UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Fiscal Year Ended December 31, 2017

OR

 

¨	TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from________ to ________                     

 

Commission File No. 333-171913

 

  

First Connecticut Bancorp, Inc.

(Exact name of Registrant as Specified in its Charter)

 

Maryland		45-1496206
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification Number)
One Farm Glen Boulevard, Farmington, CT		06032
(Address of Principal Executive Office)		(Zip Code)

 

(860) 676-4600

(Registrant’s Telephone Number including Area Code)

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Class		Name of Each Exchange On Which Registered
Common Stock, par value $0.01 per share		The NASDAQ Global Select Market

 

Securities Registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    YES  ¨    NO  x

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    YES  ¨     NO  x

 

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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days  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 (§ 232.405 of this chapter) during the preceding 12 months (or for shorter period that the registrant was required to submit and post such files)   YES  ¨      NO x

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K.    x

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer — See definition of “accelerated and large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

 

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

 

The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock as of June 30, 2017 was approximately $392.6 million.

 

As of February 26, 2018, there were outstanding 15,967,658 shares of the Registrant’s common stock.

 

 

DOCUMENT INCORPORATED BY REFERENCE

 

Portions of the Proxy Statement for the Annual Meeting of Stockholders (Part III) expected to be filed within 120 days after the end of the Registrant’s fiscal year ended December 31, 2017, are incorporated herein by reference.

 

 

First Connecticut Bancorp, Inc.

 

Form 10-K Table of Contents

 

December 31, 2017

		Page
PART I
ITEM 1.	Business	1
ITEM 1A.	Risk Factors	34
ITEM 1B.	Unresolved Staff Comments	37
ITEM 2.	Properties	38
ITEM 3.	Legal Proceedings	39
ITEM 4.	Mine Safety Disclosures	39
PART II
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	39
ITEM 6.	Selected Financial Data	41
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	43
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	60
ITEM 8.	Financial Statements and Supplementary Data	60
ITEM 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	128
ITEM 9A.	Controls and Procedures	128
ITEM 9B.	Other Information	128
PART III		129
ITEM 10.	Directors, Executive Officers, and Corporate Governance	129
ITEM 11.	Executive Compensation	129
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	129
ITEM 13.	Certain Relationships and Related Transactions, and Director Independence	129
ITEM 14.	Principal Accountant Fees and Services	129
PART IV
ITEM 15.	Exhibits and Financial Statement Schedules	129
ITEM 16.	Form 10-K Summary	131
SIGNATURES		132

Part I

Item 1. Business

 

Forward-Looking Statements

 

From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A. and our Cautionary Statement Regarding Forward-Looking Information included in Item 7.

 

First Connecticut Bancorp, Inc.

 

First Connecticut Bancorp, Inc. (“First Connecticut Bancorp”, “FCB” or the “Company”) is a Maryland-chartered stock holding company that wholly owns its only subsidiary, Farmington Bank (“Bank”). At December 31, 2017, the Company had, on a consolidated basis, $3.1 billion in assets, of which $2.7 billion were in loans, $2.4 billion in deposits and stockholders’ equity of $272.5 million.

 

On July 2, 2012, the Company received regulatory approval to repurchase up to 1,788,020 shares, or 10% of its current outstanding common stock. On May 30, 2013, the Company completed its repurchase of 1,788,020 shares at a cost of $24.9 million, of which 486,947 shares were reissued as part of the 2012 Stock Incentive Plan. On June 21, 2013, the Company received regulatory approval to repurchase up to an additional 1,676,452 shares, or 10% of its then current outstanding common stock. As of December 31, 2017, the Company has repurchased 1,075,507 of these shares at a cost of $16.2 million. Repurchased shares are held as treasury stock and are available for general corporate purposes.

 

On September 5, 2012, the Company registered 2,503,228 shares to be reserved for issuance from the First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The shares under the 2012 Plan have been granted as of December 31, 2017. In May 2016, the Company’s shareholders approved the First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (the “2016 Plan”). The 2016 Plan provides for a total of 300,000 shares of common stock for issuance upon the grant or exercise of awards. The 2016 Plan shares were registered on July 12, 2016. The Company has issued 61,296 shares from the 2016 Plan as of December 31, 2017.

 

Farmington Bank

 

Farmington Bank is a full-service, community bank with 24 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Established in 1851, Farmington Bank is a diversified consumer and commercial bank with an ongoing commitment to contribute to the betterment of the communities in our region. Farmington Bank is regulated by the Connecticut Department of Banking and the Federal Deposit Insurance Corporation (“FDIC”). Farmington Bank’s deposits are insured to the maximum allowable under the Deposit Insurance Fund, which is administered by the FDIC. Farmington Bank is a member of the Federal Home Loan Bank of Boston (“FHLBB”). Farmington Bank is the wholly-owned subsidiary of First Connecticut Bancorp.

 

The executive office of the Company is located at One Farm Glen Boulevard, Farmington, Connecticut, 06032.

 

Farmington Bank’s website (www.farmingtonbankct.com) contains a direct link to the Company’s filings with the Securities and Exchange Commission, including copies of our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to these filings, as well as ownership reports on Forms 3, 4 and 5 filed by the Company’s directors and executive officers. Copies may also be obtained, without charge, by written request to First Connecticut Bancorp, Inc. Investor Relations, One Farm Glen Boulevard, Farmington, Connecticut, 06032, Attention: Jennifer Daukas or send an email to: investor-relations@firstconnecticutbancorp.com. Information on our website is not part of this Annual Report on Form 10-K.

 

Market Area

 

We operate in a primarily suburban market area that has a stable population and household base. Our current branch offices are primarily in Hartford County, Connecticut; two of our branch offices are located in Hampden County, Massachusetts. Our primary market area is central Connecticut and western Massachusetts. Our main office is in Farmington, Connecticut and is approximately ten miles from the City of Hartford, Connecticut. The counties we serve have a mix of industry groups and employment sectors including insurance, health services, finance, manufacturing, not-for-profit, education, government and technology. Our primary market area for deposits includes the communities in which we maintain our banking office locations. Our lending area is broader than our deposit market area and primarily includes Connecticut and western Massachusetts, however, we will selectively lend to borrowers in other northeastern states. We expect to open a branch office in Manchester, CT in the first quarter of 2018. During 2016, we opened a branch office in Vernon, CT and a loan production office in Fairfield, CT.

 

Based on the most recent data available from the Federal Deposit Insurance Corporation (“FDIC”) as of June 30, 2017, we possess a 5.99% deposit market share in Hartford County. Our market share rank is 4th out of 27 financial institutions.

 

Lending Activities

 

Historically, our principal lending activities have been residential, consumer and commercial lending. As part of our growth strategy, we have been increasing our commercial portfolio and attracting larger, more comprehensive long-term borrowing relationships in the areas of commercial real estate lending (both owner and non-owner-occupied) and commercial lending, and supplementing these areas with more extensive cash management and depository services in an effort to increase interest income, diversify our loan portfolio and better serve the community.

 

The resulting overall loan portfolio performance has been strong with total loan growth of 7.8% in 2017, 7.9% in 2016, 10.4% in 2015 and 17.5% in 2014. Our total loans at December 31, 2017 increased by $199.3 million or 7.8% from December 31, 2016 primarily due to increases in our commercial loan portfolio which grew $123.3 million or 8.5% from December 31, 2016 to December 31, 2017.

 

Our senior management team has carefully built the infrastructure necessary to support this growth and provide critical on-going portfolio management and risk assessment. A comprehensive risk management program is in place to enable us to evaluate the risk in our portfolio and to implement changes in our underwriting standards so as to minimize overall portfolio risk. As part of this program, our loan portfolio is subject to concentration limits, market analyses, stress testing, ongoing monitoring, and reporting and review of underwriting standards.

 

The following table sets forth the composition of our loan portfolio by type of loans at the dates indicated:

 

		At December 31,
		2017								2016								2015								2014								2013
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
		(Dollars in Thousands)
Real estate:
Residential		$	989,366				36.1	%		$	907,946				35.7	%		$	849,722				36.1	%		$	827,005				38.7	%		$	693,046				38.2	%
Commercial			1,063,755				38.8	%			979,370				38.5	%			887,431				37.6	%			765,066				35.8	%			633,764				34.9	%
Construction(1)			90,059				3.3	%			49,679				2.0	%			30,895				1.3	%			57,371				2.7	%			78,191				4.3	%
Commercial			429,116				15.6	%			430,539				16.9	%			409,550				17.4	%			309,708				14.5	%			252,032				13.9	%
Home equity line of credit			165,070				6.0	%			170,786				6.7	%			174,701				7.4	%			169,768				8.0	%			151,606				8.3	%
Other			5,650				0.2	%			5,348				0.2	%			5,513				0.2	%			6,117				0.3	%			7,669				0.4	%
Total loans			2,743,016				100.0	%			2,543,668				100.0	%			2,357,812				100.0	%			2,135,035				100.0	%			1,816,308				100.0	%
Net deferred loan costs			5,065								3,844								3,984								3,842								2,993
Loans			2,748,081								2,547,512								2,361,796								2,138,877								1,819,301
Allowance for loan losses			(22,448	)							(21,529	)							(20,198	)							(18,960	)							(18,314	)
Loans, net		$	2,725,633							$	2,525,983							$	2,341,598							$	2,119,917							$	1,800,987

 

(1)

Construction loans include commercial and residential construction loans and are reported net of undisbursed construction loans of $50.0 million as of December 31, 2017.

 

Major loan customers: Our five largest lending relationships are with commercial borrowers with loans totaling $138.8 million or 5.1% of our total loan portfolio outstanding as of December 31, 2017. Loan commitments to these borrowers totaled $141.1 million for the same period. These relationships and commitments consist of the following:

 

1.

Fully advanced $35.8 million relationship comprised of two commercial mortgage loans on two distinct properties to acquire a retail plaza in Massachusetts anchored by a national investment grade grocery tenant and to provide capital reimbursement for the purchase of property leased to a national investment grade superstore in Maryland.

 

2.

Fully advanced $28.5 million relationship comprised of three commercial mortgage loans on two distinct properties extended to a well-known New England developer for the refinancing of construction debt associated with the redevelopment of an 82-unit apartment complex located in New Hampshire and refinancing of construction debt associated with the redevelopment of a 157-unit apartment complex located in Rhode Island.

 

3.

$25.1 million advanced on a $27.4 million relationship comprised of two loans, a non-revolving line of credit to fund construction of a retail plaza anchored by national tenants in Connecticut and a fully advanced mortgage to refinance a retail plaza located in New York, which is 100% occupied and anchored by a national grocery chain.

 

4.

Fully advanced $25 million direct purchase bond financing loan to a private college located in Pennsylvania for the construction of new dorms and a student commons building.

 

5.

Fully advanced $24.4 million relationship comprised of five loans, each to finance the acquisition of property in Connecticut under long-term leases to one of the largest pharmacy store chains in the United States.

 

All of the credit facilities extended to the five largest borrowers as of December 31, 2017 are current and performing in accordance with their respective terms.

 

Real Estate Loans:

 

Residential Real Estate Loans: One of our primary lending activities consists of the origination of one-to-four family residential real estate loans that are primarily secured by properties located in Hartford County and surrounding counties in Connecticut. Of the $989.4 million and $907.9 million of residential loans outstanding at December 31, 2017 and 2016, respectively, $413.3 million and $411.7 million are fixed-rate loans. Generally, residential real estate loans are 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%. We usually do not make loans secured by single-family homes with loan-to-value ratios in excess of 95.0% (with the exception of Federal Housing Administration loans which allow for a 96.5% loan-to-value ratio). Fixed-rate mortgage loans generally are originated for terms of 7, 10, 15, 20, 25 and 30 years. All fixed-rate residential mortgage loans are underwritten pursuant to secondary market underwriting guidelines which include minimum FICO standards.

 

Based on the market environment for our residential mortgage originations we may sell our conforming 10, 15, 20 and 30 year fixed-rate residential mortgage loan production in the secondary market, while retaining the servicing rights. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We originated $130.2 million of conforming fixed-rate one-to-four family residential loans for the year ended December 31, 2017, $115.0 million of which were sold in the secondary market and we originated $157.9 million of fixed-rate one-to-four family residential loans for the year ended December 31, 2016, $141.1 million of which were sold in the secondary market. The loans sold meet secondary market guidelines and are subject to warranty exposure. Such exposure is mitigated by our quality control procedures and the fact that we are selling newly originated loans instead of seasoned loans in the secondary market. As of December 31, 2017, we have not been requested or required to repurchase any sold loans due to inadequate underwriting or documentation deficiencies. We have not and do not intend to originate subprime or alternative A paper (alt A) loans.

 

We also offer adjustable-rate mortgage loans for one-to-four family properties, with an interest rate that adjusts annually based on the Wall Street Journal One-Year LIBOR, after a one, three, five, seven or ten - year initial fixed-rate period. Our adjustable rate mortgage loans generally provide for maximum rate adjustments of 500 basis points per adjustment, with a lifetime maximum adjustment up to 5.0%, regardless of the initial rate. Our adjustable rate mortgage loans amortize over terms of up to 30 years. We originated $42.6 million and $33.5 million adjustable rate one-to-four family residential loans for the years ended December 31, 2017 and 2016, respectively. For the years ended December 31, 2017 and 2016, we purchased $114.6 million and $117.7 million in adjustable rate mortgages through our correspondent network, respectively.

 

Adjustable rate mortgage loans decrease the risks associated with changes in market interest rates by periodically repricing, but involve other risks because as interest rates increase, the underlying payments by the borrower increase, thus increasing the potential for default by the borrower. At the same time, the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustment of the contractual interest rate is also limited by the maximum periodic and lifetime interest rate adjustments permitted by our loan documents and, therefore, the effectiveness of adjustable rate mortgage loans may be limited during periods of rapidly rising interest rates. Of our one-to-four family residential real estate loans, $576.0 million and $496.2 million had adjustable rates of interest at December 31, 2017 and 2016, respectively. Declines in real estate values and or a slowdown in the housing market may make it more difficult for borrowers experiencing financial difficulty to sell their homes or refinance their debt due to their declining collateral values.

 

All residential mortgage loans that we originate include “due-on-sale” clauses, which give us the right to declare a loan immediately due and payable in the event that, among other things, the borrower sells or otherwise disposes of the real property. We also require homeowner’s insurance and, where circumstances warrant, flood insurance on properties securing real estate loans.

 

Our largest residential mortgage loan had a principal balance of $3.8 million at December 31, 2017, which is performing in accordance with terms.

 

Commercial Real Estate Loans: We originate commercial investment real estate loans and loans on owner-occupied properties used for a variety of business purposes, including office buildings, multi-family dwellings, industrial and warehouse facilities and retail facilities. Commercial mortgage loans totaled $1.1 billion and $979.4 million, or 38.8% and 38.5% of total loans, at December 31, 2017 and 2016, respectively. At December 31, 2017, our owner-occupied commercial mortgage loans constituted 25.6% of our commercial real estate portfolio and our investor-owned commercial mortgage real estate loans were 74.4% of the commercial real estate portfolio. The investor-owned portfolio is diversified among a number of property types as shown in the following table. Owner-occupied commercial real estate loans totaled $272.3 million and $213.3 million, or 25.6% and 21.8%, at December 31, 2017 and 2016, respectively. Our owner-occupied commercial real estate underwriting policies provide that typically such real estate loans may be made in amounts of up to 80.0% of the appraised value of the property. Our commercial real estate loans are generally made with terms of up to 20 years, amortization schedules generally up to 25 years and interest rates that are fixed for a period of time, generally set at a margin above the FHLBB Advance rates. Variable rate options are also available, generally tied to the prime rate as published in the Wall Street Journal, or for qualifying borrowers, tied to LIBOR plus a margin. Interest rate swaps are offered to qualified borrowers to effect a fixed-rate equivalent for the borrower and allows us to effectively hedge against interest rate risk on large, long-term loans. In reaching a credit decision on whether to make a commercial real estate loan, we consider gross revenues and the net operating income of the property, the borrower’s cash flow and credit history, and the appraised value of the underlying property. In addition, with respect to commercial real estate rental properties, we also consider the terms and conditions of the leases, the credit quality of the tenants and the borrower’s global cash flow. We typically require that the properties securing our commercial real estate loans have debt service coverage ratios (the ratio of earnings before interest, taxes, depreciation and amortization divided by interest expense and current maturities of long-term debt) of at least 1.20x. Environmental reports and current appraisals are required for commercial real estate loans as governed by our written environmental and appraisal policies. Generally, a commercial real estate loan made to a corporation, partnership or other business entity requires personal guarantees by the principals and owners of 20.0% or more of the entity, though, we do offer non-recourse financing to commercial real estate borrowers who exhibit strong credit metrics including, but not limited to, strong debt service coverage and low loan-to-value ratios.

 

A commercial real estate borrower’s financial information and various credit quality indicators are monitored on an ongoing basis by requiring the submission of periodic financial statement updates, annual tax returns and the periodic review of payment history. In addition, we typically conduct periodic face-to-face meetings with the borrower, as well as property site visits. These requirements also apply to guarantors of commercial real estate loans. Borrowers with loans secured by rental investment property are required to provide an annual report of income and expenses for such property, including a tenant rent roll and copies of leases, as applicable.

 

Loans secured by commercial real estate generally involve larger principal amounts and a greater degree of risk than one-to-four family residential mortgage loans. Because payments on loans secured by commercial real estate are often dependent on the successful operation or management of the properties, repayment of such loans may be affected by adverse conditions in the real estate market, the economy or the tenant(s). Given our level of commercial real estate exposure, our commercial real estate portfolio risk management program enables us to evaluate the risk in our portfolio and to implement changes in our lending practices to minimize overall portfolio risk. As part of this program, the commercial real estate portfolio is subject to concentration limits, market analyses, stress testing, ongoing monitoring, and review and reporting of underwriting standards.

 

The largest commercial real estate loan, excluding commercial construction, was $21.5 million at December 31, 2017 and is performing in accordance with terms.

 

 

The following table presents the amounts and percentages of commercial real estate loans held by type as of December 31, 2017 and 2016.

 

		2017								2016
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Type of Commercial Real Estate Loans:
Retail		$	345,256				32.5	%		$	287,551				29.4	%
Owner occupied			272,333				25.6	%			213,335				21.8	%
Multi-family			206,312				19.4	%			204,389				20.9	%
Office			91,537				8.6	%			128,675				13.1	%
Other			83,110				7.8	%			80,225				8.2	%
Industrial			32,545				3.0	%			40,652				4.1	%
Hotel			23,227				2.2	%			21,495				2.2	%
Land			9,435				0.9	%			3,048				0.3	%
Total		$	1,063,755				100.0	%		$	979,370				100.0	%

 

Construction Loans: We offer construction loans, including commercial construction loans and 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 loans outstanding, including commercial and residential, totaled $90.1 million and $49.7 million, or 3.3% and 2.0% of total loans outstanding at December 31, 2017 and 2016, respectively. At December 31, 2017, the unadvanced portion of these construction loans totaled $50.0 million, as compared to $57.1 million at December 31, 2016. Our underwriting policies provide that construction loans typically be made in amounts of up to 75.0% of the appraised value of the property. We extend loans to residential subdivision developers for the purpose of land acquisition, the development of infrastructure and the construction of homes. Advances are determined as a percentage of the cost or appraised value of the improvements, whichever is less, and each project is physically inspected prior to each advance either by a loan officer or an engineer approved by us. We typically limit the number of speculative units financed by a customer, with the majority of construction advances supported by purchase contracts.

 

We also originate construction loans to individuals and contractors for the construction and acquisition of personal residences. Residential construction loans outstanding totaled $10.2 million and $4.5 million at December 31, 2017 and 2016, respectively. The unadvanced portion of these construction loans totaled $7.6 million and $5.1 million at December 31, 2017 and 2016, respectively. Our residential construction mortgage loans generally provide for the payment of interest only during the construction phase, which is typically up to nine months, although our policy is to consider construction periods as long as 12 months. At the end of the construction phase, the construction loan converts to a long-term owner-occupied residential mortgage loan. Construction loans can be made with a maximum loan-to-value ratio of 80.0%. Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. We also review and inspect each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of completion method. Construction loans to individuals are generally made on the same terms as our one-to-four family mortgage loans.

 

Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the actual cost (including interest) of construction and other assumptions. If the estimate of construction cost is too low, we may be required to advance funds beyond the amount originally committed in order to protect the value of the property. Additionally, if the estimate of value is too high, we may be confronted with a project, when completed, with a value that is insufficient to assure full payment. 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. A continued economic downturn could have an additional adverse impact on the value of the properties securing construction loans and on our borrowers’ ability to sell their units for the amounts necessary to complete their projects and repay their loans.

 

 

The following table presents the amounts and percentages of construction loans held by type as of December 31, 2017 and 2016.

 

		2017								2016
		Amount				Percent				Amount				Percent
		(Dollars in thousands)
Type of Construction Loans:
Retail		$	27,979				31.1	%		$	11,908				24.0	%
Multi-family			18,726				20.8	%			8,685				17.5	%
Commercial owner-occupied			14,873				16.5	%			17,293				34.8	%
Office			13,781				15.3	%			3,995				8.0	%
Residential			10,152				11.3	%			4,507				9.1	%
Subdivision			2,213				2.4	%			1,595				3.2	%
Other			1,466				1.6	%			1,696				3.4	%
Subdivision speculative			869				1.0	%			-				-
Total		$	90,059				100.0	%		$	49,679				100.0	%

 

The establishment of interest reserves for construction and development loans is an established banking practice, but the handling of such interest reserves varies widely within the industry. Many of our construction and development loans provide for the use of interest reserves, and based upon our knowledge of general industry practices, we believe that our practices related to such interest reserves are appropriate and adequate. When we underwrite construction and development loans, we consider the expected total project costs, including hard costs such as land, site work and construction costs and soft costs such as architectural and engineering fees, closing costs, leasing commissions and construction period interest. Based on the total project costs and other factors, we determine the required borrower cash equity contribution and the maximum amount we are willing to loan. In the vast majority of cases, we require that all of the borrower’s cash equity contribution be contributed prior to any material loan advances. This ensures that the borrower’s cash equity required to complete the project will in fact be available for such purposes. As a result of this practice, the borrower’s cash equity typically goes toward the purchase of the land and early stage hard costs and soft costs. This results in our funding the loan later as the project progresses, and accordingly we typically fund the majority of the construction period interest through loan advances. As of December 31, 2017, we are committed to advance construction period interest totaling approximately $1.6 million on construction and development loans. The maximum committed balance of all construction and development loans which provide for the use of interest reserves at December 31, 2017 was approximately $87.1 million, of which $50.4 million was outstanding at December 31, 2017 and $36.7 million remained to be advanced.

 

The largest commercial construction loan was $12.6 million of which $10.4 million was outstanding at December 31, 2017, and is performing in accordance with terms.

 

Commercial Loans:

 

Our approach to commercial lending is centered in relationship banking. While our primary focus is to extend financing to meet the needs of creditworthy borrowers, we also endeavor to provide a comprehensive solution for all of a business’ banking needs including depository, cash management and investment needs. The commercial business loan portfolio is comprised of both middle market companies and small businesses located primarily in Connecticut and western Massachusetts. Market segments represented include manufacturers, distributors, service businesses, financial services, healthcare providers, not-for-profits, higher and secondary education institutions and professional service companies. Typically, our middle market lending group seeks relationships with companies that have borrowing needs in excess of $750,000, while our small business lending group supports companies with borrowing needs of $750,000 or less.

 

We had $429.1 million and $430.5 million in commercial loans at December 31, 2017 and 2016, respectively. Of the loans in our commercial loan portfolio, $15.2 million and $16.4 million were guaranteed by either the Small Business Administration, the Connecticut Development Authority or the United States Department of Agriculture at December 31, 2017 and 2016, respectively. Total commercial business loans amounted to 15.6% and 16.9% of total loans at December 31, 2017 and 2016, respectively.

 

Commercial business lending products generally include term loans, revolving lines of credit for working capital needs, equipment lines of credit to facilitate the purchase of equipment, and letters of credit. Commercial business loans are made with either adjustable or fixed-rates of interest. Variable rates are tied to either the prime rate, as published in The Wall Street Journal, or LIBOR, plus a margin. The interest rates of fixed-rate commercial business loans are typically set at a margin above the FHLBB Advance rates. Interest rate swaps are offered to qualified borrowers to effect a fixed-rate equivalent for the borrower and allows us to effectively hedge against interest rate risk on large, long-term loans.

 

When making commercial business loans, we consider the character and capabilities of the borrower’s management, our lending history with the borrower, the debt service capabilities of the borrower, the historical and projected cash flows of the business, the strength of the borrower’s balance sheet, the value and composition of the collateral, and the financial strength and commitment of the guarantors, if any. Commercial loans are generally secured by a variety of collateral, including accounts receivable, inventory and equipment, and supported by personal guarantees. Depending on the collateral used to secure the loans, commercial business loans are typically advanced at a discount to the value of the loan’s collateral. As of December 31, 2017 and 2016, unsecured commercial loans totaled $72.0 million and $69.3 million, respectively, or less than 3.0% of total loans outstanding. Generally, a commercial loan made to a corporation, partnership or other business entity requires personal guarantees by the principals and owners of 20.0% or more of the entity, though, we do offer non-recourse financing to commercial borrowers who exhibit strong credit metrics including but not limited to, strong debt service coverage and low loan-to-value ratios.

 

Commercial loans generally have greater credit risk than residential real estate loans. Unlike residential mortgage loans, which largely are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans generally are made on the basis of the borrower’s ability to repay the loan from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of a commercial business loan depends substantially on the success of the business itself. Further, any collateral securing the loan may depreciate over time, be difficult to appraise and or fluctuate in value. We seek to minimize these risks through our underwriting standards.

 

As of December 31, 2017, our largest commercial business loan relationship was fully advanced at $25.0 million, which was performing according to its terms. In addition to the commercial business loans discussed above, we had $3.9 million in letter of credit commitments as of December 31, 2017.

 

In an effort to both attract more sophisticated borrowers, as well as to hedge our interest rate risk associated with long-term commercial loans, we offer interest rate swaps via our correspondent banking partners. Interest rate swaps are primarily used to exchange a floating rate payment stream into a fixed-rate payment stream. The variable rates on swaps will change as market interest rates change. We will enter into swap transactions solely to limit our interest rate risk and effectively “fix” the rate for appropriate customer borrowings. We do not engage in any speculative swap transactions. Generally, swap options are offered to “pass” rated borrowers requesting long-term commercial loans or commercial mortgages in amounts of at least $1.0 million. We have established a derivative policy which sets forth the parameters for such transactions (including underwriting guidelines, rate setting process, maximum maturity, approval and documentation requirements), as well as identifying 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). Our interest rate swap derivatives are primarily collateralized by cash. As of December 31, 2017, we have 81 mirrored swap transactions with a total current notional amount of $411.7 million. The fair value of the interest rate swap derivative asset and liability is $10.3 million and $10.4 million, respectively, at December 31, 2017.

 

Our small business customers typically generate annual revenues from their businesses of up to $2.5 million and have borrowing needs of up to $750,000. We deliver and promote the delivery of small business loan products to our existing and prospective customer base by leveraging our retail branch network, including our branch managers, supplemented by a team of dedicated business development officers. Our branch managers and business development officers are fully trained to assist small business owners through the entire loan process from application to closing. We offer a streamlined process for our customers by utilizing a credit scoring system as a key part of our underwriting process, along with a standardized loan documentation package. This results in our ability to deliver quick decision-making along with cost effective loan closings to our small business customers. As a designated Small Business Administration (“SBA”) preferred lender, we are also able to offer flexible financing terms to those borrowers who otherwise would not qualify under our traditional underwriting standards. The Small Business Administration program is a cornerstone of our small business loan program. Based on the SBA 2017 fiscal year, we were ranked 4^th out of 71 small business lenders in CT as measured by number of loans, originating 48 loans totaling $3.2 million. Based on the SBA 2016, 2015, 2014 and 2013 fiscal years, we were ranked 4^th, 1^st, 2^nd and 3^rd respectively, out of over 50 small business lenders in CT as measured by number of loans. We also were awarded the “Top Lender to Women Entrepreneurs” award for fiscal year 2015. As of December 31, 2017, our entire small business loan portfolio totaled $94.5 million or 3.4% of total loans, with an additional $4.5 million in unfunded loan commitments and an average loan size of approximately $97,000.

 

Home Equity Line of Credit:

 

We also offer home equity loans and home equity lines of credit, both of which are secured by owner-occupied one-to-four family residences. Home equity loans and home equity lines of credit totaled $165.1 million and $170.8 million, or 6.0% and 6.7% of total loans at December 31, 2017 and 2016, respectively. At December 31, 2017, the unadvanced amount of home equity lines of credit totaled $205.4 million, as compared to $199.2 million at December 31, 2016.

 

The underwriting standards utilized for home equity loans and home equity lines of credit include a determination of the borrower’s credit history, an assessment of the borrower’s ability to meet existing obligations and future payments on the proposed loan and the value of the collateral securing the loan. Home equity loans are offered with fixed-rates of interest and with terms of up to 15 years. The loan-to-value ratio for our home equity loans and our lines of credit, including any first mortgage, is generally limited to no more than 80.0%. Our home equity lines of credit have a ten-year draw period which amortizes over a 20-year period and adjustable rates of interest which are indexed to the prime rate, as reported in The Wall Street Journal.

 

Interest rates on home equity lines of credit are generally limited to a maximum rate of 18.0% per annum.

 

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. Other loans totaled $5.7 million and $5.3 million, or 0.2% of our total loan portfolio at December 31, 2017 and 2016, respectively. While the asset quality of these portfolios is currently strong, there is increased risk associated with consumer loans during economic downturns as increased unemployment and inflationary costs may make it more difficult for some borrowers to repay their loans.

 

Origination, Purchasing and Servicing of Loans:

 

In order to reduce our exposure to rising interest rates, we sell fixed-rate conforming loans into the secondary market while retaining the servicing for the majority of these loans. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent mortgagors, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans.

 

We are an approved seller and servicer of the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation and the Federal Home Loan Bank. All adjustable rate mortgages are currently being held in our residential portfolio. We also originate Federal Housing Administration loans through our “Direct Endorsed” designation with the U.S. Department of Housing and Urban Development and U.S. Department of Veteran Affairs.

 

We were servicing residential real estate loans sold in the amount of $598.4 million and $540.4 million at December 31, 2017 and 2016, respectively. We anticipate our servicing assets will continue to grow as we expect to sell a portion of our fixed-rate conforming loan production into the secondary market.

 

We also purchase one-to-four family residential mortgage loans throughout the New England and New York/New Jersey markets, from approved Correspondents licensed with the respective State Departments of Banking. The approved Correspondents are not employed by us and sell their loans based on competitive pricing. The loans are underwritten to meet or exceed Secondary Market requirements. We do not, however, participate in the purchase of credit impaired loans. We expect to continue to purchase one-to-four family residential mortgage loans from approved Correspondents so long as pricing and purchase opportunities remain favorable.

 

From time to time we enter into participations with other regional lenders in commercial real estate and commercial business loan transactions. We participate in transactions (purchase a share of the loan commitment), as well as sell portions of transactions that we originate. As of December 31, 2017 and 2016, our loan portfolio included $161.9 million and $139.4 million, respectively, in loans in which we purchased a participation share, and $155.7 million and $153.2 million, respectively, in loans participated to other institutions.

 

 

Loan Portfolio Maturities and Yields:

 

The following table summarizes the scheduled maturities of our loan portfolio at December 31, 2017. Demand loans, loans having no stated repayment schedule or maturity are reported as being due in one year or less. Weighted average rates are computed based on the rate of the loan at December 31, 2017.

 

		Loans Maturing During the Years Ending December 31,
		2018								2019 to 2022								2023 and beyond								Total
		Amount				Weighted Average Rate				Amount				Weighted Average Rate				Amount				Weighted Average Rate				Amount				Weighted Average Rate
		(Dollars in Thousands)
Real estate:
Residential		$	775				3.61	%		$	8,469				3.12	%		$	980,122				3.46	%		$	989,366				3.45	%
Commercial			2,537				4.61	%			192,050				4.02	%			869,168				4.07	%			1,063,755				4.07	%
Construction			6,303				5.08	%			2,653				4.15	%			81,103				3.78	%			90,059				3.88	%
Commercial			55,973				4.46	%			93,753				4.20	%			279,390				3.21	%			429,116				3.59	%
Home equity line of credit			5,235				4.07	%			62,773				3.58	%			97,062				3.72	%			165,070				3.68	%
Other			1,832				3.33	%			994				6.04	%			2,824				4.92	%			5,650				4.60	%
Total		$	72,655				4.45	%		$	360,692				3.98	%		$	2,309,669				3.68	%		$	2,743,016				3.74	%

 

The following table sets forth the fixed-rate and adjustable rate loans at December 31, 2017 that are contractually due after December 31, 2018:

 

		Fixed				Adjustable				Total
		(Dollars in Thousands)
Real estate:
Residential		$	412,577			$	576,014			$	988,591
Commercial			350,464				710,754				1,061,218
Construction			20,245				63,511				83,756
Commercial			263,927				109,216				373,143
Home equity line of credit			433				159,402				159,835
Other			2,408				1,410				3,818
Total		$	1,050,054			$	1,620,307			$	2,670,361

 

Loan Approval Procedures and Authority:

 

Our lending activities follow written, non-discriminatory and regulatory compliant underwriting standards and loan origination procedures established by our board of directors and documented in our loan policy. The loan approval process is intended to assess the borrower’s ability to repay the loan, the viability of the loan, and the adequacy of the value of the collateral that will secure the loan, if applicable. To assess a business borrower’s ability to repay, we review and analyze, among other factors: the borrower’s historical, current, and projected financial performance; the borrower’s balance sheet and balance sheet trends; its capitalization; its ability to repay the proposed loan(s); the value and complexion of the assets offered as collateral; the ability of management to lead the borrower through the current and future economic cycles; and the financial strength and commitment of the personal or corporate guarantors, if any. To assess an individual borrower’s ability to repay, we review their employment and credit history and information on their historical and projected income and expenses, as well as the adequacy of the collateral.

 

Our policies and loan approval limits are established by our board of directors. Our board has delegated its authority to grant loans in varying amounts to the board of directors’ loan committee, which is currently comprised of all board members. The board loan committee is charged with general oversight of our credit extension functions and has designated the responsibility for the approval of loans, depending on risk rating and size (generally $7.5 million and under) to our management loan committee. In general, loan requests above $7.5 million are required to be approved by the board’s loan committee. Our management loan committee, in turn, has the right to delegate approval authority with respect to such loans to individual lenders as deemed appropriate.

 

Review of Credit Quality:

 

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 that our internal Credit Risk Management Department further evaluate the risk rating of the individual loan or relationship, with our Credit Risk Management Department 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. Our risk rating system is designed to be a dynamic system and we grade loans on a “real time” basis. Considerable emphasis is placed on risk rating accuracy, risk rating justification, and risk rating triggers. Our risk rating process is enhanced with the utilization of industry-based risk rating “cards.” The cards are utilized to 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 our independent loan review firm. More frequent reviews of loans rated special mention, substandard and doubtful are conducted by our Credit Risk Management Department. We utilize an independent loan review consulting firm to affirm our rating accuracy and opine on the overall credit quality of our loan portfolio. The consulting firm conducts two loan reviews per year aiming at a 60.0% or higher commercial portfolio penetration. Summary findings of all loan reviews performed by the outside consulting firm are reported to our board of directors and senior management upon completion.

 

 

Our board of directors and senior management receive reporting throughout the year on credit trends in the commercial, residential and consumer portfolios (delinquencies, non-performing loans, risk rating migration, charge-off requests, etc.), as well as an update on any significant or developing troubled assets. We use risk management “dashboards” to assist in our ongoing portfolio monitoring and credit risk management reporting. The dashboards provide detailed analysis of portfolio and industry concentrations, as well as a variety of asset quality trends within industry and loan product types, and are presented to the board of directors on a monthly basis. This reporting system also performs various credit administration tracking functions, credit grade migration analysis and allows for an enhanced level of stress testing of the portfolios utilizing multiple variables.

 

In addition to the dashboards, on a periodic basis our board of directors and senior management receive reports on various “highly monitored” industries and portfolios, such as investment commercial real estate, “for-sale” real estate (i.e. subdivision and condominium lending) and home equity loans.

 

This comprehensive portfolio monitoring process is supplemented with several risk assessment tools including monitoring of delinquency levels, analysis of historical loss experience by loan portfolio segment, identification of portfolio concentrations by borrower and industry, and a review of economic conditions that might impact loan quality.

 

Non-performing and Problem Assets:

 

Our senior management places considerable emphasis on the early identification of problem assets, problem resolution and minimizing loss exposure. A loan is considered delinquent when the customer does not make their payments according to their contractual terms. Delinquencies are monitored daily and delinquency notices are mailed monthly to borrowers who have exceeded their payment grace period. In general, if a borrower fails to bring a loan current within 120 days from the original due date the matter may be referred to legal counsel and foreclosure or other collection proceedings may be initiated. We may consider a loan modification, forbearance or other 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. Commercial delinquencies are handled on a case by case basis, typically by our Special Assets Department. Appropriate problem resolution and working strategies are formulated based on the specific facts and circumstances.

 

Loans are placed on non-accrual status when they become 90 days or more delinquent. In certain cases, if a loan is less than 90 days delinquent but the borrower is experiencing financial difficulties, such loan may be placed on non-accrual status if we determine that collection of the loan in full is not probable. When loans are placed on non-accrual status, unpaid accrued interest is reversed and cash payments received are applied as a reduction to the loan principal. 

 

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 not recognized, until qualifying for return to accrual status. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. If a residential real estate, commercial real estate, construction, installment, commercial, collateral, home equity line of credit, demand or revolving credit loan is on non-accrual status or is considered to be impaired, cash payments are applied first as a reduction of principal.

 

Classified Assets: Under our internal risk rating system, we currently classify loans and other assets considered to be of lesser quality as “substandard,” “doubtful” or “loss” assets. An asset is considered “substandard” if it is inadequately protected by either the current net worth or the paying capacity of the obligor or by the collateral pledged, if any. “Substandard” assets include those characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as “doubtful” have all of 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, conditions, and values, highly questionable and improbable. Assets classified as “loss” are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. In addition to the classifications discussed above, consistent with ASC 310-10-35, assets are classified as impaired when it is probable that we will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement.

 

 

The loan portfolio is reviewed on a regular basis to determine whether any loans require risk classification or reclassification. Not all classified assets constitute non-performing assets. For example, at December 31, 2017, 89% of commercial real estate, construction real estate, commercial business and resort loans rated substandard were on accrual status and current as to payments. Our classified assets include loans identified as “substandard”, “doubtful” or “loss”. Substandard assets consisted of $39.7 million and $37.7 million of our total loan portfolio at December 31, 2017 and 2016, respectively. We had no assets classified as “doubtful” or “loss” at December 31, 2017 and 2016.

 

On a quarterly basis, our loan policy requires that we evaluate for impairment all commercial loans classified as non-accrual, and residential and consumer non-accruing loans greater than $100,000 and troubled debt restructurings. We have determined that $30.2 million and $34.3 million of impaired loans existed at December 31, 2017 and 2016, respectively. Based upon our analysis, $1.2 million and $4.9 million of impaired loans required an allowance of $174,000 and $278,000 to be established as of December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, $36.9 million and $22.0 million, respectively, were included on the classified loan list and were not considered impaired.

 

Loan Delinquencies: The following is a summary of loan delinquencies at recorded investment values at the dates indicated.

 

		Loans Delinquent For
		30-59 Days								60-89 Days								90 Days and Over								Total
		Number				Amount				Number				Amount				Number				Amount				Number				Amount
		(Dollars in thousands)
At December 31, 2017
Real estate:
Residential			13			$	2,445				9			$	1,874				20			$	7,317				42			$	11,636
Commercial			1				67				-				-				-				-				1				67
Construction			-				-				-				-				1				4,532				1				4,532
Commercial			-				-				1				22				1				38				2				60
Home equity line of credit			2				223				1				48				4				584				7				855
Other			7				74				-				-				3				30				10				104
Total			23			$	2,809				11			$	1,944				29			$	12,501				63			$	17,254
At December 31, 2016
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
At December 31, 2015
Real estate:
Residential			18			$	3,379				5			$	863				15			$	6,304				38			$	10,546
Commercial			2				318				-				-				1				994				3				1,312
Construction			-				-				-				-				1				187				1				187
Commercial			4				153				-				-				2				1,752				6				1,905
Home equity line of credit			3				280				2				360				2				210				7				850
Other			11				135				-				-				1				10				12				145
Total			38			$	4,265				7			$	1,223				22			$	9,457				67			$	14,945

 

 

Non-performing Assets: The table below sets forth the amounts and categories of our non-performing assets at the dates indicated. Once a loan is 90 days delinquent or either the borrower or the loan collateral experiences an event that makes full collectability of the loan improbable, the loan is placed on “non-accrual” status. Our policy requires at least six months of continuous payments in order for the loan to be removed from non-accrual status.

 

		At December 31,
		2017				2016				2015				2014				2013
		(Dollars in thousands)
Non-performing loans:
Real estate:
Residential		$	9,401			$	9,846			$	9,773			$	9,706			$	10,599
Commercial			67				976				1,106				2,112				827
Construction			4,532				4,532				187				187				187
Commercial			775				1,301				3,232				2,268				2,285
Home equity line of credit			963				862				573				1,040				740
Other			54				44				42				155				162
Total non-performing loans			15,792				17,561				14,913				15,468				14,800
Loans 90 days past due and still accruing			-				-				-				-				-
Other real estate owned			-				-				279				400				393
Total nonperforming assets		$	15,792			$	17,561			$	15,192			$	15,868			$	15,193
Total non-performing loans to total loans			0.58	%			0.69	%			0.63	%			0.72	%			0.81	%
Total non-performing loans to total assets			0.52	%			0.62	%			0.55	%			0.62	%			0.70	%

 

The amount of income that was contractually due but not recognized on non-accrual loans totaled $1.0 million for the year ended December 31, 2017.

 

Troubled debt restructurings: The following table presents information on loans whose terms had been modified in a troubled debt restructuring:

 

		At December 31,
		2017				2016				2015				2014				2013
		(Dollars in thousands)
Restructured loans on accrual status		$	6,172			$	8,160			$	16,952			$	18,664			$	15,790
Restructured loans on non-accrual status			9,484				10,090				7,258				7,581				7,578
Total restructured loans		$	15,656			$	18,250			$	24,210			$	26,245			$	23,368

 

A loan is considered a troubled debt restructuring (“TDR”) when we, for economic or legal reasons related to the borrower’s financial difficulties, grant a concession to the borrower in modifying or renewing the loan that we 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 amortization, or other modifications to the structure of the loan. 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. Our 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 and at calendar year-end reporting period per our policy.

 

At December 31, 2017, 100% of the accruing TDRs were performing in accordance with the restructured terms. At December 31, 2017 and 2016, the allowance for loan losses included specific reserves of $172,000 and $160,000 related to TDRs, respectively. For the years ended December 31, 2017 and 2016, the Bank had charge-offs totaling $83,000 and $272,000, respectively, related to portions of TDRs deemed to be uncollectible. The Bank may provide additional funds to borrowers in TDR status. The amount of additional funds available to borrowers in TDR status was $107,000 and $369,000 at December 31, 2017 and 2016, respectively.

 

 

Potential Problem Loans: We perform a comprehensive internal analysis of our loan portfolio in order to identify and quantify loans with higher than normal risk. Loans having a higher risk profile are assigned a risk rating corresponding to the level of weakness identified in the loan. All special mention, substandard and doubtful loans are included on our “Watched Asset” report which is updated and reviewed quarterly by our Credit Risk Management Department. In addition, on a quarterly basis, loans rated special mention, substandard or doubtful are formally presented to and reviewed by management to assess the level of risk, ensure the risk ratings are appropriate, and ensure appropriate actions are being taken to minimize potential loss exposure. The review cycle is determined based on the risk rating and level of overall credit exposure. This quarterly review is performed by the Chief Risk Officer, Chief Lending Officer and members of the Credit Risk Management and Special Assets Departments. Loans identified as being “loss” are normally fully charged off. Loans risk rated substandard or more severe are generally transferred to the Special Assets Department, although it is not uncommon for commercial lenders to manage stable or improving substandard loans with significant oversight from the Special Assets Department. We do not use interest reserves to keep problem loans current. Interest reserves are only used for construction loans during the construction phase of the loan.

 

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 year ended December 31, 2017.

 

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.

 

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 December 31, 2017 and 2016.

 

 

Based on the quantitative and qualitative assessment of the loan portfolio segments and in thorough consideration of the characteristics, risk and credit quality indicators, a detailed review of classified, non-performing and impaired loans, management believes that the allowance for loan losses properly estimated the inherent probable credit loss that exists in the loan portfolio as of the balance sheet date. This analysis process is both quantitative and qualitative as it requires management to make estimates that are susceptible to revisions as more information becomes available. Although we believe that we have established the allowance at levels to absorb probable losses, future additions may be necessary if economic or other conditions in the future differ from the current environment.

 

Schedule of Allowance for Loan Losses: The following table sets forth activity in the allowance for loan losses for the years indicated.

 

		For the Year Ended December 31,
		2017				2016				2015				2014				2013
		(Dollars in thousands)
Balance at beginning of year		$	21,529			$	20,198			$	18,960			$	18,314			$	17,229
Provision for loan losses			1,551				2,332				2,440				2,588				1,530
Charge-offs:
Real estate:
Residential			(95	)			(327	)			(295	)			(701	)			(430	)
Commercial			(111	)			-				(213	)			(93	)			-
Construction			-				(18	)			-				-				-
Commercial			(371	)			(410	)			(318	)			(1,066	)			(31	)
Home equity line of credit			-				(13	)			(238	)			(106	)			-
Other			(184	)			(278	)			(285	)			(137	)			(62	)
Total charge-offs			(761	)			(1,046	)			(1,349	)			(2,103	)			(523	)
Recoveries:
Real estate:
Residential			15				2				112				58				6
Commercial			2				-				-				1				-
Construction			-				-				-				-				-
Commercial			81				10				6				84				52
Home equity line of credit			-				-				-				-				-
Other			31				33				29				18				20
Total recoveries			129				45				147				161				78
Net charge-offs			(632	)			(1,001	)			(1,202	)			(1,942	)			(445	)
Allowance at end of year		$	22,448			$	21,529			$	20,198			$	18,960			$	18,314
Ratios:
Allowance for loan losses to non-performing loans at end of year			142.15	%			122.60	%			135.44	%			122.58	%			123.74	%
Allowance for loan losses to total loans outstanding at end of year			0.82	%			0.85	%			0.86	%			0.89	%			1.01	%
Net charge-offs to average loans outstanding			0.02	%			0.04	%			0.05	%			0.10	%			0.03	%

 

It is our general policy to charge-off or partially charge-off any loan when it becomes evident that its collectability is highly unlikely, or our internal loan rating dictates a charge-off, either full or partial.  We take a charge-off when it is determined that there is a confirmed loss. Our charge-off policy has remained consistent and has not undergone any material revisions.

 

In making a determination on whether collection of a loan is unlikely, a number of criteria are considered including, but not limited to: the borrower’s financial condition; the borrower’s historical, current, and pro-forma debt service ability; an updated collateral valuation and / or impairment test; and the borrower’s and /or guarantor’s willingness and demonstrated ability to continue to support the credit (inclusive of a global cash flow analysis, if warranted).

 

With respect to reserves, all impaired loans are reviewed to determine if a valuation should be established based on one of three measurement tests: (1) the present value of expected cash flows discounted at the effective interest rate; (2) the fair value of the collateral, if applicable; or (3) the observable market price for the loan.  If we determine that an impairment amount exists, we will establish a valuation allowance (i.e. specific reserve) for the loan.  A charge-off is promptly recorded when a current appraisal for a collateral dependent loan indicates a fair value in excess of its recorded investment and the excess is identified as uncollectable. Updated appraisals are obtained at least annually per guidelines stated in the Loan Policy and, if appropriate, adjusted to reflect the estimated decline in the fair value based upon current market conditions for comparable properties.   We categorize our loan portfolio into separate loan portfolio segment with similar risk characteristics.  In estimating credit losses, we consider historical loss experience on each loan portfolio segment, adjusted for changes in trends, conditions, and other relevant factors that may affect repayment of the loans as of the evaluation date.  Any partial charge-offs on our non-performing or impaired loans cause a reduction in our coverage ratio for our allowance for loan losses and other credit loss statistics.

 

 

As of December 31, 2017, we had impaired loans of $29.1 million with no valuation or partial charge-offs recorded.  As described above, if a loan is determined to be impaired, we will evaluate the amount of reserves for such loans based on 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.  If we determine that an impairment amount exists, we will establish a valuation allowance for the loan.  If no impairment amount exists based on these tests, then no allowance for loan loss is required on that loan.  If an impairment is shown to exist, we establish an allowance for loan loss for the amount that the recorded investment or book value, in the loan exceeds the measure of the impaired loan.  In general, any portion of the recorded investment in a collateral dependent loan in excess of the fair value can be identified as uncollectible and is, therefore, deemed a confirmed loss which is charged-off against our allowance for loan losses.

 

Allocation of Allowance for Loan Losses: The following table sets forth the allowance for loan losses allocated by loan portfolio segment, the percentage of allowance in each category to total allowance, and the percentage of loans in each portfolio segment to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

 

		At December 31,
		2017												2016
		Allowance for Loan Losses				% of Allowance for Loan Losses				% of Loans in Category to Total Loans				Allowance for Loan Losses				% of Allowance for Loan Losses				% of Loans in Category to Total Loans
		(Dollars in thousands)
Real estate:
Residential		$	4,137				18.4	%			36.1	%		$	4,134				19.2	%			35.7	%
Commercial			11,963				53.3	%			38.8	%			11,131				51.7	%			38.5	%
Construction			785				3.5	%			3.3	%			425				2.0	%			2.0	%
Commercial			4,155				18.5	%			15.6	%			4,400				20.4	%			16.9	%
Home equity line of credit			1,364				6.1	%			6.0	%			1,398				6.5	%			6.7	%
Other			44				0.2	%			0.2	%			41				0.2	%			0.2	%
Total		$	22,448				100.0	%			100.0	%		$	21,529				100.0	%			100.0	%

 

		At December 31,
		2015												2014												2013
		Allowance for Loan Losses				% of Allowance for Loan Losses				% of Loans in Category to Total Loans				Allowance for Loan Losses				% of Allowance for Loan Losses				% of Loans in Category to Total Loans				Allowance for Loan Losses				% of Allowance for Loan Losses				% of Loans in Category to Total Loans
		(Dollars in thousands)
Real estate:
Residential		$	4,084				20.2	%			36.1	%		$	4,382				23.1	%			38.7	%		$	3,647				19.9	%			38.2	%
Commercial			10,255				50.8	%			37.6	%			8,949				47.3	%			35.8	%			8,253				45.0	%			34.9	%
Construction			231				1.1	%			1.3	%			478				2.5	%			2.7	%			1,152				6.3	%			4.3	%
Commercial			4,119				20.4	%			17.4	%			3,250				17.1	%			14.5	%			3,746				20.5	%			13.9	%
Home equity line of credit			1,470				7.3	%			7.4	%			1,859				9.8	%			8.0	%			1,465				8.0	%			8.3	%
Other			39				0.2	%			0.2	%			42				0.2	%			0.3	%			51				0.3	%			0.4	%
Total		$	20,198				100.0	%			100.0	%		$	18,960				100.0	%			100.0	%		$	18,314				100.0	%			100.0	%

 

  

Investment Activities

 

Our Chief Financial Officer is responsible for implementing our investment policy. The investment policy is reviewed at least annually by management and our board of directors and any changes to the policy are subject to the approval of the board of directors. Authority to make investments under the approved investment policy guidelines is delegated by the board of directors to our Chairman, President and Chief Executive Officer, our Chief Financial Officer and limited purchasing by our Finance Officer. While general investment strategies are developed and authorized by our Chief Financial Officer, the execution of specific actions rests with both our Chairman, President and Chief Executive Officer and the Chief Financial Officer, who may act jointly or severally. The Chief Financial Officer is responsible for ensuring that the guidelines and requirements included in the investment policy are followed and that all securities are considered prudent for investment.

 

Our investment policy requires that all securities transactions be conducted in a safe and sound manner. Investment decisions must be based upon a thorough analysis of each security instrument to determine its credit quality and fit within our overall asset/liability management objectives, its effect on our risk-based capital and the overall prospects for yield and/or appreciation.

 

Our investment portfolio, excluding FHLBB stock, totaled $162.2 million and $136.6 million at December 31, 2017 and 2016, respectively, and consisted primarily of United States government securities, securities issued and guaranteed by Government Sponsored Enterprises (GSE’s) including debt and mortgage-backed securities, municipal and other bonds, mutual funds and equity securities, including preferred equity securities.

 

Our investment objectives are to provide and maintain liquidity and appropriate collateral requirements, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy, which is reviewed and approved at least annually. Our board of directors reviews the status of our investment portfolio on a semi-annual basis.

 

Investment Securities Portfolio: The following table sets forth the carrying values of our available-for-sale and held-to-maturity securities portfolio at the dates indicated.

 

		At December 31,
		2017								2016								2015
(Dollars in thousands)		Amortized Cost				Fair Value				Amortized Cost				Fair Value				Amortized Cost				Fair Value
Available-for-sale
Debt securities:
U.S. Treasury obligations		$	11,847			$	11,909			$	19,826			$	19,968			$	38,782			$	38,859
U.S. Government agency obligations			66,000				65,656				73,996				73,711				82,002				81,805
Government sponsored residential mortgage-backed securities			2,677				2,793				3,424				3,569				4,958				5,153
Corporate debt securities			-				-				500				515				1,000				1,048
Preferred equity securities			2,000				1,807				2,000				1,746				2,000				1,632
Marketable equity securities			108				187				108				182				108				160
Mutual funds			5,187				4,899				4,071				3,829				3,957				3,767
Total securities available-for-sale		$	87,819			$	87,251			$	103,925			$	103,520			$	132,807			$	132,424
Held-to-maturity
U.S. Treasury obligations		$	4,991			$	4,991			$	-			$	-			$	-			$	-
U.S. Government agency obligations			37,982				37,550				16,000				15,917				24,000				24,008
Government sponsored residential mortgage-backed securities			32,012				32,013				17,061				17,124				8,246				8,349
Total held-to-maturity   Total securities held-to-maturity		$	74,985			$	74,554			$	33,061			$	33,041			$	32,246			$	32,357

 

During the years ended December 31, 2017, 2016 and 2015, we recorded no other-than-temporary impairment charges.

 

Consistent with our overall business and asset/liability management strategy, which focuses on sustaining adequate levels of core earnings, most securities purchased were classified available-for-sale at December 31, 2017 and 2016.

 

 

U.S. Treasury and U.S. Government Agency Obligations: At December 31, 2017 and 2016, our U.S. Treasury and U.S. Government agency obligations portfolio totaled $120.5 million and $109.7 million, respectively, of which $77.6 million and $93.7 million, respectively, were classified as available-for-sale. There were no structured notes or derivatives in the portfolio.

 

Government Sponsored Residential Mortgage-Backed Securities: We purchase mortgage-backed securities insured or guaranteed by U.S. Government agencies and government-sponsored enterprises, including Fannie Mae, Freddie Mac and Ginnie Mae. We do not own any “private label” mortgage backed securities. We invest in mortgage-backed securities to achieve a positive interest rate spread with minimal administrative expense and to lower our credit risk as a result of the guarantees provided by Fannie Mae, Freddie Mac and Ginnie Mae.

 

Government sponsored mortgage-backed securities are created by the pooling of mortgages and the issuance of a security with an interest rate which is less than the interest rate on the underlying mortgages. These mortgage-backed securities typically represent a participation interest in a pool of single-family or multi-family mortgages, although we focus our investments on mortgage-backed securities backed by one-to-four family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as us and guarantee the payment of principal and interest to investors. Government sponsored residential mortgage-backed securities generally yield less than the loans that underlie such securities because of the cost of payment guarantees, mortgage servicing and credit enhancements. However, these mortgage-backed securities are usually more liquid than individual mortgage loans and may be used to collateralize our borrowing obligations.

 

At December 31, 2017, the carrying value of Government sponsored residential mortgage-backed securities totaled $34.8 million or 1.1% of assets, and 1.2% of interest earning assets, $2.8 million of which were classified as available-for-sale and $32.0 million of which were classified as held-to-maturity, compared to the carrying value of mortgage-backed securities at December 31, 2016 which totaled $20.6 million or 0.7% of assets, and 0.8% of interest earning assets, $3.6 million of which were classified as available-for-sale and $17.1 million of which were classified as held-to-maturity. The available-for-sale mortgage-backed securities portfolio had a book yield of 3.44% and 3.23% at December 31, 2017 and 2016, respectively, and the held-to-maturity mortgage-backed securities portfolio had a book yield of 2.50% at December 31, 2017 and 2016. The estimated fair value of our mortgage-backed securities at December 31, 2017 was $34.8 million, which is $117,000 more than the amortized cost and at December 31, 2016 $20.6 million, which was $208,000 more than the amortized cost. Investments in mortgage-backed securities involve a risk that actual prepayments may differ from estimated prepayments over the life of the security, which may require adjustments to the amortization of any premium or accretion of any discount relating to such instruments, thereby changing the net yield on such securities. There is also reinvestment risk associated with the cash flows from such securities. In addition, the market value of such securities may be adversely affected by changes in interest rates.

 

Our investment portfolio contained no Government sponsored residential mortgage-backed securities collateralized by “subprime” loans for the years ended December 31, 2017 and 2016. Although we do not have a direct exposure to subprime related assets, the value and related income of our mortgage-backed securities are sensitive to changes in economic conditions, including delinquencies and/or defaults on the underlying mortgages. Continuing shifts in the market’s perception of credit quality on securities backed by residential mortgage loans may result in increased volatility of market price and periods of illiquidity that can have a negative impact upon the valuation of certain securities held by us.

 

Corporate Debt Securities: We had no corporate debt securities at December 31, 2017. At December 31, 2016, the fair value of our corporate bond portfolio totaled $515,000 which was classified as available-for-sale. The corporate bond portfolio was fixed rate earning a book yield of 5.41% at December 31, 2016. Although corporate bonds may offer higher yields than U.S. Treasury or agency securities of comparable duration, corporate bonds also have a higher risk of default due to possible adverse changes in the credit-worthiness of the issuer. In order to mitigate this risk, our investment policy requires that corporate debt obligation purchases be rated “A” or better by a nationally recognized rating agency. A security that is subsequently downgraded below investment grade will require additional analysis of credit worthiness and a determination will be made to hold or dispose of the investment.

 

Marketable Equity Securities and Mutual Funds: We currently maintain a diversified equity securities and mutual funds portfolio. At December 31, 2017 and 2016, the fair value of our marketable equity securities portfolio totaled $187,000 and $182,000, respectively. Our marketable equity securities represented less than one percent of total assets at December 31, 2017 and 2016 and were classified as available-for-sale. The mutual funds portfolio totaled $4.9 million and $3.8 million at December 31, 2017 and 2016, respectively. The industries represented by our common stock investments are diverse and include banking, insurance and financial services, integrated utilities and various industrial sectors. Our investment policy provides that the total equity portfolio cannot exceed 50% of the Tier I capital of Farmington Bank. Investments in equity securities and mutual funds involve risk as they are not insured or guaranteed investments and are affected by stock market fluctuations. Such investments are carried at their market value and can directly affect our net capital position.

 

 

Preferred Equity Securities: Our investments in preferred equity securities consist of 80,000 shares of Goldman Sachs preferred stock at December 31, 2017. The carrying value of our preferred equity securities totaled $1.8 million and $1.7 million at December 31, 2017 and 2016, respectively.

 

Trust Preferred Debt Securities: We had no trust preferred debt securities at December 31, 2017 and 2016. During 2015, we sold our trust preferred debt securities for a gain of $1.5 million.

 

Portfolio Maturities and Yields: The composition and maturities of the investment securities portfolio at December 31, 2017 and 2016 are summarized in the following tables. Maturities are based on the final contractual payment dates, and do not reflect the impact of prepayments or early redemptions that may occur. State agency and municipal obligations as well as common and preferred stock yields have not been adjusted to a tax-equivalent basis. Certain mortgage-backed securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below.

 

		December 31, 2017
		One Year or Less								More than One Year through Five Years								More than Five Years through Ten Years								More than Ten Years								Total Securities
		Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield
		(Dollars in thousands)
Available-for-Sale:
U.S. Treasury obligations		$	-				0.00	%		$	11,909				1.64	%		$	-				-			$	-				-			$	11,909				1.64	%
U.S. Government agency obligations			27,919				1.05	%			37,737				1.52	%			-				-				-				-				65,656				1.32	%
Government-sponsored residential mortgage-backed securities			23				4.50	%			18				4.50	%			-				-				2,752				3.43	%			2,793				3.44	%
Corporate debt securities			-				0.00	%			-				-				-				-				-				-				-				0.00	%
Total debt securities available-for-sale		$	27,942				1.06	%		$	49,664				1.55	%		$	-				-			$	2,752				3.43	%		$	80,358				1.44	%
Held-to-Maturity:
U.S. Treasury obligations		$	-				-			$	4,991				2.13	%		$	-				-			$	-				-			$	4,991				2.13	%
U.S. Government agency obligations			-				-				25,649				1.84	%			11,901				2.49	%			-				-				37,550				2.04	%
Government-sponsored residential mortgage-backed securities			-				-				-				-				-				-				32,013				2.50	%			32,013				2.50	%
Total debt securities held-to-maturity		$	-				-			$	30,640				1.88	%		$	11,901				2.49	%		$	32,013				2.50	%		$	74,554				2.25	%

  

		December 31, 2016
		One Year or Less								More than One Year through Five Years								More than Five Years through Ten Years								More than Ten Years								Total Securities
		Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield				Fair Value				Weighted- Average Yield
		(Dollars in thousands)
Available-for-Sale:
U.S. Treasury obligations		$	12,995				0.68	%		$	6,973				1.38	%		$	-				-			$	-				-			$	19,968				0.92	%
U.S. Government agency obligations			19,980				0.32	%			53,731				1.17	%			-				-				-				-				73,711				0.94	%
Government-sponsored residential mortgage-backed securities			1				5.50	%			128				4.50	%			-				-				3,440				3.19	%			3,569				3.23	%
Corporate debt securities			515				5.41	%			-				-				-				-				-				-				515				5.41	%
Total debt securities available-for-sale		$	33,491				0.54	%		$	60,832				1.20	%		$	-				-			$	3,440				3.19	%		$	97,763				1.05	%
Held-to-Maturity:
U.S. Government agency obligations		$	-				-			$	15,917				1.76	%		$	-				-			$	-				-			$	15,917				1.76	%
Government-sponsored residential mortgage-backed securities			-				-				-				-				-				-				17,124				2.50	%			17,124				2.50	%
Total debt securities held-to-maturity		$	-				-			$	15,917				1.76	%		$	-				-			$	17,124				2.50	%		$	33,041				2.14	%

 

  

Sources of Funds

 

General: Deposits have traditionally been our primary source of funds for use in lending and investment activities. In addition to deposits, funds are derived from scheduled loan payments, loan prepayments, investment maturities, retained earnings and income on earning assets.

 

Deposits: A majority of our depositors are persons and businesses who work or reside in Hartford County, Connecticut and Hampden County, Massachusetts. We offer a selection of deposit instruments, including checking, savings, money market savings accounts, negotiable order of withdrawal (“NOW”) accounts and fixed-rate time deposits. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions as a service to our customers. This program provides enhanced FDIC insurance to participating customers. The Company also has established a relationship for brokered deposits. There were brokered deposits totaling $58.8 million and $43.2 million at December 31, 2017 and 2016, respectively.

 

Interest rates paid, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies, market rates, liquidity requirements, rates paid by competitors and growth goals. To attract and retain deposits, we rely upon brand marketing, personalized customer service, long-standing relationships and competitive interest rates.

 

The flow of deposits is influenced significantly by general economic conditions, changes in money market and other prevailing interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in obtaining funds and responding to changes in consumer demand. Based on historical experience, management believes our deposits are relatively stable. Expansion of the branch network, the commercial and government banking divisions, as well as deposit promotions and disintermediation from investment firms due to increasing uncertainty in the financial markets, has provided us with opportunities to attract new deposit relationships.

 

It is unclear whether the recent growth in deposits will reflect our historical, stable experience with deposit customers. The ability to attract and maintain money market accounts and time deposits, and the rates paid on these deposits, has been and will continue to be significantly affected by market conditions. At December 31, 2017, $540.9 million or 22.2% of our deposits were time deposits, of which $380.6 million will be maturing within one year or less. At December 31, 2016, $464.6 million or 21.0% of our deposits were time deposits, of which $327.9 million will be maturing within one year or less.

 

Our government banking group provides deposit services to municipalities throughout Connecticut. Through the efforts of our government banking group, we attracted significant municipal deposits through existing and newly formed relationships. Municipal deposits as of December 31, 2017 and 2016 were $437.1 million or 18.0% and $394.5 million or 17.8% of our total deposits outstanding, respectively. These deposits can be more volatile than other deposits but provide significant liquidity generally at a lower or similar cost to wholesale funds. We limit the related contingent funding risk by limiting the amount of municipal deposits that can be accepted.

 

The following table displays a summary of our deposits by account type as of the dates indicated:

 

		At December 31,
		2017								2016								2015
(Dollars in thousands)		Balance				Percent				Balance				Percent				Balance				Percent
Demand deposits		$	473,428				19.4	%		$	441,283				19.9	%		$	401,388				20.2	%
NOW accounts			623,135				25.6	%			542,764				24.5	%			468,054				23.5	%
Money markets			559,297				23.0	%			532,681				24.0	%			460,737				23.1	%
Savings accounts			237,380				9.8	%			233,792				10.6	%			220,389				11.1	%
Total non-time deposit accounts			1,893,240				77.8	%			1,750,520				79.0	%			1,550,568				77.9	%
Time deposits			540,860				22.2	%			464,570				21.0	%			440,790				22.1	%
Total deposits		$	2,434,100				100.0	%		$	2,215,090				100.0	%		$	1,991,358				100.0	%

 

 

The following table displays the distribution of average deposit accounts by account type with the average rates paid at the dates indicated:

 

		At December 31,
		2017												2016												2015
(Dollars in thousands)		Average Balance				Interest				Weighted Average Rate				Average Balance				Interest				Weighted Average Rate				Average Balance				Interest				Weighted Average Rate
Noninterest-bearing deposit		$	441,347			$	-				-			$	412,155			$	-				-			$	357,156			$	-				-
NOW accounts			616,962				2,850				0.46	%			513,256				1,544				0.30	%			472,644				1,351				0.29	%
Money markets			533,213				4,143				0.78	%			512,396				4,119				0.80	%			453,017				3,592				0.79	%
Savings accounts			235,608				252				0.11	%			223,499				241				0.11	%			213,383				226				0.11	%
Time deposits			486,449				6,003				1.23	%			469,493				5,552				1.18	%			407,071				4,203				1.03	%
Total interest-bearing deposit			1,872,232			$	13,248				0.71	%			1,718,644			$	11,456				0.67	%			1,546,115			$	9,372				0.61	%
Total deposits		$	2,313,579											$	2,130,799											$	1,903,271

 

The following table displays information concerning time deposits by interest rate ranges at the dates indicated:

 

		At December 31, 2017
		Period to Maturity																								Total at December 31,
(Dollars in thousands)		Less Than One Year				One to Two Years				Two to Three Years				More than Three Years				Total				Percent of Total				2016				2015
Interest Rate Range:
1.00% and below		$	129,710			$	18,779			$	5,879			$	6,045			$	160,413				29.7	%		$	214,803			$	221,651
1.01% - 2.00%			247,724				68,435				6,683				11,508				334,350				61.8	%			207,448				158,003
2.01% - 3.00%			3,199				20,451				9,921				12,526				46,097				8.5	%			42,319				61,136
3.01% - 4.00%			-				-				-				-				-				-				-				-
Total		$	380,633			$	107,665			$	22,483			$	30,079			$	540,860				100.0	%		$	464,570			$	440,790

 

The following table sets forth time deposits by time remaining until maturity as of December 31, 2017.

 

		Maturity
(Dollars in thousands)		Three months or less				Over three to six months				Over six to twelve months				Over one year to three years				Over three Years				Total
Time deposits less than $100,000		$	36,991			$	41,023			$	35,948			$	42,497			$	10,227			$	166,686
Time deposits of $100,000 or more			93,395				89,188				84,088				87,651				19,852				374,174
		$	130,386			$	130,211			$	120,036			$	130,148			$	30,079			$	540,860

 

As of December 31, 2016, the aggregate amount of outstanding time deposits in amounts greater than or equal to $100,000 was $167.0 million.

 

The following table sets forth the interest-bearing deposit activities for the periods indicated:

 

		Years Ended December 31,
(Dollars in thousands)		2017				2016				2015
Balance beginning of year		$	1,773,807			$	1,589,970			$	1,402,517
Net increase in deposits before interest credited			173,617				172,381				178,081
Interest credited			13,248				11,456				9,372
Net increase in deposits			186,865				183,837				187,453
Balance end of year		$	1,960,672			$	1,773,807			$	1,589,970

 

Borrowed Funds

 

At December 31, 2017 and 2016, we had an available line of credit with the FHLBB in the amount of $8.8 million and access to additional Federal Home Loan Bank advances of up to $706.9 million subject to collateral requirements of the FHLBB at December 31, 2017. The Company also had letters of credit of $79.5 million and 83.5 million at December 31, 2017 and 2016, respectively, subject to collateral requirements of the FHLBB. Internal policies limit borrowings to 25.0% of total assets, or $763.8 million and $709.4 million at December 31, 2017 and 2016, respectively.

 

We have a Master Repurchase Agreement borrowing facility with a broker. Borrowings under the Master Repurchase Agreement are secured by our investments in certain securities and cash with a fair value totaling $11.2 million at December 31, 2017. Outstanding repurchase agreement borrowings totaled $10.5 million at December 31, 2017 and 2016.

 

The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $58.5 million at December 31, 2017 and 2016, which were undrawn at December 31, 2017 and 2016. The Company maintains a cash balance of $512,500 with certain financial institutions to avoid fees associated with the lines.

 

Competition

 

We face competition within our market area both in making loans and attracting deposits. Our primary market area is central Connecticut and western Massachusetts which has a high concentration of financial institutions including large commercial banks, community banks, credit unions and mortgage companies. We opened one de novo branch in Vernon, CT and a loan production office in Fairfield, CT during 2016. We anticipate opening a de novo branch in Manchester, CT in the first quarter of 2018. Some of our competitors offer products and services that we currently do not offer, such as trust services and private banking.

 

Based on the most recent data available from the Federal Deposit Insurance Corporation (“FDIC”) as of June 30, 2017, we possess a 5.99% deposit market share in Hartford County. Our market share rank is 4th out of 27 financial institutions.

 

Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms and credit unions. We face additional competition for deposits from money market funds, brokerage firms, mutual funds and insurance companies. Our primary focus is to build and develop profitable customer relationships across all lines of business while continuing to support the communities within our service area.

 

Subsidiary Activities

 

Farmington Bank is currently the only subsidiary of FCB and is incorporated in Connecticut. Farmington Bank currently has the following subsidiaries all of which are incorporated in Connecticut: Farmington Savings Loan Servicing, Inc., Village Investments, Inc., Village Corp., Limited, 28 Main Street Corp., Village Management Corp. and Village Square Holdings, Inc.

 

Farmington Savings Loan Servicing, Inc.: Established in 1999, Farmington Savings Loan Servicing, Inc. operates as Farmington Bank’s “passive investment company” (“PIC”) which exempts it from Connecticut income tax under current law.

 

Village Investments, Inc.: Established in 1994, Village Investments, Inc. established to offer brokerage and investment advisory services through a contract with a registered broker-dealer. Village Investments Inc. is currently inactive.

 

Village Corp., Limited: Established in 1986, Village Corp., Limited was established to hold certain commercial real estate acquired through foreclosures, deeds in lieu of foreclosure, or other similar means. Village Corp. limited is currently inactive.

 

28 Main Street Corp.: Established in 1992, 28 Main Street Corp. was established to hold residential other real estate owned. 28 Main Street Corp. is currently inactive.

 

Village Management Corp: Established in 1992, Village Management Corp. was established to hold commercial other real estate owned. Village Management Corp. is currently inactive.

 

 

Village Square Holdings, Inc.: Established in 1992, held certain commercial real estate of Farmington Bank previously used as Farmington Bank’s operations center prior to our relocation to One Farm Glen Boulevard, Farmington, Connecticut. Village Square Holdings Inc. is currently inactive.

 

The activities of these subsidiaries have had an insignificant effect on our consolidated financial conditions and results of operations to date.

 

Employees

 

At December 31, 2017, we had 349 full-time equivalent employees, none of whom are represented by a collective bargaining unit. We believe our relationship with our employees is good.

 

Charitable Foundation

 

In connection with the Conversion and Reorganization in 2011, the Company established Farmington Bank Community Foundation, Inc., a non-profit charitable organization dedicated to helping the communities the Bank serves. The Foundation was funded with a contribution of 687,700 shares of the Company’s common stock, representing 4% of the outstanding shares sold in the offering.

 

Farmington Bank Community Foundation’s mission is to improve the economic viability and well-being of residents and the communities in which Farmington Bank operates. The Farmington Bank Community Foundation supports programs and organizations that impact the quality of life of the residents of the towns we serve. The Foundation’s areas of focus are Economic Empowerment, Community Investment and Health and Wellness. The Foundation’s emphasis is on programs and services that assist households most in need and make a lasting difference for the people and communities they serve.

 

SUPERVISION AND REGULATION

 

General

 

Farmington Bank, a Connecticut-chartered stock savings bank, is subject to extensive regulation by the Connecticut Department of Banking, as its chartering agency, and by the FDIC as its deposit insurer. Farmington Bank’s deposits are insured up to applicable limits by the FDIC through the Deposit Insurance Fund. Farmington Bank is required to file reports with, and is periodically examined by, the FDIC and the Connecticut Department of Banking concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions and opening or closing branch offices. FCB, as a bank holding company is subject to regulation by and required to file reports with the Connecticut Department of Banking, the Federal Reserve Board and the Securities and Exchange Commission.

 

The following discussion of other laws and regulations material to our operations contains a summary of the current material provisions of such laws and regulations applicable to our operations. Any change in such regulations, whether by the Connecticut Department of Banking, the FDIC, the Federal Reserve Board or the Securities and Exchange Commission, could have a material adverse impact on us.

 

Dodd-Frank Wall Street Reform and Consumer Protection Act

 

On July 21, 2010, the President of the United States signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This law significantly changed the bank regulatory structure and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies were given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impacts of the Dodd-Frank Act may not be known for many months or years. The current administration, led by President Donald Trump, has announced that it intends to slow down the adoption of new Dodd-Frank Act regulations and to consider proposing changes to the legislation. In addition, members of Congress have recently introduced legislation that would make significant changes to the Dodd-Frank Act, including changes that would increase the threshold for classifying financial institutions as “systemically important” (subjecting such institutions to greater regulatory oversight) from $50 billion to $250 billion. This legislation, if adopted, would also require the federal banking agencies to create a “community bank leverage ratio” of not less than 8% and not more than 10% for certain depository institutions and depository institution holding companies with total consolidated assets of less than $10 billion. The following summary assumes no changes to the Dodd-Frank Act and regulations adopted to date.

 

 

The Dodd-Frank Act created a new Consumer Financial Protection Bureau (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks with more than $10 billion in assets. Farmington Bank, as a bank with $10 billion or less in assets, will continue to be examined for compliance with the consumer laws by our primary bank regulators. The current director of the CFPB, appointed by President Trump, recently introduced the CFPB’s new five-year strategic plan. The plan suggests the CFPB may shift to a less strident enforcement approach. In addition, certain members of Congress have introduced legislation that would, if adopted, either eliminate or significantly reduce the authority of the CFPB. The Dodd-Frank Act also weakened the federal preemption rules that have been applicable for national banks and federal savings associations, and gives state attorney generals the ability to enforce federal consumer protection laws.

 

The Dodd-Frank Act establishes numerous restrictions and requirements that mortgage lenders must follow or satisfy before making a residential mortgage loan, including the verification of a mortgage loan applicant’s ability to repay a mortgage loan. The Dodd-Frank Act’s mortgage reform provisions also allow borrowers to assert violations of certain provisions of the Truth-in-Lending Act as a defense to foreclosure proceedings.

 

The Dodd-Frank Act requires minimum leverage (Tier 1) and risk based capital levels for bank and savings and loan holding companies that are no less than those applicable to banks, which will exclude certain instruments that previously have been eligible for inclusion by bank holding companies as Tier 1 capital, such as trust preferred securities.

 

The Dodd-Frank Act also broadened the base for FDIC deposit insurance assessments. Assessments are based on the average consolidated total assets less tangible equity capital of a financial institution, rather than deposits. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The legislation also increased the required minimum reserve ratio for the Deposit Insurance Fund, from 1.15% to 1.35% of insured deposits, and directed the FDIC to offset the effects of increased assessments on depository institutions with less than $10 billion in assets. The FDIC has issued regulations to implement these provisions of the Dodd-Frank Act. It has, in addition, established a higher reserve ratio of 2% as a long-term goal beyond what is required by statute. There is no implementation deadline for the 2% ratio.

 

Under the Dodd-Frank Act we are required to give shareholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The Dodd-Frank Act also authorized the Securities and Exchange Commission to promulgate rules that would allow certain stockholders to nominate candidates for election to the FCB board of directors using our proxy materials. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank and bank holding company executives, regardless of whether the company is publicly traded or not.

 

The full scope and impact of the Dodd-Frank Act's provisions will continue to be determined over time as additional regulations are issued and examination practices are aligned with the new rules. We cannot predict the ultimate impact of the Dodd-Frank Act on First Connecticut Bancorp or Farmington Bank at this time, although it has increased our compliance and operating costs and may otherwise adversely affect our business, financial condition and/or results of operations. Nor can we predict the impact or substance of other future legislation or regulation.

 

Connecticut and FDIC Banking Laws and Supervision

 

Connecticut Banking Commissioner: The Connecticut Banking Commissioner regulates internal organization as well as the deposit, lending and investment activities of state chartered banks, including Farmington Bank. The approval of the Connecticut Banking Commissioner is required for, among other things, the establishment of branch offices and business combination transactions. The Commissioner conducts periodic examinations of Connecticut-chartered banks, as does the FDIC. The FDIC also regulates many of the areas regulated by the Connecticut Banking Commissioner, and federal law may limit some of the authority provided to Connecticut-chartered banks by Connecticut law.

 

 

Lending Activities: Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, secured and unsecured loans of any one obligor under this statutory authority may not exceed 10.0% and 15.0%, respectively, of a bank’s equity capital and allowance for loan losses.

 

Dividends: Farmington Bank may pay cash dividends out of its net profits. Further, the total amount of all dividends declared by a bank in any year may not exceed the sum of a bank’s net profits for the year in question combined with its retained net profits from the preceding two years. Federal law also prevents an institution from paying dividends or making other capital distributions that, if by doing so, would cause it to become “undercapitalized.” The FDIC may limit a bank’s ability to pay dividends. No dividends may be paid to Farmington Bank’s sole stockholder, First Connecticut Bancorp, if such dividends would reduce stockholders’ equity below the amount of the liquidation account required by Connecticut regulations.

 

Powers: Connecticut law permits Connecticut banks to sell insurance and fixed and variable rate annuities if licensed to do so by the Connecticut Insurance Commissioner. With the prior approval of the Connecticut Banking Commissioner, Connecticut banks are also authorized to engage in a broad range of activities related to the business of banking, or that are financial in nature or that are permitted under the Bank Holding Company Act or the Home Owners’ Loan Act, both federal statutes, or the regulations promulgated as a result of these statutes. Connecticut banks are also authorized to engage in any activity permitted for a national bank or a federal savings association upon filing notice with the Connecticut Banking Commissioner unless the Banking Commissioner disapproves the activity.

 

Assessments: Connecticut banks are required to pay annual assessments to the Connecticut Banking Department to fund the Department’s operations. The general assessments are paid pro-rata based upon a bank’s asset size.

 

Enforcement: Under Connecticut law, the Connecticut Banking Commissioner has extensive enforcement authority over Connecticut banks and, under certain circumstances, affiliated parties, insiders, and agents. The Connecticut Banking Commissioner’s enforcement authority includes cease and desist orders, fines, receivership, conservatorship, removal of officers and directors, emergency closures, dissolution and liquidation.

 

Holding Company Regulation

 

General: As a bank holding company, FCB is subject to comprehensive regulation and regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices.

 

Federal Reserve Board policy historically has required a bank holding company to serve as a source of strength for its subsidiary bank. The Dodd-Frank Act codified this policy as a statutory requirement. Pursuant to this requirement, the Federal Reserve Board may require, and has required in the past, a holding company to contribute additional capital to an undercapitalized subsidiary bank. As a bank holding company, FCB is required to obtain Federal Reserve Board approval before: (i) acquiring, directly or indirectly, ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, it would own or control more than 5.0% of such shares (unless it already owns or controls the majority of such shares); (ii) acquiring all or substantially all of the assets of another bank or bank holding company; or (iii) merging or consolidating with another bank holding company. Under Connecticut banking law, no person may acquire beneficial ownership of more than 10.0% of any class of voting securities of a Connecticut-chartered bank, or any bank holding company of such a bank, without prior notification of, and lack of disapproval by, the Connecticut Banking Commissioner.

 

The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5.0% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the Federal Reserve Board includes, among other things: (i) operating a savings institution, mortgage company, finance company, credit card company or factoring company; (ii) performing certain data processing operations; (iii) providing certain investment and financial advice; (iv) underwriting and acting as an insurance agent for certain types of credit-related insurance; (v) leasing property on a full-payout, non-operating basis; (vi) selling money orders, travelers’ checks and United States savings bonds; (vii) real estate and personal property appraising; (viii) providing tax planning and preparation services; (ix) financing and investing in certain community development activities; and (x) subject to certain limitations, providing securities brokerage services for customers.

 

 

As a public company with securities registered under the Securities Exchange Act of 1934, First Connecticut Bancorp also is subject to that statute and to the Sarbanes-Oxley Act.

 

Dividends: The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve Board, the Federal Reserve Board may prohibit a bank holding company from paying any dividends if the holding company’s bank subsidiary is classified as “undercapitalized.”

 

Pursuant to Connecticut banking regulations, no dividend may be paid to stockholders if such dividends would reduce our stockholders’ equity below the amount of the liquidation account established in connection with the conversion of the company from mutual to stock form. Farmington Bank may pay cash dividends only out of its net profits. For purposes of this restriction, “net profits” represents the remainder of all earnings from current operations. Further, the total amount of all dividends declared by Farmington Bank to FCB in any year may not, without express permission of the Connecticut Banking Commissioner, exceed the sum of Farmington Bank’s retained net profits for the past two fiscal years and its net profits of the year in which the dividend is paid. In addition, FCB is subject to Maryland law limitations. Maryland law generally limits dividends to an amount equal to the excess of our capital surplus over payments that would be owed upon dissolution to stockholders whose preferential rights upon dissolution are superior to those receiving the dividend, and to an amount that would not make us insolvent.

 

Redemption: Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10.0% or more of the consolidated net worth of the bank holding company. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order or any condition imposed by, or written agreement with, the Federal Reserve Board. This notification requirement does not apply to any company that meets the well capitalized standard for commercial banks, is “well managed” within the meaning of the Federal Reserve Board regulations and is not subject to any unresolved supervisory issues. However, in February 2009, the Federal Reserve Board issued SR 09-4 which, among other things, requires all bank holding companies to consult with the Federal Reserve board prior to redeeming stock without regard to the bank holding company’s capital status or regulations otherwise permitting redemptions without prior approval of the Federal Reserve Board.

 

Federal Regulations

 

Capital Requirements: Under FDIC regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Farmington Bank, are required to comply with minimum leverage capital requirements. For an institution determined by the FDIC to not be anticipating or experiencing significant growth and to be, in general, a strong banking organization, rated composite 1 under the Uniform Financial Institutions Ranking System established by the Federal Financial Institutions Examination Council, the minimum capital leverage requirement is a ratio of Tier I capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is 4.0%. Tier I capital is the sum of common stockholders’ equity, non-cumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing assets and purchased credit card relationships) and certain other specified items.

 

The FDIC regulations require state non-member banks to maintain certain levels of regulatory capital in relation to regulatory risk-weighted assets. The ratio of regulatory capital to regulatory risk-weighted assets is referred to as a bank’s “risk-based capital ratio.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items (including recourse obligations, direct credit substitutes and residual interests) to four risk-weighted categories ranging from 0.0% to 100.0%, with higher levels of capital being required for the categories perceived as representing greater risk. For example, under the FDIC’s risk-weighting system, cash and securities backed by the full faith and credit of the U.S. government are given a 0.0% risk weight, loans secured by one-to-four family residential properties generally have a 50.0% risk weight, and commercial loans have a risk weighting of 100.0%.

 

 

State non-member banks such as Farmington Bank must maintain a minimum ratio of total capital to risk-weighted assets of 8.0%, of which at least half must be Tier I capital. Total capital consists of Tier I capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier I capital. Banks that engage in specified levels of trading activities are subject to adjustments in their risk based capital calculation to ensure the maintenance of sufficient capital to support market risk.

 

The Federal Deposit Insurance Corporation Improvement Act required each federal banking agency to revise its risk-based capital standards for insured institutions to ensure that those standards take adequate account of interest-rate risk, concentration of credit risk, and the risk of nontraditional activities, as well as to reflect the actual performance and expected risk of loss on multi-family residential loans. The FDIC, along with the other federal banking agencies, has adopted a regulation providing that the agencies will take into account the exposure of a bank’s capital and economic value to changes in interest rate risk in assessing a bank’s capital adequacy. The FDIC also has authority to establish individual minimum capital requirements in appropriate cases upon determination that an institution’s capital level is, or is likely to become, inadequate in light of the particular circumstances.

 

In July 2013, the Federal Reserve Board promulgated a final rule and the FDIC promulgated an interim final rule implementing Basel III, providing for a strengthened set of capital requirements. These requirements became effective on January 1, 2015 for us. In general, the rules revise regulatory capital definitions and minimum ratios, redefine Tier I capital, create a capital ratio (common equity Tier I risk-based capital ratio), require a capital conservation buffer, revise prompt corrective action thresholds to add a ratio to these thresholds (discussed in more detail below) and revise risk weighting for certain asset categories and off-balance sheet exposures. Under the regulations, (1) a requirement to maintain a ratio of common equity Tier I capital to total risk-based assets of not less than 4.5% will be implemented, (2) the minimum Leverage Capital Ratio for all financial institutions will be at least 4%, (3) the minimum Tier I Risk-Based Capital Ratio increases from 4% to 6% and (4) the Total Risk-Based Capital Ratio maintains at 8%. In addition, the regulations impose certain limitations on dividends, share buybacks, discretionary payments on Tier I instruments and discretionary bonuses to executive officers if the organization fails to maintain a capital conservation buffer of common equity Tier I capital in an amount greater than 2.5% of its total risk-weighted assets. The end result of the capital conservation buffer will be to increase the minimum common equity Tier I capital ratio to 7%, the minimum Tier I Risk-Based Capital Ratio to 8.5% and the minimum Total Risk-Based Capital Ratio to 10.5% for financial institutions seeking to avoid limitations on capital distributions and discretionary bonus payments to executive officers. The regulations will be phased in over a period of time. The capital conservation buffer will be phased-in over a five year period with the full 2.5% requirement starting as of January 1, 2019.

 

Additionally, under the regulations, the method for calculating the ratios has been revised to generally enhance risk sensitivity as well as provide alternatives to credit ratings for calculating risk-weighted assets. As of December 31, 2017, we currently comply with the BASEL III requirements on a fully phased-in basis.

 

As a bank holding company, FCB is subject to capital adequacy guidelines for bank holding companies similar to those of the FDIC for state-chartered banks.

 

Prompt Corrective Regulatory Action: Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized.

 

The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier I risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier I risk-based capital ratio of 4.0% or greater, and generally a leverage ratio of 4.0% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier I risk-based capital ratio of less than 4.0%, or generally a leverage ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier I risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%. As of December 31, 2017, Farmington Bank was a well-capitalized institution.

 

 

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan is required to be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5.0% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional restrictions, including but not limited to an order by the FDIC to sell sufficient voting stock to become adequately capitalized, requirements to reduce total assets, cease receipt of deposits from correspondent banks or dismiss directors or officers, and restrictions on interest rates paid on deposits, compensation of executive officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

 

Safety and Soundness Standards: The Federal Deposit Insurance Act (“FDIA”) requires the federal bank regulatory agencies to establish standards, by regulations or guidelines, designed to ensure the safety and soundness of insured financial institutions. The FDIA requires financial institutions to establish, among other things, internal controls, information systems and internal audit systems, risk management policies and procedures, credit underwriting standards, and other operational and managerial standards designed to meet the FDIA’s requirements. The federal banking agencies may, but are not required, to order an institution that is not meeting applicable safety and soundness standards to submit a plan to bring the institution into compliance with such standards. If an institution fails to submit an acceptable compliance plan or fails to implement its compliance plan, the agency must issue an order directing action to correct the deficiency.

 

Transactions with Affiliates: Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act (the “FRA”). In a holding company context, at a minimum, the parent holding company of a savings bank and any companies which are controlled by such parent holding company are affiliates of the savings bank. Generally, Section 23A limits the extent to which the savings bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10.0% of such savings bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to 20.0% of capital stock and surplus. The term “covered transaction” includes, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same, or no less favorable, to the savings bank or its subsidiary as similar transactions with non-affiliates.

 

Loans to Insiders: Further, Section 22(h) of the FRA restricts an institution with respect to loans to directors, executive officers, and principal stockholders (“insiders”). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the institution’s unimpaired capital and unimpaired surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h), loans to directors, executive officers and principal stockholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the bank’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers.

 

Enforcement: The FDIC has extensive enforcement authority over insured savings banks, including Farmington Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices.

 

The FDIC has authority under Federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance.

 

 

Insurance of Deposit Accounts: The FDIC has adopted a risk-based insurance assessment system. The FDIC assigns an institution to one of three capital categories based on the institution’s financial condition consisting of (1) well capitalized, (2) adequately capitalized or (3) undercapitalized, and one of three supervisory subcategories within each capital group. The supervisory subgroup to which an institution is assigned is based on a supervisory evaluation provided to the FDIC by the institution’s primary federal regulator and information which the FDIC determines to be relevant to the institution’s financial condition and the risk posed to the Deposit Insurance Fund. An institution’s assessment rate depends on the capital category and supervisory category to which it is assigned. Effective April 1, 2011, the FDIC revised its assessment schedule so that it ranges from 2.5 basis points for the least risky institutions to 45 basis points for the riskiest. The rule changed the assessment base used for calculating deposit insurance assessments from deposits to average consolidated total assets less average tangible equity capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. FDIC members are also required to assist in the repayment of bonds issued by the Financing Corporation (FICO) in the late 1980’s to recapitalize the Federal Savings and Loan Insurance Corporation.

 

The FDIC provides insurance up to $250,000 per depositor for each account ownership category. For the years ended December 31, 2017, 2016, and 2015, the Bank’s total FDIC assessments were $1.7 million, $1.6 million and $1.7 million, respectively.

 

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. In setting the assessments necessary to achieve the 1.35% ratio, the FDIC is supposed to offset the effect of the increased ratio on insured institutions with assets of less than $10 billion. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has recently exercised that discretion by establishing a long range fund ratio of 2%.

 

The FDIC may terminate insurance of deposits if it finds that the institution is in an unsafe or unsound condition to continue operations, has engaged in unsafe or unsound practices, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violations that might lead to termination of deposit insurance.

 

Federal Reserve System: The Federal Reserve Board regulations require depository institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts. We are in compliance with these requirements.

 

Federal Home Loan Bank System: Farmington Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks composing the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. Farmington Bank, as a member of the FHLBB, is required to acquire and hold shares of capital stock in the FHLBB. While the required percentages of stock ownership are subject to change by the FHLBB, we were in compliance with this requirement with an investment in FHLBB stock of $15.5 million and $16.4 million at December 31, 2017 and 2016, respectively. The FHLBB paid dividends totaling $703,000, $701,000 and $522,000 for the years ended December 31, 2017, 2016 and 2015, respectively. There can be no assurance that the impact of recent or future legislation on the Federal Home Loan Banks also will not cause a decrease in the value of the FHLBB stock held by us.

 

Financial Modernization: The Gramm-Leach-Bliley Act permits greater affiliation among banks, securities firms, insurance companies, and other companies under a new type of financial services company known as a “financial holding company.” A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a “satisfactory” Community Reinvestment Act rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. We are not currently a financial holding company and are not precluded from submitting a notice in the future should we wish to engage in activities only permitted to financial holding companies.

 

 

Miscellaneous Regulation

 

Sarbanes-Oxley Act of 2002: The Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), which implements a broad range of corporate governance and accounting measures for public companies designed to promote honesty and transparency in corporate America and better protect investors from corporate wrongdoing. In general, the Sarbanes-Oxley Act mandated important new corporate governance and financial reporting requirements intended to enhance the accuracy and transparency of public companies’ reported financial results. It established new responsibilities for corporate chief executive officers, chief financial officers and audit committees in the financial reporting process, and it created a new regulatory body to oversee auditors of public companies. It backed these requirements with new Securities and Exchange Commission enforcement tools, increased criminal penalties for federal mail, wire and securities fraud, and created new criminal penalties for document and record destruction in connection with federal investigations. It also increased the opportunity for more private litigation by lengthening the statute of limitations for securities fraud claims and providing new federal corporate whistleblower protection.

 

Section 402 of the Sarbanes-Oxley Act prohibits the extension of personal loans to directors and executive officers of issuers (as defined in the Sarbanes-Oxley Act). The prohibition, however, does not apply to loans advanced by an insured depository institution, such as those that are subject to the insider lending restrictions of Section 22(h) of the Federal Reserve Act.

 

The Sarbanes-Oxley Act also required that the various securities exchanges, including The Nasdaq Global Select Market, prohibit the listing of the stock of an issuer unless that issuer complies with various requirements relating to their committees and the independence of their directors that serve on those committees.

 

Members of Congress have introduced legislation recently that would, if adopted, exclude some financial institutions from certain provisions of the Sarbanes-Oxley Act, such as by increasing the market capitalization thresholds that trigger the applicability of provisions related to the effectiveness of a public company’s internal controls.

 

Community Reinvestment Act: Under the Community Reinvestment Act (“CRA”), as implemented by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Farmington Bank’s latest FDIC CRA rating was “satisfactory.”

 

Connecticut has its own statutory counterpart to the CRA which is also applicable to Farmington Bank. The Connecticut version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Connecticut law requires the Connecticut Banking Commissioner to consider, but not be limited to, a bank’s record of performance under Connecticut law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Farmington Bank’s most recent rating under Connecticut law was “satisfactory.”

 

Consumer Protection and Fair Lending Regulations: We are subject to a variety of federal and Connecticut statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations.

 

 

The USA PATRIOT Act: On October 26, 2001, the USA PATRIOT Act (the “PATRIOT Act”) was enacted. The PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing and broadened anti-money laundering requirements. The PATRIOT Act also requires the federal banking regulators to take into consideration the effectiveness of controls designed to combat money-laundering activities in determining whether to approve a merger or other acquisition application of an FDIC-insured institution. As such, if FCB or Farmington Bank were to engage in a merger or other acquisition, the effectiveness of its anti-money-laundering controls would be considered as part of the application process. We have established policies, procedures and systems to comply with the applicable requirements of the law. Core provisions of the PATRIOT Act that had expired in 2015 were restored with the enactment of the USA Freedom Act in 2015.

 

Privacy Laws and Regulations: The federal Gramm-Leach-Bliley Act generally prohibits financial institutions, including Farmington Bank, from disclosing nonpublic personal financial information pertaining to consumer customers to third parties for certain purposes unless such customers have the opportunity to “opt out” of such disclosure and have not exercised this right. Connecticut law contains provisions that generally restrict the disclosure of customer financial records to third parties. The federal Fair Credit Reporting Act restricts information sharing among affiliates for marketing purposes.

 

Federal Securities Laws: The common stock of FCB is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934 and is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

 

Federal and State Taxation

 

Federal Taxation

 

General: We are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to us.

 

Method of Accounting: For Federal income tax purposes, we report income and expenses on the accrual method of accounting and use tax year ending December 31 for filing federal income tax returns.

 

Bad Debt Reserves: Prior to the Small Business Protection Act of 1996 (the “1996 Act”), Farmington Bank was permitted to establish a reserve for bad debts and to make annual additions to the reserve. These additions could, within specified formula limits, be deducted in arriving at our taxable income. As a result of the 1996 Act, Farmington Bank was required to use the specific charge-off method in computing its bad debt deduction beginning with its 1996 federal tax return. Savings institutions were required to recapture any excess reserves over those established as of December 31, 1987 (base year reserve). At December 31, 2017, Farmington Bank had no reserves subject to recapture in excess of its base year.

 

Taxable Distributions and Recapture: Prior to the 1996 Act, bad debt reserves created before January 1, 1988 were subject to recapture into taxable income if Farmington Bank failed to meet certain thrift asset and definitional tests. Federal legislation has eliminated these thrift-related recapture rules. At December 31, 2017, our total federal pre-1988 base year reserve was $3.4 million. However, under current law, pre-1988 base year reserves remain subject to recapture if Farmington Bank makes certain non-dividend distributions, repurchases any of its stock, pays dividends in excess of tax earnings and profits, or ceases to maintain a bank charter.

 

Alternative Minimum Tax: The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”) at a rate of 20.0% on a base of regular taxable income adjusted by certain tax preferences which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and is in addition to the regular income tax. Net operating losses can generally offset no more than 90.0% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. We have not been subject to the AMT and have no such amounts available as credits for carryover.

 

The newly enacted Tax Cuts and Jobs Act (“Tax Act”) repeals the corporate alternative minimum tax (“AMT”) effective for tax years beginning after December 31, 2017. Any AMT credit carryovers to tax years after the effective date generally may be utilized to the extent of the taxpayer’s regular tax liability (as reduced by certain other credits). In addition, for tax years beginning in 2018, 2019 and 2020, to the extent AMT credit carryovers exceed regular tax liability (as reduced by certain other credits), 50% of the excess AMT credit carryovers are refundable (a proration rule with respect to short tax years). Any remaining AMT credits will be fully refundable in 2021.

 

  

Net Operating Loss Carryovers: A corporation may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2017, we had no net operating loss carryforwards for federal income tax purposes.

 

The Tax Act limits the net operating loss deduction to 80% of taxable income and disallows the carryback of net operating losses for tax years ended after December 31, 2017 but allows for the indefinite carryforward of those net operating losses.

 

Charitable Contribution Carryforward: As part of the Plan of Conversion and Reorganization completed on June 29, 2011, the Company contributed shares of Company common stock to the Farmington Bank Community Foundation, Inc. This contribution resulted in a charitable contribution deduction for federal income tax purposes. Use of that charitable contribution deduction is limited under Federal tax law to 10% of federal taxable income without regard to charitable contributions, net operating losses, and dividend received deductions. Annually, a corporation is permitted to carry over to the five succeeding tax years, contributions that exceeded the 10% limitation, but also subject to the maximum annual limitation. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset totaling $137,000 was written-off.

 

Corporate Dividends-Received Deduction: FCB may exclude from its income 100.0% of dividends received from Farmington Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80.0% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20.0% of the stock of a corporation distributing a dividend may deduct only 70.0% of dividends received or accrued on their behalf.

 

The Tax Act lowers the 80% dividends received deduction (for dividends from 20% owned corporations) to 65% and the 70% dividends received deduction (for dividends from less than 20% owned corporations) to 50%, effective for tax years beginning after 2017.

 

State Taxation

 

Connecticut

 

We are subject to the Connecticut corporation business tax. The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for the fiscal years ending December 31, 2017 and 2016) (plus an additional 20% surtax applies for tax years 2017 and 2016) to arrive at Connecticut income tax.

 

In 1998, the State of Connecticut enacted legislation permitting the formation of passive investment companies by financial institutions. This legislation exempts qualifying passive investment companies from the Connecticut corporation business tax and excludes dividends paid from a passive investment company from the taxable income of the parent financial institution. Farmington Bank established a passive investment company in 1999 and substantially eliminated the state income tax expense of Farmington Bank since the passive investment company’s organization through December 31, 2017.

 

We believe we are in compliance with the state passive investment company requirements and that no state taxes relating from Farmington Bank are due for the years ended December 31, 2015 through December 31, 2017; however, we have not been audited by the Department of Revenue Services for such periods. If the state were to determine that the passive investment company was not in compliance with statutory requirements, a material amount of taxes could be due. The State of Connecticut continues to be under pressure to find new sources of revenue, and therefore could enact legislation to eliminate the passive investment company exemption. If such legislation were enacted, we would be subject to additional state income taxes in Connecticut.

 

Farmington Bank and FCB are not currently under audit with respect to their state tax returns, and their state tax returns have not been audited for the past five years.

 

 

Massachusetts

 

We are subject to the Massachusetts income excise tax. The Massachusetts income excise tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at Massachusetts taxable income. Massachusetts apportioned taxable income is multiplied by the state tax rate (9.0% for the fiscal years ending December 31, 2017 and 2016).

 

Maryland

 

As a Maryland business corporation, First Connecticut Bancorp, Inc. is required to file an annual income tax return with the State of Maryland.

 

New York

 

We are subject to the New York corporate franchise tax. The New York corporate franchise tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at New York taxable income. New York apportioned taxable income is multiplied by the state tax rate (6.5% for the fiscal years ending December 31, 2017 and 2016).

 

 

Item 1A.  Risk Factors

 

A substantial portion of our loan portfolio consists of commercial real estate loans and commercial loans, which expose us to increased risks and could adversely impact our earnings.

 

Our executive management team has brought an increased focus to transitioning Farmington Bank’s balance sheet to be more like a commercial bank. At December 31, 2017 and 2016, our commercial loan portfolio totaled $1.6 billion and $1.5 billion, or 57.7% and 57.4%, respectively, of our total loan portfolio. These types of loans generally expose a lender to greater risk of non-payment and loss than one-to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and business of the borrowers and the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial real estate and commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to four-family residential mortgage loans. Also, many of our commercial real estate and commercial loan borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to four-family residential mortgage loan.

 

All of these factors could have a material adverse effect on our financial condition and results of operations.

 

Our loan portfolio possesses increased risk due to its rapid expansion and unseasoned nature.

 

From December 31, 2013 to December 31, 2017, our total loan portfolio increased by $926.7 million or 51.0%.  As a result of this rapid expansion, a significant portion of our portfolio is unseasoned. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could adversely affect our future performance.

 

Our lack of geographic diversification increases our risk profile.

 

Our operations are located principally in central Connecticut and western Massachusetts. As a result of this geographic concentration, our results depend largely upon economic and business conditions in these areas. Deterioration in economic and business conditions in our service areas could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

 

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Recent declines in real estate values have impacted the collateral values that secure our real estate loans. The impact of these declines on the original appraised values of secured collateral is difficult to estimate. In determining the amount of the allowance for loan losses, we review our loss and delinquency experience on different loan categories, and we evaluate existing economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance, which would decrease our net income.  Our loan loss allowance for the years ended December 31, 2017 and 2016 was $22.4 million and $21.5 million, respectively.  Although we are currently unaware of any specific problems with our loan portfolio that would require any increase in our allowance at the present time, it may need to be increased further in the future due to our emphasis on loan growth and on increasing our portfolio of commercial business and commercial real estate loans.

 

In addition, banking regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations and financial condition.

 

  

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

 

Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between the interest income Farmington Bank earns on its interest-earning assets, such as loans and securities, and the interest expense Farmington Bank pays on its interest-bearing liabilities, such as deposits and borrowings. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates paid on deposits, which may result in a decrease in our net interest income.

 

In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates earned on the prepaid loans or securities.

 

We opened new branches, which may result in losses at those branches as they generate new deposit and loan portfolios, and negatively impact our earnings.

 

We opened a new branch office in Vernon, CT and a loan production office in Fairfield, CT in 2016. We anticipate opening one new branch office in Manchester, CT during 2018. Losses are expected in connection with these new branches for some time, as the expenses and costs of acquisition associated with them are largely fixed and are typically greater than the income earned at the outset as the branches build up their customer bases. No assurance can be given as to when, if ever, new branches will become profitable.

 

Strong competition within Farmington Bank’s market area may limit our growth and profitability.

 

Competition in the banking and financial services industry is intense. We expanded into western Massachusetts opening two de novo branches in the fourth quarter of 2015. In our market area, we compete with commercial banks, savings institutions, mortgage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. Our profitability depends upon our continued ability to compete successfully in our market area. The greater resources and deposit and loan products offered by our competitors may limit our ability to increase our interest-earning assets.

 

If our government banking deposits were lost within a short period of time, this could negatively impact our liquidity and earnings.

 

Our government banking group provides deposit services to municipalities throughout Connecticut.  Our municipal deposits as of December 31, 2017 and 2016 were $437.1 million, or 18.0%, and $394.5 million, or 17.8%, of our total deposits outstanding, respectively. If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short term liquidity and have an adverse impact on our earnings.

 

The loss of our Chief Executive Officer could adversely impact our business.

 

Our future success and profitability are substantially dependent upon the vision, management and banking abilities of our Chief Executive Officer, who has substantial background and significant experience in banking and financial services, as well as personal contacts in central Connecticut and the region generally. The loss of our Chief Executive Officer may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.

 

The local and national economies remain uncertain. An economic downturn will adversely affect our business and financial results.

 

During the past year, general economic conditions continued to improve nationally as well as in our market area but there remains an economic uncertainty. Worsening of unemployment and housing conditions may adversely affect our business by materially decreasing our net interest income or materially increasing our loan losses. There can be no assurance that we will not be affected by the current economic conditions in a way we cannot currently predict or mitigate.

 

  

Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act has increased our operational and compliance costs.

 

On July 21, 2010, the President of the United States signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This law significantly changed the current bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The current administration, led by President Donald Trump, has announced that it intends to slow down the adoption of new Dodd-Frank Act regulations and to consider proposing changes to the legislation. The following assumes no changes to the Dodd-Frank Act and regulations adopted to date. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies were given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws, weakens the federal preemption rules that have been applicable for national banks and federal savings associations, imposes certain capital requirements on financial institutions, eliminated the federal prohibitions on paying interest on demand deposits, broadened the base for FDIC deposit insurance assessments, required publicly traded companies to provide non-binding votes on executive compensation and so-called “golden parachute” payments, and directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives. As a result, our revenue may be reduced due to fee income limitations and we may be required to maintain higher minimum capital ratios. It is difficult to predict the continuing impact the Dodd-Frank Act and its implementing rules and regulations will have on community banks. However, at a minimum they have increased our operating and compliance costs and could increase our interest expense.

 

Higher Federal Deposit Insurance Corporation insurance premiums and special assessments will adversely affect our earnings.

 

We are generally unable to control the amount of premiums and special assessments that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures we may be required to pay even higher FDIC premiums than the recently increased levels. Such increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.

 

We operate in a highly regulated environment and our business may be adversely affected by changes in laws and regulations.

 

We are subject to extensive regulation, supervision and examination by the Connecticut Banking Commissioner, as Farmington Bank’s chartering authority, by the FDIC, as insurer of deposits, and by the Federal Reserve Board, as the regulator of FCB. Such regulation and supervision govern the activities in which a financial institution and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, may have a material impact on our operations.

 

A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses

 

Our business requires the collection and retention of large volumes of customer data and other personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide services.  Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control.  As customer, public, legislative and regulatory expectations regarding operational and information security have increased, our operations systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.

 

  

Information security risks for financial institutions, such as ours, have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, including foreign-state sponsored parties. Those parties also may attempt to fraudulently induce employees, customers, or other users of our systems to disclose confidential information in order to gain access to our data or that of our customers.  As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks.

 

These cybersecurity threats and attacks may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses, and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may result from human error, fraud or malice on the part of external or internal parties, or from accidental technological failure. Further, to access our products and services our customers may use computers, smartphones, tablets and other mobile devices that are beyond our security control systems.

 

Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.

 

To date we have not experienced any material losses relating to cyber attacks or other information security breaches, but there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened and as a result the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us.  As an additional layer of protection, we have purchased cyber and privacy liability risk insurance coverage which includes data breach coverage, business interruption loss, network security, and privacy liability.  As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities.

 

Item 1B. Unresolved Staff Comments

 

Not applicable

 

 

Item 2. Properties

 

We operate through our 24 full service branch offices, four limited services offices, three stand-alone ATM facilities and two loan production offices. Various leases have renewal options up to an additional 30 years.

 

Our full service branch offices, limited service offices and loan production offices are located as follows:

 

Branch		Address		Owned or Leased
Avon West		427 West Avon Road, Avon, CT 06001		Lease (Expires 2019)
Avon 44		310 West Main Street, Avon, CT 06001		Own
Berlin		1191 Farmington Avenue, Berlin, CT 06037		Lease (Expires 2020)
Bristol		475 Broad Street, Bristol, CT 06010		Own
Burlington		253 Spielman Highway, Burlington, CT 06013		Own
Main Street		32 Main Street, Farmington, CT 06032		Own
Gables (1) (3)		20 Devonwood Drive, Farmington, CT 06032		n/a
Village Gate (1) (3)		88 Scott Swamp Road, Farmington, CT 06032		n/a
Westwoods		282 Scott Swamp Road, Farmington, CT 06032		Own
Farm Glen (1)(2)		One Farm Glen Boulevard, Farmington, CT 06032		Lease (Expires 2019)
Glastonbury		669 Hebron Avenue, Glastonbury, CT 06033		Own
New Britain		73 Broad Street, New Britain, CT 06053		Own
Plainville - Route 10		117 East Street, Plainville, CT 06062		Lease (Expires 2020)
Plainville 372		129 New Britain Avenue, Plainville, CT 06062		Lease (Expires 2025)
Southington		One Center Street, Southington, CT 06489		Lease (Expires 2020)
Southington Drive-Thru (1)		17 Center Place, Southington, CT 06489		Lease (Expires 2019)
Unionville		1845 Farmington Avenue, Unionville, CT 06085		Own
West Hartford		962 Farmington Avenue, West Hartford, CT 06110		Lease (Expires 2019)
Elmwood		176 Newington Road, West Hartford, CT 06110		Lease (Expires 2026)
Wethersfield		486 Silas Deane Highway, Wethersfield, CT 06129		Own
Bloomfield		782 Park Avenue, Bloomfield, CT 06002		Lease (Expires 2022)
South Windsor		350 Buckland Road, South Windsor, CT 06074		Lease (Expires 2032)
Newington		1095 Main Street, Newington, CT 06111		Lease (Expires 2033)
East Hartford		957 Main Street, East Hartford, CT 06108		Lease (Expires 2033)
Rocky Hill		366 Cromwell Avenue, Rocky Hill, CT 06067		Lease (Expires 2033)
West Springfield		85 Elm Street, West Springfield, MA 01089		Lease (Expires 2022)
East Longmeadow		61 North Main Street, East Longmeadow, MA 01028		Lease (Expires 2035)
Vernon		135 Talcottville Road, Vernon, CT 06066		Lease (Expires 2036)
Branford (4)		28 School Street, Branford, CT 06405		Lease (month to month)
Fairfield (4)		1809 Black Rock Tpk, Fairfield, CT 06825		Lease (month to month)

 

(1) Limited Service Office
(2) Executive Office
(3) Bank provided space at no cost
(4) Loan production office

 

 

Item 3. Legal Proceedings

 

In the ordinary course of business, the Company and its subsidiary are routinely defendants in or parties to pending and threatened legal actions and proceedings. After reviewing pending and threatened actions with legal counsel, the Company believes that the outcome of such actions will not have a material adverse effect on the consolidated financial statements.

 

Item 4. Mine Safety Disclosures

 

None

 

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(A)

The shares of common stock of First Connecticut Bancorp, Inc. are quoted on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “FBNK.” As of December 31, 2017, First Connecticut Bancorp had 1,685 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 15,952,946 shares outstanding.

 

Market Price and Dividends. The following table sets forth market price and dividend information for the common stock for the past two fiscal years.

 

Quarter Ended		High				Low				Cash Dividend Declared
December 31, 2017		$	28.50			$	24.95			$	0.15
September 30, 2017			28.25				23.25				0.14
June 30, 2017			27.50				23.25				0.12
March 31, 2017			25.00				20.50				0.11
December 31, 2016			25.00				17.22				0.09
September 30, 2016			18.29				16.02				0.08
June 30, 2016			18.02				15.49				0.07
March 31, 2016			17.29				14.42				0.07

 

Payment of dividends on First Connecticut Bancorp’s common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, legal, and regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. See Item 1 “Supervision and Regulations” for information relating to restrictions on dividends. Repurchases of the Company’s shares of common stock during the fourth quarter of the year ended December 31, 2017 are detailed in (C) below. There were no sales of unregistered securities during the quarter ended December 31, 2017.

 

Set forth below is a stock performance graph comparing the annual total return on our shares of common stock, commencing with the closing price on December 31, 2012, with (a) the cumulative total return on stocks included in the Russell 2000 Index, (b) the cumulative total return on stocks included in the SNL New England U.S. Bank Index and (c) the cumulative total return on stocks included in the SNL U.S. Thrift Index. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.

 

There can be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance.

 

 

First Connecticut Bancorp, Inc.

 

 

		Period Ending
Index		12/31/12				12/31/13				12/31/14				12/31/15				12/31/16				12/31/17
First Connecticut Bancorp, Inc.			100.00				118.20				120.99				130.85				173.20				203.00
Russell 2000 Index			100.00				138.82				145.62				139.19				168.85				193.58
SNL New England U.S. Bank Index			100.00				154.62				170.60				163.77				213.57				250.27
SNL New England U.S. Thrift Index			100.00				126.19				133.50				151.25				208.30				221.42

 

(B)

Not Applicable

 

(C)

During the quarter ending December 31, 2017, the Company did not make any repurchases of common stock.

 

On June 21, 2013, the Company received regulatory approval to repurchase up to 1,676,452 shares, or 10% of its then current outstanding common stock. The Company has 600,945 shares remaining available to be repurchased at December 31, 2017. Shares repurchased under that approval are shown above. Repurchased shares will be held as treasury stock and will be available for general corporate purposes.

 

 

Item 6. Selected Financial Data

 

The following financial condition data and operating data are derived from the audited consolidated financial statements of First Connecticut Bancorp, Inc. Additional information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included as Item 7 and Item 8 of this report, respectively.

 

		At December 31,
		2017				2016				2015				2014				2013
		(Dollars in thousands)
Selected Financial Condition Data:
Total assets		$	3,055,050			$	2,837,555			$	2,708,546			$	2,485,360			$	2,110,028
Cash and cash equivalents			35,350				47,723				59,139				42,863				38,799
Securities held-to-maturity, at amortized cost			74,985				33,061				32,246				16,224				12,983
Securities available-for-sale, at fair value			87,251				103,520				132,424				188,041				150,886
Federal Home Loan Bank of Boston stock, at cost			15,537				16,378				21,729				19,785				13,136
Loans, net			2,725,633				2,525,983				2,341,598				2,119,917				1,800,987
Deposits			2,434,100				2,215,090				1,991,358				1,733,041				1,513,501
Federal Home Loan Bank of Boston advances			255,458				287,057				377,600				401,700				259,000
Total stockholders' equity			272,459				260,176				245,721				234,563				232,209
Allowance for loan losses			22,448				21,529				20,198				18,960				18,314
Non-accrual loans			15,792				17,561				14,913				15,468				14,800
Impaired loans			30,194				34,273				37,599				38,216				38,588
Loan delinquencies 30 days and greater			17,254				17,271				18,238				12,206				13,095

 

		At December 31,
		2017				2016				2015				2014				2013
		(Dollars in thousands)
Selected Operating Data:
Interest income		$	98,483			$	86,986			$	81,884			$	72,774			$	62,886
Interest expense			18,034				15,731				13,375				10,080				9,733
Net Interest Income			80,449				71,255				68,509				62,694				53,153
Provision for loan losses			1,551				2,332				2,440				2,588				1,530
Net interest income after provision for loan losses			78,898				68,923				66,069				60,106				51,623
Noninterest income			13,499				12,738				13,447				9,104				11,012
Noninterest expense			62,336				60,504				61,210				57,048				57,762
Income before income taxes			30,061				21,157				18,306				12,162				4,873
Income tax expense			13,872				5,942				5,727				2,827				1,169
Net income		$	16,189			$	15,215			$	12,579			$	9,335			$	3,704

 

 

		At or For the Year Ended December 31,
		2017				2016				2015				2014				2013
		(Dollars in thousands, except per share amounts)
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on average assets			0.55	%			0.55	%			0.48	%			0.41	%			0.19	%
Return on average equity			5.96	%			5.98	%			5.20	%			3.98	%			1.57	%
Interest rate spread (1)			2.75	%			2.61	%			2.66	%			2.80	%			2.80	%
Net interest margin (2)			2.93	%			2.80	%			2.81	%			2.94	%			2.97	%
Non-interest expense to average assets			2.11	%			2.20	%			2.34	%			2.51	%			3.04	%
Efficiency Ratio (3)			66.35	%			72.03	%			74.69	%			79.46	%			90.02	%
Average interest-earning assets to average interest-bearing liabilities			129.05	%			129.41	%			126.94	%			127.56	%			131.34	%
Asset Quality Ratios:
Allowance for loan losses as a percent of total loans			0.82	%			0.85	%			0.86	%			0.89	%			1.01	%
Allowance for loan losses as a percent    of non-performing loans			142.15	%			122.60	%			135.44	%			122.58	%			123.74	%
Net charge-offs to average loans			0.02	%			0.04	%			0.05	%			0.10	%			0.03	%
Non-performing loans as a percent of total loans			0.58	%			0.69	%			0.63	%			0.72	%			0.81	%
Non-performing loans as a percent of total assets			0.52	%			0.62	%			0.55	%			0.62	%			0.70	%
Loan delinquencies 30 days and greater as a percent of loans			0.63	%			0.68	%			0.63	%			0.75	%			0.85	%
Per Share Related Data:
Basic earnings per share		$	1.07			$	1.02			$	0.84			$	0.62			$	0.24
Diluted earnings per share		$	1.02			$	1.00			$	0.83			$	0.62			$	0.24
Dividends per share (4)		$	0.52			$	0.31			$	0.22			$	0.17			$	0.12
Dividend payout ratio			48.60	%			30.39	%			26.19	%			27.42	%			50.00	%
Capital Ratios:
Equity to total assets at end of period			8.92	%			9.17	%			9.07	%			9.44	%			11.01	%
Average equity to average assets			9.19	%			9.23	%			9.24	%			10.32	%			12.41	%
Total Capital (to Risk Weighted Assets)			12.38	%			12.80	%			12.88	%			13.73	%			15.50	%
Tier I Capital (to Risk Weighted Assets)			11.45	%			11.84	%			11.91	%			12.70	%			14.36	%
Common Equity Tier I Capital (to Risk Weighted Assets)			11.45	%			11.84	%			11.91	%			n/a				n/a
Tier I Leverage Capital (to Average Assets)			9.23	%			9.39	%			9.39	%			9.86	%			11.47	%
Total capital to total average assets			9.22	%			9.44	%			9.38	%			10.33	%			12.22	%
Other Data:
Number of full service offices			24				24				23				22				21
Number of limited service offices			4				4				4				4				4

 

(1)

Represents the difference between the weighted-average yield on average interest-earning assets and the weighted-average cost of the interest-bearing liabilities.

(2)

Represents net interest income as a percent of average interest-earning assets

(3)

Represents non-interest expense divided by the sum of net interest income and non-interest income

(4)

Represents dividends per share divided by basic earnings per share.

  

 

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We continued significant organic loan and deposit growth in 2017 despite a competitive environment. We continue to focus on efficiencies and process improvement which are embedded within our Company’s culture to become a high performing company.

 

Financial highlights for First Connecticut Bancorp for the year ended December 31, 2017 are as follows:

 

·

Strong Earnings Per Share Growth: Diluted earnings per share for the year ended December 31, 2017 was $1.02 compared to $1.00 for the year ended 2016.

·

Strong Regulatory Capital Ratios: Our total Risk Based Capital ratio at December 31, 2017 is 12.38%. The minimum ratio to remain Well Capitalized is 10.00%. Our Common Equity Tier I Capital ratio is 11.45% at December 31, 2017. The minimum ratio to remain Well Capitalized is 6.50%. Our total Leverage Ratio or Tier I Capital to Average Assets Ratio at December 31, 2017 is 9.23%. The minimum ratio to remain Well Capitalized is 5.00%.

·

Strong Asset Growth: Total assets increased $217.5 million or 7.7% to $3.1 billion at December 31, 2017.

·

Strong Loan Growth: Total loans increased $199.3 million or 7.8% to $2.7 billion at December 31, 2017.

·

Commercial loan portfolio experienced very strong loan growth increasing $123.3 million or 8.5% to $1.6 billion at December 31, 2017.

·

Overall deposits increased $219.0 million or 9.9% to $2.4 billion at December 31, 2017.

·

Checking accounts grew by 7.5% or 4,136 net new accounts for the year ended December 31, 2017.

·

Noninterest expense to average assets was 2.11% for the year ended December 31, 2017 compared to 2.20% in the prior year.

·

Loan delinquencies 30 days and greater represented 0.63% of total loans at December 31, 2017 compared to 0.68% at December 31, 2016. Non-accrual loans represented 0.58% of total loans compared to 0.69% of total loans at December 31, 2016.

·

The allowance for loan losses represented 0.82% of total loans at December 31, 2017 compared to 0.85% at December 31, 2016.

·

The Company paid a cash dividend of $0.52 per share for the year, an increase of $0.21 compared to the prior year.

 

Business Strategy

 

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

 

·

Maintaining a strong capital position in excess of the well-capitalized standards set by our banking regulators to support our current operations and future growth. The FDIC’s requirement for a “well-capitalized” bank is a total risk-based capital ratio of 10.0% or greater. As of December 31, 2017 our total risk-based capital ratio was 12.38%.

 

·

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

 

 

·

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

 

·

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

 

·

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

 

·

Continue expansion through de novo branching. We opened a de novo branch in Vernon, Connecticut during the second quarter of 2016 and expanded into western Massachusetts opening two de novo branches in the fourth quarter of 2015. We plan to open a branch in Manchester, Connecticut in 2018 and continue to evaluate future growth through de novo branching.

 

·

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

 

·

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

 

Critical Accounting Policies

 

The accounting policies followed by us conform with the accounting principles generally accepted in the United States of America. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, which involve the most complex subjective decisions or assessments, relate to allowance for loan losses, other-than-temporary impairment of investment securities, income taxes and pension and other post-retirement benefits. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.

 

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

 

 

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

 

General component:

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity line of credit and other. Construction loans include classes for commercial investment real estate construction, commercial owner occupied construction, residential development, residential subdivision construction and residential owner occupied construction loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and nonaccrual loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the year ended December 31, 2017.

 

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.

 

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 December 31, 2017 and 2016.

 

 

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

 

Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis. Marketable equity and debt securities are classified as either 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 December 31, 2017 and 2016, we had no debt or equity securities classified as trading. Held-to-maturity securities are debt securities for which we have the ability and intent to hold until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized.

 

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

 

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

 

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

 

As part of the Plan of Conversion and Reorganization completed on June 29, 2011, the Company contributed shares of Company common stock to the Farmington Bank Community Foundation, Inc. This contribution resulted in a charitable contribution deduction for federal income tax purposes. Use of that charitable contribution deduction is limited under Federal tax law to 10% of federal taxable income without regard to charitable contributions, net operating losses, and dividend received deductions. Annually, a corporation is permitted to carry over to the five succeeding tax years, contributions that exceeded the 10% limitation, but also subject to the maximum annual limitation. In 2015, the Company recorded a $771,000 valuation allowance related to a deferred tax asset associated with the establishment of the Bank’s foundation in 2011. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset totaling $137,000 was written-off.

 

 

In December 1999, we created and have since maintained a “passive investment company” (“PIC”), as permitted by Connecticut law. At December 31, 2017 there were no material uncertain tax positions related to federal and state income tax matters. We are currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 through 2017. If the state taxing authority were to determine that the PIC was not in compliance with statutory requirements, a material amount of taxes could be due.

 

As of December 31, 2017, management believes it is more likely than not that the deferred tax assets will be realized through future reversals of existing taxable temporary differences and future taxable income. At December 31, 2017, our net deferred tax asset was $7.7 million.

 

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

 

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.

 

 

Comparison of Financial Condition at December 31, 2017 and 2016

 

Total assets increased $217.5 million or 8% at December 31, 2017 to $3.1 billion compared to $2.8 billion at December 31, 2016, reflecting a $199.7 million increase in net loans.

 

Our investment portfolio totaled $162.2 million or 5.3% of total assets and $136.6 million or 4.8% of total assets at December 31, 2017 and 2016, respectively. Available-for-sale investment securities totaled $87.2 million at December 31, 2017 compared to $103.5 million at December 31, 2016. Securities held-to-maturity totaled $75.0 million and $33.1 million at December 31, 2017 and 2016, respectively. The Company purchases short term U.S. Treasury and agency securities in order to meet municipal and repurchase agreement pledge requirements and to minimize interest rate risk during the sustained low interest rate environment.

 

Net loans increased $199.7 million or 7.9% at December 31, 2017 to $2.7 billion compared to December 31, 2016 primarily driven by increases in commercial real estate, residential real estate and construction, which combined, increased $206.2 million, offset by a $5.7 million decrease in home equity lines of credit. The allowance for loan losses increased $919,000 or 4.3% to $22.4 million at December 31, 2017 from $21.5 million at December 31, 2016. At December 31, 2017, the allowance for loan losses represented 0.82% of total loans and 142.15% of non-performing loans, compared to 0.85% of total loans and 122.60% of non-performing loans as of December 31, 2016.

 

Total liabilities increased $205.2 million to $2.8 billion at December 31, 2017 compared to $2.6 billion at December 31, 2016. Deposits increased $219.0 million or 9.9% to $2.4 billion at December 31, 2017 primarily due to an increase in retail deposits as we continue to develop and grow relationships in the geographical areas we serve. We had municipal deposit balances totaling $437.1 million and $394.5 million at December 31, 2017 and 2016, respectively. Federal Home Loan Bank of Boston advances decreased $31.6 million to $255.5 million at December 31, 2017 from $287.1 million at December 31, 2016 due to our increased deposits funding our organic loan and securities growth.

 

Stockholders’ equity increased $12.3 million to $272.5 million compared to December 31, 2017 primarily due to $16.2 million in net income offset by dividends paid. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which lowered the Company’s federal tax rate from 35% to 21% effective January 1, 2018. As a result of the tax reduction, the Company recorded a reduction in the value of its net deferred tax asset resulting in a charge of $5.0 million to income tax expense impacting net income for the fourth quarter of 2017. The Company paid cash dividends totaling $7.8 million or $0.52 per share during the year ended December 31, 2017.

 

 

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

 

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

 

		For The Year Ended December 31,
		2017												2016												2015
		Average Balance				Interest and Dividends (1)				Yield/Cost				Average Balance				Interest and Dividends (1)				Yield/Cost				Average Balance				Interest and Dividends (1)				Yield/Cost
(Dollars in thousands)
Interest-earning assets:
Loans		$	2,654,943			$	97,615				3.68	%		$	2,420,859			$	86,374				3.57	%		$	2,279,418			$	81,177				3.56	%
Securities			151,878				2,524				1.66	%			150,582				1,881				1.25	%			188,004				1,832				0.97	%
Federal Home Loan Bank of Boston stock			16,842				703				4.17	%			17,738				701				3.95	%			21,187				522				2.46	%
Federal funds and other earning assets			8,006				149				1.86	%			36,679				179				0.49	%			11,947				26				0.22	%
Total interest-earning assets			2,831,669				100,991				3.57	%			2,625,858				89,135				3.39	%			2,500,556				83,557				3.34	%
Noninterest-earning assets			122,337												129,826												119,857
Total assets		$	2,954,006											$	2,755,684											$	2,620,413
Interest-bearing liabilities:
NOW accounts		$	616,962			$	2,850				0.46	%		$	513,256			$	1,544				0.30	%		$	472,644			$	1,351				0.29	%
Money market			533,213				4,143				0.78	%			512,396				4,119				0.80	%			453,017				3,592				0.79	%
Savings accounts			235,608				252				0.11	%			223,499				241				0.11	%			213,383				226				0.11	%
Time deposits			486,449				6,003				1.23	%			469,493				5,552				1.18	%			407,071				4,203				1.03	%
Total interest-bearing deposits			1,872,232				13,248				0.71	%			1,718,644				11,456				0.67	%			1,546,115				9,372				0.61	%
Federal Home Loan Bank of Boston Advances			283,683				4,374				1.54	%			257,281				3,826				1.49	%			356,539				3,449				0.97	%
Repurchase agreement borrowings			10,500				381				3.63	%			10,500				385				3.67	%			12,629				448				3.55	%
Repurchase liabilities			27,814				31				0.11	%			42,700				64				0.15	%			54,600				106				0.19	%
Total interest-bearing liabilities			2,194,229				18,034				0.82	%			2,029,125				15,731				0.78	%			1,969,883				13,375				0.68	%
Noninterest-bearing deposits			441,347												412,155												357,156
Other noninterest-bearing liabilities			46,817												60,008												51,312
Total liabilities			2,682,393												2,501,288												2,378,351
Stockholders' equity			271,613												254,396												242,062
Total liabilities and stockholders' equity		$	2,954,006											$	2,755,684											$	2,620,413
Tax-equivalent net interest income						$	82,957											$	73,404											$	70,182
Less: tax-equivalent adjustment							(2,508	)											(2,149	)											(1,673	)
Net interest income						$	80,449											$	71,255											$	68,509
Net interest rate spread (2)											2.75	%											2.61	%											2.66	%
Net interest-earning assets (3)		$	637,440											$	596,733											$	530,673
Net interest margin (4)											2.93	%											2.80	%											2.81	%
Average interest-earning assets to average interest-bearing liabilities							129.05	%											129.41	%											126.94	%

 

(1)

On a fully-tax equivalent basis.

(2)

Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities on a tax-equivalent basis.

(3)

Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(4)

Net interest margin represents tax-equivalent net interest income divided by average total interest-earning assets.

 

 

Rate Volume Analysis

 

The following table sets forth the effects of changing rates and volumes on tax-equivalent net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

 

		2017 vs. 2016												2016 vs. 2015
		Increase (decrease) due to												Increase (decrease) due to
(Dollars in thousands)		Volume				Rate				Total				Volume				Rate				Total
Interest-earning assets:
Loans		$	8,546			$	2,695			$	11,241			$	5,046			$	151			$	5,197
Securities			16				627				643				(408	)			457				49
Federal Home Loan Bank of Boston stock			(36	)			38				2				(96	)			275				179
Federal funds and other earning assets			(226	)			196				(30	)			96				57				153
Total interest-earning assets			8,300				3,556				11,856				4,638				940				5,578
Interest-bearing liabilities:
NOW accounts			358				948				1,306				120				73				193
Money market			164				(140	)			24				477				50				527
Savings accounts			13				(2	)			11				11				4				15
Time deposits			204				247				451				693				656				1,349
Total interest-bearing deposits			739				1,053				1,792				1,301				783				2,084
Federal Home Loan Bank of Boston advances			403				145				548				(1,140	)			1,517				377
Repurchase agreement borrowing			-				(4	)			(4	)			(78	)			15				(63	)
Repurchase liabilities			(19	)			(14	)			(33	)			(21	)			(21	)			(42	)
Total interest-bearing liabilities			1,123				1,180				2,303				62				2,294				2,356
Increase (decrease) in net interest income		$	7,177			$	2,376			$	9,553			$	4,576			$	(1,354	)		$	3,222

  

Summary of Operating Results for the Year Ended December 31, 2017 and 2016

 

The following discussion provides a summary and comparison of our operating results for the year ended December 31, 2017 and 2016:

 

		For the Year Ended December 31,
		2017				2016				$ Change				% Change
(Dollars in thousands)
Net interest income		$	80,449			$	71,255			$	9,194				12.9	%
Provision for loan losses			1,551				2,332				(781	)			(33.5	)
Noninterest income			13,499				12,738				761				6.0
Noninterest expense			62,336				60,504				1,832				3.0
Income before taxes			30,061				21,157				8,904				42.1
Income tax expense			13,872				5,942				7,930				133.5
Net income		$	16,189			$	15,215			$	974				6.4	%

 

For the year ended December 31, 2017, net income increased $974,000 compared to the year ended December 31, 2016. The increase in net income was primarily driven by a $9.2 million increase in net interest income due to organic loan growth offset by $7.9 million increase in income tax expense, of which $5.0 million was related to the reduction in the value of our net deferred tax asset due to the Tax Act lowering the Company’s federal tax rate from 35% to 21% effective January 1, 2018.

 

 

Comparison of Operating Results for the Years Ended December 31, 2017 and 2016

 

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

 

Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $9.2 million or 13% to $80.4 million for the year ended 2017 compared to $71.3 million for the year ended 2016 primarily due to a $234.1 million increase in the average loan balance offset by a 4 basis point or $2.3 million increase in interest expense. The total interest-earning assets yield increased 18 basis points to 3.57% for the year ended 2017 compared to 3.39% for the year ended 2016 primarily due to an increase in yield on our loans and securities portfolio. The cost of interest-bearing liabilities increased 4 basis points to 82 basis points for the year ended 2017 compared to 78 basis points for the year ended 2016. Net interest margin was 2.93% for the year ended 2017 compared to 2.80% for the year ended 2016.

 

Interest expense increased $2.3 million to $18.0 million for the year ended 2017 compared to $15.7 million for the year ended 2016. The cost of interest-bearing liabilities increased due to the Federal Reserve raising the prime rate during 2017 primarily impacting the costs of NOW accounts, certificate of deposit and Federal Home Loan Bank of Boston borrowings.

 

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

 

Management recorded a provision for loan losses of $1.6 million and $2.3 million for the years ended December 31, 2017 and 2016, respectively. The provision recorded is based upon management’s analysis of the allowance for loan losses necessary to absorb the estimated credit losses in the loan portfolio for the period. Net charge-offs for the year ended 2017 were $632,000 or 0.02% to average loans compared to $1.0 million or 0.04% to average loans for the year ended 2016

 

At December 31, 2017, the allowance for loan losses represented 0.82% of total loans and 142.15% of non-accrual loans, compared to 0.85% of total loans and 122.60% of non-accrual loans at December 31, 2016.

 

Noninterest Income: Sources of noninterest income primarily include service charges on deposit accounts, gain on sale of securities, mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees.

 

 

The following table summarizes noninterest income for the years ended December 31, 2017 and 2016:

 

		For the Year Ended December 31,
		2017				2016				$ Change				% Change
(Dollars in thousands)
Fees for customer services		$	6,403			$	6,151			$	252				4.1	%
Net gain on loans sold			2,597				3,105				(508	)			(16.4	)
Brokerage and insurance fee income			218				213				5				2.3
Bank owned life insurance income			1,628				1,417				211				14.9
Other			2,653				1,852				801				43.3
Total noninterest income		$	13,499			$	12,738			$	761				6.0	%

 

Total noninterest income increased $761,000 to $13.5 million for the year ended 2017 compared to $12.7 million for the year ended 2016. Fees for customer services increased $252,000 to $6.4 million for the year ended 2017 compared to the year ended 2016 driven by our growth in checking accounts and debit card fees. Net gain on loans sold decreased $508,000 to $2.6 million for the year ended 2017 compared to the year ended 2016 as a result of a decrease in volume of loans sold. Bank owned life insurance income increased $211,000 to $1.6 million for the year ended 2017 compared to the year ended 2016 primarily due to $194,000 more in bank owned life insurance proceeds in 2017 than in the prior year. Other noninterest income increased $801,000 to $2.7 million for the year ended 2017 compared to the year ended 2016 primarily due to a $206,000 increase in swap fee income, a $161,000 increase in loan servicing fees for others and $319,000 SBIC fund impairment in the prior year offset by a $159,000 decrease in mortgage banking derivatives.

 

Noninterest Expense: The following table summarizes noninterest expense for the years ended December 31, 2017 and 2016:

 

		For the Year Ended December 31,
		2017				2016				$ Change				% Change
(Dollars in thousands)
Salaries and employee benefits		$	38,595			$	36,983			$	1,612				4.4	%
Occupancy expense			5,073				4,890				183				3.7
Furniture and equipment expense			3,954				4,082				(128	)			(3.1	)
FDIC assessment			1,693				1,603				90				5.6
Marketing			2,570				2,170				400				18.4
Other operating expenses			10,451				10,776				(325	)			(3.0	)
Total noninterest expense		$	62,336			$	60,504			$	1,832				3.0	%

 

Noninterest expense increased $1.8 million to $62.3 million for the year ended 2017 compared to $60.5 million for the year ended 2016. Salaries and employee benefits increased $1.6 million to $38.6 million for the year ended 2017 compared to the year ended 2016. The increase is primarily due to general salary increases which became effective in mid-March and $343,000 in severance expense. Marketing increased $400,000 primarily due to efforts to increase the Bank’s sales support in central Connecticut and western Massachusetts. Other operating expenses decreased $325,000 to $10.5 million for the year ended 2017 compared to the prior year primarily due to a $296,000 decrease in directors’ share-based compensation expense as a result of the majority of the 2012 Stock Incentive Plan fully vesting in September 2016.

 

Income Tax Expense: Income tax expense was $13.9 million for the year ended 2017 compared to $5.9 million for the year ended 2016. As a result of the Tax Act, the Company recorded a reduction in the value of its net deferred tax asset resulting in a charge of $5.0 million to income tax expense in the fourth quarter of 2017. Income tax expense in 2016 included a $137,000 write-off of a deferred tax asset associated with the establishment of the Bank’s foundation in 2011.

 

 

Summary of Operating Results for the Years Ended December 31, 2016 and 2015

 

The following discussion provides a summary and comparison of our operating results for the years ended December 31, 2016 and 2015:

 

		For the Year Ended December 31,
		2016				2015				$ Change				% Change
(Dollars in thousands)
Net interest income		$	71,255			$	68,509			$	2,746				4.0	%
Provision for loan losses			2,332				2,440				(108	)			(4.4	)
Noninterest income			12,738				13,447				(709	)			(5.3	)
Noninterest expense			60,504				61,210				(706	)			(1.2	)
Income before taxes			21,157				18,306				2,851				15.6
Income tax expense			5,942				5,727				215				3.8
Net income		$	15,215			$	12,579			$	2,636				21.0	%

 

For the year ended December 31, 2016, net income increased $2.6 million compared to the year ended December 31, 2015. The increase in net income was primarily driven by a $2.7 million increase in net interest income due to organic loan growth.

 

Comparison of Operating Results for the Years Ended December 31, 2016 and 2015

 

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

 

Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $2.7 million or 4% to $71.3 million for the year ended 2016 compared to $68.5 million for the year ended 2015 primarily due to a $141.4 million increase in the average loan balance offset by a $2.4 million increase in interest expense. The total interest-earning assets yield increased 5 basis points to 3.39% for the year ended 2016 compared to 3.34% for the year ended 2015 primarily due to an increase in yield on our securities portfolio, Federal Home Loan Bank of Boston stocks and federal funds. The cost of interest-bearing liabilities increased 10 basis points to 78 basis points for the year ended 2016 compared to 68 basis points for the year ended 2015. The increase was primarily due to money market and certificate of deposit promotions and a 52 basis point increase in the average cost of Federal Home Loan Bank of Boston borrowings. Net interest margin was 2.80% for the year ended 2016 compared to 2.81% for the year ended 2015.

 

Interest expense increased $2.4 million to $15.7 million for the year ended 2016 compared to $13.4 million for the year ended 2015. The cost of interest-bearing liabilities increased 10 basis points to 78 basis points for the year ended 2016 compared to 68 basis points for the year ended 2015. The increase was primarily due to money market and certificate of deposit promotions and a 52 basis point increase in the average cost of Federal Home Loan Bank of Boston borrowings.

 

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

 

 

Management recorded a provision for loan losses of $2.3 million and $2.4 million for the years ended December 31, 2016 and 2015, respectively. The provision recorded is based upon management’s analysis of the allowance for loan losses necessary to absorb the estimated credit losses in the loan portfolio for the period. Net charge-offs for the year ended 2016 were $1.0 million or 0.04% to average loans compared to $1.2 million or 0.05% to average loans for the year ended 2015.

 

At December 31, 2016, the allowance for loan losses represented 0.85% of total loans and 122.60% of non-accrual loans, compared to 0.86% of total loans and 135.44% of non-accrual loans at December 31, 2015.

 

Noninterest Income: Sources of noninterest income primarily include service charges on deposit accounts, gain on sale of securities, mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees.

 

The following table summarizes noninterest income for the years ended December 31, 2016 and 2015:

 

		For the Year Ended December 31,
		2016				2015				$ Change				% Change
(Dollars in thousands)
Fees for customer services		$	6,151			$	5,975			$	176				2.9	%
Gain on sales of investments			-				1,523				(1,523	)			(100.0	)
Net gain on loans sold			3,105				2,492				613				24.6
Brokerage and insurance fee income			213				215				(2	)			(0.9	)
Bank owned life insurance income			1,417				1,672				(255	)			(15.3	)
Other			1,852				1,570				282				18.0
Total noninterest income		$	12,738			$	13,447			$	(709	)			(5.3	)%

 

Total noninterest income decreased $709,000 to $12.7 million for the year ended 2016 compared to $13.4 million for the year ended 2015. Fees for customer services increased $176,000 to $6.2 million for the year ended 2016 compared to the year ended 2015 driven by our growth in checking accounts and debit card fees. There was no gain on sale of investments for the year ended 2016. Gain on sale of investments was $1.5 million for the year ended 2015 due to the sale of trust preferred securities. Net gain on loans sold increased $613,000 to $3.1 million for the year ended 2016 compared to the year ended 2015 as a result of an increase in volume of loans sold and a lower rate environment. Bank owned life insurance income decreased $255,000 to $1.4 million for the year ended 2016 compared to the year ended 2015 primarily due to $302,000 more in bank owned life insurance proceeds in 2015 than in 2016. Other noninterest income increased $282,000 to $1.9 million for the year ended 2016 compared to the year ended 2015 primarily due to a $372,000 increase in swap fee income offset by a $78,000 decrease in mortgage banking derivatives.

 

Noninterest Expense: The following table summarizes noninterest expense for the years ended December 31, 2016 and 2015:

 

		For the Year Ended December 31,
		2016				2015				$ Change				% Change
(Dollars in thousands)
Salaries and employee benefits		$	36,983			$	36,855			$	128				0.3	%
Occupancy expense			4,890				5,115				(225	)			(4.4	)
Furniture and equipment expense			4,082				4,204				(122	)			(2.9	)
FDIC assessment			1,603				1,657				(54	)			(3.3	)
Marketing			2,170				2,149				21				1.0
Other operating expenses			10,776				11,230				(454	)			(4.0	)
Total noninterest expense		$	60,504			$	61,210			$	(706	)			(1.2	)%

 

Noninterest expense decreased $706,000 to $60.5 million for the year ended 2016 compared to $61.2 million for the year ended 2015. Salaries and employee benefits increased $128,000 to $37.0 million for the year ended 2016 compared to the year ended 2015. The increase is primarily due to increases in employee benefit related costs offset by a $616,000 decrease in officers’ share-based compensation expense due to the majority of the 2012 Stock Incentive Plan fully vesting in September 2016. Other operating expenses decreased $454,000 to $10.8 million for the year ended 2016 compared to the prior year primarily due to a $707,000 decrease in directors’ share-based compensation expense as a result of the majority of the 2012 Stock Incentive Plan fully vesting in September 2016 and a $436,000 decrease in the provision for off-balance sheet commitments as a result of a change in accounting estimate offset by a $557,000 gain on foreclosed real estate in 2015.

 

Income Tax Expense: Income tax expense was $5.9 million for the year ended 2016 compared to $5.7 million for the year ended 2015. Income tax expense in 2016 included a $137,000 write-off of a deferred tax asset associated with the establishment of the Bank’s foundation in 2011. Income tax expense in 2015 included a $771,000 valuation allowance also related to a deferred tax asset associated with the establishment of the Bank’s foundation in 2011. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset written-off. This had no impact on income tax expense in 2016.

 

 

Management of Market and Interest Rate Risk

 

General: The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans and available-for-sale investment securities, generally have longer contractual maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established an asset/liability committee which is responsible for (i) evaluating the interest rate risk inherent in our assets and liabilities, (ii) determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives and (iii) managing this risk consistent with the guidelines approved by our board of directors. Management monitors the level of interest rate risk on a regular basis and the asset/liability committee meets at least quarterly to review our asset/liability policies and interest rate risk position.

 

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, we have implemented the following strategies to manage our interest rate risk: (i) emphasizing adjustable rate commercial and consumer loans, (ii) maintaining a short average life investment portfolio and (iii) periodically lengthening the term structure of our borrowings from the FHLBB. Additionally, we sell a portion of our fixed-rate residential mortgages to the secondary market. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.

 

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

 

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

 

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

 

		Percentage Increase (Decrease) in Estimated Net Interest Income Over 12 Months
		At December 31, 2017				At December 31, 2016
100 basis point decrease			(7.08	)%			(7.57	)%
100 basis point increase			0.31	%			3.70	%
200 basis point increase			(0.48	)%			3.19	%
300 basis point increase			(1.39	)%			2.34	%
400 basis point increase			(1.38	)%			0.13	%

 

 

Liquidity and Capital Resources:

 

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

 

Our primary sources of liquidity are deposits, principal repayment and prepayment of loans, the sale in the secondary market of loans held for sale, maturities and sales of investment securities and other short-term investments, periodic pay downs of mortgage-backed securities, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions and rates offered by our competitors. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.

 

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At December 31, 2017, $35.4 million of our assets were invested in cash and cash equivalents compared to $47.7 million at December 31, 2016. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from FHLBB.

 

For the years ended December 31, 2017 and 2016, loan originations and purchases, net of collected principal and loan sales, totaled $229.3 million and $187.0 million, respectively.  Cash received from the sales and maturities of available-for-sale investment securities totaled $55.2 million and $172.0 million for the years ended December 31, 2017 and 2016, respectively. We purchased $39.1 million and $143.0 million of available-for-sale investment securities during the years ended December 31, 2017 and 2016, respectively.

 

Liquidity management is both a daily and longer-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBB, which provides an additional source of funds. At December 31, 2017, we had $255.5 million in advances from the FHLBB and an additional available borrowing limit of $706.9 million, compared to $287.1 million in advances from the FHLBB and an additional available borrowing limit of $544.7 million at December 31, 2016, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $79.5 million and $83.5 million at December 31, 2017 and 2016, respectively, subject to collateral requirements of the FHLBB. Internal policies limit borrowings to 25.0% of total assets, or $763.8 million and $709.4 million at December 30, 2017 and December 31, 2016, respectively. Other sources of funds include access to pre-approved unsecured lines of credit with financial institutions for $58.5 million and our $8.8 million secured line of credit with the FHLBB which were all undrawn at December 31, 2017. The Federal Reserve Bank’s discount window loan collateral program enables us to borrow up to $72.2 million on an overnight basis as of December 31, 2017. The funding arrangement was collateralized by $139.2 million in pledged commercial real estate loans as of December 31, 2017.

 

We had outstanding commitments to originate loans of $40.0 million and $102.4 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $479.2 million and $507.1 million at December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, time deposits scheduled to mature in less than one year totaled $380.6 million and $327.9 million, respectively. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as FHLBB advances, brokered deposits, our $58.5 million unsecured lines of credit with financial institutions, our $8.8 million secured line of credit with the FHLBB or our $72.2 million overnight borrowing arrangement with the Federal Reserve Bank in order to maintain our level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or if there is an increased amount of competition for deposits in our market area at the time of renewal.

 

 

Contractual Obligations

 

The following tables present information indicating various obligations made by us as of December 31, 2017 and the respective maturity dates:

 

		Less Than One Year				One to Three Years				Three to Five Years				More than Five Years				Total
		(Dollars in thousands)
FHLB Advances (1)		$	119,000			$	121,600			$	7,400			$	7,458			$	255,458
Interest expense payable on FHLB Advances			2,829				2,141				386				327				5,683
Repurchase agreement borrowings			10,500				-				-				-				10,500
Operating leases (2)			2,794				3,514				1,708				6,562				14,578
Other liabilities (3)			1,343				2,837				2,959				7,861				15,000
Time deposits with stated maturity dates			380,633				130,148				30,079				-				540,860
Alternative investment unfunded commitment			364				661				300				250				1,575
Total		$	517,463			$	260,901			$	42,832			$	22,458			$	843,654

 

(1)

Secured under a combination of a blanket security and specific loan agreements on qualifying assets, principally mortgage loans.

(2)

Represents non-cancelable operating leases for offices and office equipment.

(3)

Consists of estimated benefit payments over the next 10 years to retirees under unfunded nonqualified pension plans.

 

Other Commitments

 

The following tables present information indicating various other commitments made by us as of December 31, 2017 and the respective maturity dates:

 

		Less Than One Year				One to Three Years				Three to Five Years				More than Five Years				Total
		(Dollars in thousands)
Approved loan commitments (1)		$	39,974			$	-			$	-			$	-			$	39,974
Unadvanced portion of construction loans			932				6,045				-				43,037				50,014
Unused lines for home equity loans (2)			5,776				51,878				39,975				107,721				205,350
Unused revolving lines of credit			-				-				-				336				336
Unused commercial letters of credit			2,341				1,459				-				140				3,940
Unused commercial lines of credit			115,804				48,605				11,446				43,742				219,597
Total		$	164,827			$	107,987			$	51,421			$	194,976			$	519,211

 

General: 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 and generally have fixed expiration dates or other termination clauses.

 

(1)

Commitments for loans are extended to customers for up to 60 days after which they expire.

(2)

Unused portions of home equity lines of credit are available to the borrower for up to 10 years.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, other than noted above, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Impact of Inflation and Changing Prices

 

The consolidated financial statements and related notes of First Connecticut Bancorp have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature, with relatively little investments in fixed assets or inventories. Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Management believes that the impact of inflation on financial results depends on our ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.

 

 

Cautionary Statement Regarding Forward-Looking Information

 

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

 

●

statements of our goals, intentions and expectations;

 

●

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

 

●

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

 

●

estimates of our risks and future costs and benefits.

 

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

 

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

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

 

●

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.

 

 

●

Our stock value may be negatively affected by federal regulations and articles of incorporation provisions restricting takeovers.

 

●

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

 

	●	The Dodd-Frank Act has resulted in dramatic regulatory changes that affected the industry in general, and may impact our competitive position in ways that cannot be predicted at this time.
	●	The Emergency Economic Stabilization Act (“EESA”) of 2008 has and may continue to have a significant impact on the banking industry.

 

●

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

 

Any forward-looking statements made by or on behalf of us in this annual report on Form 10-K speak only as of the date of this annual report on Form 10-K. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consult any further disclosures of a forward-looking nature we may make in future filings.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

 

For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations – Management of Market and Interest Rate Risk.”

 

Item 8. Financial Statements and Supplementary Data

 

The following are included in this item:

 

(A)

Report of Independent Registered Public Accounting Firm

 

(B)

Consolidated Statements of Financial Condition as of December 31, 2017 and 2016

 

(C)

Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015

 

(D)

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015

 

(E)

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015

 

(F)

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

 

(G)

Notes to Consolidated Financial Statements

 

The supplementary data required by this item (selected quarterly financial data) is provided in Note 22 of the Notes to Consolidated Financial Statements.

 

 

CONSOLIDATED FINANCIAL STATEMENTS

 

Table of Contents

 

	Page
Report of Independent Registered Public Accounting Firm	62
Consolidated Financial Statements:
Consolidated Statements of Financial Condition	63
Consolidated Statements of Income	64
Consolidated Statements of Comprehensive Income	65
Consolidated Statements of Changes in Stockholders’ Equity	66
Consolidated Statements of Cash Flows	67
Notes to Consolidated Financial Statements	68

 

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Stockholders of

First Connecticut Bancorp, Inc.

 

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying consolidated statements of financial condition of First Connecticut Bancorp, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

 

Basis for Opinions

 

The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

 

/s/PricewaterhouseCoopers LLP

Hartford, Connecticut

March 9, 2018

 

We have served as the Company’s auditor since 1993. 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Financial Condition

 

		December 31,
		2017				2016
(Dollars in thousands, except share and per share data)
Assets
Cash and due from banks		$	33,320			$	44,086
Interest bearing deposits with other institutions			2,030				3,637
Total cash and cash equivalents			35,350				47,723
Securities held-to-maturity, at amortized cost			74,985				33,061
Securities available-for-sale, at fair value			87,251				103,520
Loans held for sale			5,295				3,270
Loans (1)			2,748,081				2,547,512
Allowance for loan losses			(22,448	)			(21,529	)
Loans, net			2,725,633				2,525,983
Premises and equipment, net			16,845				18,002
Federal Home Loan Bank of Boston stock, at cost			15,537				16,378
Accrued income receivable			8,979				7,432
Bank-owned life insurance			57,511				51,726
Deferred income taxes, net			7,662				14,795
Prepaid expenses and other assets			20,002				15,665
Total assets		$	3,055,050			$	2,837,555
Liabilities and Stockholders' Equity
Deposits
Interest-bearing		$	1,960,672			$	1,773,807
Noninterest-bearing			473,428				441,283
			2,434,100				2,215,090
Federal Home Loan Bank of Boston advances			255,458				287,057
Repurchase agreement borrowings			10,500				10,500
Repurchase liabilities			34,496				18,867
Accrued expenses and other liabilities			48,037				45,865
Total liabilities			2,782,591				2,577,379
Commitments and contingencies (Note 23)			-				-
Stockholders' Equity
Common stock, $0.01 par value, 30,000,000 shares authorized; 17,947,647 shares issued and 15,952,946 shares outstanding at December 31, 2017 and 17,947,647 shares issued and 15,897,698 shares outstanding at December 31, 2016			181				181
Additional paid-in-capital			185,779				184,111
Unallocated common stock held by ESOP			(9,539	)			(10,567	)
Treasury stock, at cost (1,994,701 shares at December 31, 2017 and 2,049,949 shares at December 31, 2016)			(29,620	)			(30,400	)
Retained earnings			131,887				123,541
Accumulated other comprehensive loss			(6,229	)			(6,690	)
Total stockholders' equity			272,459				260,176
Total liabilities and stockholders' equity		$	3,055,050			$	2,837,555

 

(1)

Loans include net deferred loan costs of $5.1 million and $3.8 million at December 31, 2017 and 2016, respectively.

 

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

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Income

 

		For the Year Ended December 31,
		2017				2016				2015
(Dollars in thousands, except share and per share data)
Interest income
Interest and fees on loans
Mortgage		$	73,922			$	64,612			$	61,920
Other			21,185				19,613				17,584
Interest and dividends on investments
United States Government and agency obligations			2,287				1,620				1,534
Other bonds			24				50				79
Corporate stocks			916				912				741
Other interest income			149				179				26
Total interest income			98,483				86,986				81,884
Interest expense
Deposits			13,248				11,456				9,372
Federal Home Loan Bank of Boston advances			4,374				3,826				3,449
Repurchase agreement borrowings			381				385				448
Repurchase liabilities			31				64				106
Total interest expense			18,034				15,731				13,375
Net interest income			80,449				71,255				68,509
Provision for loan losses			1,551				2,332				2,440
Net interest income after provision for loan losses			78,898				68,923				66,069
Noninterest income
Fees for customer services			6,403				6,151				5,975
Gain on sales of investments			-				-				1,523
Net gain on loans sold			2,597				3,105				2,492
Brokerage and insurance fee income			218				213				215
Bank owned life insurance income			1,628				1,417				1,672
Other			2,653				1,852				1,570
Total noninterest income			13,499				12,738				13,447
Noninterest expense
Salaries and employee benefits			38,595				36,983				36,855
Occupancy expense			5,073				4,890				5,115
Furniture and equipment expense			3,954				4,082				4,204
FDIC assessment			1,693				1,603				1,657
Marketing			2,570				2,170				2,149
Other operating expenses			10,451				10,776				11,230
Total noninterest expense			62,336				60,504				61,210
Income before income taxes			30,061				21,157				18,306
Income tax expense			13,872				5,942				5,727
Net income		$	16,189			$	15,215			$	12,579
Net earnings per share (See Note 3):
Basic		$	1.07			$	1.02			$	0.84
Diluted			1.02				1.00				0.83
Dividends per share			0.52				0.31				0.22

 

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

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Comprehensive Income

 

		For the Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Net income		$	16,189			$	15,215			$	12,579
Other comprehensive income, before tax Unrealized losses on securities:
Unrealized holding losses arising during the period			(163	)			(22	)			(3,525	)
Less: reclassification adjustment for gains included in net income			-				-				1,523
Net change in unrealized losses			(163	)			(22	)			(2,002	)
Change related to pension and other postretirement benefit plans			860				732				986
Other comprehensive income (loss), before tax			697				710				(1,016	)
Income tax expense (benefit)			236				238				(365	)
Other comprehensive income (loss), net of tax			461				472				(651	)
Comprehensive income		$	16,650			$	15,687			$	11,928

 

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

 

 

First Connecticut Bancorp, Inc.

Consolidated Statement of Changes in Stockholders’ Equity

 

														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, 2014			16,026,319			$	181			$	178,772			$	(12,681	)		$	(28,828	)		$	103,630			$	(6,511	)		$	234,563
ESOP shares released and  committed to be released			-				-				467				1,055				-				-				-				1,522
Cash dividend paid ($0.22 per common share)			-				-				-				-				-				(3,276	)			-				(3,276	)
Treasury stock acquired			(147,020	)			-				-				-				(2,200	)			-				-				(2,200	)
Stock options exercised			31,600				-				(14	)			-				426				-				-				412
Cancellation of shares for tax withholding			(29,236	)			-				(498	)			-				-				-				-				(498	)
Tax benefits from stock-based compensation			-				-				152				-				-				-				-				152
Share based compensation expense			-				-				3,118				-				-				-				-				3,118
Net income			-				-				-				-				-				12,579				-				12,579
Other comprehensive loss			-				-				-				-				-				-				(651	)			(651	)
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			-				-				610				1,059				-				-				-				1,669
Cash dividend paid ($0.31 per common share)			-				-				-				-				-				(4,607	)			-				(4,607	)
Treasury stock acquired			(156,800	)			-				-				-				(2,527	)			-				-				(2,527	)
Stock options exercised			202,081				-				(86	)			-				2,729				-				-				2,643
Cancelation of shares for tax withholding			(29,246	)			-				(516	)			-				-				-				-				(516	)
Tax expense from stock-based compensation			-				-				311				-				-				-				-				311
Share based compensation expense			-				-				1,795				-				-				-				-				1,795
Net income			-				-				-				-				-				15,215				-				15,215
Other comprehensive income			-				-				-				-				-				-				472				472
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			-				-				1,371				1,028				-				-				-				2,399
Cash dividend paid ($0.52 per common share)			-				-				-				-				-				(7,843	)			-				(7,843	)
Stock options exercised			49,550				-				(31	)			-				700				-				-				669
Share based compensation expense			5,698				-				328				-				80				-				-				408
Net income			-				-				-				-				-				16,189				-				16,189
Other comprehensive income			-				-				-				-				-				-				461				461
Balance at December 31, 2017			15,952,946			$	181			$	185,779			$	(9,539	)		$	(29,620	)		$	131,887			$	(6,229	)		$	272,459

 

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

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Cash Flows

 

		For the Year Ended December 31,
(Dollars in thousands)		2017				2016				2015
Cash flows from operating activities
Net income		$	16,189			$	15,215			$	12,579
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			1,551				2,332				2,440
(Reversal of) provision for off-balance sheet commitments			(151	)			(348	)			61
Depreciation and amortization			1,998				2,316				2,640
Amortization of ESOP expense			2,399				1,669				1,522
Share based compensation expense			408				1,795				3,118
Gain on sale of investments			-				-				(1,523	)
Loans originated for sale			(119,869	)			(167,377	)			(209,997	)
Proceeds from the sale of loans held for sale			119,914				176,849				205,269
Loss on disposal of premises and equipment			-				82				62
Loss (gain) on fair value adjustment for mortgage banking derivatives			113				(46	)			(123	)
Impairment losses on alternative investments			10				319				144
Writedowns on foreclosed real estate			-				21				50
Gain on sale of foreclosed real estate			-				(9	)			(570	)
Net gain on loans sold			(2,597	)			(3,105	)			(2,492	)
Net (accretion) amortization of investment security discounts and premiums			(58	)			(104	)			(65	)
Change in net deferred loan fees and costs			(1,221	)			140				(141	)
Increase in accrued income receivable			(1,547	)			(685	)			(970	)
Deferred income tax			6,897				410				1,763
Increase in cash surrender value of bank-owned life insurance			(1,354	)			(1,336	)			(1,293	)
(Increase) decrease in prepaid expenses and other assets			(4,404	)			4,113				(5,562	)
Increase (decrease) in accrued expenses and other liabilities			3,127				(583	)			2,410
Net cash provided by operating activities			21,405				31,668				9,322
Cash flows from investing activities
Maturities, calls and principal payments of securities held-to-maturity			13,713				25,152				24,978
Maturities, calls and principal payments of securities available-for-sale			55,243				172,024				278,288
Purchases of securities held-to-maturity			(55,635	)			(25,967	)			(41,000	)
Purchases of securities available-for-sale			(39,081	)			(143,038	)			(223,085	)
Loan originations, net of principal repayments			(229,323	)			(187,045	)			(226,267	)
Redemptions (purchases) of Federal Home Loan Bank of Boston stock, net			841				5,351				(1,944	)
Purchase of bank-owned life insurance			(5,000	)			-				(10,000	)
Proceeds from sale of foreclosed real estate			-				455				2,928
Proceeds from bank-owned life insurance			569				228				361
Proceeds from loans not originated for sale			29,870				-				-
Purchases of premises and equipment			(841	)			(1,835	)			(2,394	)
Net cash used in investing activities			(229,644	)			(154,675	)			(198,135	)
Cash flows from financing activities
Net payments on Federal Home Loan Bank of Boston advances			(31,599	)			(90,543	)			(24,100	)
Decrease in repurchase agreement borrowings			-				-				(10,500	)
Net increase in demand deposits, NOW accounts, savings accounts and money market accounts			142,720				199,952				182,749
Net increase in time deposits			76,290				23,780				75,568
Net increase (decrease) in repurchase liabilities			15,629				(16,902	)			(13,218	)
Stock options exercised			669				2,643				412
Excess tax expense from stock-based compensation			-				311				152
Cancellation of shares for tax withholding			-				(516	)			(498	)
Repurchase of common stock			-				(2,527	)			(2,200	)
Cash dividend paid			(7,843	)			(4,607	)			(3,276	)
Net cash provided by financing activities			195,866				111,591				205,089
Net (decrease) increase in cash and cash equivalents			(12,373	)			(11,416	)			16,276
Cash and cash equivalents at beginning of period			47,723				59,139				42,863
Cash and cash equivalents at end of period		$	35,350			$	47,723			$	59,139
Supplemental disclosure of cash flow information
Cash paid for interest		$	17,851			$	15,703			$	13,270
Cash paid for income taxes			7,315				5,399				4,944
Transfer from loans to held for sale			29,343				-				-
Loans transferred to other real estate owned			-				188				2,287

 

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

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 December 31, 2017.

 

Basis of Financial Statement Presentation

 

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The consolidated financial statements include the accounts of First Connecticut Bancorp, Inc. and its wholly-owned subsidiary, Farmington Bank. All significant intercompany transactions and balances have been eliminated in consolidation.

 

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 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.

 

Cash and Cash Equivalents

 

The Company defines cash and cash equivalents for consolidated cash flow purposes as cash due from banks, federal funds sold and money market funds. Cash flows from loans and deposits are reported net. The balances of cash and due from banks, federal funds sold and money market funds, at times, may exceed federally insured limits. The Company has not experienced any losses from such concentrations.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Investment Securities

 

Marketable equity and debt securities are classified as either available-for-sale or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. 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.

 

Federal Home Loan Bank of Boston Stock

 

The Company, which is a member of the Federal Home Loan Bank system, is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLBB”). Based on redemption provisions of the FHLBB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. As of December 31, 2017 and 2016, no impairment has been recognized.

 

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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 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.

 

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 year ended December 31, 2017.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 December 31, 2017 and 2016.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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.

 

Mortgage Servicing Rights

 

The Company capitalizes mortgage servicing rights for loans originated and then sold with servicing retained based on the fair market value on the origination date. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income and such amortization is included in the consolidated statements of income as a reduction of mortgage servicing fee income. Mortgage servicing rights are evaluated for impairment by comparing their aggregate carrying amount to their fair value. An independent appraisal of the fair value of the Company’s mortgage servicing rights is obtained quarterly and is used by management to evaluate the reasonableness of the fair value estimates. Management reviews the independent appraisal and performs procedures to determine appropriateness. Impairment is recognized as an adjustment to mortgage servicing rights and mortgage servicing income.

 

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 December 31, 2017 and 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 $4.0 million at December 31, 2017.

 

Bank Owned Life Insurance

 

Bank owned life insurance ("'BOLI") represents life insurance on certain employees who have consented to allow the Company to be the beneficiary of those policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Premises and Equipment

 

Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to ten years for furniture and equipment and five to forty years for premises. Leasehold improvements are amortized on a straight-line basis over the term of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Maintenance and repairs are charged to non-interest expense as incurred, while significant improvements are capitalized.

 

Derivative Financial Instruments

 

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 and do not meet the hedge accounting parameters under FASB ASC 815 “Derivatives and Hedging”. Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. Changes in the fair value of derivatives not designated in hedging relationships are recognized directly in earnings.

 

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.

 

Repurchase Liabilities

 

Repurchase agreements are accounted for as secured borrowings since the Company maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. Securities are sold to a counterparty with an agreement to repurchase the same or substantially the same security at a specified price and date. The Company has repurchase agreements with commercial or municipal customers that are offered as a commercial banking service. Customer repurchase agreements are for a term of one day and are backed by the purchasers’ interest in certain U.S. Treasury Bills or other U.S. Government securities. Obligations to repurchase securities sold are reflected as a liability in the Consolidated Statements of Financial Condition. The Company does not record transactions of repurchase agreements as sales. The securities underlying the repurchase agreements remain in the available-for-sale investment and held-to-maturity securities portfolios.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Transfers of Financial Assets

 

Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

 

During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

 

Fee Income 

 

Fee income for customer services which are not deferred are recorded on an accrual basis when earned.

 

Advertising Costs 

 

Advertising costs are expensed as incurred.

 

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.

 

Employee Stock Ownership Plan (“ESOP”)

 

The Company accounts for its ESOP in accordance with FASB ASC 718-40, “Compensation – Stock Compensation”. Under this guidance, unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders' equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company's ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. The Company will receive a tax deduction equal to the cost of the shares released to the extent of the principal pay down on the loan by the ESOP. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company's consolidated financial statements.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Stock Incentive Plan

 

In May 2016, the Company’s shareholders approved the First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) and during August 2012, the Company implemented the First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan to provide for issuance or granting of shares of common stock for stock options or restricted stock. The Company applies ASC 718, Compensation – “Stock Compensation”, and has recorded stock-based employee compensation cost using the fair value method. Management estimated the fair values of all option grants using the Black-Scholes option-pricing model. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The risk-free rate was determined utilizing the treasury yield for the expected life of the option contract.

 

Earnings Per Share

 

Earnings per common share is computed under the two-class method. Basic earnings per common share is computed by dividing net earnings allocated to common stockholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Non-vested restricted stock awards are participating securities as they have non-forfeitable rights to dividends or dividend equivalents. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock options for common stock using the treasury stock method. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted-average common shares used in calculating diluted earnings per common share is provided in Note 3 - Earnings Per Share.

 

Segment Reporting

 

The Company’s only business segment is Community Banking. For the years ended December 31, 2017, 2016 and 2015, this segment represented all the revenues and income of the consolidated group and therefore is the only reported segment as defined by FASB ASC 820, “Segment Reporting”.

 

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. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company's fees for customer services, brokerage and insurance fee income items are within the scope of the ASU 2014-09. The timing of the Company's revenue recognition regarding these items is not expected to materially change. The Company does not expect the adoption of ASU No. 2014-09 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, to have a material impact on its accounting and disclosures.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 does not expect the adoption of ASU 2016-01 to have a material impact on its accounting and disclosures.

 

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

 

In 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. Management has established an internal committee to manage the implementation of ASU 2016-13. The committee is led by the Company’s Chief Financial Officer and Chief Risk Officer and includes representatives of the Bank’s loan operations, credit administration, accounting and technology departments. The committee has reviewed, evaluated and selected a third-party software solution and is currently in the process of identifying and gathering the necessary historical data. The committee is currently analyzing the provisions of the ASU and published regulatory guidance.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 does not expect the adoption of ASU 2016-15 to have a material impact on its accounting and disclosures.

 

In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 requires a retrospective transition method applied to each period presented. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its accounting and disclosures.

 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The guidance is effective for public business entities for annual years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2017-07 to have a material impact 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 does not expect the adoption of ASU 2017-09 to have a material impact on its accounting and disclosures.

 

In February 2018, the FASB issued ASU No. 2018-02,”Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction of the federal corporate income tax rate pursuant to enactment of the Tax Cuts and Jobs Act. The guidance is effective for public business entities for annual years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities electing the reclassification are required to apply the guidance either at the beginning of the period of adoption or retrospectively for all periods impacted. The Company is evaluating the effects of reclassifying these stranded tax effects within accumulated other comprehensive income to retained earnings.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

2.

Restrictions on Cash and Due from Banks

 

The Company is required to maintain a percentage of transaction account balances on deposit in non-interest-earning reserves with the Federal Reserve Bank, offset by the Company’s average vault cash. The Company also is required to maintain cash balances to collateralize the Company’s position with certain third parties. The Company had cash and liquid assets of approximately $9.2 million and $9.5 million to meet these requirements at December 31, 2017 and 2016, respectively.

 

3.

Earnings Per Share

 

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

 

		For the Years Ended December 31,
		2017				2016				2015
(Dollars in thousands, except per share data):
Net income		$	16,189			$	15,215			$	12,579
Less:  Dividends to participating shares			(15	)			(18	)			(41	)
Income allocated to participating shares			(13	)			(61	)			(135	)
Net income allocated to common stockholders		$	16,161			$	15,136			$	12,403
Weighted-average shares issued			17,971,752				17,967,464				17,996,918
Less:   Average unallocated ESOP shares			(814,293	)			(909,652	)			(1,005,011	)
Average treasury stock			(2,009,786	)			(2,150,847	)			(2,048,101	)
Average unvested restricted stock			(24,105	)			(85,574	)			(217,199	)
Weighted-average basic shares outstanding			15,123,568				14,821,391				14,726,607
Plus: Average dilutive shares			673,471				374,620				223,047
Weighted-average diluted shares outstanding			15,797,039				15,196,011				14,949,654
Net earnings per share (1):
Basic		$	1.07			$	1.02			$	0.84
Diluted		$	1.02			$	1.00			$	0.83

 

(1)

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

 

For the years ended December 31, 2017, 2016 and 2015, respectively, 4,302, -0- and 78,500 options were anti-dilutive and therefore excluded from the earnings per share calculation.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

4.

Investment Securities

 

Investment securities are summarized as follows:

 

		December 31, 2017
						Recognized in OCI												Not Recognized in OCI
						Gross				Gross								Gross				Gross
		Amortized				Unrealized				Unrealized				Carrying				Unrealized				Unrealized				Fair
(Dollars in thousands)		Cost				Gains				Losses				Value				Gains				Losses				Value
Available-for-sale
Debt securities:
U.S. Treasury obligations		$	11,847			$	79			$	(17	)		$	11,909			$	-			$	-			$	11,909
U.S. Government agency obligations			66,000				-				(344	)			65,656				-				-				65,656
Government sponsored residential mortgage-backed securities			2,677				116				-				2,793				-				-				2,793
Preferred equity securities			2,000				-				(193	)			1,807				-				-				1,807
Marketable equity securities			108				79				-				187				-				-				187
Mutual funds			5,187				-				(288	)			4,899				-				-				4,899
Total securities available-for-sale		$	87,819			$	274			$	(842	)		$	87,251			$	-			$	-			$	87,251
Held-to-maturity
U.S. Treasury obligations		$	4,991			$	-			$	-			$	4,991			$	-			$	-			$	4,991
U.S. Government agency obligations			37,982				-				-				37,982				-				(432	)			37,550
Government sponsored residential mortgage-backed securities			32,012				-				-				32,012				29				(28	)			32,013
Total securities held-to-maturity		$	74,985			$	-			$	-			$	74,985			$	29			$	(460	)		$	74,554

 

		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

 

At December 31, 2017, the net unrealized loss on securities available for sale of $568,000, net of a tax benefit of $199,000 or $369,000, is included in accumulated other comprehensive income. At December 31, 2016, the net unrealized loss on securities available for sale of $405,000, net of a tax benefit of $142,000 or $263,000, is included in accumulated other comprehensive income.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 December 31, 2017 and 2016:

 

		December 31, 2017
						Less than 12 Months								12 Months or More								Total
										Gross								Gross								Gross
		Number of				Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
(Dollars in thousands)		Securities				Value				Loss				Value				Loss				Value				Loss
Available-for-sale
U.S. Treasury obligations			1			$	4,984			$	(17	)		$	-			$	-			$	4,984			$	(17	)
U.S. Government agency obligations			10				18,927				(73	)			46,729				(271	)			65,656				(344	)
Preferred equity securities			1				-				-				1,807				(193	)			1,807				(193	)
Mutual funds			1				-				-				4,899				(288	)			4,899				(288	)
			13			$	23,911			$	(90	)		$	53,435			$	(752	)		$	77,346			$	(842	)
Held-to-maturity
U.S. Government agency obligations			6			$	32,614			$	(368	)		$	4,935			$	(64	)		$	37,549			$	(432	)
Government sponsored residential mortgage-backed securities			4				16,963				(28	)			-				-				16,963				(28	)
			10			$	49,577			$	(396	)		$	4,935			$	(64	)		$	54,512			$	(460	)
Total investment securities in an unrealized loss position			23			$	73,488			$	(486	)		$	58,370			$	(816	)		$	131,858			$	(1,302	)

 

		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 December 31, 2017 represents an other-than-temporary impairment (“OTTI”), based on its detailed review of the securities portfolio. The Company has no intent to sell nor is it more likely than not that the Company will be required to sell any of the securities in a loss position during the period of time necessary to recover the unrealized losses, which may be until maturity.

 

The following summarizes the conclusions from our OTTI evaluation for those security types that incurred significant gross unrealized losses greater than twelve months as of December 31, 2017:

 

Preferred equity securities - The unrealized loss on preferred equity securities in a loss position for 12 months or more relates to one preferred equity security. This investment is in a global financial institution. When estimating the recovery period for securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. Management evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Management concluded that the preferred equity security is not other-than-temporarily impaired at December 31, 2017.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 December 31, 2017.

 

The Company recorded no other-than-temporary impairment charges to the investment securities portfolios for the years ended December 31, 2017, 2016 and 2015.

 

There were gross realized gains on sales of securities available-for-sale totaling $-0-, $-0- and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively

 

As of December 31, 2017 and 2016, U.S. Treasury, U.S. Government agency obligations and Government sponsored residential mortgage-backed securities with a fair value of $93.3 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 December 31, 2017 and 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:

 

		December 31, 2017
		Available-for-Sale								Held-to-Maturity
						Estimated								Estimated
		Amortized				Fair				Amortized				Fair
		Cost				Value				Cost				Value
(Dollars in thousands)
Due in one year or less		$	28,000			$	27,919			$	-			$	-
Due after one year through five years			49,847				49,646				30,991				30,640
Due after five years through ten years			-				-				11,982				11,901
Due after ten years			-				-				-				-
Government sponsored residential mortgage-backed securities			2,677				2,793				32,012				32,013
		$	80,524			$	80,358			$	74,985			$	74,554

 

		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

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

The Company, as a member of the FHLBB, owned $15.5 million and $16.4 million of FHLBB capital stock at December 31, 2017 and 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 December 31, 2017. Capital adequacy, credit ratings, the value of the stock, overall financial condition of the FHLB system and FHLBB as well as current economic factors were analyzed in the impairment analysis. The Company concluded that its position in FHLBB capital stock is not other-than-temporarily impaired at December 31, 2017.

 

Alternative Investments

 

Alternative investments, which totaled $2.1 million and $2.2 million at December 31, 2017 and 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 December 31, 2017. The Company recognized a $10,000, $319,000 and $144,000 other-than-temporary impairment charge on its limited partnerships for the years ended December 31, 2017, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $251,000, $179,000 and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively. See a further discussion of fair value in Note 16 - Fair Value Measurements. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of December 31, 2017.

 

5.

Loans and Allowance for Loan Losses

 

Loans consisted of the following:

 

		December 31,				December 31,
		2017				2016
(Dollars in thousands)
Real estate:
Residential		$	989,366			$	907,946
Commercial			1,063,755				979,370
Construction			90,059				49,679
Commercial			429,116				430,539
Home equity line of credit			165,070				170,786
Other			5,650				5,348
Total loans			2,743,016				2,543,668
Net deferred loan costs			5,065				3,844
Loans			2,748,081				2,547,512
Allowance for loan losses			(22,448	)			(21,529	)
Loans, net		$	2,725,633			$	2,525,983

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		For the Year Ended December 31, 2017
		Balance at beginning of year				Charge-offs				Recoveries				Provision for (Reduction of) loan losses				Balance at end of year
(Dollars in thousands)
Real estate:
Residential		$	4,134			$	(95	)		$	15			$	83			$	4,137
Commercial			11,131				(111	)			2				941				11,963
Construction			425				-				-				360				785
Commercial			4,400				(371	)			81				45				4,155
Home equity line of credit			1,398				-				-				(34	)			1,364
Other			41				(184	)			31				156				44
		$	21,529			$	(761	)		$	129			$	1,551			$	22,448

 

		For the Year Ended December 31, 2016
		Balance at beginning of year				Charge-offs				Recoveries				Provision for (Reduction of) loan losses				Balance at end of year
(Dollars in thousands)
Real estate:
Residential		$	4,084			$	(327	)		$	2			$	375			$	4,134
Commercial			10,255				-				-				876				11,131
Construction			231				(18	)			-				212				425
Commercial			4,119				(410	)			10				681				4,400
Home equity line of credit			1,470				(13	)			-				(59	)			1,398
Other			39				(278	)			33				247				41
		$	20,198			$	(1,046	)		$	45			$	2,332			$	21,529

 

		For the Year Ended December 31, 2015
		Balance at beginning of year				Charge-offs				Recoveries				Provision for (Reduction of) loan losses				Balance at end of year
(Dollars in thousands)
Real estate:
Residential		$	4,382			$	(295	)		$	112			$	(115	)		$	4,084
Commercial			8,949				(213	)			-				1,519				10,255
Construction			478				-				-				(247	)			231
Commercial			3,250				(318	)			6				1,181				4,119
Home equity line of credit			1,859				(238	)			-				(151	)			1,470
Other			42				(285	)			29				253				39
		$	18,960			$	(1,349	)		$	147			$	2,440			$	20,198

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following table lists the allocation of the allowance by impairment methodology and by loan segment at December 31, 2017 and 2016:

 

		December 31, 2017								December 31, 2016
(Dollars in thousands)		Total				Reserve Allocation				Total				Reserve Allocation
Loans individually evaluated for impairment:
Real estate:
Residential		$	12,971			$	130			$	12,778			$	145
Commercial			8,521				-				12,363				14
Construction			4,532				-				4,532				-
Commercial			1,076				38				2,029				112
Home equity line of credit			2,585				-				1,864				-
Other			509				6				707				7
			30,194				174				34,273				278
Loans collectively evaluated for impairment:
Real estate:
Residential		$	982,626			$	4,007			$	900,352			$	3,989
Commercial			1,054,122				11,963				965,718				11,117
Construction			85,527				785				45,147				425
Commercial			427,986				4,117				428,466				4,288
Home equity line of credit			162,485				1,364				168,922				1,398
Other			5,141				38				4,634				34
			2,717,887				22,274				2,513,239				21,251
Total		$	2,748,081			$	22,448			$	2,547,512			$	21,529

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		December 31, 2017
																																		Past Due 90
		30-59 Days								60-89 Days								> 90 Days																Days or More
		Past Due								Past Due								Past Due								Total								and Still
(Dollars in thousands)		Number				Amount				Number				Amount				Number				Amount				Number				Amount				Accruing
Real estate:
Residential			13			$	2,445				9			$	1,874				20			$	7,317				42			$	11,636			$	-
Commercial			1				67				-				-				-				-				1				67				-
Construction			-				-				-				-				1				4,532				1				4,532				-
Commercial			-				-				1				22				1				38				2				60				-
Home equity line of credit			2				223				1				48				4				584				7				855				-
Other			7				74				-				-				3				30				10				104				-
Total			23			$	2,809				11			$	1,944				29			$	12,501				63			$	17,254			$	-

 

		December 31, 2016
																																		Past Due 90
		30-59 Days								60-89 Days								> 90 Days																Days or More
		Past Due								Past Due								Past Due								Total								and Still
(Dollars in thousands)		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			$	-

 

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:

 

		December 31,				December 31,
(Dollars in thousands)		2017				2016
Nonaccrual loans:
Real estate:
Residential		$	9,401			$	9,846
Commercial			67				976
Construction			4,532				4,532
Commercial			775				1,301
Home equity line of credit			963				862
Other			54				44
Total nonaccruing loans			15,792				17,561
Loans 90 days past due and still accruing			-				-
Other real estate owned			-				-
Total nonperforming assets		$	15,792			$	17,561

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		December 31, 2017												December 31, 2016
						Unpaid												Unpaid
		Recorded				Principal				Related				Recorded				Principal				Related
(Dollars in thousands)		Investment				Balance				Allowance				Investment				Balance				Allowance
Impaired loans without a valuation allowance:
Real estate:
Residential		$	11,923			$	14,119			$	-			$	11,046			$	12,833			$	-
Commercial			8,521				8,555				-				9,496				9,636				-
Construction			4,532				4,532				-				4,532				4,532				-
Commercial			1,038				1,303				-				1,784				2,027				-
Home equity line of credit			2,585				2,642				-				1,864				1,909				-
Other			485				504				-				682				700				-
Total			29,084				31,655				-				29,404				31,637				-
Impaired loans with a valuation allowance:
Real estate:
Residential			1,048				1,066				130				1,732				1,796				145
Commercial			-				-				-				2,867				2,867				14
Construction			-				-				-				-				-				-
Commercial			38				62				38				245				894				112
Home equity line of credit			-				-				-				-				-				-
Other			24				24				6				25				25				7
Total			1,110				1,152				174				4,869				5,582				278
Total impaired loans		$	30,194			$	32,807			$	174			$	34,273			$	37,219			$	278

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		For the Year Ended December 31,
		2017								2016								2015
		Average				Interest				Average				Interest				Average				Interest
		Recorded				Income				Recorded				Income				Recorded				Income
(Dollars in thousands)		Investment				Recognized				Investment				Recognized				Investment				Recognized
Impaired loans without a valuation allowance:
Real estate:
Residential		$	11,818			$	119			$	11,273			$	94			$	10,621			$	112
Commercial			8,528				391				11,916				511				13,674				575
Construction			4,532				-				4,672				69				4,719				138
Commercial			1,272				24				2,017				35				4,182				110
Home equity line of credit			2,136				50				1,708				27				928				4
Other			548				27				783				34				1,065				40
Total			28,834				611				32,369				770				35,189				979
Impaired loans with  a valuation allowance:
Real estate:
Residential			1,011				37				1,097				43				1,037				35
Commercial			714				51				2,887				140				3,504				158
Construction			-				-				-				-				-				-
Commercial			50				-				792				3				1,682				15
Home equity line of credit			-				-				-				-				-				-
Other			24				1				25				1				35				1
Total			1,799				89				4,801				187				6,258				209
Total impaired loans		$	30,633			$	700			$	37,170			$	957			$	41,447			$	1,188

 

There was no interest income recognized on a cash basis method of accounting for the years ended December 31, 2017, 2016 and 2015.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		December 31, 2017
		TDRs on Accrual Status								TDRs on Nonaccrual Status								Total TDRs
(Dollars in thousands)		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
Real estate:
Residential			18			$	3,025				12			$	3,854				30			$	6,879
Commercial			2				621				-				-				2				621
Construction			-				-				1				4,532				1				4,532
Commercial			2				300				5				776				7				1,076
Home equity line of credit			14				1,731				1				309				15				2,040
Other			5				495				1				13				6				508
Total			41			$	6,172				20			$	9,484				61			$	15,656

 

		December 31, 2016
		TDRs on Accrual Status								TDRs on Nonaccrual Status								Total TDRs
(Dollars in thousands)		Number of Loans				Recorded Investment				Number of Loans				Recorded Investment				Number of Loans				Recorded Investment
Real estate:
Residential			15			$	2,581				9			$	4,433				24			$	7,014
Commercial			2				3,333				-				-				2				3,333
Construction			-				-				1				4,532				1				4,532
Commercial			3				485				6				1,047				9				1,532
Home equity line of credit			8				1,075				1				58				9				1,133
Other			5				686				1				20				6				706
Total			33			$	8,160				18			$	10,090				51			$	18,250

 

The recorded investment balance of TDRs were $15.7 million and $18.3 million at December 31, 2017 and 2016, respectively. TDRs on accrual status were $6.2 million and $8.2 million while TDRs on nonaccrual status were $9.5 million and $10.1 million at December 31, 2017 and 2016, respectively. At December 31, 2017, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At December 31, 2017 and 2016, the allowance for loan losses included specific reserves of $172,000 and $160,000 related to TDRs, respectively. For the years ended December 31, 2017 and 2016, the Bank had charge-offs totaling $83,000 and $272,000, respectively, related to portions of TDRs deemed to be uncollectible. The Bank may provide additional funds to borrowers in TDR status. The amount of additional funds available to borrowers in TDR status was $107,000 and $369,000 at December 31, 2017 and 2016, respectively.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 years ended December 31, 2017, 2016 and 2015:

 

		For the Year Ended December 31, 2017
(Dollars in thousands)		Number of Modifications				Recorded Investment Prior to Modification				Recorded Investment After Modification (1)
Troubled debt restructurings:
Real estate:
Residential			8			$	1,199			$	1,187
Commercial			1				171				171
Commercial			1				38				38
Home equity line of credit			8				1,066				1,059
Total			18			$	2,474			$	2,455

 

		For the Year Ended December 31, 2016
(Dollars in thousands)		Number of Modifications				Recorded Investment Prior to Modification				Recorded Investment After Modification (1)
Troubled debt restructurings:
Real estate:
Residential			2			$	279			$	278
Construction			1				4,532				4,532
Home equity line of credit			6				985				980
Total			9			$	5,796			$	5,790

 

		For the Year Ended December 31, 2015
(Dollars in thousands)		Number of Modifications				Recorded Investment Prior to Modification				Recorded Investment After Modification (1)
Troubled debt restructurings:
Real estate:
Residential			8			$	1,549			$	1,520
Commercial			1				493				483
Commercial			3				133				128
Home equity line of credit			3				153				153
Other			1				44				40
Total			16			$	2,372			$	2,324

 

(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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 years ended December 31, 2017, 2016 and 2015:

 

		For the Year Ended December 31, 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			8			$	89			$	-			$	334			$	764			$	1,187
Commercial			1				-				-				-				171				171
Commercial			1				-				-				-				38				38
Home equity line of credit			8				620				-				-				439				1,059
Total			18			$	709			$	-			$	334			$	1,412			$	2,455

 

		For the Year Ended December 31, 2016
(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			$	-			$	-			$	-			$	278			$	278
Construction			1				-				-				-				4,532				4,532
Home equity line of credit			6				-				-				-				980				980
Total			9			$	-			$	-			$	-			$	5,790			$	5,790

 

		For the Year Ended December 31, 2015
(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			8			$	-			$	-			$	-			$	1,520			$	1,520
Commercial			1				-				-				-				483				483
Commercial			3				-				-				33				95				128
Home equity line of credit			3				-				-				-				153				153
Other			1				-				-				-				40				40
Total			16			$	-			$	-			$	33			$	2,291			$	2,324

 

(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 years ended December 31, 2017, 2016 and 2015.

 

		For the Year Ended December 31,
		2017								2016								2015
(Dollars in thousands)		Number of Loans				Recorded Investment (1)				Number of Loans				Recorded Investment (1)				Number of Loans				Recorded Investment (1)
Real estate:
Residential			1			$	86				-			$	-				1			$	314
Construction			1				4,532				-				-				-				-
Other			-				-				-				-				1				31
Total			2			$	4,618				-			$	-				2			$	345

 

(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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		December 31, 2017
(Dollars in thousands)		Pass				Special Mention				Substandard				Doubtful				Total
Real estate:
Residential		$	976,768			$	1,973			$	10,625			$	-			$	989,366
Commercial			1,046,190				10,505				7,060				-				1,063,755
Construction			85,527				-				4,532				-				90,059
Commercial			408,442				4,202				16,472				-				429,116
Home equity line of credit			164,013				94				963				-				165,070
Other			5,578				18				54				-				5,650
Total Loans		$	2,686,518			$	16,792			$	39,706			$	-			$	2,743,016

 

		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, commercial business and resort portfolios are handled on a case-by-case basis, typically by our Special Assets Department. Appropriate problem-resolution and workout strategies are formulated based on the specific facts and circumstances.

 

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 $5.4 million and $4.8 million at December 31, 2017 and 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 $7.3 million and $6.2 million at December 31, 2017 and 2016, respectively. Total loans sold with servicing rights retained were $115.0 million, $141.1 million and $165.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The net gain on loans sold totaled $2.6 million, $3.1 million and $2.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, and is included in the accompanying Consolidated Statements of Income.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The principal balance of loans serviced for others, which are not included in the accompanying Consolidated Statements of Financial Condition, totaled $598.4 million, $540.4 million and $457.5 million at December 31, 2017, 2016 and 2015, respectively. Loan servicing fees for others totaling $1.4 million, $1.2 million and $932,000 for the years ended December 31, 2017, 2016 and 2015, respectively, are included as a component of other noninterest income in the accompanying Consolidated Statements of Income.

 

7.

Premises and Equipment

 

The following is a summary of the premises and equipment accounts:

 

		As of December 31,
		2017				2016
(Dollars in thousands)
Land		$	1,326			$	1,326
Premises and leasehold improvements			19,968				19,717
Furniture and equipment			15,246				15,253
Software			5,031				4,959
			41,571				41,255
Less: accumulated depreciation and amortization			(24,726	)			(23,253	)
		$	16,845			$	18,002

 

For the years ended December 31, 2017, 2016 and 2015 depreciation and amortization expense was $2.0 million, $2.3 million and $2.6 million, respectively.

 

8.

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 December 31, 2017 and 2016. The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $58.5 million which were undrawn at December 31, 2017 and 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 $255.5 million and $287.1 million at December 31, 2017 and 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 $1.6 billion and $1.4 billion at December 31, 2017 and 2016, respectively. The Company had available borrowings of $706.9 million and $544.7 million at December 31, 2017 and 2016, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $79.5 million and $83.5 million at December 31, 2017 and 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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

FHLBB advances and the weighted average interest rates at December 31, 2017 and 2016 consist of the following:

 

		December 31,
		2017								2016
		Amount				Weighted Average Rate				Amount				Weighted Average Rate
(Dollars in thousands)
2017		$	-				-	%		$	101,000				0.95	%
2018			119,000				1.55				50,000				1.53
2019			81,600				1.74				81,600				1.74
2020			40,000				1.75				40,000				1.75
2021			7,000				2.11				7,000				2.11
2022			400				-				-				-
Thereafter			7,458				1.59				7,457				1.59
		$	255,458				1.65	%		$	287,057				1.43	%

 

The Company participates in the Federal Reserve Bank’s discount window loan collateral program that enables the Company to borrow up to $72.2 million and $64.2 million on an overnight basis at December 31, 2017 and 2016, respectively, and was undrawn as of December 31, 2017 and 2016. The funding arrangement was collateralized by $139.2 million and $128.7 million in pledged commercial real estate loans as of December 31, 2017 and 2016, respectively.

 

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 $11.2 million and $11.3 million at December 31, 2017 and 2016, respectively. Outstanding borrowings totaled $10.5 million at December 31, 2017 and 2016.

 

Outstanding borrowings are as follows:

 

(Dollars in thousands)								December 31,
Advance Date		Interest Rate				Maturity Date		2017				2016
March 13, 2008			3.34	%		3/13/2018		$	6,000			$	6,000
March 13, 2008			3.93	%		3/13/2018			4,500				4,500
								$	10,500			$	10,500

 

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 $34.5 million and $18.9 million at December 31, 2017 and 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 $39.6 million and $30.2 million as of December 31, 2017 and 2016, respectively.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

9.

Deposits

 

Deposit balances and weighted average interest rates at December 31, 2017 and 2016 are as follows:

 

		As of December 31,
		2017								2016
		Amount				Rate				Amount				Rate
(Dollars in thousands)
Noninterest-bearing demand deposits		$	473,428							$	441,283
Interest-bearing
NOW accounts			623,135				0.46	%			542,764				0.30	%
Money market			559,297				0.78	%			532,681				0.80	%
Savings accounts			237,380				0.11	%			233,792				0.11	%
Time deposits			540,860				1.23	%			464,570				1.18	%
Total interest-bearing deposits			1,960,672				0.71	%			1,773,807				0.67	%
Total deposits		$	2,434,100							$	2,215,090

 

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions as a service to our customers. This program provides enhanced FDIC insurance to participating customers. The Company also has established relationships for brokered deposits. There were brokered deposits totaling $58.8 million and $43.2 million at December 31, 2017 and 2016, respectively.

 

Time certificates of deposit in denominations of $250,000 or more approximated $126.3 million and $99.8 million at December 31, 2017 and 2016, respectively.

 

Contractual maturities of time deposits are as follows:

 

		As of December 31,
		2017				2016
(Dollars in thousands)
Less than one year		$	380,633			$	327,887
One to two years			107,665				70,187
Two to three years			22,483				31,984
Three to four years			17,975				15,838
Four to five years			12,104				18,674
		$	540,860			$	464,570

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Interest expense on deposits are as follows:

 

		For the Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
NOW accounts		$	2,850			$	1,544			$	1,351
Money market			4,143				4,119				3,592
Savings accounts			252				241				226
Time deposits			6,003				5,552				4,203
Total interest expense		$	13,248			$	11,456			$	9,372

 

10.

Pension and Other Postretirement Benefit Plans

 

The Company maintains a non-contributory defined-benefit pension plan covering eligible employees hired prior to January 1, 2007.

 

The Company also maintains a supplemental retirement plan (“supplemental plan”) to provide benefits to certain employees whose calculated benefit under the qualified plan exceeds the Internal Revenue Service limitation.

 

The Company sponsors two defined benefit postretirement plans that cover eligible employees. One plan provides health (medical and dental) benefits, and the other provides life insurance benefits. The accounting for the health care plan anticipates no future cost-sharing changes. The Company does not advance fund its postretirement plans.

 

On December 27, 2012, the Company announced it would freeze the non-contributory defined-benefit pension plan and certain defined benefit postretirement plans as of February 28, 2013. All benefits under these plans were frozen as of that date and no additional benefits will accrue.

 

The measurement date for each plan is the Company’s year end.

 

The amounts related to the qualified plan and the supplemental plan is reflected in the tables that follow as “Pension Plans.” Both of these plans have projected and accumulated benefit obligations in excess of plan assets.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following table sets forth the change in benefit obligation, plan assets and the funded status of the pension plans and other postretirement benefits:

 

		Pension Plans								Other Postretirement Benefits
		Year Ended December 31,								Year Ended December 31,
		2017				2016				2017				2016
(Dollars in thousands)
Change in benefit obligation:
Benefit obligation at beginning of year		$	25,633			$	25,175			$	2,568			$	2,899
Service cost			-				-				57				56
Interest cost			1,000				1,051				101				119
Actuarial loss (gain)			1,426				512				20				(414	)
Benefits paid			(1,117	)			(1,105	)			(82	)			(92	)
Benefit obligation at end of year			26,942				25,633				2,664				2,568
Change in plan assets:
Fair value of plan assets at beginning of year			19,436				19,023				-				-
Actual return on plan assets			2,837				1,292				-				-
Employer contributions			1,726				226				82				92
Benefits paid			(1,117	)			(1,105	)			(82	)			(92	)
Fair value of plan assets at end of year			22,882				19,436				-				-
Funded status recognized in the statements of condition		$	(4,060	)		$	(6,197	)		$	(2,664	)		$	(2,568	)
Accumulated benefit obligation		$	(26,942	)		$	(25,633	)

 

The following table presents the amounts recognized in accumulated other comprehensive income that have not yet been recognized as a component of net period benefit cost as of December 31, 2017 and 2016:

 

		Pension Plans								Other Postretirement Benefits
		Year Ended December 31,								Year Ended December 31,
		2017				2016				2017				2016
(Dollars in thousands)
Prior service cost		$	-			$	-			$	89			$	121
Actuarial (loss) gain			(6,175	)			(6,792	)			225				244
Unrecognized components of net periodic benefit cost in accumulated other  comprehensive loss, net of tax		$	(6,175	)		$	(6,792	)		$	314			$	365

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following tables set forth the components of net periodic pension and benefit costs for the pension plans and other postretirement plans and other amounts recognized in accumulated other comprehensive loss for the retirement plans and post retirement plans for the years ended December 31, 2017, 2016 and 2015:

 

		Pension Plans
		Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Components of net periodic pension cost:
Service cost		$	-			$	-			$	-
Interest cost			1,000				1,051				1,036
Expected return on plan assets			(1,181	)			(1,113	)			(1,448	)
Amortization of unrecognized prior service cost			-				-				-
Recognized net actuarial loss			706				704				709
Curtailment charge			-				-				-
Net periodic pension cost			525				642				297
Change in plan assets and benefit obligations recognized in other comprehensive income:
Net (gain) loss			(230	)			335				138
Amortization of net loss			(706	)			(704	)			(709	)
Amortization of prior service cost			-				-				-
Curtailment charge			-				-				-
Total recognized in other comprehensive income			(936	)			(369	)			(571	)
Total recognized in net periodic pension cost and other comprehensive income		$	(411	)		$	273			$	(274	)

 

		Other Postretirement Benefits
		Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Components of net periodic pension cost:
Service cost		$	57			$	56			$	75
Interest cost			101				119				127
Recognized net (gain) loss			(8	)			-				21
Amortization of unrecognized prior service cost			(50	)			(50	)			(50	)
Curtailment charge			-				-				-
Net periodic pension cost			100				125				173
Change in plan assets and benefit obligations recognized in other comprehensive income:
Net loss (gain)			20				(414	)			(442	)
Amortization of prior service cost			-				-				-
Amortization of net loss			8				-				(21	)
Change in prior service costs			50				50				50
Total recognized in other comprehensive income			78				(364	)			(413	)
Total recognized in net periodic pension cost and other comprehensive income		$	178			$	(239	)		$	(240	)

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are as follows:

 

(Dollars in thousands)		Pension Plans				Other Post Retirement Benefits
Prior service cost (credit)		$	-			$	(50	)
Actuarial loss (gain)			627				(6	)

 

Assumptions

 

The following table presents the significant actuarial assumptions used in preparing the required disclosures:

 

		Pension Benefits								Other Postretirement Benefits
		December 31,								December 31,
		2017				2016				2017				2016
Weighted-average assumptions used to determine funding status:
Discount rate (1)			3.56	%			4.08	%			3.55	%			4.05	%
Rate of compensation increase * (2)			n/a				n/a				n/a				n/a
Weighted-average assumptions used to determine net periodic pension costs:
Discount rate			4.08	%			4.35	%			4.05	%			4.20	%
Expected return on plan assets (2)			6.00	%			6.00	%			n/a				n/a
Rate of compensation increase * (2)			n/a				n/a				n/a				n/a

 

(1)

Weighted average discount rate for the supplemental retirement plan was 3.21% and 3.55% for the years ended December 31, 2017 and 2016, respectively.

 

(2)

Rates not applicable to the supplemental retirement plan.

 

*

The compensation rate increase is not applicable after the Pension Plan freeze on February 28, 2013.

 

Health Care Trend Assumptions

 

		At December 31,
		2017				2016
Health care cost trend rate assumed for next year			8.50	%			8.50	%
Rate that the cost trend rate gradually declines to			4.75	%			4.75	%
Year that the rate reaches the rate it is assumed to remain at			2025				2025

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:

 

		Effect of a Change in the Health Care Cost Trend Rates
		2017								2016
		One Percentage Point Increase				One Percentage Point Decrease				One Percentage Point Increase				One Percentage Point Decrease
(Dollars in thousands)
Effect on total of service and interest components		$	7			$	(6	)		$	10			$	(8	)
Effect on postretirement benefit obligation			166				143				175				(150	)

 

Discount Rate

 

The plan’s projected benefit obligation cash flows were discounted to December 31, 2017 based on the spot rates from the “Above the Median” Citigroup Pension Discount Curve.  The discount rate model produced a single weighted average discount rate of 3.56% that when used to discount the same plan benefit cash flows, resulted in the same aggregate present value.

 

Plan Assets

 

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, 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).

 

Basis of Fair Value Measurement

 

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

 

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

 

Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

 

The following is a description of the valuation methodologies used for the pension plan assets measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.

 

Mutual funds: Valued based on the number of shares held at year end at the fund closing price quoted in an active market.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The fair value of the Company’s pension plan assets at December 31, 2017 and 2016 by asset category are listed in the tables below:

 

		December 31, 2017
		Investments at Fair Value
(Dollars in thousands)		Level 1				Level 2				Level 3				Total
Mutual funds:
Fixed income		$	5,806			$	-			$	-			$	5,806
Equity			8,797				-				-				8,797
Pooled separate accounts   measured at net asset value (1)
Equity separate account (2)															6,797
Money market separate account (3)															720
High yield separate account (4)															762
		$	14,603			$	-			$	-			$	22,882

 

		December 31, 2016
		Investments at Fair Value
(Dollars in thousands)		Level 1				Level 2				Level 3				Total
Mutual funds:
Fixed income		$	5,719			$	-			$	-			$	5,719
Equity			5,667				-				-				5,667
Pooled separate accounts measured at net asset value (1)
Equity separate account (2)															6,944
Money market separate account (3)															385
High yield separate account (4)															721
		$	11,386			$	-			$	-			$	19,436

 

(1) -

In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at end of year.

(2) -

Primarily invests in common stocks of companies with large market capitalization.

(3) -

Invests in high quality, short-term money market instruments.

(4) -

Invests in below investment grade bonds, bank loans and securities of foreign issuers.

 

Pooled Separate Accounts (PSA): Valued at its NAV as a practical expedient based on the market value of its underlying investments. If there is no readily available market, its value is the fair value of the underlying investments held in such PSA as determined by the custodian using generally accepted accounting practices and applicable law. The Company has the ability to redeem its PSA investments at NAV on a daily basis.

 

Investment Strategy and Asset Allocations

 

Plan assets are to be managed within an ERISA framework so as to provide the greatest probability that the following long-term objectives for the qualified pension plan are met in a prudent manner. The Company recognizes that, for any given time period, the attainment of these objectives is in large part dictated by the returns available from the capital markets in which plan assets are invested.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The asset allocation of plan assets reflects the Company’s long-term return expectations and risk tolerance in meeting the financial objectives of the plan. Plan assets should be adequately diversified by asset class, sector and industry to reduce the downside risk to total plan results over short-term time periods, while providing opportunities for long-term appreciation. The Company’s Human Resource Committee reserves the right to rebalance the assets at any time it deems it to be prudent.

 

The Company’s qualified defined benefit pension plan’s weighted-average asset allocations and the Plan’s long-term allocation structure by asset category are as follows:

 

		Actual Percentage of Fair Value
		At December 31,								Target
		2017				2016				Allocation
Cash			6	%			5	%		5-15%
Equity funds			64	%			60	%		30-70%
Fixed income funds			30	%			35	%		30-70%
Total			100	%			100	%

 

Expected Contributions

 

The Company makes annual contributions to its funded qualified defined benefit plan in amounts not less than the minimum funding requirements of ERISA and not more than that permitted by the Internal Revenue Code. Since the supplemental plan and the postretirement benefit plans are unfunded, the expected employer contributions for the year ending December 31, 2017 is equal to the Company’s estimated future benefit payment liabilities less any participant contributions.

 

Expected Benefit Payments

 

The following is a summary of benefit payments expected to be paid by the non-contributory defined benefit pension plans (dollars in thousands):

 

2018		$	1,215
2019			1,264
2020			1,306
2021			1,326
2022			1,359
Years 2023 - 2027			7,130
		$	13,600

 

The following is a summary of benefit payments expected to be paid by the medical, dental and life insurance plan (dollars in thousands):

 

2018		$	128
2019			132
2020			135
2021			135
2022			139
Years 2023 - 2027			731
		$	1,400

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

401(k) Plan

 

Employees who have completed six months of service and have attained the age of 21 are eligible to participate in the Company’s defined contribution savings plan (“401(k) plan”). Eligible employees may contribute an unlimited amount (not to exceed IRS limits) of their compensation. The Company may make a qualified non-elective contribution in an amount equal to 3% of the participant’s compensation. Contributions by the Company for the years ended December 31, 2017, 2016 and 2015 were $796,000, $682,000 and $814,000 respectively. There were no discretionary employer contributions made for the years ended December 31, 2017, 2016 and 2015.

 

Supplemental Plans

 

The Company has entered into agreements with certain current and retired executives to provide supplemental retirement benefits. The present values of these future payments, not included in the previous table, are included in accrued expenses and other liabilities in the Statements of Financial Condition. As of December 31 2017 and 2016, the accrued supplemental retirement liability was $5.4 million and $4.7 million, respectively. For the years ended December 31, 2017, 2016 and 2015 net expense for these supplemental retirement benefits were $922,000, $850,000 and $712,000, respectively.

 

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 December 31, 2017, the loan had an outstanding balance of $10.0 million and an interest rate of 5.50%. The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the unallocated shares purchased. The ESOP compensation expense was $2.4 million, $1.7 million and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.

 

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

 

Allocated			572,166
Committed to be released			95,361
Unallocated			762,889
			1,430,416

 

The fair value of unallocated ESOP shares was $19.9 million at December 31, 2017.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

11.

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 vested 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 years ended December 31, 2017, 2016 and 2015, the Company recorded $408,000, $1.8 million and $3.1 million of share-based compensation expense, respectively, comprised of $86,000, $746,000 and $1.3 million of stock option expense, respectively and $322,000, $1.0 million and $1.8 million of restricted stock expense, respectively. Expected future compensation expense relating to the 53,800 non-vested options outstanding at December 31, 2017, is $180,000 over the remaining weighted-average period of 2.21 years. Expected future compensation expense relating to the 28,698 non-vested restricted stock outstanding at December 31, 2017 is $478,000 over the remaining weighted-average period of 2.18 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. Prior to July 1, 2017, expected volatility was based on the Company’s historical volatility and the historical volatility of a peer group as the Company did not have reliably determined stock price for the period needed that was at least equal to its expected term and the Company’s historical volatility may not have reflected future expectations. The peer group consisted of financial institutions located in New England and the Mid-Atlantic regions of the United States based on whose common stock is traded on a national securities exchange, asset size, tangible capital ratio and earnings factors. The expected term of options granted is derived from using the simplified method due to the Company not having sufficient historical share option experience upon which to estimate an expected term. The risk-free rate is based on the grant date for a traded zero-coupon U.S. Treasury bond with a term equal to the option’s expected term.

 

Weighted-average assumptions for the year ended December 31, 2017 and 2016:

 

		2017				2016
Weighted per share average fair value of options granted		$	5.07			$	3.00
Weighted-average assumptions:
Risk-free interest rate			1.99	%			1.53	%
Expected volatility			22.26	%			22.88	%
Expected dividend yield			2.16	%			2.13	%
Weighted-average dividend yield			2.07% - 2.39	%			1.91 - 2.25	%
Expected life of options granted			6.0 years				6.0 years

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following is a summary of the Company’s stock option activity and related information for its option grants for the year ended December 31, 2017.

 

		Number of Stock Options				Weighted-Average Exercise Price				Weighted-Average Remaining Contractual Term (in years)				Aggregate Intrinsic Value (in thousands)
Outstanding at December 31, 2016			1,460,376			$	13.14
Granted			26,900				26.08
Exercised			(49,550	)			13.52
Forfeited			(300	)			16.39
Expired			-				-
Outstanding at December 31, 2017			1,437,426			$	13.36				4.91			$	18,388
Exercisable at December 31, 2017			1,383,626			$	13.06				4.77			$	18,106

 

The total intrinsic value of options exercised during the year ended December 31, 2017 was $565,000.

 

The following is a summary of the status of the Company’s restricted stock for the year ended December 31, 2017.

 

		Restricted Stock Awards								Time-Based Restricted Stock Units								Performance-Based Restricted Stock Units
		Number of Restricted Stock				Weighted-Average Grant Date Fair Value				Number of Restricted Stock				Weighted-Average Grant Date Fair Value				Number of Restricted Stock				Weighted-Average Grant Date Fair Value
Unvested at December 31, 2016			-			$	-				-			$	-				-			$	-
Granted			5,698				24.61				14,012				24.48				14,686				21.60
Vested			(5,698	)			24.61				-				-				-				-
Forfeited			-				-				-				-				-				-
Unvested at December 31, 2017			-			$	-				14,012			$	24.48				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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

12.

Derivative Financial Instruments

 

Non-Hedge Accounting Derivatives/Non-designated Hedges:

 

Interest Rate Swap Agreements

 

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 December 31, 2017, the Company based on its current position did not require a cash balance 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 $5.0 million.

 

Credit-risk-related Contingent Features

 

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

 

·

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

 

·

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

 

·

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

 

·

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

 

The Company is in compliance with the above provisions as of December 31, 2017.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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:

 

				December 31, 2017								December 31, 2016
(Dollars in thousands)		Consolidated Balance Sheet Location		Notional Amount				Fair Value				Notional Amount				Fair Value
Commercial loan customer interest rate swap position		Other Assets		$	197,086			$	4,927			$	242,351			$	7,095
Counterparty interest rate swap position		Other Assets			214,642				5,356				148,097				4,502
Commercial loan customer interest rate swap position		Other Liabilities			214,642				(5,318	)			148,097				(4,502	)
Counterparty interest rate swap position		Other Liabilities			197,086				(5,013	)			242,351				(7,189	)

  

Risk Participation Agreements

 

The Company also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Company has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and have entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Company has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Company manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on the Company’s normal credit review process. The fair value of the risk participation agreements in an asset and liability position was $1,000 and ($23,000) and $1,000 and ($26,000) at December 31, 2017 and 2016, respectively and are included with prepaid expenses and other assets and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 December 31, 2017, the notional amount of outstanding rate locks totaled approximately $10.8 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $14.3 million, which included mandatory forward commitments totaling approximately $10.3 million at December 31, 2017. The forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

 

13.

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 December 31, 2017 and 2016, disaggregated by the class of collateral pledged.

 

		December 31, 2017																December 31, 2016
		Remaining Contractual Maturity of the Agreements																Remaining Contractual Maturity of the Agreements
(Dollars in thousands)		Overnight and Continuous				Up to One Year				One Year to Three Years				Total				Overnight and Continuous				Up to One Year				One Year to Three Years				Total
Repurchase agreement borrowings
U.S. Government agency obligations		$	-			$	6,000			$	-			$	6,000			$	-			$	-			$	6,000			$	6,000
Government sponsored residential mortgage-backed securities			-				4,500				-				4,500				-				-				4,500				4,500
Total repurchase agreement borrowings			-				10,500				-				10,500				-				-				10,500				10,500
Repurchase liabilities
U.S. Government agency obligations			34,496				-				-				34,496				18,867				-				-				18,867
Total repurchase liabilities			34,496				-				-				34,496				18,867				-				-				18,867
Total		$	34,496			$	10,500			$	-			$	44,996			$	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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		December 31, 2017
														Gross Amounts Not Offset in the Statement of Financial Condition
		Gross Amount of Recognized Assets				Gross Amounts Offset in the Statement of Financial Condition				Net Amounts of Assets Presented in the Statement of Financial Condition				Financial Instruments				Securities Collateral Received				Cash Collateral Received				Net Amount
(Dollars in thousands)
Interest rate swap derivatives		$	10,283			$	-			$	10,283			$	-			$	-			$	-			$	10,283
Total		$	10,283			$	-			$	10,283			$	-			$	-			$	-			$	10,283

 

		December 31, 2017
														Gross Amounts Not Offset in the Statement of Financial Condition
		Gross Amount of Recognized Liabilities				Gross Amounts Offset in the Statement of Financial Condition				Net Amounts of Liabilities Presented in the Statement of Financial Condition				Financial Instruments				Securities Collateral Pledged				Cash Collateral Pledged				Net Amount
(Dollars in thousands)
Interest rate swap derivatives		$	10,331			$	-			$	10,331			$	-			$	-			$	-			$	10,331
Repurchase agreement borrowings			10,500				-				10,500				-				10,500				-				-
Total		$	20,831			$	-			$	20,831			$	-			$	10,500			$	-			$	10,331

 

		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

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

14.

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:

 

		December 31,				December 31,
		2017				2016
(Dollars in thousands)
Approved loan commitments		$	39,974			$	102,436
Unadvanced portion of construction loans			50,014				57,124
Unused lines for home equity loans			205,350				199,191
Unused revolving lines of credit			336				355
Unused commercial letters of credit			3,940				3,820
Unused commercial lines of credit			219,597				246,622
		$	519,211			$	609,548

 

Financial instruments with off-balance sheet risk had a valuation allowance of $2,000 and $153,000 as of December 31, 2017 and 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.

 

The Company had off-balance sheet risk related to its risk participation agreements totaling $998,000 and $1.1 million at December 31, 2017 and 2016, respectively.

 

At December 31, 2017 and 2016, the Company had no off-balance sheet special purpose entities and participated in no securitizations of assets.

 

15.

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.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

16.

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 year ended December 31, 2017 and 2016.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 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 December 31, 2017 and 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.

 

Derivatives: The fair values of interest rate swap and risk participation 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 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 ($113,000), $46,000 and $123,000 for the years ended December 31, 2017, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		December 31, 2017
						Quoted Prices in Active Markets for Identical Assets				Significant Observable Inputs				Significant Unobservable Inputs
(Dollars in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
Assets
U.S. Treasury obligations		$	11,909			$	-			$	11,909			$	-
U.S. Government agency obligations			65,656				-				65,656				-
Government sponsored residential mortgage-backed securities			2,793				-				2,793				-
Preferred equity securities			1,807				1,807				-				-
Marketable equity securities			187				187				-				-
Mutual funds			4,899				-				4,899				-
Securities available-for-sale			87,251				1,994				85,257				-
Interest rate swap derivative			10,283				-				10,283				-
Risk participation agreements			1				-				1				-
Derivative loan commitments			126				-				-				126
Total		$	97,661			$	1,994			$	95,541			$	126
Liabilities
Interest rate swap derivative		$	10,331			$	-			$	10,331			$	-
Risk participation agreements			23				-				23				-
Forward loan sales commitments			56				-				-				56
Total		$	10,410			$	-			$	10,354			$	56

 

		December 31, 2016
						Quoted Prices in Active Markets for Identical Assets				Significant Observable Inputs				Significant Unobservable Inputs
(Dollars in thousands)		Total				(Level 1)				(Level 2)				(Level 3)
Assets
U.S. Treasury obligations		$	19,968			$	-			$	19,968			$	-
U.S. Government agency obligations			73,711				-				73,711				-
Government sponsored residential mortgage-backed securities			3,569				-				3,569				-
Corporate debt securities			515				-				515				-
Preferred equity securities			1,746				1,746				-				-
Marketable equity securities			182				182				-				-
Mutual funds			3,829				-				3,829				-
Securities available-for-sale			103,520				1,928				101,592				-
Interest rate swap derivative			7,095				-				7,095				-
Risk participation agreements			1				-				1				-
Derivative loan commitments			95				-				-				95
Forward loan sales commitments			88				-				-				88
Total		$	110,799			$	1,928			$	108,688			$	183
Liabilities
Interest rate swap derivative		$	7,189			$	-			$	7,189			$	-
Risk participation agreements			26				-				26				-
Total		$	7,215			$	-			$	7,215			$	-

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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 Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Balance, at beginning of year		$	183			$	137			$	14
Total realized gain (loss):
Included in earnings			(113	)			46				123
Balance, at the end of year		$	70			$	183			$	137

 

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

 

December 31, 2017

Significant

(Dollars in thousands)

Fair Value

Valuation Methodology

Unobservable Inputs

Input

Derivative and forward loan sales commitments, net

$

70

Adjusted quoted prices in active markets

Embedded servicing value

1.33

%

 

 

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

 

December 31, 2017

December 31, 2016

Quoted Prices in

Significant

Significant

Quoted Prices in

Significant

Significant

Active Markets for

Observable

Unobservable

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Identical Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Impaired loans

$

-

$

-

$

2,645

$

-

$

-

$

3,727

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

Mortgage Servicing Rights: A mortgage servicing rights asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. As such, measurement at fair value is on a nonrecurring basis. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.

 

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

 

Impaired Loans: Impaired loans for which repayment of the loan is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using Level 3 inputs based on customized discounting criteria. As appraisals on impaired loans are not necessarily completed on the period end dates presented in the table above, the fair value information presented may not reflect the actual fair value as of December 31, 2017 and 2016.

 

Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value less selling costs. The write down is based upon the difference between the appraised value and the book value. Appraisals are based on observable market data such as comparable sales within the real estate market, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy. There was no other real estate owned at December 31, 2017 and 2016.

 

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

 

December 31, 2017
(Dollars in thousands)		Fair Value				Valuation Methodology		Significant Unobservable Inputs		Range of Inputs				Weighted Average Inputs
Impaired loans		$	2,645			Appraisals		Discount for dated appraisal			5% - 20%				12.50	%
								Discount for costs to sell			8% - 15%				11.50	%

 

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

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Disclosures about Fair Value of Financial Instruments

 

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

 

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

 

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

 

Alternative Investments: The Company accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing. These are non-public investments which include limited partnerships, an equity fund and membership stocks. These alternative investments, which totaled $2.1 million and $2.2 million at December 31, 2017 and 2016, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company recognized a $10,000, 319,000 and $144,000 other-than-temporary impairment charge on its limited partnerships for the years ended December 31, 2017, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $251,000, $179,000 and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of December 31, 2017.

 

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

 

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

 

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

 

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

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2017 and 2016. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization. 

 

				December 31, 2017								December 31, 2016
								Estimated								Estimated
		Fair Value		Carrying				Fair				Carrying				Fair
		Hierarchy Level		Amount				Value				Amount				Value
(Dollars in thousands)
Financial assets
Securities held-to-maturity		Level 2		$	74,985			$	74,554			$	33,061			$	33,041
Securities available-for-sale		See previous table			87,251				87,251				103,520				103,520
Loans		Level 3			2,748,081				2,699,794				2,547,512				2,515,906
Loans held-for-sale		Level 2			5,295				5,375				3,270				3,289
Mortgage servicing rights		Level 3			5,399				7,274				4,817				6,166
Federal Home Loan Bank of Boston stock		Level 2			15,537				15,537				16,378				16,378
Alternative investments		Level 3			2,112				1,939				2,228				2,045
Interest rate swap derivatives		Level 2			10,283				10,283				7,095				7,095
Risk participation agreements		Level 2			1				1				1				1
Derivative loan commitments		Level 3			126				126				95				95
Forward loan sales commitments		Level 3			-				-				88				88
Financial liabilities
Deposits other than time deposits		Level 1			1,893,240				1,893,240				1,773,807				1,773,807
Time deposits		Level 2			540,860				544,968				464,570				468,472
Federal Home Loan Bank of Boston advances		Level 2			255,458				254,228				287,057				286,629
Repurchase agreement borrowings		Level 2			10,500				10,394				10,500				10,428
Repurchase liabilities		Level 2			34,496				34,475				18,867				18,862
Interest rate swap derivatives		Level 2			10,331				10,331				7,189				7,189
Risk participation agreements		Level 2			23				23				26				26
Forward loan sales commitments		Level 3			56				56				-				-

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

17.

Income Taxes

 

The components of the income tax provision are as follows:

 

		For the Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Current provision
Federal		$	6,743			$	5,396			$	3,864
State			232				136				100
			6,975				5,532				3,964
Deferred provision (benefit)
Federal			6,868				464				1,780
State			29				(54	)			(17	)
			6,897				410				1,763
Total provision for income taxes		$	13,872			$	5,942			$	5,727

 

The following is a reconciliation of the expected federal statutory tax to the income tax provision as reported in the statements of income:

 

		For the Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Income tax expense at statutory federal tax rate		$	10,521			$	7,405			$	6,407
Impact of tax rate changes			4,981				-				-
ESOP			445				189				138
State income taxes			169				53				54
Other - net			5				98				90
Expiration of charitable contribution carryforward			-				137				-
Valuation allowance			-				-				764
Dividends received deduction			(52	)			(51	)			(54	)
Death benefits			(94	)			(27	)			(133	)
Changes in cash surrender value of life insurance			(474	)			(467	)			(453	)
Municipal income - net			(1,629	)			(1,395	)			(1,086	)
Income tax provision as reported		$	13,872			$	5,942			$	5,727

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

The components of the Company’s net deferred tax assets are as follows:

 

		At December 31,
		2017				2016
(Dollars in thousands)
Deferred tax assets
Allowance for loan losses		$	4,835			$	7,681
Minimum pension liability and postretirement benefits			2,616				4,600
Deferred compensation			1,535				2,958
Stock compensation			1,100				1,776
Other			887				1,384
Accrued bonus			183				1,345
Net unrealized loss on securities available-for-sale			122				143
Other than temporary impairment on securities available-for-sale			10				17
Accrued pension			5				153
Gross deferred tax assets			11,293				20,057
Valuation reserve			-				-
Net deferred tax assets			11,293				20,057
Deferred tax liabilities
Net origination fees			2,237				3,288
Other			1,166				1,707
Fixed assets			114				163
Bond discount accretion			114				104
Gross deferred tax liabilities			3,631				5,262
Net deferred tax assets		$	7,662			$	14,795

 

The allocation of deferred tax expense involving items charged to current year income and items charged directly to capital are as follows:

 

		At December 31,
		2017				2016
(Dollars in thousands)
Deferred tax expense allocated to capital		$	236			$	238
Deferred tax expense allocated to income			6,897				410
Total change in deferred taxes		$	7,133			$	648

 

The Company will only recognize a deferred tax asset when, based upon available evidence, realization is more likely than not. At December 31, 2017 and 2016, there was no valuation allowance recorded against the deferred tax assets.

 

On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Tax Act”) was enacted. Substantially all of the provisions of the Tax Act are effective for taxable years beginning after December 31, 2017. The most significant change in the Tax Act that impacts the Company is the reduction in the corporate federal income tax rate from 35% to 21%.

 

ASC Topic 740, Income Taxes, requires the tax effects of changes in tax laws to be recognized in the period in which the law is enacted or December 22, 2017 for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate resulting in a charge of $5.0 million to income tax expense in the fourth quarter of 2017.

 

The staff of the US Securities and Exchange Commission (SEC) has recognized the complexity of reflecting the impacts of the Tax Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (SAB 118) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.

 

The Company has completed or has made a reasonable estimate for the measurement and accounting of certain effects of the Tax Act which have been reflected in the December 31, 2017 consolidated financial statements. The accounting for these completed and provisional items increased the 2017 deferred income tax provision by $5.0 million for the year ending December 31, 2017 and decreased the accumulated deferred income tax asset by $5.0 million at December 31, 2017. As noted above, the most significant impact resulted from a reduction in the corporate income tax rate to 21%. The items reflected as provisional amounts include the impact of the Tax Act on deferred tax assets and liabilities including the expensing of certain depreciable assets, the impact of certain compensation deduction limitations and similar items.

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

As part of the Plan of Conversion and Reorganization completed on June 29, 2011, the Company contributed shares of Company common stock to the Farmington Bank Community Foundation, Inc. This contribution resulted in a charitable contribution deduction for federal income tax purposes. Use of that charitable contribution deduction is limited under Federal tax law to 10% of federal taxable income without regard to charitable contributions, net operating losses, and dividend received deductions. Annually, a corporation is permitted to carry over to the five succeeding tax years, contributions that exceeded the 10% limitation, but also subject to the maximum annual limitation. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset totaling $137,000 was written-off.

 

During 1999, the Bank formed a subsidiary, Farmington Savings Loan Servicing Inc., which qualifies and operates as a Connecticut passive investment company pursuant to legislation enacted in May 1998. Income earned by a passive investment company is exempt from Connecticut corporation business tax. In addition, dividends paid by Farmington Savings Loan Servicing, Inc. to its parent, Farmington Bank are also exempt from corporation business tax. The Bank expects the passive investment company to earn sufficient income to eliminate Connecticut income taxes in future years. As such, no Connecticut related deferred tax assets or liabilities have been recorded.

 

The Company has not provided deferred taxes for the tax reserve for bad debts, of approximately $3.4 million, that arose in tax years beginning before 1987 because it is expected that the requirements of Internal Revenue Code Section 593 will be met in the foreseeable future.

 

There was no interest expense related to uncertain tax positions recognized in income tax for the years ended December 31, 2017, 2016 and 2015.

 

The Company had no uncertain tax positions as of December 31, 2017. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 through 2017.

 

18.

Lease Commitments

 

The Company’s headquarters and certain of the Company’s branch offices are leased under non-cancelable operating leases, which expire at various dates through the year 2038. Various leases have renewal options of up to an additional thirty years. Payments on majority of the leases are subject to an escalating payment schedule.

 

The future minimum rental commitments as of December 31, 2017 for these leases are as follows:

 

(Dollars in thousands)
2018		$	2,794
2019			2,424
2020			1,090
2021			879
2022			829
Thereafter			6,562
		$	14,578

 

Total rental expense for all leases amounted to $3.2 million, $3.0 million and $3.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

19.

Regulatory Matters

 

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on their financial statements.

 

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to quantitative judgments by the regulators about components, risk weightings and other factors.

 

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

 

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

 

Management believes, as of December 31, 2017 and 2016 that the Company and the Bank meet all capital adequacy requirements to which they are subject. The Federal Deposit Insurance Corporation categorizes the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action as of December 31, 2017. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I capital and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

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

 

		Actual								Minimum Required for Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action
(Dollars in thousands)		Amount				Ratio				Amount				Ratio				Amount				Ratio
Farmington Bank:
At December 31, 2017
Total Capital (to Risk Weighted Assets)		$	272,227				11.20	%		$	194,415				8.00	%		$	243,019				10.00	%
Tier I Capital (to Risk Weighted Assets)			249,777				10.28				145,811				6.00				194,415				8.00
Common Equity Tier I Capital (to Risk Weighted Assets)			249,777				10.28				109,358				4.50				157,962				6.50
Tier I Leverage Capital (to Average Assets)			249,777				8.28				120,598				4.00				150,748				5.00
At December 31, 2016
Total Capital (to Risk Weighted Assets)		$	253,921				11.28	%		$	180,043				8.00	%		$	225,053				10.00	%
Tier I Capital (to Risk Weighted Assets)			232,239				10.32				135,033				6.00				180,044				8.00
Common Equity Tier I Capital (to Risk Weighted Assets)			232,239				10.32				101,275				4.50				146,286				6.50
Tier I Leverage Capital (to Average Assets)			232,239				8.18				113,598				4.00				141,997				5.00
First Connecticut Bancorp, Inc.:
At December 31, 2017
Total Capital (to Risk Weighted Assets)		$	300,876				12.38	%		$	194,485				8.00	%		$	243,107				10.00	%
Tier I Capital (to Risk Weighted Assets)			278,426				11.45				145,864				6.00				194,486				8.00
Common Equity Tier I Capital (to Risk Weighted Assets)			278,426				11.45				109,398				4.50				158,020				6.50
Tier I Leverage Capital (to Average Assets)			278,426				9.23				120,606				4.00				150,758				5.00
At December 31, 2016
Total Capital (to Risk Weighted Assets)		$	288,273				12.80	%		$	180,113				8.00	%		$	225,141				10.00	%
Tier I Capital (to Risk Weighted Assets)			266,591				11.84				135,084				6.00				180,112				8.00
Common Equity Tier I Capital (to Risk Weighted Assets)			266,591				11.84				101,313				4.50				146,341				6.50
Tier I Leverage Capital (to Average Assets)			266,591				9.39				113,624				4.00				142,030				5.00

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

20.

Other Comprehensive Income

 

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

 

		Investment Securities Available-for-Sale				Employee Benefit Plans				Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)
Balance at December 31, 2014		$	1,046			$	(7,557	)		$	(6,511	)
Other comprehensive loss during 2015			(2,281	)			-				(2,281	)
Amount reclassified from accumulated other comprehensive loss, net of tax			986				644				1,630
Balance at December 31, 2015			(249	)			(6,913	)			(7,162	)
Other comprehensive loss during 2016			(14	)			-				(14	)
Amount reclassified from accumulated other comprehensive loss, net of tax			-				486				486
Balance at December 31, 2016			(263	)			(6,427	)			(6,690	)
Other comprehensive loss during 2017			(105	)			-				(105	)
Amount reclassified from accumulated other comprehensive loss, net of tax			-				566				566
Balance at December 31, 2017		$	(368	)		$	(5,861	)		$	(6,229	)

 

The following tables present a reconciliation of the changes in components of other comprehensive income (loss) for the years indicated, including the amount of income tax expense allocated to each component of other comprehensive income (loss):

 

		For the Year Ended December 31, 2017
		Pre Tax Amount				Tax Benefit (Expense)				After Tax Amount
(Dollars in thousands)
Unrealized losses on available-for-sale securities		$	(163	)		$	58			$	(105	)
Less: net security gains reclassified into other noninterest income			-				-				-
Net change in fair value of securities available-for-sale			(163	)			58				(105	)
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)			860				(294	)			566
Total other comprehensive income		$	697			$	(236	)		$	461

 

		For the Year Ended December 31, 2016
		Pre Tax Amount				Tax Benefit (Expense)				After Tax Amount
(Dollars in thousands)
Unrealized losses on available-for-sale securities		$	(22	)		$	8			$	(14	)
Less: net security gains reclassified into other noninterest income			-				-				-
Net change in fair value of securities available-for-sale			(22	)			8				(14	)
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)			732				(246	)			486
Total other comprehensive income		$	710			$	(238	)		$	472

 

		For the Year Ended December 31, 2015
		Pre Tax Amount				Tax Benefit (Expense)				After Tax Amount
(Dollars in thousands)
Unrealized losses on available-for-sale securities		$	(3,525	)		$	1,244			$	(2,281	)
Less: net security gains reclassified into other noninterest income			1,523				(537	)			986
Net change in fair value of securities available-for-sale			(2,002	)			707				(1,295	)
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)			986				(342	)			644
Total other comprehensive loss		$	(1,016	)		$	365			$	(651	)

 

(1)

Amounts are included in salaries and employee benefits in the Consolidated Statements of Income.

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

21.

Parent Company Statements

 

The following represents the Parent Company’s Condensed Statements of Financial Condition as of December 31, 2017 and 2016, and Condensed Statements of Operations, Condensed Statements of Comprehensive Income and Condensed Cash Flows for the years ended December 31, 2017, 2016 and 2015:

 

Condensed Statements of Financial Condition

 

		At December 31,
		2017				2016
(Dollars in thousands)
Assets
Cash and cash equivalents		$	23,657			$	30,023
Deferred income taxes			125				189
Due from Farmington Bank			21				7
Investment in Farmington Bank			243,809				225,822
Prepaid expenses and other assets			4,909				4,189
Total assets		$	272,521			$	260,230
Liabilities		$	62			$	54
Stockholders' equity			272,459				260,176
Total liabilities and stockholders’ equity		$	272,521			$	260,230

 

Condensed Statements of Operations

 

		For The Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Interest income		$	47			$	55			$	53
Noninterest expense			2,040				1,699				1,752
Income tax (benefit) expense			(656	)			(461	)			303
Loss before equity in undistributed earnings of Farmington Bank			(1,337	)			(1,183	)			(2,002	)
Equity in undistributed earnings of Farmington Bank			17,526				16,398				14,581
Net income		$	16,189			$	15,215			$	12,579

 

Condensed Statements of Comprehensive Income

 

		For The Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Net income		$	16,189			$	15,215			$	12,579
Other comprehensive income (loss), before tax
Unrealized losses on securities:
Unrealized holding losses arising during the period			(163	)			(22	)			(3,525	)
Less: reclassification adjustment for gains included in net income			-				-				1,523
Net change in unrealized losses			(163	)			(22	)			(2,002	)
Change related to pension and other postretirement benefit plans			860				732				986
Other comprehensive income (loss), before tax			697				710				(1,016	)
Income tax expense (benefit)			236				238				(365	)
Other comprehensive income (loss), net of tax			461				472				(651	)
Comprehensive income		$	16,650			$	15,687			$	11,928

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

Condensed Statements of Cash Flows

 

		For The Year Ended December 31,
		2017				2016				2015
(Dollars in thousands)
Cash flows from operating activities:
Net income		$	16,189			$	15,215			$	12,579
Adjustments to reconcile net income to net cash  provided by operating activities:
Amortization of ESOP expense			2,399				1,669				1,522
Share based compensation expense			408				1,795				3,118
Equity in undistributed net income of Farmington Bank			(17,526	)			(16,398	)			(14,581	)
Deferred income tax			64				740				1,139
Due from Farmington Bank			(14	)			51				7,952
Increase in prepaid expenses and other assets			(720	)			(1,520	)			(1,025	)
Increase (decrease) in accrued expenses and other liabilities			8				3				(5	)
Net cash provided by operating activities			808				1,555				10,699
Cash flows from financing activities:
Cancelation of shares for tax withholding			-				(516	)			(498	)
Repurchase of common stock			-				(2,527	)			(2,200	)
Excess tax benefits from stock-based compensation			-				311				152
Exercise of stock options			669				2,643				412
Cash dividend paid			(7,843	)			(4,607	)			(3,276	)
Net cash used in financing activities			(7,174	)			(4,696	)			(5,410	)
Net (decrease) increase in cash and cash equivalents			(6,366	)			(3,141	)			5,289
Cash and cash equivalents at beginning of year			30,023				33,164				27,875
Cash and cash equivalents at end of year		$	23,657			$	30,023			$	33,164

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements

 

 

22.

Selected Quarterly Consolidated Financial Information (Unaudited)

 

The following is selected quarterly consolidated financial information for the years ended December 31, 2017 and 2016.

 

		Year Ended December 31, 2017
		First				Second				Third				Fourth
		quarter				quarter				quarter				quarter
(Dollars in thousands, except Per Share data)
Interest income		$	23,212			$	24,116			$	25,604			$	25,551
Interest expense			3,962				4,293				4,756				5,023
Net interest income			19,250				19,823				20,848				20,528
Provision for loan losses			325				710				217				299
Net interest income after provision for loan losses			18,925				19,113				20,631				20,229
Noninterest income			3,165				3,876				3,300				3,158
Noninterest expense			15,152				15,878				15,919				15,387
Income before income taxes			6,938				7,111				8,012				8,000
Income tax expense			1,845				2,109				2,415				7,503
Net income		$	5,093			$	5,002			$	5,597			$	497
Net earnings per share:
Basic		$	0.34			$	0.33			$	0.37			$	0.03
Diluted		$	0.32			$	0.32			$	0.35			$	0.03

 

		Year Ended December 31, 2016
		First				Second				Third				Fourth
		quarter				quarter				quarter				quarter
(Dollars in thousands, except Per Share data)
Interest income		$	21,323			$	21,698			$	21,805			$	22,160
Interest expense			3,817				3,826				4,050				4,038
Net interest income			17,506				17,872				17,755				18,122
Provision for loan losses			217				801				698				616
Net interest income after provision for loan losses			17,289				17,071				17,057				17,506
Noninterest income			2,900				2,617				3,685				3,536
Noninterest expense			15,277				14,644				15,484				15,099
Income before income taxes			4,912				5,044				5,258				5,943
Income tax expense			1,299				1,401				1,485				1,757
Net income		$	3,613			$	3,643			$	3,773			$	4,186
Net earnings per share:
Basic		$	0.24			$	0.24			$	0.25			$	0.28
Diluted		$	0.24			$	0.24			$	0.25			$	0.27

 

23.

Legal Actions

 

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

 

 

Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

Not Applicable.

 

Item 9A. Controls and Procedures

 

Disclosure Controls and Procedures

 

The Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2017. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, as appropriate, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017.

 

Management's Annual Report on Internal Control over Financial Reporting

 

Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

 

Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control – Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective internal control over financial reporting as of December 31, 2017.

 

The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm who also has audited the Company's consolidated financial statements included in this Annual Report on Form 10-K, as stated in their report which appears herein.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2017 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.

 

Item 9B. Other Information

 

There were no changes in or disagreements with accountants on accounting and financial disclosures as defined in Regulation S-K, Item 304.

 

 

Part III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.

 

Item 11. Executive Compensation

 

The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.

 

Item 14. Principal Accounting Fees and Services

 

The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.

 

Part IV

 

Item 15. Exhibits and Financial Statement Schedules

 

(1)         Financial Statements

 

The financial statements filed in Item 8 of this Form 10-K are as follows:

 

(A)

Report of Independent Registered Public Accounting Firm on Financial Statements

 

(B)

Consolidated Statements of Financial Condition as of December 31, 2017 and 2016

 

(C)

Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015

 

(D)

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015

 

(E)

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015

 

(F)

Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015

 

(G)

Notes to Consolidated Financial Statements

 

(2)         Financial Statements Schedules

 

All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

 

 

(3)         Exhibits

 

	3.1	Amended and Restated Articles of Incorporation of First Connecticut Bancorp, Inc. (filed as Exhibit 3.1 to the Registration Statement on the Form S-1/A filed for the Company on March 28, 2011, and incorporated herein by reference).
	3.2.2	Amended and Restated Bylaws of First Connecticut Bancorp, Inc. (filed as Exhibit 3.2.3 to the Form 8-K filed for the Company on January 25, 2018, and incorporated herein by reference).
	4.1	Form of Common Stock Certificate of First Connecticut Bancorp, Inc. (filed as Exhibit 4.1 to the Registration Statement on the Form S-1/A filed for the Company on March 28, 2011, as amended, and incorporated herein by reference).
	10.1	First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (filed as Exhibit 10.1 to the Registration Statement on the Form S-8 filed on July 12, 2016, and incorporated herein by reference).
	10.2	Supplemental Executive Retirement Plan of Farmington Bank (filed as Exhibit 10.2 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.3	Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.3 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.4	First Amendment to Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.4 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.4.1	Second Amendment to Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.4.1 to the Form 10-K for the year ended December 31, 2012 filed on March 18, 2013, and incorporated herein by reference).
	10.5	Voluntary Deferred Compensation Plan for Key Employees (filed as Exhibit 10.5 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.6	Life Insurance Premium Reimbursement Agreement between Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.6 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.7	Life Insurance Premium Reimbursement Agreement between Farmington Bank and Gregory A. White (filed as Exhibit 10.7 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.8	Farmington Savings Bank Defined Benefit Employees’ Pension Plan, as amended (filed as Exhibit 10.8 to the Registration Statement on the Form S-1/A filed for the Company on March 28, 2011, as amended, and incorporated herein by reference).
	10.8.1	Farmington Savings Bank Defined Benefit Employees’ Pension Plan, as amended (filed as Exhibit 10.8.1 to the Form 10-K for the year ended December 31, 2012 filed on March 18, 2013, and incorporated herein by reference).
	10.9	Annual Incentive Compensation Plan (filed as Exhibit 10.9 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).

 

 

	10.9.1	Amended Annual Incentive Compensation Plan (filed as Exhibit 10.9.1 to the Form 10-K for the year ended December 31, 2013 filed on March 17, 2014, and incorporated herein by reference)
	10.10	Supplemental Retirement Plan Participation Agreement between John J. Patrick, Jr. and Farmington Bank (filed as Exhibit 10.10 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.11	Supplemental Retirement Plan Participation Agreement between Michael T. Schweighoffer and Farmington Bank (filed as Exhibit 10.11 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.12	Supplemental Retirement Plan Participation Agreement between Gregory A. White and Farmington Bank (filed as Exhibit 10.12 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	10.13	Employment Agreement among First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.1 Employment Agreement on Form 8-K for the Company on April 27, 2012 and incorporated herein by reference).
	10.13.1	Employment Agreement First Amendment among First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.13.1 to the current report on the Form 8-K filed for the Company on February 28, 2013, as amended, and incorporated herein by reference) (term currently extended to December 31, 2019).
	10.14	Life Insurance Premium Reimbursement Agreement between Farmington Bank and Michael T. Schweighoffer (filed as Exhibit 10.14 to the Form 10-Q filed for the Company on May 15, 2012, and incorporated herein by reference).
	10.15	First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan (Incorporated by reference to Appendix A in the Definitive Proxy Statement on Form 14A filed on June 6, 2012 and amended on July 2, 2012 (File No. 001-35209-12890818 and 12960688).
	10.16	Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.16 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
	10.17	Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Gregory A. White (filed as Exhibit 10.17 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
	10.18	Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Michael T. Schweighoffer (filed as Exhibit 10.18 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
	10.19	Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Kenneth F. Burns (filed as Exhibit 10.19 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
	10.20	Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Catherine M. Burns (filed as Exhibit 10.20 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
	21.1	Subsidiaries of First Connecticut Bancorp, Inc. and Farmington Bank (filed as Exhibit 21.1 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
	32.1	Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
	32.2	Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
	101	Interactive data files pursuant to Rule 405 of Regulation S-t: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements tagged as blocks of text and in detail.*

 

Item 16. Form 10-K Summary

 

Not Applicable.

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	First Connecticut Bancorp, Inc.
	By:	/s/ John J. Patrick, Jr.
		John J. Patrick, Jr.
Date:  March 9, 2018		Chairman, President and Chief Executive Officer

 

Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signatures		Title		Date
/s/ John J. Patrick Jr.		Chairman of the Board, President and Chief Executive Officer		March 9, 2018
John J. Patrick, Jr.		(Principal Executive Officer)
/s/ Gregory A. White		Executive Vice President and Chief Financial Officer		March 9, 2018
Gregory A. White		(Principal Financial Officer)
/s/ Ronald A. Bucchi		Director		March 9, 2018
Ronald A. Bucchi
/s/ John J. Carson		Director		March 9, 2018
John J. Carson
/s/ Kevin S. Ray		Director		March 9, 2018
Kevin S. Ray
/s/ Michael A. Ziebka		Director		March 9, 2018
Michael A. Ziebka
/s/ Patience P. McDowell		Director		March 9, 2018
Patience P. McDowell
/s/ James T. Healey, Jr.		Director		March 9, 2018
James T. Healey, Jr.
/s/ John A. Green		Director		March 9, 2018
John A. Green