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EX-32.2 - EXHIBIT 32.2 - First Connecticut Bancorp, Inc.t1600683_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - First Connecticut Bancorp, Inc.t1600683_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - First Connecticut Bancorp, Inc.t1600683_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - First Connecticut Bancorp, Inc.t1600683_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

xQuarterly Report-
Pursuant To Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended September 30, 2016

 

OR

 

¨Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from              to           

 

Commission File No. 333-171913

 

 

 

First Connecticut Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   45-1496206

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

   
One Farm Glen Boulevard, Farmington, CT   06032
(Address of Principal Executive Offices)   (Zip Code)

 

(860) 676-4600

(Registrant’s telephone number)

 

N/A

(Former name or former address, if changed since last report)

 

 

 

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 requirements for the past 90 days.    YES    x    NO    ¨.

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES    x    NO    ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer” and “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ¨ Accelerated filer   x
         
Non-accelerated filer ¨  Smaller reporting company   ¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES    ¨    NO    x

 

As of October 24, 2016, there were 15,809,248 shares of First Connecticut Bancorp, Inc. common stock, par value $0.01, outstanding.

 

 

 

 

 

 

First Connecticut Bancorp, Inc.

 

Table of Contents

 

    Page
     
Part I. Financial Information  
     
Item 1. Consolidated Financial Statements  
     
 

Consolidated Statements of Financial Condition at September 30, 2016 (unaudited) and December 31, 2015

1
     
  Consolidated Statements of Income for the three and nine months ended September 30, 2016 and 2015 (unaudited) 2
     
  Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015 (unaudited) 3
     
  Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2016 (unaudited) 4
     
  Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015 (unaudited) 5
     
  Notes to Unaudited Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 51
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 68
     
Item 4. Controls and Procedures 69
     
Part II. Other Information  
     
Item 1. Legal Proceedings 69
     
Item1A. Risk Factors 69
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 69
     
Item 3. Defaults upon Senior Securities 69
     
Item 4. Mine Safety Disclosure 70
     
Item 5. Other Information 70
     
Item 6. Exhibits 70
     
Signatures 72
   
Exhibit 31.1  
Exhibit 31.2  
Exhibit 32.1  
Exhibit 32.2  

 

 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Financial Condition (Unaudited)

 

 

   September 30,   December 31, 
   2016   2015 
(Dollars in thousands, except share and per share data)          
Assets          
Cash and due from banks  $33,206   $45,732 
Interest bearing deposits with other institutions   56,734    13,407 
Total cash and cash equivalents   89,940    59,139 
Securities held-to-maturity, at amortized cost   7,338    32,246 
Securities available-for-sale, at fair value   134,094    132,424 
Loans held for sale   5,462    9,637 
Loans(1)   2,476,364    2,361,796 
Allowance for loan losses   (21,263)   (20,198)
Loans, net   2,455,101    2,341,598 
Premises and equipment, net   18,383    18,565 
Federal Home Loan Bank of Boston stock, at cost   15,139    21,729 
Accrued income receivable   6,413    6,747 
Bank-owned life insurance   51,364    50,618 
Deferred income taxes, net   15,136    15,443 
Prepaid expenses and other assets   33,590    20,400 
Total assets  $2,831,960   $2,708,546 
Liabilities and Stockholders' Equity          
Deposits          
Interest-bearing  $1,828,209   $1,589,970 
Noninterest-bearing   419,664    401,388 
    2,247,873    1,991,358 
Federal Home Loan Bank of Boston advances   220,600    377,600 
Repurchase agreement borrowings   10,500    10,500 
Repurchase liabilities   35,036    35,769 
Accrued expenses and other liabilities   62,336    47,598 
Total liabilities   2,576,345    2,462,825 
Stockholders' Equity          
Common stock, $0.01 par value, 30,000,000 shares authorized; 17,947,647 shares issued and 15,805,748 shares outstanding at September 30, 2016 and 17,976,893 shares issued and 15,881,663 shares outstanding at December 31, 2015   181    181 
Additional paid-in-capital   183,769    181,997 
Unallocated common stock held by ESOP   (10,833)   (11,626)
Treasury stock, at cost (2,141,899 shares at September 30, 2016 and 2,095,230 shares at December 31, 2015)  (31,645)   (30,602)
Retained earnings   120,487    112,933 
Accumulated other comprehensive loss   (6,344)   (7,162)
Total stockholders' equity   255,615    245,721 
Total liabilities and stockholders' equity  $2,831,960   $2,708,546 

 

 

(1) Loans include net deferred loan costs of $3.9 million and $4.0 million at September 30, 2016 and December 31, 2015, respectively.

 

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

 

1 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

 

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
(Dollars in thousands, except share and per share data)                
Interest income                    
Interest and fees on loans                    
Mortgage  $16,134   $15,861   $48,161   $46,250 
Other   4,983    4,594    14,555    12,853 
Interest and dividends on investments                    
United States Government and agency obligations   419    401    1,285    1,109 
Other bonds   13    13    40    66 
Corporate stocks   210    217    681    493 
Other interest income   46    8    104    19 
Total interest income   21,805    21,094    64,826    60,790 
Interest expense                    
Deposits   2,975    2,412    8,446    6,761 
Federal Home Loan Bank of Boston advances   955    890    2,902    2,445 
Repurchase agreement borrowings   98    96    289    351 
Repurchase liabilities   22    24    56    87 
Total interest expense   4,050    3,422    11,693    9,644 
Net interest income   17,755    17,672    53,133    51,146 
Provision for loan losses   698    386    1,716    1,664 
Net interest income after provision for loan losses   17,057    17,286    51,417    49,482 
Noninterest income                    
Fees for customer services   1,600    1,536    4,614    4,409 
Gain on sales of investments   -    -    -    1,523 
Net gain on loans sold   939    993    2,180    1,925 
Brokerage and insurance fee income   58    54    166    163 
Bank owned life insurance income   335    349    1,056    946 
Other   753    309    1,186    1,013 
Total noninterest income   3,685    3,241    9,202    9,979 
Noninterest expense                    
Salaries and employee benefits   9,285    9,302    27,874    27,127 
Occupancy expense   1,271    1,219    3,679    3,858 
Furniture and equipment expense   1,020    1,034    3,099    3,147 
FDIC assessment   392    413    1,179    1,227 
Marketing   682    443    1,647    1,386 
Other operating expenses   2,834    2,307    7,927    8,507 
Total noninterest expense   15,484    14,718    45,405    45,252 
Income before income taxes   5,258    5,809    15,214    14,209 
Income tax expense   1,485    1,594    4,185    4,011 
Net income  $3,773   $4,215   $11,029   $10,198 
                     
Net earnings per share (See Note 3):                    
Basic  $0.25   $0.28   $0.74   $0.68 
Diluted   0.25    0.28    0.73    0.67 
Dividends per share   0.08    0.06    0.22    0.16 

 

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

 

2 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

 

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
(Dollars in thousands)                
Net income  $3,773   $4,215   $11,029   $10,198 
Other comprehensive income, before tax                    
Unrealized gains (losses) on securities:                    
Unrealized holding gains (losses) arising during the period   8    103    776    (2,872)
Less: reclassification adjustment for gains included in net income   -    -    -    1,523 
Net change in unrealized gains (losses)   8    103    776    (1,349)
Change related to pension and other postretirement benefit plans   164    170    491    361 
Other comprehensive income (loss), before tax   172    273    1,267    (988)
Income tax expense (benefit)   61    96    449    (348)
Other comprehensive income (loss), net of tax   111    177    818    (640)
Comprehensive income  $3,884   $4,392   $11,847   $9,558 

 

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

 

3 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

 

 

               Unallocated           Accumulated     
   Common Stock   Additional   Common           Other   Total 
   Shares       Paid in   Shares Held   Treasury   Retained   Comprehensive   Stockholders' 
   Outstanding   Amount   Capital   by ESOP   Stock   Earnings   Loss   Equity 
(Dollars in thousands, except share data)                                
Balance at December 31, 2015   15,881,663   $181   $181,997   $(11,626)  $(30,602)  $112,933   $(7,162)  $245,721 
ESOP shares released and committed to be released   -    -    392    793    -    -    -    1,185 
Cash dividend paid ($0.22 per common share)   -    -    -    -    -    (3,475)   -    (3,475)
Treasury stock acquired   (156,800)   -    -    -    (2,527)   -    -    (2,527)
Stock options exercised   110,131    -    (53)   -    1,484    -    -    1,431 
Cancelation of shares for tax withholding   (29,246)   -    (516)   -    -    -    -    (516)
Tax expense from stock-based compensation   -    -    173    -    -    -    -    173 
Share based compensation expense   -    -    1,776    -    -    -    -    1,776 
Net income   -    -    -    -    -    11,029    -    11,029 
Other comprehensive income   -    -    -    -    -    -    818    818 
Balance at September 30, 2016   15,805,748   $181   $183,769   $(10,833)  $(31,645)  $120,487   $(6,344)  $255,615 

 

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

 

4 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

 

   Nine Months Ended September 30, 
(Dollars in thousands)  2016   2015 
Cash flows from operating activities        
Net income  $11,029   $10,198 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:          
Provision for loan losses   1,716    1,664 
(Reversal of) provision for off-balance sheet commitments   (415)   38 
Depreciation and amortization   1,783    1,990 
Amortization of ESOP expense   1,185    1,107 
Share based compensation expense   1,776    2,468 
Gain on sale of investments   -    (1,523)
Loans originated for sale   (127,615)   (170,638)
Proceeds from the sale of loans held for sale   133,970    166,564 
Loss on disposal of premises and equipment   71    51 
Gain on fair value adjustment for mortgage banking derivatives   (146)   (52)
Impairment losses on alternative investments   219    144 
Mortgage servicing rights impairment   283    - 
Writedowns on foreclosed real estate   21    - 
Loss (gain) on sale of foreclosed real estate   71    (567)
Net gain on loans sold   (2,180)   (1,925)
Accretion of investment security discounts and premuims, net   (82)   (47)
Change in net deferred loan costs   42    (205)
Decrease (increase) in accrued income receivable   334    (528)
Deferred income tax   (142)   1,255 
Increase in cash surrender value of bank-owned life insurance   (974)   (947)
Increase in prepaid expenses and other assets   (13,668)   (8,721)
Increase in accrued expenses and other liabilities   15,487    3,799 
Net cash provided by operating activities   22,765    4,125 
Cash flows from investing activities          
Maturities, calls and principal payments of securities held-to-maturity   24,908    24,738 
Maturities, calls and principal payments of securities available-for-sale   129,203    215,934 
Purchases of securities held-to-maturity   -    (34,000)
Purchases of securities available-for-sale   (130,015)   (199,062)
Loan originations, net of principal repayments   (115,449)   (201,790)
Redemptions (purchases) of Federal Home Loan Bank of Boston stock, net   6,590    (3,253)
Proceeds from (purchase of) bank-owned life insurance   228    (10,000)
Proceeds from sale of foreclosed real estate   375    2,620 
Purchases of premises and equipment   (1,672)   (1,038)
Net cash used in investing activities   (85,832)   (205,851)
Cash flows from financing activities          
Net payments on Federal Home Loan Bank of Boston advances   (157,000)   (28,100)
Decrease in repurchase agreement borrowings   -    (10,500)
Net increase in demand deposits, NOW accounts, savings accounts and money market accounts   220,136    170,485 
Net increase in time deposits   36,379    69,829 
Net (decrease) increase in repurchase liabilities   (733)   9,097 
Stock options exercised   1,431    365 
Excess tax expense from stock-based compensation   173    149 
Cancellation of shares for tax withholding   (516)   (498)
Repurchase of common stock   (2,527)   (1,963)
Cash dividend paid   (3,475)   (2,554)
Net cash provided by financing activities   93,868    206,310 
Net increase in cash and cash equivalents   30,801    4,584 
Cash and cash equivalents at beginning of period   59,139    42,863 
Cash and cash equivalents at end of period  $89,940   $47,447 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $11,683   $9,557 
Cash paid for income taxes   4,337    4,007 
Loans transferred to other real estate owned   189    1,991 

 

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

 

5 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

1.Summary of Significant Accounting Policies

 

Organization and Business

 

First Connecticut Bancorp, Inc. is a Maryland-chartered bank holding company that wholly owns its only subsidiary, Farmington Bank (collectively with its subsidiary, the “Company”). Farmington Bank's main office is located in Farmington, Connecticut. Farmington Bank is a full-service, community bank with 24 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Farmington Bank's primary source of income is interest accrued on loans to customers, which include small and middle market businesses and individuals residing primarily in Connecticut and western Massachusetts. However, the Bank will selectively lend to borrowers in other northeastern states.

 

Wholly-owned subsidiaries of Farmington Bank are Farmington Savings Loan Servicing, Inc., a passive investment company that was established to service and hold loans collateralized by real property; Village Investments, Inc.; the Village Corp., Limited, and Village Square Holdings, Inc.; 28 Main Street Corp., is a subsidiary that was formed to hold residential other real estate owned and Village Management Corp., is a subsidiary that was formed to hold commercial other real estate owned, are presently inactive.

 

On June 21, 2013, the Company received regulatory approval to repurchase up to 1,676,452 shares, or 10% of its current outstanding common stock. During the nine months ended September 30, 2016, the Company had repurchased 156,800 of these shares at a cost of $2.5 million. Repurchased shares are held as treasury stock and are available for general corporate purposes. The Company has 600,945 shares remaining available to be repurchased at September 30, 2016.

 

Basis of Financial Statement Presentation

 

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has condensed or omitted certain information and footnote disclosures normally included in the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. All significant intercompany transactions and balances have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2015 included in the Company’s 10-K filed on March 11, 2016. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

 

In preparing the consolidated financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the interim period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, investment security other-than-temporary impairment judgments and investment security valuation.

 

6 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Investment Securities

 

Marketable equity and debt securities are classified as either trading, available-for-sale, or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. At September 30, 2016 and December 31, 2015, the Company had no debt or equity securities classified as trading. Held-to-maturity securities are debt securities for which the Company has the ability and intent to hold until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts on debt securities are amortized or accreted into interest income over the term of the securities using the level yield method. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized. Further information relating to the fair value of securities can be found within Note 4 of the Notes to Consolidated Financial Statements. In accordance with Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") 320 — “Debt and Equity Securities”, a decline in market value of a debt security below amortized cost that is deemed other-than-temporary is charged to earnings for the credit related other-than-temporary impairment ("OTTI"), resulting in the establishment of a new cost basis for the security, while the non-credit related OTTI is recognized in other comprehensive income if there is no intent or requirement to sell the security. The securities portfolio is reviewed on a quarterly basis for the presence of other-than-temporary impairment. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered to be credit-related and a charge to earnings would be recorded. Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis.

 

Loans Held for Sale

 

Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to other noninterest income in the accompanying Consolidated Statements of Income. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold on the trade date to net gain on loans sold in the accompanying Consolidated Statements of Income.

 

Loans

 

The Company’s loan portfolio segments include residential real estate, commercial real estate, construction, installment, commercial, collateral, home equity lines of credit, demand, revolving credit and resort. Construction includes classes for commercial and residential construction.

 

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. When loans are prepaid, sold or participated out, the unamortized portion is recognized as income or expense at that time.

 

7 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Interest on loans is accrued and recognized in interest income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued, and previously accrued income is reversed, when loan payments are more than 90 days past due or when, in the judgment of management, collectability of the loan or loan interest becomes uncertain. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with contractual terms involving payment of cash or cash equivalents. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. If a residential real estate, commercial real estate, construction, installment, commercial, collateral, home equity line of credit, demand, revolving credit and resort loan is on non-accrual status cash payments are applied towards the reduction of principal.  If loans are considered impaired but accruing, cash payments are applied first to interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful.

 

The policy for determining past due or delinquency status for all loan portfolio segments is based on the number of days past due or the contractual terms of the loan. A loan is considered delinquent when the customer does not make their payments due according to their contractual terms. Generally, a loan can be demanded at any time if the loan is delinquent or if the borrower fails to meet any other agreed upon terms and conditions.

 

On a quarterly basis, our loan policy requires that we evaluate for impairment all commercial real estate, construction, commercial and resort loan segments that are classified as non-accrual, loans secured by real property in foreclosure or are otherwise likely to be impaired, non-accruing residential and installment loan segments greater than $100,000 and all troubled debt restructurings.

 

Nonperforming loans consist of non-accruing loans, non-accruing loans identified as trouble debt restructurings and loans past due more than 90 days and still accruing interest.

 

Allowance for Loan Losses

 

The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio as of the statement of condition date. The allowance for loan losses consists of a formula allowance following FASB ASC 450 — “Contingencies” and FASB ASC 310 — “Receivables”. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below. All reserves are available to cover any losses regardless of how they are allocated.

 

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: residential real estate, commercial real estate, construction, installment, commercial, collateral, home equity line of credit, demand, revolving credit and resort. Construction loans include classes for commercial investment real estate construction, commercial owner occupied construction, residential development, residential subdivision construction and residential owner occupied construction loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and nonaccrual loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2016.

 

8 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

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 — Residential real estate loans are generally originated in amounts up to 95.0% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80.0%. The Company does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. All residential mortgage loans are underwritten pursuant to secondary market underwriting guidelines which include minimum FICO standards. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

Commercial real estate — Loans in this segment are primarily originated to finance income-producing properties throughout the northeastern states. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, may have an effect on the credit quality in this segment. Management generally obtains rent rolls and other financial information, as appropriate on an annual basis and continually monitors the cash flows of these loans.

 

Construction loans — Loans in this segment include commercial construction loans, real estate subdivision development loans to developers, licensed contractors and builders for the construction and development of commercial real estate projects and residential properties. Construction lending contains a unique risk characteristic as loans are originated under market and economic conditions that may change between the time of origination and the completion and subsequent purchaser financing of the property. In addition, construction subdivision loans and commercial and residential construction loans to contractors and developers entail additional risks as compared to single-family residential mortgage lending to owner-occupants. These loans typically involve large loan balances concentrated in single borrowers or groups of related borrowers. Real estate subdivision development loans to developers, licensed contractors and builders are generally speculative real estate development loans for which payment is derived from sale of the property. Credit risk may be affected by cost overruns, time to sell at an adequate price, and market conditions. Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Residential construction credit quality may be impacted by the overall health of the economy, including unemployment rates and housing prices.

 

Commercial — 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 resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Home equity line of credit — Loans in this segment include home equity loans and lines of credit underwritten with a loan-to-value ratio generally limited to no more than 80%, including any first mortgage. Our home equity lines of credit have ten-year terms and adjustable rates of interest which are indexed to the prime rate. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.

 

Installment, Collateral, Demand, Revolving Credit and Resort – Loans in these segments include loans principally to customers residing in our primary market area with acceptable credit ratings. Our installment and collateral consumer loans generally consist of loans on new and used automobiles, loans collateralized by deposit accounts and unsecured personal loans. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment. Excluding collateral loans which are fully collateralized by a deposit account, repayment for loans in these segments is dependent on the credit quality of the individual borrower. The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations. The Company has exited the resort financing market with a residual portfolio remaining.

 

9 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Allocated component:

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial real estate, construction, commercial and resort loans by the present value of expected cash flows discounted at the effective interest rate; the fair value of the collateral, if applicable; or the observable market price for the loan. 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. The Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement or they are nonaccrual loans with outstanding balances greater than $100,000.

 

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. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Management updates the analysis quarterly. The assumptions used in appraisals are reviewed for appropriateness. Updated appraisals or valuations are obtained as needed or adjusted to reflect the estimated decline in the fair value based upon current market conditions for comparable properties.

 

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are classified as impaired.

 

Unallocated component:

 

An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at September 30, 2016 and December 31, 2015.

 

10 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Troubled Debt Restructuring

 

A loan is considered a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower in modifying or renewing the loan the Company would not otherwise consider. In connection with troubled debt restructurings, terms may be modified to fit the ability of the borrower to repay in line with their current financial status, which may include a reduction in the interest rate to market rate or below, a change in the term or movement of past due amounts to the back-end of the loan or refinancing. A loan is placed on non-accrual status upon being restructured, even if it was not previously, unless the modified loan was current for the six months prior to its modification and we believe the loan is fully collectable in accordance with its new terms. The Company’s policy to restore a restructured loan to performing status is dependent on the receipt of regular payments, generally for a period of six months and one calendar year-end. All troubled debt restructurings are classified as impaired loans and are reviewed for impairment by management on a quarterly basis per Company policy.

 

Foreclosed Real Estate

 

Real estate acquired through foreclosure comprises properties acquired in partial or total satisfaction of problem loans. The properties are acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. At the time these properties are foreclosed, the properties are initially recorded at the fair value at the date of foreclosure less estimated selling costs. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent loss provisions are charged to the foreclosed real estate valuation allowance and expenses incurred to maintain the properties are charged to noninterest expense. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose. Revenue and expense from the operation of other real estate owned and the provision to establish and adjust valuation allowances are included in noninterest expenses. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. In the Consolidated Statements of Financial Condition, total prepaid expenses and other assets include foreclosed real estate of $-0- and $279,000 as of September 30, 2016 and December 31, 2015, with no specific valuation allowance. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $4.5 million at September 30, 2016.

 

Pension and Other Postretirement Benefit Plans

 

The Company’s non-contributory defined-benefit pension plan and certain defined benefit postretirement plans were frozen as of February 28, 2013 and no additional benefits will accrue.

 

The Company has a non-contributory defined benefit pension plan that provides benefits for substantially all employees hired before January 1, 2007 who meet certain requirements as to age and length of service. The benefits are based on years of service and average compensation, as defined in the Plan Document. The Company’s funding practice is to meet the minimum funding standards established by the Employee Retirement Income Security Act of 1974.

 

In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees. Participants or eligible employees hired before January 1, 1993 become eligible for the benefits if they retire after reaching age 62 with fifteen or more years of service. A fixed percent of annual costs are paid depending on length of service at retirement. The Company accrues for the estimated costs of these other post-retirement benefits through charges to expense during the years that employees render service. The Company makes contributions to cover the current benefits paid under this plan. The Company believes the policy for determining pension and other post-retirement benefit expenses is critical because judgments are required with respect to the appropriate discount rate, rate of return on assets and other items. The Company reviews and updates the assumptions annually. If the Company’s estimate of pension and post-retirement expense is too low it may experience higher expenses in the future, reducing its net income. If the Company’s estimate is too high, it may experience lower expenses in the future, increasing its net income.

 

11 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Income Taxes

 

Deferred income taxes are provided for differences arising in the timing of income and expenses for financial reporting and for income tax purposes. Deferred income taxes and tax benefits 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 basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides a deferred tax asset valuation allowance for the estimated future tax effects attributable to temporary differences and carryforwards when realization is determined not to be more likely than not.

 

FASB ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Pursuant to FASB ASC 740-10, the Company examines its financial statements, its income tax provision and its federal and state income tax returns and analyzes its tax positions, including permanent and temporary differences, as well as the major components of income and expense to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes interest and penalties arising from income tax settlements as part of its provision for income taxes.

 

Recent Accounting Pronouncements

 

In August 2014, the FASB issued ASU 2014-15, “Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” ASU 2014-15 provides guidance in accounting principles generally accepted in the United States of America about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company does not expect ASU 2014-15 to have a significant impact on its financial statements.

 

In August 2015, the FASB issued ASU No. 2015-14 "Revenue from Contracts with Customers (Topic 606)." In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (Topic 606), with an original effective date for annual reporting periods beginning after December 15, 2016. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2015-14 deferred the effective date of ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is not permitted. The Company is assessing the impact of ASU 2015-14 on its accounting and disclosures.

 

12 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments — Overall (Topic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is assessing the impact of ASU 2016-01 on its accounting and disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)." ASU 2016-02 supersedes Topic 840, Leases. This ASU is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Some of the provisions in ASU 2016-02 include the following: 1) requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease), 2) requires lessor accounting to be updated to align with certain changes to the lessee model and the new revenue recognition standard, 3) an arrangement contains an embedded lease if property, plant, or equipment is explicitly or implicitly identified and its use is controlled by the customer, 4) in certain circumstances, the lessee is required to remeasure the lease payments, and 5) requires extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. For public business entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.

 

In March 2016, the FASB issued ASU No. 2016-07 "Investments — Equity Method and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method of Accounting." This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. For public business entities, ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is assessing the impact of ASU 2016-07 on its accounting and disclosures.

 

In March 2016, the FASB issued ASU No. 2016-09 “Compensation — Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” This ASU requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. For public business entities, ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted. The Company is assessing the impact of ASU 2016-09 on its accounting and disclosures.

 

13 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments — Credit Losses (Topic 326)" requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This ASU also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public business entities for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230) — Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is assessing the impact of ASU 2016-15 its accounting and disclosures.

 

2.Restrictions on Cash and Due from Banks

 

The Company is required to maintain a percentage of transaction account balances on deposit in non-interest-earning reserves with the Federal Reserve Bank, offset by the Company’s average vault cash. The Company also is required to maintain cash balances to collateralize the Company’s position with certain third parties. The Company had cash and liquid assets of approximately $30.4 million and $17.7 million to meet these requirements at September 30, 2016 and December 31, 2015, respectively.

 

3.Earnings Per Share

 

The following table sets forth the calculation of basic and diluted earnings per share:

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
(Dollars in thousands, except per share data):                
                 
Net income  $3,773   $4,215   $11,029   $10,198 
Less:  Dividends to participating shares   -    (8)   (18)   (33)
Income allocated to participating shares   (15)   (63)   (58)   (127)
Net income allocated to common stockholders  $3,758   $4,144   $10,953   $10,038 
                     
Weighted-average shares issued   17,968,628    17,998,820    17,974,118    18,003,666 
                     
Less:  Average unallocated ESOP shares   (897,948)   (993,416)   (921,630)   (1,017,019)
Average treasury stock   (2,156,167)   (2,084,182)   (2,167,900)   (2,031,904)
Average unvested restricted stock   (90,599)   (288,271)   (114,306)   (247,835)
Weighted-average basic shares outstanding   14,823,914    14,632,951    14,770,282    14,706,908 
                     
Plus: Average dilutive shares   368,092    254,510    322,827    176,454 
Weighted-average diluted shares outstanding   15,192,006    14,887,461    15,093,109    14,883,362 
                     
Net earnings per share(1):                    
Basic  $0.25   $0.28   $0.74   $0.68 
Diluted  $0.25   $0.28   $0.73   $0.67 

 

 

(1)  Certain per share amounts may not appear to reconcile due to rounding.

 

For the nine months ended September 30, 2016 and 2015, respectively, 44,000 and 79,500 options were anti-dilutive and therefore excluded from the earnings per share calculation.

 

14 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

4.Investment Securities

 

Investment securities are summarized as follows:

 

   September 30, 2016 
       Recognized in OCI       Not Recognized in OCI     
       Gross   Gross       Gross   Gross     
   Amortized   Unrealized   Unrealized   Carrying   Unrealized   Unrealized   Fair 
(Dollars in thousands)  Cost   Gains   Losses   Value   Gains   Losses   Value 
Available-for-sale                                   
Debt securities:                                   
U.S. Treasury obligations  $19,814   $275   $-   $20,089   $-   $-   $20,089 
U.S. Government agency obligations   102,986    168    (35)   103,119    -    -    103,119 
Government sponsored residential mortgage-backed securities   3,751    183    -    3,934    -    -    3,934 
Corporate debt securities   1,000    24    -    1,024    -    -    1,024 
Preferred equity securities   2,000    -    (132)   1,868    -    -    1,868 
Marketable equity securities   108    61    (2)   167    -    -    167 
Mutual funds   4,042    -    (149)   3,893    -    -    3,893 
Total securities available-for-sale  $133,701   $711   $(318)  $134,094   $-   $-   $134,094 
Held-to-maturity                                   
Government sponsored residential mortgage-backed securities  $7,338   $-   $-   $7,338   $281   $-   $7,619 
Total securities held-to-maturity  $7,338   $-   $-   $7,338   $281   $-   $7,619 

 

   December 31, 2015 
       Recognized in OCI       Not Recognized in OCI     
       Gross   Gross       Gross   Gross     
   Amortized   Unrealized   Unrealized   Carrying   Unrealized   Unrealized   Fair 
(Dollars in thousands)  Cost   Gains   Losses   Value   Gains   Losses   Value 
Available-for-sale                                   
Debt securities:                                   
U.S. Treasury obligations  $38,782   $83   $(6)  $38,859   $-   $-   $38,859 
U.S. Government agency obligations   82,002    43    (240)   81,805    -    -    81,805 
Government sponsored residential mortgage-backed securities   4,958    195    -    5,153    -    -    5,153 
Corporate debt securities   1,000    48    -    1,048    -    -    1,048 
Preferred equity securities   2,000    -    (368)   1,632    -    -    1,632 
Marketable equity securities   108    54    (2)   160    -    -    160 
Mutual funds   3,957    -    (190)   3,767    -    -    3,767 
Total securities available-for-sale  $132,807   $423   $(806)  $132,424   $-   $-   $132,424 
Held-to-maturity                                   
U.S. Government agency obligations  $24,000   $-   $-   $24,000   $28   $(20)  $24,008 
Government sponsored residential mortgage-backed securities   8,246    -    -    8,246    103    -    8,349 
Total securities held-to-maturity  $32,246   $-   $-   $32,246   $131   $(20)  $32,357 

 

15 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

The following tables summarize gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position at September 30, 2016 and December 31, 2015:

 

   September 30, 2016 
       Less than 12 Months   12 Months or More   Total 
           Gross       Gross       Gross 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(Dollars in thousands)  Securities   Value   Loss   Value   Loss   Value   Loss 
Available-for-sale:                                   
U.S. Government agency obligations   3   $26,965   $(35)  $-   $-   $26,965   $(35)
Preferred equity securities   1    -    -    1,868    (132)   1,868    (132)
Marketable equity securities   1    -    -    5    (2)   5    (2)
Mutual funds   1    -    -    3,893    (149)   3,893    (149)
Total investment securities in an unrealized loss position   6   $26,965   $(35)  $5,766   $(283)  $32,731   $(318)

 

   December 31, 2015 
       Less than 12 Months   12 Months or More   Total 
           Gross       Gross       Gross 
   Number of   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(Dollars in thousands)  Securities   Value   Loss   Value   Loss   Value   Loss 
Available-for-sale:                                   
U.S. Treasury obligations   4   $19,935   $(6)  $-   $-   $19,935   $(6)
U.S. Government agency obligations   7    56,762    (240)   -    -    56,762    (240)
Preferred equity securities   1    -    -    1,632    (368)   1,632    (368)
Marketable equity securities   1    -    -    5    (2)   5    (2)
Mutual funds   1    -    -    2,768    (190)   2,768    (190)
    14   $76,697   $(246)  $4,405   $(560)  $81,102   $(806)
Held-to-maturity                                   
U.S. Government agency obligations   1   $6,980   $(20)  $-   $-   $6,980   $(20)
    1    6,980    (20)   -    -    6,980    (20)
Total investment securities in an unrealized loss position   15   $83,677   $(266)  $4,405   $(560)  $88,082   $(826)

 

Management believes that no individual unrealized loss as of September 30, 2016 represents an other-than-temporary impairment (“OTTI”), based on its detailed review of the securities portfolio. The Company has no intent to sell nor is it more likely than not that the Company will be required to sell any of the securities in a loss position during the period of time necessary to recover the unrealized losses, which may be until maturity.

 

The following summarizes the conclusions from our OTTI evaluation for those security types that incurred significant gross unrealized losses greater than twelve months as of September 30, 2016:

 

Preferred equity securities — The unrealized loss on preferred equity securities in a loss position for 12 months or more relates to one preferred equity security. This investment is in a global financial institution. When estimating the recovery period for securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. Management evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Management concluded that the preferred equity security is not other-than-temporarily impaired at September 30, 2016.

 

Mutual funds — The unrealized loss on mutual funds in a loss position for 12 months or more relates to one mutual fund. The fund invests primarily in high quality debt securities and other debt instruments supporting the affordable housing industry in areas of the United States designated by fund shareholders. When estimating the recovery period for securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other fund-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. Management evaluated the near-term prospects of the fund in relation to the severity and duration of the impairment. Management concluded that the mutual fund is not other-than-temporarily impaired at September 30, 2016.

 

16 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

The Company recorded no other-than-temporary impairment charges to the investment securities portfolios for the three and nine months ended September 30, 2016 and 2015.

 

There were no gross realized gains on sales of securities available-for-sale for the three and nine months ended September 30, 2016. There were gross realized gains on sales of securities available-for-sale totaling $-0- and $1.5 million for the three and nine months ended September 30, 2015, respectively

 

As of September 30, 2016 and December 31, 2015, U.S. Treasury, U.S. Government agency obligations and Government sponsored residential mortgage-backed securities with a fair value of $115.8 million and $112.4 million, respectively, were pledged as collateral for loan derivatives, public funds, repurchase liabilities and repurchase agreement borrowings.

 

The amortized cost and estimated fair value of debt securities at September 30, 2016 and December 31, 2015 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties:

 

   September 30, 2016 
   Available-for-Sale   Held-to-Maturity 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
(Dollars in thousands)                
Due in one year or less  $42,485   $42,494   $-   $- 
Due after one year through five years   81,315    81,738    -    - 
Due after five years through ten years   -    -    -    - 
Due after ten years   -    -    -    - 
Government sponsored residential mortgage-backed securities   3,751    3,934    7,338    7,619 
   $127,551   $128,166   $7,338   $7,619 

 

   December 31, 2015 
   Available-for-Sale   Held-to-Maturity 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
   Cost   Value   Cost   Value 
(Dollars in thousands)                
Due in one year or less  $54,499   $54,511   $-   $- 
Due after one year through five years   67,285    67,201    24,000    24,008 
Due after five years through ten years   -    -    -    - 
Due after ten years   -    -    -    - 
Government sponsored residential mortgage-backed securities   4,958    5,153    8,246    8,349 
   $126,742   $126,865   $32,246   $32,357 

 

17 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Federal Home Loan Bank of Boston (“FHLBB”) Stock

 

The Company, as a member of the FHLBB, owned $15.1 million and $21.7 million of FHLBB capital stock at September 30, 2016 and December 31, 2015, respectively, which is equal to its FHLBB capital stock requirement. The Company evaluated its FHLBB capital stock for potential other-than-temporary impairment at September 30, 2016. Capital adequacy, credit ratings, the value of the stock, overall financial condition of the FHLB system and FHLBB as well as current economic factors were analyzed in the impairment analysis. The Company concluded that its position in FHLBB capital stock is not other-than-temporarily impaired at September 30, 2016.

 

Alternative Investments

 

Alternative investments, which totaled $2.3 million at September 30, 2016 and December 31, 2015, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company’s alternative investments include investments in certain non-public funds, which include limited partnerships, an equity fund and membership stocks. These investments are held at cost and were evaluated for potential other-than-temporary impairment at September 30, 2016. The Company recognized a $219,000 and $144,000 other-than-temporary impairment charge on its limited partnerships for the nine months ended September 30, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $179,000 and $26,000 for the nine months ended September 30, 2016 and 2015, respectively. See a further discussion of fair value in Note 15 — Fair Value Measurements. The Company has $619,000 in unfunded commitments remaining for its alternative investments as of September 30, 2016.

 

5.Loans and Allowance for Loan Losses

 

Loans consisted of the following:

 

   September 30,   December 31, 
   2016   2015 
(Dollars in thousands)        
Real estate:          
Residential  $864,054   $849,722 
Commercial   931,703    887,431 
Construction   50,083    30,895 
Installment   3,211    2,970 
Commercial   449,008    409,550 
Collateral   1,621    1,668 
Home equity line of credit   172,148    174,701 
Revolving credit   82    91 
Resort   512    784 
Total loans   2,472,422    2,357,812 
Net deferred loan costs   3,942    3,984 
Loans   2,476,364    2,361,796 
Allowance for loan losses   (21,263)   (20,198)
Loans, net  $2,455,101   $2,341,598 

 

18 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Changes in the allowance for loan losses by segments for the three and nine months ended September 30, 2016 and 2015 are as follows:

 

   For the Three Months Ended September 30, 2016 
   Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
(Dollars in thousands)                    
Real estate:                         
Residential  $3,744   $(57)  $-   $157   $3,844 
Commercial   10,489    -    -    151    10,640 
Construction   327    -    -    102    429 
Installment   39    (2)   -    1    38 
Commercial   4,630    (28)   -    177    4,779 
Collateral   -    -    -    -    - 
Home equity line of credit   1,491    (13)   -    55    1,533 
Revolving credit   -    (62)   7    55    - 
Resort   -    -    -    -    - 
   $20,720   $(162)  $7   $698   $21,263 

 

   For the Three Months Ended September 30, 2015 
   Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
(Dollars in thousands)                    
Real estate:                         
Residential  $4,452   $(2)  $95   $(432)  $4,113 
Commercial   9,001    -    -    464    9,465 
Construction   361    -    -    (135)   226 
Installment   36    -    -    (2)   34 
Commercial   3,745    (4)   6    348    4,095 
Collateral   -    -    -    -    - 
Home equity line of credit   1,986    -    -    91    2,077 
Revolving credit   -    (58)   6    52    - 
Resort   -    -    -    -    - 
   $19,581   $(64)  $107   $386   $20,010 

 

19 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

   For the Nine Months Ended September 30, 2016 
   Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
(Dollars in thousands)                    
Real estate:                         
Residential  $4,084   $(81)  $1   $(160)  $3,844 
Commercial   10,255    -    -    385    10,640 
Construction   231    -    -    198    429 
Installment   39    (3)   -    2    38 
Commercial   4,119    (370)   10    1,020    4,779 
Collateral   -    (10)   -    10    - 
Home equity line of credit   1,470    (13)   -    76    1,533 
Revolving credit   -    (209)   24    185    - 
Resort   -    -    -    -    - 
   $20,198   $(686)  $35   $1,716   $21,263 

 

   For the Nine Months Ended September 30, 2015 
   Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
(Dollars in thousands)                    
Real estate:                         
Residential  $4,382   $(195)  $111   $(185)  $4,113 
Commercial   8,949    (213)   -    729    9,465 
Construction   478    -    -    (252)   226 
Installment   41    (3)   -    (4)   34 
Commercial   3,250    (24)   6    863    4,095 
Collateral   -    -    -    -    - 
Home equity line of credit   1,859    (138)   -    356    2,077 
Revolving credit   -    (179)   21    158    - 
Resort   1    -    -    (1)   - 
   $18,960   $(752)  $138   $1,664   $20,010 

 

20 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

The following table lists the allocation of the allowance by impairment methodology and by loan segment at September 30, 2016 and December 31, 2015:

 

   September 30, 2016   December 31, 2015 
(Dollars in thousands)  Total   Reserve
Allocation
   Total   Reserve
Allocation
 
Loans individually evaluated for impairment:                    
Real estate:                    
Residential  $12,577   $141   $12,377   $139 
Commercial   15,089    19    16,152    26 
Construction   4,719    -    4,719    - 
Installment   230    7    259    8 
Commercial   2,604    297    6,023    361 
Collateral   -    -    -    - 
Home equity line of credit   1,867    -    703    - 
Revolving credit   -    -    -    - 
Resort   512    -    784    - 
    37,598    464    41,017    534 
                     
Loans collectively evaluated for impairment:                    
Real estate:                    
Residential  $856,224   $3,703   $841,921   $3,945 
Commercial   915,861    10,621    870,757    10,229 
Construction   45,364    429    26,176    231 
Installment   2,974    31    2,695    31 
Commercial   446,359    4,482    403,473    3,758 
Collateral   1,621    -    1,668    - 
Home equity line of credit   170,281    1,533    173,998    1,470 
Revolving credit   82    -    91    - 
Resort   -    -    -    - 
    2,438,766    20,799    2,320,779    19,664 
Total  $2,476,364   $21,263   $2,361,796   $20,198 

 

21 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

The following is a summary of loan delinquencies at recorded investment values at September 30, 2016 and December 31, 2015:

 

   September 30, 2016 
   30-59 Days   60-89 Days   > 90 Days       Past Due 90
Days or More
 
(Dollars in thousands)  Past Due   Past Due   Past Due   Total   and Still 
   Number   Amount   Number   Amount   Number   Amount   Number   Amount   Accruing 
Real estate:                                             
Residential   12   $2,476    12   $1,445    16   $7,382    40   $11,303   $         - 
Commercial   -    -    -    -    1    914    1    914    - 
Construction   -    -    1    4,532    1    187    2    4,719    - 
Installment   -    -    1    24    -    -    1    24    - 
Commercial   2    45    1    64    2    458    5    567    - 
Collateral   4    32    -    -    -    -    4    32    - 
Home equity line of credit   3    317    -    -    2    327    5    644    - 
Demand   1    35    -    -    -    -    1    35    - 
Revolving credit   -    -    -    -    -    -    -    -    - 
Resort   -    -    -    -    -    -    -    -    - 
Total   22   $2,905    15   $6,065    22   $9,268    59   $18,238   $- 

 

   December 31, 2015 
   30-59 Days   60-89 Days   > 90 Days       Past Due 90
Days or More
 
(Dollars in thousands)  Past Due   Past Due   Past Due   Total   and Still 
   Number   Amount   Number   Amount   Number   Amount   Number   Amount   Accruing 
Real estate:                                             
Residential   18   $3,379    5   $863    15   $6,304    38   $10,546   $      - 
Commercial   2    318    -    -    1    994    3    1,312    - 
Construction   -    -    -    -    1    187    1    187    - 
Installment   3    38    -    -    -    -    3    38    - 
Commercial   4    153    -    -    2    1,752    6    1,905    - 
Collateral   7    68    -    -    1    10    8    78    - 
Home equity line of credit   3    280    2    360    2    210    7    850    - 
Demand   1    29    -    -    -    -    1    29    - 
Revolving credit   -    -    -    -    -    -    -    -    - 
Resort   -    -    -    -    -    -    -    -    - 
Total   38   $4,265    7   $1,223    22   $9,457    67   $14,945   $- 

 

22 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

Nonperforming assets consist of non-accruing loans including non-accruing loans identified as troubled debt restructurings, loans past due more than 90 days and still accruing interest and other real estate owned. The following table lists nonperforming assets at:

 

   September 30,   December 31, 
(Dollars in thousands)  2016   2015 
Nonaccrual loans:          
Real estate:          
Residential  $9,575   $9,773 
Commercial   1,008    1,106 
Construction   4,719    187 
Installment   24    32 
Commercial   1,677    3,232 
Collateral   11    10 
Home equity line of credit   815    573 
Revolving credit   -    - 
Resort   -    - 
Total nonaccruing loans   17,829    14,913 
Loans 90 days past due and still accruing   -    - 
Other real estate owned   -    279 
Total nonperforming assets  $17,829   $15,192 

 

23 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

 

The following is a summary of information pertaining to impaired loans at September 30, 2016 and December 31, 2015:

 

   September 30, 2016   December 31, 2015 
       Unpaid           Unpaid     
   Recorded   Principal   Related   Recorded   Principal   Related 
(Dollars in thousands)  Investment   Balance   Allowance   Investment   Balance   Allowance 
Impaired loans without a valuation allowance:                              
Real estate:                              
Residential  $11,616   $13,168   $-   $11,530   $12,878   $- 
Commercial   12,208    12,336    -    13,233    13,303    - 
Construction   4,719    4,964    -    4,719    4,965    - 
Installment   205    222    -    202    202    - 
Commercial   2,029    2,255    -    3,921    4,066    - 
Collateral   -    -    -    -    -    - 
Home equity line of credit   1,867    1,910    -    703    719    - 
Revolving credit   -    -    -    -    -    - 
Resort   512    512    -    784    784    - 
Total   33,156    35,367    -    35,092    36,917    - 
                               
Impaired loans with a valuation allowance:                              
Real estate:                              
Residential   961    980    141    847    881    139 
Commercial   2,881    2,881    19    2,919    2,919    26 
Construction   -    -    -    -    -    - 
Installment   25    25    7    57    72    8 
Commercial   575    1,267    297    2,102    2,457    361 
Collateral   -    -    -    -    -    - 
Home equity line of credit   -    -    -    -    -    - 
Revolving credit   -    -    -    -    -    - 
Resort   -    -    -    -    -    - 
Total   4,442    5,153    464    5,925    6,329    534 
Total impaired loans  $37,598   $40,520   $464   $41,017   $43,246   $534 

 

24 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following table summarizes average recorded investment and interest income recognized on impaired loans:

 

       Three Months   Nine Months       Three Months   Nine Months 
       Ended   Ended       Ended   Ended 
   September 30,   September 30,   September 30,   September 30,   September 30,   September 30, 
   2016   2016   2016   2015   2015   2015 
   Average   Interest   Interest   Average   Interest   Interest 
   Recorded   Income   Income   Recorded   Income   Income 
(Dollars in thousands)  Investment   Recognized   Recognized   Investment   Recognized   Recognized 
Impaired loans without a valuation allowance:                              
Real estate:                              
Residential  $11,394   $22   $71   $9,204   $25   $78 
Commercial   12,850    125    396    13,817    144    433 
Construction   4,719    -    69    4,719    35    103 
Installment   211    3    9    243    3    11 
Commercial   2,552    8    27    4,083    27    82 
Collateral   -    -    -    -    -    - 
Home equity line of credit   1,417    9    18    1,010    2    3 
Revolving Credit   -    -    -    -    -    - 
Resort   648    5    17    841    5    20 
Total   33,791    172    607    33,917    241    730 
                               
Impaired loans with a valuation allowance:                              
Real estate:                              
Residential   876    8    33    2,308    9    27 
Commercial   2,900    35    105    4,086    36    122 
Construction   -    -    -    -    -    - 
Installment   33    -    1    29    -    - 
Commercial   1,256    1    3    1,694    3    13 
Collateral   -    -    -    -    -    - 
Home equity line of credit   -    -    -    -    -    - 
Revolving Credit   -    -    -    -    -    - 
Resort   -    -    -    -    -    - 
Total   5,065    44    142    8,117    48    162 
Total impaired loans  $38,856   $216   $749   $42,034   $289   $892 

 

There was no interest income recognized on a cash basis method of accounting for the three and nine months ended September 30, 2016 and 2015.

 

25 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

  

The following tables present information on loans whose terms had been modified in a troubled debt restructuring at September 30, 2016 and December 31, 2015:

 

   September 30, 2016 
   TDRs on Accrual Status   TDRs on Nonaccrual Status   Total TDRs 
(Dollars in thousands)  Number of
Loans
   Recorded
Investment
   Number of
Loans
   Recorded
Investment
   Number of
Loans
   Recorded
Investment
 
Real estate:                              
Residential   14   $2,549    9   $4,691    23   $7,240 
Commercial   3    5,972    -    -    3    5,972 
Construction   -    -    2    4,719    2    4,719 
Installment   4    206    1    24    5    230 
Commercial   3    600    8    1,220    11    1,820 
Collateral   -    -    -    -    -    - 
Home equity line of credit   8    1,076    1    58    9    1,134 
Revolving credit   -    -    -    -    -    - 
Resort   1    512    -    -    1    512 
Total   33   $10,915    21   $10,712    54   $21,627 

 

   December 31, 2015 
   TDRs on Accrual Status   TDRs on Nonaccrual Status   Total TDRs 
(Dollars in thousands)  Number of
Loans
   Recorded
Investment
   Number of
Loans
   Recorded
Investment
   Number of
Loans
   Recorded
Investment
 
Real estate:                              
Residential   14   $2,242    11   $5,557    25   $7,799 
Commercial   4    6,664    -    -    4    6,664 
Construction   1    4,532    1    187    2    4,719 
Installment   4    227    2    32    6    259 
Commercial   6    2,350    8    1,482    14    3,832 
Collateral   -    -    -    -    -    - 
Home equity line of credit   3    153    -    -    3    153 
Revolving credit   -    -    -    -    -    - 
Resort   1    784    -    -    1    784 
Total   33   $16,952    22   $7,258    55   $24,210 

 

The recorded investment balance of TDRs were $21.6 million and $24.2 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 and December 31, 2015, the majority of the Company’s TDRs are on accrual status. TDRs on accrual status were $10.9 million and $17.0 million while TDRs on nonaccrual status were $10.7 million and $7.3 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At September 30, 2016 and December 31, 2015, the allowance for loan losses included specific reserves of $282,000 and $340,000 related to TDRs, respectively. For the nine months ended September 30, 2016 and 2015, the Bank had charge-offs totaling $28,000 and $204,000, respectively, related to portions of TDRs deemed to be uncollectible. The Bank may provide additional funds to borrowers in TDR status. The amount of additional funds available to borrowers in TDR status was $87,000 and $272,000 at September 30, 2016 and December 31, 2015, respectively.

 

26 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

  

The following tables include the recorded investment and number of modifications for modified loans. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured for the three and nine months ended September 30, 2016 and 2015:

 

   For the Three Months Ended September 30, 2016   For the Nine Months Ended September 30, 2016 
(Dollars in thousands)  Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification(1) 
   Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification(1) 
 
Troubled Debt Restructurings:                              
Real estate                              
Residential   1   $231   $231    1   $231   $231 
Commercial   1    117    117    1    117    117 
Home equity line of credit   -    -    -    6    985    982 
Total   2   $348   $348   $8   $1,333   $1,330 

 

   For the Three Months Ended September 30, 2015   For the Nine Months Ended September 30, 2015 
(Dollars in thousands)  Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification(1) 
   Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification(1) 
 
Troubled Debt Restructurings:                              
Real estate                              
Residential   2   $507   $507    8   $1,549   $1,536 
Commercial   -    -    -    1    493    487 
Installment   -    -    -    1    44    41 
Commercial   -    -    -    3    133    129 
Home equity line of credit   -    -    -    3    153    153 
Total   2   $507   $507    16   $2,372   $2,346 

  

 

(1)  The period end balances are inclusive of all partial paydowns and charge-offs since the modification date.  TDRs fully paid off, charged-off or foreclosed upon

by period end are not included.

 

The following tables provide TDR loans that were modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and/or the concessions and borrowers discharged in bankruptcy for the three and nine months ended September 30, 2016 and 2015:

 

   For the Three Months Ended September 30, 2016 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity
   Adjusted
Interest
Rates
   Combination
of Rate and
Maturity
   Other   Total 
Real estate                              
Residential   1   $-   $-   $-   $231   $231 
Commercial   1    117    -    -    -    117 
Total   2   $117   $-   $-   $231   $348 

 

   For the Nine Months Ended September 30, 2016 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity
   Adjusted
Interest
Rates
   Combination
of Rate and
Maturity
   Other   Total 
Real estate                              
Residential   1   $-   $-   $-   $231   $231 
Commercial   1    117    -    -    -    117 
Home equity line of credit   6    -    -    -    982    982 
Total   8   $117   $-   $-   $1,213   $1,330 

 

27 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

   For the Three Months Ended September 30, 2015 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity
   Adjusted
Interest
Rates
   Combination
of Rate and
Maturity
   Other   Total 
Real estate                              
Residential   2   $-   $-   $-   $507   $507 
Total   2   $-   $-   $-   $507   $507 

 

   For the Nine Months Ended September 30, 2015 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity
   Adjusted
Interest
Rates
   Combination
of Rate and
Maturity
   Other   Total 
Real estate                              
Residential   8   $-   $-   $-   $1,536   $1,536 
Commercial   1    -    -    -    487    487 
Installment   1    -    -    -    41    41 
Commercial   3    -    -    34    95    129 
Home equity line of credit   3    -    -    -    153    153 
Total   16   $-   $-   $34   $2,312   $2,346 

 

A TDR is considered to be in re-default once it is more than 30 days past due following a modification. There were no loans that defaulted during the twelve month period preceding the modification date during the three and nine months ended September 30, 2016. The following loans defaulted during the twelve month period preceding the modification date during the three and nine months ended September 30, 2015.

 

   For the Three Months Ended   For the Nine Months Ended 
   September 30, 2015   September 30, 2015 
(Dollars in thousands)  Number of
Loans
   Recorded
Investment(1) 
   Number of
Loans
   Recorded
Investment(1) 
 
Real estate                    
Residential   1   $319    1   $319 
Installment   1    33    1    33 
Total   2   $352    2   $352 

 

 

(1)The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. TDRs fully paid off, charged-off or foreclosed upon by period end are not included.

 

28 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

Credit Quality Information

 

At the time of loan origination, a risk rating based on a nine point grading system is assigned to each commercial-related loan based on the loan officer’s and management’s assessment of the risk associated with each particular loan. This risk assessment is based on an in depth analysis of a variety of factors. More complex loans and larger commitments require the Company’s internal credit risk management department further evaluate the risk rating of the individual loan or relationship, with credit risk management having final determination of the appropriate risk rating. These more complex loans and relationships receive ongoing 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 Company’s risk rating system is designed to be a dynamic system and we grade loans on a “real time” basis. The Company places considerable emphasis on risk rating accuracy, risk rating justification, and risk rating triggers. The Company’s risk rating process has been enhanced with its implementation of industry-based risk rating “cards.” The cards are used by the loan officers and promote risk rating accuracy and consistency on an institution-wide basis. Most loans are reviewed annually as part of a comprehensive portfolio review conducted by management and/or by an independent loan review firm. More frequent reviews of loans rated low pass, special mention, substandard and doubtful are conducted by the credit risk management department. The Company utilizes an independent loan review consulting firm to review its rating accuracy and the overall credit quality of its loan portfolio. The review is designed to provide an evaluation of the portfolio with respect to risk rating profile as well as with regard to the soundness of individual loan files. The individual loan reviews include an analysis of the creditworthiness of obligors, via appropriate key ratios and cash flow analysis and an assessment of collateral protection. The consulting firm conducts two loan reviews per year aiming at a 65.0% or higher commercial and industrial loans and commercial real estate portfolio penetration. Summary findings of all loan reviews performed by the outside consulting firm are reported to the board of directors and senior management of the Company upon completion.

 

The Company utilizes a point risk rating scale as follows:

 

Risk Rating Definitions

 

Residential and consumer loans are not rated unless they are 45 days or more delinquent, in which case, depending on past-due days, they will be rated 6, 7 or 8.

 

Loans rated 1 – 5, 55: Commercial loans in these categories are considered “pass” rated loans with low to average risk.
   
Loans rated 6: Residential, Consumer and Commercial loans in this category are considered “special mention.” These loans are starting to show 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 obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
   
Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified 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.

 

29 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following table presents the Company’s loans by risk rating at September 30, 2016 and December 31, 2015:

 

   September 30, 2016 
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Real estate:                         
Residential  $853,388   $762   $9,904   $-   $864,054 
Commercial   917,459    4,610    9,634    -    931,703 
Construction   45,364    -    4,719    -    50,083 
Installment   3,161    26    24    -    3,211 
Commercial   429,921    5,772    13,198    117    449,008 
Collateral   1,610    -    11    -    1,621 
Home equity line of credit   171,105    39    1,004    -    172,148 
Revolving credit   82    -    -    -    82 
Resort   512    -    -    -    512 
Total Loans  $2,422,602   $11,209   $38,494   $117   $2,472,422 

 

   December 31, 2015 
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Real estate:                         
Residential  $838,314   $1,154   $10,254   $-   $849,722 
Commercial   867,531    10,861    9,039    -    887,431 
Construction   26,176    -    4,719    -    30,895 
Installment   2,886    52    32    -    2,970 
Commercial   390,719    10,354    8,311    166    409,550 
Collateral   1,647    -    21    -    1,668 
Home equity line of credit   173,879    229    593    -    174,701 
Revolving credit   91    -    -    -    91 
Resort   784    -    -    -    784 
Total Loans  $2,302,027   $22,650   $32,969   $166   $2,357,812 

 

The Company places considerable emphasis on the early identification of problem assets, problem-resolution and minimizing loss exposure. Delinquency notices are mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. Residential and consumer lending borrowers are typically given 30 days to pay the delinquent payments or to contact us to make arrangements to bring the loan current over a longer period of time. Generally, if a residential or consumer lending borrower fails to bring the loan current within 90 days from the original due date or to make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are initiated. The Company may consider forbearance or a loan restructuring in certain circumstances where a temporary loss of income is the primary cause of the delinquency, and if a reasonable plan is presented by the borrower to cure the delinquency in a reasonable period of time after his or her income resumes. Problem or delinquent borrowers in our commercial real estate, commercial business and resort portfolios are handled on a case-by-case basis, typically by our Special Assets Department. Appropriate problem-resolution and workout strategies are formulated based on the specific facts and circumstances.

 

30 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

6.Mortgage Servicing Rights

 

The Company services residential real estate mortgage loans that it has sold without recourse to third parties. The carrying value of mortgage servicing rights was $4.4 million and $4.4 million at September 30, 2016 and December 31, 2015, respectively, and the balance is included in prepaid expenses and other assets in the accompanying Consolidated Statements of Financial Condition. The fair value of mortgage servicing rights approximated $4.4 million and $5.0 million at September 30, 2016 and December 31, 2015, respectively. Mortgage servicing rights impairment totaling $283,000 and $-0- for the nine months ended September 30, 2016 and 2015, respectively, is included as a component of other noninterest income in the accompanying Consolidated Statements of Income. Total loans sold with servicing rights retained were $106.9 million and $149.2 million for the nine months ended September 30, 2016 and 2015, respectively. The net gain on loans sold totaled $2.2 million and $1.9 million for the nine months ended September 30, 2016 and 2015, respectively, and is included in the accompanying Consolidated Statements of Income.

 

The principal balance of loans serviced for others, which are not included in the accompanying Consolidated Statements of Financial Condition, totaled $522.4 million and $457.5 million at September 30, 2016 and December 31, 2015, respectively. Loan servicing fees for others totaling $897,000 and $653,000 for the nine months ended September 30, 2016 and 2015, respectively, are included as a component of other noninterest income in the accompanying Consolidated Statements of Income.

 

7.Credit Arrangements

 

The Company has access to a pre-approved line of credit with the Federal Home Loan Bank of Boston (“FHLBB”) for $8.8 million, which was undrawn at September 30, 2016 and December 31, 2015. The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $55.0 million and $45.0 million, which were undrawn at September 30, 2016 and December 31, 2015, respectively. The Company has access to a $3.5 million unsecured line of credit agreement with a bank which expires on August 31, 2017. The line was undrawn at September 30, 2016 and December 31, 2015. The Company maintains a cash balance of $512,500 with certain financial institutions to avoid fees associated with the lines.

 

In accordance with an agreement with the FHLBB, the Company is required to maintain qualified collateral, as defined in the FHLBB Statement of Credit Policy, free and clear of liens, pledges and encumbrances, as collateral for the advances, if any, and the preapproved line of credit. The Company is in compliance with these collateral requirements.

 

FHLBB advances totaled $220.6 million and $377.6 million at September 30, 2016 and December 31, 2015, respectively. Advances from the FHLBB are collateralized by first residential and commercial mortgages and home equity lines of credit with an estimated eligible collateral value of $1.2 billion and $1.3 billion at September 30, 2016 and December 31, 2015, respectively. The Company had available borrowings of $518.5 million and $407.8 million at September 30, 2016 and December 31, 2015, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $95.5 million and $63.0 million at September 30, 2016 and December 31, 2015, respectively, subject to collateral requirements of the FHLBB. The Company is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the redemption provisions of the stock.

 

The Company participates in the Federal Reserve Bank’s discount window loan collateral program that enables the Company to borrow up to $66.6 million and $63.2 million on an overnight basis at September 30, 2016 and December 31, 2015, respectively, and was undrawn as of September 30, 2016 and December 31, 2015. The funding arrangement was collateralized by $135.1 million and $136.6 million in pledged commercial real estate loans as of September 30, 2016 and December 31, 2015, respectively.

 

31 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The Bank has a Master Repurchase Agreement borrowing facility with a broker. Borrowings under the Master Repurchase Agreement are secured by the Company’s investments in certain securities with a fair value of $11.0 million and $11.3 million at September 30, 2016 and December 31, 2015, respectively. Outstanding borrowings totaled $10.5 million at September 30, 2016 and December 31, 2015.

 

The Bank offers overnight repurchase liability agreements to commercial or municipal customers whose excess deposit account balances are swept daily into collateralized repurchase liability accounts. The overnight repurchase liability agreements do not contain master netting arrangements. The Bank had repurchase liabilities outstanding of $35.0 million and $35.8 million at September 30, 2016 and December 31, 2015, respectively. They are secured by the Company’s investment in specific issues of U.S. Treasury obligations, Government sponsored residential mortgage-backed securities and U.S. Government agency obligations with a market value of $41.4 million and $40.4 million as of September 30, 2016 and December 31, 2015, respectively.

 

8.Deposits

 

Deposit balances are as follows:

 

   September 30,   December 31, 
   2016   2015 
(Dollars in thousands)        
Noninterest-bearing demand deposits  $419,664   $401,388 
Interest-bearing          
NOW accounts   590,213    468,054 
Money market   536,979    460,737 
Savings accounts   223,848    220,389 
Time deposits   477,169    440,790 
Total interest-bearing deposits   1,828,209    1,589,970 
Total deposits  $2,247,873   $1,991,358 

 

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions as a service to our customers. This program provides enhanced FDIC insurance to participating customers. The Company also has established a relationship for brokered deposits. There were brokered deposits totaling $43.2 million and $44.3 million at September 30, 2016 and December 31, 2015, respectively.

 

Time certificates of deposit in denominations of $250,000 or more approximated $106.3 million and $89.6 million at September 30, 2016 and December 31, 2015, respectively.

 

32 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

9.Pension and Other Postretirement Benefit Plans

 

The following tables set forth the components of net periodic pension and benefit costs.

 

   Pension Benefits   Other Postretirement Benefits 
   Three Months Ended September 30,   Three Months Ended September 30, 
   2016   2015   2016   2015 
(Dollars in thousands)                    
Service cost  $-   $-   $14   $14 
Interest cost   264    259    30    30 
Expected return on plan assets   (279)   (362)   -    - 
Amortization:   -         -      
Loss   176    178    -    3 
Prior service cost   -    -    (13)   (13)
Net periodic benefit cost  $161   $75   $31   $34 

 

   Pension Benefits   Other Postretirement Benefits 
   Nine Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
(Dollars in thousands)                    
Service cost  $-   $-   $42   $43 
Interest cost   789    777    90    91 
Expected return on plan assets   (835)   (1,086)   -    - 
Amortization:             -      
Loss   528    532    -    9 
Prior service cost   -    -    (38)   (38)
Net periodic benefit cost  $482   $223   $94   $105 

 

The Company’s non-contributory defined-benefit pension plan and certain defined benefit postretirement plans were frozen as of February 28, 2013 and no additional benefits will accrue.

 

The Company’s funding practice is to meet the minimum funding standards established by the Employee Retirement Income Security Act of 1974. Since the supplemental plan and the postretirement benefit plans are unfunded, the Company accrues for the estimated costs of these plans through charges to expense during the year that employees render service. The Company makes contributions to cover the current benefits paid under these plans.

 

Employee Stock Ownership Plan

 

The Company established the ESOP to provide eligible employees the opportunity to own Company stock. The Company provided a loan to the Farmington Bank Employee Stock Ownership Plan Trust in the amount needed to purchase up to 1,430,416 shares of the Company’s common stock. The loan bears an interest rate equal to the Wall Street Journal Prime Rate plus one percentage point, adjusted annually, and provides for annual payments of interest and principal over the 15 year term of the loan. At September 30, 2016, the loan had an outstanding balance of $12.0 million and an interest rate of 4.50%. The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the unallocated shares purchased. The ESOP compensation expense was $1.2 million and $1.1 million for the nine months ended September 30, 2016 and 2015, respectively.

 

33 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

Shares held by the ESOP include the following as of September 30, 2016:

 

Allocated   476,805 
Committed to be released   71,391 
Unallocated   882,220 
    1,430,416 

 

The fair value of unallocated ESOP shares was $15.7 million at September 30, 2016.

 

10.Stock Incentive Plans

 

In May 2016, the Company’s shareholders approved the First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan provides for a total of 300,000 shares of common stock for issuance upon the grant or exercise of awards. The Company has not issued any shares from the 2016 Plan as of September 30, 2016.

 

In August 2012, the Company implemented the First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan provides for a total of 2,503,228 shares of common stock for issuance upon the grant or exercise of awards. The Plan allows for the granting of 1,788,020 non-qualified stock options and 715,208 shares of restricted stock.

 

In accordance with generally accepted accounting principles for Share-Based Payments, the Company expenses the fair value of all share-based compensation grants over the requisite service periods. Under the 2012 Plan, stock options granted vested 20% immediately and will vest 20% at each annual anniversary of the grant date through 2016 and expire ten years after grant date. The Company recognizes compensation expense for the fair values of these awards, which vest on a straight-line basis over the requisite service period of the awards. Restricted shares granted vested 20% immediately and will vest 20% at each annual anniversary of the grant date through 2016. The product of the number of shares granted and the grant date market price of the Company’s common stock determines the fair value of restricted shares under the Company’s restricted stock plan. The Company recognizes compensation expense for the fair value of restricted shares on a straight-line basis over the requisite service period for the entire award.

 

The Company classifies share-based compensation for employees within “Salaries and employee benefits” and share-based payments for outside directors within “Other operating expenses” in the Consolidated Statements of Income. For the nine months ended September 30, 2016 and 2015, the Company recorded $1.8 million and $2.5 million of share-based compensation expense, respectively, comprised of $726,000 and $1.0 million of stock option expense, respectively and $1.1 million and $1.5 million of restricted stock expense, respectively. Expected future compensation expense relating to the 49,150 non-vested options outstanding at September 30, 2016, is $150,000 over the remaining weighted-average period of 2.32 years.

 

The fair value of the options awarded is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on the Company’s historical volatility and the historical volatility of a peer group as the Company does not have reliably determined stock price for the period needed that is at least equal to its expected term and the Company’s recent historical volatility may not reflect future expectations. The peer group consisted of financial institutions located in New England and the Mid-Atlantic regions of the United States based on whose common stock is traded on a national securities exchange, asset size, tangible capital ratio and earnings factors. The expected term of options granted is derived from using the simplified method due to the Company not having sufficient historical share option experience upon which to estimate an expected term. The risk-free rate is based on the grant date for a traded zero-coupon U.S. Treasury bond with a term equal to the option’s expected term.

 

34 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

Weighted-average assumptions for the nine months ended September 30, 2016 and 2015:

 

   2016   2015 
Weighted per share average fair value of options granted  $3.00   $3.33 
Weighted-average assumptions:          
Risk-free interest rate   1.53%   1.61%
Expected volatility   22.88%   24.96%
Expected dividend yield   2.13%   1.99%
Weighted-average dividend yield   1.91 - 2.25%   1.50% - 2.35%
Expected life of options granted   6.0 years    6.0 years 

 

The following is a summary of the Company’s stock option activity and related information for its option grants for the nine months ended September 30, 2016.

 

   Number of
Stock Options
   Weighted-Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(in years)
   Aggregate
Intrinsic Value
(in thousands)
 
Outstanding at December 31, 2015   1,656,157   $13.11           
Granted   9,000    16.52           
Exercised   (110,131)   13.00           
Forfeited   (2,700)   14.59           
Expired   -    -           
Outstanding at September 30, 2016   1,552,326   $13.14    6.06   $7,218 
                     
Exercisable at September 30, 2016   1,503,176   $13.05    5.99   $7,128 

 

The total intrinsic value of options exercised during the nine months ended September 30, 2016 was $416,000.

 

The following is a summary of the status of the Company’s restricted stock for the nine months ended September 30, 2016.

 

   Number of
Restricted
Stock
   Weighted-Average
Grant Date
Fair Value
 
Unvested at December 31, 2015   126,290   $12.95 
Granted   -    - 
Vested   (126,290)   12.95 
Forfeited   -    - 
Unvested at September 30, 2016   -   $- 

 

35 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

11.Derivative Financial Instruments

 

Non-Hedge Accounting Derivatives/Non-designated Hedges:

 

The Company does not use derivatives for trading or speculative purposes. Interest rate swap derivatives not designated as hedges are offered to certain qualifying commercial customers and to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting under FASB ASC 815, “Derivatives and Hedging”. The interest rate swap agreements enable these customers to synthetically fix the interest rate on variable interest rate loans. The customers pay a variable rate and enter into a fixed rate swap agreement with the Company. The credit risk associated with the interest rate swap derivatives executed with these customers is essentially the same as that involved in extending loans and is subject to the Company’s normal credit policies. The Company obtains collateral, if needed, based upon its assessment of the customers’ credit quality. Generally, interest rate swap agreements are offered to “pass” rated customers requesting long-term commercial loans or commercial mortgages in amounts generally of at least $1.0 million. The interest rate swap agreement with our customers is cross-collateralized by the loan collateral. The interest rate swap agreements do not have any embedded interest rate caps or floors.

 

For every variable interest rate swap agreement entered into with a commercial customer, the Company simultaneously enters into a fixed rate interest rate swap agreement with a correspondent bank, agreeing to pay a fixed income stream and receive a variable interest rate swap. The Company is party to master netting agreements with its correspondent banks; however, the Company does not offset assets and liabilities for financial statement presentation purposes. The master netting agreements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of cash is received or posted by the counterparty with the net liability position, in accordance with contract thresholds. As of September 30, 2016, the Company maintained a cash balance of $26.7 million with a correspondent bank to collateralize its position. The Company has an agreement with a correspondent bank to secure any outstanding receivable in excess of $10.0 million.

 

Credit-risk-related Contingent Features

 

The Company’s agreements with its derivative counterparties contain the following provisions:

 

·if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations;

 

·if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions, and the Company would be required to settle its obligations under the agreements;

 

·if the Company fails to maintain a specified minimum leverage ratio, then the Company could be declared in default on its derivative obligations; and

 

·if a specified event or condition occurs that materially changes the Company’s creditworthiness in an adverse manner, it may be required to fully collateralize its obligations under the derivative instrument.

 

The Company is in compliance with the above provisions as of September 30, 2016.

 

36 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The Company has established a derivatives policy which sets forth the parameters for such transactions (including underwriting guidelines, rate setting process, maximum maturity, approval and documentation requirements), as well as identifies internal controls for the management of risks related to these hedging activities (such as approval of counterparties, limits on counterparty credit risk, maximum loan amounts, and limits to single dealer counterparties).

 

The interest rate swap derivatives executed with our customers and our counterparties, are marked to market and are included with prepaid expenses and other assets and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition at fair value. The Company had the following outstanding interest rate swaps that were not designated for hedge accounting:

 

      September 30, 2016   December 31, 2015 
(Dollars in thousands)  Consolidated
Balance Sheet
Location
  # of
Instruments
   Notional
Amount
   Estimated
Fair
Values
   # of
Instruments
   Notional
Amount
   Estimated
Fair
Values
 
                            
Commercial loan customer interest rate swap position   Other Assets   81   $371,691   $23,952    60   $257,693   $10,564 
                                  
Commercial loan customer interest rate swap position   Other Liabilities   -    -    -    6    23,411    (78)
                                  
Counterparty interest rate swap position   Other Liabilities   81    371,691    (24,246)   66    281,104    (10,599)

 

The Company recorded the changes in the fair value of non-hedge accounting derivatives as a component of other noninterest income except for interest received and paid which is reported in interest income in the accompanying Consolidated Statements of Income as follows:

 

   For The Three Months Ended September 30, 
   2016   2015 
   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact 
(Dollars in thousands)                              
Commercial loan customer interest rate swap position  $(1,468)  $(1,594)  $(3,062)  $(1,462)  $6,923   $5,461 
                               
Counterparty interest rate swap position   1,468    1,594    3,062    1,462    (6,923)   (5,461)
Total  $-   $-   $-   $-   $-   $- 

 

   For The Nine Months Ended September 30, 
   2016   2015 
   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact 
(Dollars in thousands)                              
Commercial loan customer interest rate swap position  $(4,281)  $13,388   $9,107   $(3,799)  $6,148   $2,349 
                               
Counterparty interest rate swap position   4,281    (13,388)   (9,107)   3,799    (6,148)   (2,349)
Total  $-   $-   $-   $-   $-   $- 

 

37 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

Mortgage Banking Derivatives

 

Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Company agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At September 30, 2016, the notional amount of outstanding rate locks totaled approximately $37.7 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $38.5 million, which included mandatory forward commitments totaling approximately $31.4 million at September 30, 2016. The forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

 

12.Offsetting of Financial Assets and Liabilities

 

The following tables present the remaining contractual maturities of the Company’s repurchase agreement borrowings and repurchase liabilities as of September 30, 2016 and December 31, 2015, disaggregated by the class of collateral pledged.

 

   September 30, 2016   December 31, 2015 
   Remaining Contractual Maturity of the Agreements   Remaining Contractual Maturity of the Agreements 
(Dollars in thousands)  Overnight
and
Continuous
   Up to One
Year
   One Year to
Three Years
   Total   Overnight
and
Continuous
   Up to One
Year
   One Year to
Three Years
   Total 
Repurchase agreement borrowings                                        
U.S. Government agency obligations  $-   $-   $6,000   $6,000   $-   $-   $6,000   $6,000 
Government sponsored residential mortgage-backed securities   -    -    4,500    4,500    -    -    4,500    4,500 
Total repurchase agreement borrowings   -    -    10,500    10,500    -    -    10,500    10,500 
Repurchase liabilities                                        
U.S. Government agency obligations   35,036    -    -    35,036    35,769    -    -    35,769 
Total repurchase liabilities   35,036    -    -    35,036    35,769    -    -    35,769 
Total  $35,036   $-   $10,500   $45,536   $35,769   $-   $10,500   $46,269 

 

The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreements should the Company be in default (e.g., fail to make an interest payment to the counterparty). The collateral is held by a third party financial institution in the Company's trustee account. The counterparty has the right to sell or repledge the investment securities if the Company defaults. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential risk of over-collateralization in the event of counterparty default.

 

38 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following tables present the potential effect of rights of setoff associated with the Company’s recognized financial assets and liabilities at September 30, 2016 and December 31, 2015:

 

   September 30, 2016 
               Gross Amounts Not Offset in the Statement of
Financial Condition
 
   Gross Amount
of Recognized
Assets
   Gross Amounts
Offset in the
Statement of
Financial Condition
   Net Amounts of
Assets Presented in
the Statement of
Financial Condition
   Financial
Instruments
   Securities
Collateral
Received
   Cash
Collateral
Received
   Net
Amount
 
(Dollars in thousands)                                   
Interest rate swap derivatives  $23,952   $-   $23,952   $-   $-   $23,952   $- 
Total  $23,952   $-   $23,952   $-   $-   $23,952   $- 
                                    
   September 30, 2016 
               Gross Amounts Not Offset in the Statement of
Financial Condition
 
   Gross Amount
of Recognized
Liabilities
   Gross Amounts
Offset in the
Statement of
Financial Condition
   Net Amounts of
Liabilities Presented in
the Statement of
Financial Condition
   Financial
Instruments
   Securities
Collateral
Pledged
   Cash
Collateral
Pledged
   Net
Amount
 
(Dollars in thousands)                                   
Interest rate swap derivatives  $24,246   $-   $24,246   $-   $-   $24,246   $- 
Repurchase agreement borrowings   10,500    -    10,500    -    10,500    -    - 
Total  $34,746   $-   $34,746   $-   $10,500   $24,246   $- 
                                    
   December 31, 2015 
               Gross Amounts Not Offset in the Statement of
Financial Condition
 
   Gross Amount
of Recognized
Assets
   Gross Amounts
Offset in the
Statement of
Financial Condition
   Net Amounts of
Assets Presented in
the Statement of
Financial Condition
   Financial
Instruments
   Securities
Collateral
Received
   Cash
Collateral
Received
   Net
Amount
 
(Dollars in thousands)                                   
Interest rate swap derivatives  $10,564   $-   $10,564   $-   $-   $10,564   $- 
Total  $10,564   $-   $10,564   $-   $-   $10,564   $- 
                                    
   December 31, 2015 
               Gross Amounts Not Offset in the Statement of
Financial Condition
 
   Gross Amount
of Recognized
Liabilities
   Gross Amounts
Offset in the
Statement of
Financial Condition
   Net Amounts of
Liabilities Presented in
the Statement of
Financial Condition
   Financial
Instruments
   Securities
Collateral
Pledged
   Cash
Collateral
Pledged
   Net
Amount
 
(Dollars in thousands)                                   
Interest rate swap derivatives  $10,677   $-   $10,677   $-   $-   $10,677   $- 
Repurchase agreement borrowings   10,500    -    10,500    -    10,500    -    - 
Total  $21,177   $-   $21,177   $-   $10,500   $10,677   $- 

 

39 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

13.Financial Instruments with Off-Balance Sheet Risk

 

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and unused lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated Statements of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

 

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk are as follows:

 

   September 30,   December 31, 
   2016   2015 
(Dollars in thousands)          
Approved loan commitments  $73,531   $46,144 
Unadvanced portion of construction loans   63,581    44,457 
Unused lines for home equity loans   193,845    204,983 
Unused revolving lines of credit   68    365 
Unused commercial letters of credit   3,970    3,558 
Unused commercial lines of credit   221,373    187,819 
   $556,368   $487,326 

 

Financial instruments with off-balance sheet risk had a valuation allowance of $86,000 and $501,000 as of September 30, 2016 and December 31, 2015, respectively.

 

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. Since many of the commitments are expected to 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 is primarily residential property and commercial assets.

 

At September 30, 2016 and December 31, 2015, the Company had no off-balance sheet special purpose entities and participated in no securitizations of assets.

 

14.Significant Group Concentrations of Credit Risk

 

The Company primarily grants commercial, residential and consumer loans to customers located within its primary market area in the state of Connecticut and western Massachusetts. The majority of the Company’s loan portfolio is comprised of commercial and residential mortgages. The Company has no negative amortization or option adjustable rate mortgage loans.

 

40 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

15.Fair Value Measurements

 

Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. In accordance with FASB ASC 820-10, 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 under FASB ASC 820-10 are described as follows:

 

·Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

·Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;

 

·Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. 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, and estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.

 

Fair value estimates 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. There were no transfers between levels during the nine months ended September 30, 2016 and 2015.

 

41 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

The following is a description of the valuation methodologies used for instruments measured at fair value:

 

Securities Available-for-Sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 1 securities are those traded on active markets for identical securities including U.S. treasury obligations, preferred equity securities and marketable equity securities. Level 2 securities include U.S. treasury obligations, U.S. government agency obligations, government-sponsored residential mortgage-backed securities, corporate debt securities, trust preferred debt securities, and mutual funds. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as level 3 and reliance is placed upon internally developed models and management judgment and evaluation for valuation. The Company had no Level 3 securities at September 30, 2016 and December 31, 2015.

 

The Company utilizes a third party, nationally-recognized pricing service (“pricing service”); subject to review by management, to estimate fair value measurements for the majority of its investment securities portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data that may include dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value prices on all investment securities are reviewed for reasonableness by management. Also, management assessed the valuation techniques used by the pricing service based on a review of their pricing methodology to ensure proper pricing and hierarchy classifications. Management employs procedures to monitor the pricing service’s assumptions and establishes processes to challenge the pricing service’s valuations that appear unusual or unexpected.

 

Interest Rate Swap Derivatives: The fair values of interest rate swap agreements are calculated using a discounted cash flow approach and utilize observable inputs such as the LIBOR swap curve, effective date, maturity date, notional amount, stated interest rate and are classified within Level 2 of the valuation hierarchy. Such derivatives are basic interest rate swaps that do not have any embedded interest rate caps and floors.

 

Forward loan sale commitments and derivative loan commitments: Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements therefore are classified within Level 3 of the valuation hierarchy. The Company recognized a gain of $146,000 and $52,000 for the nine months ended September 30, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.

 

42 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following tables detail the financial instruments carried at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   September 30, 2016 
       Quoted Prices in
Active Markets for
Identical Assets
   Significant
Observable
Inputs
   Significant
Unobservable
Inputs
 
(Dollars in thousands)  Total   (Level 1)   (Level 2)   (Level 3) 
Assets                    
U.S. Treasury obligations  $20,089   $3,000   $17,089   $- 
U.S. Government agency obligations   103,119    -    103,119    - 
Government sponsored residential mortgage-backed securities   3,934    -    3,934    - 
Corporate debt securities   1,024    -    1,024    - 
Preferred equity securities   1,868    1,868    -    - 
Marketable equity securities   167    167    -    - 
Mutual funds   3,893    -    3,893    - 
Securities available-for-sale   134,094    5,035    129,059    - 
Interest rate swap derivative   23,952    -    23,952    - 
Derivative loan commitments   510    -    -    510 
Total  $158,556   $5,035   $153,011   $510 
                     
Liabilities                    
Interest rate swap derivative  $24,246   $-   $24,246   $- 
Forward loan sales commitments   227    -    -    227 
Total  $24,473   $-   $24,246   $227 
                     
   December 31, 2015 
       Quoted Prices in
Active Markets for
Identical Assets
   Significant
Observable
Inputs
   Significant
Unobservable
Inputs
 
(Dollars in thousands)  Total   (Level 1)   (Level 2)   (Level 3) 
Assets                    
U.S. Treasury obligations  $38,859   $21,996   $16,863   $- 
U.S. Government agency obligations   81,805    -    81,805    - 
Government sponsored residential mortgage-backed securities   5,153    -    5,153    - 
Corporate debt securities   1,048    -    1,048    - 
Preferred equity securities   1,632    1,632    -    - 
Marketable equity securities   160    160    -    - 
Mutual funds   3,767    -    3,767    - 
Securities available-for-sale   132,424    23,788    108,636    - 
Interest rate swap derivative   10,564    -    10,564    - 
Derivative loan commitments   207    -    -    207 
Total  $143,195   $23,788   $119,200   $207 
                     
Liabilities                    
Interest rate swap derivative  $10,677   $-   $10,677   $- 
Forward loan sales commitments   70    -    -    70 
Total  $10,747   $-   $10,677   $70 

 

43 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following table presents additional information about assets measured at fair value for which the Company has utilized Level 3 inputs.

 

   Derivative and Forward Loan Sales Commitments, Net 
   For the Three Months Ended September 30,   For the Nine Months Ended September 30, 
   2016   2015   2016   2015 
(Dollars in thousands)                    
Balance, at beginning of period  $177   $140   $137   $14 

Total realized gain (loss):

   Included in earnings

   106    (74)   146    52 
Balance, at the end of period  $283   $66   $283   $66 

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at September 30, 2016 and December 31, 2015:

 

September 30, 2016
          Significant    
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Input 
                 
Derivative and forward loan sales  commitments, net  $283   Adjusted quoted prices in active markets  Embedded servicing value   1.01%
                 
December 31, 2015
          Significant    
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Input 
                 
Derivative and forward loan sales  commitments, net  $137   Adjusted quoted prices in active markets  Embedded servicing value   1.28%

 

The embedded servicing value represents the value assigned for mortgage servicing rights and based on management’s judgment. When the embedded servicing value increases or decreases there is a direct correlation with fair value.

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

 

The following table details the financial instruments carried at fair value on a nonrecurring basis at September 30, 2016 and December 31, 2015 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   September 30, 2016   December 31, 2015 
   Quoted Prices in   Significant   Significant   Quoted Prices in   Significant   Significant 
   Active Markets for   Observable   Unobservable   Active Markets for   Observable   Unobservable 
   Identical Assets   Inputs   Inputs   Identical Assets   Inputs   Inputs 
   (Level 1)   (Level 2)   (Level 3)   (Level 1)   (Level 2)   (Level 3) 
(Dollars in thousands)                              
Impaired loans  $-   $-   $1,990   $-   $-   $4,225 
Mortgage servicing rights   -    -    4,401    -    -    - 
Other real estate owned   -    -    -    -    -    279 

 

44 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following is a description of the valuation methodologies used for instruments measured on a non-recurring basis:

 

Mortgage Servicing Rights: A mortgage servicing right 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 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 only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. Mortgage servicing rights impairment totaling $283,000 and $-0- for the nine months ended September 30, 2016 and 2015, respectively, is included as a component of other noninterest income in the accompanying Consolidated Statements of Income. As such, measurement at fair value is on a nonrecurring basis. 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.

 

Loans Held for Sale: Loans held for sale are accounted for at the lower of cost or market and are considered to be recognized at fair value when recorded at below cost. The fair value of loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics.

 

Impaired Loans: Impaired loans for which repayment of the loan is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using Level 3 inputs based on customized discounting criteria. As appraisals on impaired loans are not necessarily completed on the period end dates presented in the table above, the fair value information presented may not reflect the actual fair value as of September 30, 2016 and December 31, 2015.

 

Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value less selling costs. The write down is based upon the difference between the appraised value and the book value. Appraisals are based on observable market data such as comparable sales within the real estate market, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy. As appraisals on foreclosed real estate are not necessarily completed on the period end dates presented in the table above, the fair value information presented may not reflect the actual fair value as of December 31, 2015.

 

45 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at September 30, 2016 and December 31, 2015:

    

September 30, 2016
          Significant     Weighted 
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Range of Inputs  Average Inputs 
                  
Impaired loans  $1,990   Appraisals  Discount for dated appraisal  5% - 20%   12.50%
           Discount for costs to sell  8% - 15%   11.50%
Mortgage servicing rights  $4,401   Discounted Cash Flows  Prepayment speeds  7.46% - 20.72%   14.04%
           Discount rate  n/a   9.00%
                    
December 31, 2015
          Significant     Weighted 
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Range of Inputs  Average Inputs 
                  
Impaired loans  $4,225   Appraisals  Discount for dated appraisal  5% - 20%   12.50%
           Discount for costs to sell  8% - 15%   11.50%
Other real estate owned  $279   Appraisals  Discount for costs to sell  8% - 15%   11.50%
           Discount for condition  10% - 30%   20.00%

   

Disclosures about Fair Value of Financial Instruments

 

The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments:

 

Cash and cash equivalents: The carrying amounts reported in the statement of condition for cash and cash equivalents approximate those assets’ fair values.

 

Investment in Federal Home Loan Bank of Boston (“FHLBB”) stock: FHLBB stock does not have a readily determinable fair value and is assumed to have a fair value equal to its carrying value. Ownership of FHLBB stock is restricted to the FHLBB, and can only be purchased and redeemed at par value.

 

Alternative Investments: The Company accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing. These are non-public investments which include limited partnerships, an equity fund and membership stocks. These alternative investments totaled $2.3 million at September 30, 2016 and December 31, 2015. The Company recognized a $219,000 and $144,000 other-than-temporary impairment charge on its limited partnerships for the nine months ended September 30, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $179,000 and $26,000 for the nine months ended September 30, 2016 and 2015, respectively. The Company has $619,000 in unfunded commitments remaining for its alternative investments as of September 30, 2016.

 

Loans: In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end and included appropriate adjustments for expected credit losses. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans would seek.

 

Deposits: The fair values disclosed for demand deposits and savings accounts (e.g., interest and noninterest checking and passbook savings) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits.

 

46 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

Borrowed funds: The fair values for borrowed funds, including FHLBB advances and repurchase borrowings, are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of agreements.

 

Repurchase liabilities: Repurchase liabilities represent a short-term customer sweep account product. Because of the short-term nature of these liabilities, the carrying amount approximates its fair value.

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of September 30, 2016 and December 31, 2015. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. 

 

      September 30, 2016   December 31, 2015 
          Estimated       Estimated 
   Fair Value  Carrying   Fair   Carrying   Fair 
   Hierarchy Level  Amount   Value   Amount   Value 
(Dollars in thousands)                       
Financial assets                       
Securities held-to-maturity  Level 2  $7,338   $7,619   $32,246   $32,357 
Securities available-for-sale  See previous table   134,094    134,094    132,424    132,424 
Loans  Level 3   2,476,364    2,469,126    2,361,796    2,336,293 
Loans held-for-sale  Level 2   5,462    5,574    9,637    9,686 
Mortgage servicing rights  Level 3   4,401    4,401    4,406    5,029 
Federal Home Loan Bank of Boston stock  Level 2   15,139    15,139    21,729    21,729 
Alternative investments  Level 3   2,327    2,335    2,508    2,409 
Interest rate swap derivatives  Level 2   23,952    23,952    10,564    10,564 
Derivative loan commitments  Level 3   510    510    207    207 
                        
Financial liabilities                       
Deposits other than time deposits  Level 1   1,770,704    1,770,704    1,550,568    1,550,568 
Time deposits  Level 2   477,169    481,334    440,790    444,803 
Federal Home Loan Bank of Boston advances  Level 2   220,600    222,666    377,600    376,626 
Repurchase agreement borrowings  Level 2   10,500    10,651    10,500    10,539 
Repurchase liabilities  Level 2   35,036    35,031    35,769    35,765 
Interest rate swap derivatives  Level 2   24,246    24,246    10,677    10,677 
Forward loan sales commitments  Level 3   227    227    70    70 

 

16.Regulatory Matters

 

The Company 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 their 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 quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to quantitative judgments by the regulators about components, risk weightings and other factors.

 

47 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

  

In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the "Basel III Capital Rules"). The Basel III Capital Rules, among other things, (i) introduced a new capital measure called "Common Equity Tier 1", (ii) specify that Tier 1 capital consists of Common Equity Tier 1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) define Common Equity Tier 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Common Equity Tier 1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations and a higher minimum Tier I capital requirement. Additionally, institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The Basel III Capital Rules became effective for the Company beginning on January 1, 2015 with certain transition provisions fully phased in through January 1, 2019.

 

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier I capital and common equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier I capital (as defined in the regulations) to average assets (as defined in the regulations).

 

Management believes, as of September 30, 2016 and December 31, 2015 that the Company and the Bank meet all capital adequacy requirements to which they are subject. The Federal Deposit Insurance Corporation categorizes the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action as of September 30, 2016. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I capital and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

The following table provides information on the capital amounts and ratios for the Company and the Bank:

 

           Minimum Required
for Capital Adequacy
   To Be Well
Capitalized Under
Prompt Corrective
 
   Actual   Purposes   Action 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
Farmington Bank:                              
                               
At September 30, 2016                              
Total Capital (to Risk Weighted Assets)  $249,304    11.07%  $180,118    8.00%  $225,148    10.00%
Tier I Capital (to Risk Weighted Assets)   227,955    10.12    135,088    6.00    180,118    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   227,955    10.12    101,316    4.50    146,346    6.50 
Tier I Leverage Capital (to Average Assets)   227,955    8.19    111,397    4.00    139,247    5.00 
                               
At December 31, 2015                              
Total Capital (to Risk Weighted Assets)  $236,486    11.16%  $169,524    8.00%  $211,905    10.00%
Tier I Capital (to Risk Weighted Assets)   215,787    10.18    127,183    6.00    169,577    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   215,787    10.18    95,387    4.50    137,781    6.50 
Tier I Leverage Capital (to Average Assets)   215,787    8.03    107,490    4.00    134,363    5.00 
                               
First Connecticut Bancorp, Inc.:                              
                               
At September 30, 2016                              
Total Capital (to Risk Weighted Assets)  $283,164    12.57%  $180,196    8.00%  $225,245    10.00%
Tier I Capital (to Risk Weighted Assets)   261,815    11.62    135,147    6.00    180,195    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   261,815    11.62    101,360    4.50    146,409    6.50 
Tier I Leverage Capital (to Average Assets)   261,815    9.40    111,438    4.00    139,297    5.00 
                               
At December 31, 2015                              
Total Capital (to Risk Weighted Assets)  $273,255    12.88%  $169,724    8.00%  $212,155    10.00%
Tier I Capital (to Risk Weighted Assets)   252,556    11.91    127,232    6.00    169,643    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   252,556    11.91    95,424    4.50    137,835    6.50 
Tier I Leverage Capital (to Average Assets)   252,556    9.39    107,585    4.00    134,481    5.00 

 

48 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

 

17.Other Comprehensive Income

 

The following tables present the changes in accumulated other comprehensive loss, net of tax by component:

 

   For the Three Months Ended September 30, 2016 
   Investment
Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
(Dollars in thousands)               
Balance at June 30, 2016  $247   $(6,702)  $(6,455)
Other comprehensive income during the period   5    -    5 
Amount reclassified from accumulated other comprehensive income, net of tax   -    106    106 
Net change   5    106    111 
Balance at September 30, 2016  $252   $(6,596)  $(6,344)
                
   For the Three Months Ended September 30, 2015 
   Investment
Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
(Dollars in thousands)               
Balance at June 30, 2015  $105   $(7,433)  $(7,328)
Other comprehensive income during the period   67    -    67 
Amount reclassified from accumulated other comprehensive income, net of tax   -    110    110 
Net change   67    110    177 
Balance at September 30, 2015  $172   $(7,323)  $(7,151)
                
   For the Nine Months Ended September 30, 2016 
   Investment
Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
(Dollars in thousands)               
Balance at December 31, 2015  $(249)  $(6,913)  $(7,162)
Other comprehensive income during the period   501    -    501 
Amount reclassified from accumulated other comprehensive income, net of tax   -    317    317 
Net change   501    317    818 
Balance at September 30, 2016  $252   $(6,596)  $(6,344)
                
   For the Nine Months Ended September 30, 2015 
   Investment
Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
(Dollars in thousands)               
Balance at December 31, 2014  $1,046   $(7,557)  $(6,511)
Other comprehensive loss during the period Amount reclassified from accumulated   (1,861)   -    (1,861)
other comprehensive income, net of tax   987    234    1,221 
Net change   (874)   234    (640)
Balance at September 30, 2015  $172   $(7,323)  $(7,151)

 

49 

 

 

First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements (Unaudited)
 

  

The following tables present a reconciliation of the changes in components of other comprehensive income (loss) for the three and nine months ended September 30, 2016 and 2015, including the amount of income tax expense allocated to each component of other comprehensive income (loss):

  

   For the Three Months Ended September 30, 2016 
   Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
(Dollars in thousands)               
Unrealized gains on available-for-sale securities  $8   $(3)  $5 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   8    (3)   5 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs(1)   164    (58)   106 
Total other comprehensive income  $172   $(61)  $111 
                
   For the Three Months Ended September 30, 2015 
   Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
(Dollars in thousands)               
Unrealized gains on available-for-sale securities  $103   $(36)  $67 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   103    (36)   67 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs(1)   170    (60)   110 
Total other comprehensive income  $273   $(96)  $177 
                
   For the Nine Months Ended September 30, 2016 
   Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
(Dollars in thousands)               
Unrealized gains on available-for-sale securities  $776   $(275)  $501 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   776    (275)   501 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs(1)   491    (174)   317 
Total other comprehensive income  $1,267   $(449)  $818 
                
   For the Nine Months Ended September 30, 2015 
   Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
(Dollars in thousands)               
Unrealized losses on available-for-sale securities  $(2,872)  $1,011   $(1,861)
Less: net security gains reclassified into other noninterest income   1,523    (536)   987 
Net change in fair value of securities available-for-sale   (1,349)   475    (874)
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs(1)   361    (127)   234 
Total other comprehensive loss  $(988)  $348   $(640)

   

 

(1)Amounts are included in salaries and employee benefits in the unaudited Consolidated Statements of Income.

 

18.Legal Actions

 

The Company and its subsidiary are involved in various legal proceedings which have arisen in the normal course of business. The Company believes the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial statements.

 

50 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward-Looking Statements

 

This Form 10-Q contains “forward-looking statements.” You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:

 

·statements of our goals, intentions and expectations;

 

·statements regarding our business plans, prospects, growth and operating strategies;

 

·statements regarding the asset quality of our loan and investment portfolios; and

 

·estimates of our risks and future costs and benefits.

 

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

 

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

 

·Local, regional and national business or economic conditions may differ from those expected.

 

·The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Board’s interest rate policies, may adversely affect our business.

 

·The ability to increase market share and control expenses may be more difficult than anticipated.

 

·Changes in laws and regulatory requirements (including those concerning taxes, banking, securities and insurance) may adversely affect us or our business.

 

·Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board, may affect expected financial reporting.

 

·Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock.

 

·We are subject to lending risk and could incur losses in our loan portfolio despite our underwriting practices. Changes in real estate values could also increase our lending risk.

 

·Changes in demand for loan products, financial products and deposit flow could impact our financial performance.

 

·Strong competition within our market area may limit our growth and profitability.

 

·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 federal regulations and articles of incorporation provisions restricting takeovers.

 

51 

 

 

·Implementation of stock benefit plans will increase our costs, which will reduce our income.

 

·The Dodd-Frank Act has resulted in dramatic regulatory changes that affects the industry in general, and may impact our competitive position in ways that cannot be predicted at this time.

 

·The increased cost of maintaining or the Company’s ability to maintain adequate liquidity and capital, based on the requirements adopted by the Basel Committee on Banking Supervision and U.S. regulators.

 

·Changes to the amount and timing of proposed common stock repurchases.

 

·Computer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs.

 

·We may not manage the risks involved in the foregoing as well as anticipated.

 

Any forward-looking statements made by or on behalf of us in this Form 10-Q speak only as of the date of this Form 10-Q. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consider any further disclosures of a forward-looking nature we may make in future filings. The Company wishes to advise readers that the factors listed above could affect the Company’s financial performance and could cause the Company’s actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements.

 

General

 

First Connecticut Bancorp, Inc. is a Maryland-chartered stock holding company that wholly owns Farmington Bank. Farmington Bank is a full-service, community bank with 24 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Established in 1851, Farmington Bank is a diversified consumer and commercial bank with an ongoing commitment to contribute to the betterment of the communities in our region.

 

Our business strategy is to operate as a well-capitalized and profitable community bank for businesses, individuals and local governments, with an ongoing commitment to provide quality customer service.

 

·Maintaining a strong capital position in excess of the well-capitalized standards set by our banking regulators to support our current operations and future growth. The FDIC’s requirement for a “well-capitalized” bank is a total risk-based capital ratio of 10.0% or greater. As of September 30, 2016 our total risk-based capital ratio was 12.57%.

 

·Increasing our focus on commercial lending and continuing to expand commercial banking operations. We will continue to focus on commercial lending and the origination of commercial loans using prudent lending standards. We plan to continue to grow our commercial lending portfolio, while enhancing our complementary business products and services.

 

·Continuing to focus on residential and consumer lending in conjunction with our secondary market residential lending program. We offer traditional residential and consumer lending products and plan to continue to build a strong residential and consumer lending program that supports our secondary market residential lending program. Under our expanding secondary market residential lending program, we may sell a portion of our fixed rate residential originations while retaining the loan servicing function and mitigating our interest rate risk.

 

·Maintaining asset quality and prudent lending standards. We will continue to originate all loans utilizing prudent lending standards in an effort to maintain strong asset quality. While our delinquencies and charge-offs have decreased, we continue to diligently manage our collection function to minimize loan losses and non-performing assets. We will continue to employ sound risk management practices as we continue to expand our lending portfolio.

 

52 

 

 

·Expanding our existing products and services and developing new products and services to meet the changing needs of consumers and businesses in our market area. We will continue to evaluate our consumer and business customers’ needs to ensure that we continue to offer relevant, up-to-date products and services.

 

·Continue expansion through de novo branching. We recently expanded into western Massachusetts opening two de novo branches in the fourth quarter of 2015 and opened a de novo branch in Vernon, Connecticut during the second quarter of 2016. We plan to open a branch in Manchester, Connecticut in 2017 and continue to evaluate future growth through de novo branching.

 

·Continuing to control non-interest expenses. As part of our strategic plan, we have implemented several programs designed to control costs. We monitor our expense ratios and plan to reduce our efficiency ratio by controlling expenses and increasing net interest income and noninterest income. We plan to continue to evaluate and improve the effectiveness of our business processes and our efficiency, utilizing information technology when possible.

 

·Taking advantage of acquisition opportunities that are consistent with our strategic growth plans. We intend to continue to evaluate opportunities to acquire other financial institutions and financial service related businesses in our current market area or contiguous market areas that will enable us to enhance our existing products and services and develop new products and services. We have no specific plans, agreements or understandings with respect to any expansion or acquisition opportunities.

 

Critical Accounting Policies

 

The accounting policies followed by us conform with the accounting principles generally accepted in the United States of America. 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 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, income taxes and pension and other post-retirement benefits. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.

 

Allowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio as of the statement of condition date. The allowance for loan losses consists of a formula allowance following FASB ASC 450 — “Contingencies” and FASB ASC 310 — “Receivables”. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

 

The allowance for loan losses is evaluated on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below. All reserves are available to cover any losses regardless of how they are allocated.

 

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: residential real estate, commercial real estate, construction, installment, commercial, collateral, home equity line of credit, demand, revolving credit and resort. Construction loans include classes for commercial investment real estate construction, commercial owner occupied construction, residential development, residential subdivision construction and residential owner occupied construction loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and nonaccrual loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2016.

 

53 

 

 

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 – Residential real estate loans are generally originated in amounts up to 95.0% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80.0%. The Company does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. All residential mortgage loans are underwritten pursuant to secondary market underwriting guidelines which include minimum FICO standards. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

 

Commercial real estate – Loans in this segment are primarily originated to finance income-producing properties throughout the northeastern states. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, may have an effect on the credit quality in this segment. Management generally obtains rent rolls and other financial information, as appropriate on an annual basis and continually monitors the cash flows of these loans.

 

Construction loans – Loans in this segment include commercial construction loans, real estate subdivision development loans to developers, licensed contractors and builders for the construction and development of commercial real estate projects and residential properties. Construction lending contains a unique risk characteristic as loans are originated under market and economic conditions that may change between the time of origination and the completion and subsequent purchaser financing of the property. In addition, construction subdivision loans and commercial and residential construction loans to contractors and developers entail additional risks as compared to single-family residential mortgage lending to owner-occupants. These loans typically involve large loan balances concentrated in single borrowers or groups of related borrowers. Real estate subdivision development loans to developers, licensed contractors and builders are generally speculative real estate development loans for which payment is derived from sale of the property. Credit risk may be affected by cost overruns, time to sell at an adequate price, and market conditions. Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Residential construction credit quality may be impacted by the overall health of the economy, including unemployment rates and housing prices.

 

Commercial – 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 resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Home equity line of credit – Loans in this segment include home equity loans and lines of credit underwritten with a loan-to-value ratio generally limited to no more than 80%, including any first mortgage. Our home equity lines of credit have ten-year terms and adjustable rates of interest which are indexed to the prime rate. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.

 

Installment, Collateral, Demand, Revolving Credit and Resort – Loans in these segments include loans principally to customers residing in our primary market area with acceptable credit ratings. Our installment and collateral consumer loans generally consist of loans on new and used automobiles, loans collateralized by deposit accounts and unsecured personal loans. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment. Excluding collateral loans which are fully collateralized by a deposit account, repayment for loans in these segments is dependent on the credit quality of the individual borrower. The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations. The Company has exited the resort financing market with a residual portfolio remaining.

 

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Allocated component:

 

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial real estate, construction, commercial and resort loans by the present value of expected cash flows discounted at the effective interest rate; the fair value of the collateral, if applicable; or the observable market price for the loan. 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. The Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement or they are nonaccrual loans with outstanding balances greater than $100,000.

 

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. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Management updates the analysis quarterly. The assumptions used in appraisals are reviewed for appropriateness. Updated appraisals or valuations are obtained as needed or adjusted to reflect the estimated decline in the fair value based upon current market conditions for comparable properties.

 

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are classified as impaired.

 

Unallocated component:

 

An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at September 30, 2016 and December 31, 2015.

 

Other-than-Temporary Impairment of Securities: In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) 320 — Debt and Equity Securities, a decline in market value of a debt security below amortized cost that is deemed other-than-temporary is charged to earnings for the credit related other-than-temporary impairment (“OTTI”) resulting in the establishment of a new cost basis for the security, while the non-credit related OTTI is recognized in other comprehensive income if there is no intent or requirement to sell the security. Management reviews the securities portfolio on a quarterly basis for the presence of OTTI. An assessment is made as to whether the decline in value results from company-specific events, industry developments, general economic conditions, credit losses on debt or other reasons. After the reasons for the decline are identified, further judgments are required as to whether those conditions are likely to reverse and, if so, whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. If it is judged not to be near-term, a charge is taken which results in a new cost basis. Credit related OTTI for debt securities is recognized in earnings while non-credit related OTTI is recognized in other comprehensive income if there is no intent to sell or will not be required to sell the security. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered to be credit-related and a charge to earnings would be recorded. Management believes the policy for evaluating securities for other-than-temporary impairment is critical because it involves significant judgments by management and could have a material impact on our net income.

 

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Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis. Marketable equity and debt securities are classified as either trading, available-for-sale, or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. At September 30, 2016 and December 31, 2015, we had no debt or equity securities classified as trading. Held-to-maturity securities are debt securities for which we have the ability and intent to hold until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized.

 

Premiums and discounts on debt securities are amortized or accreted into interest income over the term of the securities using the level yield method.

 

Income Taxes: Deferred income taxes are provided for differences arising in the timing of income and expenses for financial reporting and for income tax purposes. Deferred income taxes and tax benefits 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 basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides a deferred tax asset valuation allowance for the estimated future tax effects attributable to temporary differences and carryforwards when realization is determined not to be more likely than not.

 

FASB ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Pursuant to FASB ASC 740-10, the Company examines its financial statements, its income tax provision and its federal and state income tax returns and analyzes its tax positions, including permanent and temporary differences, as well as the major components of income and expense to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes interest and penalties arising from income tax settlements as part of its provision for income taxes.

 

As part of the Plan of Conversion and Reorganization completed on June 29, 2011, the Company contributed shares of Company common stock to the Farmington Bank Community Foundation, Inc. This contribution resulted in a charitable contribution deduction for federal income tax purposes. Use of that charitable contribution deduction is limited under Federal tax law to 10% of federal taxable income without regard to charitable contributions, net operating losses, and dividend received deductions. Annually, a corporation is permitted to carry over to the five succeeding tax years, contributions that exceeded the 10% limitation, but also subject to the maximum annual limitation. As a result, approximately $2.9 million of charitable contribution carryforward remains at September 30, 2016 resulting in a deferred tax asset of approximately $1.0 million. The Company believes it is more likely than not that this carryforward will not be fully utilized before expiration in 2016. Therefore, a valuation allowance has been recorded against this deferred tax asset. Some of this charitable contribution carryforward would likely expire unutilized if the Company does not generate sufficient taxable income over this year. The Company monitors the need for a valuation allowance on a quarterly basis.

 

In December 1999, we created and have since maintained a “passive investment company” (“PIC”), as permitted by Connecticut law. At September 30, 2016 there were no material uncertain tax positions related to federal and state income tax matters. We are currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2013 through 2015. If the state taxing authority were to determine that the PIC was not in compliance with statutory requirements, a material amount of taxes could be due.

 

As of September 30, 2016, management believes it is more likely than not that the deferred tax assets other than the contribution carryforward will be realized through future reversals of existing taxable temporary differences and future taxable income. At September 30, 2016, our net deferred tax asset was $15.1 million with a $771,000 valuation allowance.

 

Pension and Other Postretirement Benefits: The Company’s non-contributory defined-benefit pension plan and certain defined benefit postretirement plans were frozen as of February 28, 2013 and no additional benefits will accrue.

 

56 

 

 

The Company has a non-contributory defined benefit pension plan that provides benefits for substantially all employees hired before January 1, 2007 who meet certain requirements as to age and length of service. The benefits are based on years of service and average compensation, as defined in the Plan Document. The Company’s funding practice is to meet the minimum funding standards established by the Employee Retirement Income Security Act of 1974.

 

In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees. Participants or eligible employees hired before January 1, 1993 become eligible for the benefits if they retire after reaching age 62 with fifteen or more years of service. A fixed percent of annual costs are paid depending on length of service at retirement. The Company accrues for the estimated costs of these other post-retirement benefits through charges to expense during the years that employees render service. The Company makes contributions to cover the current benefits paid under this plan. The Company believes the policy for determining pension and other post-retirement benefit expenses is critical because judgments are required with respect to the appropriate discount rate, rate of return on assets and other items. The Company reviews and updates the assumptions annually. If the Company’s estimate of pension and post-retirement expense is too low it may experience higher expenses in the future, reducing its net income. If the Company’s estimate is too high, it may experience lower expenses in the future, increasing its net income.

 

57 

 

 

Comparison of Financial Condition at September 30, 2016 and December 31, 2015

 

Our total assets increased $123.4 million to $2.8 billion at September 30, 2016 compared to December 31, 2015 primarily due to a $113.5 million increase in loans.

 

Our investment portfolio totaled $141.4 million or 5.0% of total assets and $164.7 million or 6.1% of total assets at September 30, 2016 and December 31, 2015, respectively. Available-for-sale investment securities totaled $134.1 million at September 30, 2016 compared to $132.4 million at December 31, 2015. Securities held-to-maturity decreased $24.9 million to $7.3 million at September 30, 2016 from $32.2 million at December 31, 2015 primarily due to $24.0 million being called during the nine months ended September 30, 2016. The Company purchases short term U.S. Treasury and agency securities in order to meet municipal and repurchase agreement pledge requirements and to minimize interest rate risk during the sustained low interest rate environment.

 

Loans increased $113.5 million to $2.5 billion as of September 30, 2016 primarily driven by a $103.0 million increase in the commercial loan portfolio. The allowance for loan losses was $21.3 million and $20.2 million at September 30, 2016 and December 31, 2015. At September 30, 2016, the allowance for loan losses represented 0.86% of total loans and 119.26% of non-performing loans, compared to 0.86% of total loans and 135.44% of non-performing loans as of December 31, 2015.

 

Prepaid expenses and other assets increased $13.2 million to $33.6 million at September 30, 2016 compared to $20.4 million at December 31, 2015 primarily due to a $13.4 million increase in the fair value of our interest rate swaps.

 

Total liabilities increased $113.5 million to $2.6 billion at September 30, 2016 compared to $2.5 billion at December 31, 2015. Deposits increased $256.5 million or 13% to $2.2 billion at September 30, 2016 which includes increases in interest-bearing deposits of $238.2 million primarily due to a seasonality increase of $91.3 million in municipal deposits and deposits related to our two de novo branch expansion into western Massachusetts during the fourth quarter of 2015 and our de novo branch in Vernon, Connecticut which opened during the second quarter of 2016. There were brokered deposits totaling $43.2 million and $44.3 million at September 30, 2016 and December 31, 2015, respectively. Federal Home Loan Bank of Boston advances decreased $157.0 million to $220.6 million at September 30, 2016 from $377.6 million at December 31, 2015 as we used the increase in the deposits to pay down the advances.

 

Stockholders’ equity increased $9.9 million to $255.6 million compared to December 31, 2015 primarily due to $11.0 million in net income. The Company paid cash dividends totaling $3.5 million or $0.22 per share during the nine months ended September 30, 2016. During the nine months ended September 30, 2016, the Company repurchased 156,800 shares of common stock at an average price per share of $16.12 at a total cost of $2.5 million. Repurchased shares are held as treasury stock and will be available for general corporate purposes.

 

58 

 

 

Net Interest Income Analysis: Average Balance Sheets, Interest and Yields/Costs

 

The following tables present the average balance sheets, average yields and costs and certain other information for the periods indicated therein on a fully tax-equivalent basis. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero percent yield. Loans held for sale average balance are included in loans average balance. The yields set forth below include the effect of net deferred costs and premiums that are amortized to interest income or expense.

 

   For The Three Months Ended September 30, 
   2016   2015 
   Average
Balance
   Interest and
Dividends(1)
   Yield/
Cost
   Average
Balance
   Interest and
Dividends(1)
   Yield/
Cost
 
(Dollars in thousands)                        
Interest-earning assets:                              
Loans  $2,430,114   $21,650    3.54%  $2,359,293   $20,937    3.52%
Securities   165,738    481    1.15%   191,530    465    0.96%
Federal Home Loan Bank of Boston stock   18,206    161    3.52%   22,883    166    2.88%
Federal funds and other earning assets   36,439    46    0.50%   11,089    8    0.29%
Total interest-earning assets   2,650,497    22,338    3.35%   2,584,795    21,576    3.31%
Noninterest-earning assets   135,828              122,438           
Total assets  $2,786,325             $2,707,233           
                               
Interest-bearing liabilities:                              
NOW accounts  $506,509   $385    0.30%  $486,798   $357    0.29%
Money market   525,301    1,085    0.82%   437,000    867    0.79%
Savings accounts   221,981    60    0.11%   210,978    58    0.11%
Certificates of deposit   481,901    1,445    1.19%   430,152    1,130    1.04%
Total interest-bearing deposits   1,735,692    2,975    0.68%   1,564,928    2,412    0.61%
Federal Home Loan Bank of Boston advances   250,459    955    1.52%   411,236    890    0.86%
Repurchase agreement borrowings   10,500    98    3.71%   10,500    96    3.63%
Repurchase liabilities   51,297    22    0.17%   57,644    24    0.17%
Total interest-bearing liabilities   2,047,948    4,050    0.79%   2,044,308    3,422    0.66%
Noninterest-bearing deposits   417,917              368,200           
Other noninterest-bearing liabilities   64,201              51,089           
Total liabilities   2,530,066              2,463,597           
Stockholders' equity   256,259              243,636           
Total liabilities and stockholders' equity  $2,786,325             $2,707,233           
                               
Tax-equivalent net interest income       $18,288             $18,154      
Less: tax-equivalent adjustment        (533)             (482)     
Net interest income       $17,755             $17,672      
                               
Net interest rate spread(2)             2.56%             2.65%
Net interest-earning assets(3)  $602,549             $540,487           
Net interest margin(4)             2.74%             2.79%
Average interest-earning assets to average interest-bearing liabilities        129.42%             126.44%     

 

 

(1)On a fully-tax equivalent basis.
(2)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents tax-equivalent net interest income divided by average total interest-earning assets.

 

59 

 

 

Rate Volume Analysis

 

The following table sets forth the effects of changing rates and volumes on tax-equivalent 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 total column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

   Three Months Ended September 30, 
   2016 vs. 2015 
   Increase (decrease) due to 
(Dollars in thousands)  Volume   Rate   Total 
Interest-earning assets:               
Loans  $583   $130   $713 
Investment securities   (68)   84    16 
Federal Home Loan Bank of Boston stock   (38)   33    (5)
Federal funds and other earning assets   29    9    38 
Total interest-earning assets   506    256    762 
                
Interest-bearing liabilities:               
NOW accounts   14    14    28 
Money market   179    39    218 
Savings accounts   3    (1)   2 
Certificates of deposit   143    172    315 
Total interest-bearing deposits   339    224    563 
Federal Home Loan Bank of Boston advances   (439)   504    65 
Repurchase agreement borrowing   -    2    2 
Repurchase liabilities   (3)   1    (2)
Total interest-bearing liabilities   (103)   731    628 
Increase in net interest income  $609   $(475)  $134 

 

Summary of Operating Results for the Three Months Ended September 30, 2016 and 2015

 

The following discussion provides a summary and comparison of our operating results for the three months ended September 30, 2016 and 2015:

 

   For the Three Months Ended September 30, 
   2016   2015   $ Change   % Change 
(Dollars in thousands)                
Net interest income  $17,755   $17,672   $83    0.5%
Provision for loan losses   698    386    312    80.8 
Noninterest income   3,685    3,241    444    13.7 
Noninterest expense   15,484    14,718    766    5.2 
Income before taxes   5,258    5,809    (551)   (9.5)
Income tax expense   1,485    1,594    (109)   (6.8)
Net income  $3,773   $4,215   $(442)   (10.5)%

 

For the three months ended September 30, 2016, net income decreased $442,000 compared to the three months ended September 30, 2015. The decrease in net income was driven by a $312,000 increase in the provision for loan losses and a $766,000 increase in noninterest expense offset by a $444,000 increase in noninterest income.

 

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Comparison of Operating Results for the three months ended September 30, 2016 and 2015

 

Our results of operations depend primarily on net interest income, which is the difference between the interest income on earning assets, such as loans and investments, and the interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. We also generate noninterest income; including service charges on deposit accounts, gain on sale of securities, income from mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees. Our noninterest expense primarily consists of salary and employee benefits, occupancy expense, furniture and equipment expenses, FDIC assessments, marketing and other general and administrative expenses. Our results of operations are also affected by our provision for loan losses.

 

Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income before the provision for loan losses was $17.8 million and $17.7 million for the three months ended September 30, 2016 and 2015, respectively. Net interest income increased $83,000 primarily due to a $70.8 million increase in the average loan balance offset by a $628,000 increase in interest expense. The yield on average interest-earning assets increased 4 basis points to 3.35% for the third quarter of 2016 from 3.31% for the prior year quarter. The increase was primarily due to a 2 basis point increase in the loans receivable yield and increases in the investment yields. The cost of average interest-bearing liabilities increased 13 basis points to 0.79% for the third quarter of 2016 compared to the prior year quarter. The increase was primarily due to money market and certificate of deposit promotions and a 66 basis point increase in Federal Home Loan Bank of Boston advance costs due a decrease in short term borrowings and due to the 25 basis point increase in the Federal Reserve interest rate during the first quarter of 2016. Net interest margin decreased 5 basis points to 2.74% in the third quarter of 2016 compared to 2.79% in the prior year quarter primarily due to an increase in the cost of interest-bearing liabilities.

 

Interest expense increased $628,000 for the third quarter of 2016 to $4.1 million compared to the prior year quarter. The average interest-bearing deposits balance increased $170.8 million, the cost of average interest-bearing deposits increased 7 basis points and a 66 basis point increase in Federal Home Loan Bank of Boston advance costs resulted in a 13 basis point increase in the cost of average interest-bearing liabilities to 0.79%. Average balances of noninterest-bearing deposits grew at a rate of 13.5%, while total average interest-bearing deposits grew at a rate of 10.9% for the third quarter in 2016 compared to the prior year quarter.

 

Provision for Loan Losses:  The allowance for loan losses is maintained at a level management determines to be appropriate to absorb estimated credit losses that are both probable and reasonably estimable at the dates of the financial statements. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The assessment considers historical loss experience, historical and current delinquency statistics, the loan portfolio segment and the amount of loans in the loan portfolio, the financial strength of the borrowers, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions and other credit quality indicators.

 

Management recorded a provision for loan losses of $698,000 and $386,000 for the three months ended September 30, 2016 and 2015, respectively. The provision recorded is based upon management’s analysis of the allowance for loan losses necessary to absorb the estimated credit losses in the loan portfolio for the period. Net charge-offs (recoveries) in the third quarter of 2016 were $155,000 or 0.03% to average loans (annualized) compared to ($43,000) or (0.01%) to average loans (annualized) in the prior year quarter.

 

At September 30, 2016, the allowance for loan losses totaled $21.3 million, or 0.86% of total loans and 119.26% of non-performing loans, compared to an allowance for loan losses of $20.2 million, or 0.86% of total loans and 135.44% of non-performing loans at December 31, 2015. 

 

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Noninterest Income: The following table summarizes noninterest income for the three months ended September 30, 2016 and 2015:

 

   For the Three Months Ended September 30, 
   2016   2015   $ Change   % Change 
(Dollars in thousands)                
Fees for customer services  $1,600   $1,536   $64    4.2%
Net gain on loans sold   939    993    (54)   (5.4)
Brokerage and insurance fee income   58    54    4    7.4 
Bank owned life insurance income   335    349    (14)   (4.0)
Other   753    309    444    143.7 
Total noninterest income  $3,685   $3,241   $444    13.7%

 

Total noninterest income increased $444,000 to $3.7 million in the third quarter of 2016 compared to the prior year quarter primarily due to a $444,000 increase in other noninterest income. Other noninterest income increased $444,000 in the third quarter of 2016 compared to the prior year quarter primarily due to an $180,000 increase in mortgage banking derivatives and a $302,000 increase in swap fees offset by a $141,000 increase in impairment on a SBIC fund.

 

Noninterest Expense: The following table summarizes noninterest expense for the three months ended September 30, 2016 and 2015:

 

   For the Three Months Ended September 30, 
   2016   2015   $ Change   % Change 
(Dollars in thousands)                
Salaries and employee benefits  $9,285   $9,302   $(17)   (0.2)%
Occupancy expense   1,271    1,219    52    4.3 
Furniture and equipment expense   1,020    1,034    (14)   (1.4)
FDIC assessment   392    413    (21)   (5.1)
Marketing   682    443    239    54.0 
Other operating expenses   2,834    2,307    527    22.8 
Total noninterest expense  $15,484   $14,718   $766    5.2%

 

Noninterest expense increased $766,000 in the third quarter of 2016 to $15.5 million compared to the prior year quarter primarily due to a $239,000 increase in marketing expenses and a $527,000 increase in other operating expenses. Other operating expenses increased $527,000 primarily due to a $557,000 gain on foreclosed real estate in the prior year quarter.

 

Income tax expense was $1.5 million in the third quarter of 2016 compared to $1.6 million in the prior year quarter.

 

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Net Interest Income Analysis: Average Balance Sheets, Interest and Yields/Costs

 

The following tables present the average balance sheets, average yields and costs and certain other information for the periods indicated therein on a fully tax-equivalent basis. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero percent yield. Loans held for sale average balance are included in loans average balance. The yields set forth below include the effect of net deferred costs and premiums that are amortized to interest income or expense.

 

   For The Nine Months Ended September 30, 
   2016   2015 
   Average
Balance
   Interest and
Dividends(1)
   Yield/
Cost
   Average
Balance
   Interest and
Dividends(1)
   Yield/
Cost
 
(Dollars in thousands)                        
Interest-earning assets:                              
Loans  $2,394,991   $64,282    3.59%  $2,256,907   $60,259    3.57%
Securities   156,876    1,479    1.26%   188,781    1,337    0.95%
Federal Home Loan Bank of Boston stock   18,590    527    3.79%   21,004    331    2.11%
Federal funds and other earning assets   28,677    104    0.48%   11,166    19    0.23%
Total interest-earning assets   2,599,134    66,392    3.41%   2,477,858    61,946    3.34%
Noninterest-earning assets   130,327              118,969           
Total assets  $2,729,461             $2,596,827           
                               
Interest-bearing liabilities:                              
NOW accounts  $500,097   $1,101    0.29%  $463,878   $988    0.28%
Money market   497,130    3,010    0.80%   450,985    2,635    0.78%
Savings accounts   221,635    177    0.11%   212,427    172    0.11%
Certificates of deposit   468,979    4,158    1.18%   397,094    2,966    1.00%
Total interest-bearing deposits   1,687,841    8,446    0.67%   1,524,384    6,761    0.59%
Federal Home Loan Bank of Boston advances   267,527    2,902    1.45%   361,094    2,445    0.91%
Repurchase agreement borrowings   10,500    289    3.66%   13,346    351    3.52%
Repurchase liabilities   46,882    56    0.16%   56,061    87    0.21%
Total interest-bearing liabilities   2,012,750    11,693    0.78%   1,954,885    9,644    0.66%
Noninterest-bearing deposits   404,599              349,444           
Other noninterest-bearing liabilities   59,668              52,000           
Total liabilities   2,477,017              2,356,329           
Stockholders' equity   252,444              240,498           
Total liabilities and stockholders' equity  $2,729,461             $2,596,827           
                               
Tax-equivalent net interest income       $54,699             $52,302      
Less: tax-equivalent adjustment        (1,566)             (1,156)     
Net interest income       $53,133             $51,146      
                               
Net interest rate spread(2)             2.63%             2.68%
Net interest-earning assets(3)  $586,384             $522,973           
Net interest margin(4)             2.81%             2.82%
Average interest-earning assets to average interest-bearing liabilities        129.13%             126.75%     

 

 

(1)On a fully-tax equivalent basis.
(2)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents tax-equivalent net interest income divided by average total interest-earning assets.

 

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Rate Volume Analysis

 

The following table sets forth the effects of changing rates and volumes on tax-equivalent 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 total column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

   Nine Months Ended September 30, 
   2016 vs. 2015 
   Increase (decrease) due to 
(Dollars in thousands)  Volume   Rate   Total 
Interest-earning assets:               
Loans  $3,757   $266   $4,023 
Investment securities   (252)   394    142 
Federal Home Loan Bank of Boston stock   (42)   238    196 
Federal funds and other earning assets   49    36    85 
Total interest-earning assets   3,512    934    4,446 
                
Interest-bearing liabilities:               
NOW accounts   80    33    113 
Money market   279    96    375 
Savings accounts   8    (3)   5 
Certificates of deposit   588    604    1,192 
Total interest-bearing deposits   955    730    1,685 
Federal Home Loan Bank of Boston advances   (751)   1,208    457 
Repurchase agreement borrowing   (78)   16    (62)
Repurchase liabilities   (13)   (18)   (31)
Total interest-bearing liabilities   113    1,936    2,049 
Increase in net interest income  $3,399   $(1,002)  $2,397 

 

Summary of Operating Results for the Nine Months Ended September 30, 2016 and 2015

 

The following discussion provides a summary and comparison of our operating results for the nine months ended September 30, 2016 and 2015:

 

   For the Nine Months Ended September 30, 
   2016   2015   $ Change   % Change 
(Dollars in thousands)                
Net interest income  $53,133   $51,146   $1,987    3.9%
Provision for loan losses   1,716    1,664    52    3.1 
Noninterest income   9,202    9,979    (777)   (7.8)
Noninterest expense   45,405    45,252    153    0.3 
Income before taxes   15,214    14,209    1,005    7.1 
Income tax expense   4,185    4,011    174    4.3 
Net income  $11,029   $10,198   $831    8.1%

 

For the nine months ended September 30, 2016, net income increased $831,000 compared to the nine months ended September 30, 2015. The increase in net income was primarily driven by a $2.0 million increase in net interest income due to organic loan growth offset by a $777,000 decrease in noninterest income.

 

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Comparison of Operating Results for the nine months ended September 30, 2016 and 2015

 

Our results of operations depend primarily on net interest income, which is the difference between the interest income on earning assets, such as loans and investments, and the interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. We also generate noninterest income; including service charges on deposit accounts, gain on sale of securities, income from mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees. Our noninterest expense primarily consists of salary and employee benefits, occupancy expense, furniture and equipment expenses, FDIC assessments, marketing and other general and administrative expenses. Our results of operations are also affected by our provision for loan losses.

 

Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income before the provision for loan losses was $53.1 million and $51.1 million for the nine months ended September 30, 2016 and 2015, respectively. Net interest income increased $2.0 million primarily due to a $138.1 million increase in the average loan balance and a $345,000 increase in prepayment penalty fees offset by a $2.0 million increase in interest expense. The yield on average interest-earning assets increased 7 basis points to 3.41% for the nine months ended September 30, 2016 from 3.34% for the nine months ended September 30, 2015. The increase was primarily due to a 2 basis point increase in the loans receivable yield and increases in the investment yields. The cost of average interest-bearing liabilities increased 12 basis points to 0.78% for the nine months ended September 30, 2016. The increase was primarily due to certificate of deposit promotions and a 54 basis point increase in Federal Home Loan Bank of Boston advance costs due a decrease in short term borrowings and due to the 25 basis point increase in the Federal Reserve interest rate during the first quarter of 2016. Net interest margin decreased 1 basis point to 2.81% in the nine months ended September 30, 2016 compared to 2.82% in the nine months ended September 30, 2015.

 

Interest expense increased $2.0 million for the nine months ended September 30, 2016 to $11.7 million compared to the same period a year ago. The average interest-bearing deposits balance increased $163.5 million, the cost of average interest-bearing deposits increased 8 basis points and a 54 basis point increase in Federal Home Loan Bank of Boston advance costs resulted in a 12 basis point increase in the yield on average interest-bearing liabilities to 0.78%. Average balances of noninterest-bearing deposits grew at a rate of 15.8%, while total average interest-bearing deposits grew at a rate of 10.7% for the nine months ended September 30, 2016 compared to the same period a year ago.

 

Provision for Loan Losses: The allowance for loan losses is maintained at a level management determines to be appropriate to absorb estimated credit losses that are both probable and reasonably estimable at the dates of the financial statements. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis. The assessment considers historical loss experience, historical and current delinquency statistics, the loan portfolio segment and the amount of loans in the loan portfolio, the financial strength of the borrowers, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions and other credit quality indicators.

 

Management recorded a provision for loan losses of $1.7 million for the nine months ended September 30, 2016 and 2015. The provision recorded is based upon management’s analysis of the allowance for loan losses necessary to absorb the estimated credit losses in the loan portfolio for the period. Net charge-offs were $651,000 and $614,000 for the nine months ended September 30, 2016 and 2015, respectively.

 

At September 30, 2016, the allowance for loan losses totaled $21.3 million, or 0.86% of total loans and 119.26% of non-performing loans, compared to an allowance for loan losses of $20.2 million, or 0.86% of total loans and 135.44% of non-performing loans at December 31, 2015. 

 

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Noninterest Income: The following table summarizes noninterest income for the nine months ended September 30, 2016 and 2015:

 

   For the Nine Months Ended September 30, 
   2016   2015   $ Change   % Change 
(Dollars in thousands)                
Fees for customer services  $4,614   $4,409   $205    4.6%
Gain on sales of investments   -    1,523    (1,523)   (100.0)
Net gain on loans sold   2,180    1,925    255    13.2 
Brokerage and insurance fee income   166    163    3    1.8 
Bank owned life insurance income   1,056    946    110    11.6 
Other   1,186    1,013    173    17.1 
Total noninterest income  $9,202   $9,979   $(777)   (7.8)%

 

Total noninterest income decreased $777,000 to $9.2 million for the nine months ended September 30, 2016 compared to the prior year. There was no gain on sale of investments for the nine months ended September 30, 2016 compared to $1.5 million gain on sale of investments for the nine months ended September 30, 2015. Net gain on loans sold increased $255,000 to $2.2 million for the nine months ended September 30, 2016 primarily due to an increase in volume. Other income increased $173,000 for the nine months ended September 30, 2016 compared to the prior year primarily due to a $406,000 increase in swap fees and a $93,000 increase in banking derivatives offset by a $283,000 mortgage servicing rights impairment due to a decline in interest rates and by a $76,000 increase in impairment on a SBIC fund.

 

Noninterest Expense: The following table summarizes noninterest expense for the nine months ended September 30, 2016 and 2015:

 

   For the Nine Months Ended September 30, 
   2016   2015   $ Change   % Change 
(Dollars in thousands)                
Salaries and employee benefits  $27,874   $27,127   $747    2.8%
Occupancy expense   3,679    3,858    (179)   (4.6)
Furniture and equipment expense   3,099    3,147    (48)   (1.5)
FDIC assessment   1,179    1,227    (48)   (3.9)
Marketing   1,647    1,386    261    18.8 
Other operating expenses   7,927    8,507    (580)   (6.8)
Total noninterest expense  $45,405   $45,252   $153    0.3%

 

Noninterest expense increased slightly to $45.4 million for the nine months ended September 30, 2016 compared to $45.3 million for the nine months ended September 30, 2015. Salaries and employee benefits increased $747,000 primarily due to our branch expansion into western Massachusetts during the 4th quarter of 2015 and to maintain the Bank’s growth. Occupancy expense decreased $179,000 primarily due to the closing of our Westfarms, Connecticut branch in early January 2016. Marketing increased $261,000 primarily related to branch openings and general marketing promotions. Other operating expenses decreased $580,000 primarily due to a $453,000 decrease in the provision for off-balance sheet commitments, a $554,000 decrease in stock compensation costs due to two directors retiring in the second quarter of 2015 offset by a $557,000 gain on foreclosed real estate for the nine months ended September 30, 2015.

 

Income tax expense was $4.2 million and $4.0 million for the nine months ended September 30, 2016 and 2015, respectively.

 

Liquidity and Capital Resources:

 

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. We adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows, fund operations and pay escrow obligations on items in our loan portfolio. We also adjust liquidity as appropriate to meet asset and liability management objectives.

 

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Our primary sources of liquidity are deposits, principal repayment 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 competitors. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.

 

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At September 30, 2016, $89.9 million of our assets were invested in cash and cash equivalents compared to $59.1 million at December 31, 2015. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from FHLBB.

 

For the nine months ended September 30, 2016 and 2015, loan originations and purchases, net of collected principal and loan sales, totaled $115.4 million and $201.8 million, respectively.  Cash received from the sales and maturities of available-for-sale investment securities totaled $129.2 million and $215.9 million for the nine months ended September 30, 2016 and 2015, respectively. We purchased $130.0 million and $199.1 million of available-for-sale investment securities during the nine months ended September 30, 2016 and 2015, respectively.

 

Liquidity management is both a daily and longer-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBB, which provides an additional source of funds. At September 30, 2016, we had $220.6 million in advances from the FHLBB and an additional available borrowing limit of $518.5 million, compared to $377.6 million in advances from the FHLBB and an additional available borrowing limit of $407.8 million at December 31, 2015, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $95.5 million and $63.0 million at September 30, 2016 and December 31, 2015, respectively, subject to collateral requirements of the FHLBB. Internal policies limit borrowings to 25.0% of total assets, or $708.0 million and $677.1 million at December 30, 2016 and December 31, 2015, respectively. Other sources of funds include access to pre-approved unsecured lines of credit with financial institutions for $55.0 million, our $8.8 million secured line of credit with the FHLBB and our $3.5 million unsecured line of credit with a bank which were all undrawn at September 30, 2016. The Federal Reserve Bank’s discount window loan collateral program enables us to borrow up to $66.6 million on an overnight basis as of September 30, 2016. The funding arrangement was collateralized by $135.1 million in pledged commercial real estate loans as of September 30, 2016.

 

We had outstanding commitments to originate loans of $73.5 million and $46.1 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $482.8 million and $441.2 million at September 30, 2016 and December 31, 2015, respectively. At September 30, 2016 and December 31, 2015, time deposits scheduled to mature in less than one year totaled $288.9 million and $267.7 million, respectively. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as FHLBB advances, brokered deposits, our $55.0 million unsecured lines of credit with financial institutions, our $8.8 million secured line of credit with the FHLBB, our $3.5 million unsecured line of credit with a bank or our $66.6 million overnight borrowing arrangement with the Federal Reserve Bank in order to maintain our 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 if there is an increased amount of competition for deposits in our market area at the time of renewal.

 

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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 loans and available-for-sale investment securities, generally 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 an asset/liability committee which is responsible for (i) evaluating the interest rate risk inherent in our assets and liabilities, (ii) determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives and (iii) managing this risk consistent with the guidelines approved by our board of directors. Management monitors the level of interest rate risk on a regular basis and the asset/liability 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 commercial and consumer loans, (ii) maintaining a short average life investment portfolio and (iii) periodically lengthening the term structure of our borrowings from the FHLBB. Additionally, we sell a portion of our fixed-rate residential mortgages to the secondary market. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.

 

Quantitative Analysis: An economic value of equity and an income simulation analysis are used to estimate our interest rate risk exposure at a particular point in time. We are most reliant on the income simulation method as it is a dynamic method in that it incorporates our forecasted balance sheet growth assumptions under the different interest rate scenarios tested. We utilize the income simulation method to analyze our interest rate sensitivity position and to manage the risk associated with interest rate movements. At least quarterly, our asset/liability committee reviews the potential effect that changes in interest rates could have on the repayment or repricing of rate sensitive assets and the funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions can have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities 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 would therefore alter our existing interest rate risk position.

 

Our asset/liability policy currently limits projected changes in net interest income to a maximum variance of (4.0%, 8.0%, 10.0% and 12.0%) assuming a 100, 200, 300 or 400 basis point interest rate shock, respectively, as measured over a 12 month period when compared to the flat rate scenario.

 

The following table depicts the percentage increase and/or decrease in estimated net interest income over twelve months based on the scenarios run at each of the periods presented:

 

   Percentage Increase (Decrease) in
Estimated Net Interest Income Over
12 Months
 
   At September 30,
2016
   At December 31,
2015
 
100 basis point decrease   (8.36)%   (6.99)%
100 basis point increase   6.22%   4.23%
200 basis point increase   7.54%   4.43%
300 basis point increase   8.57%   4.73%
400 basis point increase   8.05%   3.87%

 

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Item 4.Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

 

Part II. Other Information

 

Item 1.Legal Proceedings

 

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial statements.

 

Item 1A.Risk Factors

 

There have been no material changes in the “Risk Factors” from those previously disclosed in the Form 10-K filed on March 11, 2016.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

 

(a)Not applicable.

 

(b)Not applicable.

 

(c)During the quarter ending September 30, 2016, the Company did not make any repurchases of common stock.

 

On June 21, 2013, the Company received regulatory approval to repurchase up to 1,676,452 shares, or 10% of its then current outstanding common stock. The Company has 600,945 shares remaining available to be repurchased at September 30, 2016. Repurchased shares will be held as treasury stock and will be available for general corporate purposes.

 

Item 3.Defaults Upon Senior Securities

 

Not Applicable

 

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Item 4.Mine Safety Disclosures

 

Not Applicable

 

Item 5.Other Information

 

Not Applicable

 

Item 6.Exhibits

 

3.1Amended and Restated Certificate of Incorporation of First Connecticut Bancorp, Inc. (filed as Exhibit 3.1 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
3.2.2Second Amended and Restated Bylaws of First Connecticut Bancorp, Inc. (filed as Exhibit 3.2.2 to the Form 8-K filed for the Company on February 23, 2016, and incorporated herein by reference).
4.1Form of Common Stock Certificate of First Connecticut Bancorp, Inc. (filed as Exhibit 4.1 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.2Supplemental Executive Retirement Plan of Farmington Bank (filed as Exhibit 10.2 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.3Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.3 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.4First Amendment to Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.4 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.4.1Second Amendment to Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.4.1 to the Form 10-K for the year ended December 31, 2012 filed on March 18, 2013, and incorporated herein by reference).
10.5Voluntary Deferred Compensation Plan for Key Employees (filed as Exhibit 10.5 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.6Life Insurance Premium Reimbursement Agreement between Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.6 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.7Life Insurance Premium Reimbursement Agreement between Farmington Bank and Gregory A. White (filed as Exhibit 10.7 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.8Farmington Savings Bank Defined Benefit Employees’ Pension Plan, as amended (filed as Exhibit 10.8 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.8.1Farmington Savings Bank Defined Benefit Employees’ Pension Plan, as amended (filed as Exhibit 10.8.1 to the Form 10-K for the year ended December 31, 2012 filed on March 18, 2013, and incorporated herein by reference).
10.9Annual Incentive Compensation Plan (filed as Exhibit 10.9 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.9.1Amended Annual Incentive Compensation Plan (filed as Exhibit 10.9.1 to the Form 10-K for the year ended December 31, 2013 filed on March 17, 2014, and incorporated herein by reference)

 

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10.10Supplemental Retirement Plan Participation Agreement between John J. Patrick, Jr. and Farmington Bank (filed as Exhibit 10.10 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.11Supplemental Retirement Plan Participation Agreement between Michael T. Schweighoffer and Farmington Bank (filed as Exhibit 10.11 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.12Supplemental Retirement Plan Participation Agreement between Gregory A. White and Farmington Bank (filed as Exhibit 10.12 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.13Employment Agreement among First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.1 Employment Agreement on Form 8-K for the Company on April 24, 2012 and incorporated herein by reference).
10.13.1Employment Agreement First Amendment among First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.13.1 to the current report on the Form 8-K filed for the Company on February 28, 2013, as amended, and incorporated herein by reference) (term currently extended to December 31, 2019).
10.14Life Insurance Premium Reimbursement Agreement between Farmington Bank and Michael T. Schweighoffer (filed as Exhibit 10.14 to the Form 10-Q filed for the Company on May 15, 2012, and incorporated herein by reference).
10.15First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan (Incorporated by reference to Appendix A in the Definitive Proxy Statement on Form 14A filed on June 6, 2012 and amended on July 2, 2012 (File No. 001-35209-12890818 and 12960688).
21.1Subsidiaries of First Connecticut Bancorp, Inc. and Farmington Bank (filed as Exhibit 21.1 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
31.1Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
31.2Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
32.1Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
32.2Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
101Interactive data files pursuant to Rule 405 of Regulation S-t: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements tagged as blocks of text and in detail.*
*As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Act of 1934.

 

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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.

 

    FIRST CONNECTICUT BANCORP, INC.
   
Date: November 4, 2016  

/s/ John J. Patrick, Jr

    John J. Patrick, Jr.
    Chairman, President and Chief Executive Officer
   
Date: November 4, 2016  

/s/ Gregory A. White

    Gregory A. White
    Executive Vice President and Chief Financial Officer

 

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