Item 1. Business
Forward-Looking Statements
From time to time the Company has made and may continue to make written or oral forward-looking statements regarding our outlook or expectations for earnings, revenues, expenses, capital levels, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on our business operations or performance. This Annual Report on Form 10-K also includes forward-looking statements. With respect to all such forward-looking statements, you should review our Risk Factors discussion in Item 1A.
Item 1A. Risk Factors
A substantial portion of our loan portfolio consists of commercial real estate loans and commercial loans, which expose us to increased risks and could adversely impact our earnings.
Our executive management team has brought an increased focus to transitioning Farmington Bank’s balance sheet to be more like a commercial bank. At December 31, 2017 and 2016, our commercial loan portfolio totaled $1.6 billion and $1.5 billion, or 57.7% and 57.4%, respectively, of our total loan portfolio. These types of loans generally expose a lender to greater risk of non-payment and loss than one-to four-family residential mortgage loans because repayment of the loans often depends on the successful operation of the property and business of the borrowers and the collateral securing these loans may not be sold as easily as residential real estate. In addition, commercial real estate and commercial loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to one-to four-family residential mortgage loans. Also, many of our commercial real estate and commercial loan borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to four-family residential mortgage loan.
All of these factors could have a material adverse effect on our financial condition and results of operations.
Our loan portfolio possesses increased risk due to its rapid expansion and unseasoned nature.
From December 31, 2013 to December 31, 2017, our total loan portfolio increased by $926.7 million or 51.0%. As a result of this rapid expansion, a significant portion of our portfolio is unseasoned. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of this part of our loan portfolio. These loans may have delinquency or charge-off levels above our expectations, which could adversely affect our future performance.
Our lack of geographic diversification increases our risk profile.
Our operations are located principally in central Connecticut and western Massachusetts. As a result of this geographic concentration, our results depend largely upon economic and business conditions in these areas. Deterioration in economic and business conditions in our service areas could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn may have a material adverse effect on our results of operations.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. Recent declines in real estate values have impacted the collateral values that secure our real estate loans. The impact of these declines on the original appraised values of secured collateral is difficult to estimate. In determining the amount of the allowance for loan losses, we review our loss and delinquency experience on different loan categories, and we evaluate existing economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to our allowance, which would decrease our net income. Our loan loss allowance for the years ended December 31, 2017 and 2016 was $22.4 million and $21.5 million, respectively. Although we are currently unaware of any specific problems with our loan portfolio that would require any increase in our allowance at the present time, it may need to be increased further in the future due to our emphasis on loan growth and on increasing our portfolio of commercial business and commercial real estate loans.
In addition, banking regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities may have a material adverse effect on our results of operations and financial condition.
Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock.
Our ability to make a profit largely depends on our net interest income, which could be negatively affected by changes in interest rates. Net interest income is the difference between the interest income Farmington Bank earns on its interest-earning assets, such as loans and securities, and the interest expense Farmington Bank pays on its interest-bearing liabilities, such as deposits and borrowings. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. In addition, as market interest rates rise, we will have competitive pressures to increase the rates paid on deposits, which may result in a decrease in our net interest income.
In addition, changes in interest rates can affect the average life of loans and mortgage-backed and related securities. A reduction in interest rates results in increased prepayments of loans and mortgage-backed and related securities, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates earned on the prepaid loans or securities.
We opened new branches, which may result in losses at those branches as they generate new deposit and loan portfolios, and negatively impact our earnings.
We opened a new branch office in Vernon, CT and a loan production office in Fairfield, CT in 2016. We anticipate opening one new branch office in Manchester, CT during 2018. Losses are expected in connection with these new branches for some time, as the expenses and costs of acquisition associated with them are largely fixed and are typically greater than the income earned at the outset as the branches build up their customer bases. No assurance can be given as to when, if ever, new branches will become profitable.
Strong competition within Farmington Bank’s market area may limit our growth and profitability.
Competition in the banking and financial services industry is intense. We expanded into western Massachusetts opening two de novo branches in the fourth quarter of 2015. In our market area, we compete with commercial banks, savings institutions, mortgage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors have substantially greater resources and lending limits than we have and offer certain services that we do not or cannot provide. Our profitability depends upon our continued ability to compete successfully in our market area. The greater resources and deposit and loan products offered by our competitors may limit our ability to increase our interest-earning assets.
If our government banking deposits were lost within a short period of time, this could negatively impact our liquidity and earnings.
Our government banking group provides deposit services to municipalities throughout Connecticut. Our municipal deposits as of December 31, 2017 and 2016 were $437.1 million, or 18.0%, and $394.5 million, or 17.8%, of our total deposits outstanding, respectively. If a significant amount of these deposits were withdrawn within a short period of time, it could have a negative impact on our short term liquidity and have an adverse impact on our earnings.
The loss of our Chief Executive Officer could adversely impact our business.
Our future success and profitability are substantially dependent upon the vision, management and banking abilities of our Chief Executive Officer, who has substantial background and significant experience in banking and financial services, as well as personal contacts in central Connecticut and the region generally. The loss of our Chief Executive Officer may be disruptive to our business and could have a material adverse effect on our business, financial condition and results of operations.
The local and national economies remain uncertain. An economic downturn will adversely affect our business and financial results.
During the past year, general economic conditions continued to improve nationally as well as in our market area but there remains an economic uncertainty. Worsening of unemployment and housing conditions may adversely affect our business by materially decreasing our net interest income or materially increasing our loan losses. There can be no assurance that we will not be affected by the current economic conditions in a way we cannot currently predict or mitigate.
Passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act has increased our operational and compliance costs.
On July 21, 2010, the President of the United States signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This law significantly changed the current bank regulatory structure and affected the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The current administration, led by President Donald Trump, has announced that it intends to slow down the adoption of new Dodd-Frank Act regulations and to consider proposing changes to the legislation. The following assumes no changes to the Dodd-Frank Act and regulations adopted to date. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies were given significant discretion in drafting the rules and regulations, and consequently, many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years. The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws, weakens the federal preemption rules that have been applicable for national banks and federal savings associations, imposes certain capital requirements on financial institutions, eliminated the federal prohibitions on paying interest on demand deposits, broadened the base for FDIC deposit insurance assessments, required publicly traded companies to provide non-binding votes on executive compensation and so-called “golden parachute” payments, and directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives. As a result, our revenue may be reduced due to fee income limitations and we may be required to maintain higher minimum capital ratios. It is difficult to predict the continuing impact the Dodd-Frank Act and its implementing rules and regulations will have on community banks. However, at a minimum they have increased our operating and compliance costs and could increase our interest expense.
Higher Federal Deposit Insurance Corporation insurance premiums and special assessments will adversely affect our earnings.
We are generally unable to control the amount of premiums and special assessments that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures we may be required to pay even higher FDIC premiums than the recently increased levels. Such increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.
We operate in a highly regulated environment and our business may be adversely affected by changes in laws and regulations.
We are subject to extensive regulation, supervision and examination by the Connecticut Banking Commissioner, as Farmington Bank’s chartering authority, by the FDIC, as insurer of deposits, and by the Federal Reserve Board, as the regulator of FCB. Such regulation and supervision govern the activities in which a financial institution and its holding company may engage and are intended primarily for the protection of the insurance fund and depositors. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, may have a material impact on our operations.
A failure in or breach of our operational or security systems or infrastructure, or those of our third party vendors and other service providers, including as a result of cyber attacks, could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs and cause losses
Our business requires the collection and retention of large volumes of customer data and other personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide services. Our business, financial, accounting, data processing systems or other operating systems and facilities may stop operating properly or become disabled or damaged as a result of a number of factors including events that are wholly or partially beyond our control. As customer, public, legislative and regulatory expectations regarding operational and information security have increased, our operations systems and infrastructure must continue to be safeguarded and monitored for potential failures, disruptions and breakdowns.
Information security risks for financial institutions, such as ours, have generally increased in recent years in part because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists, activists, and other external parties, including foreign-state sponsored parties. Those parties also may attempt to fraudulently induce employees, customers, or other users of our systems to disclose confidential information in order to gain access to our data or that of our customers. As noted above, our operations rely on the secure processing, transmission and storage of confidential information in our computer systems and networks.
These cybersecurity threats and attacks may include, but are not limited to, attempts to access information, including customer and company information, malicious code, computer viruses, and denial of service attacks that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer information), account takeovers, unavailability of service or other events. These types of threats may result from human error, fraud or malice on the part of external or internal parties, or from accidental technological failure. Further, to access our products and services our customers may use computers, smartphones, tablets and other mobile devices that are beyond our security control systems.
Third parties with whom we do business or that facilitate our business activities, including exchanges, clearing houses, financial intermediaries or vendors that provide services or security solutions for our operations, could also be sources of operational and information security risk to us, including from breakdowns or failures of their own systems or capacity constraints.
To date we have not experienced any material losses relating to cyber attacks or other information security breaches, but there can be no assurance that we will not suffer such losses in the future. Our risk and exposure to these matters remains heightened and as a result the continued development and enhancement of our controls, processes and practices designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a priority for us. As an additional layer of protection, we have purchased cyber and privacy liability risk insurance coverage which includes data breach coverage, business interruption loss, network security, and privacy liability. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable
Item 2.
Item 2. Properties
We operate through our 24 full service branch offices, four limited services offices, three stand-alone ATM facilities and two loan production offices. Various leases have renewal options up to an additional 30 years.
Our full service branch offices, limited service offices and loan production offices are located as follows:
Item 3.
Item 3. Legal Proceedings
In the ordinary course of business, the Company and its subsidiary are routinely defendants in or parties to pending and threatened legal actions and proceedings. After reviewing pending and threatened actions with legal counsel, the Company believes that the outcome of such actions will not have a material adverse effect on the consolidated financial statements.
Item 4.
Item 4. Mine Safety Disclosures
None
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
(A)
The shares of common stock of First Connecticut Bancorp, Inc. are quoted on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “FBNK.” As of December 31, 2017, First Connecticut Bancorp had 1,685 stockholders of record (excluding the number of persons or entities holding stock in street name through various brokerage firms), and 15,952,946 shares outstanding.
Market Price and Dividends. The following table sets forth market price and dividend information for the common stock for the past two fiscal years.
Payment of dividends on First Connecticut Bancorp’s common stock is subject to determination and declaration by the Board of Directors and depends on a number of factors, including capital requirements, legal, and regulatory limitations on the payment of dividends, the results of operations and financial condition, tax considerations and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends will continue. See Item 1 “Supervision and Regulations” for information relating to restrictions on dividends. Repurchases of the Company’s shares of common stock during the fourth quarter of the year ended December 31, 2017 are detailed in (C) below. There were no sales of unregistered securities during the quarter ended December 31, 2017.
Set forth below is a stock performance graph comparing the annual total return on our shares of common stock, commencing with the closing price on December 31, 2012, with (a) the cumulative total return on stocks included in the Russell 2000 Index, (b) the cumulative total return on stocks included in the SNL New England U.S. Bank Index and (c) the cumulative total return on stocks included in the SNL U.S. Thrift Index. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.
There can be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance.
First Connecticut Bancorp, Inc.
(B)
Not Applicable
(C)
During the quarter ending December 31, 2017, the Company did not make any repurchases of common stock.
On June 21, 2013, the Company received regulatory approval to repurchase up to 1,676,452 shares, or 10% of its then current outstanding common stock. The Company has 600,945 shares remaining available to be repurchased at December 31, 2017. Shares repurchased under that approval are shown above. Repurchased shares will be held as treasury stock and will be available for general corporate purposes.
Item 6.
Item 6. Selected Financial Data
The following financial condition data and operating data are derived from the audited consolidated financial statements of First Connecticut Bancorp, Inc. Additional information is provided in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the Consolidated Financial Statements and related notes included as Item 7
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We continued significant organic loan and deposit growth in 2017 despite a competitive environment. We continue to focus on efficiencies and process improvement which are embedded within our Company’s culture to become a high performing company.
Financial highlights for First Connecticut Bancorp for the year ended December 31, 2017 are as follows:
·Strong Earnings Per Share Growth: Diluted earnings per share for the year ended December 31, 2017 was $1.02 compared to $1.00 for the year ended 2016.
·Strong Regulatory Capital Ratios: Our total Risk Based Capital ratio at December 31, 2017 is 12.38%. The minimum ratio to remain Well Capitalized is 10.00%. Our Common Equity Tier I Capital ratio is 11.45% at December 31, 2017. The minimum ratio to remain Well Capitalized is 6.50%. Our total Leverage Ratio or Tier I Capital to Average Assets Ratio at December 31, 2017 is 9.23%. The minimum ratio to remain Well Capitalized is 5.00%.
·Strong Asset Growth: Total assets increased $217.5 million or 7.7% to $3.1 billion at December 31, 2017.
·Strong Loan Growth: Total loans increased $199.3 million or 7.8% to $2.7 billion at December 31, 2017.
·Commercial loan portfolio experienced very strong loan growth increasing $123.3 million or 8.5% to $1.6 billion at December 31, 2017.
·Overall deposits increased $219.0 million or 9.9% to $2.4 billion at December 31, 2017.
·Checking accounts grew by 7.5% or 4,136 net new accounts for the year ended December 31, 2017.
·Noninterest expense to average assets was 2.11% for the year ended December 31, 2017 compared to 2.20% in the prior year.
·Loan delinquencies 30 days and greater represented 0.63% of total loans at December 31, 2017 compared to 0.68% at December 31, 2016. Non-accrual loans represented 0.58% of total loans compared to 0.69% of total loans at December 31, 2016.
·The allowance for loan losses represented 0.82% of total loans at December 31, 2017 compared to 0.85% at December 31, 2016.
·The Company paid a cash dividend of $0.52 per share for the year, an increase of $0.21 compared to the prior year.
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable community bank for businesses, individuals and local governments, with an ongoing commitment to provide quality customer service.
·Maintaining a strong capital position in excess of the well-capitalized standards set by our banking regulators to support our current operations and future growth. The FDIC’s requirement for a “well-capitalized” bank is a total risk-based capital ratio of 10.0% or greater. As of December 31, 2017 our total risk-based capital ratio was 12.38%.
·Increasing our focus on commercial lending and continuing to expand commercial banking operations. We will continue to focus on commercial lending and the origination of commercial loans using prudent lending standards. We plan to continue to grow our commercial lending portfolio, while enhancing our complementary business products and services.
·Continuing to focus on residential and consumer lending in conjunction with our secondary market residential lending program. We offer traditional residential and consumer lending products and plan to continue to build a strong residential and consumer lending program that supports our secondary market residential lending program. Under our expanding secondary market residential lending program, we may sell a portion of our fixed rate residential originations while retaining the loan servicing function and mitigating our interest rate risk.
·Maintaining asset quality and prudent lending standards. We will continue to originate all loans utilizing prudent lending standards in an effort to maintain strong asset quality. While our delinquencies and charge-offs have decreased, we continue to diligently manage our collection function to minimize loan losses and non-performing assets. We will continue to employ sound risk management practices as we continue to expand our lending portfolio.
·Expanding our existing products and services and developing new products and services to meet the changing needs of consumers and businesses in our market area. We will continue to evaluate our consumer and business customers’ needs to ensure that we continue to offer relevant, up-to-date products and services.
·Continue expansion through de novo branching. We opened a de novo branch in Vernon, Connecticut during the second quarter of 2016 and expanded into western Massachusetts opening two de novo branches in the fourth quarter of 2015. We plan to open a branch in Manchester, Connecticut in 2018 and continue to evaluate future growth through de novo branching.
·Continuing to control non-interest expenses. As part of our strategic plan, we have implemented several programs designed to control costs. We monitor our expense ratios and plan to reduce our efficiency ratio by controlling expenses and increasing net interest income and noninterest income. We plan to continue to evaluate and improve the effectiveness of our business processes and our efficiency, utilizing information technology when possible.
·Taking advantage of acquisition opportunities that are consistent with our strategic growth plans. We intend to continue to evaluate opportunities to acquire other financial institutions and financial service related businesses in our current market area or contiguous market areas that will enable us to enhance our existing products and services and develop new products and services. We have no specific plans, agreements or understandings with respect to any expansion or acquisition opportunities.
Critical Accounting Policies
The accounting policies followed by us conform with the accounting principles generally accepted in the United States of America. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that our most critical accounting policies, which involve the most complex subjective decisions or assessments, relate to allowance for loan losses, other-than-temporary impairment of investment securities, income taxes and pension and other post-retirement benefits. The following is a description of our critical accounting policies and an explanation of the methods and assumptions underlying their application.
Allowance for Loan Losses: The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio as of the statement of condition date. The allowance for loan losses consists of a formula allowance following FASB ASC 450 - “Contingencies” and FASB ASC 310 - “Receivables”. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below. All reserves are available to cover any losses regardless of how they are allocated.
General component:
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity line of credit and other. Construction loans include classes for commercial investment real estate construction, commercial owner occupied construction, residential development, residential subdivision construction and residential owner occupied construction loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and nonaccrual loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the year ended December 31, 2017.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate - Residential real estate loans are generally originated in amounts up to 95.0% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80.0%. The Company does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. All residential mortgage loans are underwritten pursuant to secondary market underwriting guidelines which include minimum FICO standards. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial real estate - Loans in this segment are primarily originated to finance income-producing properties throughout the northeastern states. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, may have an effect on the credit quality in this segment. Management generally obtains rent rolls and other financial information, as appropriate on an annual basis and continually monitors the cash flows of these loans.
Construction loans - Loans in this segment include commercial construction loans, real estate subdivision development loans to developers, licensed contractors and builders for the construction and development of commercial real estate projects and residential properties. Construction lending contains a unique risk characteristic as loans are originated under market and economic conditions that may change between the time of origination and the completion and subsequent purchaser financing of the property. In addition, construction subdivision loans and commercial and residential construction loans to contractors and developers entail additional risks as compared to single-family residential mortgage lending to owner-occupants. These loans typically involve large loan balances concentrated in single borrowers or groups of related borrowers. Real estate subdivision development loans to developers, licensed contractors and builders are generally speculative real estate development loans for which payment is derived from sale of the property. Credit risk may be affected by cost overruns, time to sell at an adequate price, and market conditions. Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Residential construction credit quality may be impacted by the overall health of the economy, including unemployment rates and housing prices.
Commercial - Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Home equity line of credit - Loans in this segment include home equity loans and lines of credit underwritten with a loan-to-value ratio generally limited to no more than 80%, including any first mortgage. Our home equity lines of credit have a 9 year 10 month draw period followed by a 20 year amortization period and adjustable rates of interest which are indexed to the prime rate. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.
Other - Includes installment, collateral, demand, revolving credit and resort loans to customers with acceptable credit ratings residing primarily in our market area. Installment and collateral consumer loans generally consist of loans on new and used automobiles, loans collateralized by deposit accounts, and unsecured personal loans. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment. The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations. The Bank has exited the resort financing market with a residual portfolio remaining.
Allocated component:
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial real estate, construction and commercial loans by the present value of expected cash flows discounted at the effective interest rate; the fair value of the collateral, if applicable; or the observable market price for the loan. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement or they are nonaccrual loans with outstanding balances greater than $100,000.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Management updates the analysis quarterly. The assumptions used in appraisals are reviewed for appropriateness. Updated appraisals or valuations are obtained as needed or adjusted to reflect the estimated decline in the fair value based upon current market conditions for comparable properties.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are classified as impaired.
Unallocated component:
An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at December 31, 2017 and 2016.
Other-than-Temporary Impairment of Securities: In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“FASB ASC”) 320-Debt and Equity Securities, a decline in market value of a debt security below amortized cost that is deemed other-than-temporary is charged to earnings for the credit related other-than-temporary impairment (“OTTI”) resulting in the establishment of a new cost basis for the security, while the non-credit related OTTI is recognized in other comprehensive income if there is no intent or requirement to sell the security. Management reviews the securities portfolio on a quarterly basis for the presence of OTTI. An assessment is made as to whether the decline in value results from company-specific events, industry developments, general economic conditions, credit losses on debt or other reasons. After the reasons for the decline are identified, further judgments are required as to whether those conditions are likely to reverse and, if so, whether that reversal is likely to result in a recovery of the fair value of the investment in the near term. If it is judged not to be near-term, a charge is taken which results in a new cost basis. Credit related OTTI for debt securities is recognized in earnings while non-credit related OTTI is recognized in other comprehensive income if there is no intent to sell or will not be required to sell the security. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered to be credit-related and a charge to earnings would be recorded. Management believes the policy for evaluating securities for other-than-temporary impairment is critical because it involves significant judgments by management and could have a material impact on our net income.
Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis. Marketable equity and debt securities are classified as either available-for-sale or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. At December 31, 2017 and 2016, we had no debt or equity securities classified as trading. Held-to-maturity securities are debt securities for which we have the ability and intent to hold until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized.
Premiums and discounts on debt securities are amortized or accreted into interest income over the term of the securities using the level yield method.
Income Taxes: Deferred income taxes are provided for differences arising in the timing of income and expenses for financial reporting and for income tax purposes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides a deferred tax asset valuation allowance for the estimated future tax effects attributable to temporary differences and carryforwards when realization is determined not to be more likely than not.
FASB ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Pursuant to FASB ASC 740-10, the Company examines its financial statements, its income tax provision and its federal and state income tax returns and analyzes its tax positions, including permanent and temporary differences, as well as the major components of income and expense to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes interest and penalties arising from income tax settlements as part of its provision for income taxes.
As part of the Plan of Conversion and Reorganization completed on June 29, 2011, the Company contributed shares of Company common stock to the Farmington Bank Community Foundation, Inc. This contribution resulted in a charitable contribution deduction for federal income tax purposes. Use of that charitable contribution deduction is limited under Federal tax law to 10% of federal taxable income without regard to charitable contributions, net operating losses, and dividend received deductions. Annually, a corporation is permitted to carry over to the five succeeding tax years, contributions that exceeded the 10% limitation, but also subject to the maximum annual limitation. In 2015, the Company recorded a $771,000 valuation allowance related to a deferred tax asset associated with the establishment of the Bank’s foundation in 2011. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset totaling $137,000 was written-off.
In December 1999, we created and have since maintained a “passive investment company” (“PIC”), as permitted by Connecticut law. At December 31, 2017 there were no material uncertain tax positions related to federal and state income tax matters. We are currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 through 2017. If the state taxing authority were to determine that the PIC was not in compliance with statutory requirements, a material amount of taxes could be due.
As of December 31, 2017, management believes it is more likely than not that the deferred tax assets will be realized through future reversals of existing taxable temporary differences and future taxable income. At December 31, 2017, our net deferred tax asset was $7.7 million.
Pension and Other Postretirement Benefits: The Company’s non-contributory defined-benefit pension plan and certain defined benefit postretirement plans were frozen as of February 28, 2013 and no additional benefits will accrue.
The Company has a non-contributory defined benefit pension plan that provides benefits for substantially all employees hired before January 1, 2007 who meet certain requirements as to age and length of service. The benefits are based on years of service and average compensation, as defined in the Plan Document. The Company’s funding practice is to meet the minimum funding standards established by the Employee Retirement Income Security Act of 1974.
In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees. Participants or eligible employees hired before January 1, 1993 become eligible for the benefits if they retire after reaching age 62 with fifteen or more years of service. A fixed percent of annual costs are paid depending on length of service at retirement. The Company accrues for the estimated costs of these other post-retirement benefits through charges to expense during the years that employees render service. The Company makes contributions to cover the current benefits paid under this plan. The Company believes the policy for determining pension and other post-retirement benefit expenses is critical because judgments are required with respect to the appropriate discount rate, rate of return on assets and other items. The Company reviews and updates the assumptions annually. If the Company’s estimate of pension and post-retirement expense is too low it may experience higher expenses in the future, reducing its net income. If the Company’s estimate is too high, it may experience lower expenses in the future, increasing its net income.
Comparison of Financial Condition at December 31, 2017 and 2016
Total assets increased $217.5 million or 8% at December 31, 2017 to $3.1 billion compared to $2.8 billion at December 31, 2016, reflecting a $199.7 million increase in net loans.
Our investment portfolio totaled $162.2 million or 5.3% of total assets and $136.6 million or 4.8% of total assets at December 31, 2017 and 2016, respectively. Available-for-sale investment securities totaled $87.2 million at December 31, 2017 compared to $103.5 million at December 31, 2016. Securities held-to-maturity totaled $75.0 million and $33.1 million at December 31, 2017 and 2016, respectively. The Company purchases short term U.S. Treasury and agency securities in order to meet municipal and repurchase agreement pledge requirements and to minimize interest rate risk during the sustained low interest rate environment.
Net loans increased $199.7 million or 7.9% at December 31, 2017 to $2.7 billion compared to December 31, 2016 primarily driven by increases in commercial real estate, residential real estate and construction, which combined, increased $206.2 million, offset by a $5.7 million decrease in home equity lines of credit. The allowance for loan losses increased $919,000 or 4.3% to $22.4 million at December 31, 2017 from $21.5 million at December 31, 2016. At December 31, 2017, the allowance for loan losses represented 0.82% of total loans and 142.15% of non-performing loans, compared to 0.85% of total loans and 122.60% of non-performing loans as of December 31, 2016.
Total liabilities increased $205.2 million to $2.8 billion at December 31, 2017 compared to $2.6 billion at December 31, 2016. Deposits increased $219.0 million or 9.9% to $2.4 billion at December 31, 2017 primarily due to an increase in retail deposits as we continue to develop and grow relationships in the geographical areas we serve. We had municipal deposit balances totaling $437.1 million and $394.5 million at December 31, 2017 and 2016, respectively. Federal Home Loan Bank of Boston advances decreased $31.6 million to $255.5 million at December 31, 2017 from $287.1 million at December 31, 2016 due to our increased deposits funding our organic loan and securities growth.
Stockholders’ equity increased $12.3 million to $272.5 million compared to December 31, 2017 primarily due to $16.2 million in net income offset by dividends paid. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, which lowered the Company’s federal tax rate from 35% to 21% effective January 1, 2018. As a result of the tax reduction, the Company recorded a reduction in the value of its net deferred tax asset resulting in a charge of $5.0 million to income tax expense impacting net income for the fourth quarter of 2017. The Company paid cash dividends totaling $7.8 million or $0.52 per share during the year ended December 31, 2017.
Net Interest Income Analysis: Average Balance Sheets, Interest and Yields/Costs
The following tables present the average balance sheets, average yields and costs and certain other information for the periods indicated therein on a fully tax-equivalent basis. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero percent yield. Loans held for sale average balance are included in loans average balance. The yields set forth below include the effect of net deferred costs and premiums that are amortized to interest income or expense.
(1)On a fully-tax equivalent basis.
(2)Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities on a tax-equivalent basis.
(3)Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(4)Net interest margin represents tax-equivalent net interest income divided by average total interest-earning assets.
Rate Volume Analysis
The following table sets forth the effects of changing rates and volumes on tax-equivalent net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total column represents the sum of the volume and rate columns. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.
Summary of Operating Results for the Year Ended December 31, 2017 and 2016
The following discussion provides a summary and comparison of our operating results for the year ended December 31, 2017 and 2016:
For the year ended December 31, 2017, net income increased $974,000 compared to the year ended December 31, 2016. The increase in net income was primarily driven by a $9.2 million increase in net interest income due to organic loan growth offset by $7.9 million increase in income tax expense, of which $5.0 million was related to the reduction in the value of our net deferred tax asset due to the Tax Act lowering the Company’s federal tax rate from 35% to 21% effective January 1, 2018.
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016
Our results of operations depend primarily on net interest income, which is the difference between the interest income on earning assets, such as loans and investments, and the interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. We also generate noninterest income; including service charges on deposit accounts, gain on sale of securities, income from mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees. Our noninterest expense primarily consists of salary and employee benefits, occupancy expense, furniture and equipment expenses, FDIC assessments, marketing and other general and administrative expenses. Our results of operations are also affected by our provision for loan losses.
Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $9.2 million or 13% to $80.4 million for the year ended 2017 compared to $71.3 million for the year ended 2016 primarily due to a $234.1 million increase in the average loan balance offset by a 4 basis point or $2.3 million increase in interest expense. The total interest-earning assets yield increased 18 basis points to 3.57% for the year ended 2017 compared to 3.39% for the year ended 2016 primarily due to an increase in yield on our loans and securities portfolio. The cost of interest-bearing liabilities increased 4 basis points to 82 basis points for the year ended 2017 compared to 78 basis points for the year ended 2016. Net interest margin was 2.93% for the year ended 2017 compared to 2.80% for the year ended 2016.
Interest expense increased $2.3 million to $18.0 million for the year ended 2017 compared to $15.7 million for the year ended 2016. The cost of interest-bearing liabilities increased due to the Federal Reserve raising the prime rate during 2017 primarily impacting the costs of NOW accounts, certificate of deposit and Federal Home Loan Bank of Boston borrowings.
Provision for Loan Losses: The allowance for loan losses is maintained at a level management determines to be appropriate to absorb estimated credit losses that are both probable and reasonably estimable at the dates of the financial statements. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis and charges any provision for loan losses needed to current operations. The assessment considers historical loss experience, historical and current delinquency statistics, the loan portfolio segment and the amount of loans in the loan portfolio, the financial strength of the borrowers, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions and other credit quality indicators.
Management recorded a provision for loan losses of $1.6 million and $2.3 million for the years ended December 31, 2017 and 2016, respectively. The provision recorded is based upon management’s analysis of the allowance for loan losses necessary to absorb the estimated credit losses in the loan portfolio for the period. Net charge-offs for the year ended 2017 were $632,000 or 0.02% to average loans compared to $1.0 million or 0.04% to average loans for the year ended 2016
At December 31, 2017, the allowance for loan losses represented 0.82% of total loans and 142.15% of non-accrual loans, compared to 0.85% of total loans and 122.60% of non-accrual loans at December 31, 2016.
Noninterest Income: Sources of noninterest income primarily include service charges on deposit accounts, gain on sale of securities, mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees.
The following table summarizes noninterest income for the years ended December 31, 2017 and 2016:
Total noninterest income increased $761,000 to $13.5 million for the year ended 2017 compared to $12.7 million for the year ended 2016. Fees for customer services increased $252,000 to $6.4 million for the year ended 2017 compared to the year ended 2016 driven by our growth in checking accounts and debit card fees. Net gain on loans sold decreased $508,000 to $2.6 million for the year ended 2017 compared to the year ended 2016 as a result of a decrease in volume of loans sold. Bank owned life insurance income increased $211,000 to $1.6 million for the year ended 2017 compared to the year ended 2016 primarily due to $194,000 more in bank owned life insurance proceeds in 2017 than in the prior year. Other noninterest income increased $801,000 to $2.7 million for the year ended 2017 compared to the year ended 2016 primarily due to a $206,000 increase in swap fee income, a $161,000 increase in loan servicing fees for others and $319,000 SBIC fund impairment in the prior year offset by a $159,000 decrease in mortgage banking derivatives.
Noninterest Expense: The following table summarizes noninterest expense for the years ended December 31, 2017 and 2016:
Noninterest expense increased $1.8 million to $62.3 million for the year ended 2017 compared to $60.5 million for the year ended 2016. Salaries and employee benefits increased $1.6 million to $38.6 million for the year ended 2017 compared to the year ended 2016. The increase is primarily due to general salary increases which became effective in mid-March and $343,000 in severance expense. Marketing increased $400,000 primarily due to efforts to increase the Bank’s sales support in central Connecticut and western Massachusetts. Other operating expenses decreased $325,000 to $10.5 million for the year ended 2017 compared to the prior year primarily due to a $296,000 decrease in directors’ share-based compensation expense as a result of the majority of the 2012 Stock Incentive Plan fully vesting in September 2016.
Income Tax Expense: Income tax expense was $13.9 million for the year ended 2017 compared to $5.9 million for the year ended 2016. As a result of the Tax Act, the Company recorded a reduction in the value of its net deferred tax asset resulting in a charge of $5.0 million to income tax expense in the fourth quarter of 2017. Income tax expense in 2016 included a $137,000 write-off of a deferred tax asset associated with the establishment of the Bank’s foundation in 2011.
Summary of Operating Results for the Years Ended December 31, 2016 and 2015
The following discussion provides a summary and comparison of our operating results for the years ended December 31, 2016 and 2015:
For the year ended December 31, 2016, net income increased $2.6 million compared to the year ended December 31, 2015. The increase in net income was primarily driven by a $2.7 million increase in net interest income due to organic loan growth.
Comparison of Operating Results for the Years Ended December 31, 2016 and 2015
Our results of operations depend primarily on net interest income, which is the difference between the interest income on earning assets, such as loans and investments, and the interest expense incurred on interest-bearing liabilities, such as deposits and borrowings. We also generate noninterest income; including service charges on deposit accounts, gain on sale of securities, income from mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees. Our noninterest expense primarily consists of salary and employee benefits, occupancy expense, furniture and equipment expenses, FDIC assessments, marketing and other general and administrative expenses. Our results of operations are also affected by our provision for loan losses.
Net Interest Income: Net interest income is determined by the interest rate spread (i.e., the difference between the yields earned on interest-earning assets and the rates paid on interest-bearing liabilities) and the relative amounts of interest-earning assets and interest-bearing liabilities. Net interest income increased $2.7 million or 4% to $71.3 million for the year ended 2016 compared to $68.5 million for the year ended 2015 primarily due to a $141.4 million increase in the average loan balance offset by a $2.4 million increase in interest expense. The total interest-earning assets yield increased 5 basis points to 3.39% for the year ended 2016 compared to 3.34% for the year ended 2015 primarily due to an increase in yield on our securities portfolio, Federal Home Loan Bank of Boston stocks and federal funds. The cost of interest-bearing liabilities increased 10 basis points to 78 basis points for the year ended 2016 compared to 68 basis points for the year ended 2015. The increase was primarily due to money market and certificate of deposit promotions and a 52 basis point increase in the average cost of Federal Home Loan Bank of Boston borrowings. Net interest margin was 2.80% for the year ended 2016 compared to 2.81% for the year ended 2015.
Interest expense increased $2.4 million to $15.7 million for the year ended 2016 compared to $13.4 million for the year ended 2015. The cost of interest-bearing liabilities increased 10 basis points to 78 basis points for the year ended 2016 compared to 68 basis points for the year ended 2015. The increase was primarily due to money market and certificate of deposit promotions and a 52 basis point increase in the average cost of Federal Home Loan Bank of Boston borrowings.
Provision for Loan Losses: The allowance for loan losses is maintained at a level management determines to be appropriate to absorb estimated credit losses that are both probable and reasonably estimable at the dates of the financial statements. Management evaluates the adequacy of the allowance for loan losses on a quarterly basis and charges any provision for loan losses needed to current operations. The assessment considers historical loss experience, historical and current delinquency statistics, the loan portfolio segment and the amount of loans in the loan portfolio, the financial strength of the borrowers, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions and other credit quality indicators.
Management recorded a provision for loan losses of $2.3 million and $2.4 million for the years ended December 31, 2016 and 2015, respectively. The provision recorded is based upon management’s analysis of the allowance for loan losses necessary to absorb the estimated credit losses in the loan portfolio for the period. Net charge-offs for the year ended 2016 were $1.0 million or 0.04% to average loans compared to $1.2 million or 0.05% to average loans for the year ended 2015.
At December 31, 2016, the allowance for loan losses represented 0.85% of total loans and 122.60% of non-accrual loans, compared to 0.86% of total loans and 135.44% of non-accrual loans at December 31, 2015.
Noninterest Income: Sources of noninterest income primarily include service charges on deposit accounts, gain on sale of securities, mortgage banking activities, bank-owned life insurance income, brokerage fees, insurance commissions and other miscellaneous fees.
The following table summarizes noninterest income for the years ended December 31, 2016 and 2015:
Total noninterest income decreased $709,000 to $12.7 million for the year ended 2016 compared to $13.4 million for the year ended 2015. Fees for customer services increased $176,000 to $6.2 million for the year ended 2016 compared to the year ended 2015 driven by our growth in checking accounts and debit card fees. There was no gain on sale of investments for the year ended 2016. Gain on sale of investments was $1.5 million for the year ended 2015 due to the sale of trust preferred securities. Net gain on loans sold increased $613,000 to $3.1 million for the year ended 2016 compared to the year ended 2015 as a result of an increase in volume of loans sold and a lower rate environment. Bank owned life insurance income decreased $255,000 to $1.4 million for the year ended 2016 compared to the year ended 2015 primarily due to $302,000 more in bank owned life insurance proceeds in 2015 than in 2016. Other noninterest income increased $282,000 to $1.9 million for the year ended 2016 compared to the year ended 2015 primarily due to a $372,000 increase in swap fee income offset by a $78,000 decrease in mortgage banking derivatives.
Noninterest Expense: The following table summarizes noninterest expense for the years ended December 31, 2016 and 2015:
Noninterest expense decreased $706,000 to $60.5 million for the year ended 2016 compared to $61.2 million for the year ended 2015. Salaries and employee benefits increased $128,000 to $37.0 million for the year ended 2016 compared to the year ended 2015. The increase is primarily due to increases in employee benefit related costs offset by a $616,000 decrease in officers’ share-based compensation expense due to the majority of the 2012 Stock Incentive Plan fully vesting in September 2016. Other operating expenses decreased $454,000 to $10.8 million for the year ended 2016 compared to the prior year primarily due to a $707,000 decrease in directors’ share-based compensation expense as a result of the majority of the 2012 Stock Incentive Plan fully vesting in September 2016 and a $436,000 decrease in the provision for off-balance sheet commitments as a result of a change in accounting estimate offset by a $557,000 gain on foreclosed real estate in 2015.
Income Tax Expense: Income tax expense was $5.9 million for the year ended 2016 compared to $5.7 million for the year ended 2015. Income tax expense in 2016 included a $137,000 write-off of a deferred tax asset associated with the establishment of the Bank’s foundation in 2011. Income tax expense in 2015 included a $771,000 valuation allowance also related to a deferred tax asset associated with the establishment of the Bank’s foundation in 2011. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset written-off. This had no impact on income tax expense in 2016.
Management of Market and Interest Rate Risk
General: The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of loans and available-for-sale investment securities, generally have longer contractual maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, our board of directors has established an asset/liability committee which is responsible for (i) evaluating the interest rate risk inherent in our assets and liabilities, (ii) determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives and (iii) managing this risk consistent with the guidelines approved by our board of directors. Management monitors the level of interest rate risk on a regular basis and the asset/liability committee meets at least quarterly to review our asset/liability policies and interest rate risk position.
We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. During the low interest rate environment that has existed in recent years, we have implemented the following strategies to manage our interest rate risk: (i) emphasizing adjustable rate commercial and consumer loans, (ii) maintaining a short average life investment portfolio and (iii) periodically lengthening the term structure of our borrowings from the FHLBB. Additionally, we sell a portion of our fixed-rate residential mortgages to the secondary market. These measures should serve to reduce the volatility of our future net interest income in different interest rate environments.
Quantitative Analysis: An economic value of equity and an income simulation analysis are used to estimate our interest rate risk exposure at a particular point in time. We are most reliant on the income simulation method as it is a dynamic method in that it incorporates our forecasted balance sheet growth assumptions under the different interest rate scenarios tested. We utilize the income simulation method to analyze our interest rate sensitivity position and to manage the risk associated with interest rate movements. At least quarterly, our asset/liability committee reviews the potential effect that changes in interest rates could have on the repayment or repricing of rate sensitive assets and the funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions can have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn effect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected life of our assets would tend to lengthen more than the expected average life of our liabilities and would therefore alter our existing interest rate risk position.
Our asset/liability policy currently limits projected changes in net interest income to a minimum variance of (-4.0%, -8.0%, -10.0% and -12.0%) assuming a 100, 200, 300 or 400 basis point interest rate shock, respectively, as measured over a 12 month period when compared to the flat rate scenario.
The following table depicts the percentage increase and/or decrease in estimated net interest income over twelve months based on a static balance sheet run for each of the scenarios and the periods presented:
Liquidity and Capital Resources:
We maintain liquid assets at levels we consider adequate to meet our liquidity needs. We adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows, fund operations and pay escrow obligations on items in our loan portfolio. We also adjust liquidity as appropriate to meet asset and liability management objectives.
Our primary sources of liquidity are deposits, principal repayment and prepayment of loans, the sale in the secondary market of loans held for sale, maturities and sales of investment securities and other short-term investments, periodic pay downs of mortgage-backed securities, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by market interest rates, economic conditions and rates offered by our competitors. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term interest-earning assets, which provide liquidity to meet lending requirements.
A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At December 31, 2017, $35.4 million of our assets were invested in cash and cash equivalents compared to $47.7 million at December 31, 2016. Our primary sources of cash are principal repayments on loans, proceeds from the maturities of investment securities, increases in deposit accounts, proceeds from residential loan sales and advances from FHLBB.
For the years ended December 31, 2017 and 2016, loan originations and purchases, net of collected principal and loan sales, totaled $229.3 million and $187.0 million, respectively. Cash received from the sales and maturities of available-for-sale investment securities totaled $55.2 million and $172.0 million for the years ended December 31, 2017 and 2016, respectively. We purchased $39.1 million and $143.0 million of available-for-sale investment securities during the years ended December 31, 2017 and 2016, respectively.
Liquidity management is both a daily and longer-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the FHLBB, which provides an additional source of funds. At December 31, 2017, we had $255.5 million in advances from the FHLBB and an additional available borrowing limit of $706.9 million, compared to $287.1 million in advances from the FHLBB and an additional available borrowing limit of $544.7 million at December 31, 2016, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $79.5 million and $83.5 million at December 31, 2017 and 2016, respectively, subject to collateral requirements of the FHLBB. Internal policies limit borrowings to 25.0% of total assets, or $763.8 million and $709.4 million at December 30, 2017 and December 31, 2016, respectively. Other sources of funds include access to pre-approved unsecured lines of credit with financial institutions for $58.5 million and our $8.8 million secured line of credit with the FHLBB which were all undrawn at December 31, 2017. The Federal Reserve Bank’s discount window loan collateral program enables us to borrow up to $72.2 million on an overnight basis as of December 31, 2017. The funding arrangement was collateralized by $139.2 million in pledged commercial real estate loans as of December 31, 2017.
We had outstanding commitments to originate loans of $40.0 million and $102.4 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $479.2 million and $507.1 million at December 31, 2017 and 2016, respectively. At December 31, 2017 and 2016, time deposits scheduled to mature in less than one year totaled $380.6 million and $327.9 million, respectively. Based on prior experience, management believes that a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits are not retained by us, we will have to utilize other funding sources, such as FHLBB advances, brokered deposits, our $58.5 million unsecured lines of credit with financial institutions, our $8.8 million secured line of credit with the FHLBB or our $72.2 million overnight borrowing arrangement with the Federal Reserve Bank in order to maintain our level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or if there is an increased amount of competition for deposits in our market area at the time of renewal.
Contractual Obligations
The following tables present information indicating various obligations made by us as of December 31, 2017 and the respective maturity dates:
(1)Secured under a combination of a blanket security and specific loan agreements on qualifying assets, principally mortgage loans.
(2)Represents non-cancelable operating leases for offices and office equipment.
(3)Consists of estimated benefit payments over the next 10 years to retirees under unfunded nonqualified pension plans.
Other Commitments
The following tables present information indicating various other commitments made by us as of December 31, 2017 and the respective maturity dates:
General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses.
(1)Commitments for loans are extended to customers for up to 60 days after which they expire.
(2)Unused portions of home equity lines of credit are available to the borrower for up to 10 years.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements, other than noted above, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Impact of Inflation and Changing Prices
The consolidated financial statements and related notes of First Connecticut Bancorp have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration for changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature, with relatively little investments in fixed assets or inventories. Inflation has an important impact on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio. Management believes that the impact of inflation on financial results depends on our ability to react to changes in interest rates and, by such reaction, reduce the inflationary impact on performance. Management has attempted to structure the mix of financial instruments and manage interest rate sensitivity in order to minimize the potential adverse effects of inflation or other market forces on net interest income and, therefore, earnings and capital.
Cautionary Statement Regarding Forward-Looking Information
This report contains “forward-looking statements.” You can identify these forward-looking statements through our use of words such as “may,” “will,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “estimate,” “continue,” “plan,” “project,” “could,” “intend,” “target” and other similar words and expressions of the future. These forward-looking statements include, but are not limited to:
●statements of our goals, intentions and expectations;
●statements regarding our business plans, prospects, growth and operating strategies;
●statements regarding the asset quality of our loan and investment portfolios; and
●estimates of our risks and future costs and benefits.
These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
●Local, regional and national business or economic conditions may differ from those expected.
●The effects of and changes in trade, monetary and fiscal policies and laws, including the U.S. Federal Reserve Board’s interest rate policies, may adversely affect our business.
● The ability to increase market share and control expenses may be more difficult than anticipated.
● Changes in laws and regulatory requirements (including those concerning taxes, banking, securities and insurance) may adversely affect us or our business.
● Changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board, may affect expected financial reporting.
● Future changes in interest rates may reduce our profits which could have a negative impact on the value of our stock.
● We are subject to lending risk and could incur losses in our loan portfolio despite our underwriting practices. Changes in real estate values could also increase our lending risk.
● Changes in demand for loan products, financial products and deposit flow could impact our financial performance.
● Strong competition within our market area may limit our growth and profitability.
● We may not manage the risks involved in the foregoing as well as anticipated.
● If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings could decrease.
● Our stock value may be negatively affected by federal regulations and articles of incorporation provisions restricting takeovers.
● Implementation of stock benefit plans will increase our costs, which will reduce our income.
● The Dodd-Frank Act has resulted in dramatic regulatory changes that affected the industry in general, and may impact our competitive position in ways that cannot be predicted at this time.
● The Emergency Economic Stabilization Act (“EESA”) of 2008 has and may continue to have a significant impact on the banking industry.
● Computer systems on which we depend could fail or experience a security breach, implementation of new technologies may not be successful; and our ability to anticipate and respond to technological changes can affect our ability to meet customer needs.
Any forward-looking statements made by or on behalf of us in this annual report on Form 10-K speak only as of the date of this annual report on Form 10-K. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statement was made. The reader should, however, consult any further disclosures of a forward-looking nature we may make in future filings.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
For information regarding market risk, see “Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations - Management of Market and Interest Rate Risk.”
Item 8.
Item 8. Financial Statements and Supplementary Data
The following are included in this item:
(A)Report of Independent Registered Public Accounting Firm
(B)Consolidated Statements of Financial Condition as of December 31, 2017 and 2016
(C)Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
(D)Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
(E)Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
(F)Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
(G)Notes to Consolidated Financial Statements
The supplementary data required by this item (selected quarterly financial data) is provided in Note 22 of the Notes to Consolidated Financial Statements.
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
First Connecticut Bancorp, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated statements of financial condition of First Connecticut Bancorp, Inc. and its subsidiaries as of December 31, 2017 and 2016, and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Annual Report on Internal Control over Financial Reporting, appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/PricewaterhouseCoopers LLP
Hartford, Connecticut
March 9, 2018
We have served as the Company’s auditor since 1993.
First Connecticut Bancorp, Inc.
Consolidated Statements of Financial Condition
(1)Loans include net deferred loan costs of $5.1 million and $3.8 million at December 31, 2017 and 2016, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
First Connecticut Bancorp, Inc.
Consolidated Statements of Income
The accompanying notes are an integral part of these consolidated financial statements.
First Connecticut Bancorp, Inc.
Consolidated Statements of Comprehensive Income
The accompanying notes are an integral part of these consolidated financial statements.
First Connecticut Bancorp, Inc.
Consolidated Statement of Changes in Stockholders’ Equity
The accompanying notes are an integral part of these consolidated financial statements.
First Connecticut Bancorp, Inc.
Consolidated Statements of Cash Flows
The accompanying notes are an integral part of these consolidated financial statements.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
1.Summary of Significant Accounting Policies
Organization and Business
First Connecticut Bancorp, Inc. is a Maryland-chartered bank holding company that wholly owns its only subsidiary, Farmington Bank (collectively with its subsidiary, the “Company”). Farmington Bank's main office is located in Farmington, Connecticut. Farmington Bank is a full-service, community bank with 24 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Farmington Bank's primary source of income is interest accrued on loans to customers, which include small and middle market businesses and individuals residing primarily in Connecticut and western Massachusetts. However, the Bank will selectively lend to borrowers in other northeastern states.
Wholly-owned subsidiaries of Farmington Bank are Farmington Savings Loan Servicing, Inc., a passive investment company that was established to service and hold loans collateralized by real property; Village Investments, Inc.; the Village Corp., Limited, and Village Square Holdings, Inc.; 28 Main Street Corp., is a subsidiary that was formed to hold residential other real estate owned and Village Management Corp., is a subsidiary that was formed to hold commercial other real estate owned, are presently inactive.
On June 21, 2013, the Company received regulatory approval to repurchase up to 1,676,452 shares, or 10% of its current outstanding common stock. Repurchased shares are held as treasury stock and are available for general corporate purposes. The Company has 600,945 shares remaining available to be repurchased at December 31, 2017.
Basis of Financial Statement Presentation
The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. The consolidated financial statements include the accounts of First Connecticut Bancorp, Inc. and its wholly-owned subsidiary, Farmington Bank. All significant intercompany transactions and balances have been eliminated in consolidation.
In preparing the consolidated financial statements, management is required to make extensive use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statement of condition and revenues and expenses for the period. Actual results could differ significantly from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, investment security other-than-temporary impairment judgments and investment security valuation.
Cash and Cash Equivalents
The Company defines cash and cash equivalents for consolidated cash flow purposes as cash due from banks, federal funds sold and money market funds. Cash flows from loans and deposits are reported net. The balances of cash and due from banks, federal funds sold and money market funds, at times, may exceed federally insured limits. The Company has not experienced any losses from such concentrations.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Investment Securities
Marketable equity and debt securities are classified as either available-for-sale or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. Held-to-maturity securities are debt securities for which the Company has the ability and intent to hold until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts on debt securities are amortized or accreted into interest income over the term of the securities using the level yield method. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized. Further information relating to the fair value of securities can be found within Note 4 of the Notes to Consolidated Financial Statements. In accordance with Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") 320- “Debt and Equity Securities”, a decline in market value of a debt security below amortized cost that is deemed other-than-temporary is charged to earnings for the credit related other-than-temporary impairment ("OTTI"), resulting in the establishment of a new cost basis for the security, while the non-credit related OTTI is recognized in other comprehensive income if there is no intent or requirement to sell the security. The securities portfolio is reviewed on a quarterly basis for the presence of other-than-temporary impairment. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered to be credit-related and a charge to earnings would be recorded. Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis.
Federal Home Loan Bank of Boston Stock
The Company, which is a member of the Federal Home Loan Bank system, is required to maintain an investment in capital stock of the Federal Home Loan Bank of Boston (“FHLBB”). Based on redemption provisions of the FHLBB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLBB may declare dividends on the stock. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLBB stock. As of December 31, 2017 and 2016, no impairment has been recognized.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried at the lower of amortized cost or fair value, as determined by aggregate outstanding commitments from investors or current investor yield requirements. Net unrealized losses, if any, are recognized through a valuation allowance by charges to other noninterest income in the accompanying Consolidated Statements of Income. Gains or losses on sales of mortgage loans are recognized based on the difference between the selling price and the carrying value of the related mortgage loans sold on the trade date to net gain on loans sold in the accompanying Consolidated Statements of Income.
Loans
The Company’s loan portfolio segments include residential real estate, commercial real estate, construction, commercial, home equity lines of credit and other. Construction includes classes for commercial and residential construction.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. When loans are prepaid, sold or participated out, the unamortized portion is recognized as income or expense at that time.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Interest on loans is accrued and recognized in interest income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued, and previously accrued income is reversed, when loan payments are more than 90 days past due or when, in the judgment of management, collectability of the loan or loan interest becomes uncertain. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with contractual terms involving payment of cash or cash equivalents. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. If a residential real estate, commercial real estate, construction, commercial, home equity line of credit and other loan is on non-accrual status cash payments are applied towards the reduction of principal. If loans are considered impaired but accruing, cash payments are applied first to interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful.
The policy for determining past due or delinquency status for all loan portfolio segments is based on the number of days past due or the contractual terms of the loan. A loan is considered delinquent when the customer does not make their payments due according to their contractual terms. Generally, a loan can be demanded at any time if the loan is delinquent or if the borrower fails to meet any other agreed upon terms and conditions.
On a quarterly basis, our loan policy requires that we evaluate for impairment all commercial loans classified as non-accrual, loans secured by real property in foreclosure or are otherwise likely to be impaired, non-accruing residential and home equity loan segments greater than $100,000 and all troubled debt restructurings.
Nonperforming assets consist of non-accruing loans including non-accruing loans identified as troubled debt restructurings, loans past due more than 90 days and still accruing interest and other real estate owned.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level believed adequate by management to absorb potential losses inherent in the loan portfolio as of the statement of condition date. The allowance for loan losses consists of a formula allowance following FASB ASC 450 - “Contingencies” and FASB ASC 310 - “Receivables”. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a quarterly basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below. All reserves are available to cover any losses regardless of how they are allocated.
General component:
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity line of credit and other. Construction loans include classes for commercial investment real estate construction, commercial owner occupied construction, residential development, residential subdivision construction and residential owner occupied construction loans. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies and nonaccrual loans; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no material changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the year ended December 31, 2017.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate - Residential real estate loans are generally originated in amounts up to 95.0% of the lesser of the appraised value or purchase price of the property, with private mortgage insurance required on loans with a loan-to-value ratio in excess of 80.0%. The Company does not grant subprime loans. All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. All residential mortgage loans are underwritten pursuant to secondary market underwriting guidelines which include minimum FICO standards. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial real estate - Loans in this segment are primarily originated to finance income-producing properties throughout the northeastern states. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, may have an effect on the credit quality in this segment. Management generally obtains rent rolls and other financial information, as appropriate on an annual basis and continually monitors the cash flows of these loans.
Construction loans - Loans in this segment include commercial construction loans, real estate subdivision development loans to developers, licensed contractors and builders for the construction and development of commercial real estate projects and residential properties. Construction lending contains a unique risk characteristic as loans are originated under market and economic conditions that may change between the time of origination and the completion and subsequent purchaser financing of the property. In addition, construction subdivision loans and commercial and residential construction loans to contractors and developers entail additional risks as compared to single-family residential mortgage lending to owner-occupants. These loans typically involve large loan balances concentrated in single borrowers or groups of related borrowers. Real estate subdivision development loans to developers, licensed contractors and builders are generally speculative real estate development loans for which payment is derived from sale of the property. Credit risk may be affected by cost overruns, time to sell at an adequate price, and market conditions. Construction financing is generally considered to involve a higher degree of credit risk than longer-term financing on improved, owner-occupied real estate. Residential construction credit quality may be impacted by the overall health of the economy, including unemployment rates and housing prices.
Commercial - Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Home equity line of credit - Loans in this segment include home equity loans and lines of credit underwritten with a loan-to-value ratio generally limited to no more than 80%, including any first mortgage. Our home equity lines of credit have a 9 year 10 month draw period followed by a 20 year amortization period and adjustable rates of interest which are indexed to the prime rate. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment.
Other - Includes installment, collateral, demand, revolving credit and resort loans to customers with acceptable credit ratings residing primarily in our market area. Installment and collateral consumer loans generally consist of loans on new and used automobiles, loans collateralized by deposit accounts, and unsecured personal loans. The overall health of the economy, including unemployment rates and housing prices, may have an effect on the credit quality in this segment. The resort portfolio consists of a direct receivable loan outside the Northeast which is amortizing to its contractual obligations. The Bank has exited the resort financing market with a residual portfolio remaining.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Allocated component:
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial real estate, construction and commercial loans by the present value of expected cash flows discounted at the effective interest rate; the fair value of the collateral, if applicable; or the observable market price for the loan. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The Company does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement or they are nonaccrual loans with outstanding balances greater than $100,000.
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Management updates the analysis quarterly. The assumptions used in appraisals are reviewed for appropriateness. Updated appraisals or valuations are obtained as needed or adjusted to reflect the estimated decline in the fair value based upon current market conditions for comparable properties.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are classified as impaired.
Unallocated component:
An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at December 31, 2017 and 2016.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Troubled Debt Restructuring
A loan is considered a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower in modifying or renewing the loan the Company would not otherwise consider. In connection with troubled debt restructurings, terms may be modified to fit the ability of the borrower to repay in line with their current financial status, which may include a reduction in the interest rate to market rate or below, a change in the term or movement of past due amounts to the back-end of the loan or refinancing. A loan is placed on non-accrual status upon being restructured, even if it was not previously, unless the modified loan was current for the six months prior to its modification and we believe the loan is fully collectable in accordance with its new terms. The Company’s policy to restore a restructured loan to performing status is dependent on the receipt of regular payments, generally for a period of six months and one calendar year-end. All troubled debt restructurings are classified as impaired loans and are reviewed for impairment by management on a quarterly basis per Company policy.
Mortgage Servicing Rights
The Company capitalizes mortgage servicing rights for loans originated and then sold with servicing retained based on the fair market value on the origination date. Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income and such amortization is included in the consolidated statements of income as a reduction of mortgage servicing fee income. Mortgage servicing rights are evaluated for impairment by comparing their aggregate carrying amount to their fair value. An independent appraisal of the fair value of the Company’s mortgage servicing rights is obtained quarterly and is used by management to evaluate the reasonableness of the fair value estimates. Management reviews the independent appraisal and performs procedures to determine appropriateness. Impairment is recognized as an adjustment to mortgage servicing rights and mortgage servicing income.
Foreclosed Real Estate
Real estate acquired through foreclosure comprises properties acquired in partial or total satisfaction of problem loans. The properties are acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. At the time these properties are foreclosed, the properties are initially recorded at the fair value at the date of foreclosure less estimated selling costs. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent loss provisions are charged to the foreclosed real estate valuation allowance and expenses incurred to maintain the properties are charged to noninterest expense. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose. Revenue and expense from the operation of other real estate owned and the provision to establish and adjust valuation allowances are included in noninterest expenses. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. In the Consolidated Statements of Financial Condition, total prepaid expenses and other assets include foreclosed real estate of $-0- as of December 31, 2017 and 2016, with no specific valuation allowance. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $4.0 million at December 31, 2017.
Bank Owned Life Insurance
Bank owned life insurance ("'BOLI") represents life insurance on certain employees who have consented to allow the Company to be the beneficiary of those policies. BOLI is recorded as an asset at cash surrender value. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in other non-interest income and are not subject to income tax.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, which range from three to ten years for furniture and equipment and five to forty years for premises. Leasehold improvements are amortized on a straight-line basis over the term of the respective leases, including renewal options, or the estimated useful lives of the improvements, whichever is shorter. Maintenance and repairs are charged to non-interest expense as incurred, while significant improvements are capitalized.
Derivative Financial Instruments
Interest rate swap derivatives not designated as hedges are offered to certain qualifying commercial customers and to manage the Company’s exposure to interest rate movements and do not meet the hedge accounting parameters under FASB ASC 815 “Derivatives and Hedging”. Derivative financial instruments are recognized as assets and liabilities on the consolidated balance sheet and measured at fair value. Changes in the fair value of derivatives not designated in hedging relationships are recognized directly in earnings.
Pension and Other Postretirement Benefit Plans
The Company’s non-contributory defined-benefit pension plan and certain defined benefit postretirement plans were frozen as of February 28, 2013 and no additional benefits will accrue.
The Company has a non-contributory defined benefit pension plan that provides benefits for substantially all employees hired before January 1, 2007 who meet certain requirements as to age and length of service. The benefits are based on years of service and average compensation, as defined in the Plan Document. The Company’s funding practice is to meet the minimum funding standards established by the Employee Retirement Income Security Act of 1974.
In addition to providing pension benefits, we provide certain health care and life insurance benefits for retired employees. Participants or eligible employees hired before January 1, 1993 become eligible for the benefits if they retire after reaching age 62 with fifteen or more years of service. A fixed percent of annual costs are paid depending on length of service at retirement. The Company accrues for the estimated costs of these other post-retirement benefits through charges to expense during the years that employees render service. The Company makes contributions to cover the current benefits paid under this plan. The Company believes the policy for determining pension and other post-retirement benefit expenses is critical because judgments are required with respect to the appropriate discount rate, rate of return on assets and other items. The Company reviews and updates the assumptions annually. If the Company’s estimate of pension and post-retirement expense is too low it may experience higher expenses in the future, reducing its net income. If the Company’s estimate is too high, it may experience lower expenses in the future, increasing its net income.
Repurchase Liabilities
Repurchase agreements are accounted for as secured borrowings since the Company maintains effective control over the transferred securities and the transfer meets the other criteria for such accounting. Securities are sold to a counterparty with an agreement to repurchase the same or substantially the same security at a specified price and date. The Company has repurchase agreements with commercial or municipal customers that are offered as a commercial banking service. Customer repurchase agreements are for a term of one day and are backed by the purchasers’ interest in certain U.S. Treasury Bills or other U.S. Government securities. Obligations to repurchase securities sold are reflected as a liability in the Consolidated Statements of Financial Condition. The Company does not record transactions of repurchase agreements as sales. The securities underlying the repurchase agreements remain in the available-for-sale investment and held-to-maturity securities portfolios.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Transfers of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.
During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.
Fee Income
Fee income for customer services which are not deferred are recorded on an accrual basis when earned.
Advertising Costs
Advertising costs are expensed as incurred.
Income Taxes
Deferred income taxes are provided for differences arising in the timing of income and expenses for financial reporting and for income tax purposes. Deferred income taxes and tax benefits are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company provides a deferred tax asset valuation allowance for the estimated future tax effects attributable to temporary differences and carryforwards when realization is determined not to be more likely than not.
FASB ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. Pursuant to FASB ASC 740-10, the Company examines its financial statements, its income tax provision and its federal and state income tax returns and analyzes its tax positions, including permanent and temporary differences, as well as the major components of income and expense to determine whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. The Company recognizes interest and penalties arising from income tax settlements as part of its provision for income taxes.
Employee Stock Ownership Plan (“ESOP”)
The Company accounts for its ESOP in accordance with FASB ASC 718-40, “Compensation - Stock Compensation”. Under this guidance, unearned ESOP shares are not considered outstanding and are shown as a reduction of stockholders' equity as unearned compensation. The Company will recognize compensation cost equal to the fair value of the ESOP shares during the periods in which they are committed to be released. To the extent that the fair value of the Company's ESOP shares differs from the cost of such shares, this difference will be credited or debited to equity. The Company will receive a tax deduction equal to the cost of the shares released to the extent of the principal pay down on the loan by the ESOP. As the loan is internally leveraged, the loan receivable from the ESOP to the Company is not reported as an asset nor is the debt of the ESOP shown as a liability in the Company's consolidated financial statements.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Stock Incentive Plan
In May 2016, the Company’s shareholders approved the First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) and during August 2012, the Company implemented the First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan to provide for issuance or granting of shares of common stock for stock options or restricted stock. The Company applies ASC 718, Compensation - “Stock Compensation”, and has recorded stock-based employee compensation cost using the fair value method. Management estimated the fair values of all option grants using the Black-Scholes option-pricing model. Management estimated the expected life of the options using the simplified method allowed under SAB No. 107. The risk-free rate was determined utilizing the treasury yield for the expected life of the option contract.
Earnings Per Share
Earnings per common share is computed under the two-class method. Basic earnings per common share is computed by dividing net earnings allocated to common stockholders by the weighted-average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Non-vested restricted stock awards are participating securities as they have non-forfeitable rights to dividends or dividend equivalents. Diluted earnings per common share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock options for common stock using the treasury stock method. Unallocated common shares held by the ESOP are not included in the weighted-average number of common shares outstanding for purposes of calculating both basic and diluted earnings per common share. A reconciliation of the weighted-average shares used in calculating basic earnings per common share and the weighted-average common shares used in calculating diluted earnings per common share is provided in Note 3 - Earnings Per Share.
Segment Reporting
The Company’s only business segment is Community Banking. For the years ended December 31, 2017, 2016 and 2015, this segment represented all the revenues and income of the consolidated group and therefore is the only reported segment as defined by FASB ASC 820, “Segment Reporting”.
Reclassifications
Amounts in prior period consolidated financial statements are reclassified whenever necessary to conform to the current year presentation.
Recent Accounting Pronouncements
In August 2015, the FASB issued Accounting Standards Update “ASU” No. 2015-14 "Revenue from Contracts with Customers (Topic 606)." In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), with an original effective date for annual reporting periods beginning after December 15, 2016. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2015-14 deferred the effective date of ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Since the guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other GAAP, the Company does not expect the new guidance to have a material impact on revenue most closely associated with financial instruments, including interest income and expense. The Company's fees for customer services, brokerage and insurance fee income items are within the scope of the ASU 2014-09. The timing of the Company's revenue recognition regarding these items is not expected to materially change. The Company does not expect the adoption of ASU No. 2014-09 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, to have a material impact on its accounting and disclosures.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall (Topic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-01 to have a material impact on its accounting and disclosures.
In February 2016, the FASB issued ASU No. 2016-02 "Leases (Topic 842)." ASU 2016-02 supersedes Topic 840, Leases. This ASU is to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Some of the provisions in ASU 2016-02 include the following: 1) requires lessees to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease), 2) requires lessor accounting to be updated to align with certain changes to the lessee model and the new revenue recognition standard, 3) an arrangement contains an embedded lease if property, plant, or equipment is explicitly or implicitly identified and its use is controlled by the customer, 4) in certain circumstances, the lessee is required to remeasure the lease payments, and 5) requires extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required to provide greater insight into the extent of revenue and expense recognized and expected to be recognized from existing contracts. For public business entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is assessing the impact of ASU 2016-02 on its accounting and disclosures.
In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326)" requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This ASU also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public business entities for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. Management has established an internal committee to manage the implementation of ASU 2016-13. The committee is led by the Company’s Chief Financial Officer and Chief Risk Officer and includes representatives of the Bank’s loan operations, credit administration, accounting and technology departments. The committee has reviewed, evaluated and selected a third-party software solution and is currently in the process of identifying and gathering the necessary historical data. The committee is currently analyzing the provisions of the ASU and published regulatory guidance.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for annual years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company does not expect the adoption of ASU 2016-15 to have a material impact on its accounting and disclosures.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230) - Restricted Cash” (“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash. Restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The adoption of ASU 2016-18 requires a retrospective transition method applied to each period presented. This ASU is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted. The Company does not expect the adoption of ASU 2016-18 to have a material impact on its accounting and disclosures.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” ASU 2017-07 requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The amendments also allow only the service cost component to be eligible for capitalization when applicable. The guidance is effective for public business entities for annual years beginning after December 15, 2017, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its accounting and disclosures.
In May 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting.” ASU 2017-09 provides guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. The guidance is effective for public business entities for annual years beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The amendments should be applied on a prospective basis to an award modified on or after the adoption date. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its accounting and disclosures.
In February 2018, the FASB issued ASU No. 2018-02,”Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. ASU 2018-02 allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the reduction of the federal corporate income tax rate pursuant to enactment of the Tax Cuts and Jobs Act. The guidance is effective for public business entities for annual years beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. Entities electing the reclassification are required to apply the guidance either at the beginning of the period of adoption or retrospectively for all periods impacted. The Company is evaluating the effects of reclassifying these stranded tax effects within accumulated other comprehensive income to retained earnings.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
2.Restrictions on Cash and Due from Banks
The Company is required to maintain a percentage of transaction account balances on deposit in non-interest-earning reserves with the Federal Reserve Bank, offset by the Company’s average vault cash. The Company also is required to maintain cash balances to collateralize the Company’s position with certain third parties. The Company had cash and liquid assets of approximately $9.2 million and $9.5 million to meet these requirements at December 31, 2017 and 2016, respectively.
3.Earnings Per Share
The following table sets forth the calculation of basic and diluted earnings per share:
(1)Certain per share amounts may not appear to reconcile due to rounding.
For the years ended December 31, 2017, 2016 and 2015, respectively, 4,302, -0- and 78,500 options were anti-dilutive and therefore excluded from the earnings per share calculation.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
4.Investment Securities
Investment securities are summarized as follows:
At December 31, 2017, the net unrealized loss on securities available for sale of $568,000, net of a tax benefit of $199,000 or $369,000, is included in accumulated other comprehensive income. At December 31, 2016, the net unrealized loss on securities available for sale of $405,000, net of a tax benefit of $142,000 or $263,000, is included in accumulated other comprehensive income.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables summarize gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position at December 31, 2017 and 2016:
Management believes that no individual unrealized loss as of December 31, 2017 represents an other-than-temporary impairment (“OTTI”), based on its detailed review of the securities portfolio. The Company has no intent to sell nor is it more likely than not that the Company will be required to sell any of the securities in a loss position during the period of time necessary to recover the unrealized losses, which may be until maturity.
The following summarizes the conclusions from our OTTI evaluation for those security types that incurred significant gross unrealized losses greater than twelve months as of December 31, 2017:
Preferred equity securities - The unrealized loss on preferred equity securities in a loss position for 12 months or more relates to one preferred equity security. This investment is in a global financial institution. When estimating the recovery period for securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other company-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. Management evaluated the near-term prospects of the issuer in relation to the severity and duration of the impairment. Management concluded that the preferred equity security is not other-than-temporarily impaired at December 31, 2017.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Mutual funds - The unrealized loss on mutual funds in a loss position for 12 months or more relates to one mutual fund. The fund invests primarily in high quality debt securities and other debt instruments supporting the affordable housing industry in areas of the United States designated by fund shareholders. When estimating the recovery period for securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other fund-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. Management evaluated the near-term prospects of the fund in relation to the severity and duration of the impairment. Management concluded that the mutual fund is not other-than-temporarily impaired at December 31, 2017.
The Company recorded no other-than-temporary impairment charges to the investment securities portfolios for the years ended December 31, 2017, 2016 and 2015.
There were gross realized gains on sales of securities available-for-sale totaling $-0-, $-0- and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively
As of December 31, 2017 and 2016, U.S. Treasury, U.S. Government agency obligations and Government sponsored residential mortgage-backed securities with a fair value of $93.3 million and $102.4 million, respectively, were pledged as collateral for loan derivatives, public funds, repurchase liabilities and repurchase agreement borrowings.
The amortized cost and estimated fair value of debt securities at December 31, 2017 and 2016 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Federal Home Loan Bank of Boston (“FHLBB”) Stock
The Company, as a member of the FHLBB, owned $15.5 million and $16.4 million of FHLBB capital stock at December 31, 2017 and 2016, respectively, which is equal to its FHLBB capital stock requirement. The Company evaluated its FHLBB capital stock for potential other-than-temporary impairment at December 31, 2017. Capital adequacy, credit ratings, the value of the stock, overall financial condition of the FHLB system and FHLBB as well as current economic factors were analyzed in the impairment analysis. The Company concluded that its position in FHLBB capital stock is not other-than-temporarily impaired at December 31, 2017.
Alternative Investments
Alternative investments, which totaled $2.1 million and $2.2 million at December 31, 2017 and 2016, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company’s alternative investments include investments in certain non-public funds, which include limited partnerships, an equity fund and membership stocks. These investments are held at cost and were evaluated for potential other-than-temporary impairment at December 31, 2017. The Company recognized a $10,000, $319,000 and $144,000 other-than-temporary impairment charge on its limited partnerships for the years ended December 31, 2017, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $251,000, $179,000 and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively. See a further discussion of fair value in Note 16 - Fair Value Measurements. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of December 31, 2017.
5.Loans and Allowance for Loan Losses
Loans consisted of the following:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Changes in the allowance for loan losses by segments are as follows:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table lists the allocation of the allowance by impairment methodology and by loan segment at December 31, 2017 and 2016:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following is a summary of loan delinquencies at recorded investment values at December 31, 2017 and 2016:
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:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following is a summary of information pertaining to impaired loans at December 31, 2017 and 2016:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table summarizes average recorded investment and interest income recognized on impaired loans:
There was no interest income recognized on a cash basis method of accounting for the years ended December 31, 2017, 2016 and 2015.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables present information on loans whose terms had been modified in a troubled debt restructuring at December 31, 2017 and 2016:
The recorded investment balance of TDRs were $15.7 million and $18.3 million at December 31, 2017 and 2016, respectively. TDRs on accrual status were $6.2 million and $8.2 million while TDRs on nonaccrual status were $9.5 million and $10.1 million at December 31, 2017 and 2016, respectively. At December 31, 2017, 100% of the accruing TDRs have been performing in accordance with the restructured terms. At December 31, 2017 and 2016, the allowance for loan losses included specific reserves of $172,000 and $160,000 related to TDRs, respectively. For the years ended December 31, 2017 and 2016, the Bank had charge-offs totaling $83,000 and $272,000, respectively, related to portions of TDRs deemed to be uncollectible. The Bank may provide additional funds to borrowers in TDR status. The amount of additional funds available to borrowers in TDR status was $107,000 and $369,000 at December 31, 2017 and 2016, respectively.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables include the recorded investment and number of modifications for modified loans. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured for the years ended December 31, 2017, 2016 and 2015:
(1)The period end balances are inclusive of all partial paydowns and charge-offs since the modification date.
TDRs fully paid off, charged-off or foreclosed upon by period end are not included.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables provide TDR loans that were modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and/or the concessions and borrowers discharged in bankruptcy for the years ended December 31, 2017, 2016 and 2015:
(1)The period end balances are inclusive of all partial paydowns and charge-offs since the modification date.
TDRs fully paid off, charged-off or foreclosed upon by period end are not included.
A TDR is considered to be in re-default once it is more than 30 days past due following a modification. The following loans defaulted during the twelve month period preceding the modification date during the years ended December 31, 2017, 2016 and 2015.
(1)The period end balances are inclusive of all partial paydowns and charge-offs since the modification date.
TDRs fully paid off, charged-off or foreclosed upon by period end are not included.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Credit Quality Information
At the time of loan origination, a risk rating based on a nine point grading system is assigned to each commercial-related loan based on the loan officer’s and management’s assessment of the risk associated with each particular loan. This risk assessment is based on an in depth analysis of a variety of factors. More complex loans and larger commitments require the Company’s internal credit risk management department further evaluate the risk rating of the individual loan or relationship, with credit risk management having final determination of the appropriate risk rating. These more complex loans and relationships receive ongoing periodic review to assess the appropriate risk rating on a post-closing basis with changes made to the risk rating as the borrower’s and economic conditions warrant. The Company’s risk rating system is designed to be a dynamic system and we grade loans on a “real time” basis. The Company places considerable emphasis on risk rating accuracy, risk rating justification, and risk rating triggers. The Company’s risk rating process has been enhanced with its implementation of industry-based risk rating “cards.” The cards are used by the loan officers and promote risk rating accuracy and consistency on an institution-wide basis. Most loans are reviewed annually as part of a comprehensive portfolio review conducted by management and/or by an independent loan review firm. More frequent reviews of loans rated low pass, special mention, substandard and doubtful are conducted by the credit risk management department. The Company utilizes an independent loan review consulting firm to review its rating accuracy and the overall credit quality of its loan portfolio. The review is designed to provide an evaluation of the portfolio with respect to risk rating profile as well as with regard to the soundness of individual loan files. The individual loan reviews include an analysis of the creditworthiness of obligors, via appropriate key ratios and cash flow analysis and an assessment of collateral protection. The consulting firm conducts two loan reviews per year aiming at a 65.0% or higher commercial and industrial loans and commercial real estate portfolio penetration. Summary findings of all loan reviews performed by the outside consulting firm are reported to the board of directors and senior management of the Company upon completion.
The Company utilizes a point risk rating scale as follows:
Risk Rating Definitions
Residential and consumer loans are not rated unless they are 45 days or more delinquent, in which case, depending on past-due days, they will be rated 6, 7 or 8.
Loans rated 1 - 5, 55: Commercial loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6: Residential, Consumer and Commercial loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 7: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 8: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 9: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table presents the Company’s loans by risk rating at December 31, 2017 and 2016:
The Company places considerable emphasis on the early identification of problem assets, problem-resolution and minimizing loss exposure. Delinquency notices are mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. Residential and consumer lending borrowers are typically given 30 days to pay the delinquent payments or to contact us to make arrangements to bring the loan current over a longer period of time. Generally, if a residential or consumer lending borrower fails to bring the loan current within 90 days from the original due date or to make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are initiated. The Company may consider forbearance or a loan restructuring in certain circumstances where a temporary loss of income is the primary cause of the delinquency, and if a reasonable plan is presented by the borrower to cure the delinquency in a reasonable period of time after his or her income resumes. Problem or delinquent borrowers in our commercial real estate, commercial business and resort portfolios are handled on a case-by-case basis, typically by our Special Assets Department. Appropriate problem-resolution and workout strategies are formulated based on the specific facts and circumstances.
6.Mortgage Servicing Rights
The Company services residential real estate mortgage loans that it has sold without recourse to third parties. The carrying value of mortgage servicing rights was $5.4 million and $4.8 million at December 31, 2017 and 2016, respectively, and the balance is included in prepaid expenses and other assets in the accompanying Consolidated Statements of Financial Condition. The fair value of mortgage servicing rights approximated $7.3 million and $6.2 million at December 31, 2017 and 2016, respectively. Total loans sold with servicing rights retained were $115.0 million, $141.1 million and $165.5 million for the years ended December 31, 2017, 2016 and 2015, respectively. The net gain on loans sold totaled $2.6 million, $3.1 million and $2.5 million for the years ended December 31, 2017, 2016 and 2015, respectively, and is included in the accompanying Consolidated Statements of Income.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The principal balance of loans serviced for others, which are not included in the accompanying Consolidated Statements of Financial Condition, totaled $598.4 million, $540.4 million and $457.5 million at December 31, 2017, 2016 and 2015, respectively. Loan servicing fees for others totaling $1.4 million, $1.2 million and $932,000 for the years ended December 31, 2017, 2016 and 2015, respectively, are included as a component of other noninterest income in the accompanying Consolidated Statements of Income.
7.Premises and Equipment
The following is a summary of the premises and equipment accounts:
For the years ended December 31, 2017, 2016 and 2015 depreciation and amortization expense was $2.0 million, $2.3 million and $2.6 million, respectively.
8.Credit Arrangements
The Company has access to a pre-approved line of credit with the Federal Home Loan Bank of Boston (“FHLBB”) for $8.8 million, which was undrawn at December 31, 2017 and 2016. The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $58.5 million which were undrawn at December 31, 2017 and 2016. The Company maintains a cash balance of $512,500 with certain financial institutions to avoid fees associated with the lines.
In accordance with an agreement with the FHLBB, the Company is required to maintain qualified collateral, as defined in the FHLBB Statement of Credit Policy, free and clear of liens, pledges and encumbrances, as collateral for the advances, if any, and the preapproved line of credit. The Company is in compliance with these collateral requirements.
FHLBB advances totaled $255.5 million and $287.1 million at December 31, 2017 and 2016, respectively. Advances from the FHLBB are collateralized by first residential and commercial mortgages and home equity lines of credit with an estimated eligible collateral value of $1.6 billion and $1.4 billion at December 31, 2017 and 2016, respectively. The Company had available borrowings of $706.9 million and $544.7 million at December 31, 2017 and 2016, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $79.5 million and $83.5 million at December 31, 2017 and 2016, respectively, subject to collateral requirements of the FHLBB. The Company is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the redemption provisions of the stock.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
FHLBB advances and the weighted average interest rates at December 31, 2017 and 2016 consist of the following:
The Company participates in the Federal Reserve Bank’s discount window loan collateral program that enables the Company to borrow up to $72.2 million and $64.2 million on an overnight basis at December 31, 2017 and 2016, respectively, and was undrawn as of December 31, 2017 and 2016. The funding arrangement was collateralized by $139.2 million and $128.7 million in pledged commercial real estate loans as of December 31, 2017 and 2016, respectively.
The Bank has a Master Repurchase Agreement borrowing facility with a broker. Borrowings under the Master Repurchase Agreement are secured by the Company’s investments in certain securities and cash with a fair value of $11.2 million and $11.3 million at December 31, 2017 and 2016, respectively. Outstanding borrowings totaled $10.5 million at December 31, 2017 and 2016.
Outstanding borrowings are as follows:
The Bank offers overnight repurchase liability agreements to commercial or municipal customers whose excess deposit account balances are swept daily into collateralized repurchase liability accounts. The overnight repurchase liability agreements do not contain master netting arrangements. The Bank had repurchase liabilities outstanding of $34.5 million and $18.9 million at December 31, 2017 and 2016, respectively. They are secured by the Company’s investment in specific issues of U.S. Treasury obligations, Government sponsored residential mortgage-backed securities and U.S. Government agency obligations with a market value of $39.6 million and $30.2 million as of December 31, 2017 and 2016, respectively.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
9.Deposits
Deposit balances and weighted average interest rates at December 31, 2017 and 2016 are as follows:
The Company has established a relationship to participate in a reciprocal deposit program with other financial institutions as a service to our customers. This program provides enhanced FDIC insurance to participating customers. The Company also has established relationships for brokered deposits. There were brokered deposits totaling $58.8 million and $43.2 million at December 31, 2017 and 2016, respectively.
Time certificates of deposit in denominations of $250,000 or more approximated $126.3 million and $99.8 million at December 31, 2017 and 2016, respectively.
Contractual maturities of time deposits are as follows:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Interest expense on deposits are as follows:
10.Pension and Other Postretirement Benefit Plans
The Company maintains a non-contributory defined-benefit pension plan covering eligible employees hired prior to January 1, 2007.
The Company also maintains a supplemental retirement plan (“supplemental plan”) to provide benefits to certain employees whose calculated benefit under the qualified plan exceeds the Internal Revenue Service limitation.
The Company sponsors two defined benefit postretirement plans that cover eligible employees. One plan provides health (medical and dental) benefits, and the other provides life insurance benefits. The accounting for the health care plan anticipates no future cost-sharing changes. The Company does not advance fund its postretirement plans.
On December 27, 2012, the Company announced it would freeze the non-contributory defined-benefit pension plan and certain defined benefit postretirement plans as of February 28, 2013. All benefits under these plans were frozen as of that date and no additional benefits will accrue.
The measurement date for each plan is the Company’s year end.
The amounts related to the qualified plan and the supplemental plan is reflected in the tables that follow as “Pension Plans.” Both of these plans have projected and accumulated benefit obligations in excess of plan assets.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table sets forth the change in benefit obligation, plan assets and the funded status of the pension plans and other postretirement benefits:
The following table presents the amounts recognized in accumulated other comprehensive income that have not yet been recognized as a component of net period benefit cost as of December 31, 2017 and 2016:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables set forth the components of net periodic pension and benefit costs for the pension plans and other postretirement plans and other amounts recognized in accumulated other comprehensive loss for the retirement plans and post retirement plans for the years ended December 31, 2017, 2016 and 2015:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The estimated amounts that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are as follows:
Assumptions
The following table presents the significant actuarial assumptions used in preparing the required disclosures:
(1)Weighted average discount rate for the supplemental retirement plan was 3.21% and 3.55% for the years ended December 31, 2017 and 2016, respectively.
(2)Rates not applicable to the supplemental retirement plan.
*The compensation rate increase is not applicable after the Pension Plan freeze on February 28, 2013.
Health Care Trend Assumptions
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage point change in assumed health care cost trend rates would have the following effects:
Discount Rate
The plan’s projected benefit obligation cash flows were discounted to December 31, 2017 based on the spot rates from the “Above the Median” Citigroup Pension Discount Curve. The discount rate model produced a single weighted average discount rate of 3.56% that when used to discount the same plan benefit cash flows, resulted in the same aggregate present value.
Plan Assets
Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. In accordance with FASB ASC 820, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements).
Basis of Fair Value Measurement
Level 1 - Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2 - Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 - Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The following is a description of the valuation methodologies used for the pension plan assets measured at fair value, including the general classification of such instruments pursuant to the valuation hierarchy.
Mutual funds: Valued based on the number of shares held at year end at the fund closing price quoted in an active market.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The fair value of the Company’s pension plan assets at December 31, 2017 and 2016 by asset category are listed in the tables below:
(1) - In accordance with Subtopic 820-10, certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts in this table are intended to permit reconciliation of the fair value hierarchy to the fair value of plan assets at end of year.
(2) -Primarily invests in common stocks of companies with large market capitalization.
(3) -Invests in high quality, short-term money market instruments.
(4) -Invests in below investment grade bonds, bank loans and securities of foreign issuers.
Pooled Separate Accounts (PSA): Valued at its NAV as a practical expedient based on the market value of its underlying investments. If there is no readily available market, its value is the fair value of the underlying investments held in such PSA as determined by the custodian using generally accepted accounting practices and applicable law. The Company has the ability to redeem its PSA investments at NAV on a daily basis.
Investment Strategy and Asset Allocations
Plan assets are to be managed within an ERISA framework so as to provide the greatest probability that the following long-term objectives for the qualified pension plan are met in a prudent manner. The Company recognizes that, for any given time period, the attainment of these objectives is in large part dictated by the returns available from the capital markets in which plan assets are invested.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The asset allocation of plan assets reflects the Company’s long-term return expectations and risk tolerance in meeting the financial objectives of the plan. Plan assets should be adequately diversified by asset class, sector and industry to reduce the downside risk to total plan results over short-term time periods, while providing opportunities for long-term appreciation. The Company’s Human Resource Committee reserves the right to rebalance the assets at any time it deems it to be prudent.
The Company’s qualified defined benefit pension plan’s weighted-average asset allocations and the Plan’s long-term allocation structure by asset category are as follows:
Expected Contributions
The Company makes annual contributions to its funded qualified defined benefit plan in amounts not less than the minimum funding requirements of ERISA and not more than that permitted by the Internal Revenue Code. Since the supplemental plan and the postretirement benefit plans are unfunded, the expected employer contributions for the year ending December 31, 2017 is equal to the Company’s estimated future benefit payment liabilities less any participant contributions.
Expected Benefit Payments
The following is a summary of benefit payments expected to be paid by the non-contributory defined benefit pension plans (dollars in thousands):
The following is a summary of benefit payments expected to be paid by the medical, dental and life insurance plan (dollars in thousands):
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
401(k) Plan
Employees who have completed six months of service and have attained the age of 21 are eligible to participate in the Company’s defined contribution savings plan (“401(k) plan”). Eligible employees may contribute an unlimited amount (not to exceed IRS limits) of their compensation. The Company may make a qualified non-elective contribution in an amount equal to 3% of the participant’s compensation. Contributions by the Company for the years ended December 31, 2017, 2016 and 2015 were $796,000, $682,000 and $814,000 respectively. There were no discretionary employer contributions made for the years ended December 31, 2017, 2016 and 2015.
Supplemental Plans
The Company has entered into agreements with certain current and retired executives to provide supplemental retirement benefits. The present values of these future payments, not included in the previous table, are included in accrued expenses and other liabilities in the Statements of Financial Condition. As of December 31 2017 and 2016, the accrued supplemental retirement liability was $5.4 million and $4.7 million, respectively. For the years ended December 31, 2017, 2016 and 2015 net expense for these supplemental retirement benefits were $922,000, $850,000 and $712,000, respectively.
Employee Stock Ownership Plan
The Company established the ESOP to provide eligible employees the opportunity to own Company stock. The Company provided a loan to the Farmington Bank Employee Stock Ownership Plan Trust in the amount needed to purchase up to 1,430,416 shares of the Company’s common stock. The loan bears an interest rate equal to the Wall Street Journal Prime Rate plus one percentage point, adjusted annually, and provides for annual payments of interest and principal over the 15 year term of the loan. At December 31, 2017, the loan had an outstanding balance of $10.0 million and an interest rate of 5.50%. The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the unallocated shares purchased. The ESOP compensation expense was $2.4 million, $1.7 million and $1.5 million for the years ended December 31, 2017, 2016 and 2015, respectively.
Shares held by the ESOP include the following as of December 31, 2017:
The fair value of unallocated ESOP shares was $19.9 million at December 31, 2017.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
11.Stock Incentive Plans
In August 2012, the Company implemented the First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan (the “2012 Plan”). The 2012 Plan provides for a total of 2,503,228 shares of common stock for issuance upon the grant or exercise of awards. The Plan allows for the granting of 1,788,020 non-qualified stock options and 715,208 shares of restricted stock.
In May 2016, the Company’s shareholders approved the First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (the “2016 Plan”) replacing the 2012 Plan. The 2016 Plan provides for a total of 300,000 shares of common stock for issuance upon the grant or exercise of awards.
Under the 2012 Plan, stock options granted vested 20% immediately and vested 20% at each annual anniversary of the grant date and expire ten years after grant date. Under the 2016 Plan, stock options granted vest at each annual anniversary of the grant date over a 3 year period and expire ten years after grant date. The Company recognizes compensation expense for the fair values of these awards, which vest on a straight-line basis over the requisite service period of the awards.
The Company classifies share-based compensation for employees within “Salaries and employee benefits” and share-based payments for outside directors within “Other operating expenses” in the Consolidated Statements of Income. For the years ended December 31, 2017, 2016 and 2015, the Company recorded $408,000, $1.8 million and $3.1 million of share-based compensation expense, respectively, comprised of $86,000, $746,000 and $1.3 million of stock option expense, respectively and $322,000, $1.0 million and $1.8 million of restricted stock expense, respectively. Expected future compensation expense relating to the 53,800 non-vested options outstanding at December 31, 2017, is $180,000 over the remaining weighted-average period of 2.21 years. Expected future compensation expense relating to the 28,698 non-vested restricted stock outstanding at December 31, 2017 is $478,000 over the remaining weighted-average period of 2.18 years.
The fair value of the options awarded is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatility is based on the Company’s historical volatility. Prior to July 1, 2017, expected volatility was based on the Company’s historical volatility and the historical volatility of a peer group as the Company did not have reliably determined stock price for the period needed that was at least equal to its expected term and the Company’s historical volatility may not have reflected future expectations. The peer group consisted of financial institutions located in New England and the Mid-Atlantic regions of the United States based on whose common stock is traded on a national securities exchange, asset size, tangible capital ratio and earnings factors. The expected term of options granted is derived from using the simplified method due to the Company not having sufficient historical share option experience upon which to estimate an expected term. The risk-free rate is based on the grant date for a traded zero-coupon U.S. Treasury bond with a term equal to the option’s expected term.
Weighted-average assumptions for the year ended December 31, 2017 and 2016:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following is a summary of the Company’s stock option activity and related information for its option grants for the year ended December 31, 2017.
The total intrinsic value of options exercised during the year ended December 31, 2017 was $565,000.
The following is a summary of the status of the Company’s restricted stock for the year ended December 31, 2017.
Restricted stock awards: On a semi-annual basis, stock awards are granted to the Bank’s directors as share-based compensation and vest upon grant date. The Company recognizes compensation expense for the fair value of these awards using the Company's common stock closing price at the date of grant.
Time-based restricted stock units: Time-based restricted stock units vest over a service period of three years. The Company recognizes compensation expense for the fair value of these units using the Company's common stock closing price at the date of grant, which vest on a straight-line basis over the requisite service period of the units.
Performance-based restricted stock units: Performance-based restricted stock units vests after a three year performance period with a two year holding period. The units vest with a share quantity in a range from zero to 150% dependent on the Company’s average return on average assets and earnings per share, each weighted 50%. The Company recognizes compensation expense over the vesting period, based on a fair value calculated using the Chaffe model. In this model, the discount is estimated as the value of an at-the money put option with a life equal to the restriction period, divided by the price of a fully liquid share of stock. Compensation expense is subject to adjustment based on management's assessment of the Company's performance relative to the target number of shares performance criteria.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
12.Derivative Financial Instruments
Non-Hedge Accounting Derivatives/Non-designated Hedges:
Interest Rate Swap Agreements
The Company does not use derivatives for trading or speculative purposes. Interest rate swap derivatives not designated as hedges are offered to certain qualifying commercial customers and to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting definition under FASB ASC 815, “Derivatives and Hedging”. The interest rate swap agreements enable these customers to synthetically fix the interest rate on variable interest rate loans. The customers pay a variable rate and enter into a fixed rate swap agreement with the Company. The credit risk associated with the interest rate swap derivatives executed with these customers is essentially the same as that involved in extending loans and is subject to the Company’s normal credit policies. The Company obtains collateral, if needed, based upon its assessment of the customers’ credit quality. Generally, interest rate swap agreements are offered to “pass” rated customers requesting long-term commercial loans or commercial mortgages in amounts generally of at least $1.0 million. The interest rate swap agreement with our customers is cross-collateralized by the loan collateral. The interest rate swap agreements do not have any embedded interest rate caps or floors.
For every variable interest rate swap agreement entered into with a commercial customer, the Company simultaneously enters into a fixed rate interest rate swap agreement with a correspondent bank, agreeing to pay a fixed income stream and receive a variable interest rate swap. The Company is party to master netting agreements with its correspondent banks; however, the Company does not offset assets and liabilities for financial statement presentation purposes. The master netting agreements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of cash is received or posted by the counterparty with the net liability position, in accordance with contract thresholds. As of December 31, 2017, the Company based on its current position did not require a cash balance with a correspondent bank to collateralize its position. The Company has an agreement with a correspondent bank to secure any outstanding receivable in excess of $5.0 million.
Credit-risk-related Contingent Features
The Company’s agreements with its derivative counterparties contain the following provisions:
·if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Company could also be declared in default on its derivative obligations;
·if the Company fails to maintain its status as a well/adequately capitalized institution, then the counterparty could terminate the derivative positions, and the Company would be required to settle its obligations under the agreements;
·if the Company fails to maintain a specified minimum leverage ratio, then the Company could be declared in default on its derivative obligations; and
·if a specified event or condition occurs that materially changes the Company’s creditworthiness in an adverse manner, it may be required to fully collateralize its obligations under the derivative instrument.
The Company is in compliance with the above provisions as of December 31, 2017.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The Company has established a derivatives policy which sets forth the parameters for such transactions (including underwriting guidelines, rate setting process, maximum maturity, approval and documentation requirements), as well as identifies internal controls for the management of risks related to these hedging activities (such as approval of counterparties, limits on counterparty credit risk, maximum loan amounts, and limits to single dealer counterparties).
The interest rate swap derivatives executed with our customers and our counterparties, are marked to market and are included with prepaid expenses and other assets and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition at fair value. The Company had the following outstanding interest rate swaps that were not designated for hedge accounting:
Risk Participation Agreements
The Company also enters into risk participation agreements under which it may either assume or sell credit risk associated with a borrower’s performance under certain interest rate derivative contracts. In those instances where the Company has assumed credit risk, it is not a direct counterparty to the derivative contract with the borrower and have entered into the risk participation agreement because it is a party to the related loan agreement with the borrower. In those instances in which the Company has sold credit risk, it is the sole counterparty to the derivative contract with the borrower and has entered into the risk participation agreement because other banks participate in the related loan agreement. The Company manages its credit risk under risk participation agreements by monitoring the creditworthiness of the borrower, based on the Company’s normal credit review process. The fair value of the risk participation agreements in an asset and liability position was $1,000 and ($23,000) and $1,000 and ($26,000) at December 31, 2017 and 2016, respectively and are included with prepaid expenses and other assets and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Mortgage Banking Derivatives
Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Company agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At December 31, 2017, the notional amount of outstanding rate locks totaled approximately $10.8 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $14.3 million, which included mandatory forward commitments totaling approximately $10.3 million at December 31, 2017. The forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.
13.Offsetting of Financial Assets and Liabilities
The following tables present the remaining contractual maturities of the Company’s repurchase agreement borrowings and repurchase liabilities as of December 31, 2017 and 2016, disaggregated by the class of collateral pledged.
The right of setoff for a repurchase agreement resembles a secured borrowing, whereby the collateral pledged by the Company would be used to settle the fair value of the repurchase agreements should the Company be in default (e.g., fail to make an interest payment to the counterparty). The collateral is held by a third party financial institution in the Company's trustee account. The counterparty has the right to sell or repledge the investment securities if the Company defaults. The Company is required by the counterparty to maintain adequate collateral levels. In the event the collateral fair value falls below stipulated levels, the Company will pledge additional securities. The Company closely monitors collateral levels to ensure adequate levels are maintained, while mitigating the potential risk of over-collateralization in the event of counterparty default.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables present the potential effect of rights of setoff associated with the Company’s recognized financial assets and liabilities at December 31, 2017 and 2016:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
14.Financial Instruments with Off-Balance Sheet Risk
The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and unused lines of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated Statements of Financial Condition. The contract amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. Financial instruments whose contract amounts represent credit risk are as follows:
Financial instruments with off-balance sheet risk had a valuation allowance of $2,000 and $153,000 as of December 31, 2017 and 2016, respectively.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held is primarily residential property and commercial assets.
The Company had off-balance sheet risk related to its risk participation agreements totaling $998,000 and $1.1 million at December 31, 2017 and 2016, respectively.
At December 31, 2017 and 2016, the Company had no off-balance sheet special purpose entities and participated in no securitizations of assets.
15.Significant Group Concentrations of Credit Risk
The Company primarily grants commercial, residential and consumer loans to customers located within its primary market area in the state of Connecticut and western Massachusetts. The majority of the Company’s loan portfolio is comprised of commercial and residential mortgages. The Company has no negative amortization or option adjustable rate mortgage loans.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
16.Fair Value Measurements
Fair value estimates are made as of a specific point in time based on the characteristics of the financial instruments and relevant market information. In accordance with FASB ASC 820-10, the fair value estimates are measured within the fair value hierarchy. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820-10 are described as follows:
·Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
·Level 2 - Quoted prices in markets that are not active, or inputs that are observable either directly or indirectly, for substantially the full term of the asset or liability;
·Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. When available, quoted market prices are used. In other cases, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties and are significantly affected by the assumptions used and judgments made regarding risk characteristics of various financial instruments, discount rates, and estimates of future cash flows, future expected loss experience and other factors. Changes in assumptions could significantly affect these estimates. Derived fair value estimates cannot be substantiated by comparison to independent markets and, in certain cases, could not be realized in an immediate sale of the instrument.
Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. There were no transfers between levels during the year ended December 31, 2017 and 2016.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following is a description of the valuation methodologies used for instruments measured at fair value:
Securities Available-for-Sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 1 securities are those traded on active markets for identical securities including U.S. treasury obligations, preferred equity securities and marketable equity securities. Level 2 securities include U.S. treasury obligations, U.S. government agency obligations, government-sponsored residential mortgage-backed securities, corporate debt securities and mutual funds. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as level 3 and reliance is placed upon internally developed models and management judgment and evaluation for valuation. The Company had no Level 3 securities at December 31, 2017 and 2016.
The Company utilizes a third party, nationally-recognized pricing service (“pricing service”); subject to review by management, to estimate fair value measurements for the majority of its investment securities portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data that may include dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value prices on all investment securities are reviewed for reasonableness by management. Also, management assessed the valuation techniques used by the pricing service based on a review of their pricing methodology to ensure proper pricing and hierarchy classifications. Management employs procedures to monitor the pricing service’s assumptions and establishes processes to challenge the pricing service’s valuations that appear unusual or unexpected.
Derivatives: The fair values of interest rate swap and risk participation agreements are calculated using a discounted cash flow approach and utilize observable inputs such as the LIBOR swap curve, effective date, maturity date, notional amount, stated interest rate and are classified within Level 2 of the valuation hierarchy. Such derivatives do not have any embedded interest rate caps and floors.
Forward loan sale commitments and derivative loan commitments: Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements therefore are classified within Level 3 of the valuation hierarchy. The Company recognized a (loss) gain of ($113,000), $46,000 and $123,000 for the years ended December 31, 2017, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following tables detail the financial instruments carried at fair value on a recurring basis as of December 31, 2017 and 2016 and indicate the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table presents additional information about assets measured at fair value for which the Company has utilized Level 3 inputs.
The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a recurring basis at December 31, 2017 and 2016:
The embedded servicing value represents the value assigned for mortgage servicing rights and based on management’s judgment. When the embedded servicing value increases or decreases there is a direct correlation with fair value.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.
The following table details the financial instruments carried at fair value on a nonrecurring basis at December 31, 2017 and 2016 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following is a description of the valuation methodologies used for instruments measured on a non-recurring basis:
Mortgage Servicing Rights: A mortgage servicing rights asset represents the amount by which the present value of the estimated future net cash flows to be received from servicing loans are expected to more than adequately compensate the Company for performing the servicing. The fair value of servicing rights is estimated using a present value cash flow model. The most important assumptions used in the valuation model are the anticipated rate of the loan prepayments and discount rates. Adjustments are only recorded when the discounted cash flows derived from the valuation model are less than the carrying value of the asset. As such, measurement at fair value is on a nonrecurring basis. Although some assumptions in determining fair value are based on standards used by market participants, some are based on unobservable inputs and therefore are classified in Level 3 of the valuation hierarchy.
Loans Held for Sale: Loans held for sale are accounted for at the lower of cost or market and are considered to be recognized at fair value when recorded at below cost. The fair value of loans held for sale is based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted as required for changes in loan characteristics.
Impaired Loans: Impaired loans for which repayment of the loan is expected to be provided solely by the value of the underlying collateral are considered collateral dependent and are valued based on the estimated fair value of such collateral using Level 3 inputs based on customized discounting criteria. As appraisals on impaired loans are not necessarily completed on the period end dates presented in the table above, the fair value information presented may not reflect the actual fair value as of December 31, 2017 and 2016.
Other Real Estate Owned: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as other real estate owned in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value less selling costs. The write down is based upon the difference between the appraised value and the book value. Appraisals are based on observable market data such as comparable sales within the real estate market, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy. There was no other real estate owned at December 31, 2017 and 2016.
The following tables present the valuation methodology and unobservable inputs for Level 3 assets measured at fair value on a non-recurring basis at December 31, 2017 and 2016:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Disclosures about Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in estimating its fair value disclosure for financial instruments:
Cash and cash equivalents: The carrying amounts reported in the statement of condition for cash and cash equivalents approximate those assets’ fair values.
Investment in Federal Home Loan Bank of Boston (“FHLBB”) stock: FHLBB stock does not have a readily determinable fair value and is assumed to have a fair value equal to its carrying value. Ownership of FHLBB stock is restricted to the FHLBB, and can only be purchased and redeemed at par value.
Alternative Investments: The Company accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing. These are non-public investments which include limited partnerships, an equity fund and membership stocks. These alternative investments, which totaled $2.1 million and $2.2 million at December 31, 2017 and 2016, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company recognized a $10,000, 319,000 and $144,000 other-than-temporary impairment charge on its limited partnerships for the years ended December 31, 2017, 2016 and 2015, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $251,000, $179,000 and $26,000 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of December 31, 2017.
Loans: In general, discount rates used to calculate values for loan products were based on the Company’s pricing at the respective period end and included appropriate adjustments for expected credit losses. A higher discount rate was assumed with respect to estimated cash flows associated with nonaccrual loans. Projected loan cash flows were adjusted for estimated credit losses. However, such estimates made by the Company may not be indicative of assumptions and adjustments that a purchaser of the Company’s loans would seek.
Deposits: The fair values disclosed for demand deposits and savings accounts (e.g., interest and noninterest checking and passbook savings) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts for variable-rate, fixed-term certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits.
Borrowed funds: The fair values for borrowed funds, including FHLBB advances and repurchase borrowings, are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rate for similar types of agreements.
Repurchase liabilities: Repurchase liabilities represent a short-term customer sweep account product. Because of the short-term nature of these liabilities, the carrying amount approximates its fair value.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following presents the carrying amount, fair value, and placement in the fair value hierarchy of the Company’s financial instruments as of December 31, 2017 and 2016. For short-term financial assets such as cash and cash equivalents, the carrying amount is a reasonable estimate of fair value due to the relatively short time between the origination of the instrument and its expected realization.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
17.Income Taxes
The components of the income tax provision are as follows:
The following is a reconciliation of the expected federal statutory tax to the income tax provision as reported in the statements of income:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The components of the Company’s net deferred tax assets are as follows:
The allocation of deferred tax expense involving items charged to current year income and items charged directly to capital are as follows:
The Company will only recognize a deferred tax asset when, based upon available evidence, realization is more likely than not. At December 31, 2017 and 2016, there was no valuation allowance recorded against the deferred tax assets.
On December 22, 2017, the “Tax Cuts and Jobs Act” (the “Tax Act”) was enacted. Substantially all of the provisions of the Tax Act are effective for taxable years beginning after December 31, 2017. The most significant change in the Tax Act that impacts the Company is the reduction in the corporate federal income tax rate from 35% to 21%.
ASC Topic 740, Income Taxes, requires the tax effects of changes in tax laws to be recognized in the period in which the law is enacted or December 22, 2017 for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at the enacted tax rate expected to apply when temporary differences are to be realized or settled. Thus, at the date of enactment, the Company’s deferred taxes were re-measured based upon the new tax rate resulting in a charge of $5.0 million to income tax expense in the fourth quarter of 2017.
The staff of the US Securities and Exchange Commission (SEC) has recognized the complexity of reflecting the impacts of the Tax Act, and on December 22, 2017 issued guidance in Staff Accounting Bulletin 118 (SAB 118) which clarifies accounting for income taxes under ASC 740 if information is not yet available or complete and provides for up to a one year period in which to complete the required analyses and accounting (the measurement period). SAB 118 describes three scenarios (or “buckets”) associated with a company’s status of accounting for income tax reform: (1) a company is complete with its accounting for certain effects of tax reform, (2) a company is able to determine a reasonable estimate for certain effects of tax reform and records that estimate as a provisional amount, or (3) a company is not able to determine a reasonable estimate and therefore continues to apply ASC 740, based on the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
The Company has completed or has made a reasonable estimate for the measurement and accounting of certain effects of the Tax Act which have been reflected in the December 31, 2017 consolidated financial statements. The accounting for these completed and provisional items increased the 2017 deferred income tax provision by $5.0 million for the year ending December 31, 2017 and decreased the accumulated deferred income tax asset by $5.0 million at December 31, 2017. As noted above, the most significant impact resulted from a reduction in the corporate income tax rate to 21%. The items reflected as provisional amounts include the impact of the Tax Act on deferred tax assets and liabilities including the expensing of certain depreciable assets, the impact of certain compensation deduction limitations and similar items.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
As part of the Plan of Conversion and Reorganization completed on June 29, 2011, the Company contributed shares of Company common stock to the Farmington Bank Community Foundation, Inc. This contribution resulted in a charitable contribution deduction for federal income tax purposes. Use of that charitable contribution deduction is limited under Federal tax law to 10% of federal taxable income without regard to charitable contributions, net operating losses, and dividend received deductions. Annually, a corporation is permitted to carry over to the five succeeding tax years, contributions that exceeded the 10% limitation, but also subject to the maximum annual limitation. In the fourth quarter of 2016, the valuation allowance established in 2015 of $771,000 was reversed and the related deferred tax asset totaling $137,000 was written-off.
During 1999, the Bank formed a subsidiary, Farmington Savings Loan Servicing Inc., which qualifies and operates as a Connecticut passive investment company pursuant to legislation enacted in May 1998. Income earned by a passive investment company is exempt from Connecticut corporation business tax. In addition, dividends paid by Farmington Savings Loan Servicing, Inc. to its parent, Farmington Bank are also exempt from corporation business tax. The Bank expects the passive investment company to earn sufficient income to eliminate Connecticut income taxes in future years. As such, no Connecticut related deferred tax assets or liabilities have been recorded.
The Company has not provided deferred taxes for the tax reserve for bad debts, of approximately $3.4 million, that arose in tax years beginning before 1987 because it is expected that the requirements of Internal Revenue Code Section 593 will be met in the foreseeable future.
There was no interest expense related to uncertain tax positions recognized in income tax for the years ended December 31, 2017, 2016 and 2015.
The Company had no uncertain tax positions as of December 31, 2017. The Company is currently open to audit under the statute of limitations by the Internal Revenue Service and state taxing authorities for the years ended December 31, 2014 through 2017.
18.Lease Commitments
The Company’s headquarters and certain of the Company’s branch offices are leased under non-cancelable operating leases, which expire at various dates through the year 2038. Various leases have renewal options of up to an additional thirty years. Payments on majority of the leases are subject to an escalating payment schedule.
The future minimum rental commitments as of December 31, 2017 for these leases are as follows:
Total rental expense for all leases amounted to $3.2 million, $3.0 million and $3.1 million for the years ended December 31, 2017, 2016 and 2015, respectively.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
19.Regulatory Matters
The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on their financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classifications are also subject to quantitative judgments by the regulators about components, risk weightings and other factors.
In July 2013, the Federal Reserve published final rules for the adoption of the Basel III regulatory capital framework (the "Basel III Capital Rules"). The Basel III Capital Rules, among other things, (i) introduced a new capital measure called "Common Equity Tier 1", (ii) specify that Tier 1 capital consists of Common Equity Tier 1 and "Additional Tier 1 Capital" instruments meeting specified requirements, (iii) define Common Equity Tier 1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to Common Equity Tier 1 and not to the other components of capital and (iv) expand the scope of the deductions/adjustments as compared to existing regulations and a higher minimum Tier I capital requirement. Additionally, institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonus payments to executive officers. The Basel III Capital Rules became effective for the Company beginning on January 1, 2015 with certain transition provisions fully phased in through January 1, 2019.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total capital, Tier I capital and common equity Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations) and of Tier I capital (as defined in the regulations) to average assets (as defined in the regulations).
Management believes, as of December 31, 2017 and 2016 that the Company and the Bank meet all capital adequacy requirements to which they are subject. The Federal Deposit Insurance Corporation categorizes the Company and the Bank as well capitalized under the regulatory framework for prompt corrective action as of December 31, 2017. To be categorized as well capitalized, the Company and the Bank must maintain minimum total risk-based, Tier I risk-based, common equity Tier I capital and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
The following table provides information on the capital amounts and ratios for the Company and the Bank:
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
20.Other Comprehensive Income
The following table presents the changes in accumulated other comprehensive loss, net of tax by component:
The following tables present a reconciliation of the changes in components of other comprehensive income (loss) for the years indicated, including the amount of income tax expense allocated to each component of other comprehensive income (loss):
(1)Amounts are included in salaries and employee benefits in the Consolidated Statements of Income.
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
21.Parent Company Statements
The following represents the Parent Company’s Condensed Statements of Financial Condition as of December 31, 2017 and 2016, and Condensed Statements of Operations, Condensed Statements of Comprehensive Income and Condensed Cash Flows for the years ended December 31, 2017, 2016 and 2015:
Condensed Statements of Financial Condition
Condensed Statements of Operations
Condensed Statements of Comprehensive Income
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
Condensed Statements of Cash Flows
First Connecticut Bancorp, Inc.
Notes to Consolidated Financial Statements
22.Selected Quarterly Consolidated Financial Information (Unaudited)
The following is selected quarterly consolidated financial information for the years ended December 31, 2017 and 2016.
23.Legal Actions
The Company and its subsidiary are involved in various legal proceedings which have arisen in the normal course of business. The Company believes the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial statements.
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of December 31, 2017. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the U.S. Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to the Company's management, as appropriate, including the Company's Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2017.
Management's Annual Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Management assessed the effectiveness of the Company's internal control over financial reporting as of December 31, 2017. This assessment was based on criteria for effective internal control over financial reporting described in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this assessment, the Chief Executive Officer and Chief Financial Officer assert that the Company maintained effective internal control over financial reporting as of December 31, 2017.
The effectiveness of the Company's internal control over financial reporting as of December 31, 2017 has been audited by PricewaterhouseCoopers LLP, the independent registered public accounting firm who also has audited the Company's consolidated financial statements included in this Annual Report on Form 10-K, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended December 31, 2017 that have materially affected or are reasonably likely to materially affect the Company's internal control over financial reporting.
Item 9B.
Item 9B. Other Information
There were no changes in or disagreements with accountants on accounting and financial disclosures as defined in Regulation S-K, Item 304.
Part III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.
Item 11.
Item 11. Executive Compensation
The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.
Item 14.
Item 14. Principal Accounting Fees and Services
The information required under this item will be provided in a future proxy statement or 10-K/A filing with the Securities and Exchange Commission no later than 120 days after the close of the fiscal year ended December 31, 2017.
Part IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(1) Financial Statements
The financial statements filed in Item 8 of this Form 10-K are as follows:
(A)Report of Independent Registered Public Accounting Firm on Financial Statements
(B)Consolidated Statements of Financial Condition as of December 31, 2017 and 2016
(C)Consolidated Statements of Income for the years ended December 31, 2017, 2016 and 2015
(D)Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016 and 2015
(E)Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2017, 2016 and 2015
(F)Consolidated Statements of Cash Flows for the years ended December 31, 2017, 2016 and 2015
(G)Notes to Consolidated Financial Statements
(2) Financial Statements Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.
(3) Exhibits
3.1 Amended and Restated Articles of Incorporation of First Connecticut Bancorp, Inc. (filed as Exhibit 3.1 to the Registration Statement on the Form S-1/A filed for the Company on March 28, 2011, and incorporated herein by reference).
3.2.2 Amended and Restated Bylaws of First Connecticut Bancorp, Inc. (filed as Exhibit 3.2.3 to the Form 8-K filed for the Company on January 25, 2018, and incorporated herein by reference).
4.1 Form of Common Stock Certificate of First Connecticut Bancorp, Inc. (filed as Exhibit 4.1 to the Registration Statement on the Form S-1/A filed for the Company on March 28, 2011, as amended, and incorporated herein by reference).
10.1 First Connecticut Bancorp, Inc. 2016 Stock Incentive Plan (filed as Exhibit 10.1 to the Registration Statement on the Form S-8 filed on July 12, 2016, and incorporated herein by reference).
10.2 Supplemental Executive Retirement Plan of Farmington Bank (filed as Exhibit 10.2 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.3 Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.3 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.4 First Amendment to Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.4 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.4.1 Second Amendment to Voluntary Deferred Compensation Plan for Directors and Key Employees (filed as Exhibit 10.4.1 to the Form 10-K for the year ended December 31, 2012 filed on March 18, 2013, and incorporated herein by reference).
10.5 Voluntary Deferred Compensation Plan for Key Employees (filed as Exhibit 10.5 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.6 Life Insurance Premium Reimbursement Agreement between Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.6 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.7 Life Insurance Premium Reimbursement Agreement between Farmington Bank and Gregory A. White (filed as Exhibit 10.7 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.8 Farmington Savings Bank Defined Benefit Employees’ Pension Plan, as amended (filed as Exhibit 10.8 to the Registration Statement on the Form S-1/A filed for the Company on March 28, 2011, as amended, and incorporated herein by reference).
10.8.1 Farmington Savings Bank Defined Benefit Employees’ Pension Plan, as amended (filed as Exhibit 10.8.1 to the Form 10-K for the year ended December 31, 2012 filed on March 18, 2013, and incorporated herein by reference).
10.9 Annual Incentive Compensation Plan (filed as Exhibit 10.9 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.9.1 Amended Annual Incentive Compensation Plan (filed as Exhibit 10.9.1 to the Form 10-K for the year ended December 31, 2013 filed on March 17, 2014, and incorporated herein by reference)
10.10 Supplemental Retirement Plan Participation Agreement between John J. Patrick, Jr. and Farmington Bank (filed as Exhibit 10.10 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.11 Supplemental Retirement Plan Participation Agreement between Michael T. Schweighoffer and Farmington Bank (filed as Exhibit 10.11 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.12 Supplemental Retirement Plan Participation Agreement between Gregory A. White and Farmington Bank (filed as Exhibit 10.12 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
10.13 Employment Agreement among First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.1 Employment Agreement on Form 8-K for the Company on April 27, 2012 and incorporated herein by reference).
10.13.1 Employment Agreement First Amendment among First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.13.1 to the current report on the Form 8-K filed for the Company on February 28, 2013, as amended, and incorporated herein by reference) (term currently extended to December 31, 2019).
10.14 Life Insurance Premium Reimbursement Agreement between Farmington Bank and Michael T. Schweighoffer (filed as Exhibit 10.14 to the Form 10-Q filed for the Company on May 15, 2012, and incorporated herein by reference).
10.15 First Connecticut Bancorp, Inc. 2012 Stock Incentive Plan (Incorporated by reference to Appendix A in the Definitive Proxy Statement on Form 14A filed on June 6, 2012 and amended on July 2, 2012 (File No. 001-35209-12890818 and 12960688).
10.16 Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and John J. Patrick, Jr. (filed as Exhibit 10.16 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
10.17 Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Gregory A. White (filed as Exhibit 10.17 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
10.18 Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Michael T. Schweighoffer (filed as Exhibit 10.18 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
10.19 Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Kenneth F. Burns (filed as Exhibit 10.19 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
10.20 Change in Control Agreement between First Connecticut Bancorp, Inc., Farmington Bank and Catherine M. Burns (filed as Exhibit 10.20 to the Form 10-K for the year ended December 31, 2016 filed on March 13, 2017, and incorporated herein by reference).
21.1 Subsidiaries of First Connecticut Bancorp, Inc. and Farmington Bank (filed as Exhibit 21.1 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
32.1 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.
32.2 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.
Interactive data files pursuant to Rule 405 of Regulation S-t: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements tagged as blocks of text and in detail.*
Item 16. Form 10-K Summary
Not Applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
First Connecticut Bancorp, Inc.
By: /s/ John J. Patrick, Jr.
John J. Patrick, Jr.
Date: March 9, 2018
Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures
Title
Date
/s/ John J. Patrick Jr.
Chairman of the Board, President and Chief Executive Officer
March 9, 2018
John J. Patrick, Jr.
(Principal Executive Officer)
/s/ Gregory A. White
Executive Vice President and Chief Financial Officer
March 9, 2018
Gregory A. White
(Principal Financial Officer)
/s/ Ronald A. Bucchi
Director
March 9, 2018
Ronald A. Bucchi
/s/ John J. Carson
Director
March 9, 2018
John J. Carson
/s/ Kevin S. Ray
Director
March 9, 2018
Kevin S. Ray
/s/ Michael A. Ziebka
Director
March 9, 2018
Michael A. Ziebka
/s/ Patience P. McDowell
Director
March 9, 2018
Patience P. McDowell
/s/ James T. Healey, Jr.
Director
March 9, 2018
James T. Healey, Jr.
/s/ John A. Green
Director
March 9, 2018
John A. Green