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EX-32.2 - EXHIBIT 32.2 - First Connecticut Bancorp, Inc.t1700467_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - First Connecticut Bancorp, Inc.t1700467_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - First Connecticut Bancorp, Inc.t1700467_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - First Connecticut Bancorp, Inc.t1700467_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 June 30, 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 July 24, 2017, there were 15,945,246 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 June 30, 2017 (unaudited) and December 31, 2016 1
   
Consolidated Statements of Income for the three and six months ended June 30, 2017 and 2016 (unaudited) 2
   
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016 (unaudited) 3
   
Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2017 and 2016 (unaudited) 4
   
Consolidated Statements of Cash Flows for the six months ended June 30, 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 51
   
Item 3.  Quantitative and Qualitative Disclosures About Market Risk 68
   
Item 4.  Controls and Procedures 69
   
Part II. Other Information  
   
Item 1.  Legal Proceedings 69
   
Item1A. Risk Factors 69
   
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds 69
   
Item 3.  Defaults upon Senior Securities 69
   
Item 4.  Mine Safety Disclosure 70
   
Item 5.  Other Information 70
   
Item 6.  Exhibits 70
   
Signatures 73
   
Exhibit 31.1  
Exhibit 31.2  
Exhibit 32.1  
Exhibit 32.2  

 

 

 

 

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

 

   June 30,   December 31, 
   2017   2016 
(Dollars in thousands, except share and per share data)        
Assets          
Cash and due from banks  $37,308   $44,086 
Interest bearing deposits with other institutions   9,243    3,637 
Total cash and cash equivalents   46,551    47,723 
Securities held-to-maturity, at amortized cost   50,655    33,061 
Securities available-for-sale, at fair value   112,443    103,520 
Loans held for sale   2,537    3,270 
Loans (1)   2,666,655    2,547,512 
Allowance for loan losses   (22,037)   (21,529)
Loans, net   2,644,618    2,525,983 
Premises and equipment, net   17,609    18,002 
Federal Home Loan Bank of Boston stock, at cost   19,583    16,378 
Accrued income receivable   7,939    7,432 
Bank-owned life insurance   56,802    51,726 
Deferred income taxes, net   13,970    14,795 
Prepaid expenses and other assets   19,419    15,665 
Total assets  $2,992,126   $2,837,555 
           
Liabilities and Stockholders' Equity          
Deposits          
Interest-bearing  $1,799,955   $1,773,807 
Noninterest-bearing   445,049    441,283 
    2,245,004    2,215,090 
Federal Home Loan Bank of Boston advances   389,458    287,057 
Repurchase agreement borrowings   10,500    10,500 
Repurchase liabilities   36,101    18,867 
Accrued expenses and other liabilities   42,227    45,865 
Total liabilities   2,723,290    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 15,942,614 shares outstanding at June 30, 2017 and 17,947,647 shares issued and 15,897,698 shares outstanding at December 31, 2016   181    181 
Additional paid-in-capital   184,871    184,111 
Unallocated common stock held by ESOP   (10,053)   (10,567)
Treasury stock, at cost (2,005,033 shares at June 30, 2017 and 2,049,949 shares at December 31, 2016)   (29,770)   (30,400)
Retained earnings   129,972    123,541 
Accumulated other comprehensive loss   (6,365)   (6,690)
Total stockholders' equity   268,836    260,176 
Total liabilities and stockholders' equity  $2,992,126   $2,837,555 

 

(1) Loans include net deferred loan costs of $4.4 million and $3.8 million at June 30, 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 June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
(Dollars in thousands, except share and per share data)                
Interest income                    
Interest and fees on loans                    
Mortgage  $18,056   $16,120   $35,614   $32,027 
Other   5,209    4,858    10,156    9,572 
Interest and dividends on investments                    
United States Government and agency obligations   598    448    1,072    866 
Other bonds   7    14    14    27 
Corporate stocks   216    232    415    471 
Other interest income   30    26    57    58 
Total interest income   24,116    21,698    47,328    43,021 
Interest expense                    
Deposits   3,026    2,735    5,937    5,471 
Federal Home Loan Bank of Boston advances   1,164    980    2,113    1,947 
Repurchase agreement borrowings   96    96    191    191 
Repurchase liabilities   7    15    14    34 
Total interest expense   4,293    3,826    8,255    7,643 
Net interest income   19,823    17,872    39,073    35,378 
Provision for loan losses   710    801    1,035    1,018 
Net interest income after provision for loan losses   19,113    17,071    38,038    34,360 
Noninterest income                    
Fees for customer services   1,572    1,530    3,078    3,014 
Net gain on loans sold   711    751    1,127    1,241 
Brokerage and insurance fee income   55    54    105    108 
Bank owned life insurance income   598    307    917    721 
Other   940    (25)   1,814    433 
Total noninterest income   3,876    2,617    7,041    5,517 
Noninterest expense                    
Salaries and employee benefits   10,036    9,213    19,363    18,589 
Occupancy expense   1,187    1,189    2,500    2,408 
Furniture and equipment expense   985    1,018    1,969    2,079 
FDIC assessment   410    383    838    787 
Marketing   708    544    1,275    965 
Other operating expenses   2,552    2,297    5,085    5,093 
Total noninterest expense   15,878    14,644    31,030    29,921 
Income before income taxes   7,111    5,044    14,049    9,956 
Income tax expense   2,109    1,401    3,954    2,700 
Net income  $5,002   $3,643   $10,095   $7,256 
                     
Net earnings per share (See Note 3):                    
Basic  $0.33   $0.24   $0.67   $0.49 
Diluted   0.32    0.24    0.64    0.48 
Dividends per share   0.12    0.07    0.23    0.14 

 

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 June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
(Dollars in thousands)                
Net income  $5,002   $3,643   $10,095   $7,256 
Other comprehensive income, before tax                    
Unrealized gains on securities:                    
Unrealized holding gains arising during the period   41    126    178    768 
Less: reclassification adjustment for gains included in net income   -    -    -    - 
Net change in unrealized gains   41    126    178    768 
Change related to pension and other postretirement benefit plans   162    163    325    327 
Other comprehensive income, before tax   203    289    503    1,095 
Income tax expense   72    103    178    388 
Other comprehensive income, net of tax   131    186    325    707 
Comprehensive income  $5,133   $3,829   $10,420   $7,963 

 

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   -    -    250    526    -    -    -    776 
Cash dividend paid ($0.14 per common share)   -    -    -    -    -    (2,209)   -    (2,209)
Treasury stock acquired   (156,800)   -    -    -    (2,527)   -    -    (2,527)
Stock options exercised   93,631    -    (45)   -    1,261    -    -    1,216 
Tax expense from stock-based compensation   -    -    7    -    -    -    -    7 
Share based compensation expense   -    -    1,295    -    -    -    -    1,295 
Net income   -    -    -    -    -    7,256    -    7,256 
Other comprehensive income   -    -    -    -    -    -    707    707 
Balance at June 30, 2016   15,818,494   $181   $183,504   $(11,100)  $(31,868)  $117,980   $(6,455)  $252,242 
                                         
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   -    -    639    514    -    -    -    1,153 
Cash dividend paid ($0.23 per common share)   -    -    -    -    -    (3,664)   -    (3,664)
Stock options exercised   41,850    -    (21)   -    588    -    -    567 
Share based compensation expense   3,066    -    142    -    42    -    -    184 
Net income   -    -    -    -    -    10,095    -    10,095 
Other comprehensive income   -    -    -    -    -    -    325    325 
Balance at June 30, 2017   15,942,614   $181   $184,871   $(10,053)  $(29,770)  $129,972   $(6,365)  $268,836 

 

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

 

4 

 

 

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

 

   Six Months Ended June 30, 
(Dollars in thousands)  2017   2016 
Cash flows from operating activities          
Net income  $10,095   $7,256 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   1,035    1,018 
(Reversal of) provision for off-balance sheet commitments   (92)   (428)
Depreciation and amortization   1,020    1,210 
Amortization of ESOP expense   1,153    776 
Share based compensation expense   184    1,295 
Loans originated for sale   (52,634)   (76,572)
Proceeds from the sale of loans held for sale   54,494    80,538 
Loss on disposal of premises and equipment   -    8 
Loss (gain) on fair value adjustment for mortgage banking derivatives   51    (39)
Impairment losses on alternative investments   10    47 
Mortgage servicing rights impairment   -    374 
Writedowns on foreclosed real estate   -    21 
Loss on sale of foreclosed real estate   -    1 
Net gain on loans sold   (1,127)   (1,241)
Net (accretion) amortization of investment security discounts and premiums   (23)   (40)
Change in net deferred loan fees and costs   (525)   208 
(Increase) decrease in accrued income receivable   (507)   11 
Deferred income tax   647    (350)
Increase in cash surrender value of bank-owned life insurance   (645)   (639)
Increase in prepaid expenses and other assets   (3,749)   (14,497)
(Decrease) increase in accrued expenses and other liabilities   (3,287)   14,303 
Net cash provided by operating activities   6,100    13,260 
Cash flows from investing activities          
Maturities, calls and principal payments of securities held-to-maturity   5,115    24,606 
Maturities, calls and principal payments of securities available-for-sale   16,302    79,854 
Purchases of securities held-to-maturity   (22,709)   - 
Purchases of securities available-for-sale   (25,024)   (96,018)
Loan originations, net of principal repayments   (119,145)   (63,237)
(Purchases) redemptions of Federal Home Loan Bank of Boston stock, net   (3,205)   3,489 
Purchase of bank-owned life insurance   (5,000)   - 
Proceeds from sale of foreclosed real estate   -    167 
Proceeds from bank-owned life insurance   569    228 
Purchases of premises and equipment   (627)   (1,570)
Net cash used in investing activities   (153,724)   (52,481)
Cash flows from financing activities          
Net proceeds from (payments on) Federal Home Loan Bank of Boston advances   102,401    (37,000)
Net increase in demand deposits, NOW accounts, savings accounts and money market accounts   6,365    23,682 
Net increase in time deposits   23,549    36,398 
Net increase in repurchase liabilities   17,234    27,258 
Stock options exercised   567    1,216 
Excess tax expense from stock-based compensation   -    7 
Repurchase of common stock   -    (2,527)
Cash dividend paid   (3,664)   (2,209)
Net cash provided by financing activities   146,452    46,825 
Net (decrease) increase in cash and cash equivalents   (1,172)   7,604 
Cash and cash equivalents at beginning of period   47,723    59,139 
Cash and cash equivalents at end of period  $46,551   $66,743 
           
Supplemental disclosure of cash flow information          
Cash paid for interest  $8,258   $7,655 
Cash paid for income taxes   3,602    3,097 
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 June 30, 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 June 30, 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 six months ended June 30, 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 June 30, 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 June 30, 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 $4.3 million at June 30, 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 June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326)" requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This ASU also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public business entities for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures.

 

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for 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.

 

13 

 

 

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

 

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.

 

In May 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for public business entities for annual years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a prospective basis to an award modified on or after the adoption date. The Company is assessing the impact of ASU 2017-09 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 $15.5 million and $9.5 million to meet these requirements at June 30, 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 June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
(Dollars in thousands, except per share data):                
                 
Net income  $5,002   $3,643   $10,095   $7,256 
Less: Dividends to participating shares   (3)   (9)   (6)   (18)
Income allocated to participating shares   (6)   (22)   (8)   (43)
Net income allocated to common stockholders  $4,993   $3,612   $10,081   $7,195 
                     
Weighted-average shares issued   17,975,345    17,976,893    17,967,541    17,976,893 
                     
Less: Average unallocated ESOP shares   (826,559)   (921,744)   (838,298)   (933,600)
Average treasury stock   (2,013,898)   (2,163,407)   (2,021,628)   (2,173,831)
Average unvested restricted stock   (27,698)   (126,290)   (19,894)   (126,290)
Weighted-average basic shares outstanding   15,107,190    14,765,452    15,087,721    14,743,172 
                     
Plus: Average dilutive shares   683,922    311,839    653,779    300,383 
Weighted-average diluted shares outstanding   15,791,112    15,077,291    15,741,500    15,043,555 
                     
Net earnings per share (1):                    
Basic  $0.33   $0.24   $0.67   $0.49 
Diluted  $0.32   $0.24   $0.64   $0.48 

 

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

 

For the three months ended June 30, 2017 and 2016, respectively, 785 and 59,000 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:

 

   June 30, 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  $30,816   $176   $-   $30,992   $-   $-   $30,992 
U.S. Government agency obligations   71,000    43    (311)   70,732    -    -    70,732 
Government sponsored residential mortgage-backed securities   3,121    151    -    3,272    -    -    3,272 
Corporate debt securities   500    7    -    507    -    -    507 
Preferred equity securities   2,000    -    (112)   1,888    -    -    1,888 
Marketable equity securities   108    74    -    182    -    -    182 
Mutual funds   5,125    -    (255)   4,870    -    -    4,870 
Total securities available-for-sale  $112,670   $451   $(678)  $112,443   $-   $-   $112,443 
Held-to-maturity                                   
U.S. Treasury obligations  $4,990   $-   $-   $4,990   $65   $-   $5,055 
U.S. Government agency obligations   24,000    -    -    24,000    -    (99)   23,901 
Government sponsored residential mortgage-backed securities   21,665    -    -    21,665    178    -    21,843 
Total securities held-to-maturity  $50,655   $-   $-   $50,655   $243   $(99)  $50,799 

 

   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 June 30, 2017 and December 31, 2016:

 

   June 30, 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   $46,697   $(303)  $9,992   $(8)  $56,689   $(311)
Preferred equity securities   1    -    -    1,888    (112)   1,888    (112)
Mutual funds   1    -    -    4,869    (255)   4,869    (255)
    10   $46,697   $(303)  $16,749   $(375)  $63,446   $(678)
Held-to-maturity                                   
U.S. Government agency obligations   4   $23,901   $(99)  $-   $-   $23,901   $(99)
Total investment securities in an unrealized loss position   14   $70,598   $(402)  $16,749   $(375)  $87,347   $(777)

 

   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 June 30, 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 June 30, 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 June 30, 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 June 30, 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 six months ended June 30, 2017 and 2016.

 

There were no gross realized gains on sales of securities available-for-sale for the six months ended June 30, 2017 and 2016.

 

As of June 30, 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 $132.9 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 June 30, 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:

 

   June 30, 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  $43,469   $43,413   $-   $- 
Due after one year through five years   58,847    58,818    23,990    23,982 
Due after five years through ten years   -    -    5,000    4,974 
Due after ten years   -    -    -    - 
Government sponsored residential mortgage-backed securities   3,121    3,272    21,665    21,843 
   $105,437   $105,503   $50,655   $50,799 

 

   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 $19.6 million and $16.4 million of FHLBB capital stock at June 30, 2017 and December 31, 2016, respectively, which is equal to its FHLBB capital stock requirement. The Company evaluated its FHLBB capital stock for potential other-than-temporary impairment at June 30, 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 June 30, 2017.

 

Alternative Investments

 

Alternative investments, which totaled $2.1 million and $2.2 million at June 30, 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 June 30, 2017. The Company recognized a $10,000 and $47,000 other-than-temporary impairment charge on its limited partnerships for the six months ended June 30, 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 $240,000 and $178,000 for the six months ended June 30, 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 June 30, 2017.

 

5.Loans and Allowance for Loan Losses

 

Loans consisted of the following:

 

   June 30,   December 31, 
   2017   2016 
(Dollars in thousands)          
Real estate:          
Residential  $962,732   $907,946 
Commercial   1,020,560    979,370 
Construction   74,063    49,679 
Commercial   431,243    430,539 
Home equity line of credit   168,278    170,786 
Other   5,410    5,348 
Total loans   2,662,286    2,543,668 
Net deferred loan costs   4,369    3,844 
Loans   2,666,655    2,547,512 
Allowance for loan losses   (22,037)   (21,529)
Loans, net  $2,644,618   $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 June 30, 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  $4,247   $(2)  $1   $8   $4,254 
Commercial   11,240    -    2    391    11,633 
Construction   518    -    -    133    651 
Commercial   3,915    -    -    162    4,077 
Home equity line of credit   1,380    -    -    (1)   1,379 
Other   49    (29)   6    17    43 
   $21,349   $(31)  $9   $710   $22,037 

 

   For the Three Months Ended June 30, 2016 
   Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
(Dollars in thousands)                         
Real estate                         
Residential  $3,926   $-   $1   $(183)  $3,744 
Commercial   10,245    -    -    244    10,489 
Construction   296    -    -    31    327 
Commercial   4,247    (191)   1    573    4,630 
Home equity line of credit   1,420    -    -    71    1,491 
Other   40    (72)   6    65    39 
   $20,174   $(263)  $8   $801   $20,720 

 

20 

 

 

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

 

   For the Six Months Ended June 30, 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   $(33)  $1   $152   $4,254 
Commercial   11,131    (111)   2    611    11,633 
Construction   425    -    -    226    651 
Commercial   4,400    (322)   -    (1)   4,077 
Home equity line of credit   1,398    -    -    (19)   1,379 
Other   41    (80)   16    66    43 
   $21,529   $(546)  $19   $1,035   $22,037 

 

   For the Six Months Ended June 30, 2016 
   Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
(Dollars in thousands)                    
Real estate:                    
Residential  $4,084   $(24)  $1   $(317)  $3,744 
Commercial   10,255    -    -    234    10,489 
Construction   231    -    -    96    327 
Commercial   4,119    (342)   10    843    4,630 
Home equity line of credit   1,470    -    -    21    1,491 
Other   39    (158)   17    141    39 
   $20,198   $(524)  $28   $1,018   $20,720 

 

21 

 

 

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 June 30, 2017 and December 31, 2016:

 

   June 30, 2017   December 31, 2016 
       Reserve       Reserve 
(Dollars in thousands)  Total   Allocation   Total   Allocation 
Loans individually evaluated for impairment:                    
Real estate:                    
Residential  $13,036   $127   $12,778   $145 
Commercial   8,460    -    12,363    14 
Construction   4,532    -    4,532    - 
Commercial   1,379    -    2,029    112 
Home equity line of credit   2,034    -    1,864    - 
Other   566    6    707    7 
    30,007    133    34,273    278 
                     
Loans collectively evaluated for impairment:                    
Real estate:                    
Residential  $955,410   $4,127   $900,352   $3,989 
Commercial   1,010,806    11,633    965,718    11,117 
Construction   69,531    651    45,147    425 
Commercial   429,818    4,077    428,466    4,288 
Home equity line of credit   166,244    1,379    168,922    1,398 
Other   4,839    37    4,634    34 
    2,636,648    21,904    2,513,239    21,251 
Total  $2,666,655   $22,037   $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:

 

   June 30,   December 31, 
(Dollars in thousands)  2017   2016 
Nonaccrual loans:          
Real estate:          
Residential  $9,664   $9,846 
Commercial   78    976 
Construction   4,532    4,532 
Commercial   892    1,301 
Home equity line of credit   798    862 
Other   58    44 
Total nonaccruing loans   16,022    17,561 
Loans 90 days past due and still accruing   -    - 
Other real estate owned   -    - 
Total nonperforming assets  $16,022   $17,561 

 

22 

 

 

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

 

The following is a summary of loan delinquencies at recorded investment values at June 30, 2017 and December 31, 2016:

 

   June 30, 2017 
   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   9   $1,663    8   $1,421    23   $7,889    40   $10,973   $- 
Commercial   -    -    -    -    -    -    -    -    - 
Construction   -    -    -    -    1    4,532    1    4,532    - 
Commercial   -    -    -    -    1    25    1    25    - 
Home equity line of credit   -    -    1    7    3    400    4    407    - 
Other   12    101    1    3    1    18    14    122    - 
Total   21   $1,764    10   $1,431    29   $12,864    60   $16,059   $- 

 

   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   $- 

 

23 

 

 

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

 

The following is a summary of information pertaining to impaired loans at June 30, 2017 and December 31, 2016:

 

   June 30, 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  $12,070   $13,934   $-   $11,046   $12,833   $- 
Commercial   8,460    8,494    -    9,496    9,636    - 
Construction   4,532    4,532    -    4,532    4,532    - 
Commercial   1,379    2,433    -    1,784    2,027    - 
Home equity line of credit   2,034    2,087    -    1,864    1,909    - 
Other   542    561    -    682    700    - 
Total   29,017    32,041    -    29,404    31,637    - 
                               
Impaired loans with a valuation allowance:                              
Real estate:                              
Residential   966    990    127    1,732    1,796    145 
Commercial   -    -    -    2,867    2,867    14 
Construction   -    -    -    -    -    - 
Commercial   -    -    -    245    894    112 
Home equity line of credit   -    -    -    -    -    - 
Other   24    24    6    25    25    7 
Total   990    1,014    133    4,869    5,582    278 
Total impaired loans  $30,007   $33,055   $133   $34,273   $37,219   $278 

 

24 

 

 

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

 

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

 

       Three Months   Six Months       Three Months   Six Months 
       Ended   Ended       Ended   Ended 
   June 30,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2017   2017   2017   2016   2016   2016 
   Average   Interest   Interest   Average   Interest   Interest 
   Recorded   Income   Income   Recorded   Income   Income 
(Dollars in thousands)  Investment   Recognized   Recognized   Investment   Recognized   Recognized 
Impaired loans without a valuation allowance:                              
Real estate:                              
Residential  $11,566   $31   $58   $11,260   $24   $48 
Commercial   9,677    96    192    13,138    132    271 
Construction   4,579    -    -    4,719    34    69 
Commercial   1,590    5    8    3,101    8    19 
Home equity line of credit   1,927    11    21    1,195    8    10 
Other   648    7    14    941    9    19 
Total   29,987    150    293    34,354    215    436 
                               
Impaired loans with a valuation allowance:                              
Real estate:                              
Residential   1,181    7    14    855    8    19 
Commercial   2,151    17    51    2,913    35    70 
Construction   -    -    -    -    -    - 
Commercial   229    -    -    1,966    1    2 
Home equity line of credit   -    -    -    -    -    - 
Other   25    -    -    34    -    - 
Total   3,586    24    65    5,768    44    91 
Total impaired loans  $33,573   $174   $358   $40,122   $259   $527 

 

There was no interest income recognized on a cash basis method of accounting for the three and six months ended June 30, 2017 and 2016.

 

25 

 

 

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

 

The following tables present information on loans whose terms had been modified in a troubled debt restructuring at June 30, 2017 and December 31, 2016:

 

   June 30, 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   17   $2,891    13   $4,969    30   $7,860 
Commercial   1    457    -    -    1    457 
Construction   -    -    1    4,532    1    4,532 
Commercial   2    226    5    846    7    1,072 
Home equity line of credit   12    1,314    -    -    12    1,314 
Other   5    551    1    15    6    566 
Total   37   $5,439    20   $10,362    57   $15,801 

 

   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 balances of TDRs were $15.8 million and $18.3 million at June 30, 2017 and December 31, 2016, respectively. TDRs on accrual status were $5.4 million and $8.2 million while TDRs on nonaccrual status were $10.4 million and $10.1 million at June 30, 2017 and December 31, 2016, respectively. At June 30, 2017, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At June 30, 2017 and December 31, 2016, the allowance for loan losses included specific reserves of $132,000 and $160,000 related to TDRs, respectively. For the six months ended June 30, 2017 and 2016, the Bank had charge-offs totaling $35,000 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 $121,000 and $369,000 at June 30, 2017 and December 31, 2016, respectively.

 

26 

 

 

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

 

The following tables include the recorded investment and number of modifications for modified loans. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured for the three and six months ended June 30, 2017 and 2016:

 

   For the Three Months Ended June 30, 2017   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
   Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
 
Troubled Debt Restructurings:                              
Real estate                              
Residential   2   $357   $357    6   $953   $946 
Home equity line of credit   1    96    96    3    184    184 
Total   3   $453   $453   $9   $1,137   $1,130 

 

   For the Three Months Ended June 30, 2016   For the Six Months Ended June 30, 2016 
(Dollars in thousands)  Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
   Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
 
Troubled Debt Restructurings:                              
Home equity line of credit   3   $141   $141    6   $985   $984 
Total   3   $141   $141    6   $985   $984 

 

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

 

The following tables provide TDR loans that were modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and/or the concessions and borrowers discharged in bankruptcy for the three and six months ended June 30, 2017 and 2016:

 

   For the Three Months Ended June 30, 2017 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity (1)
   Adjusted
Interest
Rates (1)
   Combination
of Rate and
Maturity (1)
   Other (1)    Total 
Real estate                              
Residential   2   $-   $-   $-   $357   $357 
Home equity line of credit   1    -    -    -    96    96 
Total   3   $-   $-   $-   $453   $453 

 

   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity (1)
   Adjusted
Interest
Rates (1)
   Combination
of Rate and
Maturity (1)
   Other (1)    Total 
Real estate                              
Residential   6   $89   $-   $331   $526   $946 
Home equity line of credit   3   $88   $-   $-   $96   $184 
Total   9   $177   $-   $331   $622   $1,130 

 

27 

 

 

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

 

   For the Three Months Ended June 30, 2016 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity (1)
   Adjusted
Interest
Rates (1)
   Combination
of Rate and
Maturity (1)
   Other (1)    Total 
Home equity line of credit   3   $-   $-   $-   $141   $141 
Total   3   $-   $-   $-   $141   $141 

 

   For the Six Months Ended June 30, 2016 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity (1)
   Adjusted
Interest
Rates (1)
   Combination
of Rate and
Maturity (1)
   Other (1)    Total 
Home equity line of credit   6   $-   $-   $-   $984   $984 
Total   6   $-   $-   $-   $984   $984 

 

(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.

 

A TDR is considered to be in re-default once it is more than 30 days past due following a modification. The following loans defaulted during the twelve month period preceding the modification date during the three and six months ended June 30, 2017 and 2016.

 

   For the Three Months Ended   For the Six Months Ended 
   June 30, 2017   June 30, 2017 
(Dollars in thousands)  Number of
Loans
   Recorded
Investment (1)
   Number of
Loans
   Recorded
Investment (1)
 
Real estate                    
Construction   -   $-    1   $4,532 
Total   -   $-    1   $4,532 

 

   For the Three Months Ended   For the Six Months Ended 
   June 30, 2016   June 30, 2016 
(Dollars in thousands)  Number of
Loans
   Recorded
Investment (1)
   Number of
Loans
   Recorded
Investment (1)
 
Real estate                    
Residential   1   $301    1   $301 
Total   1   $301    1   $301 

 

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

 

28 

 

 

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

 

Credit Quality Information

 

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

 

The Company utilizes a point risk rating scale as follows:

 

Risk Rating Definitions

 

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

 

Loans rated 1 – 5, 55:Commercial loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 6:Residential, Consumer and Commercial loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

 

Loans rated 7:Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

 

Loans rated 8:Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

 

Loans rated 9:Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

 

29 

 

 

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

 

The following table presents the Company’s loans by risk rating at June 30, 2017 and December 31, 2016:

 

   June 30, 2017 
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Real estate:                         
Residential  $951,626   $1,056   $10,050   $-   $962,732 
Commercial   1,008,523    3,146    8,891    -    1,020,560 
Construction   69,531    -    4,532    -    74,063 
Commercial   402,821    14,928    13,494    -    431,243 
Home equity line of credit   167,441    39    798    -    168,278 
Other   5,321    29    60    -    5,410 
Total Loans  $2,605,263   $19,198   $37,825   $-   $2,662,286 

 

   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.

 

30 

 

 

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

 

6.Mortgage Servicing Rights

 

The Company services residential real estate mortgage loans that it has sold without recourse to third parties. The carrying value of mortgage servicing rights was $4.9 million and $4.8 million at June 30, 2017 and December 31, 2016, respectively, and the balance is included in prepaid expenses and other assets in the accompanying Consolidated Statements of Financial Condition. The fair value of mortgage servicing rights approximated $6.4 million and $6.2 million at June 30, 2017 and December 31, 2016, respectively. Mortgage servicing rights impairment totaling $-0- and $374,000 for the six months ended June 30, 2017 and 2016, respectively, is included as a component of other noninterest income in the accompanying Consolidated Statements of Income. Total loans sold with servicing rights retained were $40.0 million and $64.3 million for the six months ended June 30, 2017 and 2016, respectively. The net gain on loans sold totaled $1.1 million and $1.2 million for the six months ended June 30, 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 $551.7 million and $540.4 million at June 30, 2017 and December 31, 2016, respectively. Loan servicing fees for others totaling $678,000 and $584,000 for the six months ended June 30, 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 June 30, 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 June 30, 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 June 30, 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 $389.5 million and $287.1 million at June 30, 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 June 30, 2017 and December 31, 2016. The Company had available borrowings of $510.8 million and $544.7 million at June 30, 2017 and December 31, 2016, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $41.5 million and $83.5 million at June 30, 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 $69.5 million and $64.2 million on an overnight basis at June 30, 2017 and December 31, 2016, respectively, and was undrawn as of June 30, 2017 and December 31, 2016. The funding arrangement was collateralized by $133.8 million and $128.7 million in pledged commercial real estate loans as of June 30, 2017 and December 31, 2016, respectively.

 

31 

 

 

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

 

The Bank has a Master Repurchase Agreement borrowing facility with a broker. Borrowings under the Master Repurchase Agreement are secured by the Company’s investments in certain securities and cash with a fair value of $11.3 million at June 30, 2017 and December 31, 2016. Outstanding borrowings totaled $10.5 million at June 30, 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 $36.1 million and $18.9 million at June 30, 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 $45.9 million and $30.2 million as of June 30, 2017 and December 31, 2016, respectively.

 

8.Deposits

 

Deposit balances are as follows:

 

   June 30,   December 31, 
   2017   2016 
(Dollars in thousands)        
Noninterest-bearing demand deposits  $445,049   $441,283 
Interest-bearing          
NOW accounts   547,868    542,764 
Money market   522,070    532,681 
Savings accounts   241,898    233,792 
Time deposits   488,119    464,570 
Total interest-bearing deposits   1,799,955    1,773,807 
Total deposits  $2,245,004   $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. Currently, this program is not being utilized. The Company also has established a relationship for brokered deposits. There were brokered deposits totaling $43.5 million and $43.2 million at June 30, 2017 and December 31, 2016, respectively.

 

Time certificates of deposit in denominations of $250,000 or more approximated $109.6 million and $99.8 million at June 30, 2017 and December 31, 2016, respectively.

 

32 

 

 

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

 

9.Pension and Other Postretirement Benefit Plans

 

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

 

   Pension Benefits   Other Postretirement Benefits 
   Three Months Ended June 30,   Three Months Ended June 30, 
   2017   2016   2017   2016 
(Dollars in thousands)                    
Service cost  $-   $-   $14   $14 
Interest cost   250    262    25    30 
Expected return on plan assets   (296)   (278)   -    - 
Amortization:                    
Loss   178    176    -    - 
Prior service cost   -    -    (13)   (13)
Recognized net gain   -    -    (2)   - 
Net periodic benefit cost  $132   $160   $24   $31 

 

   Pension Benefits   Other Postretirement Benefits 
   Six Months Ended June 30,   Six Months Ended June 30, 
   2017   2016   2017   2016 
(Dollars in thousands)                
Service cost  $-   $-   $29   $28 
Interest cost   500    525    51    60 
Expected return on plan assets   (591)   (556)   -    - 
Amortization:             -      
Loss   354    352    -    - 
Prior service cost   -    -    (25)   (25)
Recognized net gain   -    -    (4)   - 
Net periodic benefit cost  $263   $321   $51   $63 

 

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 June 30, 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 $1.2 million and $776,000 for the six months ended June 30, 2017 and 2016, respectively.

 

33 

 

 

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

 

Shares held by the ESOP include the following as of June 30, 2017:

 

Allocated   572,166 
Committed to be released   47,289 
Unallocated   810,961 
    1,430,416 

 

The fair value of unallocated ESOP shares was $20.8 million at June 30, 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 June 30, 2017 and 2016, the Company recorded $73,000 and $644,000 of share-based compensation expense, respectively, comprised of $20,000 and $260,000 of stock option expense, respectively and $53,000 and $384,000 of restricted stock expense, respectively. For the six months ended June 30, 2017 and 2016, the Company recorded $184,000 and $1.3 million of share-based compensation expense, respectively, comprised of $40,000 and $528,000 of stock option expense, respectively and $144,000 and $767,000 of restricted stock expense, respectively. Expected future compensation expense relating to the 46,350 non-vested options outstanding at June 30, 2017 is $129,000 over the remaining weighted-average period of 2.04 years. Expected future compensation expense relating to the 27,698 non-vested restricted stock outstanding at June 30, 2017 is $559,000 over the remaining weighted-average period of 2.65 years.

 

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

 

34 

 

 

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

 

Weighted-average assumptions for the six months ended June 30, 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 six months ended June 30, 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   (41,850)   13.56           
Forfeited   -    -           
Expired   -    -           
Outstanding at June 30, 2017   1,426,026   $13.18    5.35   $17,770 
                     
Exercisable at June 30, 2017   1,379,676   $13.05    5.25   $17,391 

 

The total intrinsic value of options exercised during the six months ended June 30, 2017 was $457,000.

 

The following is a summary of the status of the Company’s restricted stock for the three months ended June 30, 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 June 30, 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.

 

35 

 

 

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

 

11.Derivative Financial Instruments

 

Non-Hedge Accounting Derivatives/Non-designated Hedges:

 

The Company does not use derivatives for trading or speculative purposes. Interest rate swap derivatives not designated as hedges are offered to certain qualifying commercial customers and to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting 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 June 30, 2017, the Company maintained a cash balance of $7.4 million with a correspondent bank to collateralize its position. The Company has an agreement with a correspondent bank to secure any outstanding receivable in excess of $10.0 million.

 

Credit-risk-related Contingent Features

 

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

 

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

 

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

 

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

 

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

 

36 

 

 

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

 

The Company is in compliance with the above provisions as of June 30, 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:

 

      June 30, 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   57   $295,774   $7,863    51   $242,351   $7,095 
                                  
Commercial loan customer interest rate swap position  Other Liabilities   30    133,732    (3,897)   33    148,097    (4,502)
                                  
Counterparty interest rate swap position  Other Liabilities   87    429,506    (4,065)   84    390,448    (2,687)

 

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 June 30, 
   2017   2016 
   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact 
(Dollars in thousands)                              
Commercial loan customer interest rate swap position  $(1,093)  $1,804   $711   $(1,441)  $5,190   $3,749 
                               
Counterparty interest rate swap position   1,093    (1,804)   (711)   1,441    (5,190)   (3,749)
Total  $-   $-   $-   $-   $-   $- 

 

   For The Six Months Ended June 30, 
   2017   2016 
   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact   Interest Income
Recorded in
Interest Income
   MTM Gain
(Loss) Recorded
in Noninterest
Income
   Net Impact 
(Dollars in thousands)                              
Commercial loan customer interest rate swap position  $(2,370)  $768   $(1,602)  $(2,813)  $14,982   $12,169 
                               
Counterparty interest rate swap position   2,370    (768)   1,602    2,813    (14,982)   (12,169)
Total  $-   $-   $-   $-   $-   $- 

 

37 

 

 

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

 

Mortgage Banking Derivatives

 

Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Company agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At June 30, 2017, the notional amount of outstanding rate locks totaled approximately $26.1 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $23.2 million, which included mandatory forward commitments totaling approximately $14.5 million at June 30, 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 June 30, 2017 and December 31, 2016, disaggregated by the class of collateral pledged.

 

   June 30, 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   36,101    -    -    36,101    18,867    -    -    18,867 
Total repurchase liabilities   36,101    -    -    36,101    18,867    -    -    18,867 
Total  $36,101   $10,500   $-   $46,601   $18,867   $-   $10,500   $29,367 

 

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

 

38 

 

 

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

 

The following tables present the potential effect of rights of setoff associated with the Company’s recognized financial assets and liabilities at June 30, 2017 and December 31, 2016:

 

   June 30, 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  $7,863   $-   $7,863   $-   $-   $7,400   $463 
Total  $7,863   $-   $7,863   $-   $-   $7,400   $463 

 

   June 30, 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  $7,962   $-   $7,962   $-   $-   $7,400   $562 
Repurchase agreement borrowings   10,500    -    10,500    -    10,420    80    - 
Total  $18,462   $-   $18,462   $-   $10,420   $7,480   $562 

 

   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 

 

39 

 

 

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

 

13.Financial Instruments with Off-Balance Sheet Risk

 

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

 

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

 

   June 30,   December 31, 
   2017   2016 
(Dollars in thousands)        
Approved loan commitments  $40,073   $102,436 
Unadvanced portion of construction loans   59,864    57,124 
Unused lines for home equity loans   207,912    199,191 
Unused revolving lines of credit   340    355 
Unused commercial letters of credit   5,496    3,820 
Unused commercial lines of credit   224,962    246,622 
   $538,647   $609,548 

 

Financial instruments with off-balance sheet risk had a valuation allowance of $62,000 and $153,000 as of June 30, 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 June 30, 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.

 

40 

 

 

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

 

15.Fair Value Measurements

 

Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. In accordance with FASB ASC 820-10, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10 are described as follows:

 

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

 

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

 

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

 

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, and estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.

 

Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. There were no transfers between levels during the six months ended June 30, 2017 and 2016.

 

41 

 

 

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

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

Securities Available-for-Sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 1 securities are those traded on active markets for identical securities including U.S. treasury obligations, preferred equity securities and marketable equity securities. Level 2 securities include U.S. treasury obligations, U.S. government agency obligations, government-sponsored residential mortgage-backed securities, corporate debt securities, trust preferred debt securities, and mutual funds. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as level 3 and reliance is placed upon internally developed models and management judgment and evaluation for valuation. The Company had no Level 3 securities at June 30, 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 ($52,000) and $40,000 for the six months ended June 30, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.

 

42 

 

 

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

 

The following tables detail the financial instruments carried at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   June 30, 2017 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   Inputs 
(Dollars in thousands)  Total   (Level 1)   (Level 2)   (Level 3) 
Assets                    
U.S. Treasury obligations  $30,992   $8,974   $22,018   $- 
U.S. Government agency obligations   70,732    -    70,732    - 
Government sponsored residential mortgage-backed securities   3,272    -    3,272    - 
Corporate debt securities   507    -    507    - 
Preferred equity securities   1,888    1,888    -    - 
Marketable equity securities   182    182    -    - 
Mutual funds   4,870    -    4,870    - 
Securities available-for-sale   112,443    11,044    101,399    - 
Interest rate swap derivative   7,863    -    7,863    - 
Derivative loan commitments   197    -    -    197 
Total  $120,503   $11,044   $109,262   $197 
                     
Liabilities                    
Interest rate swap derivative  $7,962   $-   $7,962   $- 
Forward loan sales commitments   66    -    -    66 
Total  $8,028   $-   $7,962   $66 

 

   December 31, 2016 
       Quoted Prices in   Significant   Significant 
       Active Markets for   Observable   Unobservable 
       Identical Assets   Inputs   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   $- 

 

43 

 

 

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

 

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

 

   Derivative and Forward Loan Sales Commitments, Net 
   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
   2017   2016   2017   2016 
(Dollars in thousands)                
Balance, at beginning of period  $139   $192   $183   $137 
Total realized (loss) gain:                    
Included in earnings   (8)   (15)   (52)   40 
Balance, at the end of period  $131   $177   $131   $177 

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016:

 

June 30, 2017
          Significant    
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Input 
Derivative and forward loan sales commitments, net  $131   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 June 30, 2017 and December 31, 2016 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   June 30, 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  $-   $-   $2,140   $-   $-   $3,727 

 

44