First Connecticut Bancorp (FBNK) 10-Q 2017 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

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

For the quarterly period ended March 31, 2017

OR

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

For the transition period from            to            

Commission File No. 333-171913

First Connecticut Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland	45-1496206
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
One Farm Glen Boulevard, Farmington, CT	06032
(Address of Principal Executive Offices)	(Zip Code)

(860) 676-4600

(Registrant’s telephone number)

N/A

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

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

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

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

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

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

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

As of April 24, 2017, there were 15,924,314 shares of First Connecticut Bancorp, Inc. common stock, par value $0.01, outstanding.

First Connecticut Bancorp, Inc.

Table of Contents

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

First Connecticut Bancorp, Inc.

Consolidated Statements of Financial Condition (Unaudited)

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

(1) Loans include net deferred loan costs of $4.3 million and $3.8 million at March 31, 2017 and December 31, 2016, respectively.

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

1

First Connecticut Bancorp, Inc.

Consolidated Statements of Income (Unaudited)

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

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

2

First Connecticut Bancorp, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

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

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

3

First Connecticut Bancorp, Inc.

Consolidated Statement of Changes in Stockholders’ Equity (Unaudited)

									Unallocated									Accumulated
	Common Stock					Additional			Common									Other			Total
	Shares					Paid in			Shares Held			Treasury			Retained			Comprehensive			Stockholders'
	Outstanding			Amount		Capital			by ESOP			Stock			Earnings			Loss			Equity
(Dollars in thousands, except share data)
Balance at December 31, 2015		15,881,663		$	181	$	181,997		$	(11,626	)	$	(30,602	)	$	112,933		$	(7,162	)	$	245,721
ESOP shares released andcommitted to be released		-			-		123			263			-			-			-			386
Cash dividend paid ($0.07 per common share)		-			-		-			-			-			(1,102	)		-			(1,102	)
Treasury stock acquired		(147,100	)		-		-			-			(2,373	)		-			-			(2,373	)
Stock options exercised		46,094			-		(23	)		-			620			-			-			597
Tax expense from stock-based compensation		-			-		(1	)		-			-			-			-			(1	)
Share based compensation expense		-			-		651			-			-			-			-			651
Net income		-			-		-			-			-			3,613			-			3,613
Other comprehensive income		-			-		-			-			-			-			521			521
Balance at March 31, 2016		15,780,657		$	181	$	182,747		$	(11,363	)	$	(32,355	)	$	115,444		$	(6,641	)	$	248,013
Balance at December 31, 2016		15,897,698		$	181	$	184,111		$	(10,567	)	$	(30,400	)	$	123,541		$	(6,690	)	$	260,176
ESOP shares released and
committed to be released		-			-		290			258			-			-			-			548
Cash dividend paid ($0.11 per common share)		-			-		-			-			-			(1,752	)		-			(1,752	)
Stock options exercised		22,750			-		(14	)		-			311			-			-			297
Share based compensation expense		3,066			-		69			-			42			-			-			111
Net income		-			-		-			-			-			5,093			-			5,093
Other comprehensive income		-			-		-			-			-			-			194			194
Balance at March 31, 2017		15,923,514		$	181	$	184,456		$	(10,309	)	$	(30,047	)	$	126,882		$	(6,496	)	$	264,667

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

4

First Connecticut Bancorp, Inc.

Consolidated Statements of Cash Flows (Unaudited)

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

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

5

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

1. Summary of Significant Accounting Policies

Organization and Business

First Connecticut Bancorp, Inc. is a Maryland-chartered bank holding company that wholly owns its only subsidiary, Farmington Bank (collectively with its subsidiary, the “Company”). Farmington Bank's main office is located in Farmington, Connecticut. Farmington Bank is a full-service, community bank with 24 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Farmington Bank's primary source of income is interest accrued on loans to customers, which include small and middle market businesses and individuals residing primarily in Connecticut and western Massachusetts. However, the Bank will selectively lend to borrowers in other northeastern states.

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

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

Basis of Financial Statement Presentation

The consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. The Company has condensed or omitted certain information and footnote disclosures normally included in the consolidated financial statements in accordance with accounting principles generally accepted in the United States of America pursuant to such rules and regulations. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. All significant intercompany transactions and balances have been eliminated in consolidation. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements as of and for the year ended December 31, 2016 included in the Company’s 10-K filed on March 13, 2017. The results of operations for the interim periods are not necessarily indicative of the results for the full year.

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

6

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Investment Securities

Marketable equity and debt securities are classified as either trading, available-for-sale, or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. At March 31, 2017 and December 31, 2016, the Company had no debt or equity securities classified as trading. Held-to-maturity securities are debt securities for which the Company has the ability and intent to hold until maturity. All other securities not included in held-to-maturity are classified as available-for-sale. Held-to-maturity securities are recorded at amortized cost, adjusted for the amortization or accretion of premiums or discounts. Premiums and discounts on debt securities are amortized or accreted into interest income over the term of the securities using the level yield method. Available-for-sale securities are recorded at fair value. Unrealized gains and losses, net of the related tax effect, on available-for-sale securities are excluded from earnings and are reported in accumulated other comprehensive income, a separate component of equity, until realized. Further information relating to the fair value of securities can be found within Note 4 of the Notes to Consolidated Financial Statements. In accordance with Financial Accounting Standards Board Accounting Standards Codification ("FASB ASC") 320- “Debt and Equity Securities”, a decline in market value of a debt security below amortized cost that is deemed other-than-temporary is charged to earnings for the credit related other-than-temporary impairment ("OTTI"), resulting in the establishment of a new cost basis for the security, while the non-credit related OTTI is recognized in other comprehensive income if there is no intent or requirement to sell the security. The securities portfolio is reviewed on a quarterly basis for the presence of other-than-temporary impairment. If an equity security is deemed other-than-temporarily impaired, the full impairment is considered to be credit-related and a charge to earnings would be recorded. Gains and losses on sales of securities are recognized at the time of sale on a specific identification basis.

Loans Held for Sale

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

Loans

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

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

7

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Interest on loans is accrued and recognized in interest income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued, and previously accrued income is reversed, when loan payments are more than 90 days past due or when, in the judgment of management, collectability of the loan or loan interest becomes uncertain. Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within a reasonable period and there is a sustained period of repayment performance (generally a minimum of six months) by the borrower, in accordance with contractual terms involving payment of cash or cash equivalents. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual status. If a residential real estate, commercial real estate, construction, commercial, home equity line of credit and other loan is on non-accrual status cash payments are applied towards the reduction of principal.  If loans are considered impaired but accruing, cash payments are applied first to interest income and then as a reduction of principal as specified in the contractual agreement, unless the collection of the remaining principal amount due is considered doubtful.

The policy for determining past due or delinquency status for all loan portfolio segments is based on the number of days past due or the contractual terms of the loan. A loan is considered delinquent when the customer does not make their payments due according to their contractual terms. Generally, a loan can be demanded at any time if the loan is delinquent or if the borrower fails to meet any other agreed upon terms and conditions.

On a quarterly basis, our loan policy requires that we evaluate for impairment all commercial loans classified as non-accrual, loans secured by real property in foreclosure or are otherwise likely to be impaired, non-accruing residential and home equity loan segments greater than $100,000 and all troubled debt restructurings.

Nonperforming loans consist of non-accruing loans, non-accruing loans identified as trouble debt restructurings and loans past due more than 90 days and still accruing interest.

Allowance for Loan Losses

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

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

General component:

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

8

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

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

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

9

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Allocated component:

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

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

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

Unallocated component:

An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at March 31, 2017 and December 31, 2016.

10

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Troubled Debt Restructuring

A loan is considered a troubled debt restructuring (“TDR”) when the Company, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower in modifying or renewing the loan the Company would not otherwise consider. In connection with troubled debt restructurings, terms may be modified to fit the ability of the borrower to repay in line with their current financial status, which may include a reduction in the interest rate to market rate or below, a change in the term or movement of past due amounts to the back-end of the loan or refinancing. A loan is placed on non-accrual status upon being restructured, even if it was not previously, unless the modified loan was current for the six months prior to its modification and we believe the loan is fully collectable in accordance with its new terms. The Company’s policy to restore a restructured loan to performing status is dependent on the receipt of regular payments, generally for a period of six months and one calendar year-end. All troubled debt restructurings are classified as impaired loans and are reviewed for impairment by management on a quarterly basis per Company policy.

Foreclosed Real Estate

Real estate acquired through foreclosure comprises properties acquired in partial or total satisfaction of problem loans. The properties are acquired through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. At the time these properties are foreclosed, the properties are initially recorded at the fair value at the date of foreclosure less estimated selling costs. Losses arising at the time of acquisition of such properties are charged against the allowance for loan losses. Subsequent loss provisions are charged to the foreclosed real estate valuation allowance and expenses incurred to maintain the properties are charged to noninterest expense. Properties are evaluated regularly to ensure the recorded amounts are supported by current fair values, and a charge to operations is recorded as necessary to reduce the carrying amount to fair value less estimated costs to dispose. Revenue and expense from the operation of other real estate owned and the provision to establish and adjust valuation allowances are included in noninterest expenses. Costs relating to the development and improvement of the property are capitalized, subject to the limit of fair value of the collateral. In the Consolidated Statements of Financial Condition, total prepaid expenses and other assets include foreclosed real estate of $-0- as of March 31, 2017 and December 31, 2016, with no specific valuation allowance. The recorded investment of consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements of the applicable jurisdiction totaled $4.2 million at March 31, 2017.

Pension and Other Postretirement Benefit Plans

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

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

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

11

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Income Taxes

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

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

Reclassifications

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

Recent Accounting Pronouncements

In August 2015, the FASB issued Accounting Standards Update “ASU” No. 2015-14 "Revenue from Contracts with Customers (Topic 606)." In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), with an original effective date for annual reporting periods beginning after December 15, 2016. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. ASU 2015-14 deferred the effective date of ASU 2014-09 to annual periods and interim periods within those annual periods beginning after December 15, 2017. The amendments can be applied retrospectively to each prior reporting period or retrospectively with the cumulative effect of initially applying this Update recognized at the date of initial application. Early application is not permitted. The Company is assessing the impact of ASU 2015-14 on its accounting and disclosures.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments—Overall (Topic 825-10): "Recognition and Measurement of Financial Assets and Financial Liabilities." ASU 2016-01 amends the guidance on the classification and measurement of financial instruments. Some of the amendments in ASU 2016-01 include the following: 1) requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment; 3) requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; and 4) requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value; among others. For public business entities, the amendments of ASU 2016-01 are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is assessing the impact of ASU 2016-01 on its accounting and disclosures.

12

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

In March 2016, the FASB issued ASU No. 2016-07 "Investments – Equity Method and Joint Ventures (Topic 323) Simplifying the Transition to the Equity Method of Accounting." This ASU eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by step basis as if the equity method had been in effect during all previous periods that the investment had been held. The amendments require that the equity method investor add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting. Therefore, upon qualifying for the equity method of accounting, no retroactive adjustment of the investment is required. For public business entities, ASU 2016-07 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that result in the adoption of the equity method. Earlier application is permitted. The Company is assessing the impact of ASU 2016-07 on its accounting and disclosures.

In March 2016, the FASB issued ASU No. 2016-09 “Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting.” This ASU requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled. It also allows an employer to repurchase more of an employee’s shares than it can today for tax withholding purposes without triggering liability accounting and to make a policy election for forfeitures as they occur. For public business entities, ASU No. 2016-09 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2016-09 and it had no material impact on its accounting and disclosures.

In June 2016, the FASB issued ASU No. 2016-13 "Financial Instruments - Credit Losses (Topic 326)" requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. This ASU also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public business entities for annual periods beginning after December 13, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is assessing the impact of ASU 2016-13 on its accounting and disclosures.

13

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

In August 2016, the FASB issued ASU No. 2016-15 “Statement of Cash Flows (Topic 230) - Classification of Certain Cash Receipts and Cash Payments.” ASU 2016-15 provides cash flow statement classification guidance for certain transactions including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. The guidance is effective for public business entities for annual years beginning after December 15, 2017, and interim periods within those fiscal years and should be applied retrospectively. Early adoption is permitted, including adoption in an interim period. The Company is assessing the impact of ASU 2016-15 on its accounting and disclosures.

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

2. Restrictions on Cash and Due from Banks

The Company is required to maintain a percentage of transaction account balances on deposit in non-interest-earning reserves with the Federal Reserve Bank, offset by the Company’s average vault cash. The Company also is required to maintain cash balances to collateralize the Company’s position with certain third parties. The Company had cash and liquid assets of approximately $9.7 million and $9.5 million to meet these requirements at March 31, 2017 and December 31, 2016, respectively.

14

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

3. Earnings Per Share

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

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

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

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

15

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

4. Investment Securities

Investment securities are summarized as follows:

	March 31, 2017
			Recognized in OCI							Not Recognized in OCI
			Gross		Gross					Gross		Gross
	Amortized		Unrealized		Unrealized			Carrying		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value		Gains		Losses			Value
Available-for-sale
Debt securities:
U.S. Treasury obligations	$	24,831	$	166	$	-		$	24,997	$	-	$	-		$	24,997
U.S. Government agency obligations		71,000		45		(302	)		70,743		-		-			70,743
Government sponsored residential mortgage-backed securities		3,272		145		-			3,417		-		-			3,417
Corporate debt securities		500		12		-			512		-		-			512
Preferred equity securities		2,000		-		(155	)		1,845		-		-			1,845
Marketable equity securities		108		77		(1	)		184		-		-			184
Mutual funds		4,098		-		(255	)		3,843		-		-			3,843
Total securities available-for-sale	$	105,809	$	445	$	(713	)	$	105,541	$	-	$	-		$	105,541
Held-to-maturity
U.S. Treasury obligations	$	4,989	$	-	$	-		$	4,989	$	45	$	-		$	5,034
U.S. Government agency obligations		23,000		-		-			23,000		-		(95	)		22,905
Government sponsored residential mortgage-backed securities		22,331		-		-			22,331		90		-			22,421
Total securities held-to-maturity	$	50,320	$	-	$	-		$	50,320	$	135	$	(95	)	$	50,360

	December 31, 2016
			Recognized in OCI							Not Recognized in OCI
			Gross		Gross					Gross		Gross
	Amortized		Unrealized		Unrealized			Carrying		Unrealized		Unrealized			Fair
(Dollars in thousands)	Cost		Gains		Losses			Value		Gains		Losses			Value
Available-for-sale
Debt securities:
U.S. Treasury obligations	$	19,826	$	142	$	-		$	19,968	$	-	$	-		$	19,968
U.S. Government agency obligations		73,996		67		(352	)		73,711		-		-			73,711
Government sponsored residential mortgage-backed securities		3,424		145		-			3,569		-		-			3,569
Corporate debt securities		500		15		-			515		-		-			515
Preferred equity securities		2,000		-		(254	)		1,746		-		-			1,746
Marketable equity securities		108		75		(1	)		182		-		-			182
Mutual funds		4,071		-		(242	)		3,829		-		-			3,829
Total securities available-for-sale	$	103,925	$	444	$	(849	)	$	103,520	$	-	$	-		$	103,520
Held-to-maturity
U.S. Government agency obligations	$	16,000	$	-	$	-		$	16,000	$	-	$	(83	)	$	15,917
Government sponsored residential mortgage-backed securities		17,061		-		-			17,061		63		-			17,124
Total securities held-to-maturity	$	33,061	$	-	$	-		$	33,061	$	63	$	(83	)	$	33,041

16

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables summarize gross unrealized losses and fair value, aggregated by investment category and length of time the investments have been in a continuous unrealized loss position at March 31, 2017 and December 31, 2016:

	March 31, 2017
			Less than 12 Months					12 Months or More					Total
					Gross					Gross					Gross
	Number of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Securities		Value		Loss			Value		Loss			Value		Loss
Available-for-sale:
U.S. Government agency obligations		8	$	56,698	$	(302	)	$	-	$	-		$	56,698	$	(302	)
Preferred equity securities		1		-		-			1,845		(155	)		1,845		(155	)
Marketable equity securities		1		-		-			6		(1	)		6		(1	)
Mutual funds		1		-		-			3,843		(255	)		3,843		(255	)
		11	$	56,698	$	(302	)	$	5,694	$	(411	)	$	62,392	$	(713	)
Held-to-maturity
U.S. Government agency obligations		4	$	22,905	$	(95	)	$	-	$	-		$	22,905	$	(95	)
Total investment securities in an unrealized loss position		15	$	79,603	$	(397	)	$	5,694	$	(411	)	$	85,297	$	(808	)

	December 31, 2016
			Less than 12 Months					12 Months or More					Total
					Gross					Gross					Gross
	Number of		Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
(Dollars in thousands)	Securities		Value		Loss			Value		Loss			Value		Loss
Available-for-sale:
U.S. Government agency obligations		10	$	66,644	$	(352	)	$	-	$	-		$	66,644	$	(352	)
Preferred equity securities		1		-		-			1,746		(254	)		1,746		(254	)
Marketable equity securities		1		-		-			6		(1	)		6		(1	)
Mutual funds		1		-		-			3,830		(242	)		3,830		(242	)
		13	$	66,644	$	(352	)	$	5,582	$	(497	)	$	72,226	$	(849	)
Held-to-maturity
U.S. Government agency obligations		2	$	11,917	$	(83	)	$	-	$	-		$	11,917	$	(83	)
Total investment securities in an unrealized loss position		15	$	78,561	$	(435	)	$	5,582	$	(497	)	$	84,143	$	(932	)

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

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

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

Mutual funds - The unrealized loss on mutual funds in a loss position for 12 months or more relates to one mutual fund. The fund invests primarily in high quality debt securities and other debt instruments supporting the affordable housing industry in areas of the United States designated by fund shareholders. When estimating the recovery period for securities in an unrealized loss position, management utilizes analyst forecasts, earnings assumptions and other fund-specific financial performance metrics. In addition, this assessment incorporates general market data, industry and sector cycles and related trends to determine a reasonable recovery period. Management evaluated the near-term prospects of the fund in relation to the severity and duration of the impairment. Management concluded that the mutual fund is not other-than-temporarily impaired at March 31, 2017.

17

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The Company recorded no other-than-temporary impairment charges to the investment securities portfolios for the three months ended March 31, 2017 and 2016.

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

As of March 31, 2017 and December 31, 2016, U.S. Treasury, U.S. Government agency obligations and Government sponsored residential mortgage-backed securities with a fair value of $125.6 million and $102.4 million, respectively, were pledged as collateral for loan derivatives, public funds, repurchase liabilities and repurchase agreement borrowings.

The amortized cost and estimated fair value of debt securities at March 31, 2017 and December 31, 2016 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or repay obligations with or without call or repayment penalties:

	March 31, 2017
	Available-for-Sale				Held-to-Maturity
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
(Dollars in thousands)
Due in one year or less	$	37,484	$	37,427	$	-	$	-
Due after one year through five years		58,847		58,825		23,000		22,905
Due after five years through ten years		-		-		4,989		5,034
Due after ten years		-		-		-		-
Government sponsored residential mortgage-backed securities		3,272		3,417		22,331		22,421
	$	99,603	$	99,669	$	50,320	$	50,360

	December 31, 2016
	Available-for-Sale				Held-to-Maturity
			Estimated				Estimated
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
(Dollars in thousands)
Due in one year or less	$	33,475	$	33,490	$	-	$	-
Due after one year through five years		60,847		60,704		16,000		15,917
Due after five years through ten years		-		-		-		-
Due after ten years		-		-		-		-
Government sponsored residential mortgage-backed securities		3,424		3,569		17,061		17,124
	$	97,746	$	97,763	$	33,061	$	33,041

18

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

The Company, as a member of the FHLBB, owned $16.4 million of FHLBB capital stock at March 31, 2017 and December 31, 2016, which is equal to its FHLBB capital stock requirement. The Company evaluated its FHLBB capital stock for potential other-than-temporary impairment at March 31, 2017. Capital adequacy, credit ratings, the value of the stock, overall financial condition of the FHLB system and FHLBB as well as current economic factors were analyzed in the impairment analysis. The Company concluded that its position in FHLBB capital stock is not other-than-temporarily impaired at March 31, 2017.

Alternative Investments

Alternative investments, which totaled $2.3 million and $2.2 million at March 31, 2017 and December 31, 2016, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company’s alternative investments include investments in certain non-public funds, which include limited partnerships, an equity fund and membership stocks. These investments are held at cost and were evaluated for potential other-than-temporary impairment at March 31, 2017. The Company recognized a $10,000 and $47,000 other-than-temporary impairment charge on its limited partnerships for the three months ended March 31, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $11,000 and $129,000 for the three months ended March 31, 2017 and 2016, respectively. See a further discussion of fair value in Note 15 - Fair Value Measurements. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of March 31, 2017.

5. Loans and Allowance for Loan Losses

Loans consisted of the following:

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

19

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

	For the Three Months Ended March 31, 2017
	Balance at beginning of period		Charge-offs			Recoveries		Provision for (Reduction of) loan losses			Balance at end of period
(Dollars in thousands)
Real estate
Residential	$	4,134	$	(31	)	$	-	$	144		$	4,247
Commercial		11,131		(111	)		-		220			11,240
Construction		425		-			-		93			518
Commercial		4,400		(322	)		-		(163	)		3,915
Home equity line of credit		1,398		-			-		(18	)		1,380
Other		41		(51	)		10		49			49
	$	21,529	$	(515	)	$	10	$	325		$	21,349

	For the Three Months Ended March 31, 2016
	Balance at beginning of period		Charge-offs			Recoveries		Provision for (Reduction of) loan losses			Balance at end of period
(Dollars in thousands)
Real estate
Residential	$	4,084	$	(24	)	$	-	$	(134	)	$	3,926
Commercial		10,255		-			-		(10	)		10,245
Construction		231		-			-		65			296
Commercial		4,119		(151	)		9		270			4,247
Home equity line of credit		1,470		-			-		(50	)		1,420
Other		39		(86	)		11		76			40
	$	20,198	$	(261	)	$	20	$	217		$	20,174

20

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

21

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

	March 31, 2017
																	Past Due 90
	30-59 Days				60-89 Days				> 90 Days								Days or More
(Dollars in thousands)	Past Due				Past Due				Past Due				Total				and Still
	Number		Amount		Number		Amount		Number		Amount		Number		Amount		Accruing
Real estate:
Residential		21	$	4,381		-	$	-		21	$	7,757		42	$	12,138	$	-
Commercial		-		-		-		-		-		-		-		-		-
Construction		-		-		-		-		1		4,532		1		4,532		-
Commercial		-		-		-		-		1		95		1		95		-
Home equity line of credit		2		76		2		127		1		258		5		461		-
Other		9		99		-		-		1		21		10		120		-
Total		32	$	4,556		2	$	127		25	$	12,663		59	$	17,346	$	-

	December 31, 2016
	30-59 Days				60-89 Days				> 90 Days								Past Due 90 Days or More
(Dollars in thousands)	Past Due				Past Due				Past Due				Total				and Still
	Number		Amount		Number		Amount		Number		Amount		Number		Amount		Accruing
Real estate:
Residential		10	$	1,226		6	$	1,529		23	$	7,979		39	$	10,734	$	-
Commercial		1		193		-		-		1		888		2		1,081		-
Construction		-		-		-		-		1		4,532		1		4,532		-
Commercial		1		54		-		-		3		319		4		373		-
Home equity line of credit		-		-		2		85		3		377		5		462		-
Other		7		66		1		23		-		-		8		89		-
Total		19	$	1,539		9	$	1,637		31	$	14,095		59	$	17,271	$	-

22

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

	March 31, 2017						December 31, 2016
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance
Impaired loans without a valuation allowance:
Real estate:
Residential	$	11,531	$	13,357	$	-	$	11,046	$	12,833	$	-
Commercial		8,543		8,575		-		9,496		9,636		-
Construction		4,532		4,532		-		4,532		4,532		-
Commercial		1,169		1,440		-		1,784		2,027		-
Home equity line of credit		1,943		1,995		-		1,864		1,909		-
Other		651		670		-		682		700		-
Total		28,369		30,569		-		29,404		31,637		-
Impaired loans with a valuation allowance:
Real estate:
Residential		1,064		1,087		131		1,732		1,796		145
Commercial		2,854		2,854		17		2,867		2,867		14
Construction		-		-		-		-		-		-
Commercial		95		862		42		245		894		112
Home equity line of credit		-		-		-		-		-		-
Other		25		25		7		25		25		7
Total		4,038		4,828		197		4,869		5,582		278
Total impaired loans	$	32,407	$	35,397	$	197	$	34,273	$	37,219	$	278

23

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

24

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

	March 31, 2017
	TDRs on Accrual Status				TDRs on Nonaccrual Status				Total TDRs
(Dollars in thousands)	Number of Loans		Recorded Investment		Number of Loans		Recorded Investment		Number of Loans		Recorded Investment
Real estate:
Residential		16	$	2,732		12	$	4,825		28	$	7,557
Commercial		2		3,315		-		-		2		3,315
Construction		-		-		1		4,532		1		4,532
Commercial		2		231		5		902		7		1,133
Home equity line of credit		10		1,162		1		57		11		1,219
Other		5		658		1		18		6		676
Total		35	$	8,098		20	$	10,334		55	$	18,432

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

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

25

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The following tables include the recorded investment and number of modifications for modified loans. The Company reports the recorded investment in the loans prior to a modification and also the recorded investment in the loans after the loans were restructured for the three months ended March 31, 2017 and 2016:

	For the Three Months Ended March 31, 2017						For the Three Months Ended March 31, 2016
(Dollars in thousands)	Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification (1)		Number of Modifications		Recorded Investment Prior to Modification		Recorded Investment After Modification (1)
Troubled Debt Restructurings:
Real estate
Residential		4	$	596	$	596		-	$	-	$	-
Home equity line of credit		2		88		88		3		844		844
Total		6	$	684	$	684	$	3	$	844	$	844

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

The following tables provide TDR loans that were modified by means of extended maturity, below market adjusted interest rates, a combination of rate and maturity, or by other means including covenant modifications, forbearance and/or the concessions and borrowers discharged in bankruptcy for the three months ended March 31, 2017 and 2016:

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

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

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

26

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Credit Quality Information

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

The Company utilizes a point risk rating scale as follows:

Risk Rating Definitions

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

Loans rated 1 – 5, 55:	Commercial loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 6:	Residential, Consumer and Commercial loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 7:	Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 8:	Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 9:	Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

27

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

The Company places considerable emphasis on the early identification of problem assets, problem-resolution and minimizing loss exposure. Delinquency notices are mailed monthly to all delinquent borrowers, advising them of the amount of their delinquency. Residential and consumer lending borrowers are typically given 30 days to pay the delinquent payments or to contact us to make arrangements to bring the loan current over a longer period of time. Generally, if a residential or consumer lending borrower fails to bring the loan current within 90 days from the original due date or to make arrangements to cure the delinquency over a longer period of time, the matter is referred to legal counsel and foreclosure or other collection proceedings are initiated. The Company may consider forbearance or a loan restructuring in certain circumstances where a temporary loss of income is the primary cause of the delinquency, and if a reasonable plan is presented by the borrower to cure the delinquency in a reasonable period of time after his or her income resumes. Problem or delinquent borrowers in our commercial real estate and commercial business portfolios are handled on a case-by-case basis, typically by our Special Assets Department. Appropriate problem-resolution and workout strategies are formulated based on the specific facts and circumstances.

28

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

6. Mortgage Servicing Rights

The Company services residential real estate mortgage loans that it has sold without recourse to third parties. The carrying value of mortgage servicing rights was $4.8 million at March 31, 2017 and December 31, 2016, and the balance is included in prepaid expenses and other assets in the accompanying Consolidated Statements of Financial Condition. The fair value of mortgage servicing rights approximated $6.6 million and $6.2 million at March 31, 2017 and December 31, 2016, respectively. Total loans sold with servicing rights retained were $17.7 million and $24.3 million for the three months ended March 31, 2017 and 2016, respectively. The net gain on loans sold totaled $416,000 and $490,000 for the three months ended March 31, 2017 and 2016, respectively, and is included in the accompanying Consolidated Statements of Income.

The principal balance of loans serviced for others, which are not included in the accompanying Consolidated Statements of Financial Condition, totaled $544.4 million and $540.4 million at March 31, 2017 and December 31, 2016, respectively. Loan servicing fees for others totaling $338,000 and $289,000 for the three months ended March 31, 2017 and 2016, respectively, are included as a component of other noninterest income in the accompanying Consolidated Statements of Income.

7. Credit Arrangements

The Company has access to a pre-approved line of credit with the Federal Home Loan Bank of Boston (“FHLBB”) for $8.8 million, which was undrawn at March 31, 2017 and December 31, 2016. The Company has access to pre-approved unsecured lines of credit with financial institutions totaling $55.0 million which were undrawn at March 31, 2017 and December 31, 2016, respectively. The Company has access to a $3.5 million unsecured line of credit agreement with a bank which expires on August 31, 2017. The line was undrawn at March 31, 2017 and December 31, 2016. The Company maintains a cash balance of $512,500 with certain financial institutions to avoid fees associated with the lines.

In accordance with an agreement with the FHLBB, the Company is required to maintain qualified collateral, as defined in the FHLBB Statement of Credit Policy, free and clear of liens, pledges and encumbrances, as collateral for the advances, if any, and the preapproved line of credit. The Company is in compliance with these collateral requirements.

FHLBB advances totaled $282.1 million and $287.1 million at March 31, 2017 and December 31, 2016, respectively. Advances from the FHLBB are collateralized by first residential and commercial mortgages and home equity lines of credit with an estimated eligible collateral value of $1.4 billion at March 31, 2017 and December 31, 2016. The Company had available borrowings of $573.9 million and $544.7 million at March 31, 2017 and December 31, 2016, respectively, subject to collateral requirements of the FHLBB. The Company also had letters of credit of $79.5 million and $83.5 million at March 31, 2017 and December 31, 2016, respectively, subject to collateral requirements of the FHLBB. The Company is required to acquire and hold shares of capital stock in the FHLBB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or up to 4.5% of its advances (borrowings) from the FHLBB. The carrying value of FHLBB stock approximates fair value based on the redemption provisions of the stock.

The Company participates in the Federal Reserve Bank’s discount window loan collateral program that enables the Company to borrow up to $62.2 million and $64.2 million on an overnight basis at March 31, 2017 and December 31, 2016, respectively, and was undrawn as of March 31, 2017 and December 31, 2016. The funding arrangement was collateralized by $121.1 million and $128.7 million in pledged commercial real estate loans as of March 31, 2017 and December 31, 2016, respectively.

29

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

The Bank offers overnight repurchase liability agreements to commercial or municipal customers whose excess deposit account balances are swept daily into collateralized repurchase liability accounts. The overnight repurchase liability agreements do not contain master netting arrangements. The Bank had repurchase liabilities outstanding of $19.5 million and $18.9 million at March 31, 2017 and December 31, 2016, respectively. They are secured by the Company’s investment in specific issues of U.S. Treasury obligations, Government sponsored residential mortgage-backed securities and U.S. Government agency obligations with a market value of $30.0 million and $30.2 million as of March 31, 2017 and December 31, 2016, respectively.

8. Deposits

Deposit balances are as follows:

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

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

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

9. Pension and Other Postretirement Benefit Plans

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

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

30

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

Employee Stock Ownership Plan

The Company established the ESOP to provide eligible employees the opportunity to own Company stock. The Company provided a loan to the Farmington Bank Employee Stock Ownership Plan Trust in the amount needed to purchase up to 1,430,416 shares of the Company’s common stock. The loan bears an interest rate equal to the Wall Street Journal Prime Rate plus one percentage point, adjusted annually, and provides for annual payments of interest and principal over the 15 year term of the loan. At March 31, 2017, the loan had an outstanding balance of $11.1 million and an interest rate of 4.75%. The Bank has committed to make contributions to the ESOP sufficient to support the debt service of the loan. The loan is secured by the unallocated shares purchased. The ESOP compensation expense was $548,000 and $386,000 for the three months ended March 31, 2017 and 2016, respectively.

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

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

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

10. Stock Incentive Plans

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

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

Under the 2012 Plan, stock options granted vested 20% immediately and will vest 20% at each annual anniversary of the grant date and expire ten years after grant date. Under the 2016 Plan, stock options granted vest at each annual anniversary of the grant date over a 3 year period and expire ten years after grant date. The Company recognizes compensation expense for the fair values of these awards, which vest on a straight-line basis over the requisite service period of the awards.

The Company classifies share-based compensation for employees within “Salaries and employee benefits” and share-based payments for outside directors within “Other operating expenses” in the Consolidated Statements of Income. For the three months ended March 31, 2017 and 2016, the Company recorded $111,000 and $651,000 of share-based compensation expense, respectively, comprised of $20,000 and $268,000 of stock option expense, respectively and $91,000 and 383,000 of restricted stock expense, respectively. Expected future compensation expense relating to the 46,350 non-vested options outstanding at March 31, 2017 is $149,000 over the remaining weighted-average period of 2.22 years. Expected future compensation expense relating to the 27,698 non-vested restricted stock outstanding at March 31, 2017 is $612,000 over the remaining weighted-average period of 2.90 years.

31

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

	2017			2016
Weighted per share average fair value of options granted	$	5.09		$	2.98
Weighted-average assumptions:
Risk-free interest rate		2.05	%		1.59	%
Expected volatility		22.08	%		23.11	%
Expected dividend yield		1.94	%		2.13	%
Weighted-average dividend yield		1.89 - 2.00	%		1.72% - 2.35	%
Expected life of options granted		6.0 years			6.0 years

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

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

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

32

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

11.       Derivative Financial Instruments

Non-Hedge Accounting Derivatives/Non-designated Hedges:

The Company does not use derivatives for trading or speculative purposes. Interest rate swap derivatives not designated as hedges are offered to certain qualifying commercial customers and to manage the Company’s exposure to interest rate movements but do not meet the strict hedge accounting definition under FASB ASC 815, “Derivatives and Hedging”. The interest rate swap agreements enable these customers to synthetically fix the interest rate on variable interest rate loans. The customers pay a variable rate and enter into a fixed rate swap agreement with the Company. The credit risk associated with the interest rate swap derivatives executed with these customers is essentially the same as that involved in extending loans and is subject to the Company’s normal credit policies. The Company obtains collateral, if needed, based upon its assessment of the customers’ credit quality. Generally, interest rate swap agreements are offered to “pass” rated customers requesting long-term commercial loans or commercial mortgages in amounts generally of at least $1.0 million. The interest rate swap agreement with our customers is cross-collateralized by the loan collateral. The interest rate swap agreements do not have any embedded interest rate caps or floors.

For every variable interest rate swap agreement entered into with a commercial customer, the Company simultaneously enters into a fixed rate interest rate swap agreement with a correspondent bank, agreeing to pay a fixed income stream and receive a variable interest rate swap. The Company is party to master netting agreements with its correspondent banks; however, the Company does not offset assets and liabilities for financial statement presentation purposes. The master netting agreements provide for a single net settlement of all swap agreements, as well as collateral, in the event of default on, or termination of, any one contract. Collateral generally in the form of cash is received or posted by the counterparty with the net liability position, in accordance with contract thresholds. As of March 31, 2017, the Company maintained a cash balance of $2.0 million with a correspondent bank to collateralize its position. The Company has an agreement with a correspondent bank to secure any outstanding receivable in excess of $10.0 million.

33

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Credit-risk-related Contingent Features

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

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

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

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

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

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

The Company has established a derivatives policy which sets forth the parameters for such transactions (including underwriting guidelines, rate setting process, maximum maturity, approval and documentation requirements), as well as identifies internal controls for the management of risks related to these hedging activities (such as approval of counterparties, limits on counterparty credit risk, maximum loan amounts, and limits to single dealer counterparties).

The interest rate swap derivatives executed with our customers and our counterparties, are marked to market and are included with prepaid expenses and other assets and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition at fair value. The Company had the following outstanding interest rate swaps that were not designated for hedge accounting:

		March 31, 2017							December 31, 2016
(Dollars in thousands)	Consolidated Balance Sheet Location	# of Instruments		Notional Amount		Estimated Fair Values			# of Instruments		Notional Amount		Estimated Fair Values
Commercial loan customer interest rate swap position	Other Assets		46	$	240,371	$	6,059			51	$	242,351	$	7,095
Commercial loan customer interest rate swap position	Other Liabilities		35		151,434		(4,937	)		33		148,097		(4,502	)
Counterparty interest rate swap position	Other Liabilities		81		391,805		(1,200	)		84		390,448		(2,687	)

34

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

The Company recorded the changes in the fair value of non-hedge accounting derivatives as a component of other noninterest income except for interest received and paid which is reported in interest income in the accompanying Consolidated Statements of Income as follows:

	For The Three Months Ended March 31,
	2017									2016
	Interest Income Recorded in Interest Income			MTM (Loss) Gain Recorded in Noninterest Income			Net Impact			Interest Income Recorded in Interest Income			MTM Gain (Loss) Recorded in Noninterest Income			Net Impact
(Dollars in thousands)
Commercial loan customer interest rate swap position	$	(1,277	)	$	(1,036	)	$	(2,313	)	$	(1,372	)	$	9,792		$	8,420
Counterparty interest rate swap position		1,277			1,036			2,313			1,372			(9,792	)		(8,420	)
Total	$	-		$	-		$	-		$	-		$	-		$	-

Mortgage Banking Derivatives

Certain derivative instruments, primarily forward sales of mortgage loans and mortgage-backed securities (“MBS”) are utilized by the Company in its efforts to manage risk of loss associated with its mortgage loan commitments and mortgage loans held for sale. Prior to closing and funding certain single-family residential mortgage loans, an interest-rate lock commitment is generally extended to the borrower. During the period from commitment date to closing date, the Company is subject to the risk that market rates of interest may change. If market rates rise, investors generally will pay less to purchase such loans resulting in a reduction in the gain on sale of the loans or, possibly, a loss. In an effort to mitigate such risk, forward delivery sales commitments, under which the Company agrees to deliver whole mortgage loans to various investors or issue MBS, are established. At March 31, 2017, the notional amount of outstanding rate locks totaled approximately $16.5 million. The notional amount of outstanding commitments to sell residential mortgage loans totaled approximately $17.4 million, which included mandatory forward commitments totaling approximately $12.0 million at March 31, 2017. The forward commitments establish the price to be received upon the sale of the related mortgage loan, thereby mitigating certain interest rate risk. There is, however, still certain execution risk specifically related to the Company’s ability to close and deliver to its investors the mortgage loans it has committed to sell.

12. Offsetting of Financial Assets and Liabilities

The following tables present the remaining contractual maturities of the Company’s repurchase agreement borrowings and repurchase liabilities as of March 31, 2017 and December 31, 2016, disaggregated by the class of collateral pledged.

	March 31, 2017								December 31, 2016
	Remaining Contractual Maturity of the Agreements								Remaining Contractual Maturity of the Agreements
(Dollars in thousands)	Overnight and Continuous		Up to One Year		One Year to Three Years		Total		Overnight and Continuous		Up to One Year		One Year to Three Years		Total
Repurchase agreement borrowings U.S. Government agency obligations	$	-	$	6,000	$	-	$	6,000	$	-	$	-	$	6,000	$	6,000
Government sponsored residential mortgage-backed securities		-		4,500		-		4,500		-		-		4,500		4,500
Total repurchase agreement borrowings		-		10,500		-		10,500		-		-		10,500		10,500
Repurchase liabilities
U.S. Government agency obligations		19,526		-		-		19,526		18,867		-		-		18,867
Total repurchase liabilities		19,526		-		-		19,526		18,867		-		-		18,867
Total	$	19,526	$	10,500	$	-	$	30,026	$	18,867	$	-	$	10,500	$	29,367

35

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

	March 31, 2017
							Gross Amounts Not Offset in the Statement of Financial Condition
	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Securities Collateral Received		Cash Collateral Received		Net Amount
(Dollars in thousands)
Interest rate swap derivatives	$	6,059	$	-	$	6,059	$	-	$	-	$	1,950	$	4,109
Total	$	6,059	$	-	$	6,059	$	-	$	-	$	1,950	$	4,109

	March 31, 2017
							Gross Amounts Not Offset in the Statement of Financial Condition
	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Securities Collateral Pledged		Cash Collateral Pledged		Net Amount
(Dollars in thousands)
Interest rate swap derivatives	$	6,137	$	-	$	6,137	$	-	$	-	$	1,950	$	4,187
Repurchase agreement borrowings		10,500		-		10,500		-		10,500		-		-
Total	$	16,637	$	-	$	16,637	$	-	$	10,500	$	1,950	$	4,187

	December 31, 2016
							Gross Amounts Not Offset in the Statement of Financial Condition
	Gross Amount of Recognized Assets		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Assets Presented in the Statement of Financial Condition		Financial Instruments		Securities Collateral Received		Cash Collateral Received		Net Amount
(Dollars in thousands)
Interest rate swap derivatives	$	7,095	$	-	$	7,095	$	-	$	-	$	2,000	$	5,095
Total	$	7,095	$	-	$	7,095	$	-	$	-	$	2,000	$	5,095

	December 31, 2016
							Gross Amounts Not Offset in the Statement of Financial Condition
	Gross Amount of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Condition		Net Amounts of Liabilities Presented in the Statement of Financial Condition		Financial Instruments		Securities Collateral Pledged		Cash Collateral Pledged		Net Amount
(Dollars in thousands)
Interest rate swap derivatives	$	7,189	$	-	$	7,189	$	-	$	-	$	2,000	$	5,189
Repurchase agreement borrowings		10,500		-		10,500		-		10,500		-		-
Total	$	17,689	$	-	$	17,689	$	-	$	10,500	$	2,000	$	5,189

36

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

13. Financial Instruments with Off-Balance Sheet Risk

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

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

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

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

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Company upon extension of credit is based on management’s credit evaluation of the counterparty. Collateral held is primarily residential property and commercial assets.

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

14. Significant Group Concentrations of Credit Risk

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

37

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

15. Fair Value Measurements

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

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

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

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

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

Fair value estimates are based on existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not financial instruments. Accordingly, the aggregate fair value amounts presented do not purport to represent the underlying market value of the Company. There were no transfers between levels during the three months ended March 31, 2017 and 2016.

38

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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

Securities Available-for-Sale: Investment securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models. Level 1 securities are those traded on active markets for identical securities including U.S. treasury obligations, preferred equity securities and marketable equity securities. Level 2 securities include U.S. treasury obligations, U.S. government agency obligations, government-sponsored residential mortgage-backed securities, corporate debt securities, trust preferred debt securities, and mutual funds. When a market is illiquid or there is a lack of transparency around the inputs to valuation, the respective securities are classified as level 3 and reliance is placed upon internally developed models and management judgment and evaluation for valuation. The Company had no Level 3 securities at March 31, 2017 and December 31, 2016.

The Company utilizes a third party, nationally-recognized pricing service (“pricing service”); subject to review by management, to estimate fair value measurements for the majority of its investment securities portfolio. The pricing service evaluates each asset class based on relevant market information considering observable data that may include dealer quotes, reported trades, market spreads, cash flows, the U.S. Treasury yield curve, the LIBOR swap yield curve, trade execution data, market prepayment speeds, credit information and the bond’s terms and conditions, among other things. The fair value prices on all investment securities are reviewed for reasonableness by management. Also, management assessed the valuation techniques used by the pricing service based on a review of their pricing methodology to ensure proper pricing and hierarchy classifications. Management employs procedures to monitor the pricing service’s assumptions and establishes processes to challenge the pricing service’s valuations that appear unusual or unexpected.

Interest Rate Swap Derivatives: The fair values of interest rate swap agreements are calculated using a discounted cash flow approach and utilize observable inputs such as the LIBOR swap curve, effective date, maturity date, notional amount, stated interest rate and are classified within Level 2 of the valuation hierarchy. Such derivatives are basic interest rate swaps that do not have any embedded interest rate caps and floors.

Forward loan sale commitments and derivative loan commitments: Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements therefore are classified within Level 3 of the valuation hierarchy. The Company recognized a (loss) gain of ($44,000) and $55,000 for the three months ended March 31, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income.

39

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

	March 31, 2017
			Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury obligations	$	24,997	$	-	$	24,997	$	-
U.S. Government agency obligations		70,743		-		70,743		-
Government sponsored residential  mortgage-backed securities		3,417		-		3,417		-
Corporate debt securities		512		-		512		-
Preferred equity securities		1,845		1,845		-		-
Marketable equity securities		184		184		-		-
Mutual funds		3,843		-		3,843		-
Securities available-for-sale		105,541		2,029		103,512		-
Interest rate swap derivative		6,059		-		6,059		-
Derivative loan commitments		273		-		-		273
Total	$	111,873	$	2,029	$	109,571	$	273
Liabilities
Interest rate swap derivative	$	6,137	$	-	$	6,137	$	-
Forward loan sales commitments		134		-		-		134
Total	$	6,271	$	-	$	6,137	$	134

	December 31, 2016
			Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
(Dollars in thousands)	Total		(Level 1)		(Level 2)		(Level 3)
Assets
U.S. Treasury obligations	$	19,968	$	-	$	19,968	$	-
U.S. Government agency obligations		73,711		-		73,711		-
Government sponsored residential  mortgage-backed securities		3,569		-		3,569		-
Corporate debt securities		515		-		515		-
Preferred equity securities		1,746		1,746		-		-
Marketable equity securities		182		182		-		-
Mutual funds		3,829		-		3,829		-
Securities available-for-sale		103,520		1,928		101,592		-
Interest rate swap derivative		7,095		-		7,095		-
Derivative loan commitments		95		-		-		95
Forward loan sales commitments		88		-		-		88
Total	$	110,798	$	1,928	$	108,687	$	183
Liabilities
Interest rate swap derivative	$	7,189	$	-	$	7,189	$	-
Total	$	7,189	$	-	$	7,189	$	-

40

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

	Derivative and Forward Loan Sales Commitments, Net
	For the Three Months Ended March 31,
	2017			2016
(Dollars in thousands)
Balance, at beginning of period	$	183		$	137
Total realized (loss) gain:
Included in earnings		(44	)		55
Balance, at the end of period	$	139		$	192

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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

The following table details the financial instruments carried at fair value on a nonrecurring basis at March 31, 2017 and December 31, 2016 and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value:

March 31, 2017

December 31, 2016

Quoted Prices in

Significant

Significant

Quoted Prices in

Significant

Significant

Active Markets for

Observable

Unobservable

Active Markets for

Observable

Unobservable

Identical Assets

Inputs

Inputs

Identical Assets

Inputs

Inputs

(Level 1)

(Level 2)

(Level 3)

(Level 1)

(Level 2)

(Level 3)

(Dollars in thousands)

Impaired loans

$

-

$

-

$

2,561

$

-

$

-

$

3,727

41

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

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

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

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

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

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

42

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

Disclosures about Fair Value of Financial Instruments

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

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

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

Alternative Investments: The Company accounts for its percentage ownership of alternative investment funds at cost, subject to impairment testing. These are non-public investments which include limited partnerships, an equity fund and membership stocks. These alternative investments totaled $2.3 million and $2.2 million at March 31, 2017 and December 31, 2016, respectively, are included in other assets in the accompanying Consolidated Statements of Financial Condition. The Company recognized a $10,000 and $47,000 other-than-temporary impairment charge on its limited partnerships for the three months ended March 31, 2017 and 2016, respectively, included in other noninterest income in the accompanying Consolidated Statements of Income. The Company recognized profit distributions in its limited partnerships of $11,000 and $129,000 for the three months ended March 31, 2017 and 2016, respectively. The Company has $1.6 million in unfunded commitments remaining for its alternative investments as of March 31, 2017.

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

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

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

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

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

43

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

16. Regulatory Matters

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

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

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

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

44

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

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

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

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

45

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

17. Other Comprehensive Income

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

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

	For the Three Months Ended March 31, 2016
	Investment Securities Available-for-Sale			Employee Benefit Plans			Accumulated Other Comprehensive (Loss) Income
(Dollars in thousands)
Balance at December 31, 2015	$	(249	)	$	(6,913	)	$	(7,162	)
Other comprehensive income during the period		415			-			415
Amount reclassified from accumulated other comprehensive income, net of tax		-			106			106
Net change		415			106			521
Balance at March 31, 2016	$	166		$	(6,807	)	$	(6,641	)

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

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

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

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

46

First Connecticut Bancorp, Inc.

Notes to Consolidated Financial Statements (Unaudited)

18. Legal Actions

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

47

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

Forward-Looking Statements

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

· statements of our goals, intentions and expectations;

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

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

· estimates of our risks and future costs and benefits.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

48

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

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

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

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

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

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

General

First Connecticut Bancorp, Inc. is a Maryland-chartered stock holding company that wholly owns Farmington Bank. Farmington Bank is a full-service, community bank with 24 branch locations throughout central Connecticut and western Massachusetts, offering commercial and residential lending as well as wealth management services. Established in 1851, Farmington Bank is a diversified consumer and commercial bank with an ongoing commitment to contribute to the betterment of the communities in our region.

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

· Maintaining a strong capital position in excess of the well-capitalized standards set by our banking regulators to support our current operations and future growth. The FDIC’s requirement for a “well-capitalized” bank is a total risk-based capital ratio of 10.0% or greater. As of March 31, 2017 our total risk-based capital ratio was 12.67%.

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

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

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

49

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

· Continue expansion through de novo branching. We recently expanded into western Massachusetts opening two de novo branches in the fourth quarter of 2015 and opened a de novo branch in Vernon, Connecticut during the second quarter of 2016. We plan to open a branch in Manchester, Connecticut in 2017 and continue to evaluate future growth through de novo branching.

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

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

Critical Accounting Policies

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

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

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

General component:

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

50

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.

51

Allocated component:

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

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

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

Unallocated component:

An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The Company’s Loan Policy allows management to utilize a high and low range of 0.0% to 5.0% of our total allowance for loan losses when establishing an unallocated allowance, when considered necessary. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at March 31, 2017 and December 31, 2016.

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.

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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 trading, available-for-sale, or held-to-maturity (applies only to debt securities). Management determines the appropriate classifications of securities at the time of purchase. At March 31, 2017 and December 31, 2016, 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.

In December 1999, we created and have since maintained a “passive investment company” (“PIC”), as permitted by Connecticut law. At March 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, 2013 through 2016. 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 March 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 March 31, 2017, our net deferred tax asset was $14.8 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.

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

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

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Comparison of Financial Condition at March 31, 2017 and December 31, 2016

Total assets increased $66.7 million at March 31, 2017 to $2.9 billion compared to December 31, 2016, largely reflecting an increase in net loans.

Our investment portfolio totaled $155.9 million or 5.4% of total assets and $136.6 million or 4.8% of total assets at March 31, 2017 and December 31, 2016, respectively. Available-for-sale investment securities totaled $105.5 million at March 31, 2017 compared to $103.5 million at December 31, 2016. Securities held-to-maturity totaled $50.3 million and $33.1 million at March 31, 2017 and December 31, 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 $59.5 million at March 31, 2017 to $2.6 billion compared to December 31, 2016 primarily driven by a $46.8 million increase residential real estate. The allowance for loan losses decreased $180,000 to $21.3 million at March 31, 2017 from $21.5 million at December 31, 2016. At March 31, 2017, the allowance for loan losses represented 0.82% of total loans and 133.63% 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 $62.2 million to $2.6 billion at March 31, 2017 compared to December 31, 2016. Deposits increased $72.7 million to $2.3 billion at March 31, 2017 primarily due to a $56.6 million increase in seasonal municipal deposit. We had municipal deposit balances totaling $451.2 million and $394.5 million at March 31, 2017 and December 31, 2016, respectively. Federal Home Loan Bank of Boston advances decreased $5 million to $282.1 million at March 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 $4.5 million to $264.7 million compared to December 31, 2016 primarily due to $5.1 million in net income. The Company paid cash dividends totaling $1.8 million or $0.11 per share during the three months ended March 31, 2017.

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

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

	For The Three Months Ended March 31,
	2017								2016
	Average Balance		Interest and Dividends (1)			Yield/ Cost			Average Balance		Interest and Dividends (1)			Yield/ Cost
(Dollars in thousands)
Interest-earning assets:
Loans	$	2,576,295	$	23,101			3.64	%	$	2,366,935	$	21,132			3.59	%
Securities		142,929		529			1.50	%		154,534		483			1.26	%
Federal Home Loan Bank of Boston stock		16,165		151			3.79	%		19,804		187			3.80	%
Federal funds and other earning assets		6,351		27			1.72	%		27,148		32			0.47	%
Total interest-earning assets		2,741,740		23,808			3.52	%		2,568,421		21,834			3.42	%
Noninterest-earning assets		118,104								127,192
Total assets	$	2,859,844							$	2,695,613
Interest-bearing liabilities:
NOW accounts	$	602,631	$	528			0.36	%	$	522,876	$	380			0.29	%
Money market		529,409		970			0.74	%		478,954		995			0.84	%
Savings accounts		231,465		61			0.11	%		216,102		58			0.11	%
Certificates of deposit		466,852		1,352			1.17	%		450,917		1,303			1.16	%
Total interest-bearing deposits		1,830,357		2,911			0.64	%		1,668,849		2,736			0.66	%
Federal Home Loan Bank of Boston advances		245,591		949			1.57	%		272,610		967			1.43	%
Repurchase agreement borrowings		10,500		95			3.67	%		10,500		95			3.64	%
Repurchase liabilities		24,984		7			0.11	%		47,543		19			0.16	%
Total interest-bearing liabilities		2,111,432		3,962			0.76	%		1,999,502		3,817			0.77	%
Noninterest-bearing deposits		433,058								390,926
Other noninterest-bearing liabilities		49,886								56,765
Total liabilities		2,594,376								2,447,193
Stockholders' equity		265,468								248,420
Total liabilities and stockholders' equity	$	2,859,844							$	2,695,613
Tax-equivalent net interest income			$	19,846							$	18,017
Less: tax-equivalent adjustment				(596	)							(511	)
Net interest income			$	19,250							$	17,506
Net interest rate spread(2)							2.76	%							2.65	%
Net interest-earning assets(3)	$	630,308							$	568,919
Net interest margin(4)							2.94	%							2.82	%
Average interest-earning assets to average interest-bearing liabilities				129.85	%							128.45	%

(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.

(3) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

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

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Rate Volume Analysis

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

	Three Months Ended March 31,
	2017 vs. 2016
	Increase (decrease) due to
(Dollars in thousands)	Volume			Rate			Total
Interest-earning assets:
Loans	$	1,721		$	248		$	1,969
Investment securities		(39	)		85			46
Federal Home Loan Bank of Boston stock		(36	)		-			(36	)
Federal funds and other earning assets		(39	)		34			(5	)
Total interest-earning assets		1,607			367			1,974
Interest-bearing liabilities:
NOW accounts		61			87			148
Money market		94			(119	)		(25	)
Savings accounts		4			(1	)		3
Certificates of deposit		38			11			49
Total interest-bearing deposits		197			(22	)		175
Federal Home Loan Bank of Boston advances		(104	)		86			(18	)
Repurchase agreement borrowing		-			-			-
Repurchase liabilities		(7	)		(5	)		(12	)
Total interest-bearing liabilities		86			59			145
Increase in net interest income	$	1,521		$	308		$	1,829

Summary of Operating Results for the Three Months Ended March 31, 2017 and 2016

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

	For the Three Months Ended March 31,
	2017		2016		$ Change			% Change
(Dollars in thousands)
Net interest income	$	19,250	$	17,506	$	1,744			10.0	%
Provision for loan losses		325		217		108			49.8
Noninterest income		3,165		2,900		265			9.1
Noninterest expense		15,152		15,277		(125	)		(0.8	)
Income before taxes		6,938		4,912		2,026			41.2
Income tax expense		1,845		1,299		546			42.0
Net income	$	5,093	$	3,613	$	1,480			41.0	%

For the three months ended March 31, 2017, net income increased $1.5 million compared to the three months ended March 31, 2016. The increase in net income was driven by a $1.7 million increase in net interest income.

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Comparison of Operating Results for the three months ended March 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 before the provision for loan losses was $19.3 million and $17.5 million for the three months ended March 31, 2017 and 2016, respectively. Net interest income increased $1.7 million primarily due to a $209.4 million increase in the average loan balance and a 5 basis point increase in the loan yield to 3.64%. The yield on average interest-earning assets increased 10 basis points to 3.52% for the first quarter of 2017 from 3.42% for the prior year quarter. The increase was primarily due to a 5 basis point increase in the loans receivable yield and increases in the investment yields. The cost of average interest-bearing liabilities decreased 1 basis point to 0.76% for the first quarter of 2017 compared to the prior year quarter. Net interest margin increased 12 basis points to 2.94% in the first quarter of 2017 compared to 2.82% in the prior year quarter primarily due to the recent increases in the prime interest rate.

Interest expense increased $145,000 for the first quarter of 2017 to $4.0 million compared to the prior year quarter. The cost of average interest-bearing liabilities decreased 1 basis point to 0.76% for the first quarter of 2017 compared to the prior year quarter. Average balances of noninterest-bearing deposits grew at a rate of 10.8%, while total average interest-bearing deposits grew at a rate of 9.7% for the first quarter in 2017 compared to the prior year quarter.

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

Management recorded a provision for loan losses of $325,000 and $217,000 for the three months ended March 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 in the first quarter of 2017 were $505,000 or 0.08% to average loans (annualized) compared to $241,000 or 0.04% to average loans (annualized) in the prior year quarter.

At March 31, 2017, the allowance for loan losses totaled $21.3 million, or 0.82% of total loans and 133.63% of non-performing loans, compared to an allowance for loan losses of $21.5 million, or 0.85% of total loans and 122.60% of non-performing loans at December 31, 2016. 

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Noninterest Income: The following table summarizes noninterest income for the three months ended March 31, 2017 and 2016:

	For the Three Months Ended March 31,
	2017		2016		$ Change			% Change
(Dollars in thousands)
Fees for customer services	$	1,506	$	1,484	$	22			1.5	%
Net gain on loans sold		416		490		(74	)		(15.1	)
Brokerage and insurance fee income		50		54		(4	)		(7.4	)
Bank owned life insurance income		319		414		(95	)		(22.9	)
Other		874		458		416			90.8
Total noninterest income	$	3,165	$	2,900	$	265			9.1	%

Total noninterest income increased $265,000 to $3.2 million in the first quarter of 2017 compared to the prior year quarter primarily due to a $416,000 increase in other noninterest income offset by a $169,000 decrease in net gains on loans sold and bank owned life insurance. Other noninterest income increased $416,000 to $874,000 in the first quarter of 2017 compared to the prior year quarter primarily due to a $396,000 increase in swap fees.

Noninterest Expense: The following table summarizes noninterest expense for the three months ended March 31, 2017 and 2016:

	For the Three Months Ended March 31,
	2017		2016		$ Change			% Change
(Dollars in thousands)
Salaries and employee benefits	$	9,327	$	9,376	$	(49	)		(0.5	)%
Occupancy expense		1,313		1,219		94			7.7
Furniture and equipment expense		984		1,061		(77	)		(7.3	)
FDIC assessment		428		404		24			5.9
Marketing		567		421		146			34.7
Other operating expenses		2,533		2,796		(263	)		(9.4	)
Total noninterest expense	$	15,152	$	15,277	$	(125	)		(0.8	)%

Noninterest expense decreased $125,000 in the first quarter of 2017 to $15.2 million compared to the prior year quarter primarily due to a $263,000 decrease in other operating expenses offset by a $146,000 increase in marketing expenses. Other operating expenses decreased $263,000 to $2.5 million primarily due to decreases in check and debit card losses and a one-time charge relating to reissuing EMV chip debit cards in the prior year quarter. Marketing expense increased $146,000 primarily due to efforts to increase the Bank’s sales support in central Connecticut and western Massachusetts.

Income tax expense was $1.8 million in the first quarter of 2017 and $1.3 million in the prior year quarter. Increase in income tax expense was primarily due to a $2.0 million increase in income before taxes over the prior year.

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Liquidity and Capital Resources:

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

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

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At March 31, 2017, $36.4 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 three months ended March 31, 2017 and 2016, loan originations and purchases, net of collected principal and loan sales, totaled $59.4 million and $8.9 million, respectively.  Cash received from the calls and maturities of available-for-sale investment securities totaled $13.2 million and $48.4 million for the three months ended March 31, 2017 and 2016, respectively. We purchased $15.0 million and $44.0 million of available-for-sale investment securities during the three months ended March 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 March 31, 2017, we had $282.1 million in advances from the FHLBB and an additional available borrowing limit of $573.9 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 March 31, 2017 and December 31, 2016, respectively, subject to collateral requirements of the FHLBB. Internal policies limit borrowings to 25.0% of total assets, or $726.1 million and $709.4 million at March 31, 2017 and December 31, 2016, respectively. Other sources of funds include access to pre-approved unsecured lines of credit with financial institutions for $55.0 million, our $8.8 million secured line of credit with the FHLBB and our $3.5 million unsecured line of credit with a bank which were all undrawn at March 31, 2017. The Federal Reserve Bank’s discount window loan collateral program enables us to borrow up to $62.2 million on an overnight basis as of March 31, 2017. The funding arrangement was collateralized by $121.1 million in pledged commercial real estate loans as of March 31, 2017.

We had outstanding commitments to originate loans of $29.2 million and $102.4 million and unfunded commitments under construction loans, lines of credit and stand-by letters of credit of $502.5 million and $507.1 million at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017 and December 31, 2016, time deposits scheduled to mature in less than one year totaled $294.3 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 $55.0 million unsecured lines of credit with financial institutions, our $8.8 million secured line of credit with the FHLBB, our $3.5 million unsecured line of credit with a bank or our $62.2 million overnight borrowing arrangement with the Federal Reserve Bank in order to maintain our level of assets. Alternatively, we would reduce our level of liquid assets, such as our cash and cash equivalents in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or if there is an increased amount of competition for deposits in our market area at the time of renewal.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 maximum 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 the scenarios run at each of the periods presented:

	Percentage Increase (Decrease) in Estimated Net Interest Income Over 12 Months
	At March 31, 2017			At December 31, 2016
100 basis point decrease		(7.52	)%		(7.57	)%
100 basis point increase		3.37	%		3.70	%
200 basis point increase		2.28	%		3.19	%
300 basis point increase		0.86	%		2.34	%
400 basis point increase		(1.80	)%		0.13	%

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Item 4. Controls and Procedures

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

Part II. Other Information

Item 1. Legal Proceedings

The Company and its subsidiaries are subject to various legal actions arising in the normal course of business. In the opinion of management, the resolution of these legal actions is not expected to have a material adverse effect on the Company’s consolidated financial statements.

Item 1A. Risk Factors

There have been no material changes in the “Risk Factors” from those previously disclosed in the Form 10-K filed on March 13, 2017.

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

(a) Not applicable.

(b) Not applicable.

(c) During the quarter ending March 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. Shares repurchased under that approval are shown above. Repurchased shares will be held as treasury stock and will be available for general corporate purposes.

Item 3. Defaults Upon Senior Securities

Not Applicable

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Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

Not Applicable

Item 6. Exhibits

3.1 Amended and Restated Certificate of Incorporation of First Connecticut Bancorp, Inc. (filed as Exhibit 3.1 to the Registration Statement on the Form S-1 filed for the Company on January 28, 2011, as amended, and incorporated herein by reference).

3.2.2 Second Amended and Restated Bylaws of First Connecticut Bancorp, Inc. (filed as Exhibit 3.2.2 to the Form 8-K filed for the Company on February 23, 2016, 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 filed for the Company on January 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 filed for the Company on January 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).

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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 24, 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.

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32.1 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Executive Officer.

32.2 Written Statement pursuant to 18 U.S.C. § 1350, as created by section 906 of the Sarbanes-Oxley Act of 2002, signed by the Company’s Chief Financial Officer.

101 Interactive data files pursuant to Rule 405 of Regulation S-t: (i) the Consolidated Statements of Financial Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statement of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Consolidated Financial Statements tagged as blocks of text and in detail.*

* As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Act of 1934.

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SIGNATURES

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

	FIRST CONNECTICUT BANCORP, INC.
Date: May 4, 2017	/s/ John J. Patrick, Jr
	John J. Patrick, Jr.
	Chairman, President and Chief Executive Officer
Date: May 4, 2017	/s/ Gregory A. White
	Gregory A. White
	Executive Vice President and Chief Financial Officer

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