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EX-32.2 - EXHIBIT 32.2 - First Connecticut Bancorp, Inc.tv499696_ex32-2.htm
EX-32.1 - EXHIBIT 32.1 - First Connecticut Bancorp, Inc.tv499696_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - First Connecticut Bancorp, Inc.tv499696_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - First Connecticut Bancorp, Inc.tv499696_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

 

x

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

 

For the quarterly period ended June 30, 2018

 

OR

 

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

 

For the transition period from              to             

 

Commission File No. 333-171913

 

 

First Connecticut Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

     
Maryland   45-1496206

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

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

 

(860) 676-4600

(Registrant’s telephone number)

 

N/A

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

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    YES   x     NO   ¨ .

 

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

 

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

 

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

 

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

 

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

 

As of July 23, 2018, there were 16,036,214 shares of First Connecticut Bancorp, Inc. common stock, par value $0.01, outstanding.

 

 

 

 

 

First Connecticut Bancorp, Inc.

 

Table of Contents

 

    Page
     
Part I. Financial Information  
     
Item 1.   Consolidated Financial Statements  
     
  Consolidated Statements of Financial Condition at June 30, 2018 (unaudited) and December 31, 2017 1
     
  Consolidated Statements of Income for the three and six months ended June 30, 2018 and 2017 (unaudited) 2
     
  Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2018 and 2017 (unaudited) 3
     
  Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2018 and 2017 (unaudited) 4
     
  Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) 5
     
  Notes to Unaudited Consolidated Financial Statements 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 53
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 69
     
Item 4. Controls and Procedures 70
     
Part II. Other Information  
     
Item 1. Legal Proceedings 70
     
Item1A. Risk Factors 70
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 73
     
Item 3. Defaults upon Senior Securities 73
     
Item 4. Mine Safety Disclosure 73
     
Item 5. Other Information 73
     
Item 6. Exhibits 74
     
Signatures   77

 

Exhibit 31.1    
Exhibit 31.2    
Exhibit 32.1    
Exhibit 32.2    

 

 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Financial Condition (Unaudited)

 

   June 30,   December 31, 
(Dollars in thousands, except share and per share data)  2018   2017 
        
Assets          
Cash and due from banks  $36,028   $33,320 
Interest bearing deposits with other institutions   940    2,030 
Total cash, cash equivalents and restricted cash   36,968    35,350 
Debt securities held-to-maturity, at amortized cost   86,981    74,985 
Debt securities available-for-sale, at fair value   98,010    80,358 
Loans held for sale   5,331    5,295 
Loans (1)   2,923,386    2,748,081 
Allowance for loan losses   (22,672)   (22,448)
Loans, net   2,900,714    2,725,633 
Premises and equipment, net   16,965    16,845 
Federal Home Loan Bank of Boston stock, at cost   22,195    15,537 
Accrued income receivable   9,913    8,979 
Bank-owned life insurance   58,193    57,511 
Deferred income taxes, net   7,724    7,662 
Prepaid expenses and other assets   32,844    26,895 
Total assets  $3,275,838   $3,055,050 
           
Liabilities and Stockholders' Equity          
Deposits          
Interest-bearing  $1,965,487   $1,960,672 
Noninterest-bearing   478,319    473,428 
    2,443,806    2,434,100 
Federal Home Loan Bank of Boston advances   457,457    255,458 
Repurchase agreement borrowings   -    10,500 
Repurchase liabilities   40,374    34,496 
Accrued expenses and other liabilities   52,337    48,037 
Total liabilities   2,993,974    2,782,591 
           
Commitments and contingencies (Note 18)   -    - 
           
Stockholders' Equity          
           
Common stock, $0.01 par value, 30,000,000 shares authorized; 17,946,190 shares issued and 16,012,664 shares outstanding at June 30, 2018 and 17,947,647 shares issued and 15,952,946 shares outstanding at December 31, 2017   181    181 
Additional paid-in-capital   186,776    185,779 
Unallocated common stock held by ESOP   (9,043)   (9,539)
Treasury stock, at cost (1,933,526 shares at June 30, 2018 and 1,994,701 shares at December 31, 2017)   (28,802)   (29,620)
Retained earnings   140,228    131,887 
Accumulated other comprehensive loss   (7,476)   (6,229)
Total stockholders' equity   281,864    272,459 
Total liabilities and stockholders' equity  $3,275,838   $3,055,050 

 

(1)Loans include net deferred loan costs of $5.9 million and $5.1 million at June 30, 2018 and December 31, 2017, respectively.

 

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

 

 1 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
(Dollars in thousands, except share and per share data)  2018   2017   2018   2017 
                
Interest income                    
Interest and fees on loans                    
Mortgage  $21,560   $18,056   $41,487   $35,614 
Other   5,672    5,209    11,137    10,156 
Interest and dividends on investments                    
United States Government and agency obligations   954    598    1,751    1,072 
Other bonds   -    7    -    14 
Corporate stocks   258    216    499    415 
Other interest income   27    30    60    57 
Total interest income   28,471    24,116    54,934    47,328 
                     
Interest expense                    
Deposits   4,702    3,026    9,041    5,937 
Federal Home Loan Bank of Boston advances   1,771    1,164    2,890    2,113 
Repurchase agreement borrowings   -    96    74    191 
Repurchase liabilities   7    7    16    14 
Total interest expense   6,480    4,293    12,021    8,255 
Net interest income   21,991    19,823    42,913    39,073 
Provision for loan losses   69    710    534    1,035 
Net interest income after provision for loan losses   21,922    19,113    42,379    38,038 
Noninterest income                    
Fees for customer services   1,718    1,572    3,375    3,078 
Net gain on loans sold   341    711    629    1,127 
Brokerage and insurance fee income   63    55    121    105 
Bank owned life insurance income   341    598    682    917 
Other   799    940    1,600    1,814 
Total noninterest income   3,262    3,876    6,407    7,041 
Noninterest expense                    
Salaries and employee benefits   9,704    9,848    19,476    18,986 
Occupancy expense   1,315    1,187    2,644    2,500 
Furniture and equipment expense   947    985    1,895    1,969 
FDIC assessment   422    410    846    838 
Marketing   767    708    1,372    1,275 
Other operating expenses   3,864    2,740    7,025    5,462 
Total noninterest expense   17,019    15,878    33,258    31,030 
Income before income taxes   8,165    7,111    15,528    14,049 
Income tax expense   1,435    2,109    2,787    3,954 
Net income  $6,730   $5,002   $12,741   $10,095 
                     
Net earnings per share (See Note 3):                    
Basic  $0.44   $0.33   $0.83   $0.67 
Diluted   0.42    0.32    0.80    0.64 
Dividends per share   0.17    0.12    0.33    0.23 

 

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

 

 2 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended June 30,   Six Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
                
Net income  $6,730   $5,002   $12,741   $10,095 
Other comprehensive (loss) income, before tax                    
Unrealized losses on debt securities:                    
Unrealized holding (losses) gains arising during the period (1)   (271)   41    (686)   178 
Less: reclassification adjustment for gains  included in net income   -    -    -    - 
Net change in unrealized (losses) gains   (271)   41    (686)   178 
Change related to pension and other postretirement benefit plans   149    162    298    325 
Other comprehensive (loss) income, before tax   (122)   203    (388)   503 
Income tax (benefit) expense   (44)   72    (101)   178 
Other comprehensive (loss) income, net of tax   (78)   131    (287)   325 
Comprehensive income  $6,652   $5,133   $12,454   $10,420 

 

(1)The Company adopted ASU 2016-01 effective January 1, 2018 which requires equity securities to be measured at fair value with changes in fair value recoginized in net income. The prior period includes changes in the fair value of equity securities recognized in other comprehensive income.

 

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

 

 3 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

 

 

               Unallocated           Accumulated     
   Common Stock   Additional   Common           Other   Total 
   Shares       Paid in   Shares Held   Treasury   Retained   Comprehensive   Stockholders' 
(Dollars in thousands, except share data)  Outstanding   Amount   Capital   by ESOP   Stock   Earnings   Loss   Equity 
                                
Balance at December 31, 2016   15,897,698   $181   $184,111   $(10,567)  $(30,400)  $123,541   $(6,690)  $260,176 
ESOP shares released and  committed to be released   -    -    639    514    -    -    -    1,153 
Cash dividend paid ($0.23 per common share)   -    -    -    -    -    (3,664)   -    (3,664)
Stock options exercised   41,850    -    (21)   -    588    -    -    567 
Share based compensation expense   3,066    -    142    -    42    -    -    184 
Net income   -    -    -    -    -    10,095    -    10,095 
Other comprehensive income   -    -    -    -    -    -    325    325 
Balance at June 30, 2017   15,942,614   $181   $184,871   $(10,053)  $(29,770)  $129,972   $(6,365)  $268,836 
                                         
Balance at December 31, 2017   15,952,946   $181   $185,779   $(9,539)  $(29,620)  $131,887   $(6,229)  $272,459 
ESOP shares released and  committed to be released   -    -    746    496    -    -    -    1,242 
Cash dividend paid ($0.33 per common share)   -    -    -    -    -    (5,274)   -    (5,274)
Stock options exercised   54,194    -    (70)   -    780    -    -    710 
Cancellation of shares for tax withholding   (1,457)   -    (38)   -    -    -    -    (38)
Share based compensation expense   6,981    -    359    -    38    -    -    397 
Net income   -    -    -    -    -    12,741    -    12,741 
Reclassification of disproportionate tax effects resulting from the Tax Cuts and Jobs Act of 2017 pursuant to ASU 2018-02   -    -    -    -    -    1,275    (1,275)   - 
Reclassification of cumulative effect adjustment per ASU 2016-01   -    -    -    -    -    (401)   315    (86)
Other comprehensive loss   -    -    -    -    -    -    (287)   (287)
Balance at June 30, 2018   16,012,664   $181   $186,776   $(9,043)  $(28,802)  $140,228   $(7,476)  $281,864 

 

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

 

 4 

 

 

First Connecticut Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

 

 

   Six Months Ended June 30, 
  2018   2017 
(Dollars in thousands)        
Cash flows from operating activities          
Net income  $12,741   $10,095 
Adjustments to reconcile net income to net cash provided by    operating activities:          
Provision for loan losses   534    1,035 
Provision for (reversal of) off-balance sheet commitments   58    (92)
Depreciation and amortization   927    1,020 
Amortization of ESOP expense   1,242    1,153 
Share based compensation expense   397    184 
Amortization of mortgage servicing rights   464    451 
Writedown on foreclosed real estate   451    - 
Loans originated for sale   (55,181)   (52,634)
Proceeds from the sale of loans held for sale   55,774    54,494 
(Gain) loss on fair value adjustment for mortgage banking derivatives   (3)   51 
Impairment losses on alternative investments   -    10 
Loss on fair value adjustment for equity securities   94    - 
Net gain on loans sold   (629)   (1,127)
Net amortization (accretion) of investment security discounts and premiums   78    (23)
Change in net deferred loan fees and costs   (862)   (525)
Increase in accrued income receivable   (934)   (507)
Deferred income tax   (47)   647 
Increase in cash surrender value of bank-owned life insurance   (682)   (645)
Increase in prepaid expenses and other assets   (4,755)   (4,200)
Increase (decrease) in accrued expenses and other liabilities   4,504    (3,287)
Net cash provided by operating activities   14,171    6,100 
Cash flows from investing activities          
Maturities, calls and principal payments of debt securities held-to-maturity   1,979    5,115 
Maturities, calls and principal payments of debt securities available-for-sale   28,993    16,302 
Purchases of debt securities held-to-maturity   (13,972)   (22,709)
Purchases of debt securities available-for-sale   (47,412)   (25,024)
Loan originations, net of principal repayments   (176,917)   (119,145)
Purchases of Federal Home Loan Bank of Boston stock, net   (6,658)   (3,205)
Purchase of bank-owned life insurance   -    (5,000)
Proceeds from bank-owned life insurance   -    569 
Purchases of premises and equipment   (1,047)   (627)
Net cash used in investing activities   (215,034)   (153,724)
Cash flows from financing activities          
Net proceeds from Federal Home Loan Bank of Boston advances   201,999    102,401 
Decrease in repurchase agreement borrowings   (10,500)   - 
Net (decrease) increase in demand deposits, NOW accounts,      savings accounts and money market accounts   (28,965)   6,365 
Net increase in time deposits   38,671    23,549 
Net increase in repurchase liabilities   5,878    17,234 
Stock options exercised   710    567 
Cancellation of shares for tax withholding   (38)   - 
Cash dividend paid   (5,274)   (3,664)
Net cash provided by financing activities   202,481    146,452 
Net increase (decrease) in cash, cash equivalents and restricted cash   1,618    (1,172)
Cash, cash equivalents and restricted cash at beginning of period   35,350    47,723 
Cash, cash equivalents and restricted cash at end of period  $36,968   $46,551 
           
Supplemental disclosure of cash flow information          
Loans transferred to other real estate owned  $2,164   $- 

 

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

 

 5 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

1.Summary of Significant Accounting Policies

 

Organization and Business

 

First Connecticut Bancorp, Inc. is a Maryland-chartered bank holding company that wholly owns its only subsidiary, Farmington Bank (collectively with its subsidiary, the “Company”). Farmington Bank's main office is located in Farmington, Connecticut. Farmington Bank is a full-service, community bank with 25 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Farmington Bank's primary source of income is interest accrued on loans to customers, which include small and middle market businesses and individuals residing primarily in Connecticut and western Massachusetts. However, the Bank will selectively lend to borrowers in other northeastern states.

 

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

 

On June 21, 2013, the Company received regulatory approval to repurchase up to 1,676,452 shares, or 10% of its current outstanding common stock. Repurchased shares are held as treasury stock and are available for general corporate purposes. The Company has 600,945 shares remaining available to be repurchased at June 30, 2018.

 

Merger

 

On June 19, 2018, the Company announced its entry into a definitive Agreement and Plan of Merger with People’s United Financial, Inc. ("People's United"), pursuant to which the Company will merge with and into People's United. Completion of the transaction is subject to customary closing conditions, including receipt of regulatory approvals and the approval of the Company’s shareholders.

 

Basis of Financial Statement Presentation

 

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has condensed or omitted certain information and footnote disclosures normally included in the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. All significant intercompany transactions and balances have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2017 included in the Company’s 10-K filed on March 9, 2018. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

 

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

 

 6 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Investment Securities

 

Debt securities are classified as either available-for-sale or held-to-maturity. Management determines the appropriate classifications of debt securities at the time of purchase. Held-to-maturity debt securities are 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 debt 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. Unrealized gains and losses, net of the related tax effect, on available-for-sale debt 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. Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis.

 

Loans Held for Sale

 

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

 

Loans

 

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

 

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

 

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.

 

 7 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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 six months ended June 30, 2018.

 

 8 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

 

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

 

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

 

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

 

Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

 

Home equity line of credit – Loans in this segment include home equity loans and lines of credit underwritten with a loan-to-value ratio generally limited to no more than 80%, including any first mortgage. Our home equity lines of credit have a 9 year 10 month draw period followed by a 20 year amortization period and adjustable rates of interest which are indexed to the prime rate. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.

 

Other – Includes installment, collateral, demand, revolving credit and resort loans to customers with acceptable credit ratings residing primarily in our market area.  Installment and collateral consumer loans generally consist of loans on new and used automobiles, loans collateralized by deposit accounts, and unsecured personal loans.  The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.  The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations.  The Bank has exited the resort financing market with a residual portfolio remaining.

 

 9 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Allocated component:

 

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

 

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

 

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

 

Unallocated component:

 

An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at June 30, 2018 and December 31, 2017.

 

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.

 

 10 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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 $1.7 million and $-0- as of June 30, 2018 and December 31, 2017, 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 $1.7 million at June 30, 2018.

 

Pension and Other Postretirement Benefit Plans

 

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

 

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

 

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

 

 11 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Income Taxes

 

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.

 

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.

 

 12 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Revenue Recognition

 

Revenue from Contracts with Customers Accounting Standards Codification ("ASC 606"), establishes principles for reporting information about the nature, amount, timing and uncertainty of revenue and cash flows arising from the entity's contracts to provide goods or services to customers. The core principle requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied.

 

The majority of the Company’s revenue-generating transactions are not subject to ASC 606, such as interest and fee income on loans, interest and dividends on investments, net gain on loans sold, gain on sale of investments, mortgage servicing fees and swap fees. Revenue generating transactions subject to ASC 606 are fees for customer service and brokerage and insurance fees, which are presented in the Consolidated Statements of Income as components of noninterest income, as follows:

 

Fees for customer service: The Company enters into depository agreements with deposit customers whereby the customer is provided with custody services of deposited funds and access to deposited funds. Fees are charged to deposit customers – such as debit card fees; NSF or overdraft protection fees; return item fees; stop payment fees; wire fees; ATM surcharge fees; safe deposit box rental fees; credit card advance fees, etc. Revenue is recognized when the Company’s performance obligation is completed, which is generally monthly, for account maintenance services or when a transaction has been completed (such as a wire transfer). Payment for such performance obligations is generally received at the time the performance obligations are satisfied.

 

Brokerage and insurance fees: The Company receives fees from a third party broker dealer as part of a revenue-sharing agreement for fees earned from customers that the Company refers to the third party. These fees are paid to the Company by the third party on a monthly basis and recognized as the Company’s performance obligation is satisfied.

 

Reclassifications

 

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

 

Accounting Standards Adopted in 2018

 

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 adoption of the new guidance did not 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 did not materially change. The Company adopted ASU No. 2014-09 effective January 1, 2018, utilizing the modified retrospective approach which did not result in a cumulative effect adjustment to opening retained earnings and added additional disclosures related to revenue recognition in Note 1 Summary of Significant Accounting Policies.

 

 13 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments—Overall (Topic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted ASU No. 2016-01 effective January 1, 2018 utilizing the modified retrospective approach which resulted in a $401,000 cumulative effect adjustment to opening retained earnings related to unrealized losses on equity securities previously recorded in accumulated other comprehensive loss.

 

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 adopted ASU 2016-15 effective January 1, 2018 and it did not 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 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 adopted ASU 2016-18 effective January 1, 2018 and it did not 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 adopted ASU 2017-07 effective January 1, 2018 and it did not have a material impact on its accounting and disclosures. The Company elected to apply the practical expedient and use the amounts disclosed in Note 9 to the consolidated financial statements included in Part I, Item 1 of the Company’s Quarterly Report on Form 10-Q for the three and six months ended June 30, 2017 as the estimation basis for applying the retrospective presentation requirements of the standard.

 

 14 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

   Three Months Ended
June 30, 2017
   Impact of
Adoption of ASU
   Three Months Ended
June 30, 2017
 
(Dollars in thousands)  As previously reported   2017-07   As reported 
               
Noninterest expense               
Salaries and employee benefits  $10,036   $(188)  $9,848 
Other operating expenses   2,552    188    2,740 

 

   Six Months Ended
June 30, 2017
   Impact of
Adoption of ASU
   Six Months Ended
June 30, 2017
 
(Dollars in thousands)  As previously reported   2017-07   As reported 
               
Noninterest expense               
Salaries and employee benefits  $19,363   $(377)  $18,986 
Other operating expenses   5,085    377    5,462 

 

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 adopted ASU 2017-09 effective January 1, 2018 and it did not 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 early adopted this standard effective January 1, 2018 and reclassified $1,275,000 to opening retained earnings that was recorded to income tax expense due to re-measuring from 35% to 21% the federal taxes on the accumulated other comprehensive loss components related to available-for-sale, held-to-maturity securities and pension.

 

Accounting Standards Pending Adoption

 

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.

 

 15 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326)" requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This ASU also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public business entities for annual periods beginning after December 31, 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.

 

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 $9.0 million and $9.2 million to meet these requirements at June 30, 2018 and December 31, 2017, respectively. The Company classifies restrictions on cash within “Cash, Cash Equivalents and Restricted Cash” in the Consolidated Statements of Financial Condition.

 

 16 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

3.Earnings Per Share

 

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

 

   Three Months Ended June 30,   Six Months Ended June 30, 
(Dollars in thousands, except per share data):  2018   2017   2018   2017 
                    
Net income  $6,730   $5,002   $12,741   $10,095 
Less:  Dividends to participating shares   (9)   (3)   (18)   (6)
Income allocated to participating shares   (14)   (6)   (22)   (8)
Net income allocated to common stockholders  $6,707   $4,993   $12,701   $10,081 
                     
Weighted-average shares issued   18,000,464    17,975,345    17,992,650    17,967,541 
                     
Less:  Average unallocated ESOP shares   (731,459)   (826,559)   (742,937)   (838,298)
Average treasury stock   (1,954,096)   (2,013,898)   (1,965,705)   (2,021,628)
Average unvested restricted stock   (54,274)   (27,698)   (46,014)   (19,894)
Weighted-average basic shares outstanding   15,260,635    15,107,190    15,237,994    15,087,721 
                     
Plus: Average dilutive shares   681,836    683,922    683,533    653,779 
Weighted-average diluted shares outstanding   15,942,471    15,791,112    15,921,527    15,741,500 
                     
Net earnings per share (1):                    
Basic  $0.44   $0.33   $0.83   $0.67 
Diluted  $0.42   $0.32   $0.80   $0.64 

 

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

 

For the three months ended June 30, 2018 and 2017, respectively, 8,293 and 785 options were anti-dilutive and therefore excluded from the earnings per share calculation.

 

 17 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

4.Investment Securities

 

Debt Securities

 

Debt securities have been classified in the consolidated financial statements as available-for-sale or held-to-maturity. The amortized cost of debt securities and their approximate fair values at June 30, 2018 and December 31, 2017 are as follows:

 

   June 30, 2018 
       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                                   
U.S. Treasury obligations  $11,847   $33   $(97)  $11,783   $-   $-   $11,783 
U.S. Government agency obligations   59,000    -    (587)   58,413    -    -    58,413 
Government sponsored residential   mortgage-backed securities   28,015    85    (286)   27,814        -        -    27,814 
Total debt securities available-for-sale  $98,862   $118   $(970)  $98,010   $-   $-   $98,010 
Held-to-maturity                                   
U.S. Treasury obligations  $4,991   $-   $-   $4,991   $-   $(100)  $4,891 
U.S. Government agency obligations   51,956    -    -    51,956    -    (1,137)   50,819 
Government sponsored residential   mortgage-backed securities   30,034    -    -    30,034    -    (771)   29,263 
Total debt securities held-to-maturity  $86,981   $-   $-   $86,981   $-   $(2,008)  $84,973 

 

   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                                   
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 
Total debt securities available-for-sale  $80,524   $195   $(361)  $80,358   $-   $-   $80,358 
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 debt securities held-to-maturity  $74,985   $-   $-   $74,985   $29   $(460)  $74,554 

 

 18 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables summarize debt securities with gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
       Less than 12 Months   12 Months or More   Total 
   Number of       Gross       Gross       Gross 
   Debt   Fair   Unrealized   Fair   Unrealized   Fair   Unrealized 
(Dollars in thousands)  Securities   Value   Loss   Value   Loss   Value   Loss 
Available-for-sale                                   
U.S. Treasury obligations   1   $4,903   $(97)  $-   $-   $4,903   $(97)
U.S. Government agency obligations   9    25,653    (347)   32,760    (240)   58,413    (587)
Government sponsored residential   mortgage-backed securities   5    25,389    (286)   -    -    25,389    (286)
    15   $55,945   $(730)  $32,760   $(240)  $88,705   $(970)
Held-to-maturity                                   
U.S. Treasury obligations   1   $4,891   $(100)  $-   $-   $4,891   $(100)
U.S. Government agency obligations   8    45,905    (1,050)   4,914    (87)   50,819    (1,137)
Government sponsored residential   mortgage-backed securities   7    29,263    (771)   -    -    29,263    (771)
    16   $80,059   $(1,921)  $4,914   $(87)  $84,973   $(2,008)
Total debt securities in an unrealized  loss position   31   $136,004   $(2,651)  $37,674   $(327)  $173,678   $(2,978)

 

   December 31, 2017 
       Less than 12 Months   12 Months or More   Total 
   Number of       Gross       Gross       Gross 
   Debt   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)
    11   $23,911   $(90)  $46,729   $(271)  $70,640   $(361)
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 debt securities in an unrealized  loss position   21   $73,488   $(486)  $51,664   $(335)  $125,152   $(821)

 

Management evaluates debt securities for other than temporary impairment on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the security for a period of time sufficient to allow for any anticipated recovery in fair value.

 

Management does not have the intent to sell any of these securities and believes that it is more likely than not that the Company will not have to sell any such securities before a recovery of cost. The fair value is expected to recover as the debt securities approach their maturity date or repricing date or if market yields for such investments decline. Management does not believe that any of the securities are impaired due to reasons of credit quality. Accordingly, as of June 30, 2018, management believes that the unrealized losses detailed in the previous table are temporary and no other than temporary impairment loss has been recognized in the Company’s Consolidated Statements of Income.

 

The Company recorded no other-than-temporary impairment charges to the debt securities portfolios for the six months ended June 30, 2018 and 2017.

 

As of June 30, 2018 and December 31, 2017, U.S. Treasury, U.S. Government agency obligations and Government sponsored residential mortgage-backed securities with a fair value of $71.3 million and $93.3 million, respectively, were pledged as collateral for loan derivatives, public funds, repurchase liabilities and repurchase agreement borrowings.

 

 19 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The amortized cost and estimated fair value of debt securities at June 30, 2018 and December 31, 2017 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties:

 

   June 30, 2018 
   Available-for-Sale   Held-to-Maturity 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
(Dollars in thousands)  Cost   Value   Cost   Value 
                    
Due in one year or less  $33,000   $32,760   $-   $- 
Due after one year through five years   37,847    37,436    37,991    37,103 
Due after five years through ten years   -    -    18,956    18,607 
Due after ten years   -    -    -    - 
Government sponsored residential   mortgage-backed securities   28,015    27,814    30,034    29,263 
   $98,862   $98,010   $86,981   $84,973 

 

   December 31, 2017 
   Available-for-Sale   Held-to-Maturity 
       Estimated       Estimated 
   Amortized   Fair   Amortized   Fair 
(Dollars in thousands)  Cost   Value   Cost   Value 
                    
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 

 

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

 

The Company, as a member of the FHLBB, owned $22.2 million and $15.5 million of FHLBB capital stock at June 30, 2018 and December 31, 2017, respectively, which is equal to its FHLBB capital stock requirement. The Company evaluated its FHLBB capital stock for potential other-than-temporary impairment at June 30, 2018. Capital adequacy, credit ratings, the value of the stock, overall financial condition of the FHLB system and FHLBB as well as current economic factors were analyzed in the impairment analysis. The Company concluded that its position in FHLBB capital stock is not other-than-temporarily impaired at June 30, 2018.

 

Equity Securities

 

The Company held equity securities with fair values of $6.9 million at June 30, 2018 and December 31, 2017, included in other assets in the accompanying Consolidated Statements of Financial Condition. During the six months ended June 30, 2018, the Company recognized a realized loss of $94,000 on the equity securities held at June 30, 2018, which was recorded in “Other noninterest income” within the Consolidated Statements of Income. There were no sales of equity securities during the six months ended June 30, 2018 and 2017.

 

 20 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Alternative Investments

 

Alternative investments, which totaled $2.1 million at June 30, 2018 and December 31, 2017, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company’s alternative investments include investments in certain non-public funds, which include limited partnerships, an equity fund and membership stocks. These investments are held at cost and were evaluated for potential other-than-temporary impairment at June 30, 2018. The Company recognized a $-0- and $10,000 other-than-temporary impairment charge on its limited partnerships for the for the six months ended June 30, 2018 and 2017, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $11,000 and $240,000 for the six months ended June 30, 2018 and 2017, respectively. See a further discussion of fair value in Note 15 - Fair Value Measurements. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of June 30, 2018.

 

5.Loans and Allowance for Loan Losses

 

Loans consisted of the following:

 

   June 30,   December 31, 
(Dollars in thousands)  2018   2017 
          
Real estate:          
Residential  $1,141,015   $989,366 
Commercial   1,085,903    1,063,755 
Construction   94,615    90,059 
Commercial   435,034    429,116 
Home equity line of credit   155,853    165,070 
Other   5,039    5,650 
Total loans   2,917,459    2,743,016 
Net deferred loan costs   5,927    5,065 
Loans   2,923,386    2,748,081 
Allowance for loan losses   (22,672)   (22,448)
Loans, net  $2,900,714   $2,725,633 

 

 21 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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

 

   For the Three Months Ended June 30, 2018 
(Dollars in thousands)  Balance at
beginning of
 period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
                         
Real estate:                         
Residential  $4,505   $(5)  $1   $160   $4,661 
Commercial   12,047    -    -    (154)   11,893 
Construction   891    -    -    (46)   845 
Commercial   3,990    -    14    9    4,013 
Home equity line of credit   1,148    (1)   -    83    1,230 
Other   39    (34)   8    17    30 
   $22,620   $(40)  $23   $69   $22,672 

 

   For the Three Months Ended June 30, 2017 
(Dollars in thousands)  Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
                         
Real estate:                         
Residential  $4,247   $(2)  $1   $8   $4,254 
Commercial   11,240    -    2    391    11,633 
Construction   518    -    -    133    651 
Commercial   3,915    -    -    162    4,077 
Home equity line of credit   1,380    -    -    (1)   1,379 
Other   49    (29)   6    17    43 
   $21,349   $(31)  $9   $710   $22,037 

 

 22 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

   For the Six Months Ended June 30, 2018 
(Dollars in thousands)  Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
                         
Real estate:                         
Residential  $4,137   $(205)  $1   $728   $4,661 
Commercial   11,963    -    -    (70)   11,893 
Construction   785    -    -    60    845 
Commercial   4,155    (14)   14    (142)   4,013 
Home equity line of credit   1,364    (55)   -    (79)   1,230 
Other   44    (69)   18    37    30 
   $22,448   $(343)  $33   $534   $22,672 

 

   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Balance at
beginning of
period
   Charge-offs   Recoveries   Provision for
(Reduction of)
loan losses
   Balance at
end of period
 
                         
Real estate:                         
Residential  $4,134   $(33)  $1   $152   $4,254 
Commercial   11,131    (111)   2    611    11,633 
Construction   425    -    -    226    651 
Commercial   4,400    (322)   -    (1)   4,077 
Home equity line of credit   1,398    -    -    (19)   1,379 
Other   41    (80)   16    66    43 
   $21,529   $(546)  $19   $1,035   $22,037 

 

 23 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following table lists the allocation of the allowance by impairment methodology and by loan segment at June 30, 2018 and December 31, 2017:

 

   June 30, 2018   December 31, 2017 
       Reserve       Reserve 
(Dollars in thousands)  Total   Allocation   Total   Allocation 
Loans individually evaluated for impairment:                    
Real estate:                    
Residential  $11,276   $115   $12,971   $130 
Commercial   8,385    -    8,521    - 
Construction   4,532    -    4,532    - 
Commercial   1,850    18    1,076    38 
Home equity line of credit   1,900    -    2,585    - 
Other   871    6    509    6 
    28,814    139    30,194    174 
                     
Loans collectively evaluated for impairment:                    
Real estate:                    
Residential  $1,136,776   $4,546   $982,626   $4,007 
Commercial   1,076,491    11,893    1,054,122    11,963 
Construction   90,083    845    85,527    785 
Commercial   433,139    3,995    427,986    4,117 
Home equity line of credit   153,953    1,230    162,485    1,364 
Other   4,130    24    5,141    38 
    2,894,572    22,533    2,717,887    22,274 
Total  $2,923,386   $22,672   $2,748,081   $22,448 

 

 24 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following is a summary of loan delinquencies at recorded investment values at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
   30-59 Days   60-89 Days   > 90 Days       Past Due 90
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   14   $2,472    12   $2,678    9   $1,702    35   $6,852   $- 
Commercial   2    349    -    -    -    -    2    349    - 
Construction   -    -    -    -    1    4,532    1    4,532    - 
Commercial   2    130    2    23    -    -    4    153    - 
Home equity line of credit   1    37    2    486    3    314    6    837           - 
Other   7    65    2    8    1    1    10    74    - 
Total   26   $3,053    18   $3,195    14   $6,549    58   $12,797   $- 

 

   December 31, 2017 
   30-59 Days   60-89 Days   > 90 Days       Past Due 90
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   $- 

 

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

 

   June 30,   December 31, 
(Dollars in thousands)  2018   2017 
Nonaccrual loans:          
Real estate:          
Residential  $6,268   $9,401 
Commercial   57    67 
Construction   4,532    4,532 
Commercial   651    775 
Home equity line of credit   392    963 
Other   25    54 
Total nonaccruing loans   11,925    15,792 
Loans 90 days past due and still accruing   -    - 
Other real estate owned   1,713    - 
Total nonperforming assets  $13,638   $15,792 

 

 25 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following is a summary of information pertaining to impaired loans at June 30, 2018 and December 31, 2017:

 

   June 30, 2018   December 31, 2017 
       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  $9,740   $10,409   $-   $11,923   $14,119   $- 
Commercial   8,385    8,420    -    8,521    8,555    - 
Construction   4,532    4,532    -    4,532    4,532    - 
Commercial   1,832    2,121    -    1,038    1,303    - 
Home equity line of credit   1,900    1,928    -    2,585    2,642    - 
Other   848    870    -    485    504    - 
Total   27,237    28,280    -    29,084    31,655    - 
                               
Impaired loans with  a valuation allowance:                              
Real estate:                              
Residential   1,536    1,597    115    1,048    1,066    130 
Commercial   -    -    -    -    -    - 
Construction   -    -    -    -    -    - 
Commercial   18    19    18    38    62    38 
Home equity line of credit   -    -    -    -    -    - 
Other   23    23    6    24    24    6 
Total   1,577    1,639    139    1,110    1,152    174 
Total impaired loans  $28,814   $29,919   $139   $30,194   $32,807   $174 

 

 26 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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

 

       Three Months   Six Months       Three Months   Six Months 
       Ended   Ended       Ended   Ended 
   June 30,   June 30,   June 30,   June 30,   June 30,   June 30, 
   2018   2018   2018   2017   2017   2017 
   Average   Interest   Interest   Average   Interest   Interest 
   Recorded   Income   Income   Recorded   Income   Income 
(Dollars in thousands)  Investment   Recognized   Recognized   Investment   Recognized   Recognized 
Impaired loans without  a valuation allowance:                              
Real estate:                              
Residential  $10,798   $61   $93   $11,566   $31   $58 
Commercial   8,487    95    190    9,677    96    192 
Construction   4,532    -    -    4,579    -    - 
Commercial   1,476    11    24    1,590    5    8 
Home equity line of credit   2,254    21    42    1,927    11    21 
Other   574    6    11    648    7    14 
Total   28,121    194    360    29,987    150    293 
                               
Impaired loans with  a valuation allowance:                              
Real estate:                              
Residential   1,127    10    20    1,181    7    14 
Commercial   -    -    -    2,151    17    51 
Construction   -    -    -    -    -    - 
Commercial   49    -    -    229    -    - 
Home equity line of credit   10    -    -    -    -    - 
Other   24    -    -    25    -    - 
Total   1,210    10    20    3,586    24    65 
Total impaired loans  $29,331   $204   $380   $33,573   $174   $358 

 

There was no interest income recognized on a cash basis method of accounting for the six months ended June 30, 2018 and 2017.

 

 27 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables present information on loans whose terms had been modified in a troubled debt restructuring at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
   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   22   $4,482    11   $1,824    33   $6,306 
Commercial   2    611    -    -    2    611 
Construction   -    -    1    4,532    1    4,532 
Commercial   3    1,197    4    634    7    1,831 
Home equity line of credit   14    1,555    2    58    16    1,613 
Other   6    864    1    8    7    872 
Total   47   $8,709    19   $7,056    66   $15,765 

 

   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 

 

The recorded investment balance of TDRs were $15.8 million and $15.7 million at June 30, 2018 and December 31, 2017, respectively. TDRs on accrual status were $8.7 million and $6.2 million while TDRs on nonaccrual status were $7.1 million and $9.5 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At June 30, 2018 and December 31, 2017, the allowance for loan losses included specific reserves of $120,000 and $172,000 related to TDRs, respectively. For the six months ended June 30, 2018 and 2017, the Bank had charge-offs totaling $-0- and $35,000, 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 $1.3 million and $107,000 at June 30, 2018 and December 31, 2017, respectively.

 

 28 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables include the recorded investment and number of modifications for modified loans. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured for the three and six months ended June 30, 2018 and 2017:

 

   For the Three Months Ended June 30, 2018   For the Three Months Ended June 30, 2017 
(Dollars in thousands)  Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
   Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
 
Troubled Debt Restructurings:                              
Real estate:                              
Residential   3   $747   $747    2   $357   $357 
Home equity line of credit   -    -    -    1    96    96 
Total   3   $747   $747   $3   $453   $453 

 

   For the Six Months Ended June 30, 2018   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Number of
Modifications
   Recorded
Investment
Prior to
Modification
   Recorded
Investment
After
Modification (1)
   Number of
Modifications
   Recorded
Investment
Prior to
Modification
  

Recorded

Investment
After
Modification (1)

 
Troubled Debt Restructurings:                              
Real estate:                              
Residential   6   $1,133   $1,130    6   $953   $946 
Construction   1    4,532    4,532    -    -    - 
Commercial   2    551    902    -    -    - 
Home equity line of credit   3    131    129    3    184    184 
Total   12   $6,347   $6,693   $9   $1,137   $1,130 

 

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

 

The following tables provide TDR loans that were modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and/or the concessions and borrowers discharged in bankruptcy for the three and six months ended June 30, 2018 and 2017:

 

   For the Three Months Ended June 30, 2018 
(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   3   $-   $-   $-   $747   $747 
Total   3   $-   $-   $-   $747   $747 

 

   For the Six Months Ended June 30, 2018 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity (1)
   Adjusted
Interest
Rates (1)
   Combination
of Rate and
Maturity (1)
   Other (1)    Total 
Real estate:                              
Residential   6   $-   $  -   $-   $1,130   $1,130 
Construction   1    -    -    4,532    -    4,532 
Commercial   2    902    -    -    -    902 
Home equity line of credit   3    129    -    -    -    129 
Total   12   $1,031   $-   $4,532   $1,130   $6,693 

 

 29 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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

 

   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Number of
Modifications
   Extended
Maturity (1)
   Adjusted
Interest
Rates (1)
  

Combination

of Rate and

Maturity (1)

   Other (1)    Total 
Real estate:                                    
Residential   6   $89   $-   $331   $526   $946 
Home equity line of credit   3    88    -    -    96    184 
Total   9   $177   $-   $331   $622   $1,130 

 

(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. There were no loans that defaulted and had been modified as a TDR during the twelve month period preceding the default date as of June 30, 2018. There was one construction loan totaling $4.5 million that defaulted and had been modified as a TDR during the twelve month period preceding the default date as of June 30, 2017.

 

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.

 

 30 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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.

 

 31 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following table presents the Company’s loans by risk rating at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
(Dollars in thousands)  Pass   Special Mention   Substandard   Doubtful   Total 
Real estate:                         
Residential  $1,132,643   $1,190   $7,182   $    -   $1,141,015 
Commercial   1,069,110    9,619    7,174    -    1,085,903 
Construction   90,083    -    4,532    -    94,615 
Commercial   417,845    3,193    13,996    -    435,034 
Home equity line of credit   154,843    74    936    -    155,853 
Other   4,998    16    25    -    5,039 
Total Loans  $2,869,522   $14,092   $33,845   $-   $2,917,459 

 

   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 

 

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 $5.5 million and $5.4 million at June 30, 2018 and December 31, 2017, 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 $8.0 million and $7.3 million at June 30, 2018 and December 31, 2017, respectively. Total loans sold with servicing rights retained were $44.7 million and $40.0 million for the six months ended June 30, 2018 and 2017, respectively. The net gain on loans sold totaled $629,000 and $1.1 million for the six months ended June 30, 2018 and 2017, respectively, and is included in the accompanying Consolidated Statements of Income.

 

 32 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The principal balance of loans serviced for others, which are not included in the accompanying Consolidated Statements of Financial Condition, totaled $611.1 million and $598.4 million at June 30, 2018 and December 31, 2017, respectively. Loan servicing fees for others totaling $754,000 and $678,000 for the six months ended June 30, 2018 and 2017, respectively, are included as a component of other noninterest income in the accompanying Consolidated Statements of Income.

 

7.Deposits

 

Deposit balances are as follows:

 

   June 30,   December 31, 
(Dollars in thousands)  2018   2017 
        
Noninterest-bearing demand deposits  $478,319   $473,428 
Interest-bearing          
NOW accounts   570,952    623,135 
Money market   564,810    559,297 
Savings accounts   250,194    237,380 
Time deposits   579,531    540,860 
Total interest-bearing deposits   1,965,487    1,960,672 
Total deposits  $2,443,806   $2,434,100 

 

The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions as a service to our customers. This program provides enhanced FDIC insurance to participating customers. Currently, this program is not being utilized. The Company also has established relationships for brokered deposits. There were brokered deposits totaling $63.8 million and $58.8 million at June 30, 2018 and December 31, 2017, respectively.

 

Time certificates of deposit in denominations of $250,000 or more approximated $140.0 million and $126.3 million at June 30, 2018 and December 31, 2017, 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 June 30, 2018 and December 31, 2017. The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $58.5 million which were undrawn at June 30, 2018 and December 31, 2017. The Company maintains a cash balance of $250,000 a certain financial institution as a requirement of maintaining the line.

 

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 $457.5 million and $255.5 million at June 30, 2018 and December 31, 2017, 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 $1.7 billion and $1.6 billion at June 30, 2018 and December 31, 2017, respectively. The Company had available borrowings of $553.7 million and $706.9 million at June 30, 2018 and December 31, 2017, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $87.5 million and $79.5 million at June 30, 2018 and December 31, 2017, 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.

 

 33 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The Company participates in the Federal Reserve Bank’s discount window loan collateral program that enables the Company to borrow up to $62.2 million and $72.2 million on an overnight basis at June 30, 2018 and December 31, 2017, respectively, and was undrawn as of June 30, 2018 and December 31, 2017. The funding arrangement was collateralized by $121.7 million and $139.2 million in pledged commercial real estate loans as of June 30, 2018 and December 31, 2017, respectively.

 

The Bank had a Master Repurchase Agreement borrowing facility with a broker which matured in March 2018. Borrowings under the Master Repurchase Agreement were secured by the Company’s investments in certain securities and cash with a fair value of $11.2 million at December 31, 2017. Outstanding borrowings totaled $10.5 million at December 31, 2017.

 

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 $40.4 million and $34.5 million at June 30, 2018 and December 31, 2017, respectively. They are secured by the Company’s investment in specific issues of U.S. Treasury obligations, Government sponsored residential mortgage-backed securities and U.S. Government agency obligations with a market value of $45.5 million and $39.6 million as of June 30, 2018 and December 31, 2017, respectively.

 

9.Pension and Other Postretirement Benefit Plans

 

Effective January 1, 2018, the Company retrospectively adopted ASU 2017-07 (see Note 1). As a result, the Company classifies only the service cost component of net periodic pension and benefit costs within “Salaries and employee benefits” and all other components of net periodic pension and benefit costs within “Other operating expenses” in the Consolidated Statements of Income.

 

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

 

   Pension Benefits   Other Postretirement Benefits 
   Three Months Ended June 30,   Three Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
                    
Service cost  $-    -   $16   $14 
Interest cost   234    250    23    25 
Expected return on plan assets   (336)   (296)   -    - 
Amortization:                    
Loss   162    178    -    - 
Prior service cost   -    -    (13)   (13)
Recognized net gain   -    -    (1)   (2)
Net periodic benefit cost  $60   $132   $25   $24 

 

 34 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

   Pension Benefits   Other Postretirement Benefits 
   Six Months Ended June 30,   Six Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
                
Service cost  $-   $-   $32   $29 
Interest cost   468    500    46    51 
Expected return on plan assets   (672)   (591)   -    - 
Amortization:                  - 
Loss   325    354    -    - 
Prior service cost   -    -    (25)   (25)
Recognized net gain   -    -    (3)   (4)
Net periodic benefit cost  $121   $263   $50   $51 

 

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

 

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

 

Employee Stock Ownership Plan

 

The Company established the ESOP to provide eligible employees the opportunity to own Company stock. The Company provided a loan to the Farmington Bank Employee Stock Ownership Plan Trust in the amount needed to purchase up to 1,430,416 shares of the Company’s common stock. The loan bears an interest rate equal to the Wall Street Journal Prime Rate plus one percentage point, adjusted annually, and provides for annual payments of interest and principal over the 15 year term of the loan. At June 30, 2018, 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 $1.2 million for the six months ended June 30, 2018 and 2017.

 

Shares held by the ESOP include the following as of June 30, 2018:

 

Allocated   667,527 
Committed to be released   47,289 
Unallocated   715,600 
    1,430,416 

 

The fair value of unallocated ESOP shares was $21.9 million at June 30, 2018.

 

10.Stock Incentive Plans

 

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

 

 35 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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 three months ended June 30, 2018 and 2017, the Company recorded $163,000 and $73,000 of share-based compensation expense, respectively, comprised of $37,000 and $20,000 of stock option expense, respectively and $126,000 and $53,000 of restricted stock expense, respectively. For the six months ended June 30, 2018 and 2017, the Company recorded $397,000 and $184,000 of share-based compensation expense, respectively, comprised of $67,000 and $40,000 of stock option expense, respectively and $330,000 and $144,000 of restricted stock expense, respectively. Expected future compensation expense relating to the 82,302 non-vested options outstanding at June 30, 2018 is $299,000 over the remaining weighted-average period of 2.31 years. Expected future compensation expense relating to the 54,274 non-vested restricted stock outstanding at June 30, 2018 is $1.1 million over the remaining weighted-average period of 2.25 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 six months ended June 30, 2018 and 2017:

 

   2018   2017 
Weighted per share average fair value of options granted  $4.81   $5.09 
Weighted-average assumptions:          
Risk-free interest rate   2.69%   2.05%
Expected volatility   22.11%   22.08%
Expected dividend yield   2.49%   1.94%
Weighted-average dividend yield   2.44% - 2.53%   1.89 - 2.00%
Expected life of options granted   6.0 years    6.0 years 

 

The following is a summary of the Company’s stock option activity and related information for its option grants for the six months ended June 30, 2018.

 

 36 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

   Number of
Stock Options
   Weighted-Average
Exercise Price
   Weighted-Average
Remaining
Contractual Term
(in years)
   Aggregate
Intrinsic Value
(in thousands)
 
Outstanding at December 31, 2017   1,437,426   $13.36           
Granted   38,600    25.05           
Exercised   (54,194)   13.09           
Forfeited   -    -           
Expired   -    -           
Outstanding at June 30, 2018   1,421,832   $13.69    4.56   $24,012 
                     
Exercisable at June 30, 2018   1,339,530   $13.10    4.29   $23,444 

 

The total intrinsic value of options exercised during the six months ended June 30, 2018 was $838,000.

 

The following is a summary of the status of the Company’s restricted stock for the six months ended June 30, 2018.

 

   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, 2017   -   $-    14,012   $24.48    14,686   $21.60 
Granted   2,646    26.50    14,701    25.05    15,210    22.25 
Vested   (2,646)   26.50    (4,335)   24.27    -    - 
Forfeited   -    -    -    -    -    - 
Unvested at June 30, 2018   -   $-    24,378   $24.86    29,896   $21.93 

 

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.

 

 37 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

11.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 bank; however, the Company does not offset assets and liabilities for financial statement presentation purposes. The master netting agreements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of cash is received or posted by the counterparty with the net liability position, in accordance with contract thresholds. As of June 30, 2018, based on its current position the correspondent bank has paid $10.4 million into a collateral account to collateralize its position. The Company and correspondent bank have an agreement to secure any outstanding payable in excess of $100,000.

 

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 June 30, 2018.

 

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:

 

 38 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

      June 30, 2018   December 31, 2017 
(Dollars in thousands)  Consolidated
Balance Sheet
Location
  Notional
Amount
   Fair Value   Notional
Amount
   Fair Value 
                    
Commercial loan customer interest rate swap position   Other Assets  $142,641   $2,203   $197,086   $4,927 
                        
Counterparty interest rate swap position   Other Assets   370,641    13,219    214,642    5,356 
                        
Commercial loan customer interest rate swap position   Other Liabilities   370,641    (13,201)   214,642    (5,318)
                        
Counterparty interest rate swap position   Other Liabilities   142,641    (2,229)   197,086    (5,013)

 

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 $4,000 and ($10,000) and $1,000 and ($23,000) at June 30, 2018 and December 31, 2017, respectively and are included with prepaid expenses and other assets and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.

 

 39 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Mortgage Banking Derivatives

 

Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Company agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At June 30, 2018, the notional amount of outstanding rate locks totaled approximately $17.2 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $19.2 million, which included mandatory forward commitments totaling approximately $12.2 million at June 30, 2018. The forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

 

12.Offsetting of Financial Assets and Liabilities

 

The following tables present the remaining contractual maturities of the Company’s repurchase agreement borrowings and repurchase liabilities as of June 30, 2018 and December 31, 2017, disaggregated by the class of collateral pledged.

 

   June 30, 2018   December 31, 2017 
   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 
Government sponsored residential mortgage-backed securities      -       -       -      -      -    4,500       -    4,500 
Total repurchase agreement borrowings   -    -    -    -    -    10,500    -    10,500 
Repurchase liabilities                                        
U.S. Government agency obligations   39,009    -    -    39,009    34,496    -    -    34,496 
Government sponsored residential mortgage-backed securities   1,365    -    -    1,365    -    -    -    - 
Total repurchase liabilities   40,374    -    -    40,374    34,496    -    -    34,496 
Total  $40,374   $-   $-   $40,374   $34,496   $10,500   $-   $44,996 

 

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.

 

 40 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables present the potential effect of rights of setoff associated with the Company’s recognized financial assets and liabilities at June 30, 2018 and December 31, 2017:

 

   June 30, 2018 
               Gross Amounts Not Offset in the Statement of
Financial Condition
 
(Dollars in thousands)  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
 
                                   
Interest rate swap derivatives  $15,422   $        -   $15,422   $    -   $        -   $    -   $15,422 
Total  $15,422   $-   $15,422   $-   $-   $-   $15,422 

 

   June 30, 2018 
              

Gross Amounts Not Offset in the Statement of

Financial Condition

 
(Dollars in thousands)  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
 
                                   
Interest rate swap derivatives  $15,430   $       -   $15,430   $         -   $    -   $    -   $15,430 
Total  $15,430   $-   $15,430   $-   $-   $-   $15,430 

 

   December 31, 2017 
               Gross Amounts Not Offset in the Statement of
Financial Condition
 
(Dollars in thousands)  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
 
                                   
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
 
 (Dollars in thousands)  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
 
                                   
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 

 

 41 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

13.Financial Instruments with Off-Balance Sheet Risk

 

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

 

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

 

   June 30,   December 31, 
(Dollars in thousands)  2018   2017 
          
Approved loan commitments  $45,832   $39,974 
Unadvanced portion of construction loans   66,229    50,014 
Unused lines for home equity loans   205,350    205,350 
Unused revolving lines of credit   327    336 
Unused commercial letters of credit   3,496    3,940 
Unused commercial lines of credit   221,285    219,597 
   $542,519   $519,211 

 

Financial instruments with off-balance sheet risk had a valuation allowance of $60,000 and $2,000 as of June 30, 2018 and December 31, 2017, 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 $187,000 and $998,000 at June 30, 2018 and December 31, 2017, respectively.

 

At June 30, 2018 and December 31, 2017, the Company had no off-balance sheet special purpose entities and participated in no securitizations of assets.

 

14.Significant Group Concentrations of Credit Risk

 

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

 

 42 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

15.Fair Value Measurements

 

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

 

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

 

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

 

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

 

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

 

Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. There were no transfers between levels during the six months ended June 30, 2018 and 2017.

 

 43 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

Assets and Liabilities Measured at Fair Value on a Recurring Basis

 

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

 

Debt securities available-for-sale: Debt 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. Level 2 securities include U.S. treasury obligations, U.S. government agency obligations and government-sponsored residential mortgage-backed securities. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as level 3 and reliance is placed upon internally developed models and management judgment and evaluation for valuation. The Company had no Level 3 securities at June 30, 2018 and December 31, 2017.

 

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.

 

Equity securities: Equity securities are recorded at fair value on a recurring basis. Level 1 equity securities include preferred equity securities and marketable equity securities. Level 2 equity securities include mutual funds.

 

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 gain (loss) of $3,000 and ($52,000) for the six months ended June 30, 2018 and 2017, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.

 

 44 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following tables detail the financial instruments carried at fair value on a recurring basis as of June 30, 2018 and December 31, 2017 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   June 30, 2018 
(Dollars in thousands)  Total   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets                    
Debt securities available-for-sale:                    
U.S. Treasury obligations  $11,783   $-   $11,783   $- 
U.S. Government agency obligations   58,413    -    58,413    - 
Government sponsored residential  mortgage-backed securities   27,814    -    27,814    - 
Equity securities   6,866    2,037    4,829    - 
Interest rate swap derivative   15,422    -    15,422    - 
Risk participation agreements   4    -    4    - 
Derivative loan commitments   165    -    -    165 
Total  $120,467   $2,037   $118,265   $165 
                     
Liabilities                    
Interest rate swap derivative  $15,430   $-   $15,430   $- 
Risk participation agreements   10    -    10    - 
Forward loan sales commitments   92    -    -    92 
Total  $15,532   $-   $15,440   $92 

 

   December 31, 2017 
(Dollars in thousands)  Total   Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
   Significant
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
Assets                    
Debt securities available-for-sale:                    
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    - 
Equity securities   6,893    1,994    4,899    - 
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 

 

 45 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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

 

   Derivative and Forward Loan Sales Commitments, Net 
   For the Three Months Ended June 30,   For the Six Months Ended June 30, 
(Dollars in thousands)  2018   2017   2018   2017 
                    
Balance, at beginning of period  $52   $139   $70   $183 
Total realized (loss) gain: Included in earnings   21    (8)   3    (52)
Balance, at the end of period  $73   $131   $73   $131 

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017:

 

June 30, 2018
          Significant    
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Input 
                 
Derivative and forward loan sales  commitments, net  $73   Adjusted quoted prices in active markets  Embedded servicing value   1.32%

 

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%

 

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

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

 

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

 

The following table details the financial instruments carried at fair value on a nonrecurring basis at June 30, 2018 and December 31, 2017 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

 

   June 30, 2018   December 31, 2017 
   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 
 (Dollars in thousands)  (Level 1)   (Level 2)   (Level 3)   (Level 1)   (Level 2)   (Level 3) 
                                             
Impaired loans  $     -   $-   $1,134   $-   $-   $2,645 
Other real estate owned   -    -    1,713    -    -    - 

 

 46 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following is a description of the valuation methodologies used for instruments measured at fair value 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 June 30, 2018 and December 31, 2017.

 

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. An appraisal on foreclosed real estate is not necessarily completed on the period end dates in the table above, the fair value information presented may not reflect the actual fair value as of June 30, 2018.

 

The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at June 30, 2018 and December 31, 2017:

 

June 30, 2018
          Significant     Weighted 
(Dollars in thousands)  Fair Value   Valuation Methodology  Unobservable Inputs  Range of Inputs  Average Inputs 
                  
Impaired loans  $1,134   Appraisals  Discount for dated appraisal  5% - 20%   12.50%
           Discount for costs to sell  8% - 15%   11.50%
Other real estate owned  $1,713   Appraisals  Discount for costs to sell  8% - 15%   11.50%
           Discount for condition  10% - 30%   20.00%

 

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

 

 47 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of June 30, 2018 and December 31, 2017. 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. 

 

         June 30, 2018   December 31, 2017 
   GAAP         Estimated       Estimated 
   Measurement  Fair Value  Carrying   Fair   Carrying   Fair 
(Dollars in thousands)  Category  Hierarchy Level  Amount   Value   Amount   Value 
                      
Financial assets                          
Debt securities held-to-maturity  Amortized Cost  Level 2  $86,981   $84,973   $74,985   $74,554 
Debt securities available-for-sale  Fair Value  See previous table   98,010    98,010    80,358    80,358 
Equity securities  Fair Value  See previous table   6,866    6,866    6,893    6,893 
Loans (1)  Amortized Cost  Level 3   2,923,386    2,770,878    2,748,081    2,699,794 
Loans held-for-sale  Lower of Cost or Market  Level 2   5,331    5,419    5,295    5,375 
Mortgage servicing rights  Lower of Cost or Market  Level 3   5,517    8,002    5,399    7,274 
Federal Home Loan Bank of Boston stock  Amortized Cost  Level 2   22,195    22,195    15,537    15,537 
Alternative investments  Amortized Cost  Level 3   2,066    1,895    2,112    1,939 
Interest rate swap derivatives  Fair Value  Level 2   15,422    15,422    10,283    10,283 
Risk participation agreements  Fair Value  Level 2   4    4    1    1 
Derivative loan commitments  Fair Value  Level 3   165    165    126    126 
                           
Financial liabilities                          
Deposits other than time deposits  Amortized Cost  Level 1   1,864,275    1,864,275    1,893,240    1,893,240 
Time deposits  Amortized Cost  Level 2   579,531    584,006    540,860    544,968 
Federal Home Loan Bank of Boston advances  Amortized Cost  Level 2   457,457    455,648    255,458    254,228 
Repurchase agreement borrowings  Amortized Cost  Level 2   -    -    10,500    10,394 
Repurchase liabilities  Amortized Cost  Level 2   40,374    40,339    34,496    34,475 
Interest rate swap derivatives  Fair Value  Level 2   15,430    15,430    10,331    10,331 
Risk participation agreements  Fair Value  Level 2   10    10    23    23 
Forward loan sales commitments  Fair Value  Level 3   92    92    56    56 

 

(1)Per ASU 2016-01 which became effective January 1, 2018, the fair value of loans was determined using an exit price methodology in the current period. Prior period loans fair value was estimated based on an entrance price methodology therefore the fair value adjustments between periods are not comparable.

 

 48 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

16.Regulatory Matters

 

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

 

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

 

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

 

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

 

Management believes, as of June 30, 2018 and December 31, 2017 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 June 30, 2018. 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.

 

 49 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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 June 30, 2018                              
Total Capital (to Risk Weighted Assets)  $287,158    11.25%  $204,161    8.00%  $255,202    10.00%
Tier I Capital (to Risk Weighted Assets)   264,426    10.36    153,122    6.00    204,162    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   264,426    10.36    114,841    4.50    165,882    6.50 
Tier I Leverage Capital (to Average Assets)   264,426    8.21    128,787    4.00    160,984    5.00 
                               
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 
                               
First Connecticut Bancorp, Inc.:                              
                               
At June 30, 2018                              
Total Capital (to Risk Weighted Assets)  $312,072    12.23%  $204,175    8.00%  $255,219    10.00%
Tier I Capital (to Risk Weighted Assets)   289,340    11.34    153,132    6.00    204,176    8.00 
Common Equity Tier I Capital (to Risk Weighted Assets)   289,340    11.34    114,849    4.50    165,893    6.50 
Tier I Leverage Capital (to Average Assets)   289,340    8.99    128,805    4.00    161,006    5.00 
                               
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 

 

 50 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

17.Other Comprehensive Income

 

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

 

   For the Three Months Ended June 30, 2018 
(Dollars in thousands)  Debt Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
               
Balance at March 31, 2018  $(694)  $(5,744)  $(6,438)
Other comprehensive loss during the period   (211)   -    (211)
Amount reclassified from accumulated other comprehensive income, net of tax   -    133    133 
Net change   (211)   133    (78)
Balance at June 30, 2018  $(905)  $(5,611)  $(6,516)

 

   For the Three Months Ended June 30, 2017 
(Dollars in thousands)  Debt Securities
Available-for-Sale
  

Employee Benefit

Plans

   Accumulated
Other
Comprehensive
(Loss) Income
 
               
Balance at March 31, 2017  $(174)  $(6,322)  $(6,496)
Other comprehensive income during the period   26    -    26 
Amount reclassified from accumulated other comprehensive income, net of tax   -    105    105 
Net change   26    105    131 
Balance at June 30, 2017  $(148)  $(6,217)  $(6,365)

 

   For the Six Months Ended June 30, 2018 
(Dollars in thousands)  Debt Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
               
Balance at December 31, 2017  $(368)  $(5,861)  $(6,229)
Other comprehensive loss during the period   (537)   -    (537)
Amount reclassified from accumulated other comprehensive income, net of tax   -    250    250 
Net change   (537)   250    (287)
Balance at June 30, 2018  $(905)  $(5,611)  $(6,516)

 

   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Debt Securities
Available-for-Sale
   Employee Benefit
Plans
   Accumulated
Other
Comprehensive
(Loss) Income
 
               
Balance at December 31, 2016  $(263)  $(6,427)  $(6,690)
Other comprehensive income during the period   115    -    115 
Amount reclassified from accumulated other comprehensive income, net of tax   -    210    210 
Net change   115    210    325 
Balance at June 30, 2017  $(148)  $(6,217)  $(6,365)

 

 51 

 

 

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

 

 

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

 

   For the Three Months Ended June 30, 2018 
(Dollars in thousands)  Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
               
Unrealized losses on available-for-sale debt securities  $(271)  $60   $(211)
Less: net debt security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of debt securities available-for-sale   (271)   60    (211)
Reclassification adjustment for prior service costs and net gain  included in net periodic pension costs (1) (2)   149    (16)   133 
Total other comprehensive loss  $(122)  $44   $(78)

 

   For the Three Months Ended June 30, 2017 
(Dollars in thousands)  Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
               
Unrealized gains on available-for-sale securities  $41   $(15)  $26 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   41    (15)   26 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)   162    (57)   105 
Total other comprehensive income  $203   $(72)  $131 

 

   For the Six Months Ended June 30, 2018 
(Dollars in thousands)  Pre Tax
Amount
   Tax Benefit
(Expense)
   After Tax
Amount
 
               
Unrealized gains on available-for-sale securities  $(686)  $149   $(537)
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   (686)   149    (537)
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1) (2)   298    (48)   250 
Total other comprehensive loss  $(388)  $101   $(287)

 

   For the Six Months Ended June 30, 2017 
(Dollars in thousands)  Pre Tax
Amount
   Tax Benefit
(Expense)
  

After Tax

Amount

 
               
Unrealized gains on available-for-sale securities  $178   $(63)  $115 
Less: net security gains reclassified into other noninterest income   -    -    - 
Net change in fair value of securities available-for-sale   178    (63)   115 
Reclassification adjustment for prior service costs and net gain included in net periodic pension costs (1)   325    (115)   210 
Total other comprehensive income  $503   $(178)  $325 

 

(1)Amounts are included in other operating expenses in the unaudited Consolidated Statements of Income.

 

(2)The Company adopted ASU 2016-01 effective January 1, 2018 which requires equity securities to be measured at fair value with changes in fair value recoginized in net income. The prior period includes changes in the fair value of equity securities recognized in other comprehensive income.

 

18.Legal Actions

 

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

 

 52 

 

 

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

 

Forward-Looking Statements

 

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

 

·statements of our goals, intentions and expectations;

 

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

 

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

 

·estimates of our risks and future costs and benefits.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 53 

 

 

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

 

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

 

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

  

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

 

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

 

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

 

General

 

First Connecticut Bancorp, Inc. is a Maryland-chartered stock holding company that wholly owns Farmington Bank. Farmington Bank is a full-service, community bank with 25 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Established in 1851, Farmington Bank is a diversified consumer and commercial bank with an ongoing commitment to contribute to the betterment of the communities in our region.

 

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

 

·Maintaining a strong capital position in excess of the well-capitalized standards set by our banking regulators to support our current operations and future growth. The FDIC’s requirement for a “well-capitalized” bank is a total risk-based capital ratio of 10.0% or greater. As of June 30, 2018 our total risk-based capital ratio was 12.23%.

 

·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.

 

 54 

 

 

·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 Manchester, Connecticut during the first quarter of 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, other-than-temporary impairment of securities, relate to allowance for loan losses, 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.

 

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. 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 debt securities are recognized at the time of sale on a specific identification basis. Debt securities are classified as either available-for-sale or held-to-maturity. Management determines the appropriate classifications of debt securities at the time of purchase. Held-to-maturity debt securities are debt securities for which we have the ability and intent to hold until maturity. All other debt securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity debt securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale debt securities are recorded at fair value.

 

 55 

 

 

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

 

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

 

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

 

General component:

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity line of credit and other. Construction loans include classes for commercial investment real estate construction, commercial owner occupied construction, residential development, residential subdivision construction and residential owner occupied construction loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and nonaccrual loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the six months ended June 30, 2018.

 

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.

 

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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.

 

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Unallocated component:

 

An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at June 30, 2018 and December 31, 2017.

 

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.

 

In December 1999, we created and have since maintained a “passive investment company” (“PIC”), as permitted by Connecticut law. At June 30, 2018 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 June 30, 2018, 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 June 30, 2018, 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.

 

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Comparison of Financial Condition at June 30, 2018 and December 31, 2017

 

Total assets increased $220.8 million or 7% at June 30, 2018 to $3.3 billion compared to December 31, 2017, reflecting a $175.1 million increase in net loans and a $29.6 million increase in debt securities.

 

Our investment portfolio totaled $185.0 million or 5.6% of total assets and $155.3 million or 5.1% of total assets at June 30, 2018 and December 31, 2017, respectively. Available-for-sale debt securities totaled $98.0 million at June 30, 2018 compared to $80.4 million at December 31, 2017. Debt securities held-to-maturity totaled $87.0 million and $75.0 million at June 30, 2018 and December 31, 2017, 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 $175.1 million or 6.4% at June 30, 2018 to $2.9 billion compared to December 31, 2017 primarily driven by a $151.6 million increase in residential real estate loans. The allowance for loan losses increased $224,000 or 1.0% to $22.7 million at June 30, 2018 from $22.4 million at December 31, 2017. At June 30, 2018, 2018, the allowance for loan losses represented 0.78% of total loans and 190.12% of non-performing loans, compared to 0.82% of total loans and 142.15% of non-performing loans as of December 31, 2017.

 

Total liabilities increased $211.4 million to $3.0 billion at June 30, 2018 compared to $2.8 billion at December 31, 2017. Deposits increased $9.7 million to $2.4 billion at June 30, 2018 as we continue to develop and grow relationships in the geographical areas we serve. We had municipal deposit balances totaling $354.5 million and $437.1 million at June 30, 2018 and December 31, 2017, respectively. Federal Home Loan Bank of Boston advances increased $202.0 million to $457.5 million at June 30, 2018 from $255.5 million at December 31, 2017 to fund our organic loan and securities growth.

 

Stockholders’ equity increased $9.4 million to $281.9 million compared to June 30, 2018 primarily due to $12.7 million in net income offset by dividends paid. The Company paid cash dividends totaling $5.3 million or $0.33 per share during the six months ended June 30, 2018.

 

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

 

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

 

   For The Three Months Ended June 30, 
   2018   2017 
(Dollars in thousands)  Average
Balance
   Interest and
Dividends (1)
   Yield/
Cost
   Average
Balance
   Interest and
Dividends (1)
   Yield/
Cost
 
                              
Interest-earning assets:                              
Loans  $2,878,570   $27,537    3.84%  $2,629,493   $23,900    3.65%
Securities   187,681    1,010    2.16%   157,230    659    1.68%
Federal Home Loan Bank of Boston stock   19,566    202    4.14%   18,056    162    3.60%
Federal funds and other earning assets   915    27    11.84%   7,715    30    1.56%
Total interest-earning assets   3,086,732    28,776    3.74%   2,812,494    24,751    3.53%
Noninterest-earning assets   125,358              120,308           
Total assets  $3,212,090             $2,932,802           
                               
Interest-bearing liabilities:                              
NOW accounts  $609,571   $1,072    0.71%  $595,350   $574    0.39%
Money market   584,667    1,388    0.95%   525,266    979    0.75%
Savings accounts   247,015    66    0.11%   242,009    63    0.10%
Time deposits   581,263    2,176    1.50%   471,905    1,410    1.20%
Total interest-bearing deposits   2,022,516    4,702    0.93%   1,834,530    3,026    0.66%
Federal Home Loan Bank of Boston advances   372,128    1,771    1.91%   315,665    1,164    1.48%
Repurchase agreement borrowings   -    -    0.00%   10,500    96    3.67%
Repurchase liabilities   26,623    7    0.11%   28,728    7    0.10%
Total interest-bearing liabilities   2,421,267    6,480    1.07%   2,189,423    4,293    0.79%
Noninterest-bearing deposits   458,686              431,336           
Other noninterest-bearing liabilities   50,639              42,857           
Total liabilities   2,930,592              2,663,616           
Stockholders' equity   281,498              269,186           
Total liabilities and stockholders' equity  $3,212,090             $2,932,802           
                               
Tax-equivalent net interest income       $22,296             $20,458      
Less: tax-equivalent adjustment        (305)             (635)     
Net interest income       $21,991             $19,823      
                               
Net interest rate spread (2)             2.67%             2.74%
Net interest-earning assets (3)  $665,465             $623,071           
Net interest margin (4)             2.90%             2.92%
Average interest-earning assets to average interest-bearing liabilities        127.48%             128.46%     

 

(1)On a fully-tax equivalent basis calculated using a federal income tax rate of 21% for three months ended June 30, 2018 and 35% for the three months ended June 30, 2017.
(2)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents tax-equivalent net interest income divided by average total interest-earning assets.

 

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Rate Volume Analysis

 

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

 

   Three Months Ended June 30, 
   2018 vs. 2017 
   Increase (decrease) due to 
(Dollars in thousands)  Volume   Rate   Total 
Interest-earning assets:               
Loans  $2,340   $1,297   $3,637 
Securities   142    209    351 
Federal Home Loan Bank of Boston stock   14    26    40 
Federal funds and other earning assets   (47)   44    (3)
Total interest-earning assets   2,449    1,576    4,025 
                
Interest-bearing liabilities:               
NOW accounts   14    484    498 
Money market   120    289    409 
Savings accounts   1    2    3 
Time deposits   366    400    766 
Total interest-bearing deposits   501    1,175    1,676 
Federal Home Loan Bank of Boston advances   231    376    607 
Repurchase agreement borrowing   (48)   (48)   (96)
Repurchase liabilities   (1)   1    - 
Total interest-bearing liabilities   683    1,504    2,187 
Increase in net interest income  $1,766   $72   $1,838 

   

Summary of Operating Results for the Three Months Ended June 30, 2018 and 2017

 

The following discussion provides a summary and comparison of our operating results for the three months ended June 30, 2018 and 2017:

 

   For the Three Months Ended June 30, 
(Dollars in thousands)  2018   2017   $ Change   % Change 
                    
Net interest income  $21,991   $19,823   $2,168    10.9%
Provision for loan losses   69    710    (641)   (90.3)
Noninterest income   3,262    3,876    (614)   (15.8)
Noninterest expense   17,019    15,878    1,141    7.2 
Income before taxes   8,165    7,111    1,054    14.8 
Income tax expense   1,435    2,109    (674)   (32.0)
Net income  $6,730   $5,002   $1,728    34.5%

 

For the three months ended June 30, 2018, net income increased $1.7 million compared to the three months ended June 30, 2017. The increase in net income was primarily driven by a $2.2 million increase in net interest income and a lower income tax expense offset by a $1.1 million increase in noninterest expense.

 

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Comparison of Operating Results for the three months ended June 30, 2018 and 2017

 

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

 

Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income before the provision for loan losses was $22.0 million and $19.8 million for the three months ended June 30, 2018 and 2017, respectively. Net interest income increased $2.2 million primarily due to a $249.1 million increase in the average loan balance and a 19 basis point increase in the loan yield to 3.84% offset by a $2.2 million increase in interest expense. The yield on average interest-earning assets increased 21 basis points to 3.74% for the second quarter of 2018 from 3.53% for the prior year quarter. The increase was primarily due to a 19 basis point increase in the loan yield and increases in the investment yields. The cost of average interest-bearing liabilities increased 28 basis point to 1.07% for the second quarter of 2018 compared to the prior year quarter. Net interest margin was 2.90% in the second quarter of 2018 compared to 2.92% in the prior year quarter. The Tax Act negatively affected the net interest margin by 4 basis points on a tax-equivalent basis in the second quarter of 2018.

 

Interest expense increased $2.2 million for the second quarter of 2018 to $6.5 million compared to the prior year quarter. The cost of average interest-bearing liabilities increased 28 basis point to 1.07% for the second quarter of 2018 compared to the prior year quarter. Average balances of noninterest-bearing deposits grew at a rate of 6.3%, while total average interest-bearing deposits grew at a rate of 10.2% for the second quarter in 2018 compared to the prior year quarter.

 

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

 

Management recorded a provision for loan losses of $69,000 and $710,000 for the three months ended June 30, 2018 and 2017, 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 in the second quarter of 2018 were $17,000 or 0.00% to average loans (annualized) compared to $22,000 or 0.00% to average loans (annualized) in the prior year quarter.

 

At June 30, 2018, the allowance for loan losses totaled $22.7 million or 0.78% of total loans and 190.12% of non-performing loans, compared to $22.4 million or 0.82% of total loans and 142.15% of non-performing loans as of December 31, 2017.

 

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Noninterest Income: The following table summarizes noninterest income for the three months ended June 30, 2018 and 2017.

 

   For the Three Months Ended June 30, 
(Dollars in thousands)  2018   2017   $ Change   % Change 
                    
Fees for customer services  $1,718   $1,572   $146    9.3%
Net gain on loans sold   341    711    (370)   (52.0)
Brokerage and insurance fee income   63    55    8    14.5 
Bank owned life insurance income   341    598    (257)   (43.0)
Other   799    940    (141)   (15.0)
Total noninterest income  $3,262   $3,876   $(614)   (15.8)%

 

Total noninterest income was $3.3 million in the second quarter of 2018 compared to $3.9 million in the prior year quarter. Net gain on loans sold decreased to $341,000 from $711,000 primarily due to a decrease in volume of loans sold. Bank owned life insurance income decreased $257,000 primarily due to receiving $271,000 in death benefit proceeds in the prior year quarter. Other noninterest income includes swap fees totaling $574,000 compared to $562,000 in the prior year quarter.

 

Noninterest Expense: The following table summarizes noninterest expense for the three months ended June 30, 2018 and 2017:

 

   For the Three Months Ended June 30, 
(Dollars in thousands)  2018   2017   $ Change   % Change 
                    
Salaries and employee benefits  $9,704   $9,848   $(144)   (1.5)%
Occupancy expense   1,315    1,187    128    10.8 
Furniture and equipment expense   947    985    (38)   (3.9)
FDIC assessment   422    410    12    2.9 
Marketing   767    708    59    8.3 
Other operating expenses   3,864    2,740    1,124    41.0 
Total noninterest expense  $17,019   $15,878   $1,141    7.2%

 

Noninterest expense increased $1.1 million to $17.0 million in the second quarter of 2018 compared to the prior year quarter primarily due to a $1.1 million increase in other operating expenses. Other operating expenses increased $1.1 million to $3.9 million primarily due to a $451,000 other real estate owned writedown, a $211,000 software termination buyout fee and $210,000 in acquisition related expenses.

 

Income tax expense was $1.4 million in the second quarter of 2018 compared to $2.1 million in the prior year quarter. As a result of the Tax Act, the Company’s federal tax rate was lowered from 35% to 21% for 2018.

 

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

 

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

 

   For The Six Months Ended June 30, 
   2018   2017 
(Dollars in thousands)  Average
Balance
  

Interest and

Dividends (1)

   Yield/Cost   Average
Balance
   Interest and
Dividends (1)
   Yield/Cost 
                              
Interest-earning assets:                              
Loans  $2,825,611   $53,229    3.80%  $2,603,041   $47,001    3.64%
Securities   181,592    1,861    2.07%   150,119    1,188    1.60%
Federal Home Loan Bank of Boston stock   17,289    389    4.54%   17,116    313    3.69%
Federal funds and other earning assets   1,524    60    7.94%   7,037    57    1.63%
Total interest-earning assets   3,026,016    55,539    3.70%   2,777,313    48,559    3.53%
Noninterest-earning assets   126,054              119,211           
Total assets  $3,152,070             $2,896,524           
                               
Interest-bearing liabilities:                              
NOW accounts  $636,740   $2,217    0.70%  $598,970   $1,102    0.37%
Money market   576,560    2,705    0.95%   527,326    1,949    0.75%
Savings accounts   240,872    129    0.11%   236,766    124    0.11%
Time deposits   559,845    3,990    1.44%   469,393    2,762    1.19%
Total interest-bearing deposits   2,014,017    9,041    0.91%   1,832,455    5,937    0.65%
Federal Home Loan Bank of Boston advances   317,159    2,890    1.84%   280,822    2,113    1.52%
Repurchase agreement borrowings   4,210    74    3.54%   10,500    191    3.67%
Repurchase liabilities   29,348    16    0.11%   26,866    14    0.11%
Total interest-bearing liabilities   2,364,734    12,021    1.03%   2,150,643    8,255    0.77%
Noninterest-bearing deposits   454,897              432,192           
Other noninterest-bearing liabilities   53,123              46,352           
Total liabilities   2,872,754              2,629,187           
Stockholders' equity   279,316              267,337           
Total liabilities and stockholders' equity  $3,152,070             $2,896,524           
                               
Tax-equivalent net interest income       $43,518             $40,304      
Less: tax-equivalent adjustment        (605)             (1,231)     
Net interest income       $42,913             $39,073      
                               
Net interest rate spread (2)             2.67%             2.76%
Net interest-earning assets (3)  $661,282             $626,670           
Net interest margin (4)             2.90%             2.93%
Average interest-earning assets to average interest-bearing liabilities        127.96%             129.14%     

 

(1)On a fully-tax equivalent basis calculated using a federal income tax rate of 21% for six months ended June 30, 2018 and 35% for the six months ended June 30, 2017.
(2)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents tax-equivalent net interest income divided by average total interest-earning assets.

 

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Rate Volume Analysis

 

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

 

   Six Months Ended June 30, 
   2018 vs. 2017 
(Dollars in thousands)  Increase (decrease) due to 
   Volume    Rate    Total 
Interest-earning assets:               
Loans  $4,134   $2,094   $6,228 
Securities   280    393    673 
Federal Home Loan Bank of Boston stock   3    73    76 
Federal funds and other earning assets   (74)   77    3 
Total interest-earning assets   4,343    2,637    6,980 
                
Interest-bearing liabilities:               
NOW accounts   74    1,041    1,115 
Money market   195    561    756 
Savings accounts   2    3    5 
Time deposits   586    642    1,228 
Total interest-bearing deposits   857    2,247    3,104 
Federal Home Loan Bank of Boston advances   295    482    777 
Repurchase agreement borrowing   (111)   (6)   (117)
Repurchase liabilities   1    1    2 
Total interest-bearing liabilities   1,042    2,724    3,766 
Increase in net interest income  $3,301   $(87)  $3,214 

 

Summary of Operating Results for the Six Months Ended June 30, 2018 and 2017

 

The following discussion provides a summary and comparison of our operating results for the six months ended June 30, 2018 and 2017:

 

   For the Six Months Ended June 30, 
(Dollars in thousands)  2018   2017   $ Change   % Change 
                    
Net interest income  $42,913   $39,073   $3,840    9.8%
Provision for loan losses   534    1,035    (501)   (48.4)
Noninterest income   6,407    7,041    (634)   (9.0)
Noninterest expense   33,258    31,030    2,228    7.2 
Income before taxes   15,528    14,049    1,479    10.5 
Income tax expense   2,787    3,954    (1,167)   (29.5)
Net income  $12,741   $10,095   $2,646    26.2%

 

For the six months ended June 30, 2018, net income increased $2.6 million compared to the six months ended June 30, 2017. The increase in net income was primarily driven by a $3.8 million increase in net interest income, a $1.2 million decrease in income tax expense offset by a $2.2 million increase in noninterest expense.

 

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Comparison of Operating Results for the six months ended June 30, 2018 and 2017

 

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

 

Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income before the provision for loan losses was $42.9 million and $39.1 million for the six months ended June 30, 2018 and 2017, respectively. Net interest income increased $3.8 million primarily due to a $222.6 million increase in the average loan balance and a 16 basis point increase in the loan yield to 3.80% offset by a $3.8 million increase in interest expense. The yield on average interest-earning assets increased 17 basis points to 3.70% for the six months ended June 30, 2018 from 3.53% for the six months ended June 30, 2017. The cost of average interest-bearing liabilities increased 26 basis points to 1.03% for the six months ended June 30, 2018 compared to 0.77% for the six months ended June 30, 2017. Net interest margin decreased 3 basis points to 2.90% for the six months ended June 30, 2018 compared to 2.93% for the six months ended June 30, 2017 primarily due to the recent increases in the prime interest rate.

 

Interest expense increased $3.8 million for the six months ended June 30, 2018 to $12.0 million compared to the prior year. The cost of average interest-bearing liabilities increased 26 basis points to 1.03% for the six months ended June 30, 2018 compared to 0.77% for the six months ended June 30, 2017. Average balances of noninterest-bearing deposits grew at a rate of 5.3%, while total average interest-bearing deposits grew at a rate of 9.9% for the six months ended June 30, 2018 compared to the six months ended June 30, 2017.

 

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

 

Management recorded a provision for loan losses of $534,000 and $1.0 million for the six months ended June 30, 2018 and 2017, 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 were $310,000 and $527,000 for the six months ended June 30, 2018 and 2017, respectively.

 

At June 30, 2018, the allowance for loan losses totaled $22.7 million, or 0.78% of total loans and 190.12% of non-performing loans, compared to an allowance for loan losses of $22.4 million, or 0.82% of total loans and 142.15% of non-performing loans at December 31, 2017. 

 

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Noninterest Income: The following table summarizes noninterest expense for the six months ended June 30, 2018 and 2017:

 

   For the Six Months Ended June 30, 
(Dollars in thousands)  2018   2017   $ Change   % Change 
                    
Fees for customer services  $3,375   $3,078   $297    9.6%
Net gain on loans sold   629    1,127    (498)   (44.2)
Brokerage and insurance fee income   121    105    16    15.2 
Bank owned life insurance income   682    917    (235)   (25.6)
Other   1,600    1,814    (214)   (11.8)
Total noninterest income  $6,407   $7,041   $(634)   (9.0)%

 

Total noninterest income decreased $634,000 to $6.4 million for the six months ended June 30, 2018 compared to the prior year primarily due to a $498,000 decrease in net gain on loans sold due to a decrease in volume of loans sold and bank owned life insurance income decreased $235,000 primarily due to receiving $271,000 in death benefit proceeds in the prior year period.

 

Noninterest Expense: The following table summarizes noninterest expense for the six months ended June 30, 2018 and 2017:

 

   For the Six Months Ended June 30, 
(Dollars in thousands)  2018   2017   $ Change   % Change 
                    
Salaries and employee benefits  $19,476   $18,986   $490    2.6%
Occupancy expense   2,644    2,500    144    5.8 
Furniture and equipment expense   1,895    1,969    (74)   (3.8)
FDIC assessment   846    838    8    1.0 
Marketing   1,372    1,275    97    7.6 
Other operating expenses   7,025    5,462    1,563    28.6 
Total noninterest expense  $33,258   $31,030   $2,228    7.2%

 

Noninterest expense increased $2.2 million to $33.3 million for the six months ended June 30, 2018 compared to the six months ended June 30, 2017 primarily due to a $490,000 increase in salaries and employee benefits and a $1.6 million increase in other operating expenses. Salaries and employee benefits increased $490,000 to $19.5 million primarily due to general salary increases over the past year. Other operating expenses increased $1.6 million to $7.0 million primarily due to a $451,000 other real estate owned writedown, a $211,000 software termination buyout fee, $210,000 in acquisition related expenses and $385,000 increase in 3rd party services.

 

Income tax expense was $2.8 million and $4.0 million for the six months ended June 30, 2018 and 2017, respectively. As a result of the Tax Act, the Company’s federal tax rate was lowered from 35% to 21% for 2018.

 

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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 June 30, 2018, $37.0 million of our assets were invested in cash and cash equivalents compared to $35.4 million at December 31, 2017. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of debt securities, increases in deposit accounts, proceeds from residential loan sales and advances from FHLBB.

 

For the six months ended June 30, 2018 and 2017, loan originations and purchases, net of collected principal and loan sales, totaled $176.9 million and $119.1 million, respectively.  Cash received from the calls and maturities of available-for-sale debt securities totaled $29.0 million and $16.3 million for the six months ended June 30, 2018 and 2017, respectively. We purchased $47.4 million and $25.0 million of available-for-sale debt securities during the six months ended June 30, 2018 and 2017, 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 June 30, 2018, we had $457.5 million in advances from the FHLBB and an additional available borrowing limit of $553.7 million, compared to $255.5 million in advances from the FHLBB and an additional available borrowing limit of $706.9 million at December 31, 2017, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $87.5 million and $79.5 million at June 30, 2018 and December 31, 2017, respectively, subject to collateral requirements of the FHLBB. Internal policies limit borrowings to 25.0% of total assets, or $819.0 million and $763.8 million at June 30, 2018 and December 31, 2017, 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 June 30, 2018. The Federal Reserve Bank’s discount window loan collateral program enables us to borrow up to $62.2 million on an overnight basis as of June 30, 2018. The funding arrangement was collateralized by $121.7 million in pledged commercial real estate loans as of June 30, 2018.

 

We had outstanding commitments to originate loans of $45.8 million and $40.0 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $496.7 million and $479.2 million at June 30, 2018 and December 31, 2017, respectively. At June 30, 2018 and December 31, 2017, time deposits scheduled to mature in less than one year totaled $340.1 million and $380.6 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 $62.2 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.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

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

 

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

 

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

 

Our asset/liability policy currently limits projected changes in net interest income to a 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 June 30, 2018   At December 31, 2017 
100 basis point decrease   (4.9)%   (7.1)%
100 basis point increase   (2.8)%   0.3%
200 basis point increase   (5.6)%   (0.5)%
300 basis point increase   (8.1)%   (1.4)%
400 basis point increase   (11.2)%   (1.4)%

 

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Item 4. Controls and Procedures

 

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

 

Part II. Other Information

 

Item 1. Legal Proceedings

 

See the information set forth in Note 18. Legal Actions in the Notes to Consolidated Financial Statements (Unaudited) under Part I, Item I, which information is incorporated by reference in response to this item.

 

Item 1A. Risk Factors

 

There have been no material changes in the “Risk Factors” from those previously disclosed in the Form 10-K filed on March 9, 2018, except as discussed below.

 

Because the market price of People’s United common stock will fluctuate, the Company’s shareholders cannot be certain of the market value of the merger consideration they will receive.

 

Upon completion of the merger, each outstanding share of Company common stock (except for certain shares specified in the merger agreement) will be converted into the right to receive 1.725 shares of People’s United common stock. The market value of the People’s United common stock to be issued in the merger will depend upon the market price of People’s United common stock. This market price may vary from the closing price of People’s United common stock on the date the merger was announced, on the date that the proxy statement/prospectus relating to the merger was mailed to the Company’s shareholders and on the date on which Company shareholders voted to adopt the merger agreement at a special meeting of shareholders. There will be no adjustment to the consideration paid to Company shareholders in the merger for changes in the market price of either shares of People’s United common stock or Company common stock.

 

The market price of People’s United common stock could be subject to significant fluctuations due to changes in sentiment in the market regarding People’s United’s operations or business prospects, including market sentiment regarding People’s United’s entry into the merger agreement. These risks may be affected by:

 

·operating results that vary from the expectations of People’s United’s management or of securities analysts and investors;
·developments in People’s United’s business or in the financial services sector generally;
·regulatory or legislative changes affecting People’s United’s industry generally or its business and operations;
·operating and securities price performance of companies that investors consider to be comparable to People’s United;
·changes in estimates or recommendations by securities analysts or rating agencies;
·announcements of strategic developments, acquisitions, dispositions, financings and other material events by People’s United or its competitors; and
·changes in global financial markets and economies and general market conditions, such as interest or foreign exchange rates, stock, commodity, credit or asset valuations or volatility.

 

Accordingly, at the time Company shareholders decide to adopt the merger agreement at the special meeting, they will not necessarily know or will not able to calculate the value of the merger consideration they would be entitled to receive upon completion of the merger. Company shareholders are encouraged to obtain current market quotations for both People’s United common stock and Company common stock.

 

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The merger agreement may be terminated in accordance with its terms, and the merger may not be completed.

 

The merger agreement is subject to a number of conditions that must be fulfilled in order to complete the merger. These conditions to the closing of the merger may not be fulfilled in a timely manner or at all, and, accordingly, the merger may be delayed or may not be completed. In addition, if the merger is not completed by June 18, 2019, either People’s United or the Company may choose not to proceed with the merger, and the parties may mutually decide to terminate the merger agreement at any time. In addition, People’s United and the Company may elect to terminate the merger agreement in certain other circumstances and the Company may be required to pay a termination fee.

 

Failure to complete the merger could negatively impact the stock price, future business and financial results of the Company.

 

If the merger is not completed, the ongoing business of the Company may be adversely affected, and the Company will be subject to several risks, including the following:

 

·the Company may be required, under certain circumstances, to pay People’s United a termination fee of $22.5 million under the merger agreement;
·the Company will be required to pay certain costs relating to the merger, whether or not the merger is completed, such as legal, accounting, financial advisor and printing fees;
·under the merger agreement, the Company is subject to certain restrictions on the conduct of its business prior to completing the merger, which may adversely affect its ability to execute certain of its business strategies; and
·matters relating to the merger may require substantial commitments of time and resources by Company management, which could otherwise have been devoted to other opportunities that may have been beneficial to the Company.

 

In addition, if the merger is not completed, the Company may experience negative reactions from the financial markets and from its customers and employees. For example, the Company’s business may be impacted adversely by the failure to pursue other beneficial opportunities due to the focus of management on the merger, without realizing any of the anticipated benefits of completing the merger. The market price of Company common stock could decline to the extent that the current market price reflects a market assumption that the merger will be completed. The Company also could be subject to litigation related to any failure to complete the merger or to proceedings commenced against the Company to perform its obligations under the merger agreement. If the merger is not completed, the Company cannot assure its shareholders that the risks described above will not materialize and will not materially affect the business, financial results and stock price of the Company.

 

Lawsuits challenging the merger have been filed against the Company, the Company’s board of directors and People’s United, and an adverse judgment in any such lawsuit or any future similar lawsuits may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

 

Shareholders of First Connecticut may file lawsuits against the Company, People’s United and/or the

directors and officers of either company in connection with the merger. One of the conditions to the closing of the merger is that no order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition that prevents the consummation of the merger or any of the other transactions contemplated by the merger agreement be in effect. If any plaintiff were successful in obtaining an injunction prohibiting the Company or People’s United from completing the merger on the agreed upon terms, then such injunction may prevent the merger from becoming effective or from becoming effective within the expected timeframe.

 

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The merger is subject to the receipt of consents and approvals from governmental entities that may delay the date of completion of the merger or impose conditions that could have an adverse effect on the combined company following the merger.

 

Before the merger may be completed, various approvals or consents must be obtained from governmental authorities. Satisfying the requirements of these governmental entities may delay the date of completion of the merger. In addition, these governmental entities may include conditions on the completion of the merger or require changes to the terms of the merger. While the Company does not currently expect that any such conditions or changes would result in a material adverse effect on the combined company following the merger, there can be no assurance that they will not, and such conditions or changes could have the effect of delaying completion of the merger or imposing additional costs on or limiting the revenues of the combined company following the merger, any of which might have a material adverse effect on the combined company following the merger.

 

The Company will be subject to business uncertainties and contractual restrictions while the merger is pending.

 

Uncertainty about the effect of the merger on employees and customers may have an adverse effect on the Company. These uncertainties may impair the Company’s ability to attract, retain and motivate key personnel until the merger is completed and could cause customers and others that deal with the Company to seek to change existing business relationships with the Company. Retention of certain employees may be challenging while the merger is pending, as certain employees may experience uncertainty about their future roles with the combined company. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to remain with the combined company, the Company’s business could be harmed. In addition, the merger agreement restricts the Company from making certain acquisitions and taking other specified actions until the merger occurs without the consent of People’s United. These restrictions may prevent the Company from pursuing attractive business opportunities that may arise prior to the completion of the merger.

 

If the merger is not completed, the Company will have incurred substantial expenses without realizing the expected benefits of the merger.

The Company has incurred and will incur substantial expenses in connection with the negotiation and completion of the transactions contemplated by the merger agreement. If the merger is not completed, the Company would have to recognize these expenses without realizing the expected benefits of the merger.

 

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

 

(a)Not applicable.

 

(b)Not applicable.

 

(c)During the quarter ending June 30, 2018, 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. 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 3. Defaults Upon Senior Securities

 

Not Applicable

 

Item 4. Mine Safety Disclosures

 

Not Applicable

 

Item 5. Other Information

 

(a)Additional Information for Stockholders

 

In connection with the proposed merger, People's Unitedfiled on July 25, 2018 with the Securities and Exchange Commission ("SEC") a Registration Statement on Form S-4 that included a Proxy Statement of First Connecticut Bancorp, Inc. (“FCB”) and a Prospectus of People's United, as well as other relevant documents concerning the proposed transaction.  This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.  Stockholders are urged to read the Registration Statement, the Proxy Statement of FCB and Prospectus of People's United regarding the merger when it becomes available and any other relevant documents filed with the SEC, as well as any amendments or supplements to those documents, because they will contain important information.  A free copy of the Proxy Statement/Prospectus, as well as other filings containing information about FCB and People's United, may be obtained at the SEC's Internet site (http://www.sec.gov).  A definitive copy of the Proxy Statement/Prospectus will also be sent to the FCB stockholders seeking any required stockholder approval. You will also be able to obtain these documents, free of charge, from FCB by accessing FCB's website at www.firstconnecticutbancorp.com under the tab "SEC Filings" and then under the heading "Documents" or from People's United at www.peoples.com under the tab "Investor Relations" and then under the heading "Financial Information."  Alternatively, these documents, when available, can be obtained free of charge from FCB upon written request to First Connecticut Bancorp, Inc. Investor Relations, One Farm Glen Boulevard, Farmington, Connecticut 06032, by calling (860) 284-6359, or by sending an email to investor-relations@firstconnecticutbancorp.com, or from People's United upon written request to People's United Financial, Inc., 850 Main Street, Bridgeport, Connecticut 06604, Attn: Investor Relations, by calling (203) 338-4581, or by sending an email to andrew.hersom@peoples.com.

 

FCB and People's United and certain of their directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of FCB in connection with the proposed merger.  Information about the directors and executive officers of FCB is set forth in the proxy statement for FCB's 2018 annual meeting of stockholders, as filed with the SEC on a Schedule 14A on March 30, 2018.  Information about the directors and executive officers of People's United is set forth in the proxy statement for People's United's 2018 annual meeting of stockholders, as filed with the SEC on a Schedule 14A on March 7, 2018.  Additional information regarding the interests of those participants and other persons who may be deemed participants in the transaction may be obtained by reading the Proxy Statement/Prospectus regarding the proposed merger when it becomes available.  Free copies of this document may be obtained as described in the preceding paragraph.

 

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Item 6. Exhibits

 

  2.1 Agreement and Plan of Merger between First Connecticut Bancorp, Inc. and People’s United Financial, Inc. (filed as Exhibit 2.1 to the 8-K filed for the Company on June 21, 2018, and incorporated herein by reference).
     
  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)

 

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  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.

 

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  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.*

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    FIRST CONNECTICUT BANCORP, INC.
   
Date: August 7, 2018  

/s/ John J. Patrick, Jr

    John J. Patrick, Jr.
    Chairman, President and Chief Executive Officer
   
Date: August 7, 2018  

/s/ Gregory A. White

    Gregory A. White
    Executive Vice President and Chief Financial Officer

 

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