This Form 10-Q contains forward-looking statements that are within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties. These risks and uncertainties could cause our results to differ materially from those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as "believes," "anticipates," "expects," "intends," "plans," "estimates," "targeted" and similar expressions, and future or conditional verbs, such as "will," "would," "should," "could" or "may" are intended to identify forward-looking statements but are not the only means to identify these statements.
Factors that have a material adverse effect on operations include, but are not limited to, the following:
• Local, regional, national and international business or economic
conditions may differ from those expected; • The effects of and changes in trade, monetary and fiscal policies and
laws, including the U.S.
Federal Reserve Board'sinterest rate policies, may adversely affect our business;
• The ability to increase market share and control expenses may be more
difficult than anticipated;
• Changes in government regulations (including those concerning taxes,
banking, securities and insurance) may adversely affect us or our businesses, including those under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Basel III update to the Basel Accords; • Changes in accounting policies and practices, as may be adopted by regulatory agencies, the
Public Company Accounting Oversight Boardor the Financial Accounting Standards Board, may affect expected financial reporting; • Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock; • Technological changes and cyber-security matters; • Changes in demand for loan products, financial products and deposit flow could impact our financial performance; • The timely development and acceptance of new products and services and perceived overall value of these products and services by customers; • Adverse conditions in the securities markets that lead to impairment
in the value of securities in our investment portfolio; 38
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• Strong competition within our market area may limit our growth and
profitability; • We have opened and plan to open additional new branches and/or loan
production offices which may not become profitable as soon as anticipated, if at all;
• If our allowance for loan losses is not sufficient to cover actual
loan losses, our earnings could decrease;
• Our stock value may be negatively affected by banking regulations and
our Certificate of Incorporation restricting takeovers; • Changes in the level of non-performing assets and charge-offs; • Because we intend to continue to increase our commercial real estate and commercial business loan originations, our lending risk may increase, and downturns in the real estate market or local economy could adversely affect our earnings;
• The trading volume in our stock is less than in larger publicly traded
companies which can cause price volatility, hinder your
sell our common stock and may lower the market price of the stock; • We have merged with
United Financial Bancorp, Inc.which may not yield
the desired synergies and cost saves projected; • Our ability to attract and retain qualified employees;
• We may not manage the risks involved in the foregoing as well as
anticipated, and • Severe weather, natural disasters, acts of God, war or terrorism and other external events could significantly impact our business. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this 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. The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader understand
United Financial Bancorp, Inc., our operations and our present business environment. We believe accuracy, transparency and clarity are the primary goals of successful financial reporting. We remain committed to transparency in our financial reporting, providing our stockholders with informative financial disclosures and presenting an accurate view of our financial disclosures, financial position and operating results. MD&A is provided as a supplement to-and should be read in conjunction with-our Unaudited Consolidated Financial Statements and the accompanying notes thereto contained in Part I, Item 1, of this report as well as our Annual Report on Form 10-K for the year ended December 31, 2013. The following sections are included in MD&A: • Our Business - a general description of our business, our objectives and regulatory considerations • Critical Accounting Estimates - a discussion of accounting estimates that require critical judgments and estimates. • Operating Results - an analysis of our Company's consolidated results of operations for the periods presented in our Unaudited Consolidated Financial Statements. • Comparison of Financial Liquidity and Capital Resources - an overview of financial condition and market interest rate risk. Our Business
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• Legacy United merged with and into
Rockville Financial, Inc. Rockville Financial, Inc.was the accounting acquirer and the surviving entity. • Rockville Financial, Inc.changed its legal entity name to United Financial Bancorp, Inc.• The Company's common stock began trading on the NASDAQ Global Select Stock Exchangeunder the symbol "UBNK" upon consummation of the merger. • United Bankmerged into Rockville Bank. • Rockville Bankchanged its legal entity name to United Bank.
We refer to the transactions detailed above collectively as the "Merger".
The Merger was a stock-for-stock transaction valued at
$358.1 millionbased on the closing price of Rockville Financial, Inc.common stock on April 30, 2014. Under the terms of the Merger, each share of Legacy United was converted into the right to receive 1.3472 shares of Rockville Financial, Inc.common stock. See additional disclosure regarding the Merger with Legacy United in Note 14, Subsequent Events, in the Notes to the Unaudited Consolidated Financial Statements contained elsewhere in this report. As of December 31, 2013, the date of Legacy United's last publicly available financial statements, Legacy United had total assets of $2.48 billion, total loans of $1.87 billion, total deposits of $1.94 billionand equity of $302.8 million. The merger has a significant impact by more than doubling the assets and deposits of the former Rockville Financial, Inc., expanding the branch network and by entering into new markets - Western and Central Massachusettsas well as expanding our presence in Connecticutin New Haven County.
The financial statements do not reflect the operations of Legacy United unless specifically stated.
United Financial Bancorp, Inc.is the third largest publicly traded banking institution headquartered in Connecticutwith consolidated assets of $2.37 billionand stockholders' equity of $300.3 millionat March 31, 2014. The Company delivers financial services to individuals, families and businesses throughout Connecticutand the region through its 22 banking offices, its commercial loan production office, its mortgage loan production offices, 37 ATMs and internet website (www. unitedfinancialinc.com). The Company strives to remain a leader in meeting the financial service needs of the community and to provide superior customer service to the individuals and businesses in the market areas that it has served since 1858. United Bankis a community-oriented provider of traditional banking products and services to business organizations and individuals, offering products such as residential and commercial real estate loans, commercial business loans, consumer loans and a variety of deposit products. Our business philosophy is to remain a community-oriented franchise and continue to focus on providing superior customer service to meet the financial needs of the communities in which we operate. Current strategies include (1) continuing our residential mortgage lending activities and continuing to expand our commercial real estate and commercial business lending activities and growing our deposit base (2) increase the non-interest income component of total revenues through development of banking-related fee income and the sale of insurance and investment products and (3) continuing to improve operating efficiencies. 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, income and expenses pertaining to other real estate owned, gains and losses from sales of loans and securities and non-interest income and expenses. Non-interest income primarily consists of fee income from depositors, mortgage servicing income, mortgage origination and loan sale income 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, marketing, professional fees, FDICinsurance assessments, other real estate owned 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. Uncertainty and challenges surrounding future economic growth, consumer confidence, credit availability, competition and corporate earnings remains. 40
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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:
• Grow and retain primary households to increase core deposit relationships with a focus on checking, savings and money market accounts for personal, business and municipal depositors; • Build high quality, profitable loan portfolios using primarily organic growth and also purchase strategies, while also continuing to build efficiencies in its robust secondary mortgage banking business; • Build and diversify revenue streams through development of banking-related fee income, in particular, through the expansion of its financial advisory services; • Maintain expense discipline and improve operating efficiencies;
• Invest in technology to enhance superior customer service and products; and
• Maintain a rigorous risk identification and management process. 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 equity and assets, net interest margin, non-interest income, operating expenses related to total assets and efficiency ratio, asset quality, loan and deposit growth, capital management, liquidity and interest rate sensitivity levels, customer service standards, market share and peer comparisons.
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, 2013for additional disclosures with respect to laws and regulations affecting the Company's businesses. It is difficult to predict at this time what specific impact certain provisions the Dodd-Frank Act and the yet to be written implementing rules and regulations will have on the Company, including any regulations promulgated by the Consumer Financial Protection Bureau. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications on the financial industry, the competitive environment, and our ability to conduct business. Management will have to apply additional resources to ensure compliance with all applicable provisions of the Dodd-Frank Act and any implementing rules, which may increase our costs of operations and adversely impact our earnings. In July 2013, the Federal Reserve published Basel III rules establishing a new comprehensive capital framework of U.S. banking organizations. Under the rules, effective January 1, 2015for the Company and Bank , the minimum capital ratios will be a) 4.5% "Common Equity Tier 1" to risk-weighted assets, b) 6.0% Tier 1 capital to risk-weighted assets and c) 8.0% total capital to risk-weighted assets. In addition, the new regulations will impose certain limitations on dividends, share buy-backs, discretionary payments on Tier 1 instruments and discretionary bonuses to executive officers if the organization does not maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of its risk-weighted assets, phased in over a 5 year period until January 1, 2019. Accordingly, the Company is still in the process of assessing the impacts of these complex proposals. We believe, however, that we will continue to exceed all expected well capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis.
Critical Accounting Estimates
The accounting policies followed by the Company and its subsidiaries conform with accounting principles generally accepted in
the United States of Americaand 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. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our Consolidated Financial Statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. 41
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We believe that our most critical accounting policies, which involve the most complex subjective decisions or assessments, relate to allowance for loan losses, other-than-temporary impairment of investment securities, derivatives, and income taxes. Effective
January 1, 2014, the Company no longer considered pension and other post-retirement benefits as a critical accounting estimate. Additional accounting policies are more fully described in Note 1 in the "Notes to Consolidated Financial Statements" presented in our 2013 Annual Report on Form 10-K. A brief description of our current policies involving significant judgment follows: Allowance for Loan Losses: The allowance for loan losses 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. 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 into two major categories: available for sale and held to maturity. Securities available for sale are recorded at estimated fair value with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Held to maturity securities are recorded at amortized cost. Management determines the classifications of a security at the time of its purchase. Quarterly, securities with unrealized losses are reviewed as deemed appropriate to assess whether the decline in fair value is temporary or other-than-temporary. The assessment is to determine whether the decline in value is from company-specific events, industry developments, general economic conditions, credit losses on debt or other reasons. Declines in the fair value of available for sale securities below their cost or amortized cost that are deemed to be other-than-temporary are reflected in earnings for equity securities and for debt securities that have an identified credit loss. Unrealized losses on debt securities with no identified credit loss component are reflected in other comprehensive income. In the first three months of 2014, the Company did not experience any losses which were deemed to be other-than-temporarily impaired. 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.
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 carryforward 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. 42
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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.
Earnings for the first quarter of 2014 were
The Company's results were significantly impacted by the merger with Legacy United which was completed on
April 30, 2014. The Company incurred $1.8 millionin merger related expenses during the quarter and we expect to continue to incur additional merger related charges through the end of this year. The Company was also impacted by the shift in the mortgage market due to the change in interest rates in the second half of 2013 which resulted in a more difficult secondary mortgage market when originating new loans in a fiercely competitive local market with low interest rates for new mortgage loans. As a result, the Company recorded $1.6 millionless in gains from the sale of loans in the secondary market. Additionally, the Company experienced a $1.6 millionincrease in salaries and employee benefits quarter over quarter as a result of restructuring the executive management team, onboarding of new revenue producing commission-based mortgage loan officers as well as increased commissions on mortgage originations and increased healthcare costs related to the Company's self-insurance program. The Company's results were also attributable to balance sheet growth, a decline in the net interest margin as well as continued solid asset quality. The Company's tax-equivalent net interest margin for the three months ended March 31, 2014was 3.17%, a decrease of 31 basis points over the prior year quarter of 3.48%. The general year over year trends impacting the margin include decreased yields on loans due to the low interest rate environment. This was partially offset by slightly higher yields on securities due to an increase in investment grade collateralized loan obligations. Additionally, downward pressure was felt in the net-interest margin as a result of strategic decisions by management to better position the balance sheet for rising interest rates which resulted in a focus on adjustable and variable rate asset originations reducing the average duration of assets. Complementing this strategy is a loan level hedging program that the Company implemented in the second quarter of 2013 that converts fixed rate assets to floating rate, which typically have a lower yield at inception. Over the last several quarters the Company's secondary market strategy of opportunistically selling long duration fixed rate residential originations and more modestly, the increasing prevalence of adjustable rate mortgage originations due to higher rate offerings on longer duration fixed rate mortgages has had a significant impact on the residential portfolio's contribution to net interest margin. To offset these decreases, the Company grew the average balances of interest-earning assets and managed its cost of funds downward, particularly in borrowings and time deposits. The sustained period of low interest rates has impacted the net interest margin as interest-earning assets continue to originate or reprice downward while the cost of interest-bearing deposits has for all practical purposes reached a floor. The Company has the ability to originate relatively longer duration assets to obtain higher earnings yields while opportunistically choosing wholesale funding options that take advantage of the steepness in the yield curve in order to better contribute to net interest income growth based on our risk tolerance. Nevertheless, the net interest margin may continue to be adversely impacted if the low interest rate environment persists and if asset originations are primarily adjustable and variable rate. The asset quality of our loan portfolio has remained strong even as the leading economic indicators have provided mixed results as evidenced in part by the continued high unemployment and foreclosure rates throughout Connecticutand the region. The allowance for loan losses to total loans ratio was 1.11% and 1.12%, the allowance for loan losses to non-performing loans ratio was 162.72% and 140.50%, and the ratio of non-performing loans to total loans was 0.68% and 0.80% at March 31, 2014and December 31, 2013, respectively. A provision for loan losses of $450,000was recorded for the current quarter compared to $391,000for the quarter ended March 31, 2013. 43 --------------------------------------------------------------------------------
Table of Contents Selected Financial Data At or For the Three Months Ended March 31, (Dollars in thousands, except share data) 2014 2013 Share Data: Basic net income per common share
$ 0.04 $ 0.17Diluted net income per common share 0.04 0.17 Dividends declared per share 0.10 0.10 Operating Data: Total operating revenue $ 20,117 $ 21,391Total operating expense 18,257 14,670 Key Ratios (annualized): Return on average assets 0.16 % 0.89 % Return on average equity 1.26 % 5.68 % Tax-equivalent net interest margin 3.17 % 3.48 % Non-interest expense to average assets 3.16 % 2.87 % Cost of interest-bearing deposits 0.58 % 0.61 % Non-performing Assets: Total non-accrual loans, excluding troubled debt restructures $ 10,200 $ 12,514Troubled debt restructures-non-accruing 1,784 3,312 Total non-performing loans 11,984 15,826 Other real estate owned 2,657 2,587 Total non-performing assets $ 14,641 $ 18,413Non-performing loans to total loans 0.68 % 1.01 % Non-performing assets to total assets 0.62 % 0.89 % Allowance for loan losses to non-performing loans 162.72 % 117.13 % Allowance for loan losses to total loans 1.11 % 1.18 % Non GAAP Ratio: Efficiency ratio(1) 90.76 % 68.58 %
(1) The efficiency ratio represents the ratio of non-interest expenses to the sum
of net interest income before provision for loan losses and non-interest
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Average Balances, Interest, Average Yields\Cost and Rate\Volume Analysis
The table 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 months ended
March 31, 2014and 2013. All average balances are daily average balances. Loans held for sale and non-accrual loans are included in the computation of interest-earning average balances, with non-accrual loans carrying a zero yield. The yields set forth above include the effect of deferred costs, discounts and premiums that are amortized or accreted to interest income or expense.
Average Balance Sheets for the Three Months Ended
Three Months Ended March 31, 2014 2013 Annualized Annualized Average Interest and Yield/ Average Interest and Yield/ (Dollars in thousands) Balance Dividends Cost Balance Dividends Cost Interest-earning assets: Residential real estate loans
$ 650,047 $ 5,8873.62 % $ 676,276 $ 6,6423.93 % Commercial real estate loans 784,803 8,487 4.39 696,477 8,251 4.80 Construction loans 47,079 419 3.61 48,182 416 3.50 Commercial loans 250,503 2,030 3.29 172,722 1,813 4.26 Installment and collateral loans 2,171 21 3.92 2,803 33 4.71 Securities 422,928 3,118 2.95 290,844 2,095 2.88 Federal Home Loan Bank stock 15,053 57 1.54 15,740 15 0.39 Other earning assets 17,807 11 0.25 34,666 21 0.24 Total interest-earning assets 2,190,391 20,030 3.69 1,937,710 19,286 4.01 Allowance for loan losses (19,255 ) (18,735 ) Non-interest-earning assets 143,107 122,829 Total assets $ 2,314,243 $ 2,041,804Interest-bearing liabilities: NOW and money market accounts $ 688,268552 0.33 $ 546,934374 0.28 Saving deposits (1) 223,369 35 0.06 220,479 34 0.06 Time deposits 585,090 1,571 1.09 536,238 1,576 1.19 Total interest-bearing deposits 1,496,727 2,158 0.58 1,303,651 1,984
Advances from the Federal Home Loan Bank 192,859 584 1.23 158,428 583 1.49 Other borrowings 45,815 52 0.46 8,945 11 0.50 Total interest-bearing liabilities 1,735,401 2,794 0.65 % 1,471,024 2,578 0.71
Non-interest-bearing liabilities 279,167 250,261 Total liabilities 2,014,568 1,721,285 Stockholders' equity 299,675 320,519 Total liabilities and stockholders' equity
$ 2,314,243 $ 2,041,804Net interest-earning assets (3) $ 454,990 $ 466,686Tax-equivalent net interest income 17,236 16,708 Tax-equivalent net interest rate spread (2) 3.04 % 3.30 % Tax-equivalent net interest margin (4) 3.17 % 3.48 % Average interest-earning assets to average interest-bearing liabilities 126.22 % 131.73 % Less tax-equivalent adjustment 328 201 $ 16,908 $ 16,507
(1) Includes mortgagors' and investors' escrow accounts.
(2) Net interest rate spread represents the difference between yield on average
interest-earning assets and the cost of average interest- bearing
(3) Tax-equivalent net interest-earning assets represent total interest-earning
assets less total interest-bearing liabilities.
(4) Tax-equivalent net interest rate margin represents tax-equivalent net
interest income divided by average interest-earning assets. 45
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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. Rate\Volume Analysis Three Months Ended March 31, 2014 Compared to March 31, 2013 Increase (Decrease) Due to (In thousands) Volume Rate Net Interest and dividend income: Loans receivable
$ 1,426 $ (1,737 ) $ (311 )Securities 975 48 1,023 Other earning assets(1) (7 ) 39 32 Total earning assets 2,394 (1,650 ) 744 Interest expense: NOW and money market accounts 107 71 178 Savings accounts - 1 1 Time deposits 137 (142 ) (5 ) Total interest-bearing deposits 244 (70 ) 174 FHLBB advances 5 (4 ) 1 Other borrowings 42 (1 ) 41 Total interest-bearing liabilities 291 (75 ) 216 Change in tax-equivalent net interest income $ 2,103 $ (1,575 ) $ 528(1) Includes FHLBB stock
Comparison of Operating Results for the Three Months Ended
The following discussion provides a summary and comparison of the Company's operating results for the three months ended
Net Interest Income Analysis
Net interest income is the amount that interest and fees on earning assets (loans and investments) exceeds the cost of funds, interest paid to the Company's depositors and interest on external borrowings. Net interest margin is the difference between the income on earning assets and the cost of interest-bearing funds as a percentage of average earning assets.
As shown in the tables, tax-equivalent net interest income increased
$528,000for the three months ended March 31, 2014compared to the three months ended March 31, 2013. The yield on average earning assets declined 32 basis points for the three months ended March 31, 2014and the cost of interest-bearing liabilities declined 6 basis points compared to the same period in the prior year. Partially offsetting the negative impact of the decline in the tax-equivalent interest rate spread was an increase of $252.7 millionof average earning assets for the three months ended March 31, 2014compared to March 31, 2013. Average earning assets increased primarily in the loan and securities portfolios by $138.1 millionand $132.1 million, respectively as the Company sought to grow average earning assets to offset the decline in yields in the loan portfolio. Since 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. 46
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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. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The adequacy of the loan loss allowance is based on such interrelated factors as the composition of the loan portfolio and its inherent risk characteristics, the level of non-performing loans and charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision is charged against earnings in order to maintain an allowance for loan losses that reflects management's best estimate of probable losses inherent in the loan portfolio at the balance sheet date. Management recorded a provision of
$450,000for the three months ended March 31, 2014compared to $391,000for the same period of 2013. The primary factors that influenced management's decision to record these provision expenses were due to the ongoing assessment of estimated exposure on impaired loans, the increase in net loans outstanding of $42.9 millionduring the period. Impaired loans totaled $24.4 millionat March 31, 2014compared to $22.1 millionat December 31, 2013, an increase of $2.3 million, or 10.3% due to an increase in accruing troubled debt restructured ("TDR") loans. At March 31, 2014, the allowance for loan losses totaled $19.5 million, which represented 1.11% of total loans and 162.72% of non-performing loans compared to an allowance for loan losses of $19.2 million, which represented 1.12% of total loans and 140.50% of non-performing loans as of December 31, 2013. The repayment of these impaired loans is largely dependent upon the sale and value of collateral that may be impacted by current real estate conditions. Non-interest Income: For the three months ended March 31, 2014and 2013, non-interest income represented 16.0% and 22.8% of total net revenues, respectively. The following is a summary of non-interest income by major category for the three months ended March 31, 2014and 2013: Non-Interest Income For the Three Months Ended March 31, (Dollars in thousands) 2014 2013 $ Change % Change Service charges and fees $ 2,126 $ 1,549 $ 57737.2 % Net gain from sales of securities 268 227 41 18.1 Net gain from sales of loans 456 2,060 (1,604 ) (77.9 ) BOLI income 522 510 12 2.4 Other income (loss) (163 ) 538 (701 ) 130.3 Total non-interest income $ 3,209 $ 4,884 $ (1,675 )(34.3 ) Service Charges and Fees: Service charges and fees were $2.1 millionfor the three months ended March 31, 2014, an increase of $577,000from the comparable 2013 period. The increases were due primarily (a) to increases in loan servicing income resulting from increases in loan sales to the secondary market over the past year with servicing retained, (b) increases in fee income produced by the Company's investment subsidiary, United Financial Services Inc., previously known as Rockville Financial Services, Inc., (c) check printing fees and (d) fees derived from the Company's loan level hedge program that was implemented in the second quarter of 2013 that is offered to certain commercial banking customers to facilitate their respective risk management strategies. These increases were partially offset by reductions in loan origination fee income, previously provided by United Bank Mortgage, Inc.Net Gain From Sales of Securities: For the three months ended March 31, 2014, the Company recorded $268,000in net gains on security sales compared to $227,000in the same period in the prior year period. Periodically, the Company evaluates the portfolio for prepayment risk and will act to reduce this exposure. To date, sales in 2014 and 2013 reflect execution of this strategy. Net Gain From Sales of Loans: Net gain from sales of loans was $456,000and $2.1 millionfor the three months ended March 31, 2014and 2013, respectively, a decrease of $1.6 million. This decrease was driven primarily by the change in the interest rate environment in the second half of 2013 and resulted in a tighter spread on sales in the secondary market and slowed secondary market sale activity after a prolonged period of historically low interest rates. Overall, decreased consumer activity in mortgage refinances translated to 47
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decreased activity in the secondary market for the three months ended
March 31, 2014and resulted in significantly smaller gains on sales than was experienced for the three months ended March 31, 2013. The Company sold residential mortgage loans totaling $18.0 millionin the first quarter of 2014 compared to $63.0 millionin the first quarter of 2013. BOLI Income: For the three months ended March 31, 2014and 2013, the Company recorded BOLI income of $522,000and $510,000, respectively, an increase of $12,000from the comparable 2013 period. The increase was primarily due to the additional purchase of $4.0 millionin May 2013. The increase was partially offset by a decline in the average yield earned on the BOLI policies as a result of current market interest rates. Other Income (Loss): The Company recorded a decrease in other income of $701,000for the three months ended March 31, 2014as compared to the same prior year period. The decrease is due to the impact of the change in the fair value recognized in net income for mortgage servicing rights, the losses realized on the change in value of rate lock and forward loan sale commitments and loan level swaps.
For the three months ended
Non-Interest Expense For the Three Months Ended March 31, (Dollars in thousands) 2014 2013 $ Change
Salaries and employee benefits
18.1 % Service bureau fees 1,091 815 276 33.9 Occupancy and equipment 1,698 1,436 262 18.2 Professional fees 428 723 (295 ) (40.8 ) Marketing and promotions 229 70 159 227.1 FDIC insurance assessments 318 294 24 8.2 Other real estate owned 308 246 62 25.2 Merger related expense 1,829 - 1,829 - Other 2,114 2,412 (298 ) (12.4 ) Total non-interest expense
$ 18,257 $ 14,670 $ 3,58724.5 % Salaries and Employee Benefits: Salaries and employee benefits was $10.2 millionfor the three months ended March 31, 2014, an increase of $1.6 millionfrom the comparable 2013 period. The increase in salaries and benefits was primarily due to the increase of the number of full-time equivalent employees as compared to the prior period to support the Company's growth plan. The new hires were part of the restructured management team and the addition of new revenue producing commission-based mortgage loan officers. The Company experienced increased incentives on mortgage originations, product sales and increased health care costs related to the Company's self-insurance plan. These increases were partially offset by decreases in pension costs due to the change in the discount rate used in the calculation of the pension liability and 401(k) expenses. In January 2014the Company merged its Employee Stock Ownership Plan ("ESOP") with its 40l(k) Plan which allows the Company to make contributions to the 401(k) Plan with ESOP shares in lieu of making cash employer contributions. The Company anticipates saving approximately $1.2 millionin 2014 due to the merging of these two plans.
Service Bureau Fees: Service bureau fees increased
Occupancy and Equipment: Occupancy and equipment was
$1.7 millionand $1.4 millionfor the three months ended March 31, 2014and 2013, respectively, an increase of $262,000. The increases were due primarily to additional rent, real estate taxes, and maintenance contracts related to newly leased properties and depreciation expense associated with leasehold improvements, and computer hardware and software. Professional Fees: Professional fees were $428,000and $723,000for the three months ended March 31, 2014and 2013, respectively, a decrease of $295,000. The decrease in professional fees was primarily in legal and consulting expenses as the Company's projects that focused on potential growth opportunities and evaluation of the infrastructure and risk management needs were scaled back. 48
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Marketing and Promotions: Marketing and promotion expense increased
$159,000for the three months ended March 31, 2014compared to the first three months of 2013. The increase is attributable to the development of a new Company website design. Merger Related Expense: Expenses related to the merger of the Company with Legacy United consummated on April 30, 2014totaled $1.8 millionfor the quarter ended March 31, 2014. The Company expects that conversion and merger related charges resulting from the United merger will continue throughout 2014.
Other Expenses: Other expense was
The decrease for the three months ended
Income Tax Provision: The provision for income taxes was
$463,000and $1.8 millionthe three months ended March 31, 2014and 2013, respectively. The Company's estimated annualized effective tax rate for the three months ended March 31, 2014was 32.8% as compared to 28.1% for the same period in 2013. The increase in the estimated annualized effective tax rate was primarily due to the estimated annualized non-deductible expenses associated with the merger of the Company and Legacy United in 2014.
Financial Condition, Liquidity and Capital Resources
The Company had total assets of
$2.37 billionat March 31, 2014and $2.30 billionat December 31, 2013, an increase of $70.9 million, or 3.1%, primarily due to the increase in net loans and available for sale securities, principally asset-backed and corporate debt securities and loans. The Company utilized deposit growth and additional advances from the Federal Home Loan Bank of Bostonto fund the growth in securities and loans. Total loans, net of $1.74 billion, with allowance for loan and lease losses of $19.5 millionat March 31, 2014, increased $42.9 millionwhen compared to total loans, net of $1.70 billion, with allowance for loan losses of $19.2 millionat December 31, 2013. Total deposits of $1.81 billionat March 31, 2014increased $73.2 millionwhen compared to total deposits of $1.74 billionat December 31, 2013. Non-interest-bearing deposits increased $8.5 million, or 3.2%, resulting from an increase in commercial demand deposit balances totaling $9.0 million. Interest-bearing deposits increased $64.8 million, or 4.4%, during the period due to the growth in the Company's newest branch in Hamden, CT. The Bank's net loan-to-deposit ratio was 96.2% at March 31, 2014, compared to 97.8% at December 31, 2013. At March 31, 2014, total equity of $300.4 millionincreased $1.0 millionwhen compared to total equity of $299.4 millionat December 31, 2013. Changes in equity for the period-ended March 31, 2014consisted primarily of increases in additional paid-in capital, reduction of unearned ESOP compensation and a reduction of accumulated other comprehensive loss offset by a reduction in retained earnings. At March 31, 2014, the tangible common equity ratio was 12.5% compared to 12.8% at December 31, 2013. See Note 11, "Regulatory Matters" in Notes to Unaudited Consolidated Financial Statements contained elsewhere 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:
Table of Contents Securities March 31, 2014 December 31, 2013 Amortized Fair Amortized Fair (In thousands) Cost Value Cost Value Available for sale: Debt securities:
U.S. Governmentand government-sponsored enterprise obligations $ 6,798 $ 6,177 $ 6,801 $ 6,031Government-sponsored residential mortgage-backed securities 93,532 93,150 96,708 95,662 Government-sponsored residential collateralized debt obligations 91,272 90,053 69,568 67,751 Government-sponsored commercial mortgage-backed securities 13,772 13,073 13,841 12,898 Government-sponsored commercial collateralized debt obligations 5,042 4,789 5,043 4,706 Asset-backed securities 116,407 116,033 107,699 106,536 Corporate debt securities 42,220 41,265 43,586 42,486 Obligations of states and political subdivisions 67,061 64,702 67,142 62,505 Total debt securities 436,104 429,242 410,388 398,575 Marketable equity securities, by sector: Banks 9,799 9,817 3,068 3,047 Industrial 109 200 109 211 Mutual funds 2,800 2,857 2,793 2,844 Oil and gas 131 216 131 226 Total marketable equity securities 12,839 13,090
Total available for sale securities
$ 448,943 $ 442,332
Held to maturity: Debt securities: Obligations of states and political subdivisions
$ 11,210 $ 11,671 $ 10,087 $ 10,153Government-sponsored residential mortgage-backed securities 3,539 3,895 3,743 4,107 $ 14,749 $ 15,566 $ 13,830 $ 14,260The available for sale securities portfolio increased by $37.4 millionto $442.3 million, while the held to maturity portfolio increased by $919,000to $14.7 millionat March 31, 2014. The Company's underlying investment strategy has been to incrementally shorten the duration of the investment portfolio by purchasing investments that show favorable price movement to changes in rising interest rates. The Company's strategy included the addition of shorter duration floating rate asset-backed securities and collateralized mortgage obligations and corporate bonds, of which purchases totaled $5.4 millionand $6.0 millionfor the three months ended March 31, 2014, respectively. The Company's investment focus for asset-backed securities during the quarter was to make purchases in seasoned structures of securities supported by government guaranteed loan collateral in the payment phase, with large collateral pools and low levels of loss sensitivity in stressed economic cycles. The asset-backed securities consisted of cash flowing securities supported by government guaranteed student loan obligations originated through the Federal Family Education Loan Program ("FFELP"). In addition, the effective duration and weighted-average life of the FFELP portfolio is 0.25 years and 6.46 years, respectively. The Company limits purchases in the government guaranteed asset-backed securities, municipal bonds and non-guaranteed corporate bonds to investment grade or better rating prior to purchase. Furthermore, the Company limits its exposure to position parameters and will review the impact on the portfolio from periodic issuer disclosures as well as developing market trends. 50
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During the three months ended
March 31, 2014, the Company recorded no write-downs for other-than-temporary impairments of its available for sale securities. The Company held $271.7 millionin securities that are in an unrealized loss position at March 31, 2014. Approximately $158.3 millionof this total had been in an unrealized loss position for less than twelve months while the remainder, $113.4 millionhad been 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 movements and other factors that influence the fair value of securities continue, the Company may be required to record additional impairment charges for other-than-temporary impairment in future periods. For additional information on the securities portfolio, see Note 4, "Securities" in the Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report. 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 5, "Derivatives and Hedging Activities", in the Notes to Unaudited Consolidated Financial Statements contained elsewhere in this report for additional information concerning derivative financial instruments.
The Company makes commercial real estate loans, residential real estate loans secured by one-to-four family residences, residential and commercial construction loans, commercial business loans, multi-family loans, home equity loans and lines of credit and other consumer loans. The table below displays the balances of the Company's loan portfolio as of
March 31, 2014and December 31, 2013. Loan Portfolio Analysis March 31, 2014 December 31, 2013 (Dollars in thousands) Amount Percent Amount Percent Real estate loans: Residential $ 657,95137.5 % $ 634,44737.0 % Commercial 806,834 45.9 776,913 45.3 Construction 40,760 2.3 52,243 3.1 Total real estate loans 1,505,545 85.7 1,463,603 85.4 Commercial business loans 248,986 14.2 247,932 14.5 Installment and collateral loans 2,080 0.1 2,257 0.1 Total loans 1,756,611 100.0 % 1,713,792 100.0 % Net deferred loan costs and premiums 2,841 2,403 Allowance for loan losses (19,500 ) (19,183 ) Loans-net $ 1,739,952 $ 1,697,012
As shown above, gross loans were
Commercial real estate loans represent the largest segment of our loan portfolio at 45.9% of total loans and increased
$29.9 millionto $806.8 millionfrom December 31, 2013. The Bank has experienced increased demand in commercial real estate loans given the current rate environment. Mid-sized businesses continue to look to community banks for relationship banking and personalized lending services. Residential real estate loans continue to represent a major segment of the Company's loan portfolio as of March 31, 2014, comprising 37.5% of total loans. The increase of $23.5 millionfrom December 31, 2013was primarily due to the sale of newly originated and existing residential mortgage loans and the net impact of prepayments. The Company had originations of both adjustable and fixed rate mortgages of $58.1 millionduring the first quarter of the year, with approximately $48.0 millionoriginated for portfolio. The Company opportunistically sells a majority of originated fixed rate residential real estate loans with terms of 15 to 30 years. The strong mortgage origination activity resulted from competitive pricing and increased emphasis by the Company on the expansion of the residential mortgage business program. 51
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Construction real estate loans totaled
$40.8 millionat March 31, 2014, a decrease of $11.5 millionfrom December 31, 2013. Construction real estate loans consist of residential construction and commercial construction. 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 $4.5 millionat March 31, 2014compared to $6.2 millionat December 31, 2013. Commercial real estate construction loans are made for developing commercial real estate properties such as office complexes, apartment buildings and residential subdivisions. Total commercial real estate construction loans totaled $36.3 millionat March 31, 2014, $19.8 millionof which is residential use and $16.4 millioncommercial use, compared to total commercial real estate construction loans of $46.0 millionat December 31, 2013, $22.3 millionof which is residential use and $23.7 millionis commercial use. Commercial business loans increased to $249.0 millionand included production from the Shared National Credit program. A newly formed business line within Commercial Banking "Corporate Loan Strategies" 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 Bank; diversify commercial loan portfolios by providing opportunities to participate in loans to borrowers in other regions or industries the Bank might otherwise have no access. The Bank 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.
The Company occasionally originates loans with interest reserves on certain commercial construction credits depending on various factors including, but not limited to, quality of credit, interest rate and project type. At
It is the Company's policy to recognize income for this interest component as long as the project is progressing as agreed and if there has been no material deterioration in the financial standing of the borrower or the underlying project. If there is monetary or non-monetary loan default, the Company will cease any interest accrual. At
March 31, 2014there were no situations where additional interest reserves were advanced to keep a loan from becoming non-performing.
United's lending strategy focuses on direct relationship lending within its primary market area as the quality of assets underwritten is an important factor in the successful operation of a financial institution. Non-performing assets, loan delinquency and credit loss levels are considered to be key measures of asset quality. Management strives to maintain asset quality through its underwriting standards, servicing of loans and management of non-performing assets since asset quality is a key factor in the determination of the level of the allowance for loan losses ("ALL"). See Note 6, "Loans Receivable and Allowance for Loan Losses" contained elsewhere in this report for further information concerning the Allowance for Loan Losses. 52
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The following table details asset quality ratios for the following periods:
Asset Quality Ratios At March 31, At December 31, 2014 2013 Non-performing loans as a percentage of total loans 0.68 % 0.80 % Non-performing assets as a percentage of total assets 0.62 % 0.59 % Net charge-offs as a percentage of average loans (1) 0.03 % 0.08 % Allowance for loan losses as a percentage of total loans 1.11 % 1.12 % Allowance for loan losses to non-performing loans 162.72 % 140.50 % (1) Calculated based on year to date net charge-offs annualized
Generally loans are placed on non-accrual if collection of principal or interest in full is in doubt, if the loan has been restructured, 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
March 31, 2014and December 31, 2013, no loans greater than 90 days past due were accruing. The following table details non-performing assets for the periods presented: Non-performing Assets At March 31, 2014 At December 31, 2013 (Dollars in thousands) Amount % Amount % Non-accrual loans: Real estate loans: Residential $ 8,37357.19 % $ 8,48155.86 % Commercial - 0.00 656 4.32 Construction 673 4.60 1,518 10.00 Commercial business loans 1,148 7.84 1,259 8.29 Installment and collateral loans 6 0.04 3 0.02 Total non-accrual loans, excluding troubled debt restructured loans 10,200 69.67 11,917 78.49 Troubled debt restructurings-non-accruing 1,784 12.18
Total non-performing loans 11,984 81.85 13,654 89.94 Other real estate owned 2,657 18.15
Total non-performing assets
$ 14,641100.00 %
As displayed in the table above, non-performing assets at
March 31, 2014decreased to $14.6 millioncompared to $15.2 millionat December 31, 2013. The decrease is primarily due to decreases in non-accrual loans, partially offset by increases in other real estate owned. The decrease in non-accruing residential loans of $108,000was due to first quarter net charge offs of $176,000and the transfer of two loans to other real estate owned which was partially offset by the addition of three non-accruing residential real estate loans. Current economic conditions, including factors such as continued high unemployment rates and softness in the real estate market, are impacting customers' ability to make loan payments. There are 97 loans in the residential real estate non-performing category, including troubled debt restructured loans ("TDR"), totaling $1.8 million, representing 0.3% of the total residential real estate 53
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portfolio. The Company continues to originate loans with superior 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 Bank is committed to mortgage solution programs designed to assist homeowners to remain in their homes. As has been its practice historically, the Company does not originate subprime loans.
$656,000decrease in non-accruing commercial real estate loans is primarily due to the transfer of the remaining two loans into other real estate owned. The $845,000decrease in non-accruing construction loans is due to principal payment reductions on non-accrual construction loans. The $111,000decrease in non-accruing commercial business loans is primarily due to principal reductions of $104,000on a single loan. The $1.1 millionnet increase in other real estate owned is primarily due to the addition of four properties valued at $1.5 millionwhich was partially offset by the sale of two properties resulting in a net increase in the fair value of the remaining properties.
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. Restructured loans are classified as accruing or non-accruing based on management's assessment of the collectability of the loan. Loans which are already on non-accrual status at the time of the restructuring generally remain on non-accrual status for a minimum of six months before management considers such loans for return to accruing TDR status. Accruing restructured loans are placed into non-accrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Once a loan is classified as a TDR it retains that classification for the life of the loan; however, some TDRs may demonstrate acceptable performance allowing the TDR loan to be placed on accruing TDR status. The increase in accruing TDRs is primarily attributable to the addition of three larger construction relationships which comprised the majority of the
$4 millionincrease in the first three months of 2014.
The following tables provide detail of TDR balances and activity for the periods presented:
Troubled Debt Restructuring Balances
At March 31, At December 31, (In thousands) 2014 2013 Recorded investment in TDRs: Accrual status
$ 12,436$ 8,478 Non-accrual status 1,784 1,737 Total recorded investment $ 14,220$ 10,215 Accruing TDRs performing under modified terms more than one year $ 1,246$ 1,302 TDR allocated reserves included in the balance of allowance for loan losses $ - $ - Additional funds committed to borrowers in TDR status $ - $ - 54
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Troubled Debt Restructuring Activity
Three Months Ended March 31, (In thousands) 2014 2013 TDRs, beginning of period
$ 10,215 $ 3,760New TDR status 4,261 3,108 Paydowns/draws on existing TDRs, net (257 ) (50 ) Charge-offs post modification - (2 ) TDRs, end of period $ 14,219 $ 6,816
Allowance for Loan Losses
The allowance for loan losses and the reserve for unfunded credit commitments are maintained at a level estimated by management to provide for probable losses inherent within the loan portfolio. Probable losses are estimated based upon a quarterly review of the loan portfolio, which includes historic default and loss experience, specific problem loans, risk rating profile, economic conditions and other pertinent factors which, in management's judgment, warrant current recognition in the loss estimation process. 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
March 31, 2014, 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 a loan loss allowance of $19.5 million, or 1.11%, of total loans at March 31, 2014as compared to a loan loss allowance of $19.2 million, or 1.12%, of total loans at December 31, 2013. 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 March 31, 2014increased $118,000to $365,000compared to December 31, 2013. See Note 6, "Loans Receivable and Allowance for Loan Losses" in the Notes to the Unaudited Consolidated Financial Statements contained elsewhere in this report for a table providing the activity in the Company's allowance for loan losses for the three months ended March 31, 2014and 2013. 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 March 31, 2014, the reserve for unfunded credit commitments was $655,000compared to a reserve for unfunded credit commitments of $524,000at March 31, 2013.
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 Federal Home Loan Bank of
Bostonadvances, reverse repurchase agreements, fed funds lines, loan and mortgage-backed securities repayments, securities sales proceeds and maturities, 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. 55
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The Company offers a wide variety of deposit products to consumer, business and municipal customers. Deposit customers can access their accounts in a variety of ways including branch banking, ATM's, internet 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 Bank 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 Committee meets monthly, to determine pricing and marketing initiatives. Actions of the committee 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. The following table presents deposits by category as of the dates indicated: Deposits (In thousands) March 31, 2014 December 31, 2013 Demand deposits
$ 275,068$ 244,996 NOW accounts 154,185 175,363 Regular savings and club accounts 226,278
Money market and investment savings 545,098 524,638 Total core deposits 1,200,629 1,164,632 Time deposits 607,824 570,573 Total deposits
$ 1,808,453$ 1,735,205 Deposits totaled $1.81 billionat March 31, 2014, up $73.2 millionfrom the balance at December 31, 2013. Core deposits increased $36.0 million, or 3.1%, from year end as the Company's strategy has been to increase core deposits and reduce rates paid on interest-bearing deposits, particularly on time deposits, in order to improve the net interest margin and the interest rate spread while continuing to build core relationships. This strategy included promoting commercial deposit and cash management deposit products, competitive rate shorter term deposits and money market accounts in response to the competition within our marketplace. Time deposits included brokered certificate of deposits of $77.9 millionand $88.7 millionat March 31, 2014and December 31, 2013, respectively. The Company utilizes out-of-market brokered time deposits as part of its overall funding program along with other sources. Excluding out-of-market brokered certificates of deposits, in market deposits totaled $1.73 billionat March 31, 2014. United Bankis a member of the Certificate Deposit Account Registry Service network.
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.
United Bankis 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. Governmentand its agencies. The capital stock investment is restricted in that there is no market for it, and it can only be redeemed by the Federal Home Loan Bank of Boston. 56
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Total Federal Home Loan Bank of
Bostonadvances increased $10.0 millionto $202.0 millionat March 31, 2014compared to $192.0 millionat December 31, 2013. This increase is a result of greater utilization of FHLBB advances at lower interest rates, combined with the growth in our core deposits, which assisted the Company in funding growth in our securities and loans portfolios, and in meeting other liquidity needs while effectively managing interest rate risk. At March 31, 2014, all of the Company's outstanding FHLBB advances were at fixed rates ranging from 0.19% to 4.39%. The average cost of FHLBB advances was 1.23% for the quarter ended March 31, 2014. FHLBB borrowings represented 8.5% and 8.3% of assets at March 31, 2014and December 31, 2013, respectively.
In addition, advances outstanding under reverse purchase agreements totaled
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
March 31, 2014, $32.6 millionof the Company's assets were invested in cash and cash equivalents compared to $45.2 millionat December 31, 2013. 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 Federal Home Loan Bank of Boston. 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 Federal Home Loan Bank of Boston, which provide an additional source of funds. At March 31, 2014, the Company had $202.0 millionin advances from the Federal Home Loan Bank of Bostonand an additional available borrowing limit of $106.9 millionbased on collateral requirements of the Federal Home Loan Bank of Bostoninclusive of the line of credit. In addition, the Bank has a relationship with a brokered sweep deposit provider by which the Bank could borrow an additional $50.5 millionthrough this relationship. Internal policies limit wholesale borrowings to 30% of total assets, or $711.3 million, at March 31, 2014. In addition, the Company has uncommitted federal funds line of credit with four counterparties totaling $97.5 millionat March 31, 2014. No federal funds purchased were outstanding at March 31, 2014. At March 31, 2014, the Company had outstanding commitments to originate loans of $66.1 millionand unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $342.4 million. At March 31, 2014, time deposits scheduled to mature in less than one year totaled $316.0 million. 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 Federal Home Loan Bank of Bostonadvances 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 source of liquidity at the parent company level is dividends from United Bank. The main uses of liquidity are payments of dividends to common stockholders, repurchase of United Bank'scommon stock, and corporate operating expenses. There are certain restrictions on the payment of dividends. See Note 17, "Regulatory Matters" in the Company's 2013 Consolidated Financial Statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2013for further information on dividend restrictions. 57
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The Company and the Bank are subject to various regulatory capital requirements. As of
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.