
 
 (17)
Dividends paid ($0.12 per common share)
 
 
 
 (6,119) 
 (6,119)
Balance at June 30, 201851,117,349
 $539,006
 $4,559
 $(5,352) $190,304
 $(26,640) $701,877


See accompanying notes to unaudited consolidated financial statements.
7
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
 For the Six Months 
 Ended June 30,
 2019 2018
 (In thousands)
Cash flows from operating activities:   
Net income$9,409
 $31,433
Adjustments to reconcile net income to net cash provided by operating activities:   
Amortization of premiums and discounts on investments, net2,544
 2,157
Amortization of intangible assets and purchase accounting marks, net1,260
 681
Amortization of subordinated debt issuance costs32
 63
Stock-based compensation expense1,069
 1,417
ESOP expense164
 191
Provision for loan losses4,515
 4,289
Gains on sales of securities, net(874) (178)
Net realized (gain) loss on marketable equity securities(45) 1
Loans originated for sale(72,353) (170,922)
Principal balance of loans sold112,332
 199,537
Decrease (increase) in mortgage servicing asset2,075
 (1,946)
Loss (gain) on sales of other real estate owned7
 (78)
Net change in mortgage banking fair value adjustments(581) 1,144
Loss on disposal of equipment102
 68
Write-downs of other real estate owned58
 218
Depreciation and amortization of premises and equipment4,205
 3,769
Net loss on limited partnership investments8,501
 1,550
Deferred income tax expense (benefit)57
 (928)
Increase in cash surrender value of bank-owned life insurance(3,046) (2,882)
Income recognized from death benefits on bank-owned life insurance(421) (435)
Right-of-use asset depreciation2,590
 
Amortization of lease liabilities(2,118) 
Lease incentives received117
 
Net change in:   
Deferred loan fees and premiums(179) (708)
Accrued interest receivable(115) (877)
Other assets(30,475) (11,700)
Accrued expenses and other liabilities15,592
 7,165
Net cash provided by operating activities54,422
 63,029
Cash flows from investing activities:   
Proceeds from sales of available-for-sale securities333,892
 58,652
Proceeds from calls and maturities of available-for-sale securities26,280
 26,065
Principal payments on available-for-sale securities30,819
 33,669
Purchases of available-for-sale securities(233,531) (85,557)
Redemption of FHLBB and other restricted stock9,002
 6,940
Purchase of FHLBB stock(1,930) (3,480)
Proceeds from sale of other real estate owned600
 1,635
Purchases of loans(169,414) (144,913)
Loan originations, net of principal repayments67,214
 4,315
Proceeds from bank-owned life insurance death benefits854
 1,082
Purchases of bank-owned life insurance
 (30,000)
Proceeds from redemption of bank-owned life insurance
 26,292
Purchases of premises and equipment(1,544) (3,977)
Net cash provided by (used in) investing activities62,242
 (109,277)

(Continued)
See accompanying notes to unaudited consolidated financial statements.
8
 


United Financial Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows - Concluded
(Unaudited)
 For the Six Months 
 Ended June 30,
 2019 2018
 (In thousands)
Cash flows from financing activities:   
Net increase (decrease) in non-interest-bearing deposits44,141
 (7,594)
Net increase in interest-bearing deposits11,808
 202,871
Net increase in mortgagors’ and investors’ escrow accounts9,856
 6,981
Net decrease in short-term FHLBB advances(160,000) (91,000)
Repayments of long-term FHLBB advances(287) (775)
Repayments of called FHLBB advances
 (30,000)
Proceeds from long-term FHLBB advances15,000
 950
Net change in other borrowings(8,627) (2,219)
Principal payments on finance leases(132) 
Proceeds from exercise of stock options852
 1,435
Common stock repurchased
 (1,551)
Cancellation of shares for tax withholding(291) (102)
Cash dividend paid on common stock(12,202) (12,241)
Net cash (used in) provided by financing activities(99,882) 66,755
Net increase in cash and cash equivalents16,782
 20,507
Cash and cash equivalents, beginning of period97,964
 88,668
Cash and cash equivalents, end of period$114,746
 $109,175
    
Supplemental Disclosures of Cash Flow Information:   
Cash paid during the year for:   
Interest$52,597
 $34,989
Income taxes, net2,193
 1,135
Transfer of loans to other real estate owned731
 1,476
Cash paid for amounts included in the measurement of lease liabilities:   
Operating cash flows from operating leases3,107
 
Operating cash flows from finance leases125
 
Finance cash flows from finance leases132
 
Right-of-use assets obtained in exchange for lease obligations

 

Operating leases43,171
 
Finance leases4,266
 

See accompanying notes to unaudited consolidated financial statements.
9
 


United Financial Bancorp, Inc. and Subsidiaries
Notes to Unaudited Consolidated Financial Statements
Note 1.Summary of Significant Accounting Policies
Nature of Operations
United Financial Bancorp, Inc. (the “Company” or “United”) is headquartered in Hartford, Connecticut, and through United Bank (the “Bank”) and various subsidiaries, delivers financial services to individuals, families and businesses primarily throughout Connecticut and Massachusetts through 58 banking offices, its commercial loan production offices, its mortgage loan production offices, 72 ATMs, telephone banking, mobile banking and online banking (www.bankatunited.com).
Basis of Presentation
The consolidated interim financial statements and the accompanying notes presented in this report include the accounts of the Company, the Bank and the Bank’s wholly-owned subsidiaries, United Bank Mortgage Company, United Bank Investment Corp., Inc., United Bank Commercial Properties, Inc., United Bank Residential Properties, Inc., United Wealth Management, Inc., United Bank Investment Sub, Inc., UB Properties, LLC, United Financial Realty HC, Inc. and UCB Securities, Inc. II. In addition, the Bank has a real estate investment trust subsidiary, United Financial Business Trust I, which is a wholly-owned subsidiary of United Financial Realty HC, Inc.
The consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules of the Securities and Exchange Commission (“SEC”) for quarterly reports on Form 10-Q. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included in the interim unaudited consolidated financial statements. Interim results are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or any future period. These unaudited interim consolidated financial statements should be read in conjunction with the Company’s 2018 audited consolidated financial statements and notes thereto included in United Financial Bancorp, Inc.’s Annual Report on Form 10-K as of and for the year ended December 31, 2018.
Common Share Repurchases
The Company is chartered in the state of Connecticut. Connecticut law does not provide for treasury shares, and shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances.
Reclassifications
Certain reclassifications have been made in prior periods’ consolidated financial statements to conform to the 2019 presentation. These reclassifications had no impact on the Company’s consolidated financial position, results of operations or net change in cash equivalents.
Use of Estimates
The preparation of the consolidated interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results in the future could vary from the amounts derived from management’s estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the realizability of deferred tax assets, the evaluation of securities for other-than-temporary impairment, the valuation of derivative instruments and hedging activities, and goodwill impairment valuations.
Note 2.Recent Accounting Pronouncements

Recently Adopted Accounting Principles Previously Disclosed
Effective January 1, 2019, the Company adopted the following Accounting Standards Updates (“ASUs”):
ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting
ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
ASU No. 2016-02, Leases (Topic 842)
ASU No. 2018-11, Leases (Topic 842): Targeted Improvements
ASU No. 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors


10
 


See Note 3, “Securities”, and Note 5, “Leases” for further discussion of the impact of ASU No. 2017-08, ASU No. 2016-02, ASU No. 2018-11, and ASU No. 2018-20. The adoption of ASU No. 2018-07 did not have a material impact on the Company’s consolidated interim financial statements.
Accounting Standards Issued but Not Yet Adopted
The following list identifies ASUs applicable to the Company that have been issued but are not yet effective:
Disclosure
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this ASU remove the disclosure requirements that no longer are considered cost beneficial, clarify the specific requirements of disclosures and add disclosure requirements identified as relevant. The amendments in this ASU are effective for fiscal years ending after December 15, 2020. Early adoption is permitted and amendments should be applied on a retrospective basis to all periods presented. This ASU will affect the Company’s disclosure only and will not have a financial statement impact.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU updates disclosure requirements of Accounting Standards Codification (“ASC”) Topic 820 in order to improve the effectiveness of the disclosures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments affecting changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty are to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented upon their effective date. An entity is permitted to early adopt any removed or modified disclosures and delay adoption of the additional disclosures until their effective date. This ASU will affect the Company’s disclosures only and will not have a financial statement impact.
Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the FASB’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the current expected credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. The ASU is also intended to reduce the complexity of GAAP by decreasing the number of credit impairment models that entities use to account for debt instruments. For public business entities that are SEC filers, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU earlier as of the fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The expected credit loss model will require a financial asset to be presented at the net amount expected to be collected. The impact on adoption is a one-time adjustment to retained earnings.
Additional updates were issued through ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, Topic 815, Derivatives and Hedging (Topic 825), Financial Instruments. This ASU clarifies and improves guidance related to the previously issued standards on credit losses, hedging and recognition and measurement of financial instruments. The amendments provide entities with various measurement alternatives and policy elections related to accounting for credit losses and accrued interest receivable balances. Entities are also able to elect a practical expedient to separately disclose the total amount of accrued interest included in the amortized cost basis as a single balance to meet certain disclosure requirements. The amendments clarify that the estimated allowance for credit losses should include all expected recoveries of financial assets and trade receivables that were previously written off and expected to be written off. The amendments also allow entities to use projections of future interest rate environments when using a discounted cash flow method to measure expected credit losses on variable-rate financial instruments.
In addition, new updates were issued through ASU No. 2019-05, Financial Instruments - Credit Losses (Topic 326): Targeted Transition Relief. This amendment allows entities to elect the fair value option on certain financial instruments. On adoption, an entity is allowed to irrevocably elect the fair value option on an instrument-by-instrument basis. This alternative is available for all instruments in the scope of Subtopic 326-20 except for existing held-to-maturity debt securities. If an entity elects the fair value option, the difference between the instrument’s fair value and carrying amount is recognized as a cumulative-effect adjustment.
The Company is evaluating the provisions of ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05, and will closely monitor developments and additional guidance to determine the potential impact on the Company’s consolidated financial statements. The ASU is expected to increase loan loss reserves, the amount of which is uncertain at this time. The Company has formed a committee led by the Bank’s Chief Credit Officer, which includes the Chief Financial Officer and Chief Risk Officer, to assist in identifying, implementing and evaluating the impact of the required changes to loan loss estimation models and processes.


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The Company has evaluated portfolio segments, methodologies and the control environment under the new standard. Additionally, the Company is in the process of finalizing internal policy, documentation for regulators, model governance and process controls, and is performing parallel testing.


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Note 3.Securities
The amortized cost, gross unrealized gains, gross unrealized losses and fair value of investment securities classified as available-for-sale at June 30, 2019 and December 31, 2018 are as follows:
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 (In thousands)
June 30, 2019       
Available-for-sale:       
Government-sponsored residential mortgage-backed securities$235,412
 $1,272
 $(304) $236,380
Government-sponsored residential collateralized debt obligations116,142
 821
 (47) 116,916
Government-sponsored commercial mortgage-backed securities15,230
 574
 
 15,804
Government-sponsored commercial collateralized debt obligations149,654
 776
 (1,261) 149,169
Asset-backed securities141,918
 411
 (789) 141,540
Corporate debt securities91,952
 1,865
 (145) 93,672
Obligations of states and political subdivisions84,970
 2,141
 (92) 87,019
Total available-for-sale debt securities$835,278
 $7,860
 $(2,638) $840,500
December 31, 2018       
Available-for-sale:       
Government-sponsored residential mortgage-backed securities$208,916
 $
 $(4,818) $204,098
Government-sponsored residential collateralized debt obligations172,468
 270
 (2,019) 170,719
Government-sponsored commercial mortgage-backed securities28,694
 
 (1,016) 27,678
Government-sponsored commercial collateralized debt obligations155,091
 
 (6,865) 148,226
Asset-backed securities102,371
 15
 (1,891) 100,495
Corporate debt securities86,462
 48
 (3,280) 83,230
Obligations of states and political subdivisions250,593
 425
 (12,117) 238,901
Total available-for-sale debt securities$1,004,595
 $758
 $(32,006) $973,347

At June 30, 2019, the net unrealized gain on securities available-for-sale of $5.2 million, net of an income tax benefit of $1.1 million, or $4.1 million, was included in accumulated other comprehensive loss on the unaudited Consolidated Statement of Condition.
The amortized cost and fair value of debt securities at June 30, 2019 by contractual maturities are presented below. Actual maturities may differ from contractual maturities because some securities may be called or repaid without any penalties. Also, because mortgage-backed securities require periodic principal paydowns, they are not included in the maturity categories in the following maturity summary.


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 Available-for-Sale
 Amortized
Cost
 Fair
Value
 (In thousands)
Maturity:   
Within 1 year$
 $
After 1 year through 5 years9,258
 9,413
After 5 years through 10 years85,822
 87,371
After 10 years81,842
 83,907
 176,922
 180,691
Government-sponsored residential mortgage-backed securities235,412
 236,380
Government-sponsored residential collateralized debt obligations116,142
 116,916
Government-sponsored commercial mortgage-backed securities15,230
 15,804
Government-sponsored commercial collateralized debt obligations149,654
 149,169
Asset-backed securities141,918
 141,540
Total available-for-sale debt securities$835,278
 $840,500


Effective January 1, 2018, the Company adopted FASB ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which required the Company to recognize the changes in fair value of marketable equity securities to be recorded in the Consolidated Statements of Net Income. The cumulative-effect adjustment resulting from the adoption of this new standard was a one-time adjustment that increased retained earnings and increased accumulated other comprehensive losses on January 1, 2018 by $177,000. For the three months ended June 30, 2019 and 2018, there were ($8,000) and $24,000, respectively, in realized gains (losses) recognized in other (loss) income in the Consolidated Statements of Net Income on marketable equity securities. For the six months ended June 30, 2019 and 2018, there were $45,000 and $(1,000), respectively, in realized gains (losses) recognized in other income in the Consolidated Statements of Net Income on marketable equity securities. At June 30, 2019 and December 31, 2018, the fair value of marketable equity securities included in other assets on the Consolidated Statements of Condition was $401,000 and $356,000, respectively.

Effective January 1, 2019, the Company adopted FASB ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which required the Company to recognize the amortization period for callable debt securities held at a premium as the period from purchase to earliest call date. The cumulative-effect adjustment resulting from the adoption of this new standard was a one-time adjustment that decreased retained earnings by $10.2 million.
At June 30, 2019 and December 31, 2018, the Company had securities with a fair value of $365.0 million and $438.8 million, respectively, pledged as derivative collateral, collateral for reverse repurchase borrowings, collateral for municipal deposit exposure, and collateral for FHLBB borrowing capacity.
For the three months ended June 30, 2019 and 2018, gross gains of $468,000 and $71,000, respectively, were realized on the sales of available-for-sale securities. For the six months ended June 30, 2019 and 2018, gross gains of $3.4 million and $418,000, respectively, were realized on the sales of available-for-sale securities. There were gross losses of $331,000 and $9,000 realized on the sale of available-for-sale securities for the three months ended June 30, 2019 and 2018, respectively. There were gross losses of $2.5 million and $240,000 realized on the sale of available-for-sale securities for the six months ended June 30, 2019 and 2018, respectively.
As of June 30, 2019, the Company did not have any exposure to private-label mortgage-backed securities. The Company also did not own any single security with an aggregate book value in excess of 10% of the Company’s stockholders’ equity.
As of June 30, 2019, the fair value of the obligations of states and political subdivisions portfolio was $87.0 million, with no significant geographic or issuer exposure concentrations. Of the total state and political obligations of $87.0 million, $32.7 million were representative of general obligation bonds, for which $18.1 million are general obligations of political subdivisions of the respective state, rather than general obligations of the state itself.


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The following table summarizes gross unrealized losses and fair value, aggregated by category and length of time the securities have been in a continuous unrealized loss position, as of June 30, 2019 and December 31, 2018:
 Less Than 12 Months 12 Months or More Total
 Fair
Value
 Unrealized
Loss
 Fair
Value
 Unrealized
Loss
 Fair
Value
 Unrealized
Loss
 (In thousands)
June 30, 2019           
Available-for-sale:           
Government-sponsored residential mortgage-backed securities$28,737
 $(74) $66,174
 $(230) $94,911
 $(304)
Government-sponsored residential collateralized debt obligations
 
 8,177
 (47) 8,177
 (47)
Government-sponsored commercial collateralized debt obligations
 
 99,536
 (1,261) 99,536
 (1,261)
Asset-backed securities50,056
 (263) 33,113
 (526) 83,169
 (789)
Corporate debt securities6,147
 (34) 7,382
 (111) 13,529
 (145)
Obligations of states and political subdivisions
 
 14,068
 (92) 14,068
 (92)
Total available-for-sale securities$84,940
 $(371) $228,450
 $(2,267) $313,390
 $(2,638)
            
December 31, 2018           
Available-for-sale:           
Government-sponsored residential mortgage-backed securities$97,634
 $(1,590) $106,464
 $(3,228) $204,098
 $(4,818)
Government-sponsored residential collateralized debt obligations5,093
 (54) 107,291
 (1,965) 112,384
 (2,019)
Government-sponsored commercial mortgage-backed securities
 
 27,678
 (1,016) 27,678
 (1,016)
Government-sponsored commercial collateralized debt obligations15,787
 (176) 132,439
 (6,689) 148,226
 (6,865)
Asset-backed securities62,444
 (1,272) 23,426
 (619) 85,870
 (1,891)
Corporate debt securities43,937
 (1,394) 33,245
 (1,886) 77,182
 (3,280)
Obligations of states and political subdivisions89,312
 (2,204) 137,590
 (9,913) 226,902
 (12,117)
Total available-for-sale securities$314,207
 $(6,690) $568,133
 $(25,316) $882,340
 $(32,006)

Of the available-for-sale securities summarized above as of June 30, 2019, 20 securities had unrealized losses equaling 0.4% of the amortized cost basis for less than twelve months and 46 securities had unrealized losses of 1.0% of the amortized cost basis for twelve months or more. As of December 31, 2018, of the available-for sale securities, 95 securities had unrealized losses equaling 2.1% of the amortized cost basis for less than twelve months and 155 securities had unrealized losses equaling 4.3% of the amortized cost basis for twelve months or more.
Based on its detailed quarterly review of the securities portfolio, management believes that no individual unrealized loss as of June 30, 2019 represents an other-than-temporary impairment. Among other things, the other-than-temporary impairment review of the investment securities portfolio focuses on the combined factors of percentage and length of time by which a security is below book value as well as consideration of issuer specific information (present value of cash flows expected to be collected, issuer rating changes and trends, credit worthiness and review of underlying collateral), broad market details and the Company’s intent to sell the security or if it is more likely than not that the Company will be required to sell the debt security before recovering its cost. The Company also considers whether the depreciation is due to interest rates, market changes, or credit risk.
The following paragraphs outline the Company’s position related to unrealized losses in its investment securities portfolio at June 30, 2019.
Government-sponsored residential mortgage-backed securities, residential collateralized debt obligations, commercial mortgage-backed securities, and commercial collateralized debt obligations.  The unrealized losses on certain securities within the Company’s government-sponsored mortgage-backed and collateralized debt obligation portfolios were caused by the higher


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overall interest rate levels compared to the market interest rates when purchases were initiated. The Company monitors this risk, and does not expect these securities to settle at a price less than the par value of the securities.
Asset-backed securitiesThe unrealized losses on certain securities within the Company’s asset- backed securities portfolio were largely driven by the spread widening of these securities as a response to the market volatility in the fourth quarter of 2018, with limited tightening occurring in the first half of 2019, as well as the market viewing floating rate products as less desirable in a downward rate movement environment. Based on the credit profiles and asset qualities of the individual securities, management does not believe that the securities have suffered from any credit related losses at this time. The Company does not expect these securities to settle at a price less than the par value of the securities.
Corporate debt securities. The unrealized losses on corporate debt securities relates to securities with no company specific concentration. The unrealized loss was due to an upward shift in interest rates that resulted in a negative impact to the respective bonds’ pricing, relative to the time of purchase.
Obligations of states and political subdivisions. The unrealized loss on obligations of states and political subdivisions relates to several securities, with no geographic concentration. The unrealized loss was largely due to an upward shift in the rates relative to the time of purchase of certain securities.
The Company will continue to review its entire portfolio for other-than-temporarily impaired securities.
Note 4.Loans Receivable and Allowance for Loan Losses
A summary of the Company’s loan portfolio is as follows:
 June 30, 2019 December 31, 2018
 Amount Percent Amount Percent
 (Dollars in thousands)
Commercial real estate loans:       
Owner-occupied$459,648
 8.0% $443,398
 7.8%
Investor non-owner occupied1,971,103
 34.2
 1,911,070
 33.8
Construction80,063
 1.4
 87,493
 1.5
Total commercial real estate loans2,510,814
 43.6
 2,441,961
 43.1
        
Commercial business loans910,473
 15.8
 886,770
 15.7
        
Consumer loans:       
Residential real estate1,306,208
 22.8
 1,313,373
 23.2
Home equity575,683
 10.0
 583,454
 10.3
Residential construction12,542
 0.2
 20,632
 0.4
Other consumer439,413
 7.6
 410,249
 7.3
Total consumer loans2,333,846
 40.6
 2,327,708
 41.2
Total loans5,755,133
 100.0% 5,656,439
 100.0%
Net deferred loan costs and premiums17,965
   17,786
  
Allowance for loan losses(53,206)   (51,636)  
Loans - net$5,719,892
   $5,622,589
  

Allowance for Loan Losses
Management has established a methodology to determine the adequacy of the allowance for loan losses (“ALL”) that assesses the risks and losses inherent in the loan portfolio. The ALL is established as embedded losses are estimated to have occurred through the provisions for losses charged against operations and is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on past loan loss experience, known and inherent losses and size of the loan portfolios, an assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, review of regulatory authority examination reports and other relevant factors. An allowance is maintained for impaired loans to reflect the difference, if any, between the carrying value of the loan and the present value of the projected cash flows, observable fair value or collateral value. Loans are charged-off against the ALL when management believes that the uncollectibility of principal is confirmed. Any subsequent


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recoveries are credited to the ALL when received. In connection with the determination of the ALL, management obtains independent appraisals for significant properties, when considered necessary.
The ALL is maintained at a level estimated by management to provide for probable losses inherent within the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, which includes historic default and loss experience, specific problem loans, risk rating profile, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process.
The adequacy of the ALL is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in the Company’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers.
The Company’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. The Company recognizes full or partial charge-offs on collateral dependent impaired loans when the collateral is deemed to be insufficient to support the carrying value of the loan. The Company does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.
At June 30, 2019, the Company had an allowance for loan losses of $53.2 million, or 0.92%, of total loans as compared to an allowance for loan losses of $51.6 million, or 0.91%, of total loans at December 31, 2018. Management believes that the allowance for loan losses is adequate and consistent with asset quality indicators and that it represents the best estimate of probable losses inherent in the loan portfolio.
There are three components for the allowance for loan loss calculation:
General component
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: owner-occupied and investor non-owner occupied commercial real estate, commercial and residential construction, commercial business, residential real estate, home equity, and other consumer. Management uses a rolling average of historical losses based on a 12-quarter loss history to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels and trends in delinquencies; level and trend of charge-offs and recoveries; trends in volume and types of loans; effects of changes in risk selection and underwriting standards; experience and depth of management; changes in weighted average risk ratings; and national and local economic trends and conditions. The general component of the allowance for loan losses also includes a reserve based upon historical loss experience for loans which were acquired and have subsequently evidenced measured credit deterioration following initial acquisition. Our acquired loan portfolio is comprised of purchased loans that show no evidence of deterioration subsequent to acquisition and therefore are not covered by the allowance for loan losses. Acquired impaired loans are loans with evidence of deterioration subsequent to acquisition and are considered in establishing the allowance for loan losses. There were no changes in the Company’s methodology pertaining to the general component of the allowance for loan losses during 2019.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate and home equity loans – The Company establishes maximum loan-to-value and debt-to-income ratios and minimum credit scores as an integral component of the underwriting criteria. Loans in these segments are collateralized by residential real estate and repayment is dependent on the income and credit quality of the individual borrower. Within the qualitative allowance factors, national and local economic trends including unemployment rates and potential declines in property value, are key elements reviewed as a component of establishing the appropriate allocation. Overall economic conditions, unemployment rates and housing price trends will influence the underlying credit quality of these segments.
Owner-occupied and investor non-owner occupied commercial real estate (“Owner-occupied CRE” and “Investor CRE”) – Loans in these segments are primarily income-producing properties throughout Connecticut, western Massachusetts, and other select markets in the Northeast. The underlying cash flows generated by the properties could be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually, continually monitors the cash flows of these loans and performs stress testing.
Commercial and residential construction loans – Loans in this segment primarily include commercial real estate development and residential subdivision loans for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial business loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy and its effect on business profitability and cash flow could have an effect on the credit quality in this segment.


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Other consumer – Loans in this segment generally consist of loans on high-end retail boats and small yachts, new and used automobiles, home improvement loans, loans collateralized by deposit accounts and unsecured personal loans. These loans are secured or unsecured and repayment is dependent on the credit quality of the individual borrower.

For acquired loans accounted for under ASC 310-30, our accretable discount is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established through a provision based on our estimate of future credit losses over the remaining life of the loans.
Allocated component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial business, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Updated property evaluations are obtained at the time of impairment and serve as the basis for the loss allocation if foreclosure is probable or the loan is collateral dependent.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Loans which are placed on non-accrual status, or deemed troubled debt restructures, are considered impaired by the Company and subject to impairment testing for possible partial or full charge-off when loss can be reasonably determined. Generally, when all contractual payments on a loan are not expected to be collected, or the loan has failed to make contractual payments for a period of 90 days or more, a loan is placed on non-accrual status. In accordance with the Company's loan policy, losses on open and closed end consumer loans are recognized within a period of 120 days past due. For commercial loans, there is no threshold in terms of days past due for losses to be recognized as a result of the complexity in reasonably determining losses within a set time frame. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due.

When a loan is determined to be impaired, the Company makes a determination if the repayment of the obligation is collateral dependent. As a majority of impaired loans are collateralized by real estate, appraisals on the underlying value of the property securing the obligation are utilized in determining the specific impairment amount that is allocated to the loan as a component of the allowance calculation. If the loan is collateral dependent, an updated appraisal is obtained within a short period of time from the date the loan is determined to be impaired; typically no longer than 30 days for a residential property and 90 days for a commercial real estate property. The appraisal and the appraised value are reviewed for adequacy and then further discounted for estimated disposition costs in order to determine the impairment amount. The Company updates the appraised value at least annually and on a more frequent basis if current market factors indicate a potential change in valuation.

The majority of the Company’s loans are collateralized by real estate located in central and eastern Connecticut and western Massachusetts in addition to a portion of the commercial real estate loan portfolio located in the Northeast region of the United States. Accordingly, the collateral value of a substantial portion of the Company’s loan portfolio and real estate acquired through foreclosure is susceptible to changes in market conditions in these areas.
Unallocated component
An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
Credit Quality Information
The Company utilizes a nine-grade internal loan rating system for residential and commercial real estate, construction, commercial business and other consumer loans as follows:
Loans rated 1 – 5: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6: Loans in this category are considered “special mention.” These loans reflect signs of potential weakness and are being closely monitored by management.
Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor and there is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.


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Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
At the time of loan origination, a risk rating based on this nine point grading system is assigned to each loan based on the loan officer’s assessment of risk. For residential real estate and other consumer loans, the Company considers factors such as updated FICO scores, employment status, home prices, loan to value and geography. Residential real estate and other consumer loans are pass rated unless their payment history reveals signs of deterioration, which may result in modifications to the original contractual terms. In situations which require modification to the loan terms, the internal loan grade will typically be reduced to substandard. More complex loans, such as commercial business loans and commercial real estate loans require that the Company’s internal credit department further evaluate the risk rating of the individual loan, with the credit department and Chief Credit Officer having final determination of the appropriate risk rating. These more complex loans and relationships receive an in-depth analysis and periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The credit quality of the Company’s loan portfolio is reviewed by a third-party risk assessment firm throughout the year and by the Company’s internal credit management function. The internal and external analysis of the loan portfolio is utilized to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All loans risk rated Special Mention, Substandard or Doubtful are reviewed by management not less than on a quarterly basis to assess the level of risk and to ensure that appropriate actions are being taken to minimize potential loss exposure. Loans identified as being loss are normally fully charged off.
The following table presents the Company’s loans by risk rating at June 30, 2019 and December 31, 2018:
 Owner-Occupied CRE Investor CRE Construction Commercial Business Residential Real Estate Home Equity Other Consumer
 (In thousands)
June 30, 2019             
Loans rated 1-5$427,943
 $1,943,854
 $87,531
 $867,018
 $1,287,301
 $568,675
 $437,269
Loans rated 618,846
 4,590
 2,377
 31,331
 2,594
 608
 
Loans rated 712,859
 22,659
 2,697
 12,124
 16,313
 6,400
 2,144
Loans rated 8
 
 
 
 
 
 
Loans rated 9
 ��
 
 
 
 
 
 $459,648
 $1,971,103
 $92,605
 $910,473
 $1,306,208
 $575,683
 $439,413
              
December 31, 2018             
Loans rated 1-5$410,403
 $1,884,767
 $104,848
 $844,541
 $1,294,623
 $576,509
 $407,935
Loans rated 617,134
 6,544
 1,994
 28,385
 2,429
 740
 
Loans rated 715,861
 19,759
 1,283
 13,844
 16,321
 6,205
 2,314
Loans rated 8
 
 
 
 
 
 
Loans rated 9
 
 
 
 
 
 
 $443,398
 $1,911,070
 $108,125
 $886,770
 $1,313,373
 $583,454
 $410,249


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Activity in the allowance for loan losses for the periods ended June 30, 2019 and 2018 was as follows:
 Owner-Occupied CRE Investor CRE Construction Commercial
Business
 Residential Real Estate Home Equity Other Consumer Unallocated Total
 (In thousands)
Three Months Ended June 30, 2019              
Balance, beginning of period$4,148
 $17,677
 $1,573
 $11,010
 $7,825
 $3,348
 $4,360
 $2,100
 $52,041
Provision (credit) for loan losses321
 389
 (13) 85
 (175) 91
 1,774
 
 2,472
Loans charged off
 
 (34) (366) (152) (173) (1,241) 
 (1,966)
Recoveries of loans previously charged off47
 10
 
 179
 78
 126
 219
 
 659
Balance, end of period$4,516
 $18,076
 $1,526
 $10,908
 $7,576
 $3,392
 $5,112
 $2,100
 $53,206
                  
Three Months Ended June 30, 2018              
Balance, beginning of period$3,927
 $15,983
 $1,633
 $10,981
 $7,785
 $3,217
 $2,544
 $1,845
 $47,915
Provision (credit) for loan losses(76) 1,238
 (135) 104
 219
 35
 880
 85
 2,350
Loans charged off
 (16) 
 (582) (69) (75) (597) 
 (1,339)
Recoveries of loans previously charged off
 16
 
 23
 21
 69
 108
 
 237
Balance, end of period$3,851
 $17,221
 $1,498
 $10,526
 $7,956
 $3,246
 $2,935
 $1,930
 $49,163
                  
Six Months Ended June 30, 2019              
Balance, beginning of period$4,459
 $17,011
 $1,653
 $10,961
 $7,971
 $3,220
 $4,381
 $1,980
 $51,636
Provision (credit) for loan losses10
 1,050
 56
 592
 (310) 546
 2,451
 120
 4,515
Loans charged off
 
 (183) (884) (260) (522) (2,179) 
 (4,028)
Recoveries of loans previously charged off47
 15
 
 239
 175
 148
 459
 
 1,083
Balance, end of period$4,516
 $18,076
 $1,526
 $10,908
 $7,576
 $3,392
 $5,112
 $2,100
 $53,206
                  
Six Months Ended June 30, 2018              
Balance, beginning of period$3,754
 $15,916
 $1,601
 $10,608
 $7,694
 $3,258
 $2,523
 $1,745
 $47,099
Provision (credit) for loan losses97
 1,332
 (82) 900
 422
 287
 1,148
 185
 4,289
Loans charged off
 (80) (21) (1,235) (250) (424) (1,022) 
 (3,032)
Recoveries of loans previously charged off
 53
 
 253
 90
 125
 286
 
 807
Balance, end of period$3,851
 $17,221
 $1,498
 $10,526
 $7,956
 $3,246
 $2,935
 $1,930
 $49,163


20
 


Further information pertaining to the allowance for loan losses and impaired loans at June 30, 2019 and December 31, 2018 follows:
 Owner-Occupied CRE Investor CRE Construction Commercial
Business
 Residential Real Estate Home Equity Other Consumer Unallocated Total
 (In thousands)
June 30, 2019                 
Allowance related to loans individually evaluated and deemed impaired$
 $
 $
 $4
 $68
 $
 $243
 $
 $315
Allowance related to loans collectively evaluated and not deemed impaired4,516
 18,076
 1,526
 10,904
 7,508
 3,392
 4,869
 2,100
 52,891
Total allowance for loan losses$4,516
 $18,076
 $1,526
 $10,908
 $7,576
 $3,392
 $5,112
 $2,100
 $53,206
                  
Loans deemed impaired$2,502
 $8,094
 $763
 $8,915
 $19,780
 $8,567
 $929
 


 $49,550
Loans not deemed impaired457,146
 1,962,858
 91,842
 901,558
 1,284,737
 567,116
 437,197
 


 5,702,454
Loans acquired with deteriorated credit quality
 151
 
 
 1,691
 
 1,287
   3,129
Total loans$459,648
 $1,971,103
 $92,605
 $910,473
 $1,306,208
 $575,683
 $439,413
   $5,755,133
                  
December 31, 2018                 
Allowance related to loans individually evaluated and deemed impaired$
 $
 $92
 $114
 $120
 $1
 $243
 $
 $570
Allowance related to loans collectively evaluated and not deemed impaired4,459
 17,011
 1,561
 10,847
 7,851
 3,219
 4,138
 1,980
 51,066
Total allowance for loan losses$4,459
 $17,011
 $1,653
 $10,961
 $7,971
 $3,220
 $4,381
 $1,980
 $51,636
                  
Loans deemed impaired$3,034
 $6,895
 $1,047
 $5,219
 $20,114
 $8,257
 $1,318
 


 $45,884
Loans not deemed impaired440,364
 1,903,998
 107,078
 881,551
 1,291,255
 575,197
 407,851
 


 5,607,294
Loans acquired with deteriorated credit quality
 177
 
 
 2,004
 
 1,080
   3,261
Total loans$443,398
 $1,911,070
 $108,125
 $886,770
 $1,313,373
 $583,454
 $410,249
   $5,656,439
Management has established the allowance for loan loss in accordance with GAAP at June 30, 2019 based on the current risk assessment and level of loss that is believed to exist within the portfolio. This level of reserve is deemed an appropriate estimate of probable loan losses inherent in the loan portfolio as of June 30, 2019 based upon the analysis conducted and given the portfolio composition, delinquencies, charge offs and risk rating changes experienced during the first six months of 2019 and the three-year evaluation period utilized in the analysis. Based on the qualitative assessment of the portfolio and in thorough consideration of non-performing loans, management believes that the allowance for loan losses properly supports the level of associated loss and risk.


21
 


The following is a summary of past due and non-accrual loans at June 30, 2019 and December 31, 2018, including purchased credit impaired loans:
 30-59 Days Past Due 60-89 Days Past Due Past Due 90
Days or More
 Total Past Due Past Due
90 Days or
More and
Still Accruing
 Loans on
Non-accrual
 (In thousands)
June 30, 2019           
Owner-occupied CRE$122
 $
 $705
 $827
 $
 $1,989
Investor CRE729
 135
 633
 1,497
 
 2,357
Construction
 
 629
 629
 
 629
Commercial business loans1,337
 711
 3,702
 5,750
 1,913
 2,871
Residential real estate3,965
 1,169
 8,650
 13,784
 1,691
 15,492
Home equity1,447
 512
 4,774
 6,733
 
 6,376
Other consumer683
 797
 1,009
 2,489
 161
 856
Total$8,283
 $3,324
 $20,102
 $31,709
 $3,765
 $30,570
            
December 31, 2018           
Owner-occupied CRE$1,745
 $7
 $352
 $2,104
 $
 $2,503
Investor CRE1,306
 91
 546
 1,943
 
 1,131
Construction331
 
 913
 1,244
 
 913
Commercial business loans5,455
 1,582
 2,803
 9,840
 1,387
 2,481
Residential real estate11,214
 5,216
 9,448
 25,878
 2,004
 16,214
Home equity1,498
 779
 4,349
 6,626
 
 6,192
Other consumer1,123
 359
 1,393
 2,875
 154
 1,243
Total$22,672
 $8,034
 $19,804
 $50,510
 $3,545
 $30,677
Loans reported as past due 90 days or more and still accruing represent loans that were evaluated by management and maintained on accrual status based on an evaluation of the borrower.


22
 


The following is a summary of impaired loans with and without a valuation allowance as of June 30, 2019 and December 31, 2018:
 June 30, 2019 December 31, 2018
 Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 Recorded
Investment
 Unpaid
Principal
Balance
 Related
Allowance
 (In thousands)
Impaired loans without a valuation allowance:           
Owner-occupied CRE$2,502
 $2,756
 
 $3,034
 $3,422
 
Investor CRE8,094
 8,395
 

 6,895
 7,153
 

Construction763
 1,197
 
 333
 1,339
 
Commercial business loans8,274
 10,686
 
 5,105
 7,325
 
Residential real estate18,879
 20,978
 
 18,244
 20,153
 
Home equity8,567
 10,080
 
 8,132
 9,483
 
Other consumer686
 688
 

 725
 725
 

Total47,765
 54,780
 

 42,468
 49,600
 

            
Impaired loans with a valuation allowance:           
Construction$
 $
 $
 714
 965
 $92
Commercial business loans641
 672
 4
 114
 122
 114
Residential real estate901
 984
 68
 1,870
 2,069
 120
Home equity
 
 
 125
 130
 1
Other consumer243
 1,193
 243
 593
 593
 243
Total1,785
 2,849
 315
 3,416
 3,879
 570
Total impaired loans$49,550
 $57,629
 $315
 $45,884
 $53,479
 $570


23
 


The following is a summary of average recorded investment in impaired loans and interest income recognized on those loans for the periods indicated:
 For the Three Months 
 Ended June 30, 2019
 For the Three Months 
 Ended June 30, 2018
 Average
Recorded
Investment
 Interest
Income
Recognized
 Average
Recorded
Investment
 Interest
Income
Recognized
 (In thousands)
Owner-occupied CRE$2,452
 $25
 $2,866
 $41
Investor CRE7,293
 94
 9,060
 93
Construction816
 3
 1,497
 5
Commercial business loans8,861
 70
 4,338
 26
Residential real estate20,180
 222
 18,918
 164
Home equity8,285
 25
 8,239
 59
Other consumer1,122
 
 459
 
Total$49,009
 $439
 $45,377
 $388
        
 For the Six Months 
 Ended June 30, 2019
 For the Six Months 
 Ended June 30, 2018
 Average
Recorded
Investment
 Interest
Income
Recognized
 Average
Recorded
Investment
 Interest
Income
Recognized
        
Owner-occupied CRE$2,646
 $49
 $2,677
 $73
Investor CRE7,160
 170
 8,845
 202
Construction893
 4
 1,756
 15
Commercial business loans7,647
 109
 4,786
 78
Residential real estate20,159
 467
 18,712
 371
Home equity8,275
 56
 8,341
 137
Other consumer1,187
 1
 438
 
 $47,967
 $856
 $45,555
 $876

Troubled Debt Restructurings
The restructuring of a loan is considered a troubled debt restructuring (“TDR”) if both (i) the restructuring constitutes a concession by the creditor and (ii) the debtor is experiencing financial difficulties. A TDR may include (i) a transfer from the debtor to the creditor of receivables from third parties, real estate, or other assets to satisfy fully or partially a debt, (ii) issuance or other granting of an equity interest to the creditor by the debtor to satisfy fully or partially a debt unless the equity interest is granted pursuant to existing terms for converting debt into an equity interest, and (iii) modifications of terms of a debt.
The following table provides detail of TDR balances for the periods presented:
 At June 30,
2019
 At December 31,
2018
 (In thousands)
Recorded investment in TDRs:   
Accrual status$18,980
 $15,208
Non-accrual status5,820
 6,971
Total recorded investment in TDRs$24,800
 $22,179
    
Accruing TDRs performing under modified terms more than one year$12,823
 $12,609
Specific reserves for TDRs included in the balance of allowance for loan losses$68
 $213
Additional funds committed to borrowers in TDR status$3
 $7


24
 


Loans restructured as TDRs during the three and six months ended June 30, 2019 and 2018 are set forth in the following table:
 Three Months Ended Six Months Ended
 Number
of Contracts
 Pre-Modification
Outstanding
Recorded Investment
 Post-Modification
Outstanding
Recorded Investment
 Number
of Contracts
 Pre-Modification
Outstanding
Recorded Investment
 Post-Modification
Outstanding
Recorded Investment
 (Dollars in thousands)
June 30, 2019           
Commercial business
 $
 $
 5
 $3,512
 $3,512
Residential real estate1
 75
 107
 2
 504
 536
Home equity4
 179
 182
 4
 179
 182
Total TDRs5
 $254
 $289
 11
 $4,195
 $4,230
            
June 30, 2018           
Construction
 $
 $
 1
 $965
 $965
Residential real estate1
 29
 29
 5
 2,890
 2,890
Home equity2
 109
 123
 6
 429
 443
Total TDRs3
 $138
 $152
 12
 $4,284
 $4,298
The following table provides information on loan balances modified as TDRs during the period:
 Three Months Ended June 30,
 2019 2018
 Extended Maturity Adjusted Rate and Extended Maturity Other Extended Maturity Adjusted Rate and Extended Maturity Payment Deferral 
 (In thousands)
Residential real estate$75
 $
 $
 $
 $
 $29
 
Home equity
 179
 
 
 109
 
 
Total$75
 $179
 $
 $
 $109
 $29
 
             
 Six Months Ended June 30,
 2019 2018
 Extended
Maturity
 Adjusted Rate and Extended Maturity Other Extended
Maturity
 Adjusted Rate and Extended Maturity Payment Deferral 
 (In thousands)
Construction$
 $
 $
 $965
 $
 $
 
Commercial business
 
 3,512
 
 
 
 
Residential real estate504
 
 
 
 
 2,980
 
Home equity
 179
 
 61
 368
 
 
 $504
 $179
 $3,512
 $1,026
 $368
 $2,980
 


25
 


The following table provides information on loans modified as TDRs within the previous 12 months and for which there was a payment default during the periods presented:
 June 30, 2019 June 30, 2018
 Number of
Loans
 Recorded
Investment
 Number of
Loans
 Recorded
Investment
 (In thousands)
Investor CRE
 $
 1
 $204
Residential real estate
 
 1
 399
Home equity1
 141
 2
 560
Total1
 $141
 4
 $1,163
The majority of restructured loans were on accrual status as of June 30, 2019 and December 31, 2018. Typically, residential loans are restructured with a modification and extension of the loan amortization and maturity at substantially the same interest rate as contained in the original credit extension. As part of the TDR process, the current value of the property is compared to the Company’s carrying value and if not fully supported, a charge-off is processed through the allowance for loan losses. Commercial real estate loans, commercial construction loans and commercial business loans also contain payment modification agreements and a like assessment of the underlying collateral value if the borrower’s cash flow may be inadequate to service the entire obligation.
Loan Servicing
The Company services certain loans for third parties. The aggregate balance of loans serviced for others was $1.50 billion and $1.47 billion as of June 30, 2019 and December 31, 2018, respectively. The balances of these loans are not included on the accompanying Consolidated Statements of Condition. During the three and six months ended June 30, 2019, the Company received servicing income of $699,000 and $1.5 million, compared to $679,000 and $1.4 million for the same periods in 2018. This income is included in (loss) income from mortgage banking activities in the Consolidated Statements of Net Income.
The risks inherent in mortgage servicing rights relate primarily to changes in prepayments that result from shifts in mortgage interest rates. The fair value of mortgage servicing rights at June 30, 2019 and December 31, 2018 was determined using pretax internal rates of return ranging from 11.8% to 13.8%, and the Public Securities Association Standard Prepayment model to estimate prepayments on the portfolio with an average prepayment speed of 266 and 150, respectively. The fair value of mortgage servicing rights is obtained from a third-party provider.
Mortgage servicing rights are included in other assets on the Consolidated Statements of Condition. Changes in the fair value of mortgage servicing rights are included in (loss) income from mortgage banking activities in the Consolidated Statements of Net Income. The following table summarizes mortgage servicing rights activity for the three and six months ended June 30, 2019 and 2018.
 For the Three Months 
 Ended June 30,
 For the Six Months 
 Ended June 30,
 2019 2018 2019 2018
 (In thousands)
Mortgage servicing rights:       
Balance at beginning of period$14,691
 $13,333
 $14,739
 $11,733
Change in fair value recognized in net income(2,241) (609) (3,188) 210
Issuances214
 955
 1,113
 1,736
Fair value of mortgage servicing rights at end of period$12,664
 $13,679
 $12,664
 $13,679

Note 5.Leases

Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842), as amended, which requires most leases to be capitalized on the balance sheet as a right-of-use asset and lease liability.  The new leases standard represents a wholesale change to lease accounting and is intended to provide a more faithful representation of a company’s assets and liabilities and deliver greater transparency about the company’s obligations and leasing activities.  



26
 


The Company elected to transition to the new standard under the amended transition approach in which an entity is permitted to apply the new leases standard at the adoption date (January 1, 2019).  As such, prior periods reflect lease accounting under Topic 840.  The Company’s prior period on-balance sheet reporting under Topic 840 included capital leases and accrued rent liabilities for operating leases.  Capitalized lease assets, under Topic 840, were included in premises and equipment, while capitalized lease obligations were included in other borrowings and accrued rent liabilities were reported in accrued expenses and other liabilities on the Consolidated Statements of Condition.  Upon transition to Topic 842, these items were reclassified and are now included as part of the respective right-of-use asset and lease liability, along with the additional assets and liabilities reported on-balance sheet under the new guidance.

Transition to the new standard did not result in a cumulative-effect adjustment as the net impact to the Company’s assets was equal to the net impact to liabilities.  The Company adopted the package of practical expedients as provided under the transition guidance within the new standard, which allows an entity to not reassess the following: (a) whether any expired or existing contracts are or contain a lease, (b) lease classification for any expired or existing leases, and (c) initial direct costs for any expired or existing leases. 

Upon adoption of this ASU, the Company recorded an increase in assets of $46.5 million and an increase in liabilities of $46.5 million on the Consolidated Statements of Condition as a result of recognizing right-of-use assets and lease liabilities.

At June 30, 2019, the Company had 70 operating leases consisting of branches, administrative offices, ATMs, and copiers, as well as three finance leases for branch locations.  The Company’s leases have remaining lease terms of one to twenty years with renewal options of five to thirty years.  Renewal options are recognized as part of the right-of-use asset and lease liability in cases where the option has been exercised or the Company is reasonably certain to exercise an option to renew based on relevant factors that create an economic incentive to exercise.

The Company subleases four properties, as sublessor, with sublease terms that closely adhere to the related prime lease agreement.  The sublease agreements are each classified as operating leases. Additionally, the Company, as lessor, leases two owned properties, classified as operating leases, with the remaining lease terms of approximately two years and nine years, each with options to extend up to ten additional years. The Company applied the package of expedients in determining whether a contract is or contains a lease and classification of the lease.

Certain lease agreements, with the Company as lessee or lessor, include rental payments based on a percentage increase in the consumer price index (“CPI”).  Future incremental changes in CPI, as applicable, are reflected in the Consolidated Statements of Net Income when incurred.  The Company’s lease agreements do not contain residual value guarantees or restrictive covenants.

As most of the Company’s lease agreements do not provide an implicit rate, the Company used the incremental borrowing rate that the Company would have to pay to borrow on a collateralized basis over a similar term to the remaining lease payments period for each lease agreement. 

The components of lease expense were as follows:
 Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
 (In thousands)
Operating lease cost$1,674
 $3,346
    
Finance lease cost:   
Amortization of right-of-use assets89
 178
Interest on lease liabilities62
 125
    
Sublease income(223) (445)
Lease income(98) (197)
    
Total lease cost$1,504
 $3,007




27
 






Other information related to leases as of June 30, 2019 is as follows:
 June 30,
2019
Weighted Average Remaining Lease Term (in years): 
Operating Leases12.00
Finance Leases13.00
  
Weighted Average Discount Rate: 
Operating Leases3.54%
Finance Leases5.44%



Maturities of lease liabilities as of June 30, 2019 are as follows:
 Operating Leases Finance Leases
 (In thousands)
2019 (remaining six months)$3,529
 $257
20207,189
 515
20217,021
 515
20226,555
 515
20235,447
 515
Thereafter38,252
 3,929
Total lease payments67,993
 6,246
Less: imputed interest(12,796) (1,728)
Total$55,197
 $4,518



Maturities of rents receivable as of June 30, 2019 are as follows:
 Operating Leases
 (In thousands)
2019 (remaining six months)$682
20201,391
20211,266
2022841
2023144
Thereafter297
Total lease payments receivable$4,621





28
 


Note 6.Goodwill and Core Deposit Intangibles
The carrying value of goodwill was $116.7 million and $116.8 million at June 30, 2019 and December 31, 2018, respectively. The changes in the carrying amount of core deposit intangible assets are summarized as follows:
  Core Deposit Intangibles
 (In thousands)
Balance at December 31, 2017 $4,491
Amortization expense (1,350)
Acquisitions 2,886
Balance at December 31, 2018 $6,027
Amortization expense (808)
Balance at June 30, 2019 $5,219
   
Estimated amortization expense for the years ending December 31,  
2019 (remaining six months) $730
2020 1,293
2021 1,048
2022 803
2023 559
2024 and thereafter 786
Total remaining $5,219

In accordance with ASC 350, Intangibles – Goodwill and Other, goodwill is not amortized, but will be subject to an annual review of qualitative factors to determine if an impairment test is required. The core deposit intangible is being amortized using the sum of the years’ digits method over its estimated life of 10 years. Amortization expense of the core deposit intangible was $388,000 and $305,000 for the three months ended June 30, 2019 and 2018, respectively, and $808,000 and $642,000 for the six months ended June 30, 2019 and 2018, respectively.
On October 5, 2018, the Company acquired six branches which were accounted for under FASB ASC 805, Business Combinations. In addition to the acquired branches, the Company assumed $109.4 million of branch deposits and $2.3 million of fixed assets. The purchase price of $6.9 million was allocated based on the estimated fair market values of the assets and liabilities acquired.

Note 7.Borrowings
Federal Home Loan Bank of Boston Advances
The Company is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Contractual maturities and weighted-average rates of outstanding advances from the FHLBB as of June 30, 2019 and December 31, 2018 are summarized below:
 June 30, 2019 December 31, 2018
 Amount Weighted-
Average
Rate
 Amount Weighted-
Average
Rate
 (Dollars in thousands)
2019$590,000
 2.57% $785,000
 2.55%
202010,000
 2.18
 8,000
 2.33
202133,000
 2.61
 
 
202215,000
 2.80
 
 
20232,306
 2.51
 2,557
 2.51
Thereafter1,494
 2.58
 1,531
 2.58
 $651,800
 2.57% $797,088
 2.54%



29
 


The total carrying value of FHLBB advances at June 30, 2019 was $652.0 million, which includes a remaining fair value adjustment of $163,000 on acquired advances. At December 31, 2018, the total carrying value of FHLBB advances was $797.3 million, with a remaining fair value adjustment of $183,000.
At June 30, 2019, the Company had no outstanding advances that are callable by the FHLBB. All advances are collateralized by first and second mortgage loans, as well as investment securities with an estimated eligible collateral value of $2.30 billion and $2.37 billion at June 30, 2019 and December 31, 2018, respectively.
In addition to the outstanding advances, the Company has access to an unused line of credit with the FHLBB amounting to $10.0 million at June 30, 2019 and December 31, 2018. In accordance with an agreement with the FHLBB, the qualified collateral must be free and clear of liens, pledges and have a discounted value equal to the aggregate amount of the line of credit and outstanding advances. At June 30, 2019, the Company could borrow immediately an additional $700.0 million from the FHLBB, inclusive of the line of credit.
Other Borrowings
The following table presents other borrowings by category as of the dates indicated:
 June 30, 2019 December 31, 2018
 (In thousands)
Subordinated debentures$80,322
 $80,201
Wholesale repurchase agreements
 10,000
Customer repurchase agreements9,703
 8,361
Other
 3,793
Total other borrowings$90,025
 $102,355

Subordinated Debentures
On September 23, 2014, the Company closed its public offering of $75.0 million of its 5.75% Subordinated Notes due October 1, 2024 (the “Notes”). The Notes were offered to the public at par. Interest on the Notes is payable semi-annually in arrears on April 1 and October 1 of each year, commencing on April 1, 2015. Issuance costs totaled $1.3 million and are being amortized over the life of the Notes as a component of interest expense. The carrying value, net of issuance costs, totaled $74.3 million at both June 30, 2019 and December 31, 2018.
The Company assumed junior subordinated debt in the form of trust preferred securities issued through a private placement offering with a face amount of $7.7 million in a merger in 2014. The Company recorded a fair value acquisition discount of $2.3 million on May 1, 2014. The remaining unamortized discount was $1.7 million and $1.8 million at June 30, 2019 and December 31, 2018, respectively. This issue has a maturity date of March 15, 2036 and bears a floating rate of interest that reprices quarterly at the 3-month LIBOR rate plus 1.85%. A special redemption provision allows the Company to redeem this issue at par on March 15, June 15, September 15, or December 15 of any year subsequent to March 15, 2011.


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Repurchase Agreements
The following table presents the Company’s outstanding borrowings under repurchase agreements as of June 30, 2019 and December 31, 2018:
  Remaining Contractual Maturity of the Agreements
  Overnight Up to 1 Year 1 - 3 Years Greater than 3 Years Total
  (In thousands)
June 30, 2019          
Repurchase Agreements          
U.S. Agency Securities $9,703
 $
 $
 $
 $9,703
           
December 31, 2018          
Repurchase Agreements          
U.S. Treasury and Agency Securities $8,361
 $10,000
 $
 $
 $18,361

At June 30, 2019, the Company had no advances outstanding under wholesale reverse repurchase agreements. At December 31, 2018, advances outstanding under wholesale reverse repurchase agreements totaled $10.0 million, and consisted of one individual borrowing with a remaining term of one year or less and had a weighted average cost of 2.44%. The Company pledged investment securities with a market value of $12.5 million as collateral for these borrowings at December 31, 2018.
Retail repurchase agreements, primarily consisting of transactions with commercial and municipal customers, are for a term of one day and are backed by the purchasers’ interest in certain U.S. Government Agency securities or government-sponsored securities. As of June 30, 2019 and December 31, 2018, retail repurchase agreements totaled $9.7 million and $8.4 million, respectively. The Company pledged investment securities with a market value of $24.6 million and $25.4 million as collateral for these borrowings at June 30, 2019 and December 31, 2018, respectively.
Given that the repurchase agreements are secured by investment securities valued at market value, the collateral position is susceptible to change based upon variation in the market value of the securities that can arise due to fluctuations in interest rates, among other things. In the event that the interest rate changes result in a decrease in the value of the pledged securities, additional securities will be required to be pledged in order to secure the borrowings. Due to the short term nature of the majority of the repurchase agreements, Management believes the risk of further encumbered securities pose a minimal impact to the Company’s liquidity position.
Other
At December 31, 2018, other borrowings totaled $3.8 million and consisted of capital lease obligations for three of the Company’s leased banking branches acquired during a merger. Effective January 1, 2019, the Company adopted ASU No. 2016-02, Leases (Topic 842). Upon adoption, these capital lease obligations were reclassified from other borrowings to finance lease liabilities on the Consolidated Statements of Condition, and totaled $4.5 million at June 30, 2019. See Note 5, “Leases” in the Notes to Consolidated Financial Statements for further information.
Other Sources of Wholesale Funding
The Company has relationships with brokered sweep deposit providers by which funds are deposited by the counterparties at the Company’s request. Amounts outstanding under these agreements are reported as interest-bearing deposits and totaled $369.9 million at a cost of 2.57% at June 30, 2019 and $432.5 million at a cost of 2.44% at December 31, 2018. The Company maintains open dialogue with the brokered sweep providers and has the ability to increase the deposit balances upon request, up to certain limits based upon internal policy requirements.
Additionally, the Company has unused federal funds lines of credit with four counterparties totaling $140.0 million at both June 30, 2019 and December 31, 2018.
Note 8.Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposure to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources,


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and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings. The Company also has interest rate derivatives that result from a service provided to certain qualifying customers. The Company manages a matched book with respect to these derivative instruments in order to minimize its net risk exposure resulting from such transactions.
Information about interest rate swap agreements and non-hedging derivative assets and liabilities as of June 30, 2019 and December 31, 2018 is as follows:
 Notional Amount Weighted-Average Remaining Maturity Weighted-Average Rate Estimated Fair Value, Net Asset (Liability)
   Received Paid 
 (In thousands) (In years)     (In thousands)
June 30, 2019         
Cash flow hedges:         
Interest rate swaps$445,000
 3.66 2.51% 2.53% $(12,679)
Non-hedging derivatives:         
Forward loan sale commitments62,152
 0.00     (328)
Derivative loan commitments24,035
 0.00     430
Interest rate swap7,500
 7.04 

 

 (267)
Loan level swaps - dealer(1)668,901
 6.32 4.24% 4.12% (24,622)
Loan level swaps - borrowers(1)668,901
 6.32 4.12% 4.24% 24,610
Forward starting loan level swaps - dealer(1)8,000
 8.20 TBD
(2)5.11% (430)
Forward starting loan level swaps - borrower(1)8,000
 8.20 5.11% TBD
(2)430
Total$1,892,489
       $(12,856)
          
December 31, 2018         
Cash flow hedges:         
Forward starting interest rate swaps on future borrowings$50,000
 5.22 TBD
(3)2.67% $(356)
Interest rate swaps395,000
 4.02 2.59% 2.51% 457
Non-hedging derivatives:         
Forward loan sale commitments85,043
 0.00     (681)
Derivative loan commitments8,491
 0.00     194
Interest rate swap7,500
 7.54     (686)
Loan level swaps - dealer(1)640,760
 6.88 4.20% 4.10% 2,068
Loan level swaps - borrowers(1)640,760
 6.88 4.10% 4.20% (2,074)
Forward starting loan level swaps - dealer(1)8,000
 8.70 TBD
(2)5.11% (37)
Forward starting loan level swaps - borrower(1)8,000
 8.70 5.11% TBD
(2)37
Total$1,843,554
       $(1,078)

(1)The Company offers a loan level hedging product to qualifying commercial borrowers that seek to mitigate risk to rising interest rates. As such, the Company enters into equal and offsetting trades with dealer counterparties.
(2)The floating leg of the forward starting loan level hedge is indexed to the one month USD-LIBOR-BBA, as determined one London banking day prior to the tenth day of each calendar month, commencing with the effective trade date on September 10, 2020.


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(3)The receiver leg of the cash flow hedge is floating rate and indexed to the 3-month USD-LIBOR-BBA, as determined two London banking days prior to the first day of each calendar quarter, commencing with the earliest effective trade. The earliest effective trade date for this forward starting cash flow hedge was March 20, 2019 for the period ended December 31, 2018.
Cash Flow Hedges of Interest Rate Risk
The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to reclassify $2.4 million from accumulated other comprehensive loss to interest expense during the next 12 months.
The Company is hedging its exposure to the variability in future cash flows for forecasted transactions over a period of approximately 60 months (excluding forecasted transactions related to the payment of variable interest on existing financial instruments).
As of June 30, 2019, the Company had 11 outstanding interest rate derivatives with a notional value of $445.0 million that were designated as cash flow hedges of interest rate risk.
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for the Company making variable rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in earnings. The Company includes the gain or loss on the hedged items in the same line item as the offsetting gain or loss on the related derivatives. For the three and six months ended June 30, 2019, there was no net impact to interest expense, and for the three and six months ended June 30, 2018, the Company recognized a negligible net impact to interest expense.
As of June 30, 2019, the Company had no outstanding interest rate derivatives that were designated as a fair value hedge of interest rate risk.
Non-Designated Hedges
Loan Level Interest Rate Swaps
Qualifying derivatives not designated as hedges are not speculative and result from a service the Company provides to certain customers. The Company executes interest rate derivatives with commercial banking customers to facilitate their respective risk management strategies. Those interest rate derivatives are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings.
As of June 30, 2019, the Company had 89 borrower-facing interest rate derivatives with an aggregate notional amount of $668.9 million and 89 broker derivatives with an aggregate notional value amount of $668.9 million related to this program.
As of June 30, 2019, the Company had ten risk participation agreements with three counterparties related to a loan level interest rate swap with nine of its commercial banking customers. Of these agreements, four were entered into in conjunction with credit enhancements provided to the borrowers by the counterparties; therefore, if the borrowers default, the counterparties are responsible for a percentage of the exposure. Six agreements were entered into in conjunction with credit enhancements provided to the borrower by the Company, whereby the Company is responsible for a percentage of the exposure to the counterparty. At June 30, 2019, the notional amount of these risk participation agreements was $40.9 million, reflecting the counterparty participation of 31.9%. At June 30, 2019, the notional amount of the remaining four risk participation agreements was $30.1 million, reflecting the counterparty


33
 


participation level of 36.5%. The risk participation agreements are a guarantee of performance on a derivative and accordingly, are recorded at fair value on the Company’s Consolidated Statements of Condition. The fair value of the risk participation agreements in an asset and liability position was negligible at June 30, 2019, and is recorded in other assets and other liabilities, respectively, on the Company’s Consolidated Statements of Condition.

Forward Starting Loan Level Swaps
As of June 30, 2019, the Company had one borrower-facing forward starting loan level swap with a notional amount of $8.0 million, and one broker derivative with a notional amount of $8.0 million related to this program. These swaps are related to the permanent financing of projects that are currently in the construction phase.

Mortgage Servicing Rights Interest Rate Swap
As of June 30, 2019, the Company had one receive-fixed interest rate derivative with a notional amount of $7.5 million and a maturity date in July 2026. The derivative was executed to protect against a portion of the devaluation of the Company’s mortgage servicing right asset that occurs in a falling rate environment. The instrument is marked to market through the Company’s Consolidated Statements of Net Income.
Derivative Loan Commitments
Additionally, the Company enters into mortgage loan commitments that are also referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, the Company utilizes To Be Announced (“TBA”) as well as cash (“mandatory delivery” and “best efforts”) forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.
With TBA and mandatory cash contracts, the Company commits to deliver a certain principal amount of mortgage loans to an investor/counterparty at a specified price on or before a specified date. If the market improves (rate decline) and the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor/counterparty to compensate the investor for the shortfall. Conversely, if the market declines (rates increase) the investor/counterparty is obligated to pay a “pair-off” fee to the Company based on then-current market prices. The Company expects that these forward loan sale commitments, TBA and mandatory, will experience changes in fair value opposite to the change in fair value of derivative loan commitments.
With best effort cash contracts, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally best efforts cash contracts have no pair-off risk regardless of market movement. The price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). The Company expects that these forward loan sale commitments, best efforts, will experience a net neutral shift in fair value of derivative loan commitments.
Fair Values of Derivative Instruments on the Statement of Condition
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Consolidated Statements of Condition as of June 30, 2019 and December 31, 2018:


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 Derivative Assets Derivative Liabilities
   Fair Value   Fair Value
 Balance Sheet Location Jun 30, 2019 Dec 31, 2018 Balance Sheet Location Jun 30, 2019 Dec 31, 2018
 (In thousands)
Derivatives designated as hedging instruments:           
Interest rate swap - cash flow hedgeOther Assets $
 $1,610
 Other Liabilities $12,679
 $1,509
Total derivatives designated as hedging instruments  $
 $1,610
   $12,679
 $1,509
Derivatives not designated as hedging instruments:           
Forward loan sale commitmentsOther Assets $6
 $
 Other Liabilities $334
 $681
Derivative loan commitmentsOther Assets 430
 194
 Other Liabilities 
 
Interest rate swapOther Assets 
 
 Other Liabilities 267
 686
Interest rate swap - with customersOther Assets 25,265
 4,805
 Other Liabilities 655
 6,879
Interest rate swap - with counterpartiesOther Assets 655
 6,877
 Other Liabilities 25,277
 4,809
Forward starting loan level swapOther Assets 430
 37
 Other Liabilities 430
 37
Total derivatives not designated as hedging  $26,786
 $11,913
   $26,963
 $13,092

Effect of Derivative Instruments in the Company’s Consolidated Statements of Net Income and Changes in Stockholders’ Equity
The tables below present the effect of derivative instruments in the Company’s Statements of Changes in Stockholders’ Equity designated as hedging instruments for the three and six months ended June 30, 2019 and 2018:

Cash Flow Hedges       
 Amount of Gain (Loss) Recognized in AOCI  (Effective Portion)
Derivatives Designated as Cash Flow Hedging InstrumentsThree Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
 (In thousands)
Interest rate swaps$(7,916) $2,451
 $(12,489) $6,883

 Amount of (Loss) Gain Reclassified from AOCI into Expense (Effective Portion)
Derivatives Designated as Cash Flow Hedging InstrumentsThree Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
 (In thousands)
Interest rate swaps$(68) $84
 $(291) $429

The tables below present information pertaining to the Company’s derivatives in the Consolidated Statements of Net Income designated as hedging instruments for the three and six months ended June 30, 2019 and 2018:
Fair Value Hedges         
   Amount of Gain Recognized in Income from Derivatives
Derivatives Designated as Fair Value
Hedging Instruments
Location of Gain Recognized in Income Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
   (In thousands)
Interest rate swapsInterest income $
 $20
 $
 $28
          
   Amount of Gain Recognized in Income from Hedged Items
   Three Months Ended June 30, Six Months Ended June 30,
   2019 2018 2019 2018
   (In thousands)
Interest rate swapsInterest income $
 $20
 $
 $29



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The table below presents information pertaining to the Company’s derivatives not designated as hedging instruments in the Consolidated Statements of Net Income as of June 30, 2019 and 2018:
 Amount of Gain (Loss) Recognized in Income
 Three Months Ended June 30, Six Months Ended June 30,
 2019 2018 2019 2018
 (In thousands)
Derivatives not designated as hedging instruments:       
Derivative loan commitments$221
 $75
 $236
 $49
Interest rate swap250
 (62) 419
 (256)
Forward loan sale commitments(329) (133) 353
 (138)
Loan level swaps(5) (1) (6) 4
Forward starting loan level swaps1
 
 
 
 $138
 $(121) $1,002
 $(341)

Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision where if the counterparty defaults on any of its indebtedness or fails to maintain a well-capitalized rating, then the Company could also be declared in default on its derivative obligations and could be required to terminate its derivative positions with the counterparty.
As of June 30, 2019, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $37.9 million. As of June 30, 2019, the Company has minimum collateral posting thresholds with certain of its derivative counterparties and had $37.5 million of securities pledged as collateral under these agreements. A degree of netting occurs on occasions where the Company has exposure to a counterparty and the counterparty has exposure to the Company. If the Company had breached any of these provisions at June 30, 2019, it could have been required to settle its obligations under the agreements at the termination value and would have been required to pay any additional amounts due in excess of amounts previously posted as collateral with the respective counterparty.
Note 9.Stock-Based Compensation Plans
The Company maintains and operates several stock incentive award plans to attract, retain and reward performance of qualified employees and directors who contribute to the success of the Company. These plans include those assumed by the Company in 2014 as a result of merger activity. Current active plans are:
Rockville Financial, Inc. 2006 Stock Incentive Award Plan (the “2006 Plan”);
Rockville Financial, Inc. 2012 Stock Incentive Plan (the “2012 Plan”);
United Financial Bancorp, Inc. 2008 Equity Incentive Plan; and
2015 Omnibus Stock Incentive Plan (the “2015 Plan”).
The 2015 Plan became effective on October 29, 2015 upon approval by the Company’s shareholders. As of the effective date of the 2015 Plan, no other awards may be granted from the previously approved or assumed plans. The 2015 Plan allows the Company to use stock options, stock awards, and performance awards to attract, retain and reward performance of qualified employees and directors who contribute to the success of the Company. The 2015 Plan reserves a total of up to 4,050,000 shares (the “Cap”) of Company common stock for issuance upon the grant or exercise of awards made pursuant to the 2015 Plan. Of these shares, the Company may grant shares in the form of restricted stock, performance shares and other share-based awards and may grant stock options. However, the number of shares issuable will be adjusted by a “fungible ratio” of 2.35. This means that for each share award other than a stock option share or a stock appreciation right share, each 1 share awarded shall be deemed to be 2.35 shares awarded. As of June 30, 2019, there were 2,269,546 shares available for future grants under the 2015 Plan.
For the six months ended June 30, 2019, total employee and director stock-based compensation expense recognized for stock options and restricted stock was $6,000 with a related tax benefit of $1,000 and $1.1 million with a related tax benefit of $234,000, respectively. Of the total expense amount for the six-month period, the amount for director stock-based compensation expense recognized (in the Consolidated Statements of Net Income as other non-interest expense) was $131,000, and the amount for officer stock-based compensation expense recognized (in the Consolidated Statements of Net Income as salaries and employee benefit expense) was $938,000. For the six months ended June 30, 2018, total employee and director stock-based compensation expense recognized for stock options and restricted stock was $8,000 with a related tax benefit of $2,000 and $1.4 million with a related tax benefit of $311,000, respectively.


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For the three months ended June 30, 2019, total employee and director stock-based compensation expense recognized for stock options and restricted stock was $2,000 with a negligible related tax benefit and $487,000 with a related tax benefit of $107,000, respectively. Of the total expense amount for the three-month period, the amount for director stock-based compensation expense recognized (in the Consolidated Statements of Net Income as other non-interest expense) was $71,000, and the amount for officer stock-based compensation expense recognized (in the Consolidated Statements of Net Income as salaries and employee benefit expense) was $418,000. For the three months ended June 30, 2018, total employee and director stock-based compensation expense recognized for stock options and restricted stock was $3,000 with a related tax benefit of $1,000 and $696,000 with a related tax benefit of $153,000, respectively.
The fair values of stock option and restricted stock awards, measured at grant date, are amortized to compensation expense on a straight-line basis over the vesting period.
Stock Options
The following table presents the activity related to stock options outstanding, including options that have stock appreciation rights (“SARs”), under the Plans for the six months ended June 30, 2019:
 Number of
Stock
Options
 Weighted-
Average
Exercise Price
 Weighted-Average
Remaining
Contractual Term
(in years)
 Aggregate
Intrinsic
Value
(in millions)
Outstanding at December 31, 20181,386,712
 $11.70
 
 
Granted
 
    
Exercised(81,909) 10.40
   
Forfeited or expired(866) 13.73
    
Outstanding at June 30, 20191,303,937
 $11.79
 3.3 $3.1
Stock options vested and exercisable at June 30, 20191,303,937
 $11.79
 3.3 $3.1

As of June 30, 2019, all exercisable stock options were fully vested, and accordingly, there was no unrecognized cost related to outstanding stock options.
There were no stock options granted during the six months ended June 30, 2019 and 2018.
Options exercised may include awards that were originally granted as tandem SARs. Therefore, if the SAR component is exercised, it will not equate to the number of shares issued due to the conversion of the SAR option value to the actual share value at exercise date. There were no options with a SAR component included in total options exercised during the six months ended June 30, 2019.
Restricted Stock
Restricted stock provides grantees with rights to shares of common stock upon completion of a service period and in certain cases obtaining a performance metric. During the restriction period, all shares are considered outstanding and dividends are paid on the restricted stock. The Company issued 1,483 shares of restricted stock from shares available under the Company’s 2015 Plan during the six months ended June 30, 2019. The following table presents the activity for restricted stock for the six months ended June 30, 2019:
 Number
of Shares
 Weighted-Average
Grant-Date
Fair Value
Unvested as of December 31, 2018474,508
 $15.44
Granted1,483
 13.48
Vested(60,163) 11.57
Forfeited(74,702) 14.75
Unvested as of June 30, 2019341,126
 $16.27

As of June 30, 2019, there was $3.4 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.9 years.
Employee Stock Ownership Plan
As part of the second-step conversion and stock offering completed in 2011, the Employee Stock Ownership Plan (“ESOP”) borrowed an additional $7.1 million from the Company to purchase 684,395 shares of common stock during the initial public offering and in the open market. The outstanding loan balance of $5.9 million at June 30, 2019 will be repaid principally from the


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Bank’s discretionary contributions to the ESOP over a remaining period of 22 years. The loan bears an interest rate of prime plus one percent. The unallocated ESOP shares are pledged as collateral on the loans. As the loans are repaid to the Company, shares will be released from collateral and will be allocated to the accounts of the participants. For the three months ended June 30, 2019 and 2018, ESOP compensation expense was $78,000 and $96,000, respectively. For the six months ended June 30, 2019 and 2018, ESOP compensation expense was $164,000 and $191,000, respectively.
The Company accounts for its ESOP in accordance with FASB ASC 718-40, Compensation – Stock Compensation. Under this guidance, unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders’ equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be allocated. To the extent that the fair value of the Company’s ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company’s consolidated financial statements. Dividends on unallocated shares are used to pay the ESOP debt.
The ESOP shares as of the period indicated below were as follows:
 June 30, 2019
Allocated shares1,243,678
Shares allocated for release11,407
Unreleased shares490,483
Total ESOP shares1,745,568
Market value of unreleased shares (in thousands)$6,955

Note 10.Regulatory Matters

Minimum regulatory capital requirements
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve qualitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6.0%, total capital to total risk-weighted assets ratio of 8.0%, and a minimum leverage ratio of 4.0% for all banking organizations. Additionally, community banking institutions must maintain a minimum capital conservation buffer of common equity Tier 1 capital of 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer and certain deductions from and adjustments to regulatory capital and risk-weighted assets were phased in over several years. The required minimum conservation buffer was 1.875% as of December 31, 2018 and increased to 2.5% on January 1, 2019, which was the date marking the end of the phase in period.
As of June 30, 2019, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. Management believes, as of June 30, 2019 and December 31, 2018, that the Company and the Bank meet all capital adequacy requirements to which they are subject. The Company’s and the Bank’s actual capital amounts and ratios as of June 30, 2019 and December 31, 2018 are also presented in the following table:


38
 


 Actual Minimum For
Capital
Adequacy
Purposes
 Minimum To Be
Well-Capitalized Under Prompt Corrective
Action Provisions
 Amount Ratio Amount Ratio Amount Ratio
 (Dollars in thousands)
United Bank           
June 30, 2019           
Total capital to risk weighted assets$698,591
 11.60% $481,787
 8.00% $602,234
 10.00%
Common equity tier 1 capital to risk weighted assets642,922
 10.67
 271,148
 4.50
 391,658
 6.50
Tier 1 capital to risk weighted assets642,922
 10.67
 361,531
 6.00
 482,041
 8.00
Tier 1 capital to total average assets642,922
 8.99
 286,061
 4.00
 357,576
 5.00
December 31, 2018           
Total capital to risk weighted assets$694,633
 11.87% $466,980
 8.00% $583,725
 10.00%
Common equity tier 1 capital to risk weighted assets640,773
 10.95
 264,539
 4.50
 382,112
 6.50
Tier 1 capital to risk weighted assets640,773
 10.95
 352,719
 6.00
 470,292
 8.00
Tier 1 capital to total average assets640,773
 8.99
 284,788
 4.00
 355,985
 5.00
            
United Financial Bancorp, Inc.           
June 30, 2019           
Total capital to risk weighted assets$733,239
 12.14% $483,189
 8.00% N/A
 N/A
Common equity tier 1 capital to risk weighted assets602,570
 9.98
 271,700
 4.50
 N/A
 N/A
Tier 1 capital to risk weighted assets602,570
 9.98
 362,267
 6.00
 N/A
 N/A
Tier 1 capital to total average assets602,570
 8.41
 286,597
 4.00
 N/A
 N/A
December 31, 2018           
Total capital to risk weighted assets$739,322
 12.60% $469,411
 8.00% N/A
 N/A
Common equity tier 1 capital to risk weighted assets610,462
 10.40
 264,142
 4.50
 N/A
 N/A
Tier 1 capital to risk weighted assets610,462
 10.40
 352,190
 6.00
 N/A
 N/A
Tier 1 capital to total average assets610,462
 8.43
 290,696
 4.00
 N/A
 N/A


Our ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. The Federal Reserve guidance sets forth the supervisory expectation that bank holding companies will inform and consult with Federal Reserve staff in advance of issuing a dividend that exceeds earnings for the quarter and should not pay dividends in a rolling four quarter period in an amount that exceeds net income for that period. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. The FDIC may limit a savings bank’s ability to pay dividends. No dividends may be paid to the Company’s shareholders if such dividends would reduce stockholders’ equity below the amount of the liquidation account required by the Connecticut conversion regulations. Connecticut law restricts the amount of dividends that the Bank can pay based on net income included in retained earnings for the current year and the preceding two years. As of June 30, 2019 and December 31, 2018, $86.1 million and $135.0 million, respectively, was available for the payment of dividends. Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, any one obligor under this statutory authority may not exceed 10% and 15%, respectively, of a bank’s capital and allowance for loan losses.


39
 


Note 11.Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, included in stockholders’ equity, are as follows:
  June 30, 2019 December 31, 2018
  (In thousands)
Benefit plans:    
Unrecognized net actuarial loss $(7,578) $(7,861)
Tax effect 1,669
 1,731
Benefit plans, net (5,909) (6,130)
     
Securities available-for-sale:    
Net unrealized gain (loss) 5,222
 (31,248)
Tax effect (1,151) 6,885
Securities available-for-sale, net 4,071
 (24,363)
     
Interest rate swaps:    
Net unrealized (loss) gain (12,679) 101
Tax effect 2,793
 (22)
Interest rate swaps, net (9,886) 79
  $(11,724) $(30,414)

On January 1, 2018, the Company adopted ASU No. 2018-02, Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which addressed the impact of the federal tax rate reduction on deferred taxes that were originally recorded through accumulated other comprehensive income. Through the adoption of this ASU, the Company reclassed the “dangling” difference due to the tax rate differential caused by the enactment of the Tax Cuts and Jobs Act on December 22, 2017. As a result, a one-time reclassification of $2.6 million was made from accumulated other comprehensive loss to retained earnings.
Note 12.Net (Loss) Income Per Share
The following table sets forth the calculation of basic and diluted net (loss) income per share for the three and six months ended June 30, 2019 and 2018:
 For the Three Months 
 Ended June 30,
 For the Six Months 
 Ended June 30,
 2019 2018 2019 2018
 (In thousands, except share data)
Net (loss) income available to common stockholders$(3,248) $15,646
 $9,409
 $31,433
Weighted-average common shares outstanding51,114,458
 51,021,309
 51,114,720
 51,009,560
Less: average number of unallocated ESOP award shares(494,222) (517,036) (497,059) (519,871)
Weighted-average basic shares outstanding50,620,236
 50,504,273
 50,617,661
 50,489,689
Dilutive effect of stock options
 470,010
 146,017
 495,831
Weighted-average diluted shares50,620,236
 50,974,283
 50,763,678
 50,985,520
Net (loss) income per share:       
Basic$(0.06) $0.31
 $0.19
 $0.62
Diluted$(0.06) $0.31
 $0.19
 $0.62

For the three and six months ended June 30, 2019, common stock equivalents of 181,033 shares have been excluded from the computation of diluted net (loss) income per share because the inclusion of such amounts is anti-dilutive. There were no anti-dilutive stock options during the three and six months ended June 30, 2018.
Note 13.Fair Value Measurements
Fair value estimates are made as of a specific point in time based on the characteristics of the assets and liabilities and relevant market information. In accordance with FASB ASC 820, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Level 1:Quoted prices are available in active markets for identical assets and liabilities as of the reporting date. The quoted price is not adjusted because of the size of the position relative to trading volume.
Level 2:Pricing inputs are observable for assets and liabilities, either directly or indirectly, but are not the same as those used in Level 1. Fair value is determined through the use of models or other valuation methodologies.
Level 3:Pricing inputs are unobservable for assets and liabilities and include situations where there is little, if any, market activity and the determination of fair value requires significant judgment or estimation.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such instances, the determination of which category within the fair value hierarchy is appropriate for any given asset and liability is based on the lowest level of input that is significant to the fair value of the asset and liability.
When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates and could be material. Derived fair value estimates may not be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.


40
 


Fair value estimates for financial instrument fair value disclosures are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company.
Loans Held for Sale
The Company has elected the fair value option for its portfolio of residential real estate and government mortgage loans held for sale to reduce certain timing differences and better match changes in fair value of the loans with changes in the fair value of the derivative loan sale contracts used to economically hedge them.
The aggregate principal amount of the residential real estate and government mortgage loans held for sale was $38.1 million and $76.6 million at June 30, 2019 and December 31, 2018, respectively. The aggregate fair value of these loans as of the same dates was $38.8 million and $78.8 million, respectively.
There were no residential real estate mortgage loans held for sale 90 days or more past due at June 30, 2019 and December 31, 2018.
Changes in the fair value of mortgage loans held for sale are reported as a component of (loss) income from mortgage banking activities in the Consolidated Statements of Net Income. The following table presents the (losses) gains in fair value related to mortgage loans held for sale for the periods indicated:
  Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
  2019 2018 2019 2018
  (In thousands)
Mortgage loans held for sale $(853) $475
 $19
 $(782)

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables detail the assets and liabilities carried at fair value on a recurring basis as of June 30, 2019 and December 31, 2018 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. There were no transfers in and out of Level 1, Level 2 and Level 3 measurements during the six months ended June 30, 2019 and 2018.


41
 


 Total
Fair
Value
 Quoted Prices
in Active
Markets for
Identical Assets
 Other
Observable
Inputs
 Significant
Unobservable
Inputs
  (Level 1) (Level 2) (Level 3)
 (In thousands)
June 30, 2019       
Available-for-Sale Securities:       
Government-sponsored residential mortgage-backed securities$236,380
 $
 $236,380
 $
Government-sponsored residential collateralized debt obligations116,916
 
 116,916
 
Government-sponsored commercial mortgage-backed securities15,804
 
 15,804
 
Government-sponsored commercial collateralized debt obligations149,169
 
 149,169
 
Asset-backed securities141,540
 
 
 141,540
Corporate debt securities93,672
 
 93,672
 
Obligations of states and political subdivisions87,019
 
 87,019
 
Total available-for-sale debt securities$840,500
 $
 $698,960
 $141,540
        
Mortgage loan derivative assets$436
 $
 $436
 $
Mortgage loan derivative liabilities334
 
 334
 
Loans held for sale38,809
 
 38,809
 
Marketable equity securities401
 401
 
 
Mortgage servicing rights12,664
 
 
 12,664
Interest rate swap assets26,350
 
 26,350
 
Interest rate swap liabilities39,308
 
 39,308
 
        
December 31, 2018       
Available-for-Sale Securities:       
Government-sponsored residential mortgage-backed securities$204,098
 $
 $204,098
 $
Government-sponsored residential collateralized-debt obligations170,719
 
 170,719
 
Government-sponsored commercial mortgage-backed securities27,678
 
 27,678
 
Government-sponsored commercial collateralized-debt obligations148,226
 
 148,226
 
Asset-backed securities100,495
 
 
 100,495
Corporate debt securities83,230
 
 83,230
 
Obligations of states and political subdivisions238,901
 
 238,901
 
Total available-for-sale securities$973,347
 $
 $872,852
 $100,495
        
Mortgage loan derivative assets$194
 $
 $194
 $
Mortgage loan derivative liabilities681
 
 681
 
Loans held for sale78,788
 
 78,788
 
Marketable equity securities356
 356
 
 
Mortgage servicing rights14,739
 
 
 14,739
Interest rate swap assets13,329
 
 13,329
 
Interest rate swap liabilities13,920
 
 13,920
 



42
 


The following table presents additional information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value:
 Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
 2019 2018 2019 2018
 (In thousands)
Balance of available-for-sale securities, at beginning of period$158,171
 $111,189
 $100,495
 $167,139
Purchases (sales)(17,526) (5,376) 39,495
 (61,082)
Principal payments and net accretion63
 (40) 52
 (117)
Total realized gains (losses) included in earnings20
 67
 20
 (82)
Total unrealized gains (losses) included in other comprehensive income/loss812
 (802) 1,478
 (820)
Balance at end of period$141,540
 $105,038
 $141,540
 $105,038

       
Balance of mortgage servicing rights, at beginning of period$14,691
 $13,333
 $14,739
 $11,733
Issuances214
 955
 1,113
 1,736
Change in fair value recognized in net (loss) income(2,241) (609) (3,188) 210
Balance at end of period$12,664
 $13,679
 $12,664
 $13,679

The following valuation methodologies are used for certain assets that are recorded at fair value on a recurring basis.
Available-for-Sale and Marketable Equity Securities: Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using an independent pricing service. Level 1 securities are those traded on active markets for identical securities including U.S. treasury securities, equity securities and mutual funds. Level 2 securities include U.S. Government agency obligations, U.S. Government-sponsored enterprises, mortgage-backed securities, obligations of states and political subdivisions, corporate and other debt securities. Level 3 securities include private placement securities and thinly traded equity securities. All fair value measurements are obtained from a third-party pricing service and are not adjusted by management.
Matrix pricing is used for pricing most obligations of states and political subdivisions, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on securities relationships to other benchmark quoted securities. The grouping of securities is completed according to insurer, credit support, state of issuance and rating to incorporate additional spreads and municipal bond yield curves.
The valuation of the Company’s asset-backed securities is determined utilizing an approach that combines advanced analytics with structural and fundamental cash flow analysis based upon observed market based yields. The third-party provider’s model analyzes each instrument’s underlying collateral given observable collateral characteristics and credit statistics to extrapolate future performance and project cash flows, by incorporating expectations of default probabilities, recovery rates, prepayment speeds, loss severities and a derived discount rate. The Company has determined that due to the liquidity and significance of unobservable inputs, asset-backed securities are classified in Level 3 of the valuation hierarchy.
Loans Held for Sale: The fair value of residential and government mortgage loans held for sale is estimated using quoted market prices for loans with similar characteristics provided by government-sponsored entities. Any changes in the valuation of mortgage loans held for sale is based upon the change in market interest rates between closing the loan and the measurement date and an immaterial portion attributable to changes in instrument-specific credit risk. The Company has determined that loans held for sale are classified in Level 2 of the valuation hierarchy.
Mortgage Servicing Rights: A mortgage servicing right (“MSR”) asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is provided by a third party and is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are recorded monthly as the cash flows derived from the valuation model change the fair value of the asset. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy. See Note 4, “Loans Receivable and Allowance for Loan Losses” in the Notes to Consolidated Financial Statements contained elsewhere in this report.


43
 


Derivatives: Derivative instruments related to commitments for loans to be sold are carried at fair value. Fair value is determined through quotes obtained from actively traded mortgage markets. Any change in fair value for rate lock commitments to the borrower is based upon the change in market interest rates between making the rate lock commitment and the measurement date and, for forward loan sale commitments to the investor, is based upon the change in market interest rates from entering into the forward loan sales contract and the measurement date. Both the rate lock commitments to the borrowers and the forward loan sale commitments to investors are derivatives pursuant to the requirements of FASB ASC 815-10; however, the Company has not designated them as hedging instruments. Accordingly, they are marked to fair value through earnings.
The Company’s intention is to sell the majority of its fixed rate mortgage loans with original terms of 30 years on a servicing retained basis as well as certain 10-, 15- and 20-year loans. The servicing value has been included in the pricing of the rate lock commitments. The Company estimates a fallout rate of approximately 20.2% based upon historical averages in determining the fair value of rate lock commitments. Although the use of historical averages is based upon unobservable data, the Company believes that this input is insignificant to the valuation and, therefore, has concluded that the fair value measurements meet the Level 2 criteria. The Company continually reassesses the significance of the fallout rate on the fair value measurement and updates the fallout rate accordingly.
Hedging derivatives include interest rate swaps as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy.
The following table presents additional quantitative information about assets measured at fair value on a recurring basis for which the Company utilized Level 3 inputs to determine fair value at June 30, 2019:
(Dollars in thousands)        
  
Fair
Value
 Valuation Technique Unobservable Inputs 
Range
(Weighted Average)
Asset-backed securities $141,540
 Discounted Cash Flow Discount Rates 2.9% - 6.1% (3.82%)
      Cumulative Default % 0.2% - 14.2% (9.94%)
      Loss Given Default 0.1% - 4.2% (3.03%)
         
Mortgage servicing rights $12,664
 Discounted Cash Flow Discount Rate 11.0% - 15.5% (12.84%)
      Cost to Service $75 - $135 ($88.27)
      Float Earnings Rate 1.5% (1.5%)

Asset-backed securities: Given the level of market activity for the asset-backed securities in the portfolio, the discount rates utilized in the fair value measurement were derived by analyzing current market yields for comparable securities and research reports issued by brokers and dealers in the financial services industry. Adjustments were then made for credit and structural differences between these types of securities. There is an inverse correlation between the discount rate and the fair value measurement. When the discount rate increases, the fair value decreases.
Other significant unobservable inputs to the fair value measurement of the asset backed securities in the portfolio included prospective defaults and recoveries.  The cumulative default percentage represents the lifetime defaults assumed. The loss given default percentage represents the percentage of current and projected defaults assumed to be lost. There is an inverse correlation between the default percentages and the fair value measurement. When default percentages increase, the fair value decreases. 
Other significant unobservable inputs to the fair value measurement of the collateralized debt obligations included prospective defaults and recoveries. The cumulative default percentage represents the lifetime defaults assumed, excluding currently defaulted collateral and including all performing and currently deferring collateral.  As a result, the cumulative default percentage also reflects assumptions of the possibility of currently deferring collateral curing and becoming current.  The loss given default percentage represents the percentage of current and projected defaults assumed to be lost. There is an inverse correlation between the cumulative default and loss given default percentages and the fair value measurement. When default percentages increase, the fair value decreases. 
Mortgage servicing rights: Given the low level of market activity in the MSR market and the general difficulty in price discovery, even when activity is at historic norms, the discount rate utilized in the fair value measurement was derived by analyzing recent and historical pricing for MSRs. Adjustments were then made for various loan and investor types underlying these


44
 


MSRs. There is an inverse correlation between the discount rate and the fair value measurement. When the discount rate increases, the fair value decreases.
Other significant unobservable inputs to the fair value measurement of MSRs include cost to service, an input that is not as simple as taking total costs and dividing by a number of loans. It is a figure informed by marginal cost and pricing for MSRs by competing firms, taking other assumptions into consideration. It is different for different loan types. There is an inverse correlation between the cost to service and the fair value measurement. When the cost assumption increases, the fair value decreases.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following tables detail the assets carried at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018 and indicate the fair value hierarchy of the valuation technique utilized by the Company to determine fair value. There were no liabilities measured at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018.
  Total
Fair Value
 Quoted Prices in
Active Markets for
Identical Assets
 Other
Observable
Inputs
 Significant
Unobservable
Inputs
   (Level 1) (Level 2) (Level 3)
  (In thousands)
June 30, 2019        
Impaired loans $636
 $
 $
 $636
Other real estate owned 1,455
 
 
 1,455
Total $2,091
 $
 $
 $2,091
December 31, 2018        
Impaired loans $2,847
 $
 $
 $2,847
Other real estate owned 1,389
 
 
 1,389
Total $4,236
 $
 $
 $4,236

The following is a description of the valuation methodologies used for certain assets that are recorded at fair value on a non-recurring basis.
Impaired Loans: Accounting standards require that a creditor recognize the impairment of a loan if the present value of expected future cash flows discounted at the loan’s effective interest rate (or, alternatively, the observable market price of the loan or the fair value of the collateral) is less than the recorded investment in the impaired loan. Non-recurring fair value adjustments to collateral dependent loans are recorded, when necessary, to reflect partial write-downs and the specific reserve allocations based upon observable market price or current appraised value of the collateral less selling costs and discounts based on management’s judgment of current conditions. Based on the significance of management’s judgment, the Company records collateral dependent impaired loans as non-recurring Level 3 fair value measurements.
Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure, as other real estate owned (“OREO”) in its financial statements. Upon foreclosure, the property securing the loan is recorded at fair value as determined by real estate appraisals less the estimated selling expense. Appraisals are based upon observable market data such as comparable sales within the real estate market. Assumptions are also made based on management’s judgment of the appraisals and current real estate market conditions and therefore these assets are classified as non-recurring Level 3 assets in the fair value hierarchy.
Gains (losses) on assets recorded at fair value on a non-recurring basis for the three and six months ended June 30, 2019 and 2018 are as follows:
 Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
 2019 2018 2019 2018
 (In thousands)
Impaired loans$266
 $308
 $239
 $208
Other real estate owned(27) (117) (58) (167)
Total$239
 $191
 $181
 $41



45
 



Disclosures about Fair Value of Financial Instruments:
As of June 30, 2019 and December 31, 2018, the carrying value and estimated fair values of the Company’s financial instruments are as described below:
 Carrying
Value
 Fair Value
  Level 1 Level 2 Level 3 Total
 (In thousands)
June 30, 2019         
Financial assets:         
Cash and cash equivalents$114,746
 $114,746
 $
 $
 $114,746
Available-for-sale securities840,500
 
 698,960
 141,540
 840,500
Loans held for sale38,809
 
 38,809
 
 38,809
Loans receivable-net5,719,892
 
 
 5,693,909
 5,693,909
FHLBB stock34,335
 
 
 34,335
 34,335
Accrued interest receivable24,938
 
 
 24,938
 24,938
Derivative assets26,786
 
 26,786
 
 26,786
Mortgage servicing rights12,664
 
 
 12,664
 12,664
Marketable equity securities401
 401
 
 
 401
Financial liabilities:         
Deposits5,726,548
 
 
 5,730,556
 5,730,556
Mortgagors’ and investors’ escrow accounts14,541
 
 
 14,541
 14,541
FHLBB advances and other borrowings741,989
 
 743,469
 
 743,469
Derivative liabilities39,642
 
 39,642
 
 39,642
          
December 31, 2018         
Financial assets:         
Cash and cash equivalents$97,964
 $97,964
 $
 $
 $97,964
Available-for-sale securities973,347
 
 872,852
 100,495
 973,347
Loans held for sale78,788
 
 78,788
 
 78,788
Loans receivable-net5,622,589
 
 
 5,533,626
 5,533,626
FHLBB stock41,407
 
 
 41,407
 41,407
Accrued interest receivable24,823
 
 
 24,823
 24,823
Derivative assets13,523
 
 13,523
 
 13,523
Mortgage servicing rights14,739
 
 
 14,739
 14,739
Marketable equity securities356
 356
 
 
 356
Financial liabilities:         
Deposits5,670,599
 
 
 5,661,129
 5,661,129
Mortgagors’ and investors’ escrow accounts4,685
 
 
 4,685
 4,685
FHLBB advances and other borrowings899,626
 
 900,146
 
 900,146
Derivative liabilities14,601
 
 14,601
 
 14,601

Certain financial instruments and all nonfinancial investments are exempt from disclosure requirements. Accordingly, the aggregate fair value of amounts presented above may not necessarily represent the underlying fair value of the Company.
Note 14.Commitments and Contingencies
Financial Instruments With Off-Balance Sheet Risk
In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit through issuing standby letters of credit and undisbursed portions of construction loans and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized on the Consolidated Statements of Condition. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.


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The contractual amounts of commitments to extend credit represent the amounts of potential accounting loss should the contract be fully drawn upon, the customer defaults and the value of any existing collateral obligations is deemed worthless. The Company uses the same credit policies in making commitments as it does for on-balance sheet instruments. Off-balance sheet financial instruments whose contract amounts represent credit risk are as follows at June 30, 2019 and December 31, 2018:
 June 30,
2019
 December 31,
2018
 (In thousands)
Commitments to extend credit:   
Commitment to grant loans$129,842
 $140,875
Undisbursed construction loans186,979
 122,838
Undisbursed home equity lines of credit471,501
 453,634
Undisbursed commercial lines of credit592,176
 515,193
Standby letters of credit22,475
 13,252
Unused credit card lines25,407
 21,331
Unused checking overdraft lines of credit2,505
 2,322
Total$1,430,885
 $1,269,445

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counterparty. Collateral held varies but may include residential and commercial property, accounts receivable, inventory, property, plant and equipment, deposits, and securities.
Other Commitments
The Company invests in partnerships, including low income housing tax credit, new markets housing tax credit, and alternative energy tax credit partnerships. The net carrying balance of these investments totaled $44.3 million at June 30, 2019 and is included in other assets in the Consolidated Statement of Condition. At June 30, 2019, the Company was contractually committed under these limited partnership agreements to make additional capital contributions of $3.0 million, which constitutes our maximum potential obligation to these partnerships.
Legal Matters
The Company is involved in various legal proceedings that have arisen in the normal course of business. The Company is not involved in any legal proceedings deemed to be material as of June 30, 2019.
Note 15.Investment in D.C. Solar Tax-Advantaged Funds
The Company invests, as a limited liability member, in Solar Eclipse Investment Fund X, LLC, Solar Eclipse Investment Fund XV, LLC, and Solar Eclipse Investment Fund XXII, LLC (collectively, the “LLCs”), which generate solar investment tax credits for the Company. The managing member for each of the LLCs is Solarmore Management Services, Inc. Solarmore Management Services, Inc. is also the managing member of a number of other solar investment tax credit LLC funds (collectively, the “Funds”). The LLCs were established to participate in a government sponsored program to promote solar technology and obtain financing to acquire approximately 500 mobile solar generators and place those generators in service to qualify for a federal tax credit based upon the fair value of the generator units. Each LLC obtained financing from D.C. Solar Solutions, Inc. (“Solutions”), which is also the manufacturer and seller of the generators; and each LLC entered into a master lease arrangement with D.C. Solar Distribution, Inc. (“Distribution”), the entity that is responsible for the end sub-lease activity supporting the fair value of the master lease agreement. Solutions and Distribution are indirectly related.
In December 2018, Solutions and Distribution (collectively, “D.C. Solar”) had certain assets seized by the U.S. Government. In late January and early February, 2019, D.C. Solar filed voluntary petitions for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code in an attempt to reorganize. On March 22, 2019, mainly due to the lack of financing to maintain the on-going operations of these companies, ambiguity around actual inventory in existence and the U.S. Government’s seizure of certain assets, the bankruptcy cases were converted to cases under Chapter 7.  While a federal criminal investigation is ongoing, an FBI affidavit filed in the


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bankruptcy cases contains allegations of a potential fraud perpetrated by the principals of D.C. Solar, including allegations of fictitious or overstated sales of mobile solar generators sold to the Funds (including the LLCs) as well as the fabrication of sublease revenue streams for the generators.
During the three months ended June 30, 2019, the following developments occurred, which affected the Company’s analysis of the key factors for determining probable loss estimates:
The generator inventory process was completed at known locations. Prior to the filing of the Form 10-Q for March 31, 2019, there was uncertainty around the number of found generators owned by each Fund.

Efforts were made by a third-party transportation company to identify tampered generators during the movement of found generators to storage. Although only a small number of generators were moved, no additional generators were identified as owned by any of the LLCs.

Additional locations of generators were identified. Inventory efforts to date around these locations have not resulted in an increase in generators owned by any of the LLCs.

Additional information about maintenance, insurance, storage and redeployment costs for the generators became available. This information is critical to making decisions about the level of salvage efforts to be made by the Company, particularly for missing generators. The incrementally trending costs may make salvage efforts prohibitively expensive.

Investor group efforts to identify missing generator ownership are waning and some investors have taken impairment charges, presumably on missing generators. Each investor has a different set of facts and circumstances relating to the quantity of generators found and manufacturer records for the generators associated with their investment funds. The Company maintains manufacturer records supporting the majority of the missing generators for the LLCs in which it invested. However, lack of investor group support can impact the timing and cost of further efforts to locate and identify missing generators, increasing the probability that the current missing generators are not recoverable.

The Company concluded that the above developments represented a significant change in facts and circumstances concerning the probability of loss on the LLCs’ missing generators. As of June 30, 2019, the Company concluded that there was sufficient evidence to support that a full loss was probable on the missing generators.
During the quarterly period ended June 30, 2019, the Company recorded an impairment charge to its investments in the LLCs of $6.3 million, after tax effect, and an additional ASC 740 reserve against tax benefits and credits of $8.7 million to reflect the loss of the missing generators and the associated tax benefits. The valuation of inventory remains uncertain and although additional loss is probable on the generators that have been located, the amount of loss cannot be estimated as of June 30, 2019.  As such, the Company is not in a position to record additional ASC 740 reserves for exposure above that which relates to the missing generators.  The net impact to net income for the quarterly period ended June 30, 2019 was $15.0 million.

The components of the possible remaining risk of loss to the Company with respect to its investments in the LLCs, based on facts and circumstances known as of the date of filing for the reporting period ended June 30, 2019, are as follows:

 (in thousands)
Investment in LLCs, after tax effect$7,800
Tax credit benefit reversal (1)13,000
Deferred tax liability - tax loss flow through reversal, rate differential (2)2,600
    Total risk of loss (3)$23,400

(1)For tax credits utilized during the quarterly period ended December 31, 2014 through the quarterly period ended June 30, 2019, net of basis adjustment under Internal Revenue Code § 50(d) at the post tax-reform corporate rate of 21%.
(2)Exposure for the reversal of tax loss flow through benefits at the pre tax-reform corporate rate of 35%, carried in the deferred tax asset balance of the Company as of June 30, 2019 at the current corporate rate of 21%.
(3)This total does not include litigation exposure, potential costs, penalties, interest or recoveries.




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The following table provides, solely on an illustrative basis, the potential impact on capital if the Company were to recognize a complete loss on the LLC investments including total tax benefit recapture. The Company does not currently believe a complete loss to be likely. The total exposure reflected in the table does not include litigation exposure, potential costs, penalties, interest or recoveries.
 June 30, 2019 December 31, 2018
 Actual 
Proforma (1)
 Actual
United Financial Bancorp, Inc.     
Tangible Common Equity to Tangible Assets8.29% 7.99% 8.15%
Tier 1 Capital Ratio9.98% 9.73% 10.40%
Total Capital to Risk Weighted Assets Ratio12.14% 11.89% 12.60%
Tier 1 to Total Average Assets Ratio8.41% 8.20% 8.43%
      
United Bank     
Tier 1 Capital Ratio10.67% 10.71% 10.95%
Total Capital to Risk Weighted Assets Ratio11.60% 11.63% 11.87%
Tier 1 to Total Average Assets Ratio8.99% 9.00% 8.99%

(1)Presented as estimates, within a range of +/- 5 bps.

For additional information on the risk of our investment in tax-advantaged funds, see Part II - Other Information, Item 1A. Risk Factors.
Note 16. Subsequent Event
On July 15, 2019, the Company entered into a merger agreement with People’s United Financial, Inc. (“People’s United”) pursuant to which, upon the terms and subject to the conditions set forth therein, the Company will merge with and into People’s United, with People’s United as the surviving corporation, in an all-stock transaction valued at approximately $759.0 million, based on the closing stock price of People’s United on July 12, 2019 and including the value of stock options and other equity awards.  Following the merger, United Bank will merge with and into People’s United Bank, National Association, with People’s United Bank, National Association surviving. 
At the effective time of the merger, each outstanding share of Company common stock will be converted into the right to receive 0.875 shares (the “Exchange Ratio”) of People’s United common stock.  Company stock options and other equity awards, whether or not then vested, will be canceled and converted into the right to receive a number of shares of People’s United common stock based upon relevant formulas set forth in the merger agreement, and based upon the Exchange Ratio. 
The merger agreement contains customary representations and warranties from both United Financial and People’s United, and each party has agreed to customary covenants.  The completion of the merger is also subject to customary closing conditions. 
The merger agreement was unanimously approved by the boards of directors of each of the Company and People’s United.  Subject to the receipt of required regulatory approvals and satisfaction or waiver of other customary closing conditions in accordance with the merger agreement, the Company anticipates the merger to be complete during the fourth quarter of 2019.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
Certain statements contained in this document that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (referred to as the Securities Act), and Section 21E of the Securities Exchange Act of 1934, as amended (referred to as the Securities Exchange Act), and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. You can identify these statements from the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These forward-looking statements are subject to significant risks, assumptions and uncertainties, including among other things, changes in general economic and business conditions, increased competitive pressures, changes in the interest rate environment, legislative and regulatory change, changes in the financial markets, and other risks and


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uncertainties disclosed from time to time in documents that United Financial Bancorp, Inc. files with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2018 and the Risk Factors in Part II, Item 1A of this report. Because of these and other uncertainties, United’s actual results, performance or achievements, or industry results, may be materially different from the results indicated by these forward-looking statements. In addition, United’s past results of operations do not necessarily indicate United’s combined future results. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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.
In addition to factors previously disclosed in People’s United’s and United Financial Bancorp’s reports filed with the SEC and those identified elsewhere in this communication, the following factors, among others, could cause actual results to differ materially from forward-looking statements or historical performance: ability to obtain regulatory approvals and meet other closing conditions to the merger, including approval by United Financial Bancorp shareholders on the expected terms and schedule, and including the risk that regulatory approvals required for the merger are not obtained or are obtained subject to conditions that are not anticipated; delay in closing the merger; difficulties and delays in integrating the United Financial Bancorp business or fully realizing cost savings and other benefits; business disruption following the merger; changes in asset quality and credit risk; the inability to sustain revenue and earnings growth; changes in interest rates and capital markets; inflation; customer acceptance of People’s United’s products and services; customer borrowing, repayment, investment and deposit practices; customer disintermediation; the introduction, withdrawal, success and timing of business initiatives; competitive conditions; the inability to realize cost savings or revenues or to implement integration plans and other consequences associated with mergers, acquisitions and divestitures; economic conditions; the impact, extent and timing of technological changes and capital management activities; litigation; increased capital requirements, other regulatory requirements or enhanced regulatory supervision; and other actions of the Federal Reserve Board and legislative and regulatory actions and reforms.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand the Company’s operations and present business environment. Management believes accuracy, transparency and clarity are the primary goals of successful financial reporting. Management remains committed to transparency in the Company’s financial reporting, providing the Company’s stockholders with informative financial disclosures and presenting an accurate view of the Company’s financial disclosures, financial position and operating results.
The MD&A is provided as a supplement to—and should be read in conjunction with—the Unaudited Consolidated Financial Statements and the accompanying notes thereto contained in Part I, Item 1, of this report as well as the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. The following sections are included in the MD&A:
Business – a general description of the Company’s business, objectives and regulatory considerations.
Critical Accounting Estimates – a discussion of accounting estimates that require critical judgments and estimates.
Comparison of Operating Results – an analysis of the Company’s consolidated results of operations for the periods presented in the Unaudited Consolidated Financial Statements.
Financial Condition, Liquidity and Capital Resources – an overview of financial condition and market interest rate risk.
Business
General
United Financial Bancorp, Inc., a publicly-owned registered financial holding company, is headquartered in Hartford, Connecticut and is a Connecticut corporation. United Financial Bancorp, Inc. is the holding company for United Bank. United’s common stock is traded on the NASDAQ Global Select Stock Market under the symbol “UBNK.” The Company’s principal asset at June 30, 2019 is the outstanding capital stock of United Bank, a wholly-owned subsidiary of the Company.
The Company entered into a merger agreement on July 15, 2019, whereby People’s United Financial, Inc. (“People’s United”) will acquire the Company in a stock transaction. The merger agreement has been unanimously approved by the board of directors of the Company and People’s United and upon all customary closing conditions, the Company anticipates the merger to be complete in the fourth quarter of 2019. Further details are described below under the Executive Overview heading.
By assets, United Financial Bancorp, Inc. is the third largest publicly traded banking institution headquartered in Connecticut with consolidated assets of $7.34 billion and stockholders’ equity of $720.0 million at June 30, 2019.
The Company is a commercially-focused financial institution delivering financial services primarily to small- to mid-sized businesses and individuals throughout Connecticut and Massachusetts through 58 banking offices, commercial loan production offices, mortgage loan production offices, 72 ATMs, telephone banking, mobile banking, and online banking (www.bankatunited.com). In the second quarter of 2018, the Company entered into an agreement with Webster Bank, N.A. to purchase and assume the personal and business banking deposits, including checking, savings, overdraft lines of credit tied to checking accounts, IRAs, and CDs, at six branches located in Connecticut, Massachusetts, and Rhode Island. The deal closed in October 2018, at which time three United Bank branches consolidated into the closest, respective Webster branch.
The Company’s vision is to pursue excellence in all things with respect to its customers, employees, shareholders and communities. This pursuit of excellence has helped the Company fulfill the financial needs of its customers while delivering an exceptional banking experience in the market areas that it has served since 1858. The structure of United Bank supports the vision with community banking teams in each market that provide traditional banking products and services to business organizations and individuals, including commercial business loans, commercial and residential real estate loans, consumer loans, financial advisory services and a variety of deposit products.
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, gains and losses from sales of loans and securities, and


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non-interest income and expenses. Non-interest income primarily consists of fee income from depositors, mortgage banking activities, loan swap fees and increases in cash surrender value of bank-owned life insurance (“BOLI”). Non-interest expenses consist principally of salaries and employee benefits, occupancy, service bureau fees, core deposit intangible amortization, 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 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;
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 an attractive cost structure;
Grow operating revenue, maximize operating earnings, grow tangible book value, and pay dividends; and
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 common equity and assets, net interest margin, non-interest income, operating expenses related to total average assets and efficiency ratio, pre-tax pre-provision (“PTPP”) profitability, asset quality, loan and deposit growth, capital management, liquidity and interest rate sensitivity levels, customer service standards, market share and peer comparisons.
Regulatory Considerations
The Company and its subsidiaries are subject to numerous examinations by federal and state banking regulators, as well as the Securities and Exchange Commission. Please refer to the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for additional disclosures with respect to laws and regulations affecting the Company’s businesses.


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Critical Accounting Estimates
The accounting policies followed by the Company and its subsidiaries conform with accounting principles generally accepted in the United States of America and with general practices within the banking industry. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company bases its assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time the Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that the Consolidated Financial Statements are presented fairly and in accordance with GAAP.
Management believes that the most critical accounting policies, which involve the most complex subjective decisions or assessments, relate to the allowance for loan losses, other-than-temporary impairment of investment securities, derivative instruments and hedging activities, goodwill, and income taxes. Management has reviewed these critical accounting estimates and related disclosures with the Audit Committee of the Board of Directors. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2018 Annual Report on Form 10-K. A brief description of the Company’s current policies involving significant judgment follows:
Allowance for Loan Losses
The allowance for loan losses is maintained at a level that management considers adequate to absorb losses in the loan portfolio. Management’s judgment in determining the adequacy of the allowance is inherently subjective and is based on past loan loss experience, known and inherent losses and size of the loan portfolios, an assessment of current economic and real estate market conditions, estimates of the current value of underlying collateral, review of regulatory authority examination reports and other relevant factors.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: owner-occupied and investor non-owner occupied commercial real estate, commercial and residential construction, commercial business, residential real estate, home equity, and other consumer. The general component of the allowance for loan losses also includes a reserve based upon historical loss experience for loans which were acquired and have subsequently evidenced measured credit deterioration following initial acquisition. Our acquired loan portfolio is comprised of purchased loans that show no evidence of deterioration subsequent to acquisition and are therefore not part of the covered portfolio. Acquired impaired loans are loans with evidence of deterioration subsequent to acquisition and are considered in the covered portfolio in establishing the allowance for loan losses.
Although management believes it uses appropriate available information to establish the allowance for loan losses, future additions to the allowance may be necessary if certain future events occur that cause actual results to differ from the assumptions used in making the evaluation.
Other-than-Temporary Impairment of Securities
The Company maintains a securities portfolio that is classified as available-for-sale. Securities available-for-sale are recorded at estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Management determines the classifications of a security at the time of 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 available-for-sale securities below their cost or amortized cost that are deemed to be other-than-temporary are reflected in earnings upon the identification of credit loss. Unrealized losses on debt securities with no identified credit loss component are reflected in other comprehensive income.
Derivative Instruments and Hedging Activities
The Company uses derivatives to manage a variety of risks, including risks related to interest rates. Accounting for derivatives as hedges requires that, at inception and over the term of the arrangement, the hedged item and related derivative meet the requirements for hedge accounting. The rules and interpretations related to derivatives accounting are complex. Failure to apply this complex guidance correctly will result in the changes in the fair value of the derivative being reported in earnings.
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.


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At June 30, 2019, derivative assets and liabilities were $26.8 million and $39.6 million, respectively. Further information about our use of derivatives is provided in Note 8, “Derivatives and Hedging Activities” in Notes to Unaudited Consolidated Financial Statements in this report.
Goodwill
The Company is required to record assets and liabilities it has acquired in a business combination, including identifiable intangible assets such as core deposit intangibles, at fair value, which may involve making estimates based on third-party valuations, such as appraisals or internal valuations based on discounted cash flow analyses or other valuation techniques. The resulting goodwill is evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of the goodwill may be impaired.
When goodwill is evaluated for impairment, qualitative factors considered include, but are not limited to, industry and market conditions, overall financial performance, and events affecting the reporting unit. If there are no qualitative factors that indicate goodwill may be impaired, the quantitative analysis is not required. For a quantitative analysis, if the carrying amount exceeds the implied 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.
The carrying value of goodwill at June 30, 2019 was $116.7 million. For further discussion on goodwill see Note 6, “Goodwill and Core Deposit Intangibles” in Notes to Unaudited Consolidated Financial Statements in this report.
Income Taxes
The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
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 forecasted future operating results, based upon approved business plans, including a review of the eligible carry forward periods, tax planning opportunities and other relevant considerations. Management believes that the accounting estimate related to the valuation allowance is a critical accounting estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.
The reserve for tax contingencies contains uncertainties because management is required to make assumptions and to apply judgment to estimate the exposures associated with our various tax positions. The effective income tax rate is also affected by changes in tax law, entry into new tax jurisdictions, the level of earnings and the results of tax audits.

Operating Results
Executive Overview
The Company entered into a merger agreement with People’s United on July 15, 2019, pursuant to which the Company will merge with and into People’s United, with People’s United as the surviving corporation. The merger agreement has been unanimously approved by the board of directors of the Company and People’s United. Subject to satisfaction or waives of customary closing conditions in accordance with the merger agreement, the Company anticipates the merger to be complete in the fourth quarter of 2019.
Further information about the merger agreement can be found in Note 16, “Subsequent Event” in the Notes to Unaudited Consolidated Financial Statements located under Part I, Item I, Financial Statements.
While the merger is pending, the Company will continue to focus on core deposit account generation and originating quality loans while maintaining credit quality and prudent risk management practices. The Company is also committed to the integration process to endeavor to complete a smooth transition for all of its customers.
Second quarter results reflect the charges (totaling $15.0 million) the Company recorded related to its investment in D.C. Solar tax-advantaged funds. The Company recorded an impairment charge of $6.3 million, after tax effect, and an additional ASC 740 reserve of $8.7 million to reflect the loss of the missing generators and the associated tax benefits. See Note 15, “Investment in D.C. Solar Tax-Advantaged Funds” in the Notes to Unaudited Consolidated Financial Statements located under Part I, Item I,


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Financial Statements for further information. Additionally, the Company experienced a higher level of professional expenses due to the proposed merger with People’s United as well as increased legal fees related to the D.C. Solar tax-advantaged funds.
Net loss of $3.2 million, or $0.06 per diluted share, was recorded for the three months ended June 30, 2019, compared to net income of $15.6 million, or $0.31 per diluted share, for the same period in 2018. Net income for the six months ended June 30, 2019 was $9.4 million, or $0.19 per diluted share, compared to $31.4 million, or $0.62 per diluted share, for the same period in 2018.
Tax-equivalent net interest income decreased $1.6 million for the three months ended June 30, 2019 from the comparative 2018 period. This was primarily due to the cost of interest bearing deposits rising $7.7 million year over year, with the main drivers being increases in NOW and money market accounts and time deposits. The increase in total interest expense of $7.4 million was partially offset by the increase in tax-equivalent interest and dividend income of $5.9 million. The tax-equivalent net interest margin decreased 15 basis points, the yield on average interest-earning assets increased 27 basis points, and the cost of interest-bearing liabilities increased 52 basis points from the same period in 2018. Tax-equivalent net interest income decreased $1.5 million for the six months ended June 30, 2019 from the comparative 2018 period. The decrease was derived from the cost of interest bearing deposits increasing $16.6 million year over year, with the main drivers being increases in NOW and money market accounts and time deposits. The increase in total interest expense of $16.8 million was partially offset by the increase in tax-equivalent interest and dividend income of $15.2 million. The tax-equivalent net interest margin decreased 13 basis points, the yield on average interest-earning assets increased 35 basis points, and the cost of interest-bearing liabilities increased 57 basis points from the same period in 2018.
Non-interest income decreased $7.5 million and $7.8 million for the three and six months ended June 30, 2019, respectively, as compared to the same periods in 2018. The most significant factor contributing to the decreases was the impairment charge of $7.8 million ($6.3 million after tax effect) that the Company recorded related to its investment in D.C. Solar tax-advantaged funds to reflect the loss of the missing generators. In addition, there were decreases in (loss) income from mortgage banking activities of $1.3 million and $2.4 million for the three and six months ended June 30, 2019, respectively, primarily due to a decrease in the valuation of mortgage servicing rights as compared to the same periods in 2018.
Non-interest expense increased $1.1 million to $39.5 million for the three months ended June 30, 2019, as compared to the same period in 2018. Non-interest expense increased $3.5 million to $78.6 million for the six months ended June 30, 2019, as compared to the same period in 2018. The largest increase was reflected in professional fees as compared to the same periods in 2018. The Company experienced a higher level of professional expenses due to the proposed merger with People’s United as well as increased legal fees related to the D.C. Solar tax-advantaged funds.
The provision for income taxes increased $9.0 million and $9.7 million for the three and six months ended June 30, 2019, respectively, from the prior-year periods primarily due to the recognition of uncertain tax positions of $8.7 million associated with D.C. Solar as discussed above.
The asset quality of our loan portfolio has remained strong. At June 30, 2019 and December 31, 2018, the allowance for loan losses to total loans ratio was 0.92% and 0.91%, respectively, and the allowance for loan losses to non-performing loans ratio was 174.05% and 168.32%, respectively. The ratio of non-performing loans to total loans was 0.53% and 0.54% at June 30, 2019 and December 31, 2018, respectively. A provision for loan losses of $2.5 million and $4.5 million was recorded for the three and six months ended June 30, 2019, respectively, compared to $2.4 million and $4.3 million for the same periods in the prior year, reflecting the ongoing assessment of asset quality measures including the estimated exposure on impaired loans and organic loan growth.


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The following table presents selected financial data and ratios:
Selected Financial DataAt or For the Three Months 
 Ended June 30,
 At or For the Six Months 
 Ended June 30,
 2019 2018 2019 2018
 (Dollars in thousands, except share data)
Share Data:       
Basic net (loss) income per share$(0.06) $0.31
 $0.19
 $0.62
Diluted net (loss) income per share(0.06) 0.31
 0.19
 0.62
Dividends declared per share0.12
 0.12
 0.24
 0.24
Key Statistics:       
Total revenue$47,850
 $56,541
 $103,767
 $112,373
Total non-interest expense39,457
 38,370
 78,644
 75,106
Key Ratios (annualized):       
(Loss) return on average assets(0.18)% 0.88% 0.26% 0.89%
(Loss) return on average equity(1.79)% 9.00% 2.62% 9.07%
Tax-equivalent net interest margin2.82 % 2.97% 2.81% 2.94%
Non-interest expense to average assets2.16 % 2.16% 2.15% 2.12%
Cost of interest-bearing deposits1.70 % 1.14% 1.68% 1.07%
Non-performing Assets:       
Total non-accrual loans, excluding troubled debt restructures$24,750
 $22,087
 $24,750
 $22,087
Troubled debt restructured - non-accruing5,820
 7,330
 5,820
 7,330
Total non-performing loans30,570
 29,417
 30,570
 29,417
Other real estate owned1,455
 1,855
 1,455
 1,855
Total non-performing assets$32,025
 $31,272
 $32,025
 $31,272
Asset Quality Ratios:       
Non-performing loans to total loans0.53 % 0.54% 0.53% 0.54%
Non-performing assets to total assets0.44 % 0.43% 0.44% 0.43%
Allowance for loan losses to non-performing loans174.05 % 167.12% 174.05% 167.12%
Allowance for loan losses to total loans0.92 % 0.90% 0.92% 0.90%
Non-GAAP Ratio:       
Efficiency ratio (1)
69.99 % 65.18% 69.83% 64.58%
(1)Calculations for this non-GAAP metric are provided in the following Non-GAAP Financial Measures section.
Non-GAAP Financial Measures
In addition to evaluating the Company’s results of operations in accordance with GAAP, management periodically supplements this evaluation with an analysis of certain non-GAAP financial measures. These non-GAAP financial measures are intended to provide the reader with additional perspectives on operating results, financial condition, and performance trends, while facilitating comparisons with the performance of other financial institutions. Non-GAAP financial measures are not a substitute for GAAP measures, rather, they should be read and used in conjunction with the Company’s GAAP financial information.
The efficiency ratio is used as a common measure by banks as a comparable metric to understand the Company’s expense structure relative to its total revenue; in other words, for every dollar of total revenue we recognize, how much of that dollar is expended. In order to improve the comparability of the ratio to our peers, we remove non-core items. To improve transparency, and acknowledging that banks are not consistent in their definition of the efficiency ratio, we include our calculation of this non-GAAP measure.


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The following is a calculation of our efficiency ratio for the three and six months ended June 30, 2019 and 2018:
 For the Three Months 
 Ended June 30,
 For the Six Months 
 Ended June 30,
 2019 2018 2019 2018
Efficiency Ratio:(Dollars in thousands)
Non-Interest Expense (GAAP)$39,457
 $38,370
 $78,644
 $75,106
Non-GAAP adjustments:       
Other real estate owned expense(83) (163) (188) (330)
Lease exit/disposal cost obligation
 (215) 
 (215)
Non-Interest Expense for Efficiency Ratio (non-GAAP)$39,374
 $37,992
 $78,456
 $74,561
        
Net Interest Income (GAAP)$47,010
 $48,181
 $93,947
 $94,724
Non-GAAP adjustments:       
Tax equivalent adjustment for tax-exempt loans and investment securities644
 1,059
 1,379
 2,142
        
Non-Interest Income (GAAP)840
 8,360
 9,820
 17,649
Non-GAAP adjustments:       
Net gain on sales of securities(137) (62) (874) (178)
Net loss on limited partnership investments7,898
 960
 8,501
 1,550
BOLI claim benefit
 (209) (421) (435)
Total Revenue for Efficiency Ratio (non-GAAP)$56,255
 $58,289
 $112,352
 $115,452
        
Efficiency Ratio (Non-Interest Expense for Efficiency Ratio (non-GAAP)/Total Revenue for Efficiency Ratio (non-GAAP))69.99% 65.18% 69.83% 64.58%
Average Balances, Interest, Average Yields\Cost and Rate\Volume Analysis
The tables below sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. A tax-equivalent yield adjustment was made for the three and six months ended June 30, 2019 and 2018. 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 below include the effect of deferred costs, discounts and premiums that are amortized or accreted to interest income or expense.



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Average Balance Sheets for the Three Months Ended June 30, 2019 and 2018:
 Three Months Ended June 30,
 2019 2018
(Dollars in thousands) Average Balance Interest and Dividends Annualized Yield/Cost  Average Balance Interest and Dividends Annualized Yield/Cost
  
Interest-earning assets:           
Residential real estate loans$1,351,571
 $12,520
 3.71% $1,338,021
 $12,020
 3.60%
Commercial real estate loans2,379,330
 27,503
 4.57
 2,306,896
 24,762
 4.25
Construction loans105,801
 1,387
 5.19
 114,987
 1,331
 4.58
Commercial business loans916,928
 11,487
 4.96
 816,102
 9,139
 4.43
Home equity loans576,046
 7,771
 5.41
 588,080
 7,058
 4.81
Other consumer loans433,971
 5,496
 5.08
 322,103
 4,062
 5.06
        Total loans (1)
5,763,647
 66,164
 4.56
 5,486,189
 58,372
 4.23
Investment securities846,711
 6,921
 3.26
 1,019,491
 8,998
 3.53
Federal Home Loan Bank stock35,513
 620
 6.98
 49,136
 703
 5.72
Other earning assets60,366
 344
 2.29
 30,122
 116
 1.55
Total interest-earning assets6,706,237
 74,049
 4.39
 6,584,938
 68,189
 4.12
Allowance for loan losses(52,680)     (48,624)    
Non-interest-earning assets636,544
     555,407
    
Total assets$7,290,101
     $7,091,721
    
Interest-bearing liabilities:           
NOW and money market accounts$2,517,212
 $10,267
 1.64% $2,256,323
 $6,163
 1.10%
Saving deposits (2)
504,186
 81
 0.06
 517,910
 77
 0.06
Time deposits1,830,763
 10,215
 2.24
 1,749,097
 6,624
 1.52
Total interest-bearing deposits4,852,161
 20,563
 1.70
 4,523,330
 12,864
 1.14
Advances from the Federal Home Loan Bank694,082
 4,542
 2.59
 959,248
 4,692
 1.94
Other borrowings87,875
 1,290
 5.81
 112,112
 1,393
 4.91
Total interest-bearing liabilities5,634,118
 26,395
 1.87
 5,594,690
 18,949
 1.35
Non-interest-bearing deposits796,504
     738,484
    
Other liabilities134,924
     63,246
    
Total liabilities6,565,546
     6,396,420
    
Stockholders’ equity724,555
     695,301
    
Total liabilities and stockholders’ equity$7,290,101
     $7,091,721
    
Net interest-earning assets (3)
$1,072,119
     $990,248
    
Tax-equivalent net interest income  47,654
     49,240
  
Tax-equivalent net interest rate spread (4)
    2.52%     2.77%
Tax-equivalent net interest margin (5)
    2.82%     2.97%
Average interest-earning assets to average interest-bearing liabilities    119.03%     117.70%
Less tax-equivalent adjustment  644
     1,059
  
Net interest income  $47,010
     $48,181
  
(1)Total loans includes loans held for sale and nonperforming loans.
(2)Includes mortgagors’ and investors’ escrow accounts.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Tax-equivalent net interest rate spread represents the difference between yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(5)Tax-equivalent net interest margin represents tax-equivalent net interest income divided by average interest-earning assets.


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Average Balance Sheets for the Six Months Ended June 30, 2019 and 2018:
 Six Months Ended June 30,
 2019 2018
  Average Balance Interest and Dividends Annualized Yield/Cost  Average Balance Interest and Dividends Annualized Yield/Cost
 (Dollars in thousands)
Interest-earning assets:           
Residential real estate loans$1,366,119
 $25,406
 3.72% $1,326,185
 $23,526
 3.56%
Commercial real estate loans2,369,199
 54,804
 4.60
 2,294,451
 48,419
 4.20
Construction loans108,484
 2,813
 5.16
 117,199
 2,656
 4.51
Commercial business loans902,761
 22,099
 4.87
 829,382
 17,521
 4.20
Home equity loans579,096
 15,645
 5.45
 583,454
 13,585
 4.69
Other consumer loans426,056
 10,670
 5.05
 311,032
 7,862
 5.10
       Total loans (1)
5,751,715
 131,437
 4.56
 5,461,703
 113,569
 4.15
Investment securities906,444
 14,740
 3.25
 1,030,404
 17,618
 3.42
Federal Home Loan Bank stock37,980
 1,248
 6.57
 50,291
 1,309
 5.21
Other earning assets48,567
 573
 2.38
 34,202
 270
 1.59
Total interest-earning assets6,744,706
 147,998
 4.38
 6,576,600
 132,766
 4.03
Allowance for loan losses(52,386)     (48,205)    
Non-interest-earning assets638,225
     554,873
    
Total assets$7,330,545
     $7,083,268
    
Interest-bearing liabilities:           
NOW and money market accounts$2,542,284
 $20,577
 1.63% $2,201,937
 $11,055
 1.01%
Saving deposits (2)
502,187
 156
 0.06
 514,426
 150
 0.06
Time deposits1,827,334
 19,762
 2.18
 1,772,754
 12,686
 1.44
Total interest-bearing deposits4,871,805
 40,495
 1.68
 4,489,117
 23,891
 1.07
Advances from the Federal Home Loan Bank747,177
 9,586
 2.55
 996,360
 9,238
 1.84
Other borrowings88,314
 2,591
 5.84
 115,043
 2,771
 4.79
Total interest-bearing liabilities5,707,296
 52,672
 1.86
 5,600,520
 35,900
 1.29
Non-interest-bearing deposits771,023
     725,993
    
Other liabilities134,955
     63,919
    
Total liabilities6,613,274
     6,390,432
    
Stockholders’ equity717,271
     692,836
    
Total liabilities and stockholders’ equity$7,330,545
     $7,083,268
    
Net interest-earning assets (3)
$1,037,410
     $976,080
    
Tax-equivalent net interest income  95,326
     96,866
  
Tax-equivalent net interest rate spread (4)
    2.52%     2.74%
Tax-equivalent net interest margin (5)
    2.81%     2.94%
Average interest-earning assets to average interest-bearing liabilities    118.18%     117.43%
Less tax-equivalent adjustment  1,379
     2,142
  
Net interest income  $93,947
     $94,724
  
(1)Total loans includes loans held for sale and nonperforming loans.
(2)Includes mortgagors’ and investors’ escrow accounts.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Tax-equivalent net interest rate spread represents the difference between yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(5)Tax-equivalent net interest margin represents tax-equivalent net interest income divided by average interest-earning assets.


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Rate\Volume Analysis
The following table presents the effects of changing rates and volumes on our 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 prior columns. For purposes of this table, changes attributable to changes in 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.
 Three Months Ended
June 30, 2019 Compared to
June 30, 2018
 Six Months Ended
June 30, 2019 Compared to
June 30, 2018
 Increase (Decrease)
Due to
   Increase (Decrease)
Due to
  
 Volume Rate Net Volume Rate Net
 (In thousands)
Interest and dividend income:           
Loans receivable$3,252
 $4,540
 $7,792
 $5,985
 $11,883
 $17,868
Securities (1)
(1,662) (498) (2,160) (2,405) (534) (2,939)
Other earning assets155
 73
 228
 140
 163
 303
Total interest-earning assets1,745
 4,115
 5,860
 3,720
 11,512
 15,232
Interest expense:           
NOW and money market accounts779
 3,325
 4,104
 1,920
 7,602
 9,522
Savings accounts(2) 6
 4
 (4) 10
 6
Time deposits322
 3,269
 3,591
 402
 6,674
 7,076
Total interest-bearing deposits1,099
 6,600
 7,699
 2,318
 14,286
 16,604
FHLBB advances(1,474) 1,324
 (150) (2,623) 2,971
 348
Other borrowings(326) 223
 (103) (707) 527
 (180)
Total interest-bearing liabilities(701) 8,147
 7,446
 (1,012) 17,784
 16,772
Change in tax-equivalent net interest income$2,446
 $(4,032) $(1,586) $4,732
 $(6,272) $(1,540)
(1)Includes FHLBB stock
Comparison of Operating Results for the Three and Six Months Ended June 30, 2019 and 2018
The following discussion provides a summary and comparison of the Company’s operating results for the three and six months ended June 30, 2019 and 2018.


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Net Interest Income
Net interest income is the amount that interest and fees on earning assets (loans and investments) exceeds the cost of funds, interest paid to the Company’s depositors and interest on external borrowings. Net interest margin is the difference between the income on interest-earning assets and the cost of interest-bearing funds as a percentage of average earning assets. Growth in net interest income has resulted from the growth in interest-earning assets outpacing the growth in interest-bearing liabilities, primarily reflecting organic loan growth and portfolio purchases.
For the three months ended June 30, 2019, tax-equivalent net interest income decreased $1.6 million from the comparative 2018 period. This was primarily due to the cost of interest bearing deposits rising $7.7 million year over year, with the main drivers being increases in NOW and money market accounts and time deposits. The increase in total interest expense of $7.4 million was partially offset by the increase in tax-equivalent interest and dividend income of $5.9 million. The net interest margin decreased 15 basis points, the yield on average interest-earning assets increased 27 basis points, and the cost of interest-bearing liabilities increased 52 basis points from the same period in 2018.
For the six months ended June 30, 2019, tax-equivalent net interest income decreased $1.5 million from the comparative 2018 period. The loss is derived from the cost of interest bearing deposits increasing $16.6 million year over year, with the main drivers being increases in NOW and money market accounts and time deposits. The increase in total interest expense of $16.8 million was partially offset by the increase in tax-equivalent interest and dividend income of $15.2 million. The net interest margin decreased 13 basis points, the yield on average interest-earning assets increased 35 basis points, and the cost of interest-bearing liabilities increased 57 basis points from the same period in 2018.
The increase in the average balances of loans primarily reflects loan growth and portfolio purchases. The average balance of total loans for the three and six months ended June 30, 2019 was $5.76 billion and $5.75 billion, respectively, and the average yield for both periods was 4.56%. There were increases in average balances of loans in all categories except construction and home equity loans for both periods, and in total, average loans increased by $277.5 million and $290.0 million, respectively, for the three and six months ended June 30, 2019 as compared to the same periods in 2018. The loan portfolio has responded favorably to the increase in the LIBOR and Prime rate indices, as 30% of the portfolio is priced off of the LIBOR index, and 13% of the portfolio is priced off of the Prime rate index as of June 30, 2019.
The average balance of investment securities decreased $172.8 million and $124.0 million, respectively, and the average yield decreased 27 and 17 basis points, respectively, for the three and six months ended June 30, 2019 compared to the same periods in 2018. The decline in the portfolio balances and yields during the three and six months ended June 30, 2019 was the result of redirecting portfolio cash flows to more favorable risk adjusted returns on capital achieved in the loan portfolio, as well as sales of lower yielding collateralized mortgage obligations and municipal securities during the periods.
For the three and six months ended June 30, 2019 compared to the same periods in 2018, the average balance of total interest-bearing deposits increased $328.8 million and $382.7 million, respectively. These increases were primarily due to the Company’s continued focus to grow deposits and the continued success in new account acquisition strategies. The average cost of total interest-bearing deposits increased 56 and 61 basis points, respectively, for the three and six months ended June 30, 2019 compared to the same periods in 2018. The average balances of FHLBB advances decreased $265.2 million and $249.2 million, respectively, while the average cost increased 65 and 71 basis points, respectively, for the three and six months ended June 30, 2019 compared to the same periods in 2018, as the Company utilized excess funds to pay down maturing advances. The Company continued to utilize shorter duration advances to align the structure of the advances with the cash flow hedges of interest rate risk to extend the duration of the portfolio. Overnight FHLBB advance and short term rates were elevated due to Federal Open Market Committee (“FOMC”) rate increases during 2018 and a flattening yield curve.
Net interest income is affected by changes in interest rates, loan and deposit pricing strategies, competitive conditions, the volume and mix of interest-earning assets and interest-bearing liabilities as well as the level of non-performing assets. The Company manages the risk of changes in interest rates on its net interest income through an Asset/Liability Management Committee and through related interest rate risk monitoring and management policies.
Provision for Loan Losses
The provision for loan losses is a charge to earnings in an amount sufficient to maintain the allowance for loan losses at a level deemed adequate by the Company. The level of the allowance is a critical accounting estimate, which is subject to uncertainty. Acquired loans are recorded at fair value at the time of acquisition, with no carryover of the allowance for loan losses, which includes adjustments for market interest rates and expected credit losses. Included within the ALL at June 30, 2019 are reserves for acquired loans in accordance with Bank policies.
Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The adequacy of the loan loss allowance is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics, the level of non-performing loans and charge-offs, both current and historic, local economic and credit conditions, the direction of


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real estate values, and regulatory guidelines. The provision is charged against earnings in order to maintain an allowance for loan losses that reflects management’s best estimate of probable losses inherent in the loan portfolio at the balance sheet date.
Management recorded a provision for loan losses of $2.5 million and $4.5 million for the three and six months ended June 30, 2019, compared to $2.4 million and $4.3 million for the same periods of 2018. The primary factors that influenced management’s decision to record the provision were organic growth during the periods, the on-going assessment of estimated exposure on impaired loans, level of delinquencies, and general economic conditions. Impaired loans totaled $49.6 million at June 30, 2019, compared to $45.9 million at December 31, 2018, an increase of $3.7 million, or 8.0%, primarily reflecting increases of $3.7 million in commercial business impaired loans and $1.2 million in investor commercial real estate impaired loans, offset by a decrease in owner-occupied commercial real estate impaired loans of $532,000. Troubled debt restructured (“TDR”) loans totaled $24.8 million at June 30, 2019, compared to $22.2 million at December 31, 2018, an increase of $2.6 million. At June 30, 2019, the allowance for loan losses totaled $53.2 million, representing 0.92% of total loans and 174.05% of non-performing loans compared to an allowance for loan losses of $51.6 million, which represented 0.91% of total loans and 168.32% of non-performing loans as of December 31, 2018. There is no carryover of the allowance for loan losses on acquired loans. The repayment of impaired loans is largely dependent upon the sale and value of collateral that may be impacted by current real estate conditions.
Non-Interest Income
Total non-interest income was $840,000 and $9.8 million for the three and six months ended June 30, 2019, with non-interest income representing 1.8% and 9.5% of total revenues, respectively. Total non-interest income was $8.4 million and $17.6 million for the three and six months ended June 30, 2018, with non-interest income representing 14.8% and 15.7% of total revenues, respectively. The following is a summary of non-interest income by major category for the three and six months ended June 30, 2019 and 2018:
 For the Three Months Ended June 30, For the Six Months Ended June 30,
 2019 2018 $ Change % Change 2019 2018 $ Change % Change
 (Dollars in thousands)
Service charges and fees$7,538
 $6,542
 $996
 15.2 % $13,723
 $12,701
 $1,022
 8.0 %
Gain on sale of securities, net137
 62
 75
 121.0
 874
 178
 696
 391.0
(Loss) income from mortgage banking activities(410) 846
 (1,256) (148.5) 181
 2,575
 (2,394) (93.0)
Bank-owned life insurance income1,521
 1,671
 (150) (9.0) 3,467
 3,317
 150
 4.5
Net loss on limited partnership investments(7,898) (960) (6,938) 722.7
 (8,501) (1,550) (6,951) 448.5
Other (loss) income(48) 199
 (247) (124.1) 76
 428
 (352) (82.2)
Total non-interest income$840
 $8,360
 $(7,520) (90.0)% $9,820
 $17,649
 $(7,829) (44.4)%
Service Charges and Fees: Service charges and fees were $7.5 million and $13.7 million for the three and six months ended June 30, 2019, respectively, an increase of $996,000 and $1.0 million from the comparable 2018 periods.
For the three and six months ended June 30, 2019, the Company recorded increases in revenue generated by the Company’s investment advisor, United Wealth Management (“UWM”), debit card fees and non-sufficient funds (“NSF”) fees, partially offset by a decrease in loan swap fee income on a year to date basis.
The increase in revenue generated by UWM is due to the Company’s expansion of the financial advisory program that has continued the strategy of acquiring proven talent with deep local relationships, as well as installing Series 6 representatives in select branches to work alongside our retail employees to ensure a coordinated sales approach to meeting the financial needs of our customers. Additionally, although to a lesser extent, assets under management increased which also contributed to higher revenues period over period. The increase in NSF fees and debit card fees is primarily due to higher transactional volume partly related to the branch acquisitions completed in the fourth quarter of 2018. NSF fees also benefited from a modification of the fee structure that took place in the third quarter of 2018. These increases were offset by a decrease in loan swap fee income as a direct result of lower transactional volume on a year to date basis, as the Company did not enter into any swaps in the first quarter of 2019. For the three months ended June 30, 2019, loan swap fee income was relatively stable, increasing approximately $17,000 over the prior-year period. 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.
Gain on Sales of Securities, Net: For the three and six months ended June 30, 2019, the Company recorded $137,000 and $874,000, respectively, in net gains on security sales compared to $62,000 and $178,000 in net gains in the prior-year periods.


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Investment activity in 2019 has been concentrated in the first half of the year. During the three months ended March 31, 2019, the Company sold lower yielding securities in two repositioning actions, reducing the effect of the lower yielding securities in the portfolio going forward while generating gains during the period. The first action was taken in January in response to adopting ASU No. 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which had a negative five basis point impact upon adoption to the Company’s net interest margin. Under the new guidance, premiums on bonds purchased are amortized to the bond’s earliest call date rather than the date of maturity to more closely align interest income recorded on these bonds with the economics of the underlying instrument. The second action provided the Company a de-leveraging opportunity and occurred toward the end of March, whereby proceeds from sales of lower yielding securities were used to pay off higher costing FHLBB funding upon maturity. During the three months ended June 30, 2019, the Company undertook additional investment transactions with the goal of taking advantage of market conditions to continue selling lower yielding assets and reinvesting into securities with higher yields.
For the three and six months ended June 30, 2018, the Company pursued a strategy to sell various securities with shortened average lives and lower yields, which were then reinvested into more capital-efficient investments.
(Loss) Income From Mortgage Banking Activities: The Company recorded a decrease of $1.3 million and $2.4 million in (loss) income from mortgage banking activities for the three and six months ended June 30, 2019, respectively, compared to the same periods in 2018.
The decrease for the three and six months ended June 30, 2019 was primarily due to a decline in the fair value recognized in net (loss) income for mortgage servicing rights in relation to the prior-year periods due to a decrease in long-term rates and a decrease in mortgage pair off fees. These decreases were partially offset by (a) an increase in gains on sales of loans due to gains on the fair value of loans held for sale, (b) an increase in gains on derivative loan commitments due to market interest rate changes and (c) an increase in the mortgage servicing rights derivative that was established to partly mitigate mortgage servicing rights valuation losses in a declining rate environment.
Bank-Owned Life Insurance (“BOLI”) Income: For the three and six months ended June 30, 2019, the Company recorded BOLI income of $1.5 million and $3.5 million compared to $1.7 million and $3.3 million for the same periods in 2018, a decrease of $150,000 and an increase of $150,000, respectively. The decrease for the three-month period was mainly due to no death benefit proceeds received in the current-year period as compared to $209,000 of death benefit proceeds received in the prior-year period. The increase for the six-month period was primarily due to the fact that the Company purchased additional BOLI policies in late December 2018 for which a full two quarters of income was earned in 2019.
Net Loss on Limited Partnership Investments: The Company has investments in low income housing, new markets housing and alternative energy tax credit partnerships. For the three and six months ended June 30, 2019, the Company recorded net losses of $7.9 million and $8.5 million on limited partnership investments, compared to net losses of $960,000 and $1.6 million for the corresponding prior-year periods. The increase in net losses was primarily due to the fact that the Company recorded an impairment charge of $7.8 million ($6.3 million after tax effect) related to its investment in D.C. Solar tax-advantaged funds during the three months ended June 30, 2019 to reflect the loss of missing generators. See Note 15, “Investment in D.C. Solar Tax-Advantaged Funds” in the Notes to Unaudited Consolidated Financial Statements located under Part I, Item I, Financial Statements for further information.
Non-Interest Expense
Non-interest expense increased $1.1 million to $39.5 million for the three months ended June 30, 2019 and $3.5 million to $78.6 million for the six months ended June 30, 2019.


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For both the three months ended June 30, 2019 and 2018, annualized non-interest expense represented 2.16% of average assets, while annualized non-interest expense represented 2.15% and 2.12% of average assets for the six months ended June 30, 2019 and 2018, respectively.
The following table summarizes non-interest expense for the three and six months ended June 30, 2019 and 2018:
 For the Three Months Ended June 30, For the Six Months Ended June 30,
 2019 2018 $ Change % Change 2019 2018 $ Change % Change
 (Dollars in thousands)
Salaries and employee benefits$21,923
 $22,113
 $(190) (0.9)% $44,125
 $43,311
 $814
 1.9 %
Service bureau fees2,198
 2,165
 33
 1.5
 4,235
 4,383
 (148) (3.4)
Occupancy and equipment5,111
 4,668
 443
 9.5
 10,651
 9,617
 1,034
 10.8
Professional fees2,414
 1,105
 1,309
 118.5
 3,707
 2,269
 1,438
 63.4
Marketing and promotions782
 1,189
 (407) (34.2) 1,640
 1,874
 (234) (12.5)
FDIC insurance assessments769
 735
 34
 4.6
 1,428
 1,474
 (46) (3.1)
Core deposit intangible amortization388
 305
 83
 27.2
 808
 642
 166
 25.9
Other5,872
 6,090
 (218) (3.6) 12,050
 11,536
 514
 4.5
Total non-interest expense$39,457
 $38,370
 $1,087
 2.8 % $78,644
 $75,106
 $3,538
 4.7 %
Salaries and Employee Benefits: Salaries and employee benefits were $21.9 million for the three months ended June 30, 2019, a decrease of $190,000 from the comparable 2018 period. The decrease is primarily attributable to (a) a decrease in salaries due to reduced staffing in the Company’s mortgage division in 2019 as a result of the Company’s shift in mortgage banking strategy at the end of 2018, and (b) a decrease in executive restricted stock compensation due primarily to forfeitures of unvested awards by executives that left the Company during the period, offset by an increase in health insurance costs as a result of a higher level of claims being submitted in the current period as compared to the same period in 2018.
Salaries and employee benefits were $44.1 million for the six months ended June 30, 2019, an increase of $814,000 from the comparable 2018 period. The increase was primarily attributable to an increase in health insurance costs due to a higher level of claims being submitted as compared to the same period in 2018, as well as a decrease in deferred expenses due to fewer loan originations. These increases were partially offset by decreases in salaries and commissions due to reduced staffing in the Company’s mortgage division in 2019 as discussed above and a decrease in executive restricted stock compensation due primarily to forfeitures of unvested awards by executives that left the Company during the period.
Occupancy and Equipment: For the three and six months ended June 30, 2019, the $443,000 and $1.0 million increases in occupancy and equipment expenses were driven by (a) the acquisition of six branches by the Company in the fourth quarter of 2018, (b) the opening of two new branches (one in December 2018 and the other in January 2019) and (c) the expansion of the square footage at the Company’s new corporate headquarters in Hartford, Connecticut in the second quarter of 2018 which resulted in an increase in rent expense, depreciation on leasehold improvements and computer hardware as well as real estate taxes, utilities and building maintenance. These increases were partially offset by an increase in rental income on properties that are subleased. The Company expects personal property taxes to increase in the second half of the year as the personal property declarations from 2018 for our new corporate headquarters become effective in the third quarter.
Professional Fees: Professional fees increased $1.3 million and $1.4 million for the three and six months ended June 30, 2019, compared to the same periods in 2018. The increase was primarily due to (a) a higher level of legal and consulting expenses due to the proposed acquisition by People’s United, (b) increased legal fees related to the D.C. Solar tax-advantaged funds and (c) consulting fees pertaining to CECL model review and controls evaluation.
Marketing and Promotions: Marketing and promotion expenses decreased $407,000 and $234,000 for the three and six months ended June 30, 2019 compared to the same periods in 2018. The decrease was primarily due to a decrease in digital advertising and production costs. In the second quarter of 2018, the Company ran a debit card promotion to encourage customers to activate and use debit cards in exchange for VISA gift cards; and there were also a number of promotional campaigns run for HELOCs, Simply Checking accounts and 30-month certificates of deposit. In addition, there was advertising of the Company’s new branch locations in Springfield and City Place in Hartford, both of which were new during the prior-year period. The Company did not run as many promotional campaigns during the comparative periods in 2019, thereby leading to decreases in these expenses.
Other Expenses: For the three months ended June 30, 2019 other expenses recorded by the Company were $5.9 million, representing a decrease of $218,000 from the comparable 2018 period. The decrease was primarily related to lower postage costs


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and a reduction in sales and use tax expense due to the finalization of the Connecticut sales and use tax audit during the current-year period.
For the six months ended June 30, 2019, other expenses recorded by the Company were $12.1 million, representing an increase of $514,000 from the comparable 2018 period. The increase for the six months ended June 30, 2019 was primarily driven by increased expenses in computer software and maintenance related to technology investments attributable to the branch acquisitions in the fourth quarter of 2018 and the opening of two new branches in December 2018 and January 2019. Additionally, the increase was due to (a) the off-balance sheet provision for credit losses due to higher provisions for credit cards and commercial lines of credit, (b) mortgage loan servicing expenses and (c) other bank service expenses. These increases were partially offset by reductions in (a) telecommunications expense, (b) loan swap fee expenses due to the Company entering into fewer swaps in the current-year period, (c) collection expenses and (d) office equipment expense, as the 2018 expense was elevated due to the move to the Company’s current headquarters in Hartford.
Income Tax Provision
The provision for income taxes was $9.2 million and $175,000 for the three months ended June 30, 2019 and 2018, respectively, and $11.2 million and $1.5 million for the six months ended June 30, 2019 and 2018, respectively. The Company’s effective tax rate for the three months ended June 30, 2019 and 2018 was 154.9% and 1.1%, respectively. The Company’s effective tax rate for the six months ended June 30, 2019 and 2018 was 54.3% and 4.7%, respectively. The annual projected effective tax rate as of June 30, 2019 is expected to be approximately 30%. The effective tax rate is higher than the statutory rate due to the establishment of tax reserves associated with the Company’s investment in D.C. Solar LLCs during the quarter ended June 30, 2019.
The Company anticipates the potential for increased periodic volatility in future effective tax rates due to the impact of FASB’s ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which applies the tax effect of restricted stock vestings and stock option exercises through the tax rate as discrete items in the period in which the tax event occurs.
The Company continually monitors and evaluates the potential impact of current events and circumstances on the estimates used in the analysis of its income tax positions, and accordingly, the Company’s effective tax rate may fluctuate in the future. The Company evaluates its income tax positions based on tax laws and appropriate regulations and financial reporting considerations, and records adjustments as appropriate. This evaluation takes into consideration the status of current taxing authorities’ examinations of the Company’s tax returns and recent positions taken by the taxing authorities on similar transactions, if any. Accordingly, the results of these examinations may alter the timing or amount of taxable income or deductions taken by the Company.
Financial Condition, Liquidity and Capital Resources
Summary
The Company had total assets of $7.34 billion at June 30, 2019 and $7.36 billion at December 31, 2018, a decrease of $20.9 million, or 0.3%, primarily due a decrease in the total investment securities portfolio of $132.8 million and a decrease in loans held for sale of $40.0 million. These decreases were partially offset by a $97.3 million increase in net loans, a $16.8 million increase in cash and cash equivalents, and a net $46.5 million dollar increase in right-of-use assets due to the adoption of ASC 842.


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Total net loans of $5.72 billion, with an allowance for loan losses of $53.2 million at June 30, 2019, increased $97.3 million, or 1.7%, when compared to total net loans of $5.62 billion, with an allowance for loan losses of $51.6 million at December 31, 2018. The increase in loans was due primarily to organic loan growth, as well as continued loan portfolio purchases. Net loans increased due to growth in all categories except commercial construction loans, residential real estate loans, residential construction loans and home equity loans.
Total deposits of $5.73 billion at June 30, 2019 increased $55.9 million, or 1.0%, when compared to total deposits of $5.67 billion at December 31, 2018. The increase in deposits was mainly due to growth in demand accounts, NOW accounts and time deposits, offset by decreases in money market and savings accounts. The Company’s gross loan-to-deposit ratio was 100.5% at June 30, 2019, compared to 99.8% at December 31, 2018.
At June 30, 2019, total equity of $720.0 million increased $7.5 million when compared to total equity of $712.5 million at December 31, 2018. The increase in equity for the period ended June 30, 2019 was primarily due to year-to-date net income and decreases in accumulated other comprehensive losses as a result of an increase in the market value of the Company’s investment portfolio as compared to December 31, 2018, partially offset by dividends paid to common shareholders. At June 30, 2019, the tangible common equity ratio was 8.29%, compared to 8.15% at December 31, 2018.
See Note 10, “Regulatory Matters” in Notes to Unaudited Consolidated Financial Statements contained in this report for information on the Bank and the Company’s regulatory capital levels and ratios.
Securities
The Company maintains a securities portfolio that is primarily structured to generate interest income, manage interest-rate sensitivity, and provide a source of liquidity for operating needs. The securities portfolio is managed in accordance with regulatory guidelines and established internal corporate investment policies.
The following table sets forth information regarding the amortized cost and fair value of the Company’s investment portfolio at the dates indicated:
Securities
 June 30, 2019 December 31, 2018
 Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
 (In thousands)
Available-for-sale:       
Government-sponsored residential mortgage-backed securities$235,412
 $236,380
 $208,916
 $204,098
Government-sponsored residential collateralized debt obligations116,142
 116,916
 172,468
 170,719
Government-sponsored commercial mortgage-backed securities15,230
 15,804
 28,694
 27,678
Government-sponsored commercial collateralized debt obligations149,654
 149,169
 155,091
 148,226
Asset-backed securities141,918
 141,540
 102,371
 100,495
Corporate debt securities91,952
 93,672
 86,462
 83,230
Obligations of states and political subdivisions84,970
 87,019
 250,593
 238,901
Total available-for-sale debt securities$835,278
 $840,500
 $1,004,595
 $973,347
During the six months ended June 30, 2019, the available-for-sale securities portfolio decreased $132.8 million to $840.5 million, representing 11.5% of total assets at June 30, 2019, from $973.3 million and 13.2% of total assets at December 31, 2018. The decrease is largely due to a coordinated investment strategy in which the Company sold $133.4 million of mortgage-backed securities, collateralized mortgage obligations and municipal bonds. These securities carried particularly low yields, and the proceeds generated were used to pay down borrowings. Given market conditions in the first quarter, the Company was able to dispose of these assets without realizing significant losses. The Company continues to maintain its barbell portfolio management strategy, with any purchases made focusing on maintaining the portfolio duration and ensuring credit diversification. Portfolio activity observed less transactional volume over the quarter. There were various opportunities to swap out of lower yielding securities and move into agency pass throughs with attractive structure and yield characteristics, as well as increasing overall credit quality of the portfolio. While purchasing these securities, the Company maintains a bias towards higher credit enhancement and quality when possible, while also taking advantage of any relative value opportunities.
Accounting guidance requires the Company to designate its securities as held-to-maturity, available-for-sale, or trading depending on the Company’s intent regarding its investments at the time of purchase. The Company does not currently maintain a portfolio of held-to-maturity or trading securities.
Further accounting guidance became effective in the first quarter. ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities, which requires the Company to recognize the amortization period for callable debt securities held at a premium as the period from purchase to earliest call date, was adopted effective January 1, 2019. This guidance specifically affected the portfolio allocation to municipal bonds and resulted in lower yields being recognized on these securities. The Company recorded a cumulative-effect adjustment in the amount of $10.2 million upon adoption. This was a one-time adjustment that decreased retained earnings.
The Company held $313.4 million in securities that were in an unrealized loss position at June 30, 2019; $84.9 million of this total had been in an unrealized loss position for less than twelve months with the remaining $228.5 million in an unrealized loss position for twelve months or longer. These securities were evaluated by management and were determined not to be other-than-temporarily impaired. The Company does not have the intent to sell these securities, and it is more-likely-than-not that it will not have to sell the securities before the recovery of their cost basis. To the extent that changes in interest rates, credit spread movements and other factors that influence the fair value of securities continue, the Company may be required to record impairment charges for other-than-temporary impairment in future periods. For additional information on the securities portfolio, see Note 3, “Securities” in the Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report.
The Company monitors investment exposures continually, performs credit assessments based on market data available at the time of purchase, and performs ongoing credit due diligence for all collateralized loan obligations, corporate exposures, and municipal securities. The Company’s investment portfolio is regularly monitored for performance enhancements and interest rate risk profiles, with dynamic strategies implemented accordingly.
The Company has the ability to use the investment portfolio, as well as interest-rate financial instruments within internal policy guidelines, to hedge and manage interest-rate risk as part of its asset/liability strategy. See Note 8, “Derivatives and Hedging Activities,” in the Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.


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Lending Activities
The Company’s wholesale lending team includes bankers, cash management specialists and originations, 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 Wealth Management (“UWM”).
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’s experience in our geographic areas we lend in allows us to look at a wide variety of commercial, mortgage and consumer loans. Opportunities are initially reviewed 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 returns on capital. Through the Company’s Loan and Funds Management Policies, 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 business 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.
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.
The Company purchases loans to enhance geographical diversification, enhance returns, and gain exposure to loan types that we are unwilling to make infrastructure investments in to originate ourselves. 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, and visits and observes first hand the servicer and its operational process and controls to ensure that the originator and servicer both 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 ongoing monitoring of the respective servicer and performance to ensure the portfolio performance is meeting our initial and ongoing 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 table below displays the balances of the Company’s loan portfolio as of June 30, 2019 and December 31, 2018:


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Loan Portfolio Analysis
 June 30, 2019 December 31, 2018
 Amount Percent Amount Percent
 (Dollars in thousands)
Commercial real estate loans:       
Owner-occupied$459,648
 8.0% $443,398
 7.8%
Investor non-owner occupied1,971,103
 34.2
 1,911,070
 33.8
Construction80,063
 1.4
 87,493
 1.5
Total commercial real estate loans2,510,814
 43.6
 2,441,961
 43.1
        
Commercial business loans910,473
 15.8
 886,770
 15.7
        
Consumer loans:       
Residential real estate1,306,208
 22.8
 1,313,373
 23.2
Home equity575,683
 10.0
 583,454
 10.3
Residential construction12,542
 0.2
 20,632
 0.4
Other consumer439,413
 7.6
 410,249
 7.3
Total consumer loans2,333,846
 40.6
 2,327,708
 41.2
Total loans5,755,133
 100.0% 5,656,439
 100.0%
Net deferred loan costs and premiums17,965
   17,786
  
Allowance for loan losses(53,206)   (51,636)  
Loans - net$5,719,892
   $5,622,589
  
As shown above, gross loans were $5.76 billion, an increase of $98.7 million, or 1.7%, at June 30, 2019 from December 31, 2018.
Total commercial real estate loans represent the largest segment of our loan portfolio at 43.6% of total loans and increased $68.9 million, or 2.8%, to $2.51 billion from December 31, 2018. The commercial real estate loan portfolio is comprised of owner-occupied commercial real estate (“OOCRE”) and investor non-owner occupied commercial real estate (“Investor CRE”), and to a lesser extent, commercial construction. Investor CRE represents the largest segment of the Company’s loan portfolio as of June 30, 2019, comprising 34.2% of total loans and OOCRE represents 8.0% of the portfolio. Commercial real estate construction loans are made for developing commercial real estate properties such as office complexes, apartment buildings and residential subdivisions. Commercial real estate construction loans totaled $80.1 million at June 30, 2019, approximately $22.6 million of which is residential use and $57.5 million of which is commercial use, compared to total commercial real estate construction loans of $87.5 million at December 31, 2018, $25.7 million of which was residential use and $61.8 million of which was commercial use.
Commercial business loans increased $23.7 million to $910.5 million at June 30, 2019 from $886.8 million at December 31, 2018. Mid-sized businesses continue to look to community banks for relationship banking and personalized lending services. Periodically, the Company participates in a shared national credit (“SNC”) program, which engages in the participation and purchase of credits with other “supervised” unaffiliated banks or financial institutions, specifically loan syndications and participations. These loans generate earning assets to increase profitability of the Company and diversify commercial loan portfolios by providing opportunities to participate in loans to borrowers in other regions or industries of which 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 are 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 and eight years with amortization from seven to ten years. These loans generally are on a floating rate basis with spreads slightly higher than the standard commercial business loan spreads. The educational banking practice consists of K-12 schools and colleges/universities utilizing both taxable and tax-exempt loan products for campus improvements, expansions and working capital needs. Generally, educational term loans have longer dated maturities that amortize up to 30 years and typically offer the Company a full deposit and cash management relationship. Both the franchise and educational lending areas focus on opportunities across New England and certain Mid-Atlantic states.


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Residential real estate loans continue to represent a major segment of the Company’s loan portfolio as of June 30, 2019, comprising 22.8% of total loans, decreasing $7.2 million from December 31, 2018. The Company had originations of both adjustable and fixed rate mortgages of $78.4 million for the six months ending June 30, 2019, reflecting both refinancing activity and loans for new home purchases. The Company currently sells the majority of all originated fixed rate residential real estate loans with terms of 30 years, but will also sell 10, 15, and 20 year loans depending on the circumstances. The mortgage origination activity resulted from low market interest rates and competitive pricing.
The Company also offers home equity loans and home equity lines of credit (“HELOCs”), both of which are secured by owner-occupied one-to-four family residences. Home equity loans are offered with fixed rates of interest and with terms up to 15 years. At June 30, 2019, the home equity portfolio totaled $575.7 million compared to $583.5 million at December 31, 2018. During the six months ended June 30, 2019, the Company purchased HELOC portfolios totaling $30.3 million, compared to purchases totaling $82.5 million for the year ended December 31, 2018. The total principal balance of the HELOC purchased portfolios outstanding at June 30, 2019 and December 31, 2018 was $239.8 million and $249.3 million, respectively. These loans are not serviced by the Company. The purchased HELOC portfolios are secured by second liens. The Company plans to stop purchasing HELOCs in the fourth quarter of 2019.
Residential real estate construction loans are made to individuals for home construction whereby the borrower owns the parcel of land and the funds are advanced in stages until completion. Residential real estate construction loans totaled $12.5 million at June 30, 2019, compared to $20.6 million at December 31, 2018.
Other consumer loans totaled $439.4 million, or 7.6%, of the total loan portfolio at June 30, 2019. Other consumer loans generally consist of loans on retail high-end boats and small yachts, home improvement loans, new and used automobiles, loans collateralized by deposit accounts and unsecured personal loans. During December 2015, the Company purchased two consumer loan portfolios totaling $229.2 million which consisted of marine retail loans and home improvement loans. At June 30, 2019 and December 31, 2018, $83.7 million and $95.5 million of these loans were outstanding, respectively. The marine retail loans are collateralized by premium brand boats. The home improvement loans are 90% backed by the U.S. Department of Housing and Urban Development and consist of loans to install energy efficient upgrades to the borrowers’ one-to-four family residences. The Company’s plan is to cease purchasing home improvement loans during the third quarter of 2019.
LH-Finance, the Company’s marine lending unit, includes purchased and originated retail loans and dealer floorplan loans. The Company’s relationships are limited to well established dealers of global premium brand manufacturers. The Company’s top three manufacturer customers have been in business between 30 and 100 years. The Company has generally secured agreements with premium manufacturers to support dealer floor plan loans which may reduce the Company’s credit exposure to the dealer, despite our underwriting of each respective dealer. We have developed incentive retail pricing programs with the dealers to drive 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, and excess cash flow. Retail loans have an average life of four years and key markets include Florida, California, and New England.
The Company has employed specific parameters taking into account: geographical considerations; exposure hold levels; qualifying financial partners; and most importantly sound credit quality with strong metrics. A thorough independent analysis of the credit quality of each borrower is made for every transaction whether it is an assignment or participation.
Asset Quality
The Company’s lending strategy focuses on direct relationship lending within its primary market area as the quality of assets underwritten is an important factor in the successful operation of a financial institution. Non-performing assets, loan delinquency and credit loss levels are considered to be key measures of asset quality. Management strives to maintain asset quality through its underwriting standards, servicing of loans and management of non-performing assets since asset quality is a key factor in the determination of the level of the allowance for loan losses. See Note 4, “Loans Receivable and Allowance for Loan Losses” contained elsewhere in this report for further information concerning the Allowance for Loan Losses.


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The following table details asset quality ratios for the following periods:
Asset Quality Ratios
 At June 30, 2019 At December 31, 2018
Non-performing loans as a percentage of total loans0.53% 0.54%
Non-performing assets as a percentage of total assets0.44% 0.44%
Net charge-offs as a percentage of average loans0.10%
(1) 
0.08%
Allowance for loan losses as a percentage of total loans0.92% 0.91%
Allowance for loan losses to non-performing loans174.05% 168.32%
(1) 
Calculated based on year to date net charge-offs annualized
Non-performing Assets
Generally, loans are placed on non-accrual if collection of principal or interest in full is in doubt, if the loan has been restructured as part of a TDR, or if any payment of principal or interest is past due 90 days or more. A loan may be returned to accrual status if it has demonstrated sustained contractual performance for six continuous months or if all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period. There are, on occasion, circumstances that cause commercial loans to be placed in the 90 days delinquent and accruing category, for example, loans that are considered to be well secured and in the process of collection or renewal. As of June 30, 2019 and December 31, 2018, loans totaling $3.8 million and $3.5 million, respectively, were greater than 90 days past due and accruing. The loans reported as past due 90 days or more and still accruing represent loans that were evaluated by management and maintained on accrual status based on an evaluation of the borrower.
The following table details non-performing assets for the periods presented:
 At June 30, 2019 At December 31, 2018
 Amount % Amount %
 (Dollars in thousands)
Non-accrual loans:       
Owner-occupied commercial real estate$1,989
 6.2% $2,450
 7.6%
Investor non-owner occupied commercial real estate2,357
 7.4
 1,131
 3.5
Construction137
 0.4
 199
 0.6
Commercial business1,666
 5.2
 944
 2.9
Residential real estate12,893
 40.2
 13,217
 41.3
Home equity5,051
 15.8
 4,735
 14.8
Other consumer loans657
 2.1
 1,030
 3.2
Total non-accrual loans, excluding troubled debt restructured loans24,750
 77.3% 23,706
 73.9%
Troubled debt restructurings - non-accruing5,820
 18.2
 6,971
 21.8
Total non-performing loans30,570
 95.5
 30,677
 95.7
Other real estate owned1,455
 4.5
 1,389
 4.3
Total non-performing assets$32,025
 100.0% $32,066
 100.0%
As displayed in the table above, non-performing assets at June 30, 2019 decreased to $32.0 million compared to $32.1 million at December 31, 2018.
Non-accruing TDR loans decreased by $1.2 million since December 31, 2018, due primarily to decreases of $398,000 in residential real estate non-accruing TDR loans and $332,000 in commercial business non-accruing TDR loans. The decrease in non-accruing TDRs is the result of charge offs and paydowns on loans as compared to December 31, 2018.
Home equity non-accrual loans increased $316,000 to $5.1 million due to decline in performance of HELOCs during the six months ended June 30, 2019.
Residential real estate non-accrual loans decreased $324,000 to $12.9 million at June 30, 2019. The Company continues to originate loans with strong credit characteristics and routinely updates non-performing loans in terms of FICO scores and LTV ratios. Through continued heightened account monitoring, collections and workout efforts, the Company is committed to mortgage


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solution programs designed to assist homeowners to remain in their homes. Consistent with historical practice, the Company does not originate subprime loans.
At June 30, 2019, commercial real estate non-accrual loans (including owner-occupied and investor non-owner occupied commercial real estate loans) increased $765,000 and commercial business non-accrual loans increased $722,000 as compared to December 31, 2018. The movements in these categories were the result of several larger relationships which impacted the totals within the categories.
Construction non-accrual loans decreased $62,000 as compared to December 31, 2018, and consists of one commercial relationship at both June 30, 2019 and December 31, 2018 totaling $137,000 and $199,000, respectively, which relates to construction for a residential subdivision.
Troubled Debt Restructuring
Loans are considered restructured in a troubled debt restructuring when the Company has granted concessions to a borrower due to the borrower’s financial condition that it otherwise would not have considered. These concessions include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company by increasing the ultimate probability of collection.
TDR loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the restructuring generally remain on non-accrual status for a minimum of six months before management considers such loans for return to accruing TDR status. Accruing restructured loans are placed into non-accrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Once a loan is classified as a TDR it retains that classification for the life of the loan; however, some TDRs may demonstrate acceptable performance allowing the TDR loan to be placed on accruing TDR status. The increase in TDRs is primarily attributable to the addition of one commercial relationship totaling $3.5 million during the period ended June 30, 2019.
The following table provides detail of TDR balances for the periods presented:
  At June 30,
2019
 At December 31,
2018
  (In thousands)
Recorded investment in TDRs:    
Accrual status $18,980
 $15,208
Non-accrual status 5,820
 6,971
Total recorded investment $24,800
 $22,179
     
Accruing TDRs performing under modified terms for more than one year $12,823
 $12,609
TDR allocated reserves included in the balance of allowance for loan losses 68
 213
Additional funds committed to borrowers in TDR status 3
 7

The following table provides detail of TDR activity for the periods presented:
 Three Months Ended 
 June 30,
 Six Months Ended 
 June 30,
 2019 2018 2019 2018
 (In thousands)
TDRs, beginning of period$24,746
 $23,888
 $22,179
 $22,724
Current period modifications254
 138
 4,195
 4,284
Paydowns/draws on existing TDRs, net(183) (2,237) (1,080) (4,561)
Charge-offs post modification(17) (447) (494) (1,105)
TDRs, end of period$24,800
 $21,342
 $24,800
 $21,342


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Allowance for Loan Losses
The allowance for loan losses (“ALL”) and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, which includes historic default and loss experience, specific problem loans, risk rating profile, economic conditions and other pertinent factors which, in management’s judgment, warrant current recognition in the loss estimation process. The Company’s Risk Management Committee meets quarterly to review and conclude on the adequacy of the reserves and to present their recommendation to executive management and the Board of Directors.
Management considers the adequacy of the ALL a critical accounting estimate. The adequacy of the ALL is subject to considerable assumptions and judgment used in its determination. Therefore, actual losses could differ materially from management’s estimate if actual conditions differ significantly from the assumptions utilized. These conditions include economic factors in the Company’s market and nationally, industry trends and concentrations, real estate values and trends, and the financial condition and performance of individual borrowers. While management believes the ALL is adequate as of June 30, 2019, actual results may prove different and the differences could be significant.
The Company’s general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that the collection of loan principal is unlikely. The Company recognized full or partial charge-offs on collateral dependent impaired loans when the collateral is deemed to be insufficient to support the carrying value of the loan. The Company does not recognize a recovery when an updated appraisal indicates a subsequent increase in value.
The Company had an allowance for loan losses of $53.2 million, or 0.92% of total loans, at June 30, 2019 as compared to an allowance for loan losses of $51.6 million, or 0.91% of total loans, at December 31, 2018. Management believes that the allowance for loan losses is adequate and consistent with asset quality indicators and that it represents the best estimate of probable losses inherent in the loan portfolio.
The unallocated portion of the ALL represents general valuation allowances that are not allocated to a specific loan portfolio. The unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses and reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated portion of the ALL at June 30, 2019 increased $120,000 to $2.1 million compared to December 31, 2018. See Note 4, “Loans Receivable and Allowance for Loan Losses” in the Notes to the Unaudited Consolidated Financial Statements contained in this report for a table providing the activity in the Company’s allowance for loan losses for the three and six months ended June 30, 2019 and 2018.
In addition to the ALL, the Company maintains a reserve for unfunded credit commitments in other liabilities on the Consolidated Statements of Condition. The allowance for credit losses analysis includes consideration of the risks associated with unfunded loan commitments. The reserve calculation includes factors that are consistent with ALL methodology for funded loans. The combination of ALL and unfunded reserves is calculated in a manner to capture the entirety of the underlying business relationship of the customer. The amounts of unfunded commitments and the associated reserves may be subject to fluctuations due to originations, the timing and volume of loan funding, as well as changes in risk ratings. At June 30, 2019 and December 31, 2018, the reserve for unfunded credit commitments was $2.3 million and $2.1 million, respectively.
Sources of Funds
The primary source of the Company’s cash flows, for use in lending and meeting its general operational needs, is deposits. Additional sources of funds are from FHLBB advances, reverse repurchase agreements, federal funds lines, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, subordinated debt, and earnings. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain.
Deposits
The Company offers a wide variety of deposit products to consumer, business and municipal customers. Deposit customers can access their accounts in a variety of ways including branch banking, ATMs, online banking, mobile banking and telephone banking. Effective advertising, direct mail, well-designed product offerings, customer service and competitive pricing policies have been successful in attracting and retaining deposits. A key strategic objective is to grow the base of checking customers by retaining existing relationships while attracting new customers.
Deposits provide an important source of funding for the Company as well as an ongoing stream of fee revenue. The Company attempts to control the flow of funds in its deposit accounts according to its need for funds and the cost of alternative sources of funding. A Retail Pricing Committee meets weekly and a Management ALCO meets monthly, to determine pricing and marketing initiatives. Actions of these committees influence the flow of funds primarily by the pricing of deposits, which is affected to a large extent by competitive factors in its market area and asset/liability management strategies.


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The following table presents deposits by category as of the dates indicated:
 June 30, 2019 December 31, 2018
 (In thousands)
Demand deposits$843,926
 $799,785
NOW accounts891,831
 853,789
Regular savings and club accounts486,083
 498,026
Money market accounts1,679,667
 1,736,459
Total core deposits3,901,507
 3,888,059
Time deposits1,825,041
 1,782,540
Total deposits$5,726,548
 $5,670,599
Deposits totaled $5.73 billion at June 30, 2019, a decrease of $55.9 million compared to December 31, 2018. Core deposits increased $13.4 million, or 0.3%, from December 31, 2018 due to seasonal increases in demand and NOW accounts, coupled with new account acquisitions.
Time deposits included brokered certificates of deposit of $109.0 million and $179.6 million at June 30, 2019 and December 31, 2018, respectively. The Company utilizes brokered time deposits as part of its overall funding program along with other sources. Excluding out-of-market brokered certificates of deposit, in-market time deposits totaled $1.71 billion and $1.60 billion at June 30, 2019 and December 31, 2018, respectively.
Borrowings
The Company also uses various types of short-term and long-term borrowings in meeting funding needs. While customer deposits remain the primary source for funding loan originations, management uses short-term and long-term borrowings as a supplementary funding source for loan growth and other liquidity needs when the cost of these funds are favorable compared to alternative funding, including deposits.
The following table presents borrowings by category as of the dates indicated:
 June 30, 2019 December 31, 2018
 (In thousands)
FHLBB advances (1)
$651,964
 $797,271
Subordinated debt (2)
80,322
 80,201
Wholesale repurchase agreements
 10,000
Customer repurchase agreements9,703
 8,361
Other
 3,793
Total borrowings$741,989
 $899,626
(1)FHLBB advances include $163,000 and $183,000 of purchase accounting discounts at June 30, 2019 and December 31, 2018, respectively.
(2)Subordinated debt includes $7.7 million of acquired junior subordinated debt, net of mark to market discounts of $1.7 million and $1.8 million at June 30, 2019 and December 31, 2018, respectively, and $75.0 million of Subordinated Notes, net of associated deferred costs of $664,000 and $727,000 at June 30, 2019 and December 31, 2018, respectively.
United Bank is a member of the Federal Home Loan Bank System, which consists of twelve district Federal Home Loan Banks, each subject to the supervision and regulation of the Federal Housing Finance Agency. Members are required to own capital stock in the FHLBB in order for the Bank to access advances and borrowings which are collateralized by certain home mortgages or securities of the U.S. Government and its agencies. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the FHLBB.
Total FHLBB advances decreased $145.3 million to $651.8 million at June 30, 2019, exclusive of the purchase accounting mark adjustment on the advances, compared to $797.1 million at December 31, 2018. At June 30, 2019, $526.8 million of the Company’s $651.8 million outstanding FHLBB advances were at fixed coupons ranging from 1.42% to 3.35%, with a weighted average cost of 2.53%. Additionally, the Company has four advances with the FHLBB totaling $125.0 million that are underlying hedge instruments; the interest is based on the 3-month LIBOR and adjusts quarterly. The average cost of funds including these


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adjustable advances is 2.57%. FHLBB borrowings represented 8.9% and 10.8% of assets at June 30, 2019 and December 31, 2018, respectively.
The Company had no borrowings under wholesale repurchase agreements at June 30, 2019 while the agreements totaled $10.0 million at December 31, 2018. Retail repurchase agreements, which have a term of one day and are backed by the purchasers’ interest in certain U.S. Government or government-sponsored securities, totaled $9.7 million and $8.4 million at June 30, 2019 and December 31, 2018, respectively.
Subordinated debentures totaled $80.3 million and $80.2 million at June 30, 2019 and December 31, 2018, respectively.
Liquidity and Capital Resources
Liquidity is the ability to meet cash needs at all times with available cash or by conversion of other assets to cash at a reasonable price and in a timely manner. The Company maintains liquid assets at levels the Company considers adequate to meet its liquidity needs. The Company adjusts its liquidity levels to fund loan commitments, repay its borrowings, fund deposit outflows, pay escrow obligations on all items in the loan portfolio and to fund operations. The Company also adjusts liquidity as appropriate to meet asset and liability management objectives.
The Company’s primary sources of liquidity are deposits, amortization and prepayment of loans, the sale in the secondary market of loans held for sale, maturities and sales of investment securities and other short-term investments, periodic pay downs of mortgage-backed securities, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competition. The Company sets the interest rates on our deposits to maintain a desired level of total deposits. In addition, the Company invests excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
A portion of the Company’s liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At June 30, 2019, $114.7 million of the Company’s assets were held in cash and cash equivalents compared to $98.0 million at December 31, 2018. The Company’s primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from the FHLBB.
Liquidity management is both a daily and longer-term function of business management. If the Company requires funds beyond its ability to generate them internally, borrowing agreements exist with the FHLBB, which provide an additional source of funds. At June 30, 2019, the Company had $651.8 million in advances from the FHLBB and an additional available borrowing limit of $700.0 million based on collateral requirements of the FHLBB inclusive of the line of credit. In addition, the Bank has relationships with brokered sweep deposit providers with outstanding balances of $369.9 million at June 30, 2019. Internal policies limit wholesale borrowings to 40% of total assets, or $2.93 billion, at June 30, 2019. In addition, the Company has uncommitted federal funds lines of credit with four counterparties totaling $140.0 million at June 30, 2019. No federal funds purchased were outstanding at June 30, 2019.
The Company has established access to the Federal Reserve Bank of Boston’s discount window through a borrower in custody agreement. As of June 30, 2019, the Bank had pledged 24 commercial loans, with outstanding balances totaling $166.0 million. Based on the amount of pledged collateral, the Bank had available liquidity of $134.1 million.
At June 30, 2019, the Company had outstanding commitments to originate loans of $129.8 million and unfunded commitments under construction loans, lines of credit, stand-by letters of credit, unused checking overdraft lines of credit, and unused credit card lines of $1.30 billion. At June 30, 2019, time deposits scheduled to mature in less than one year totaled $1.34 billion. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company, although there can be no assurance that this will be the case. In the event a significant portion of its deposits are not retained by the Company, it will have to utilize other funding sources, such as FHLBB advances in order to maintain its level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.
The main sources of liquidity at the parent company level are dividends from United Bank and the ability to obtain funding through capital market issuances, as evidenced by the Company’s issuance of $75.0 million of subordinated notes in September 2014. The main uses of liquidity are payments of dividends to common stockholders, repurchase of United Financial’s common stock, payment of subordinated note interest, and corporate operating expenses. There are certain restrictions on the payment of dividends. See Note 16, “Regulatory Matters” in the Company’s 2018 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for further information on dividend restrictions.
The Company and the Bank are subject to various regulatory capital requirements. As of June 30, 2019, the Bank is categorized as “well-capitalized” under the regulatory framework for prompt corrective action. See Note 10, “Regulatory Matters” in the Notes to the Unaudited Consolidated Financial Statements contained elsewhere in this report for discussion of capital requirements.
The liquidity position of the Company is continuously monitored and adjustments are made to balance between sources and uses of funds as deemed appropriate. Management is not aware of any events that are reasonably likely to have a material adverse effect on the Company’s liquidity, capital resources or operations. In addition, management is not aware of any regulatory recommendations regarding liquidity, which if implemented would have a material adverse effect on the Company. The Company has a detailed liquidity contingency plan which is designed to respond to liquidity concerns in a prompt and comprehensive manner. It is designed to provide early detection of potential problems and details specific actions required to address liquidity stress scenarios.
Other Matters
We previously invested in three Solar Eclipse Funds as a limited liability member (See Note 15, “Investment in D.C. Solar Tax-Advantaged Funds”) which generate solar investment tax credits for the Company by putting into service mobile solar generators. The generators are sold and managed by D.C. Solar. On February 4, 2019, D.C. Solar filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code (reorganization) in an attempt to reorganize. On March 22, 2019, mainly due to the lack of financing to maintain the on-going operations of these companies, ambiguity around actual inventory in existence and information on company affairs as a result of the government’s seizure of debtor/lessee records, the case was converted from Chapter 11 of the U.S. Bankruptcy Code to Chapter 7 (liquidation). Additionally, although no arrests have been made to date, an FBI affidavit states that there was fraud associated with the mobile solar generators sold to investors and managed by D.C. Solar including allegations of duplicate sales of generators and the fabrication of sublease revenue streams for the generators. Certain investors in D.C. Solar, including us, received solar investment tax credits for our investment in these funds, which are further discussed in Note 15, “Investment in D.C. Solar Tax-Advantaged Funds” of the consolidated financial statements included in this Quarterly Report on Form 10-Q.
During the quarterly period ended June 30, 2019, the Company concluded that certain developments during the period represented a significant change in facts and circumstances concerning the probability of loss on the LLCs’ missing generators. As of June 30, 2019, the Company concluded that there was sufficient evidence to support that a full loss was probable on the


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missing generators. As a result, the Company recorded an impairment charge to its investments in the LLCs of $6.3 million, after tax effect, and an additional reserve against tax credits and benefits of $8.7 million to reflect the loss of the missing generators and the associated tax benefits. The net impact to net income for the quarterly period ended June 30, 2019 was $15.0 million.

The Company will continue to monitor the investments to determine if there is any additional estimable and probable loss. Depending on the outcome of the Company’s evaluation, there may be a material adverse impact on our results of operations, financial condition and capital levels. For information on the risks of our investment in tax-advantaged investments, see Part II, Item 1A. Risk Factors.

Item 3.Quantitative and Qualitative Disclosures about Market Risk
General: The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, in general have longer contractual maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our Board of Directors has established a Risk Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. Management monitors the level of interest rate risk on a regular basis and the Risk Committee meets at least quarterly to review our asset/liability policies and interest rate risk position.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, we have implemented the following strategies to manage our interest rate risk: (i) emphasizing adjustable rate loans including, adjustable rate one-to-four family, commercial and consumer loans, (ii) selling longer-term 1-4 family fixed rate mortgage loans in the secondary market, (iii) reducing and shortening the expected average life of the investment portfolio, (iv) a forward starting hedge strategy for future dated wholesale funding and (v) a loan level hedging program. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.


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Quantitative Analysis
Income Simulation: Simulation analysis is used to estimate our interest rate risk exposure at a particular point in time. The Company models a static balance sheet when measuring interest rate risk, in which a stable balance sheet is projected throughout the modeling horizon. Under a static approach both the size and mix of the balance sheet remain constant, with maturing loan and deposit balances replaced as “new volumes” within the same loan and deposit category, repricing at the respective scenario’s market rate. This adoption was made in a continued effort to align with regulatory best practices and to highlight the current level of risk in the Company’s positions without the effects of growth assumptions. We utilize the income simulation method to analyze our interest rate sensitivity position to manage the risk associated with interest rate movements. At least quarterly, our Risk Committee of the Board of Directors reviews the potential effect changes in interest rates could have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities at June 30, 2019 and December 31, 2018 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions as well as deposit characterization assumptions can have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed assets we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn effect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected life of our assets would tend to lengthen more than the expected average life of our liabilities and therefore would most likely result in a decrease to our asset sensitive position. As a measure of potential market risk arising from a parallel shock of magnitude to the Company’s net interest income, management includes a 300 basis point parallel increase in rates in the quarterly simulation results. In order to observe the impact of a slower and gradual rate increase over the respective 12- and 24-month periods, management includes a 150 basis point ramp simulation; the simulation assumes that interest rates increase by 25 basis points every other month, totaling a 150 basis point increase by month 12 and a 300 basis point increase by month 24. To highlight the net interest income of a falling rate environment, management includes a 50 basis point parallel decrease in rates.
 Percentage (Decrease) Increase in Estimated
Net Interest Income
 Over 12 Months Over 12 -24 Months
At June 30, 2019   
300 basis point increase in rates(1.28)% (3.66)%
150 basis point ramp in rates3.79 % 4.55 %
50 basis point decrease in rates(4.91)% (5.87)%
    
At December 31, 2018   
300 basis point increase in rates0.45 % (2.40)%
150 basis point ramp in rates5.34 % 4.92 %
50 basis point decrease in rates(4.34)% (6.14)%
The Company’s Asset/Liability policy currently limits projected changes in net interest income based on a matrix of projected total risk-based capital relative to the interest rate change for each twelve-month period measured compared to the flat rate scenario. As a result, the higher a level of projected risk-based capital, the higher the limit of projected net interest income volatility the Company will accept. As the level of projected risk-based capital is reduced, the policy requires that net interest income volatility also is reduced, making the limit dynamic relative to the capital level needed to support it. These policy limits are re-evaluated on a periodic basis (not less than annually) and may be modified, as appropriate. Because of the asset-sensitivity of our balance sheet, income is projected to increase if interest rates rise on a slow, gradual basis as is expected to occur with Federal Open Market Committee rate increases. Also included in the decreasing rate scenario is the assumption that further declines are reflective of a deeper recession as well as narrower credit spreads from Federal Open Market Committee actions. At June 30, 2019, income at risk (i.e., the change in net interest income) decreased 1.28% and 4.91% based on a 300 basis point instantaneous increase or a 50 basis point instantaneous decrease, respectively. When considering the impact of the 150 basis point ramp simulation, income at risk increased 3.79% over the 12-month simulation horizon. The reduction in sensitivities to changing interest rates, as compared to December 31, 2018, has decreased largely due to a change in the investment portfolio that was mostly offset by changes in the borrowings composition. The investment portfolio had lower income variation given the removal of callable securities which were previously providing favorable extension income. The borrowings portfolio mix changed as we replaced wholesale funding with a growth in the Company’s core deposits and certificate of deposits which have lower repricing frequencies in a rising interest rate simulation than wholesale funding. While we believe the assumptions used are reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.
.
Item 4.Controls and Procedures
Evaluation of Disclosure Controls and Procedures: Our disclosure controls and procedures are designed to ensure that information the Company must disclose in its reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported on a timely basis. Our management has evaluated, with the participation and under the supervision of our chief executive officer (“CEO”) and chief financial officer (“CFO”), the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO have concluded that, as of such date, the Company’s disclosure controls and procedures are effective in ensuring that information relating to the Company, including its consolidated subsidiaries, required to be disclosed in reports that it files under the Exchange Act is (1) recorded, processed, summarized and reported within time periods specified in the SEC’s rules and forms, and (2) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls: During the quarter under report, there was no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Part II.OTHER INFORMATION
Item 1.Legal Proceedings
The Company is involved in various legal proceedings that have arisen in the normal course of business. The Company is not involved in any legal proceedings deemed to be material as of June 30, 2019.
Item 1A.Risk Factors
There have been no material changes in the Risk Factors previously disclosed in Item 1A of the Company’s Annual Report on Form 10-K for the period ended December 31, 2018, except for the following:

Our investment in certain tax-advantaged projects may not generate returns as anticipated and may have an adverse impact on our results of operations.
We invest in certain tax-advantaged projects that support affordable housing projects. Additionally, we also invest in renewable energy projects, specifically investments in solar energy funds. These investments are designed to generate a return primarily through the realization of federal and state income tax credits, and other tax benefits, over specified time periods. Due diligence review is performed prior to the initial investment and on an ongoing basis. We are subject to the risk that previously recorded tax credits, which remain subject to recapture by the U.S. Treasury based on compliance features required to be met at the investment level, may fail to meet certain government compliance requirements and may not be able to be realized. The possible inability to realize these tax credits and other tax benefits may have a negative impact on our financial results. The risk of not being able to realize the tax credits and other tax benefits depends on many factors outside our control, including changes in the applicable tax code and the ability of the projects to be completed.

We previously invested in three Solar Eclipse Funds as a limited member (See Note 15, “Investment in D.C. Solar Tax-Advantaged Funds”) which generate solar investment tax credits for the Company by putting into service mobile solar generators. The generators are sold and managed by D.C. Solar. On February 4, 2019, D.C. Solar filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code (reorganization) in an attempt to reorganize. On March 22, 2019, mainly due to the lack of financing to maintain the on-going operations of these companies, ambiguity around actual inventory in existence and information on company affairs as a result of the government’s seizure of debtor/lessee records, the case was converted from Chapter 11 of the U.S. Bankruptcy Code to Chapter 7 (liquidation). Additionally, although no arrests have been made to date, an FBI affidavit states that there was fraud associated with the mobile solar generators sold to investors and managed by D.C. Solar including allegations of duplicate sales of generators as well as the fabrication of sublease revenue streams for the generators. Certain investors in D.C. Solar, including us, received solar investment tax credits for our investment in these funds. During the quarterly period ended June 30, 2019, the Company recorded an impairment charge to its investments in the LLCs of $6.3 million, after tax effect, and an additional reserve against tax credits and benefits of $8.7 million to reflect the loss of the missing generators and the associated tax benefits. The net impact to net income for the quarterly period ended June 30, 2019 was $15.0 million. If the Company is required to recognize an additional loss in its 2019 consolidated financial statements, the loss may have a material adverse impact on our results of operations, financial condition and capital levels.
Because the market price of People’s United common stock will fluctuate, the Company’s shareholders cannot be certain of the market value of the merger consideration they will receive.
Upon completion of the merger, each outstanding share of Company common stock (except for certain shares specified in the merger agreement) will be converted into the right to receive 0.875 shares of People’s United common stock. The market value of the People’s United common stock to be issued in the merger will depend upon the market price of People’s United common stock. This market price may vary from the closing price of People’s United common stock on the date the merger was announced, on the date that the proxy statement/prospectus relating to the merger will be mailed to the Company’s shareholders and on the date on which Company shareholders vote to approve the merger agreement at a special meeting of shareholders. There will be no adjustment to the consideration paid to Company shareholders in the merger for changes in the market price of either shares of People’s United common stock or Company common stock.
The market price of People’s United common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding People’s United’s operations or business prospects, including market sentiment regarding People’s United’s entry into the merger agreement. These risks may be affected by:
operating results that vary from the expectations of People’s United’s management or of securities analysts and investors;
developments in People’s United’s business or in the financial services sector generally;


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regulatory or legislative changes affecting People’s United’s industry generally or its business and operations;
operating and securities price performance of companies that investors consider to be comparable to People’s United;
changes in estimates or recommendations by securities analysts or rating agencies;
announcements of strategic developments, acquisitions, dispositions, financings and other material events by People’s United or its competitors; and
changes in global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.
Many of these factors are outside the Company’s control. Accordingly, at the time Company shareholders decide to approve the merger agreement at the special meeting, they will not necessarily know or will not able to calculate the value of the merger consideration they would be entitled to receive upon completion of the merger. Company shareholders are encouraged to obtain current market quotations for both People’s United common stock and Company common stock.
The merger agreement may be terminated in accordance with its terms, and the merger may not be completed.
The merger agreement is subject to a number of conditions that must be fulfilled in order to complete the merger. These conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed. In addition, if the merger is not completed by July 15, 2020 (subject to extension to October 15, 2020 under certain circumstances), either People’s United or the Company may choose not to proceed with the merger, and the parties may mutually decide to terminate the merger agreement at any time. In addition, People’s United and the Company may elect to terminate the merger agreement in certain other circumstances and the Company may be required to pay a termination fee.
Failure to complete the merger could negatively impact the stock price, future business and financial results of the Company.
If the merger is not completed, the ongoing business of the Company may be adversely affected, and the Company will be subject to several risks, including the following:
the Company may be required, under certain circumstances, to pay People’s United a termination fee of $28.3 million under the merger agreement;
the Company will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees;
under the merger agreement, the Company is subject to certain restrictions on the conduct of its business prior to completing the merger, which may adversely affect its ability to execute certain of its business strategies; and
matters relating to the merger may require substantial commitments of time and resources by Company management, which could otherwise have been devoted to other opportunities that may have been beneficial to the Company.
In addition, if the merger is not completed, the Company may experience negative reactions from the financial markets and from its customers and employees. For example, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. The market price of Company common stock could decline to the extent that the current market price reflects a market assumption that the merger will be completed. The Company also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against the Company to perform its obligations under the merger agreement. If the merger is not completed, the Company cannot assure its shareholders that the risks described above will not materialize and will not materially affect the business, financial results and stock price of the Company.
Lawsuits challenging the merger may be filed against the Company, the Company’s board of directors and People’s United, and an adverse judgment in any such lawsuit or any future similar lawsuits may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
Shareholders of the Company may file lawsuits against the Company, People’s United and/or the directors and officers of either company in connection with the merger. One of the conditions to the closing of the merger is that no order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition that prevents the consummation of the merger be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or People’s United from completing the merger on the agreed upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe.
The merger is subject to the receipt of consents and approvals from governmental entities that may delay the date of completion of the merger or impose conditions that could have an adverse effect on the combined company following the merger.


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Before the merger may be completed, various approvals or consents must be obtained from governmental authorities. Satisfying the requirements of these governmental entities may delay the date of completion of the merger. In addition, these governmental entities may include conditions on the completion of the merger or require changes to the terms of the merger. While the Company does not currently expect that any such conditions or changes would result in a material adverse effect on the combined company following the merger, there can be no assurance that they will not, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have a material adverse effect on the combined company following the merger.
The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the merger is completed and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the Company’s business could be harmed. In addition, the merger agreement restricts the Company from making certain acquisitions and taking other specified actions until the merger occurs without the consent of People’s United. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.
If the merger is not completed, the Company will have incurred substantial expenses without realizing the expected benefits of the merger.
The Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger.




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Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to net purchases made by United Financial Bancorp’s, Inc. of its common stock during the period ended June 30, 2019:
Period Total number
of shares
purchased
 
Average(1)
price paid
per share
 Total number
of shares
purchased as
part of publicly
announced
plans or programs
 Maximum number of shares that may yet be purchased under the plan
April 1 - 30, 2019 
 
 
 834,636
May 1 - 31, 2019 
 
 
 834,636
June 1 - 30, 2019 
 
 
 834,636
Total 
 $
 
 834,636
(1) Includes dealer commission expense to purchase the securities.
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. As of June 30, 2019, there were 834,636 maximum shares that may yet be purchased under this publicly announced plan.
Item 3.Defaults Upon Senior Securities
None.
Item 4.Mine Safety Disclosures
None.
Item 5.Other Information
None.
Item 6.Exhibits

 Exhibit Index
2.1
3.1
3.1.1
3.2
31.1
31.2
32.0
101Interactive data files provided in Inline eXtensible Business Reporting Language (XBRL): (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Net Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Unaudited Consolidated Financial Statements filed herewith


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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
United Financial Bancorp, Inc.
By: /s/ Eric R. Newell
  Eric R. Newell
  EVP, Chief Financial Officer and Treasurer
Date: August 2, 2019


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