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EX-32.2 - EXHIBIT 32.2 - First Connecticut Bancorp, Inc.t1700277_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - First Connecticut Bancorp, Inc.t1700277_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - First Connecticut Bancorp, Inc.t1700277_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - First Connecticut Bancorp, Inc.t1700277_ex31-1.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q 

 

 

x

Quarterly Report-

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

 

For the quarterly period ended March 31, 2017

 

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 or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

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

 

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

 

As of April 24, 2017, there were 15,924,314 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 March 31, 2017 (unaudited) and December 31, 2016 1
   
Consolidated Statements of Income for the three months ended March 31, 2017 and 2016 (unaudited) 2
   
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016 (unaudited) 3
   
Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2017 and 2016 (unaudited) 4
   
Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016 (unaudited) 5
   
Notes to Unaudited Consolidated Financial Statements 6
   
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 48
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 61
   
Item 4.  Controls and Procedures 62
   
Part II. Other Information  
   
Item 1.  Legal Proceedings 62
   
Item1A. Risk Factors 62
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 62
   
Item 3.  Defaults upon Senior Securities 62
   
Item 4.  Mine Safety Disclosure 63
   
Item 5.  Other Information 63
   
Item 6.  Exhibits 63
   
Signatures 66
   
Exhibit 31.1  
Exhibit 31.2  
Exhibit 32.1  
Exhibit 32.2  

 

 

 

 

First Connecticut Bancorp, Inc.
Consolidated Statements of Financial Condition (Unaudited)

 

   March 31,   December 31, 
   2017   2016 
(Dollars in thousands, except share and per share data)          
Assets          
Cash and due from banks  $32,706   $44,086 
Interest bearing deposits with other institutions   3,721    3,637 
Total cash and cash equivalents   36,427    47,723 
Securities held-to-maturity, at amortized cost   50,320    33,061 
Securities available-for-sale, at fair value   105,541    103,520 
Loans held for sale   2,464    3,270 
Loans (1)   2,606,870    2,547,512 
Allowance for loan losses   (21,349)   (21,529)
Loans, net   2,585,521    2,525,983 
Premises and equipment, net   17,903    18,002 
Federal Home Loan Bank of Boston stock, at cost   16,418    16,378 
Accrued income receivable   7,398    7,432 
Bank-owned life insurance   52,044    51,726 
Deferred income taxes, net   14,790    14,795 
Prepaid expenses and other assets   15,438    15,665 
Total assets  $2,904,264   $2,837,555 
           
Liabilities and Stockholders' Equity          
Deposits          
Interest-bearing  $1,850,467   $1,773,807 
Noninterest-bearing   437,385    441,283 
    2,287,852    2,215,090 
Federal Home Loan Bank of Boston advances   282,057    287,057 
Repurchase agreement borrowings   10,500    10,500 
Repurchase liabilities   19,526    18,867 
Accrued expenses and other liabilities   39,662    45,865 
Total liabilities   2,639,597    2,577,379 
           
Commitments and contingencies (Note 18)   -    - 
           
Stockholders' Equity          
Common stock, $0.01 par value, 30,000,000 shares authorized; 17,947,647 shares issued and 15,923,514 shares outstanding at March 31, 2017 and 17,947,647 shares issued and 15,897,698 shares outstanding at December 31, 2016   181    181 
Additional paid-in-capital   184,456    184,111 
Unallocated common stock held by ESOP   (10,309)   (10,567)
Treasury stock, at cost (2,024,133 shares at March 31, 2017          
and 2,049,949 shares at December 31, 2016)   (30,047)   (30,400)
Retained earnings   126,882    123,541 
Accumulated other comprehensive loss   (6,496)   (6,690)
Total stockholders' equity   264,667    260,176 
Total liabilities and stockholders' equity  $2,904,264   $2,837,555 

 

(1) Loans include net deferred loan costs of $4.3 million and $3.8 million at March 31, 2017 and December 31, 2016, 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 March 31, 
   2017   2016 
(Dollars in thousands, except share and per share data)        
Interest income          
Interest and fees on loans          
Mortgage  $17,558   $15,907 
Other   4,947    4,714 
Interest and dividends on investments          
United States Government and agency obligations   474    418 
Other bonds   7    13 
Corporate stocks   199    239 
Other interest income   27    32 
Total interest income   23,212    21,323 
Interest expense          
Deposits   2,911    2,736 
Federal Home Loan Bank of Boston advances   949    967 
Repurchase agreement borrowings   95    95 
Repurchase liabilities   7    19 
Total interest expense   3,962    3,817 
Net interest income   19,250    17,506 
Provision for loan losses   325    217 
Net interest income after provision for loan losses   18,925    17,289 
Noninterest income          
Fees for customer services   1,506    1,484 
Net gain on loans sold   416    490 
Brokerage and insurance fee income   50    54 
Bank owned life insurance income   319    414 
Other   874    458 
Total noninterest income   3,165    2,900 
Noninterest expense          
Salaries and employee benefits   9,327    9,376 
Occupancy expense   1,313    1,219 
Furniture and equipment expense   984    1,061 
FDIC assessment   428    404 
Marketing   567    421 
Other operating expenses   2,533    2,796 
Total noninterest expense   15,152    15,277 
Income before income taxes   6,938    4,912 
Income tax expense   1,845    1,299 
Net income  $5,093   $3,613 
           
Net earnings per share (See Note 3):          
Basic  $0.34   $0.24 
Diluted   0.32    0.24 
Dividends per share   0.11    0.07 

 

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 March 31, 
   2017   2016 
(Dollars in thousands)        
Net income  $5,093   $3,613 
Other comprehensive income, before tax          
Unrealized gains on securities:          
Unrealized holding gains arising during the period   137    642 
Less: reclassification adjustment for gains included in net income   -    - 
Net change in unrealized gains   137    642 
Change related to pension and other postretirement benefit plans   163    164 
Other comprehensive income, before tax   300    806 
Income tax expense   106    285 
Other comprehensive income, net of tax   194    521 
Comprehensive income  $5,287   $4,134 

 

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   -    -    123    263    -    -    -    386 
Cash dividend paid ($0.07 per common share)   -    -    -    -    -    (1,102)   -    (1,102)
Treasury stock acquired   (147,100)   -    -    -    (2,373)   -    -    (2,373)
Stock options exercised   46,094    -    (23)   -    620    -    -    597 
Tax expense from stock-based compensation   -    -    (1)   -    -    -    -    (1)
Share based compensation expense   -    -    651    -    -    -    -    651 
Net income   -    -    -    -    -    3,613    -    3,613 
Other comprehensive income   -    -    -    -    -    -    521    521 
Balance at March 31, 2016   15,780,657   $181   $182,747   $(11,363)  $(32,355)  $115,444   $(6,641)  $248,013 
                                         
Balance at December 31, 2016   15,897,698   $181   $184,111   $(10,567)  $(30,400)  $123,541   $(6,690)  $260,176 
ESOP shares released and                                        
committed to be released   -    -    290    258    -    -    -    548 
Cash dividend paid ($0.11 per common share)   -    -    -    -    -    (1,752)   -    (1,752)
Stock options exercised   22,750    -    (14)   -    311    -    -    297 
Share based compensation expense   3,066    -    69    -    42    -    -    111 
Net income   -    -    -    -    -    5,093    -    5,093 
Other comprehensive income   -    -    -    -    -    -    194    194 
Balance at March 31, 2017   15,923,514   $181   $184,456   $(10,309)  $(30,047)  $126,882   $(6,496)  $264,667 

 

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

 

 

4
 

 

 

First Connecticut Bancorp, Inc.
Consolidated Statements of Cash Flows (Unaudited)

 

   Three Months Ended March 31, 
(Dollars in thousands)  2017   2016 
Cash flows from operating activities          
Net income  $5,093   $3,613 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   325    217 
(Reversal of) provision for off-balance sheet commitments   (23)   (6)
Depreciation and amortization   535    627 
Amortization of ESOP expense   548    386 
Share based compensation expense   111    651 
Loans originated for sale   (23,480)   (26,410)
Proceeds from the sale of loans held for sale   24,702    30,392 
Loss on disposal of premises and equipment   -    8 
Loss (gain) on fair value adjustment for mortgage banking derivatives   44    (55)
Impairment losses on alternative investments   10    47 
Writedowns on foreclosed real estate   -    21 
Net gain on loans sold   (416)   (490)
Net (accretion) amortization of investment security discounts and premiums   (12)   (17)
Change in net deferred loan fees and costs   (428)   (126)
Decrease in accrued income receivable   34    401 
Deferred income tax   (101)   (348)
Increase in cash surrender value of bank-owned life insurance   (318)   (334)
Decrease (increase) in prepaid expenses and other assets   307    (10,270)
(Decrease) increase in accrued expenses and other liabilities   (6,151)   7,031 
Net cash provided by operating activities   780    5,338 
Cash flows from investing activities          
Maturities, calls and principal payments of securities held-to-maturity   449    12,282 
Maturities, calls and principal payments of securities available-for-sale   13,151    48,407 
Purchases of securities held-to-maturity   (17,708)   - 
Purchases of securities available-for-sale   (15,023)   (44,005)
Loan originations, net of principal repayments   (59,435)   (8,927)
(Purchases) redemptions of Federal Home Loan Bank of Boston stock, net   (40)   6,041 
Proceeds from bank-owned life insurance   -    227 
Purchases of premises and equipment   (436)   (280)
Net cash (used in) provided by investing activities   (79,042)   13,745 
Cash flows from financing activities          
Net payments on Federal Home Loan Bank of Boston advances   (5,000)   (118,000)
Net increase in demand deposits, NOW accounts, savings accounts and money market accounts   71,211    86,740 
Net increase in time deposits   1,551    19,734 
Net increase (decrease) in repurchase liabilities   659    (4,651)
Stock options exercised   297    597 
Excess tax expense from stock-based compensation   -    (1)
Repurchase of common stock   -    (2,373)
Cash dividend paid   (1,752)   (1,102)
Net cash provided by (used in) financing activities   66,966    (19,056)
Net (decrease) increase in cash and cash equivalents   (11,296)   27 
Cash and cash equivalents at beginning of period   47,723    59,139 
Cash and cash equivalents at end of period  $36,427   $59,166 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $3,985   $3,808 
Cash paid for income taxes   1,547    1,042 
Loans transferred to other real estate owned   -    189 

 

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. 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 March 31, 2017.

 

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, 2016 included in the Company’s 10-K filed on March 13, 2017. 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 March 31, 2017 and December 31, 2016, 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, commercial, home equity lines of credit and other. 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, commercial, home equity line of credit and other 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 loans classified as non-accrual, loans secured by real property in foreclosure or are otherwise likely to be impaired, non-accruing residential and home equity 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, commercial, home equity line of credit and other. 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 three months ended March 31, 2017.

 

 

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 a 9 year 10 month draw period followed by a 20 year amortization period 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.

 

Other – Includes installment, collateral, demand, revolving credit and resort loans to customers with acceptable credit ratings residing primarily in our market area.  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. The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations. The Bank 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 and commercial 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 March 31, 2017 and December 31, 2016.

 

 

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- as of March 31, 2017 and December 31, 2016, 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 $4.2 million at March 31, 2017.

 

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.

 

Reclassifications

 

Amounts in prior period consolidated financial statements are reclassified whenever necessary to conform to the current year presentation.

 

Recent Accounting Pronouncements

 

In August 2015, the FASB issued Accounting Standards Update “ASU” No. 2015-14 "Revenue from Contracts with Customers (Topic 606)." In May 2014, the FASB issued ASU 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.

 

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.

 

 

12
 

 

 

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

 

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. The Company adopted ASU 2016-09 and it had no material impact on its accounting and disclosures.

 

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.

 

 

13
 

 

 

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

 

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 annual 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 on its accounting and disclosures.

 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The guidance is effective for public business entities for annual years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is assessing the impact of ASU 2017-07 on 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 $9.7 million and $9.5 million to meet these requirements at March 31, 2017 and December 31, 2016, respectively.

 

 

14
 

 

 

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

 

3.Earnings Per Share

 

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

 

   Three Months Ended March 31, 
   2017   2016 
(Dollars in thousands, except per share data):        
         
Net income  $5,093   $3,613 
Less:  Dividends to participating shares   (3)   (9)
Income allocated to participating shares   (3)   (21)
Net income allocated to common stockholders  $5,087   $3,583 
           
Weighted-average shares issued   17,959,649    17,976,893 
           
Less:  Average unallocated ESOP shares   (850,167)   (945,456)
Average treasury stock   (2,029,444)   (2,184,255)
Average unvested restricted stock   (12,002)   (126,290)
Weighted-average basic shares outstanding   15,068,036    14,720,892 
           
Plus: Average dilutive shares   623,302    291,648 
Weighted-average diluted shares outstanding   15,691,338    15,012,540 
           
Net earnings per share (1):          
Basic  $0.34   $0.24 
Diluted  $0.32   $0.24 

 

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

 

For the three months ended March 31, 2017 and 2016, respectively, 797 and 85,500 options were anti-dilutive and therefore excluded from the earnings per share calculation.

 

 

15
 

 

 

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

 

4.Investment Securities

 

Investment securities are summarized as follows:

 

   March 31, 2017 
       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  $24,831   $166   $-   $24,997   $-   $-   $24,997 
U.S. Government agency obligations   71,000    45    (302)   70,743    -    -    70,743 
Government sponsored residential mortgage-backed securities   3,272    145    -    3,417    -    -    3,417 
Corporate debt securities   500    12    -    512    -    -    512 
Preferred equity securities   2,000    -    (155)   1,845    -    -    1,845 
Marketable equity securities   108    77    (1)   184    -    -    184 
Mutual funds   4,098    -    (255)   3,843    -    -    3,843 
Total securities available-for-sale  $105,809   $445   $(713)  $105,541   $-   $-   $105,541 
Held-to-maturity                                   
U.S. Treasury obligations  $4,989   $-   $-   $4,989   $45   $-   $5,034 
U.S. Government agency obligations   23,000    -    -    23,000    -    (95)   22,905 
Government sponsored residential mortgage-backed securities   22,331    -    -    22,331    90    -    22,421 
Total securities held-to-maturity  $50,320   $-   $-   $50,320   $135   $(95)  $50,360 

 

   December 31, 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  $19,826   $142   $-   $19,968   $-   $-   $19,968 
U.S. Government agency obligations   73,996    67    (352)   73,711    -    -    73,711 
Government sponsored residential mortgage-backed securities   3,424    145    -    3,569    -    -    3,569 
Corporate debt securities   500    15    -    515    -    -    515 
Preferred equity securities   2,000    -    (254)   1,746    -    -    1,746 
Marketable equity securities   108    75    (1)   182    -    -    182 
Mutual funds   4,071    -    (242)   3,829    -    -    3,829 
Total securities available-for-sale  $103,925   $444   $(849)  $103,520   $-   $-   $103,520 
Held-to-maturity                                   
U.S. Government agency obligations  $16,000   $-   $-   $16,000   $-   $(83)  $15,917 
Government sponsored residential mortgage-backed securities   17,061    -    -    17,061    63    -    17,124 
Total securities held-to-maturity  $33,061   $-   $-   $33,061   $63   $(83)  $33,041 

 

 

16
 

 

 

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 March 31, 2017 and December 31, 2016:

 

   March 31, 2017 
       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   8   $56,698   $(302)  $-   $-   $56,698   $(302)
Preferred equity securities   1    -    -    1,845    (155)   1,845    (155)
Marketable equity securities   1    -    -    6    (1)   6    (1)
Mutual funds   1    -    -    3,843    (255)   3,843    (255)
    11   $56,698   $(302)  $5,694   $(411)  $62,392   $(713)
Held-to-maturity                                   
U.S. Government agency obligations   4   $22,905   $(95)  $-   $-   $22,905   $(95)
Total investment securities in an unrealized loss position   15   $79,603   $(397)  $5,694   $(411)  $85,297   $(808)

 

   December 31, 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   10   $66,644   $(352)  $-   $-   $66,644   $(352)
Preferred equity securities   1    -    -    1,746    (254)   1,746    (254)
Marketable equity securities   1    -    -    6    (1)   6    (1)
Mutual funds   1    -    -    3,830    (242)   3,830    (242)
    13   $66,644   $(352)  $5,582   $(497)  $72,226   $(849)
Held-to-maturity                                   
U.S. Government agency obligations   2   $11,917   $(83)  $-   $-   $11,917   $(83)
Total investment securities in an unrealized loss position   15   $78,561   $(435)  $5,582   $(497)  $84,143   $(932)

 

Management believes that no individual unrealized loss as of March 31, 2017 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 March 31, 2017:

 

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 March 31, 2017.

 

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 March 31, 2017.

 

 

17
 

 

 

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 months ended March 31, 2017 and 2016.

 

There were no gross realized gains on sales of securities available-for-sale for the three months ended March 31, 2017 and 2016.

 

As of March 31, 2017 and December 31, 2016, U.S. Treasury, U.S. Government agency obligations and Government sponsored residential mortgage-backed securities with a fair value of $125.6 million and $102.4 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 March 31, 2017 and December 31, 2016 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:

 

   March 31, 2017 
   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  $37,484   $37,427   $-   $- 
Due after one year through five years   58,847    58,825    23,000    22,905 
Due after five years through ten years   -    -    4,989    5,034 
Due after ten years   -    -    -    - 
Government sponsored residential mortgage-backed securities   3,272    3,417    22,331    22,421 
   $99,603   $99,669   $50,320   $50,360 

 

   December 31, 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  $33,475   $33,490   $-   $- 
Due after one year through five years   60,847    60,704    16,000    15,917 
Due after five years through ten years   -    -    -    - 
Due after ten years   -    -    -    - 
Government sponsored residential mortgage-backed securities   3,424    3,569    17,061    17,124 
   $97,746   $97,763   $33,061   $33,041 

 

 

18
 

 

 

 

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 $16.4 million of FHLBB capital stock at March 31, 2017 and December 31, 2016, which is equal to its FHLBB capital stock requirement. The Company evaluated its FHLBB capital stock for potential other-than-temporary impairment at March 31, 2017. 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 March 31, 2017.

 

Alternative Investments

 

Alternative investments, which totaled $2.3 million and $2.2 million at March 31, 2017 and December 31, 2016, respectively, 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 March 31, 2017. The Company recognized a $10,000 and $47,000 other-than-temporary impairment charge on its limited partnerships for the three months ended March 31, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $11,000 and $129,000 for the three months ended March 31, 2017 and 2016, respectively. See a further discussion of fair value in Note 15 - Fair Value Measurements. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of March 31, 2017.

 

5.Loans and Allowance for Loan Losses

 

Loans consisted of the following:

 

   March 31,   December 31, 
   2017   2016 
(Dollars in thousands)          
Real estate:          
Residential  $954,764   $907,946 
Commercial   992,861    979,370 
Construction   60,694    49,679 
Commercial   420,747    430,539 
Home equity line of credit   168,157    170,786 
Other   5,375    5,348 
Total loans   2,602,598    2,543,668 
Net deferred loan costs   4,272    3,844 
Loans   2,606,870    2,547,512 
Allowance for loan losses   (21,349)   (21,529)
Loans, net  $2,585,521   $2,525,983 

 

 

19
 

 

 

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

 

Changes in the allowance for loan losses by segments are as follows:

 

   For the Three Months Ended March 31, 2017 
   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  $4,134   $(31)  $-   $144   $4,247 
Commercial   11,131    (111)   -    220    11,240 
Construction   425    -    -    93    518 
Commercial   4,400    (322)   -    (163)   3,915 
Home equity line of credit   1,398    -    -    (18)   1,380 
Other   41    (51)   10    49    49 
   $21,529   $(515)  $10   $325   $21,349 

 

   For the Three Months Ended March 31, 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   $(24)  $-   $(134)  $3,926 
Commercial   10,255    -    -    (10)   10,245 
Construction   231    -    -    65    296 
Commercial   4,119    (151)   9    270    4,247 
Home equity line of credit   1,470    -    -    (50)   1,420 
Other   39    (86)   11    76    40 
   $20,198   $(261)  $20   $217   $20,174 

 

 

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 March 31, 2017 and December 31, 2016:

 

   March 31, 2017   December 31, 2016 
(Dollars in thousands)  Total   Reserve
Allocation
   Total   Reserve
Allocation
 
Loans individually evaluated for impairment:                    
Real estate:                    
Residential  $12,595   $131   $12,778   $145 
Commercial   11,397    17    12,363    14 
Construction   4,532    -    4,532    - 
Commercial   1,264    42    2,029    112 
Home equity line of credit   1,943    -    1,864    - 
Other   676    7    707    7 
    32,407    197    34,273    278 
                     
Loans collectively evaluated for impairment:                    
Real estate:                    
Residential  $947,772   $4,116   $900,352   $3,989 
Commercial   980,186    11,223    965,718    11,117 
Construction   56,162    518    45,147    425 
Commercial   419,436    3,873    428,466    4,288 
Home equity line of credit   166,214    1,380    168,922    1,398 
Other   4,693    42    4,634    34 
    2,574,463    21,152    2,513,239    21,251 
Total  $2,606,870   $21,349   $2,547,512   $21,529 

 

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:

 

   March 31,   December 31, 
(Dollars in thousands)  2017   2016 
Nonaccrual loans:          
Real estate:          
Residential  $9,407   $9,846 
Commercial   83    976 
Construction   4,532    4,532 
Commercial   1,031    1,301 
Home equity line of credit   860    862 
Other   63    44 
Total nonaccruing loans   15,976    17,561 
Loans 90 days past due and still accruing   -    - 
Other real estate owned   -    - 
Total nonperforming assets  $15,976   $17,561 

 

 

21
 

 

 

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

 

The following is a summary of loan delinquencies at recorded investment values at March 31, 2017 and December 31, 2016:

 

   March 31, 2017 
                   Past Due 90 
   30-59 Days   60-89 Days   > 90 Days       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   21   $4,381    -   $-    21   $7,757    42   $12,138   $- 
Commercial   -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    1    4,532    1    4,532    - 
Commercial   -    -    -    -    1    95    1    95    - 
Home equity line of credit   2    76    2    127    1    258    5    461    - 
Other   9    99    -    -    1    21    10    120    - 
Total   32   $4,556    2   $127    25   $12,663    59   $17,346   $- 

 

   December 31, 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   10   $1,226    6   $1,529    23   $7,979    39   $10,734   $- 
Commercial   1    193    -    -    1    888    2    1,081    - 
Construction   -    -    -    -    1    4,532    1    4,532    - 
Commercial   1    54    -    -    3    319    4    373    - 
Home equity line of credit   -    -    2    85    3    377    5    462    - 
Other   7    66    1    23    -    -    8    89    - 
Total   19   $1,539    9   $1,637    31   $14,095    59   $17,271   $- 

 

 

22
 

 

 

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

 

The following is a summary of information pertaining to impaired loans at March 31, 2017 and December 31, 2016:

 

   March 31, 2017   December 31, 2016 
       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  $11,531   $13,357   $-   $11,046   $12,833   $- 
Commercial   8,543    8,575    -    9,496    9,636    - 
Construction   4,532    4,532    -    4,532    4,532    - 
Commercial   1,169    1,440    -    1,784    2,027    - 
Home equity line of credit   1,943    1,995    -    1,864    1,909    - 
Other   651    670    -    682    700    - 
Total   28,369    30,569    -    29,404    31,637    - 
                               
Impaired loans with a valuation allowance:                              
Real estate:                              
Residential   1,064    1,087    131    1,732    1,796    145 
Commercial   2,854    2,854    17    2,867    2,867    14 
Construction   -    -    -    -    -    - 
Commercial   95    862    42    245    894    112 
Home equity line of credit   -    -    -    -    -    - 
Other   25    25    7    25    25    7 
Total   4,038    4,828    197    4,869    5,582    278 
Total impaired loans  $32,407   $35,397   $197   $34,273   $37,219   $278 

 

 

23
 

 

 

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

 

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

 

   For the Three Months Ended March 31, 
   2017   2016 
   Average   Interest   Average   Interest 
   Recorded   Income   Recorded   Income 
(Dollars in thousands)  Investment   Recognized   Investment   Recognized 
Impaired loans without a valuation allowance:                    
Real estate:                    
Residential  $11,456   $27   $10,960   $24 
Commercial   10,775    96    13,413    139 
Construction   4,626    -    4,719    34 
Commercial   1,743    3    3,626    10 
Home equity line of credit   1,823    9    1,050    2 
Other   700    7    1,026    10 
Total   31,123    142    34,794    219 
                     
Impaired loans with a valuation allowance:                    
Real estate:                    
Residential   1,123    7    956    10 
Commercial   2,874    34    2,925    35 
Construction   -    -    -    - 
Commercial   481    -    1,853    1 
Home equity line of credit   -    -    -    - 
Other   25    -    34    - 
Total   4,503    41    5,768    46 
Total impaired loans  $35,626   $183   $40,562   $265 

 

There was no interest income recognized on a cash basis method of accounting for the three months ended March 31, 2017 and 2016.

 

 

24
 

 

 

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 March 31, 2017 and December 31, 2016:

 

   March 31, 2017 
   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   16   $2,732    12   $4,825    28   $7,557 
Commercial   2    3,315    -    -    2    3,315 
Construction   -    -    1    4,532    1    4,532 
Commercial   2    231    5    902    7    1,133 
Home equity line of credit   10    1,162    1    57    11    1,219 
Other   5    658    1    18    6    676 
Total   35   $8,098    20   $10,334    55   $18,432 

 

   December 31, 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   15   $2,581    9   $4,433    24   $7,014 
Commercial   2    3,333    -    -    2    3,333 
Construction   -    -    1    4,532    1    4,532 
Commercial   3    485    6    1,047    9    1,532 
Home equity line of credit   8    1,075    1    58    9    1,133 
Other   5    686    1    20    6    706 
Total   33   $8,160    18   $10,090    51   $18,250 

 

The recorded investment balance of TDRs were $18.4 million and $18.3 million at March 31, 2017 and December 31, 2016, respectively. TDRs on accrual status were $8.1 million and $8.2 million while TDRs on nonaccrual status were $10.3 million and $10.1 million at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At March 31, 2017 and December 31, 2016, the allowance for loan losses included specific reserves of $153,000 and $160,000 related to TDRs, respectively. For the three months ended March 31, 2017 and 2016, the Bank had charge-offs totaling $33,000 and $-0-, 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 $89,000 and $369,000 at March 31, 2017 and December 31, 2016, respectively.

 

 

25
 

 

 

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 months ended March 31, 2017 and 2016:

 

   For the Three Months Ended March 31, 2017   For the Three Months Ended March 31, 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   4   $596   $596    -   $-   $- 
Home equity line of credit   2    88    88    3    844    844 
Total   6   $684   $684   $3   $844   $844 

 

(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 months ended March 31, 2017 and 2016:

 

   For the Three Months Ended March 31, 2017 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity
   Adjusted
Interest
Rates
   Combination
of Rate and
Maturity
   Other   Total 
Real estate                              
Residential   4   $90   $-   $335   $171   $596 
Home equity line of credit   2    88    -    -    -    88 
Total   6   $178   $-   $335   $171   $684 

 

   For the Three Months Ended March 31, 2016 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity
   Adjusted
Interest
Rates
   Combination
of Rate and
Maturity
   Other   Total 
Home equity line of credit   3   $-   $-   $-   $844   $844 
Total   3   $-   $-   $-   $844   $844 

 

A TDR is considered to be in re-default once it is more than 30 days past due following a modification. There was one construction loan totaling $4.5 million that defaulted and had been modified as a TDR during the twelve month period preceding the default date as of March 31, 2017. There were no loans that defaulted and had been modified as a TDR during the twelve month period preceding the default date as of March 31, 2016.

 

 

26
 

 

 

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.

 

 

27
 

 

 

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

 

The following table presents the Company’s loans by risk rating at March 31, 2017 and December 31, 2016:

 

   March 31, 2017 
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Real estate:                         
Residential  $943,765   $840   $10,159   $-   $954,764 
Commercial   980,434    2,783    9,644    -    992,861 
Construction   56,162    -    4,532    -    60,694 
Commercial   403,885    2,934    13,928    -    420,747 
Home equity line of credit   167,214    83    860    -    168,157 
Other   5,289    23    63    -    5,375 
Total Loans  $2,556,749   $6,663   $39,186   $-   $2,602,598 

 

   December 31, 2016 
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Real estate:                         
Residential  $896,861   $852   $10,233   $-   $907,946 
Commercial   968,109    1,991    9,270    -    979,370 
Construction   45,147    -    4,532    -    49,679 
Commercial   413,900    3,914    12,725    -    430,539 
Home equity line of credit   169,834    83    869    -    170,786 
Other   5,257    24    67    -    5,348 
Total Loans  $2,499,108   $6,864   $37,696   $-   $2,543,668 

 

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 and commercial business 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.

 

 

28
 

 

 

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 $4.8 million at March 31, 2017 and December 31, 2016, 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 $6.6 million and $6.2 million at March 31, 2017 and December 31, 2016, respectively. Total loans sold with servicing rights retained were $17.7 million and $24.3 million for the three months ended March 31, 2017 and 2016, respectively. The net gain on loans sold totaled $416,000 and $490,000 for the three months ended March 31, 2017 and 2016, 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 $544.4 million and $540.4 million at March 31, 2017 and December 31, 2016, respectively. Loan servicing fees for others totaling $338,000 and $289,000 for the three months ended March 31, 2017 and 2016, 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 March 31, 2017 and December 31, 2016. The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $55.0 million which were undrawn at March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016. 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 $282.1 million and $287.1 million at March 31, 2017 and December 31, 2016, 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 $1.4 billion at March 31, 2017 and December 31, 2016. The Company had available borrowings of $573.9 million and $544.7 million at March 31, 2017 and December 31, 2016, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $79.5 million and $83.5 million at March 31, 2017 and December 31, 2016, 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 $62.2 million and $64.2 million on an overnight basis at March 31, 2017 and December 31, 2016, respectively, and was undrawn as of March 31, 2017 and December 31, 2016. The funding arrangement was collateralized by $121.1 million and $128.7 million in pledged commercial real estate loans as of March 31, 2017 and December 31, 2016, respectively.

 

 

29
 

 

 

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 and cash with a fair value of $11.3 million at March 31, 2017 and December 31, 2016. Outstanding borrowings totaled $10.5 million at March 31, 2017 and December 31, 2016.

 

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 $19.5 million and $18.9 million at March 31, 2017 and December 31, 2016, 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 $30.0 million and $30.2 million as of March 31, 2017 and December 31, 2016, respectively.

 

8.Deposits

 

Deposit balances are as follows:

 

   March 31,   December 31, 
   2017   2016 
(Dollars in thousands)          
Noninterest-bearing demand deposits  $437,385   $441,283 
Interest-bearing          
NOW accounts   622,844    542,764 
Money market   521,759    532,681 
Savings accounts   239,743    233,792 
Time deposits   466,121    464,570 
Total interest-bearing deposits   1,850,467    1,773,807 
Total deposits  $2,287,852   $2,215,090 

 

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 at March 31, 2017 and December 31, 2016, respectively.

 

Time certificates of deposit in denominations of $250,000 or more approximated $101.3 million and $99.8 million at March 31, 2017 and December 31, 2016, respectively.

 

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 March 31,   Three Months Ended March 31, 
   2017   2016   2017   2016 
(Dollars in thousands)                
Service cost  $-   $-   $14   $14 
Interest cost   250    263    25    30 
Expected return on plan assets   (295)   (278)   -    - 
Amortization:                    
Loss   176    176    -    - 
Prior service cost   -    -    (13)   (13)
Recognized net gain   -    -    (2)   - 
Net periodic benefit cost  $131   $161   $24   $31 

 

 

30
 

 

 

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

 

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 March 31, 2017, the loan had an outstanding balance of $11.1 million and an interest rate of 4.75%. 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 $548,000 and $386,000 for the three months ended March 31, 2017 and 2016, respectively.

 

Shares held by the ESOP include the following as of March 31, 2017:

 

Allocated   572,166 
Committed to be released   23,514 
Unallocated   834,736 
    1,430,416 

 

The fair value of unallocated ESOP shares was $20.7 million at March 31, 2017.

 

10.Stock Incentive Plans

 

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 May 2016, the Company’s shareholders approved the First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) replacing the 2012 Plan. The 2016 Plan provides for a total of 300,000 shares of common stock for issuance upon the grant or exercise of awards.

 

Under the 2012 Plan, stock options granted vested 20% immediately and will vest 20% at each annual anniversary of the grant date and expire ten years after grant date. Under the 2016 Plan, stock options granted vest at each annual anniversary of the grant date over a 3 year period 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.

 

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 three months ended March 31, 2017 and 2016, the Company recorded $111,000 and $651,000 of share-based compensation expense, respectively, comprised of $20,000 and $268,000 of stock option expense, respectively and $91,000 and 383,000 of restricted stock expense, respectively. Expected future compensation expense relating to the 46,350 non-vested options outstanding at March 31, 2017 is $149,000 over the remaining weighted-average period of 2.22 years. Expected future compensation expense relating to the 27,698 non-vested restricted stock outstanding at March 31, 2017 is $612,000 over the remaining weighted-average period of 2.90 years.

 

 

31
 

 

 

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

 

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.

 

Weighted-average assumptions for the three months ended March 31, 2017 and 2016:

 

   2017   2016 
Weighted per share average fair value of options granted  $5.09   $2.98 
Weighted-average assumptions:          
Risk-free interest rate   2.05%   1.59%
Expected volatility   22.08%   23.11%
Expected dividend yield   1.94%   2.13%
Weighted-average dividend yield   1.89 - 2.00%   1.72% - 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 three months ended March 31, 2017.

 

   Number of
Stock Options
   Weighted-Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(in years)
   Aggregate
Intrinsic Value
(in thousands)
 
Outstanding at December 31, 2016   1,460,376   $13.14           
Granted   7,500    23.30           
Exercised   (22,750)   13.05           
Forfeited   -    -           
Expired   -    -           
Outstanding at March 31, 2017   1,445,126   $13.19    5.60   $16,760 
                     
Exercisable at March 31, 2017   1,398,776   $13.06    5.51   $16,421 

 

The total intrinsic value of options exercised during the year ended March 31, 2017 was $221,000.

 

 

32
 

 

 

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

 

The following is a summary of the status of the Company’s restricted stock for the three months ended March 31, 2017.

 

   Restricted Stock Awards   Time-Based Restricted Stock Units   Performance-Based Restricted Stock Units 
   Number of
Restricted Stock
   Weighted-Average
Grant Date
Fair Value
   Number of
Restricted Stock
   Weighted-Average
Grant Date
Fair Value
   Number of
Restricted Stock
   Weighted-Average
Grant Date
Fair Value
 
Unvested at December 31, 2016   -   $-    -   $-    -   $- 
Granted   3,066    22.85    13,012    24.27    14,686    21.60 
Vested   (3,066)   22.85    -    -    -    - 
Forfeited   -    -    -    -    -    - 
Unvested at March 31, 2017  $-   $-   $13,012   $24.27   $14,686   $21.60 

 

Restricted stock awards: On a semi-annual basis, stock awards are granted to the Bank’s directors as share-based compensation and vest upon grant date. The Company recognizes compensation expense for the fair value of these awards using the Company's common stock closing price at the date of grant.

 

Time-based restricted stock units: Time-based restricted stock units vest over a service period of three years. The Company recognizes compensation expense for the fair value of these units using the Company's common stock closing price at the date of grant, which vest on a straight-line basis over the requisite service period of the units.

 

Performance-based restricted stock units: Performance-based restricted stock units vests after a three year performance period with a two year holding period. The units vest with a share quantity in a range from zero to 150% dependent on the Company’s average return on average assets and earnings per share, each weighted 50%. The Company recognizes compensation expense over the vesting period, based on a fair value calculated using the Chaffe model. In this model, the discount is estimated as the value of an at-the money put option with a life equal to the restriction period, divided by the price of a fully liquid share of stock. Compensation expense is subject to adjustment based on management's assessment of the Company's performance relative to the target number of shares performance criteria.

 

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 definition 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 March 31, 2017, the Company maintained a cash balance of $2.0 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.

 

 

33
 

 

 

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

 

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 March 31, 2017.

 

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:

 

      March 31, 2017   December 31, 2016 
(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   46   $240,371   $6,059    51   $242,351   $7,095 
                                  
Commercial loan customer interest rate swap position   Other Liabilities   35    151,434    (4,937)   33    148,097    (4,502)
                                  
Counterparty interest rate swap position   Other Liabilities   81    391,805    (1,200)   84    390,448    (2,687)

 

 

34
 

 

 

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

 

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 March 31, 
   2017   2016 
   Interest Income
Recorded in
Interest Income
   MTM (Loss)
Gain 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  $(1,277)  $(1,036)  $(2,313)  $(1,372)  $9,792   $8,420 
                               
Counterparty interest rate swap position   1,277    1,036    2,313    1,372    (9,792)   (8,420)
Total  $-   $-   $-   $-   $-   $- 

 

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 March 31, 2017, the notional amount of outstanding rate locks totaled approximately $16.5 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $17.4 million, which included mandatory forward commitments totaling approximately $12.0 million at March 31, 2017. 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 March 31, 2017 and December 31, 2016, disaggregated by the class of collateral pledged.

 

   March 31, 2017   December 31, 2016 
   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   19,526    -    -    19,526    18,867    -    -    18,867 
Total repurchase liabilities   19,526    -    -    19,526    18,867    -    -    18,867 
Total  $19,526   $10,500   $-   $30,026   $18,867   $-   $10,500   $29,367 

 

 

35
 

 

 

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

 

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.

 

The following tables present the potential effect of rights of setoff associated with the Company’s recognized financial assets and liabilities at March 31, 2017 and December 31, 2016:

 

   March 31, 2017 
               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  $6,059   $-   $6,059   $-   $-   $1,950   $4,109 
Total  $6,059   $-   $6,059   $-   $-   $1,950   $4,109 

 

   March 31, 2017 
               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  $6,137   $-   $6,137   $-   $-   $1,950   $4,187 
Repurchase agreement borrowings   10,500    -    10,500    -    10,500    -    - 
Total  $16,637   $-   $16,637   $-   $10,500   $1,950   $4,187 

 

   December 31, 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  $7,095   $-   $7,095   $-   $-   $2,000   $5,095 
Total  $7,095   $-   $7,095   $-   $-   $2,000   $5,095 

 

   December 31, 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  $7,189   $-   $7,189   $-   $-   $2,000   $5,189 
Repurchase agreement borrowings   10,500    -    10,500    -    10,500    -    - 
Total  $17,689   $-   $17,689   $-   $10,500   $2,000   $5,189 

 

 

36
 

 

 

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:

 

   March 31,   December 31, 
   2017   2016 
(Dollars in thousands)          
Approved loan commitments  $29,246   $102,436 
Unadvanced portion of construction loans   59,961    57,124 
Unused lines for home equity loans   202,778    199,191 
Unused revolving lines of credit   349    355 
Unused commercial letters of credit   3,800    3,820 
Unused commercial lines of credit   235,576    246,622 
   $531,710   $609,548 

 

Financial instruments with off-balance sheet risk had a valuation allowance of $130,000 and $153,000 as of March 31, 2017 and December 31, 2016, 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 March 31, 2017 and December 31, 2016, 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.

 

 

37
 

 

 

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 three months ended March 31, 2017 and 2016.

 

 

38
 

 

 

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 March 31, 2017 and December 31, 2016.

 

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 (loss) gain of ($44,000) and $55,000 for the three months ended March 31, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.

 

 

39
 

 

 

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 March 31, 2017 and December 31, 2016 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   March 31, 2017 
       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  $24,997   $-   $24,997   $- 
U.S. Government agency obligations   70,743    -    70,743    - 
Government sponsored residential  mortgage-backed securities   3,417    -    3,417    - 
Corporate debt securities   512    -    512    - 
Preferred equity securities   1,845    1,845    -    - 
Marketable equity securities   184    184    -    - 
Mutual funds               3,843    -                 3,843    - 
Securities available-for-sale   105,541    2,029    103,512    - 
Interest rate swap derivative   6,059    -    6,059    - 
Derivative loan commitments   273    -    -    273 
Total  $111,873   $2,029   $109,571   $273 
                     
Liabilities                    
Interest rate swap derivative  $6,137   $-   $6,137   $- 
Forward loan sales commitments   134    -    -    134 
Total  $6,271   $-   $6,137   $134 

 

   December 31, 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  $19,968   $-   $19,968   $- 
U.S. Government agency obligations   73,711    -    73,711    - 
Government sponsored residential  mortgage-backed securities   3,569    -    3,569    - 
Corporate debt securities   515    -    515    - 
Preferred equity securities   1,746    1,746    -    - 
Marketable equity securities   182    182    -    - 
Mutual funds               3,829    -                 3,829    - 
Securities available-for-sale   103,520    1,928    101,592    - 
Interest rate swap derivative   7,095    -    7,095    - 
Derivative loan commitments   95    -    -    95 
Forward loan sales commitments   88    -    -    88 
Total  $110,798   $1,928   $108,687   $183 
                     
Liabilities                    
Interest rate swap derivative  $7,189   $-   $7,189   $- 
Total  $7,189   $-   $7,189   $- 

 

 

40
 

 

 

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 March 31, 
   2017   2016 
(Dollars in thousands)        
Balance, at beginning of period  $183   $137 
Total realized (loss) gain:          
Included in earnings   (44)   55 
Balance, at the end of period  $139   $192 

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016:

 

March 31, 2017
          Significant    
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Input 
                 
Derivative and forward loan sales commitments, net  $139   Adjusted quoted prices in active markets  Embedded servicing value   1.38%

 

December 31, 2016
          Significant    
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Input 
                 
Derivative and forward loan sales commitments, net  $183   Adjusted quoted prices in active markets  Embedded servicing value   1.33%

 

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 March 31, 2017 and December 31, 2016 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   March 31, 2017   December 31, 2016 
   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  $-   $-   $2,561   $-   $-   $3,727 

 

 

41
 

 

 

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. 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 March 31, 2017 and December 31, 2016.

 

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. There were no other real estate owned at March 31, 2017 and December 31, 2016.

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at March 31, 2017 and December 31, 2016:

 

March 31, 2017
          Significant     Weighted 
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Range of Inputs  Average Inputs 
                  
Impaired loans  $2,561   Appraisals  Discount for dated appraisal  5% - 20%   12.50%
           Discount for costs to sell  8% - 15%   11.50%

 

December 31, 2016
          Significant     Weighted 
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Range of Inputs  Average Inputs 
                  
Impaired loans  $3,727   Appraisals  Discount for dated appraisal  5% - 20%   12.50%
           Discount for costs to sell  8% - 15%   11.50%

 

 

42
 

 

 

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

 

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 and $2.2 million at March 31, 2017 and December 31, 2016, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company recognized a $10,000 and $47,000 other-than-temporary impairment charge on its limited partnerships for the three months ended March 31, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $11,000 and $129,000 for the three months ended March 31, 2017 and 2016, respectively. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of March 31, 2017.

 

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.

 

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 March 31, 2017 and December 31, 2016. 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. 

 

 

43
 

 

 

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

 

      March 31, 2017   December 31, 2016 
          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  $50,320   $50,360   $33,061   $33,041 
Securities available-for-sale  See previous table   105,541    105,541    103,520    103,520 
Loans  Level 3   2,606,870    2,560,640    2,547,512    2,515,906 
Loans held-for-sale  Level 2   2,464    2,524    3,270    3,289 
Mortgage servicing rights  Level 3   4,837    6,621    4,817    6,166 
Federal Home Loan Bank of Boston stock  Level 2   16,418    16,418    16,378    16,378 
Alternative investments  Level 3   2,261    2,280    2,228    2,045 
Interest rate swap derivatives  Level 2   6,059    6,059    7,095    7,095 
Derivative loan commitments  Level 3   273    273    95    95 
Forward loan sales commitments  Level 3   -    -    88    88 
                        
Financial liabilities                       
Deposits other than time deposits  Level 1   1,821,731    1,821,731    1,773,807    1,773,807 
Time deposits  Level 2   466,121    470,092    464,570    468,472 
Federal Home Loan Bank of Boston advances  Level 2   282,057    281,765    282,057    286,629 
Repurchase agreement borrowings  Level 2   10,500    10,425    10,500    10,428 
Repurchase liabilities  Level 2   19,526    19,519    18,867    18,862 
Interest rate swap derivatives  Level 2   6,137    6,137    7,189    7,189 
Forward loan sales commitments  Level 3   134    134    -    - 

 

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.

 

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).

 

 

44
 

 

 

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

 

Management believes, as of March 31, 2017 and December 31, 2016 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 March 31, 2017. 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:

 

   Actual   Minimum Required
for Capital Adequacy
Purposes
   To Be Well
Capitalized Under
Prompt Corrective
Action
 
(Dollars in thousands)  Amount   Ratio   Amount   Ratio   Amount   Ratio 
                         
Farmington Bank:                              
At March 31, 2017                              
Total Capital (to Risk Weighted Assets)  $259,151    11.23%  $184,648    8.00%  $230,810    10.00%
Tier I Capital (to Risk Weighted Assets)   237,672    10.30    138,486    6.00    184,648    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   237,672    10.30    103,865    4.50    150,027    6.50 
Tier I Leverage Capital (to Average Assets)   237,672    8.29    114,635    4.00    143,293    5.00 
                               
At December 31, 2016                              
Total Capital (to Risk Weighted Assets)  $253,921    11.28%  $180,043    8.00%  $225,053    10.00%
Tier I Capital (to Risk Weighted Assets)   232,239    10.32    135,033    6.00    180,044    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   232,239    10.32    101,275    4.50    146,286    6.50 
Tier I Leverage Capital (to Average Assets)   232,239    8.18    113,598    4.00    141,997    5.00 
                               
First Connecticut Bancorp, Inc.:                              
                               
At March 31, 2017                              
Total Capital (to Risk Weighted Assets)  $292,426    12.67%  $184,676    8.00%  $230,846    10.00%
Tier I Capital (to Risk Weighted Assets)   270,947    11.74    138,508    6.00    184,677    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   270,947    11.74    103,881    4.50    150,050    6.50 
Tier I Leverage Capital (to Average Assets)   270,947    9.45    114,654    4.00    143,317    5.00 
                               
At December 31, 2016                              
Total Capital (to Risk Weighted Assets)  $288,273    12.80%  $180,113    8.00%  $225,141    10.00%
Tier I Capital (to Risk Weighted Assets)   266,591    11.84    135,084    6.00    180,112    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   266,591    11.84    101,313    4.50    146,341    6.50 
Tier I Leverage Capital (to Average Assets)   266,591    9.39    113,624    4.00    142,030    5.00 

 

 

45
 

 

 

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

 

17.Other Comprehensive Income

 

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

 

   For the Three Months Ended March 31, 2017 
   Investment
Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
(Dollars in thousands)               
Balance at December 31, 2016  $(263)  $(6,427)  $(6,690)
Other comprehensive income during the period   89    -    89 
Amount reclassified from accumulated other comprehensive income, net of tax   -    105    105 
Net change   89    105    194 
Balance at March 31, 2017  $(174)  $(6,322)  $(6,496)

 

   For the Three Months Ended March 31, 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   415    -    415 
Amount reclassified from accumulated other comprehensive income, net of tax   -    106    106 
Net change   415    106    521 
Balance at March 31, 2016  $166   $(6,807)  $(6,641)

 

The following tables present a reconciliation of the changes in components of other comprehensive income (loss) for the three months ended March 31, 2017 and 2016, including the amount of income tax expense allocated to each component of other comprehensive income (loss):

 

   For the Three Months Ended March 31, 2017 
   Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
(Dollars in thousands)               
Unrealized gains on available-for-sale securities  $137   $(48)  $89 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   137    (48)   89 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)   163    (58)   105 
Total other comprehensive income  $300   $(106)  $194 

 

   For the Three Months Ended March 31, 2016 
   Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
(Dollars in thousands)               
Unrealized gains on available-for-sale securities  $642   $(227)  $415 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   642    (227)   415 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)   164    (58)   106 
Total other comprehensive income  $806   $(285)  $521 

 

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

 

 

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

 

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.

 

 

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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.

 

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

 

 

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·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 March 31, 2017 our total risk-based capital ratio was 12.67%.

 

·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.

 

 

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·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, commercial, home equity line of credit and other. 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 three months ended March 31, 2017.

 

 

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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 a 9 year 10 month draw period followed by a 20 year amortization period 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.

 

Other – Includes installment, collateral, demand, revolving credit and resort loans to customers with acceptable credit ratings residing primarily in our market area.  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. The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations.  The Bank 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 and commercial loans by the present value of expected cash flows discounted at the effective interest rate; the