UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2017
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-37780
Randolph Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Massachusetts |
| 81-1844402 |
State or other jurisdiction of |
| (I.R.S. Employer |
10 Cabot Place, Stoughton, MA |
| 02072 |
(Address of principal executive offices) |
| (Zip Code) |
(781) 963-2100
Registrant’s telephone number, including area code
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Name of each exchange on which registered |
Common Stock, par value $.01 per share |
| NASDAQ |
Securities registered pursuant to section 12(g) of the Act:
(Title of class)
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ 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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ |
| Accelerated filer | ☒ |
Non-accelerated filer | ☐ | (Do not check if a smaller reporting company) | 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 account standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Yes ☒ No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the voting and non-voting common equity held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was $78,736,498.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: 6,029,776 shares as of March 15, 2018.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for its 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.
2017 Form 10-K
Table of Contents
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Item 1. |
| 1 | |
Item 1A. |
| 28 | |
Item 1B. |
| 35 | |
Item 2. |
| 36 | |
Item 3. |
| 36 | |
Item 4. |
| 36 | |
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Item 5. |
| 37 | |
Item 6. |
| 38 | |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| 39 |
Item 7A. |
| 48 | |
Item 8. |
| 48 | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
| 48 |
Item 9A. |
| 48 | |
Item 9B. |
| 49 | |
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Item 10. |
| 50 | |
Item 11. |
| 50 | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
| 50 |
Item 13. | Certain Relationships and Related Transactions, and Director Independence |
| 50 |
Item 14. |
| 50 | |
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Item 15. |
| 51 | |
Item 16. |
| 52 | |
| 53 |
This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as statements relating to our financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending, finance sources and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management’s projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as “believe,” “expect,” “estimate,” “anticipate,” “continue,” “plan,” “view,” “approximately,” “intend,” “objective,” “goal,” “project,” or other similar terms or variations on those terms, or the future or conditional verbs, such as “will,” “may,” “should,” “could,” and “would.”
Such forward-looking statements reflect our current views and expectations based largely on information currently available to our management, and on our current expectations, assumptions, plans, estimates, judgments, and projections about our business and our industry, and they involve inherent risks and uncertainties. Although the Company believes that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Company cannot give you any assurance that our expectations will in fact occur or that our estimates or assumptions will be correct. The Company cautions you that actual results could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, the factors referenced in this report under Item 1A. “Risk Factors”; changes in interest rates; competitive pressures from other financial institutions; the effects of a continuing deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay our loans; changes in loan defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels necessitating increased borrowing to fund loans and investments; increasing government regulation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act; the risk that we may not be successful in the implementation of our business strategy; the risk that intangibles recorded in the Company’s financial statements will become impaired; and changes in assumptions used in making such forward-looking statements. These forward-looking statements speak only as of the date of this report and the Company does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.
Randolph Bancorp, Inc.
Randolph Bancorp, Inc. (“we,” “our,” “us,” “Randolph,” or the “Company”) is a Massachusetts corporation organized in 2016 and is the stock holding company of Envision Bank (“Bank”), formerly Randolph Savings Bank. Randolph Bancorp, Inc.’s primary business activities are the ownership of the outstanding capital stock of Envision Bank and management of the investment of offering proceeds retained from Randolph Bancorp’s mutual-to-stock conversion (the “conversion”) and our initial public offering in 2016. On July 1, 2016, we completed an initial public offering selling 5,686,750 shares of common stock at $10.00 per share for approximately $56.9 million in gross proceeds, including 469,498 shares sold to the Bank’s employee stock ownership plan (“ESOP”). In connection with the conversion and initial public offering, we also issued 181,976 shares of common stock and contributed $455,000 in cash to Randolph Savings Charitable Foundation, Inc., now Envision Bank Foundation, Inc. We also completed the acquisition of First Eastern Bankshares Corporation on July 1, 2016 for cash of $14.1 million. In the future, Randolph Bancorp, Inc. may pursue other business activities permitted by applicable laws and regulations for such holding companies, which may include the issuance of additional shares of common stock to raise capital or to support mergers or acquisitions and borrowing funds for reinvestment in Envision Bank. There are no specific plans for any additional capital issuance, merger or acquisition, or other diversification of Randolph Bancorp, Inc.’s activities at the present time. Unless the context otherwise requires, references herein to the Company include the Company and its subsidiary on a consolidated basis.
At December 31, 2017, we had total assets of $531.9 million, deposits of $366.8 million and stockholders’ equity of $81.5 million.
Randolph Bancorp, Inc.’s cash flows will depend upon earnings from the investment of the portion of net proceeds retained from its initial public offering, payments on the loan made to the ESOP, repurchases of stock and any dividends received from Envision Bank. Initially, Randolph Bancorp, Inc. will not own or lease any property, but will instead use the premises, equipment, and other property of Envision Bank.
Envision Bank
Envision Bank is a Massachusetts-chartered savings bank headquartered in Stoughton, Massachusetts with its main office in Randolph, Massachusetts. Envision Bank was organized in 1851 as Randolph Savings Bank. It reorganized into the mutual holding company structure in 2002 and into a stock holding company structure in 2016. Envision Bank is currently the wholly-owned subsidiary of Randolph Bancorp, Inc., a Massachusetts stock holding company. On July 1, 2016, we acquired First Eastern Bankshares Corporation and its wholly-owned subsidiary, First Federal Savings Bank of Boston (together, “First Eastern”), which was merged with the Bank. First Eastern was actively engaged in mortgage banking including the origination and sale of residential mortgage loans in the secondary market and the servicing of a portion of sold loans for investors.
In March 2018, Randolph Savings Bank changed its name to Envision Bank. This change was in response to expansion of the Bank’s market area and offering of products beyond those generally associated with traditional savings banks.
Envision Bank provides financial services to individuals, families, and small to mid-size businesses through our six full-service banking offices located in Norfolk and Suffolk Counties, Massachusetts and our six loan production offices and lending centers located throughout eastern Massachusetts. The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one- to four-family residential mortgage loans, commercial real estate loans, home equity loans and lines of credit, commercial and industrial loans, construction loans, consumer loans, and investment securities. The Bank offers a full range of deposit accounts, including statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts, and IRAs.
Market Area
Our primary deposit-taking market is Norfolk County, Massachusetts and our primary lending market is more broadly based in Bristol, Essex, Middlesex, Norfolk, Plymouth and Suffolk counties in Massachusetts and Kent, Newport, Providence, and Washington counties in Rhode Island. With the acquisition of First Eastern, we also acquired a loan production office in southern New Hampshire.
1
Due to its proximity to Boston, our market area benefits from the presence of numerous institutions of higher learning, medical care and research centers, and the corporate headquarters of several investment and financial services companies. The greater Boston metropolitan area also has many life science and high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, residential construction, office buildings, shopping centers, and other commercial properties in our market area. Communities within our market area include many older residential commuter towns, which function partially as business and service centers. Although our current operations are not focused in Boston, we are affected by economic conditions in Boston because our loan portfolio includes a number of loans that are secured by real estate or that have borrowers located in Boston. In addition, a number of our customers who reside in our market area are employed in Boston, the operations of our commercial and industrial loan customers depend in part on sales of products and services to individuals or other businesses located in Boston, and a number of our non-owner occupied residential loan customers have properties in Boston as well as elsewhere in our market area.
Population and household data indicate that the market within a 20 minute drive time from any of our current branch locations is a mix of urban and suburban markets with a large commuter population. Norfolk County is the wealthiest county in the state of Massachusetts and is characterized by a high concentration of white collar professionals who work in the Boston Metropolitan Statistical Area.
Competition
We face intense competition in making loans and attracting deposits. Our most direct competition for deposits has historically come from the banking institutions operating in our primary market area and from other financial service companies, such as securities brokerage firms, credit unions, and insurance companies. We also face competition for investors’ funds from money market funds and mutual funds. At June 30, 2017, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (FDIC), we held 1.38% of the deposits in Norfolk County, which was the 18th largest market share out of 48 financial institutions with offices in Norfolk County. Many of the banks owned by large national and regional holding companies and other community-based banks that operate in our primary market area are larger than we are and, therefore, may have greater resources or offer a broader range of products and services.
Our competition for loans comes from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies, and specialty finance companies. Competition in mortgage banking comes from traditional mortgage competitors within our market area as well as larger, nationally active mortgage originators, such as Quicken Loans.
We expect competition to increase in the future as a result of legislative, regulatory, and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the internet, and made it possible for non-depository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.
Lending Activities
Our primary lending activity is the origination of one- to four-family residential mortgage loans, commercial real estate loans, home equity loans and lines of credit, construction loans, commercial and industrial loans, and consumer loans, predominantly in our core market area in eastern Massachusetts, Rhode Island and southern New Hampshire.
2
Loan Portfolio. The following table sets forth the composition of our loan portfolio at the dates indicated:
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| At December 31, |
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| 2017 |
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| 2016 |
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| 2015 |
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| 2014 |
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| 2013 |
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(Dollars in thousands) |
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
|
| Amount |
|
| Percent |
| ||||||||||
Real estate loans: |
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One- to four-family residential |
| $ | 198,475 |
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|
| 49.29 | % |
| $ | 179,025 |
|
|
| 53.43 | % |
| $ | 166,483 |
|
|
| 57.99 | % |
| $ | 152,063 |
|
|
| 60.48 | % |
| $ | 123,126 |
|
|
| 59.47 | % |
Commercial |
|
| 101,755 |
|
|
| 25.27 | % |
|
| 88,394 |
|
|
| 26.38 | % |
|
| 74,911 |
|
|
| 26.09 | % |
|
| 68,380 |
|
|
| 27.20 | % |
|
| 61,994 |
|
|
| 29.94 | % |
Home equity loans and lines of credit |
|
| 38,968 |
|
|
| 9.68 | % |
|
| 35,393 |
|
|
| 10.56 | % |
|
| 33,259 |
|
|
| 11.58 | % |
|
| 25,475 |
|
|
| 10.13 | % |
|
| 18,881 |
|
|
| 9.12 | % |
Construction |
|
| 25,357 |
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|
| 6.30 | % |
|
| 23,629 |
|
|
| 7.05 | % |
|
| 7,807 |
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|
| 2.72 | % |
|
| 2,189 |
|
|
| 0.87 | % |
|
| — |
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|
| — |
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Commercial and industrial loans |
|
| 21,766 |
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|
| 5.41 | % |
|
| 2,067 |
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|
| 0.62 | % |
|
| 2,040 |
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|
| 0.71 | % |
|
| 2,161 |
|
|
| 0.86 | % |
|
| 2,302 |
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|
| 1.11 | % |
Consumer loans |
|
| 16,337 |
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|
| 4.05 | % |
|
| 6,578 |
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|
| 1.96 | % |
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| 2,602 |
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|
| 0.91 | % |
|
| 1,148 |
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|
| 0.46 | % |
|
| 755 |
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|
| 0.36 | % |
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|
| 402,658 |
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|
| 100.00 | % |
|
| 335,086 |
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|
| 100.00 | % |
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| 287,102 |
|
|
| 100.0 | % |
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| 251,416 |
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|
| 100.00 | % |
|
| 207,058 |
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|
| 100.00 | % |
Net deferred loan costs and fees, and purchase premiums |
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| 1,452 |
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| 1,176 |
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|
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|
|
| 1,288 |
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| 1,136 |
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|
| 745 |
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Allowance for loan losses |
|
| (3,737 | ) |
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|
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|
| (3,271 | ) |
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|
|
|
|
| (3,239 | ) |
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|
| (3,544 | ) |
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|
| (3,829 | ) |
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Loans, net |
| $ | 400,373 |
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| $ | 332,991 |
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| $ | 285,151 |
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| $ | 249,008 |
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| $ | 203,974 |
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Loan Maturities. The following table sets forth the scheduled contractual amortization of Randolph Savings Bank’s loan portfolio at December 31, 2017. Loans having no schedule of repayments or no stated maturity are reported as being in greater than five years. The tables do not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude net deferred loan costs and fees, and purchase premiums. The following table also sets forth the rate structure of loans scheduled to mature after one year.
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| December 31, 2017 |
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(In thousands) |
| One-to Four- Family Residential Real Estate |
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| Commercial Real Estate |
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| Home Equity Loans and Lines of Credit |
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| Construction |
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| Commercial and Industrial |
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| Consumer |
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| Total Loans |
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Amounts due in: |
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One year or less |
| $ | 8,153 |
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| $ | 6,770 |
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| $ | 1,575 |
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| $ | 22,476 |
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| $ | 3,798 |
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| $ | 2,456 |
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| $ | 45,228 |
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After one year through five years |
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| 33,377 |
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| 27,275 |
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| 5,111 |
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| 2,881 |
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| 4,924 |
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| 7,218 |
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| 80,786 |
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Beyond five years |
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| 156,945 |
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|
| 67,710 |
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|
| 32,282 |
|
|
| — |
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|
| 13,044 |
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|
| 6,663 |
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|
| 276,644 |
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Total |
| $ | 198,475 |
|
| $ | 101,755 |
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| $ | 38,968 |
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| $ | 25,357 |
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| $ | 21,766 |
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| $ | 16,337 |
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| $ | 402,658 |
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Interest rate terms on amounts due after one year: |
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Fixed rate |
| $ | 111,466 |
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| $ | 34,556 |
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| $ | 1,294 |
|
| $ | — |
|
| $ | — |
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| $ | 13,881 |
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| $ | 161,197 |
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Adjustable rate |
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| 78,856 |
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|
| 60,429 |
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|
| 36,099 |
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|
| 2,881 |
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|
| 17,968 |
|
|
| — |
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|
| 196,233 |
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Total |
| $ | 190,322 |
|
| $ | 94,985 |
|
| $ | 37,393 |
|
| $ | 2,881 |
|
| $ | 17,968 |
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| $ | 13,881 |
|
| $ | 357,430 |
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Residential Mortgage Loans. We offer mortgage loans to enable borrowers to purchase homes or refinance loans on existing homes, most of which serve as the primary residence of the owner. Excluding loans maturing in one year or less, residential mortgage loans were $190.3 million, or 47.3% of total loans, and consisted of $111.5 million and $78.9 million of fixed-rate and adjustable rate loans, respectively, at December 31, 2017. Non-owner occupied residential loans were $36.6 million, or 9.3% of total loans.
We offer fixed-rate and adjustable-rate residential mortgage loans with terms up to 30 years. Generally, our fixed-rate loans conform to Fannie Mae and Freddie Mac underwriting guidelines and are originated with the intention to sell. Our adjustable-rate mortgage loans generally adjust annually after an initial fixed period that ranges from three to ten years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal to a specified percentage above the one year Constant Maturity Treasury rate or the London Interbank Offered Rate (LIBOR). Depending on the loan type, the maximum amount by which the interest rate may be increased or decreased is generally 2.0% per adjustment period and the lifetime interest rate caps range from 5.0% to 6.0% over the initial interest rate of the loan.
3
Borrower demand for adjustable-rate compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates, and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.
While residential mortgage loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. Additionally, our current practice is generally to (1) sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans, and (2) hold in our portfolio non-conforming loans, as well as a portion of our originated longer-term fixed-rate loans and adjustable-rate loans. Generally, conforming fixed-rate loans are sold to third parties with servicing either retained or released. We generally do not originate “interest only” mortgage loans on one- to four-family residential properties nor do we offer loans that provide for negative amortization of principal, such as “option ARM” loans where the borrower can pay less than the interest owed on their loan. Additionally, we do not offer “subprime” loans (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, or bankruptcies or to borrowers with questionable repayment capacity) or “Alt-A” loans (loans to borrowers having less than full documentation).
We will make loans with loan-to-value ratios up to 100.0% for some government insured loans; however, we generally require private mortgage insurance for residential loans secured by a first mortgage with a loan-to-value ratio over 80.0%. We generally require all properties securing mortgage loans to be appraised by a licensed real estate appraiser. Exceptions to this lending policy are based on the requirements of the secondary market program under which the loan is originated. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.
In an effort to provide financing for first-time home buyers, we offer adjustable- and fixed-rate loans to qualified individuals and originate the loans using programs with more flexible underwriting guidelines, loan conditions, and reduced closing costs.
Due to historically low interest rate levels, borrowers generally have preferred fixed-rate loans in recent years. While we anticipate that our adjustable-rate loans will better offset the adverse effects on our net interest income of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loans in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.
Commercial Real Estate Loans. At December 31, 2017, commercial real estate loans were $101.8 million, or 25.3% of total loans.
We originate fixed- and adjustable-rate commercial real estate loans for terms generally up to ten years, though on an exception basis commercial real estate loans will be granted with terms up to twenty years. Excluding loans maturing in one year or less, commercial real estate loans consisted of $34.6 million of fixed-rate loans and $60.4 million of adjustable rate loans at December 31, 2017. Interest rates and payments on our adjustable-rate loans adjust every three, five or seven years and generally are adjusted to a rate equal to a specified percentage above the corresponding Federal Home Loan Bank of Boston classic borrowing rate. Most of our adjustable-rate commercial real estate loans adjust every five years and amortize over a 25 year term. Loan amounts do not generally exceed 75.0% of the property’s appraised value at the time the loan is originated but may be made up to 80.0% of appraised value on an exception basis.
We currently focus our commercial real estate origination efforts on small- and mid-size owner occupants and investors in our market area seeking loans between $500,000 and $5.0 million. Our commercial real estate loans are generally secured by properties used for business purposes, such as office buildings, warehouses, retail facilities and apartment buildings. In addition to originating these loans, we also participate in commercial real estate loans with other financial institutions located primarily in Massachusetts.
At December 31, 2017, the average loan balance of our outstanding commercial real estate loans was $683,000 and our largest commercial real estate loan was $4.5 million.
4
Loans secured by commercial real estate, including multi-family real estate, generally have larger balances and involve a greater degree of risk than residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, where applicable, to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history, profitability, global cash flow of the borrower, guarantor, and all related entities, and the value of the underlying property. We require an environmental risk assessment prior to funding for commercial real estate loans.
Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are secured by one-to four-family residences. At December 31, 2017, home equity loans and lines of credit were $39.0 million, or 9.7% of total loans. Home equity lines of credit have monthly adjustable rates of interest with 15-year draws which are then amortized over 10 years. These loans are indexed to the prime rate and generally are subject to an interest rate floor. Our home equity loans generally have a fixed interest rate. We offer home equity loan and lines of credit with cumulative loan-to-value ratios generally up to 80.0%, when taking into account both the balance of the home equity loan and first mortgage loan. Any home equity loan or line of credit made with a loan to value ratio exceeding 80.0% is made as a policy exception.
The procedures for underwriting home equity loans and lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. The procedures for underwriting residential mortgage loans apply equally to home equity loans and lines of credit.
Construction Loans. At December 31, 2017, construction loans were $25.4 million, or 6.3% of total loans. We originate construction loans only in our market area of eastern Massachusetts, New Hampshire and Rhode Island. We primarily originate construction loans to contractors and builders, and to individuals, to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including small industrial buildings and retail and office buildings. Our construction loans generally are floating-rate, interest-only loans that provide for the payment of interest only during the construction phase, which is usually 12 months. At the end of the construction phase, the loan may be paid in full or converted to a permanent mortgage loan. Construction loans generally can be made with a maximum loan to value ratio of 75.0% of appraised market value for commercial construction and 80.0% of appraised market value for owner-occupied residential construction loans estimated upon completion of the project. Before making a commitment to fund a residential construction loan, we generally require an appraisal of the property by an independent licensed appraiser. Our construction loans do not provide for interest payments to be funded by interest reserves.
Our loan policy dictates a minimum equity contribution by the borrower of 10% to 30% depending on the loan type. All borrowers are underwritten and evaluated for creditworthiness based on past experience, debt service ability, net worth analysis including available liquidity, and other credit factors. We generally require personal guarantees on all construction loans. Advances are only made following an inspection of the property confirming completion of the required progress on the project and an update to the title completed by a bank approved attorney. For owner-occupied residential construction loans, loan to value ratios of greater than 80.0% may be approved when credit enhancements or mortgage insurance is in place.
Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project before or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.
Commercial and Industrial Loans. We make commercial and industrial loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. In 2017, we entered into a master participation agreement with a super-regional bank to purchase up to $20 million in loan participations. The underlying loans are to local franchisees of a major international fast food retailer. At December 31, 2017, commercial and industrial loans were $21.8 million, or 5.4% of total loans. Commercial lending products include term and time loans and revolving lines of credit. Commercial and industrial loans and lines of credit are generally made with variable rates of interest. Variable rates are based on either the 30 Day LIBOR rate or the prime rate as
5
published in The Wall Street Journal, plus a margin. Fixed-rate business loans are generally indexed to a corresponding Federal Home Loan Bank of Boston Classic rate, plus a margin. Commercial and industrial loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately held companies with local or regional businesses that operate in our market area. In addition, commercial and industrial loans (excluding loan participations) are generally made only to existing customers having a business or individual deposit account and new borrowers are expected to establish appropriate deposit relationships with us if not already a depositor.
When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, and the value of the collateral, primarily accounts receivable, inventory, and equipment. Generally, loans are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial and industrial loans (excluding loan participations) are generally made in amounts of up to 50.0% to 80.0% of the value of the collateral securing the loan.
At December 31, 2017, our largest commercial and industrial loan (excluding loan participations) was a $360,000 loan and our largest commercial line of credit was $335,000, of which $120,000 was outstanding at December 31, 2017.
The loan participations originated in 2017 involve loans to franchisees with multiple locations. At December 31, 2017, these loan participations totaled $20.0 million with an average loan balance per borrower (our portion) of $3.3 million. These loans are secured by equipment though the most significant consideration in making these loans is the historical cash flows of the borrower.
Commercial and industrial loans also involve a greater degree of risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.
Consumer Loans. We originate automobile loans, loans secured by passbook or certificate accounts, unsecured personal loans and overdraft loans. We also purchase consumer loans. We expanded our purchases of consumer loans in 2017 to include refinanced student loans and automobile loans. In aggregate, we purchased approximately $15.7 million of such loans in 2017. At December 31, 2017, total purchased consumer loans totaled $15.6 million, while the entire consumer loan portfolio totaled $16.3 million or 4.1% of total loans. Nearly 90% of consumer loans at December 31, 2017 were unsecured.
The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Bank management assesses the underwriting criteria for each of the entities from which it purchases consumer loans as part of its pre-purchase due diligence process. Refinanced student loans, which totaled $10.0 million at December 31, 2017, are purchased from an on-line lender specializing in the origination and refinancing of such loans. Applicants are screened based on a comprehensive set of underwriting criteria designed to assess “ability to pay”, including minimum FICO scores, monthly free cash flow, maximum leverage ratios and delinquency history. On average, borrowers on refinanced student loans have demonstrated six to seven years of payment history on their existing student loan prior to refinancing. Purchased automobile loans, which totaled $2.2 million at December 31, 2017, are purchased from a local lender specializing in the origination of such loans primarily to undocumented immigrants. In addition to the vehicle collateral, these loans include credit enhancement from the lender. The Bank also purchases unsecured personal loans from a national on-line lender. At December 31, 2017, such loans totaled $3.4 million and had an average balance of $2,800. These loans have an average FICO score at loan origination of 730 and an average balance of $5,000.
Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness, death or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Loan Originations, Purchases and Sales. The primary source of loan originations are our in-house loan originators, advertising, and referrals from customers. We occasionally purchase commercial real estate loans or participation interests in commercial real
6
estate loans and commercial and industrial, and from time to time we may purchase whole residential mortgage loans from other banks. We also purchase consumer loans.
Our current practice is generally to: (1) sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans and (2) hold in our portfolio non-conforming loans, as well as a portion of our longer-term fixed-rate loans and adjustable-rate residential mortgage loans. Beginning in 2017, we originated non-conforming loans for sale in bulk transactions using a broker. Our decision to sell loans is based on prevailing market interest rate conditions and interest rate risk management. Loans are sold to third parties with servicing either retained or released. In addition, we sell participation interests in commercial real estate loans to local financial institutions, primarily the portion of loans that exceed our borrowing limits or are in an amount that is considered prudent to manage our credit risk.
Loan Originations. The following table sets forth our loan originations (excluding loans originated for sale in the secondary market), loans acquired in the First Eastern transaction, purchases and principal repayment activities during the periods indicated.
|
| Years Ended December 31, |
| |||||||||
(In thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Total loans at beginning of year |
| $ | 335,086 |
|
| $ | 287,102 |
|
| $ | 251,416 |
|
Originations: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
|
| 56,229 |
|
|
| 30,239 |
|
|
| 44,942 |
|
Commercial |
|
| 28,440 |
|
|
| 25,018 |
|
|
| 19,381 |
|
Home equity loans and lines of credit |
|
| 18,224 |
|
|
| 15,570 |
|
|
| 14,523 |
|
Construction |
|
| 24,069 |
|
|
| 17,651 |
|
|
| 10,014 |
|
Total real estate loan originations |
|
| 126,962 |
|
|
| 88,478 |
|
|
| 88,860 |
|
Commercial and industrial loans |
|
| 863 |
|
|
| 1,321 |
|
|
| 768 |
|
Consumer loans |
|
| 301 |
|
|
| 219 |
|
|
| 826 |
|
Total loan originations |
|
| 128,126 |
|
|
| 90,018 |
|
|
| 90,454 |
|
First Eastern acquisition: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
|
| — |
|
|
| 15,210 |
|
|
| — |
|
Commercial |
|
| — |
|
|
| 3,959 |
|
|
| — |
|
Home equity loans and lines of credit |
|
| — |
|
|
| 12,133 |
|
|
| — |
|
Total real estate |
|
| — |
|
|
| 31,302 |
|
|
| — |
|
Consumer loans |
|
| — |
|
|
| 4 |
|
|
| — |
|
Total acquired loans |
|
| — |
|
|
| 31,306 |
|
|
| — |
|
Purchases/Participations: |
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
|
| — |
|
|
| — |
|
|
| — |
|
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
Home equity loans and lines of credit |
|
| — |
|
|
| — |
|
|
| — |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
Total real estate loan purchases |
|
| — |
|
|
| — |
|
|
| — |
|
Commercial and industrial loans |
|
| 20,381 |
|
|
| — |
|
|
| — |
|
Consumer loans |
|
| 15,651 |
|
|
| 6,849 |
|
|
| 1,446 |
|
Total loan purchases/participations |
|
| 36,032 |
|
|
| 6,849 |
|
|
| 1,446 |
|
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments |
|
| (89,471 | ) |
|
| (70,480 | ) |
|
| (38,227 | ) |
Unadvanced funds on originations |
|
| (6,922 | ) |
|
| (9,709 | ) |
|
| (17,987 | ) |
Transfer to other real estate owned |
|
| (193 | ) |
|
| — |
|
|
| — |
|
Total other |
|
| (96,586 | ) |
|
| (80,189 | ) |
|
| (56,214 | ) |
Net loan activity |
|
| 67,572 |
|
|
| 47,984 |
|
|
| 35,686 |
|
Total loans at end of year |
| $ | 402,658 |
|
| $ | 335,086 |
|
| $ | 287,102 |
|
We also originate one-to-four-family residential mortgage loans for sale in the secondary mortgage market. During the years ended December 31, 2017, 2016, and 2015, the Bank originated $398.7 million, $404.6 million, and $105.8 million of such loans, respectively.
7
Loan Participations. We look to form relationships with other financial institutions and mitigate risk of our lending activities by participating either as the lead bank or as a participant in various loan transactions. We independently underwrite each loan using underwriting practices that generally do not differ from loans that we originate.
At December 31, 2017, the outstanding balances of loan participations purchased totaled $20.0 million and loan participations sold totaled $5.8 million.
Loan Approval Procedures and Authority. Our lending activities follow written, nondiscriminatory underwriting standards and loan origination procedures established by our board of directors and management. Our board of directors has granted loan approval authority to certain executive officers. Loans in excess of any officer’s individual authority and up to the “in-house limit” established by the board of directors must be approved by the loan committee, which is comprised of five independent members of our board of directors. Loans in excess of the “in-house limit” must be approved by the board of directors. The loan committee of the board of directors reviews all residential portfolio loan, commercial real estate loan, home equity loan and line of credit, construction loan and commercial and industrial loan requests greater than $1,000,000. All mortgage and commercial real estate loans to any single borrower that exceed our $5.0 million “in-house limit” must be approved by the board of directors. The president and chief executive officer is authorized to grant lending authority to officers and other employees in individual amounts up to $500,000. Delegation of such authority is made after due consideration of the individual’s lending experience, past performance and his or her area of responsibility.
Loans-to-One Borrower Limit. The maximum amount that the Bank may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 20.0% of its capital, which is defined under Massachusetts law as the sum of the Bank’s capital stock, surplus account, and undivided profits. At December 31, 2017, the Bank’s regulatory limit on loans-to-one borrower was $13.9 million. At that date, our largest lending relationship totaled $7.2 million and was secured by commercial real estate properties.
Loan Commitments. We issue commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.
Mortgage Banking Activities
We originate residential mortgage loans for our portfolio, for sale into the secondary market and for sale in bulk transactions through a broker. We generally underwrite our residential mortgage loans to conform to Fannie Mae and Freddie Mac standards. Approximately 88% of residential real estate loans that we originated in 2017 were sold into the secondary market. We generally hold originated adjustable-rate residential mortgage loans (ARMs) and non-conforming fixed-rate mortgage loans in our loan portfolio. We determine whether the loans will be held for investment or held for sale at the time of commitment. We may subsequently change our intent to hold loans for investment and sell some or all of our ARMs or fixed-rate mortgages as part of our asset/liability management function. Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others were $771.4 million and $1,046.6 million at December 31, 2017 and 2016, respectively. Net gains or losses recognized upon the sale of loans is included in noninterest income. For the years ended December 31, 2017 and 2016, the Bank sold $403.8 million and $403.6 million, respectively, of residential mortgage loans on the secondary market, which resulted in a net gain on sale of loans of $9.2 million and $10.4 million, respectively.
To date, we have generally retained servicing on loans sold into the secondary market. After completion of the acquisition of First Eastern, we began selling a larger portion of the servicing on residential loans that we originate but intend to continue servicing residential mortgage loans originated to customers in our market area.
We also intend to sell the rights to service blocks of loans from time to time when we do not otherwise have a relationship with the customer. The decision to sell the right to service loans also takes into consideration regulatory capital rules under Basel III which require that a haircut to capital be taken when mortgage servicing rights exceed 10% of Tier 1 Capital. During 2017 and 2016, we sold the rights to service $379 million and $196 million in loans, respectively.
Interest rates affect the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in mortgage servicing income, a component of noninterest income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment and selling the loan, interest rate changes will affect origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed, and duration of the change in interest rates.
8
Mortgage servicing rights are recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets. We capitalize mortgage servicing rights at their fair value upon sale of the related loans. Capitalized servicing rights are amortized into mortgage servicing income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. We measure impairment of our servicing rights on a disaggregate basis based on the predominant risk characteristics of the portfolio, and we discount the asset’s estimated future cash flows using a current market rate. We have determined the predominant risk characteristics to be prepayment risk and interest-rate risk. The fair value of the existing mortgage servicing rights as of December 31, 2017 and 2016 exceeded book value. To determine the fair value of mortgage servicing rights, we estimate the expected future net servicing revenue based on common industry assumptions, as well as on our historical experience.
An analysis of mortgage servicing rights for the years ended December 31, 2017 and 2016 is as follows:
(In thousands) |
| 2017 |
|
| 2016 |
| ||
Balance, beginning of year |
| $ | 8,486 |
|
| $ | 2,567 |
|
Acquisition of First Eastern |
|
| — |
|
|
| 6,216 |
|
Additions through originations |
|
| 2,310 |
|
|
| 2,382 |
|
Amortization |
|
| (1,071 | ) |
|
| (1,064 | ) |
Sales |
|
| (3,238 | ) |
|
| (1,191 | ) |
Valuation allowance |
|
| (90 | ) |
|
| (424 | ) |
Balance, end of year |
| $ | 6,397 |
|
| $ | 8,486 |
|
Fair value, end of year |
| $ | 6,485 |
|
| $ | 8,520 |
|
Changes in interest rates influence a variety of significant assumptions included in the periodic valuation of mortgage servicing rights, including prepayment speeds, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation elements. A decline in interest rates generally increases the propensity for refinancing, reduces the expected duration of the servicing portfolio and therefore reduces the estimated fair value of mortgage servicing rights. This reduction in fair value can cause a charge to mortgage servicing income. Conversely, an increase in interest rates generally increases the estimated fair value of mortgage servicing rights. Mortgage servicing income, net of amortization and changes in the valuation allowance, for the years ended December 31, 2017 and 2016 was $1.5 million and $430,000, respectively.
Asset Quality
Nonperforming Assets. We consider foreclosed assets, loans that are maintained on a nonaccrual basis and loans that are past 90 days or more and still accruing to be nonperforming assets. Loans are generally placed on nonaccrual status when they are classified as impaired or when they become 90 days or more past due. Loans are classified as impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. At the time a loan is placed on nonaccrual status, the accrual of interest ceases and interest income previously accrued on such loans is reversed against current period interest income. Payments received on a nonaccrual loan are first applied to the outstanding principal balance when collectability of principal is in doubt.
Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until it is sold. When property is acquired, it is recorded at fair market value less costs to sell at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.
Troubled debt restructurings occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. We may modify the terms of loans to lower interest rates (which may be at below market rates) or to provide for temporary interest-only terms, or to forgive or defer the payment of interest. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests. We generally do not forgive principal on loans. Once the borrower has demonstrated sustained performance with the modified terms, the loan may be upgraded from its classified and/or nonperforming status. Any loan categorized as troubled debt restructurings will continue to retain that designation through the life of the loan.
9
The following table provides information with respect to our nonperforming assets, including troubled debt restructurings, at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.
|
| At December 31, |
| |||||||||||||||||
(Dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||||
Nonaccrual loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
| $ | 1,976 |
|
| $ | 1,945 |
|
| $ | 2,022 |
|
| $ | 2,434 |
|
| $ | 2,797 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 892 |
|
|
| 2,815 |
|
Home equity loans and lines of credit |
|
| 276 |
|
|
| 276 |
|
|
| 30 |
|
|
| 81 |
|
|
| — |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial and industrial loans |
|
| — |
|
|
| — |
|
|
| 16 |
|
|
| 17 |
|
|
| 35 |
|
Consumer loans |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Total nonaccrual loans |
| $ | 2,252 |
|
| $ | 2,221 |
|
|
| 2,068 |
|
|
| 3,424 |
|
|
| 5,647 |
|
Other real estate owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
|
| 193 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 130 |
|
Commercial |
|
| — |
|
|
| — |
|
|
| 500 |
|
|
| 600 |
|
|
| — |
|
Total other real estate owned |
|
| 193 |
|
|
| — |
|
|
| 500 |
|
|
| 600 |
|
|
| 130 |
|
Total nonperforming assets |
| $ | 2,445 |
|
| $ | 2,221 |
|
| $ | 2,568 |
|
| $ | 4,024 |
|
| $ | 5,777 |
|
Performing troubled debt restructurings |
| $ | 3,383 |
|
| $ | 3,433 |
|
| $ | 4,172 |
|
| $ | 10,115 |
|
| $ | 10,437 |
|
Total nonperforming loans to total loans(1) |
|
| 0.56 | % |
|
| 0.66 | % |
|
| 0.72 | % |
|
| 1.36 | % |
|
| 2.73 | % |
Total nonperforming assets to total assets |
|
| 0.46 | % |
|
| 0.46 | % |
|
| 0.67 | % |
|
| 1.12 | % |
|
| 1.55 | % |
(1) | Total loans exclude loans held for sale and include net deferred loan costs and fees, and purchase premiums. |
Interest income that would have been recorded for the year ended December 31, 2017, had nonaccruing loans been current according to their original terms amounted to $91,000. Income related to nonaccrual loans included in interest income for the year ended December 31, 2017, amounted to $83,000.
Classified Loans. Federal regulations require us to review and classify assets on a regular basis. In addition, the FDIC and the Massachusetts Commissioner of Banks have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful, and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. When management classifies an asset as substandard or doubtful, a specific allowance for loan losses may be established. If management classifies an asset as loss, an amount equal to 100.0% of the portion of the asset classified loss is charged to the allowance for loan losses. The regulations also provide for a “special mention” category, described as assets that do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. We utilize a eight-grade internal loan rating system for commercial real estate, construction, and commercial and industrial loans. See Note 5 to the consolidated financial statements.
The following table shows the aggregate amounts of our regulatory classified loans, consisting of residential real estate, commercial real estate, construction, and commercial and industrial loans, at the dates indicated.
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Classified assets: |
|
|
|
|
|
|
|
|
Substandard |
| $ | 911 |
|
| $ | 1,098 |
|
Doubtful |
|
| — |
|
|
| — |
|
Loss |
|
| — |
|
|
| — |
|
Total classified assets |
| $ | 911 |
|
| $ | 1,098 |
|
Special mention |
| $ | 2,512 |
|
| $ | 2,214 |
|
None of the special mention loans at December 31, 2017 and 2016 were on nonaccrual.
10
Other than as disclosed in the above tables, there are no other loans where management has information indicating that there is serious doubt about the ability of the borrowers to comply with the present loan repayment terms.
Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| 30-59 Days |
|
| 60-89 Days |
|
| 90 Days or |
|
| 30-59 Days |
|
| 60-89 Days |
|
| 90 Days or |
| ||||||
(In thousands) |
| Past Due |
|
| Past Due |
|
| More Past Due |
|
| Past Due |
|
| Past Due |
|
| More Past Due |
| ||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
| $ | 737 |
|
| $ | — |
|
| $ | — |
|
| $ | 1,168 |
|
| $ | 201 |
|
| $ | — |
|
Commercial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 400 |
|
|
| — |
|
|
| — |
|
Home equity loans and lines of credit |
|
| 96 |
|
|
| — |
|
|
| 247 |
|
|
| 258 |
|
|
| 30 |
|
|
| 247 |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial and industrial loans |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Consumer loans |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 59 |
|
|
| — |
|
|
| — |
|
Total |
| $ | 833 |
|
| $ | — |
|
| $ | 247 |
|
| $ | 1,885 |
|
| $ | 231 |
|
| $ | 247 |
|
Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a regular basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) a general component related to the remainder of the loan portfolio and (2) an allocated component related to impaired loans. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
General Component. The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by our loan segments. Management uses a rolling average of historical losses based on a trailing 48-month period, 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; 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; national and local economic trends and conditions, regulatory, and legal factors; and risk rating concentrations.
Allocated Component. The allocated component of the allowance for loan losses relates to loans that are individually evaluated and determined to be impaired. Residential real estate, commercial, commercial real estate and construction loans are evaluated for impairment on a loan-by-loan basis. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer loans or second mortgages and home equity loans and lines of credit for impairment disclosures, unless such loans are 90 days or more past due or subject to a troubled debt restructuring agreement.
A loan is considered impaired when, based on current information and events, it is probable that we 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.
We 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. All troubled debt restructurings are initially classified as impaired.
11
We identify loans that may need to be charged-off as a loss by reviewing all impaired loans and related loss analyses. Loan losses are charged against the allowance when we believe the uncollectibility of the loan balance is confirmed. A borrower’s inability to make payments under the terms of the loan and a shortfall in collateral value would generally result in our charging off the loan to the extent of the loss deemed to be confirmed.
At December 31, 2017, our allowance for loan losses was $3.7 million, or 0.92% of total loans and 165.9% of nonperforming loans. At December 31, 2016, our allowance for loan losses was $3.3 million, or 0.97% of total loans and 147.3% of nonperforming loans. Nonperforming loans at December 31, 2017 were $2.3 million, or 0.56% of total loans, compared to $2.2 million, or 0.66% of total loans, at December 31, 2016. The allowance for loan losses is maintained at a level that represents management’s best estimate of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future or that additional provisions for loan losses will not be required.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that the FDIC and the Massachusetts Commissioner of Banks, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operation.
The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
|
|
|
|
| % of Allowance |
|
| % of Loans |
|
|
|
|
|
| % of Allowance |
|
| % of Loans |
| ||||
|
|
|
|
|
| Amount to Total |
|
| in Category |
|
|
|
|
|
| Amount to Total |
|
| in Category |
| ||||
(Dollars in thousands) |
| Amount |
|
| Allowance |
|
| to Total Loans |
|
| Amount |
|
| Allowance |
|
| to Total Loans |
| ||||||
Real estate loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family residential |
| $ | 854 |
|
|
| 22.85 | % |
|
| 49.29 | % |
| $ | 1,018 |
|
|
| 31.12 | % |
|
| 53.43 | % |
Commercial |
|
| 1,620 |
|
|
| 43.35 | % |
|
| 25.27 | % |
|
| 1,410 |
|
|
| 43.11 | % |
|
| 26.38 | % |
Home equity loans and lines of credit |
|
| 359 |
|
|
| 9.61 | % |
|
| 9.68 | % |
|
| 436 |
|
|
| 13.33 | % |
|
| 10.56 | % |
Construction |
|
| 351 |
|
|
| 9.39 | % |
|
| 6.30 | % |
|
| 225 |
|
|
| 6.88 | % |
|
| 7.05 | % |
Commercial and industrial loans |
|
| 335 |
|
|
| 8.96 | % |
|
| 5.41 | % |
|
| 37 |
|
|
| 1.13 | % |
|
| 0.62 | % |
Consumer loans |
|
| 218 |
|
|
| 5.84 | % |
|
| 4.05 | % |
|
| 145 |
|
|
| 4.43 | % |
|
| 1.96 | % |
Total |
| $ | 3,737 |
|
|
| 100.00 | % |
|
| 100.00 | % |
| $ | 3,271 |
|
|
| 100.00 | % |
|
| 100.00 | % |
12
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
|
| Year Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Allowance at beginning of period |
| $ | 3,271 |
|
| $ | 3,239 |
|
Provision for loan losses |
|
| 540 |
|
|
| 103 |
|
Charge offs: |
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
One- to four-family residential |
|
| — |
|
|
| — |
|
Commercial |
|
| — |
|
|
| — |
|
Home equity loans and lines of credit |
|
| — |
|
|
| — |
|
Construction |
|
| — |
|
|
| — |
|
Commercial and industrial loans |
|
| — |
|
|
| (15 | ) |
Consumer loans |
|
| (153 | ) |
|
| (81 | ) |
Total charge-offs |
|
| (153 | ) |
|
| (96 | ) |
|
|
|
|
|
|
|
|
|
Recoveries: |
|
|
|
|
|
|
|
|
Real estate loans: |
|
|
|
|
|
|
|
|
One- to four-family residential |
|
| 23 |
|
|
| 8 |
|
Commercial |
|
| — |
|
|
| — |
|
Home equity loans and lines of credit |
|
| — |
|
|
| — |
|
Construction |
|
| — |
|
|
| — |
|
Commercial and industrial loans |
|
| 35 |
|
|
| — |
|
Consumer loans |
|
| 21 |
|
|
| 17 |
|
Total recoveries |
|
| 79 |
|
|
| 25 |
|
Net charge-offs |
|
| (74 | ) |
|
| (71 | ) |
Allowance at end of period |
| $ | 3,737 |
|
| $ | 3,271 |
|
Total loans outstanding(1) |
| $ | 404,110 |
|
| $ | 336,262 |
|
Average loans outstanding |
| $ | 388,623 |
|
| $ | 328,192 |
|
Allowance for loan losses as a percent of total loans outstanding(1) |
|
| 0.92 | % |
|
| 0.97 | % |
Net loans charged off as a percent of average loans outstanding |
|
| 0.02 | % |
|
| 0.02 | % |
Allowance for loan losses to nonperforming loans |
|
| 165.94 | % |
|
| 147.28 | % |
(1) | Total loans exclude loans held for sale and include net deferred loan costs and fees, and purchase premiums. |
Investment Activities
General. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate interest rate and market risk, to diversify our assets, and to generate a reasonable rate of return on funds within the context of our interest rate and credit risk objectives. Our board of directors is responsible for adopting our investment policy. The investment policy is reviewed annually by the board of directors. Authority to make investments under the approved investment policy guidelines is delegated to our president and chief executive officer and our chief financial officer. All investment transactions are reviewed at the next regularly scheduled meeting of the board of directors. We classify all of our securities as available-for-sale.
We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises and municipal governments, deposits at the Federal Home Loan Bank of Boston, certificates of deposit of federally insured institutions, investment grade corporate bonds and investment grade marketable equity securities. We also are required to maintain an investment in Federal Home Loan Bank of Boston stock. While we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities at December 31, 2017.
13
Investment Securities. The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.
|
| At December 31, |
| |||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||||||
(In thousands) |
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
|
| Amortized Cost |
|
| Fair Value |
| ||||||
Securities available-for-sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
| $ | 3,999 |
|
| $ | 4,025 |
|
| $ | 3,999 |
|
| $ | 4,081 |
|
| $ | 6,886 |
|
| $ | 7,033 |
|
Corporates |
|
| 2,005 |
|
|
| 2,024 |
|
|
| 3,044 |
|
|
| 3,080 |
|
|
| 4,250 |
|
|
| 4,280 |
|
Municipals |
|
| 12,707 |
|
|
| 12,868 |
|
|
| 13,857 |
|
|
| 14,055 |
|
|
| 15,327 |
|
|
| 15,775 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 18,729 |
|
|
| 18,397 |
|
|
| 21,130 |
|
|
| 20,722 |
|
|
| 14,277 |
|
|
| 14,509 |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 14,451 |
|
|
| 14,061 |
|
|
| 14,676 |
|
|
| 14,178 |
|
|
| 5,465 |
|
|
| 5,444 |
|
U.S. Government guaranteed |
|
| 2,132 |
|
|
| 2,126 |
|
|
| 9,589 |
|
|
| 9,457 |
|
|
| 11,742 |
|
|
| 11,768 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 1,871 |
|
|
| 1,878 |
|
|
| 2,127 |
|
|
| 2,155 |
|
|
| 2,437 |
|
|
| 2,455 |
|
U.S. Government-guaranteed |
|
| 5,760 |
|
|
| 5,664 |
|
|
| 368 |
|
|
| 371 |
|
|
| 452 |
|
|
| 458 |
|
Mutual fund |
|
| 545 |
|
|
| 533 |
|
|
| 545 |
|
|
| 538 |
|
|
| 545 |
|
|
| 545 |
|
Total securities available-for-sale |
| $ | 62,199 |
|
| $ | 61,576 |
|
| $ | 69,335 |
|
| $ | 68,637 |
|
| $ | 61,381 |
|
| $ | 62,267 |
|
We classify all of our securities as available-for-sale. We do not engage in securities trading or derivatives activities in carrying out our investment strategies.
14
The following table sets forth the stated maturities and weighted average yields of investment securities at December 31, 2017. Certain mortgage-backed securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below.
|
| One Year or Less |
|
| More than One Year to Five Years |
|
| More than Five Years to Ten Years |
|
| More than Ten Years |
|
| Total |
| |||||||||||||||||||||||||
(Dollars in thousands) |
| Amortized Cost |
|
| Weighted Average Yield |
|
| Amortized Cost |
|
| Weighted Average Yield |
|
| Amortized Cost |
|
| Weighted Average Yield |
|
| Amortized Cost |
|
| Weighted Average Yield |
|
| Amortized Cost |
|
| Weighted Average Yield |
| ||||||||||
Securities available-for- sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government- sponsored enterprises |
| $ | — |
|
|
| — |
|
| $ | 3,999 |
|
|
| 2.52 | % |
| $ | — |
|
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | 3,999 |
|
|
| 2.52 | % |
Corporates |
|
| 470 |
|
|
| 1.73 | % |
|
| 1,535 |
|
|
| 2.96 | % |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,005 |
|
|
| 2.65 | % |
Municipals(1) |
|
| 1,608 |
|
|
| 2.92 | % |
|
| 8,843 |
|
|
| 2.85 | % |
|
| 2,256 |
|
|
| 4.04 | % |
|
| — |
|
|
| — |
|
|
| 12,707 |
|
|
| 3.08 | % |
Residential mortgage- backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government- sponsored enterprises |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,141 |
|
|
| 2.92 | % |
|
| 17,588 |
|
|
| 2.85 | % |
|
| 18,729 |
|
|
| 2.86 | % |
Commercial mortgage- backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government- sponsored enterprises |
|
| — |
|
|
| — |
|
|
| 5,243 |
|
|
| 2.49 | % |
|
| 9,208 |
|
|
| 2.08 | % |
|
| — |
|
|
| — |
|
|
| 14,451 |
|
|
| 2.21 | % |
U.S. Government- guaranteed |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,132 |
|
|
| 2.74 | % |
|
| 2,132 |
|
|
| 2.74 | % |
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government- sponsored enterprises |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 683 |
|
|
| 2.67 | % |
|
| 1,188 |
|
|
| 2.80 | % |
|
| 1,871 |
|
|
| 2.74 | % |
U.S. Government- guaranteed |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,760 |
|
|
| 2.31 | % |
|
| 5,760 |
|
|
| 2.31 | % |
Mutual fund(2) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
| 545 |
|
|
| 2.98 | % |
|
| 545 |
|
|
| 2.98 | % | |
Total securities available-for-sale |
| $ | 2,078 |
|
|
| 2.65 | % |
| $ | 19,620 |
|
|
| 2.70 | % |
| $ | 13,288 |
|
|
| 2.52 | % |
| $ | 27,213 |
|
|
| 2.73 | % |
| $ | 62,199 |
|
|
| 2.67 | % |
(1) | Yields for municipal investments are not presented on a tax equivalent basis. |
(2) | Investment in the mutual fund has no stated maturity and, accordingly, is presented herein with other investments maturing in more than 10 years. |
U.S. Government - Sponsored Enterprises. At December 31, 2017, we had U.S. government and agency securities totaling $4.0 million, which constituted 6.4% of our securities portfolio. While these securities may provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent we deem appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
Corporate Debt Securities. At December 31, 2017, we had corporate debt securities totaling $2.0 million, which constituted 3.2% of our securities portfolio. All of our corporate debt securities are investment grade and have maturities of less than 5 years. These securities generally provide slightly higher yields than U.S. government and agency securities and mortgage-backed securities.
Municipal Securities. At December 31, 2017, we had municipal securities totaling $12.7 million, which constituted 20.4% of our securities portfolio. All of our current municipal securities have maturities of less than 10 years. These securities generally provide slightly higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as other investments, so we typically maintain investments in municipal securities, to the extent appropriate, for generating returns in our investment portfolio.
15
Mortgage-Backed Securities. At December 31, 2017, we had residential mortgage-backed securities totaling $18.7 million, which constituted 30.1% of our securities portfolio, and commercial mortgage-backed securities totaling $16.6 million, which constituted 26.7% of our securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of mortgages. Mortgage-backed securities are commonly referred to as “pass-through” certificates because the principal and interest of the underlying loans is “passed through” pro-rata based on each investor’s respective interest in the security, net of certain costs, including servicing and guarantee fees. Residential mortgage-backed securities typically are collateralized by pools of one- to four-family or multi-family mortgages, although we invest primarily in mortgage-backed securities backed by one- to four-family mortgages. Commercial mortgage-backed securities typically are collateralized by pools of commercial mortgage loans. The issuers of such securities pool and resell the participation interests in the form of securities to investors, such as Randolph Savings Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our mortgage-backed securities are either backed by Ginnie Mae, a U.S. government agency or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Residential and commercial mortgage-backed securities issued by U.S. government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential and commercial mortgage-backed securities may be used to collateralize our borrowings. Investments in residential and commercial mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Collateralized Mortgage Obligations. At December 31, 2017, we had collateralized mortgage obligations issued by U.S. government-sponsored enterprises totaling $1.9 million, which constituted 3.0% of our securities portfolio, and collateralized mortgage obligations guaranteed by a U.S. government agency totaling $5.8 million, which constituted 9.3% of our securities portfolio.
Collateralized mortgage obligations are securities issued in the secondary market that are collateralized by pools of mortgages similar to mortgage-backed securities. These two types of securities differ in how the principal and interest is received by their respective investors. Cash flows from collateralized mortgage obligation securities typically are not received in the same pro-rata fashion as mortgage-backed securities. Collateralized mortgage obligations can have contractually defined “tranches” that specify differing maturity dates, interest rates and principal balances.
Other Securities. We held common stock of the Federal Home Loan Bank of Boston in connection with our borrowing activities totaling $3.3 million at December 31, 2017. The Federal Home Loan Bank of Boston common stock is carried at cost. We may be required to purchase additional Federal Home Loan Bank of Boston stock if we increase borrowings in the future.
Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us non-interest income that is non-taxable. At December 31, 2017, our balance in bank-owned life insurance totaled $8.0 million and was issued by six insurance companies, all of which were rated A- or better by A.M. Best Company.
Sources of Funds
General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.
Deposit Accounts. Deposits are attracted from within our market area by sales efforts of our commercial loan and retail officers, advertising, and through our website. We offer a broad selection of deposit instruments, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts, and certificates of deposit. Brokered deposits are a more volatile source of funding than core deposits and do not increase our deposit franchise. In a rising rate environment, we may be unwilling or unable to pay a competitive rate. To the extent that such deposits do not remain with us, they may need to be replaced with borrowings, which could increase our cost of funds and negatively impact our interest rate spread, financial condition, and results of operation. Brokered deposits totaled $7.1 million at December 31, 2017.
Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit, and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, and customer preferences and concerns. We generally review our deposit mix and
16
pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive rates and to offer periodically special rates in order to attract deposits of a specific type or term.
Business Banking. We also offer a variety of deposit accounts designed for businesses operating in our market area. Our business banking deposit products include a commercial checking account and checking accounts specifically designed for small businesses. We also offer remote deposit capture products for business customers to meet their online banking needs. Additionally, we offer money market accounts for businesses. We are seeking to increase our commercial deposits through expansion of our commercial loan portfolio and the resulting increase in our base of commercial customers.
Deposits. The following table sets forth the average balances and weighted average rates of our deposit products at the dates indicated.
|
| For the Year Ended December 31, |
| |||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||||||||||||||||||
(Dollars in thousands) |
| Average Balance |
|
| Percent |
|
| Weighted Average Rate |
|
| Average Balance |
|
| Percent |
|
| Weighted Average Rate |
|
| Average Balance |
|
| Percent |
|
| Weighted Average Rate |
| |||||||||
Deposit type: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing demand |
| $ | 61,871 |
|
|
| 17 | % |
|
| — |
|
| $ | 45,142 |
|
|
| 13 | % |
|
| — |
|
| $ | 32,515 |
|
|
| 11 | % |
|
| — |
|
NOW |
|
| 46,259 |
|
|
| 13 | % |
|
| 0.47 | % |
|
| 55,773 |
|
|
| 16 | % |
|
| 0.31 | % |
|
| 44,587 |
|
|
| 15 | % |
|
| 0.19 | % |
Money market deposits |
|
| 56,535 |
|
|
| 16 | % |
|
| 0.49 | % |
|
| 44,937 |
|
|
| 13 | % |
|
| 0.38 | % |
|
| 53,245 |
|
|
| 17 | % |
|
| 0.42 | % |
Regular and other savings |
|
| 103,670 |
|
|
| 29 | % |
|
| 0.16 | % |
|
| 99,764 |
|
|
| 29 | % |
|
| 0.15 | % |
|
| 91,458 |
|
|
| 30 | % |
|
| 0.13 | % |
Term certificates |
|
| 90,879 |
|
|
| 25 | % |
|
| 0.99 | % |
|
| 92,597 |
|
|
| 27 | % |
|
| 0.92 | % |
|
| 81,925 |
|
|
| 27 | % |
|
| 0.93 | % |
Total |
| $ | 359,214 |
|
|
| 100.00 | % |
|
| 0.43 | % |
| $ | 338,213 |
|
|
| 100.00 | % |
|
| 0.40 | % |
| $ | 303,730 |
|
|
| 100.00 | % |
|
| 0.39 | % |
The following table sets forth our term certificates classified by interest rate as of the dates indicated.
|
| At December 31, |
| |||||||||
(Dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
0.00% - 1.00% |
| $ | 41,695 |
|
| $ | 48,406 |
|
| $ | 42,242 |
|
1.01 - 2.00% |
|
| 51,454 |
|
|
| 40,716 |
|
|
| 37,757 |
|
2.01 - 3.00% |
|
| 267 |
|
|
| 768 |
|
|
| 3,392 |
|
Total |
| $ | 93,416 |
|
| $ | 89,890 |
|
| $ | 83,391 |
|
The following table sets forth the amount and maturities of our term certificates by interest rate at December 31, 2017.
|
| Amount Due |
|
|
|
|
|
|
|
|
| |||||||||||||||||
(Dollars in thousands) |
| Less than One Year |
|
| More than One Year to Two Years |
|
| More than Two Years to Three Years |
|
| More than Three Years to Four Years |
|
| More than Four Years |
|
| Total |
|
| % of Total Certificate Accounts |
| |||||||
0.00 - 1.00% |
| $ | 30,384 |
|
| $ | 8,666 |
|
| $ | 2,340 |
|
| $ | 305 |
|
| $ | — |
|
| $ | 41,695 |
|
|
| 45 | % |
1.01 - 2.00% |
|
| 19,166 |
|
|
| 13,804 |
|
|
| 6,153 |
|
|
| 4,568 |
|
|
| 7,763 |
|
|
| 51,454 |
|
|
| 55 | % |
2.01 - 3.00% |
|
| — |
|
|
| — |
|
|
| 261 |
|
|
| — |
|
|
| 6 |
|
|
| 267 |
|
|
| — |
|
Total |
| $ | 49,550 |
|
| $ | 22,470 |
|
| $ | 8,754 |
|
| $ | 4,873 |
|
| $ | 7,769 |
|
| $ | 93,416 |
|
|
| 100 | % |
17
As of December 31, 2017, the aggregate amount of our term certificates in amounts greater than or equal to $100,000 was approximately $42.2 million. The following table sets forth the maturity of these certificates as of December 31, 2017.
(In thousands) Maturity Period |
| Amount |
| |
Three months or less |
| $ | 4,565 |
|
Over three through six months |
|
| 3,643 |
|
Over six through twelve months |
|
| 11,624 |
|
Over twelve months |
|
| 22,358 |
|
Total |
| $ | 42,190 |
|
Borrowings. We may utilize advances from the Federal Home Loan Bank of Boston to supplement our supply of investable funds. The Federal Home Loan Bank of Boston functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank of Boston and are authorized to apply for advances on the security of such stock and certain of our residential and commercial real estate loans. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank of Boston’s assessment of the institution’s creditworthiness. At December 31, 2017 and December 31, 2016, we had $76.0 million and $38.7 million in outstanding advances from the Federal Home Loan Bank of Boston, respectively. At December 31, 2017 and December 31, 2016, based on available collateral and our ownership of Federal Home Loan Bank of Boston stock, and based upon our internal policy, we had access to additional Federal Home Loan Bank of Boston advances of up to $67.6 million and $65.6 million, respectively. We also have a $4.2 million available line of credit with Federal Home Loan Bank of Boston and a $3.5 million available line of credit with a correspondent bank at December 31, 2017. We had no borrowings outstanding under either of these lines of credit at December 31, 2017 and 2016. Advances from the FHLBB are secured by a blanket pledge agreement on the Bank’s qualified collateral, defined principally as 75% of the carrying value of pledged first mortgage loans on owner-occupied residential property and 65% on pledged commercial real estate loans.
The following table sets forth information concerning balances and interest rates on our short-term FHLBB borrowings at the dates and for the periods indicated.
|
| At or for the Year Ended December 31, |
| |||||||||
(Dollars in thousands) |
| 2017 |
|
| 2016 |
|
| 2015 |
| |||
Balance outstanding at end of period |
| $ | 64,739 |
|
| $ | 19,898 |
|
| $ | 11,744 |
|
Average amount outstanding during the period |
| $ | 34,656 |
|
| $ | 15,497 |
|
| $ | 9,057 |
|
Maximum outstanding at any month end |
| $ | 64,739 |
|
| $ | 19,898 |
|
| $ | 11,744 |
|
Weighted average interest rate during the period |
|
| 1.31 | % |
|
| 0.77 | % |
|
| 0.33 | % |
Weighted average interest rate at end of period |
|
| 1.59 | % |
|
| 0.80 | % |
|
| 0.51 | % |
Personnel
As of December 31, 2017, we had 187 total employees, including 169 full-time and 18 part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.
Subsidiaries
Envision Bank has eight wholly-owned subsidiaries. Cabot Security Corporation is a Massachusetts securities corporation formed to hold certain of our investment securities for tax purposes. Randolph Investment Company, Inc., Randolph Investment II Company, Inc., and Randolph Investment III Company, Inc. are Massachusetts corporations formed to hold certain real estate owned. Randolph Holding RI II, LLC is a Rhode Island limited liability company formed to hold the lease on our former Cranston, Rhode Island property. First Eastern Mortgage Corporation is an inactive Massachusetts corporation. Prime Title Services, Inc. is a Massachusetts corporation that provides mortgage loan closing services. First Realty Acquisition Corporation is a Massachusetts corporation that acquires, holds, manages, and disposes of real property in satisfaction of debts.
18
General
Envision Bank is a Massachusetts stock savings bank and is the wholly-owned subsidiary of Randolph Bancorp, Inc., a Massachusetts corporation, which is a registered bank holding company. Randolph Savings Bank’s deposits are insured up to applicable limits by the FDIC and by the Depositors Insurance Fund established by the Massachusetts General Laws for amounts in excess of the FDIC insurance limits. Randolph Savings Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency and state regulator, and by the FDIC, as its federal regulator and deposit insurer. Randolph Savings Bank is required to file reports with, and is periodically examined by, the FDIC and the Massachusetts Commissioner of Banks concerning its activities and financial condition. Randolph Savings Bank must also obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. Randolph Savings Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau (CFPB). Randolph Savings Bank is a member of and owns stock in the Federal Home Loan Bank of Boston, which is one of the 12 regional banks in the Federal Home Loan Bank System.
As a bank holding company, Randolph Bancorp, Inc. is subject to examination and supervision by, and is required to file certain reports with, the Board of Governors of the Federal Reserve System (Federal Reserve). Randolph Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission (SEC) under the federal securities laws.
The federal and state regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of other creditors or shareholders. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets, and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Massachusetts legislature, the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve, or the United States Congress, could have a material adverse impact on the financial condition and results of operations of Randolph Bancorp, Inc. and Randolph Savings Bank. As is further described below, the Dodd-Frank Act has significantly changed the bank regulatory structure and may affect the lending, investment, and general operating activities of depository institutions and their holding companies.
Set forth below are certain material regulatory requirements that are applicable to Randolph Bancorp, Inc. and Envision Bank. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Randolph Bancorp, Inc. and Envision Bank.
Holding Company Regulation
General. Randolph Bancorp, Inc. is a bank holding company within the meaning of the Bank Holding Company Act of 1956, or BHCA. As such, Randolph Bancorp, Inc. is registered with the Federal Reserve and subject to regulations, examinations, supervision, and reporting requirements applicable to bank holding companies. In addition, the Federal Reserve has enforcement authority over Randolph Bancorp, Inc. Among other things, this authority permits the Federal Reserve to restrict or prohibit activities that are determined to be a serious risk to Randolph Bancorp, Inc.’s subsidiary insured depository institution.
Permissible Activities. A bank holding company is generally prohibited from engaging in non-banking activities, or acquiring direct or indirect control of more than 5.0% of any class of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities that the Federal Reserve had determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto as of November 11, 1999. Some of the principal activities that the Federal Reserve had determined by regulation to be so closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing discount brokerage services; (iv) acting as fiduciary, investment, or financial advisor; (v) leasing personal or real property; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association whose direct and indirect activities are limited to those permitted for bank holding companies. A bank holding company that is well capitalized and well managed within the meaning of applicable regulations and whose subsidiary depository institutions are well capitalized and well managed and meet certain additional requirements, may elect to become a “financial holding company.” Such an election allows a bank holding company to engage in a broader array of financial activities, including insurance and investment banking activities.
Acquisition of Control. The BHCA provides that no company may directly or indirectly acquire control of a bank without the prior approval of the Federal Reserve. Any company that acquires control of a bank becomes a “bank holding company” subject to registration, examination and regulation by the Federal Reserve. Pursuant to federal regulations, the term “company” is defined to include banks, corporations, partnerships, associations, and certain trusts and other entities, and a company has “control” of a bank or
19
other company if the company owns, controls, or holds with power to vote 25.0% or more of any class of voting stock of the bank or other company, controls in any manner the election of a majority of the directors of the bank or other company, or if the Federal Reserve determines, after notice and opportunity for hearings, that the company has the power to exercise a controlling influence over the management or policies of the bank or other company. In addition, a bank holding company must obtain Federal Reserve approval prior to merging with another bank holding company or acquiring securities of a bank or bank holding company if, after such acquisition, the bank holding company would control more than 5.0% of any class of voting stock of the bank or bank holding company.
In evaluating applications by bank holding companies to acquire depository institutions, the Federal Reserve must consider, among other things, the financial and managerial resources and future prospects of the company and institutions involved, the convenience and needs of the community, effectiveness of the institutions involved in the transaction in combating money laundering activities, the extent to which a proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system, and competitive factors. The Federal Reserve may not approve a transaction that would result in a monopoly and may not approve a transaction that would substantially lessen competition in any banking market unless it finds that the anticompetitive effects are clearly outweighed in the public interest by the probable effect of the transaction in meeting the convenience and needs of the community to be served. In addition to the approval of the Federal Reserve, prior approval may also be necessary from other agencies having supervisory jurisdiction over the bank to be acquired before any bank acquisition can be completed.
Under the Federal Change in Bank Control Act, no person, directly or indirectly or acting in concert with one or more other persons, may acquire control of an insured depository institution or a depository institution holding company unless the appropriate federal banking agency has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition. The Federal Reserve is the appropriate federal banking agency with respect to an acquisition of control of a bank holding company. Acquisitions subject to approval under the BHCA are exempt from the prior notice requirement. Control, as defined under the Change in Bank Control Act and as implemented by the Federal Reserve with respect to bank holding companies, means the power to directly or indirectly direct the management or policies of a bank holding company or to vote 25.0% or more of any class of voting securities of the bank holding company. Acquisition of more than 10.0% of any class of a bank holding company’s voting stock is subject to a rebuttable presumption of control by the Federal Reserve if the bank holding company has registered securities under section 12 of the Exchange Act or if no other person will own, control, or hold the power to vote a greater percentage of that class of voting stock immediately after the acquisition. There are also rebuttable presumptions in the regulations concerning whether a group is “acting in concert,” including presumed concerted action among members of an “immediate family.” Accordingly, the filing of a notice with the Federal Reserve would be required before any person or group of persons acting in concert could acquire 10.0% or more of the common stock of Randolph Bancorp, Inc., unless the person or group of persons files a rebuttal of control that is accepted by the Federal Reserve.
The Federal Reserve may prohibit a proposed acquisition of control if it finds, among other things, that:
| • | the acquisition would result in a monopoly or substantially lessen competition; |
| • | the financial condition of the acquiring person might jeopardize the financial stability of the institution; |
| • | the competence, experience or integrity of the acquiring person indicates that it would not be in the interest of the depositors or the public to permit the acquisition of control by such person; or |
| • | the acquisition would have an adverse effect on the FDIC’s Deposit Insurance Fund. |
Capital. When it reaches $1 billion in total consolidated assets, we believe Randolph Bancorp, Inc. will be subject to the Federal Reserve’s capital adequacy regulations for bank holding companies (on a consolidated basis). These capital standards have historically been similar to, though less stringent than, those of the FDIC for Envision Bank. Subject to certain exceptions, including an exception for bank holding companies with less than $1 billion of assets, the Dodd-Frank Act, requires the Federal Reserve to establish, for all bank holding companies, minimum consolidated capital requirements that are as stringent as those required for insured depository institutions. Under regulations enacted by the Federal Reserve and generally effective January 1, 2015, all such bank holding companies are subject to regulatory capital requirements that are the same as or more stringent than the capital requirements applicable to Envision Bank. These capital requirements include provisions that, when applicable, might limit the ability of Randolph Bancorp, Inc. to pay dividends to its shareholders or repurchase its shares. See “—Federal Banking Regulation—Capital Requirements.” We believe Randolph Bancorp, Inc. is not subject to the new capital requirements as its total consolidated assets are below $1 billion, and we believe it otherwise meets the requirements of the Federal Reserve’s small bank holding company policy statement, including certain qualitative requirements with respect to nonbanking activities, off-balance sheet activities, and publicly-registered debt and equity. The small bank holding company policy statement generally facilitates the transfer of ownership of small community banks by allowing their holding companies to operate with higher levels of debt than would otherwise be permitted.
20
Source of Strength. Federal Reserve policy requires bank holding companies to act as a source of financial and managerial strength to their depository institution subsidiaries. The Dodd-Frank Act codified the requirement that holding companies act as a source of financial strength. As a result, Randolph Bancorp, Inc. is expected to commit resources to support Randolph Savings Bank, including at times when Randolph Bancorp, Inc. may not be in a financial position to provide such resources.
Dividends and Repurchases. A bank holding company is generally required to give the Federal Reserve prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10.0% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve. The Federal Reserve Board has adopted an exception to that approval requirement for well capitalized bank holding companies that meet certain other conditions.
The Federal Reserve has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances, such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The policy statement also states that a bank holding company should inform and consult with the Federal Reserve supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the bank holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies may affect the ability of Randolph Bancorp, Inc. to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions. In addition, the ability of Randolph Bancorp, Inc. to pay dividends may be restricted if Envision Bank becomes undercapitalized.
Massachusetts Holding Company Regulation. Under the Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. The term “company” is defined by the Massachusetts banking laws similarly to the definition of “company” under the Bank Holding Company Act. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5.0% of the voting stock of another banking institution; (ii) must register and file reports with the Massachusetts Commissioner of Banks; and (iii) is subject to examination by the Massachusetts Commissioner of Banks. Recent legislation enacted in Massachusetts provides an exemption from the requirement to obtain Board of Bank Incorporation approval for certain transactions involving a merger or consolidation subject to approval by the Massachusetts Commissioner of Banks. In addition, for a period of three years following completion of a conversion to stock form, no person may directly or indirectly offer to acquire or acquire beneficial ownership of more than 10.0% of any class of equity security of a converting mutual holding company without prior written approval of the Massachusetts Commissioner of Banks.
Federal Banking Regulation
Business Activities. Under federal law, all state-chartered FDIC-insured banks, including savings banks, have been limited in their activities as principal and in their equity investments to the type authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations. For example, certain state-chartered savings banks which had previously done so may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940. The maximum permissible investment is the lesser of 100.0% of Tier 1 capital or the maximum amount permitted by Massachusetts law. Such grandfathered authority may be terminated under certain circumstances, including a change in charter or a determination by the FDIC that such investments pose a safety and soundness risk.
The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and the FDIC has determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.
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Capital Requirements. The FDIC currently requires federally insured state-chartered banks that are not members of the Federal Reserve System, or state non-member banks, to meet minimum capital standards: a 4.5% Tier 1 common equity to risk-weighted assets ratio, a 6.0% Tier 1 equity to risk weighted assets ratio, an 8.0% total capital to risk-weighted assets ratio and a leverage ratio of 4.0%. Additionally, subject to a transition schedule that began in 2016, the FDIC’s capital rules require Randolph Savings Bank to establish a capital conservation buffer of Tier I common equity in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk weighted assets (1.25% at December 31, 2017), or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases. If Randolph Bancorp, Inc. becomes subject to the Federal Reserve’s capital adequacy rules for bank holding companies, then Randolph Bancorp, Inc. would also become subject to a similar capital conservation buffer requirement that could restrict its ability to pay dividends, pay discretionary bonuses and/or engage in share repurchases. The capital conservation buffer is required to be fully implemented by January 1, 2019. Under the capital rules, risk-based capital ratios are calculated by dividing Common Equity Tier 1, Tier 1, and total risk-based capital, respectively, by risk-weighted assets. On- and off-balance exposures are assigned to various risk-weight categories based primarily on relative risk.
Under the FDIC’s rules, an FDIC supervised institution, such as Envision Bank is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a specific capital level for any capital measure. Randolph Savings Bank is currently considered “well capitalized” under this standard.
Dividends. A state non-member bank may not make a capital distribution that would reduce its regulatory capital below the amount required by the FDIC’s regulatory capital regulations or for the liquidation account established in connection with its conversion to stock form. In addition, Randolph Savings Bank’s ability to pay dividends may be limited if Envision Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of Randolph Bancorp, Inc. to pay dividends to its shareholders. See “—Capital Requirements.”
Community Reinvestment Act and Fair Lending Laws. All institutions have a responsibility under the Community Reinvestment Act, or the CRA, and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a state non-member bank, the FDIC is required to assess the institution’s record of compliance with the CRA. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA does require the FDIC, in connection with its examination of a state non-member bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. An institution’s failure to comply with the provisions of the CRA could, at a minimum, result in denial of certain corporate applications, such as branches or mergers, or in restrictions on its activities. The CRA requires all institutions insured by the FDIC to publicly disclose their rating. Randolph Savings Bank received a “Satisfactory” CRA rating in its most recent federal examination.
Massachusetts has its own statutory counterpart to the CRA that is applicable to Envision Bank. The Massachusetts version is generally similar to the CRA but uses a five-tiered descriptive rating system. Massachusetts law requires the Massachusetts Commissioner of Banks to consider, but not be limited to, a bank’s record of performance under Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, to relocate an office, or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Randolph Savings Bank’s most recent rating under Massachusetts law was “Satisfactory.”
In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the FDIC, as well as other federal regulatory agencies and the Department of Justice.
Transactions with Related Parties. An insured depository institution’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulations. An affiliate is generally a company that controls, is controlled by or is under common control with an insured depository institution, such as Envision Bank; however, a subsidiary of a bank that engages in bank permissible activities is generally not treated as an affiliate. Randolph Bancorp, Inc. is an affiliate of Envision Bank because of its control of Envision Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and collateral requirements. Transactions with affiliates also must be consistent with safe and sound banking practices, generally not involve the purchase of low-quality assets and be on terms that are as favorable to the insured depository institution as comparable transactions with non-affiliates.
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Envision Bank’s authority to extend credit to its directors, executive officers, and 10.0% or greater shareholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve. The Dodd-Frank Act explicitly provides that an extension of credit to an insider includes credit exposure arising from a derivatives transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Among other things, these provisions generally require that extensions of credit to such insiders:
| • | be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and |
| • | not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Envision Bank’s capital. |
In addition, extensions of credit in excess of certain limits must be approved by Randolph Savings Bank’s loan committee or board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Additionally, the Dodd-Frank Act requires that asset sale transactions with insiders must be on market terms, and if the transaction represents more than 10.0% of the capital and surplus of Envision Bank, it must be approved by a majority of the disinterested directors of Envision Bank.
Enforcement. The FDIC has extensive enforcement responsibility over state non-member banks and has authority to bring enforcement actions against all “institution-affiliated parties,” including directors, officers, shareholders, attorneys, appraisers, and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an institution. Formal enforcement action by the FDIC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member bank under specified circumstances, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; (4) insufficient capital; or (5) the incurrence of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance. The FDIC also has the authority to terminate deposit insurance.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Interstate Banking and Branching. Federal law permits well capitalized and well managed bank holding companies to acquire banks in any state, subject to Federal Reserve approval, certain concentration limits and other specified conditions. In addition, pursuant to the Dodd-Frank Act, banks are now permitted to establish de novo branches on an interstate basis provided that branching is authorized by the law of the host state for banks chartered by the host state.
Prompt Corrective Action Regulations. The FDIC is required by law to take supervisory action against undercapitalized institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.
An institution that has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a common equity Tier 1 ratio of less than 4.5%, or a Tier 1 leverage ratio of less than 4.0% is considered to be “undercapitalized.” An institution that has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 4.0%, a common equity Tier 1 ratio of less than 3.0%, or a Tier 1 leverage ratio of less than 3.0% is considered to be “significantly undercapitalized.” An institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be “critically undercapitalized.”
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Generally, a receiver or conservator must be appointed for an institution that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the FDIC within 45 days of the date that an institution is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Any holding company of an institution that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5.0% of the institution’s assets at the time it was deemed to be undercapitalized by the FDIC or the amount necessary to restore the institution to adequately capitalized status. This guarantee remains in place until the FDIC notifies the institution that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures, such as a restrictions on capital distributions and asset growth. The FDIC may also take any one of a number of discretionary supervisory actions against undercapitalized institutions, including the issuance of a capital directive and the replacement of senior executive officers and directors.
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured depository institutions, such as Envision Bank. Deposit accounts in Randolph Savings Bank are insured by the FDIC up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund.
The Federal Deposit Insurance Act (“FDIA”), as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to take steps as may be necessary to cause the ratio of deposit insurance reserves to estimated insured deposits - the designated reserve ratio - to reach 1.35% by September 30, 2020, and it mandates that the reserve ratio designated by the FDIC for any year may not be less than 1.35%. Further, the Dodd-Frank Act required that, in setting assessments, the FDIC offset the effect of the increase in the minimum reserve ratio from 1.15% to 1.35% on banks with less than $10 billion in assets.
To satisfy these requirements, on March 15, 2016, the FDIC’s Board of Directors approved a final rule to increase the Deposit Insurance Fund’s reserve ratio to the statutorily required minimum ratio of 1.35% of estimated insured deposits. The final rule imposes on large banks a surcharge of 4.5 basis points of their assessment base, after making certain adjustments. Large banks will pay quarterly surcharges in addition to their regular risk-based assessments. Overall regular risk-based assessment rates will decline once the reserve ratio reaches 1.15%. Small banks, such as Envision Bank, will receive credits to offset the portion of their assessments that help to raise the reserve ratio from 1.15% to 1.35%. After the reserve ratio reaches 1.38%, the FDIC will automatically apply a small bank’s credits to reduce its regular assessment up to the entire amount of the assessment. The revised deposit insurance assessment pricing became effective on July 1, 2016.
Deposit premiums are based on assets. To determine its deposit insurance premium, Envision Bank computes the base amount of its average consolidated assets less its average tangible equity (defined as the amount of Tier 1 capital) and the applicable assessment rate. On April 26, 2016, the FDIC’s Board of Directors adopted a final rule that changed the manner in which deposit insurance assessment rates are calculated for established small banks, generally those banks with less than $10 billion of assets that have been insured for at least five years. The rule utilizes the CAMELS rating system, which is a supervisory rating system designed to take into account and reflect all financial and operational risks a bank may face, including capital adequacy, asset quality, management capability, earnings, liquidity and sensitivity to market risk. Under the final rule each of seven financial ratios and a weighted average of CAMELS component ratings will be multiplied by a corresponding pricing multiplier. The sum of these products will be added to a uniform amount, with the resulting sum being an institution’s initial base assessment rate (subject to minimum or maximum assessment rates based on a bank’s CAMELS composite rating). This method takes into account various measures that are similar to the factors that the FDIC previously considered in assigning institutions to risk categories, including an institution’s leverage ratio, brokered deposit ratio, one year asset growth, the ratio of net income before taxes to total assets, and considerations related to asset quality. Assessments for established small banks with a CAMELS rating of 1 or 2 range from 1.5 to 16 basis points, after adjustments, while assessment rates for established small banks with a CAMELS composite rating of 4 or 5 range from 11 to 30 basis points, after adjustments. Assessments for established small banks with a CAMLES rating of 3 range from 3 to 30 basis points.
In addition to the FDIC assessments, the Financing Corporation, or FICO, is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. As of September 30, 2017, the annualized FICO assessment was equal to 0.540 basis points of total assets less tangible capital.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Envision Bank. Management cannot predict what assessment rates will be in the future.
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Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition, or violation that may lead to termination of our deposit insurance.
Brokered Deposits. Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew, or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10.0% of total assets will be subject to increased FDIC deposit insurance premium assessments. However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits.
Volcker Rule Restrictions on Proprietary Trading and Sponsorship of Hedge Funds and Private Equity Funds. The Dodd-Frank Act bars banking organizations, such as the Company and Envision Bank, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain circumstances, in a provision commonly referred to as the “Volcker Rule.” Under the Dodd-Frank Act, proprietary trading generally means trading by a banking entity or its affiliate for its trading account. Hedge funds and private equity funds are described by the Dodd-Frank Act as funds that would be registered under the 1940 Act but for certain enumerated exemptions. The Volcker Rule restrictions apply to the Company, Envision Bank, and all of their subsidiaries and affiliates.
Prohibitions Against Tying Arrangements. State non-member banks are prohibited, subject to certain exceptions, from extending credit or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Reserve System. Federal Reserve regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). Envision Bank’s required reserves can be in the form of vault cash and, if vault cash does not fully satisfy the required reserves, in the form of a balance maintained with the Federal Reserve Bank of Boston. The Federal Reserve regulations currently require that reserves be maintained against aggregate transaction accounts except for transaction accounts up to $15.5 million, which are exempt. Transaction accounts greater than $15.5 million up to $115.1 million have a reserve requirement of 3.0%, and those greater than $115.1 million have a reserve requirement of approximately $2.99 million plus 10.0% of the amount over $115.1 million. The Federal Reserve generally makes annual adjustments to the tiered reserves. Envision Bank is in compliance with these requirements.
Federal Home Loan Bank System. Envision Bank is a member of the Federal Home Loan Bank of Boston, which is one of the 12 regional Federal Home Loan Banks comprising the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank, Envision Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2017, Envision Bank was in compliance with this requirement. Based on redemption provisions of the Federal Home Loan Bank, the stock has no quoted market value and is carried at cost. Envision Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank stock. As of December 31, 2017, no impairment has been recognized.
Massachusetts Banking Laws and Supervision
General. As a Massachusetts stock savings bank, Envision Bank is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, and payment of dividends. In addition, Envision Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Massachusetts Commissioner of Banks is required for a Massachusetts-chartered bank to establish or close branches, merge with other financial institutions, issue stock, and undertake certain other activities. Any Massachusetts bank that does not operate in accordance with the regulations, policies, and directives of the Massachusetts Commissioner of Banks may be sanctioned. The Massachusetts Commissioner of Banks may suspend or remove directors or officers of a bank who have violated the law, conducted a bank’s business in a manner that is unsafe, unsound, or contrary to the depositors’ interests, or been negligent in the performance of their duties. In addition, the Massachusetts Commissioner of Banks has the authority to appoint a receiver or conservator if it is determined that a bank is conducting its business in an unsafe or unauthorized manner, and under certain other circumstances.
Lending Activities. A Massachusetts savings bank may make a wide variety of mortgage loans including fixed-rate loans, adjustable-rate loans, variable-rate loans, participation loans, graduated payment loans, construction and development loans, condominium and co-operative loans, second mortgage loans, and other types of loans that may be made in accordance with
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applicable regulations. Commercial loans may be made to corporations and other commercial enterprises with or without security. Consumer and personal loans may also be made with or without security.
Insurance Sales. A Massachusetts savings bank may engage in insurance sales activities if the Massachusetts Commissioner of Banks has approved a plan of operation for insurance activities and the bank obtains a license from the Massachusetts Division of Insurance. A bank may be licensed directly or indirectly through an affiliate or a subsidiary corporation established for this purpose. Envision Bank does not currently sell or refer insurance products but has recently begun the process of seeking approval for insurance sales activities.
Dividends. A Massachusetts savings bank may declare cash dividends from net profits not more frequently than quarterly. Non-cash dividends may be declared at any time. No dividends may be declared, credited, or paid if the bank’s capital stock is impaired. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Net profits for this purpose means the remainder of all earnings from current operations plus actual recoveries on loans and investments and other assets after deducting current operating expenses, actual losses, accrued dividends on preferred stock, if any, and all federal and state taxes.
Parity Authority. A Massachusetts bank may, after providing 30 days’ prior notice to the Massachusetts Commissioner of Banks, exercise any power and engage in any activity that has been authorized for national banks, federal savings associations or state banks in a state other than Massachusetts, provided that the activity is permissible under applicable federal law and not specifically prohibited by Massachusetts law. Such powers and activities must be subject to the same limitations and restrictions imposed on the national bank, federal thrift or out-of-state bank that exercised the power or activity.
Loans-to-One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations to one borrower may not exceed 20.0% of the total of the bank’s capital stock, surplus, and undivided profits.
Loans to a Bank’s Insiders. Massachusetts banking law prohibits any executive officer or director of a bank from borrowing or guaranteeing extensions of credit by such bank except to the extent permitted by federal law.
Investment Activities. In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4.0% of the bank’s deposits. Federal law imposes additional restrictions on Envision Bank’s investment activities. See “—Federal Banking Regulation—Business Activities.”
Regulatory Enforcement Authority. Any Massachusetts savings bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including revocation of its charter. The Massachusetts Commissioner of Banks may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in an unsafe or unsound manner or contrary to the depositors interests, or been negligent in the performance of their duties. Upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. The Massachusetts Commissioner of Banks also has authority to take possession of a bank and appoint a liquidating agent under certain conditions, such as an unsafe and unsound condition to transact business, the conduct of business in an unsafe or unauthorized manner, or impaired capital. In addition, Massachusetts consumer protection and civil rights statutes applicable to Envision Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.
Depositors Insurance Fund. The Depositors Insurance Fund is a private, industry-sponsored insurance fund which insures savings bank deposits in excess of federal deposit insurance coverage at Massachusetts-chartered savings banks. The Depositors Insurance Fund is authorized to charge savings banks an annual assessment fee on deposit balances in excess of amounts insured by the FDIC. Assessment rates are based on the institution’s risk category, similar to the method currently used to determine assessments by the FDIC discussed above under “—Federal Banking Regulation—Insurance of Deposit Accounts.”
Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. The requirements, which became effective March 1, 2010, are similar to existing federal laws, such as the Gramm-Leach-Bliley Act that require organizations to establish written information security programs to prevent identity theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.
Massachusetts has additional statutes and regulations that are similar to certain of the federal provisions discussed below.
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Interest and other charges collected or contracted for by Envision Bank are subject to state usury laws and federal laws concerning interest rates. Envision Bank’s operations are also subject to state and federal laws applicable to credit transactions, such as the:
| • | Home Mortgage Disclosure Act, which requires financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; |
| • | Equal Credit Opportunity Act, which prohibits discrimination on the basis of race, creed, or other prohibited factors in extending credit; |
| • | Fair Credit Reporting Act, which governs the use and provision of information to credit reporting agencies; |
| • | Biggert-Waters Flood Insurance Reform Act of 2012, which mandates flood insurance for mortgage loans secured by residential real estate in certain areas; and |
| • | rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws. |
In addition, the CFPB issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Envision Bank is evaluating recent regulations and proposals, and devotes significant compliance, legal, and operational resources to compliance with consumer protection regulations and standards.
The operations of Envision Bank also are subject to the:
| • | Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; |
| • | Truth in Savings Act, which governs the disclosure of terms and conditions regarding interest and fees related to deposit accounts; |
| • | Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; |
| • | Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check; |
| • | USA PATRIOT Act, which requires depository institutions to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and |
| • | Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties. |
Federal Securities Laws
Our common stock is registered with the SEC under the Exchange Act. As a result of such registration, we will be subject to the period reporting, proxy solicitation, insider trading restrictions, and other requirements of the Exchange Act.
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Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described below, together with the other information contained in this report, including the financial statements and the related notes appearing at the end of this report and the matters addressed in the section of this report titled “Special Note Regarding Forward- Looking Statements”. The events discussed below could have a material and adverse impact on our business, results of operations, financial condition, and cash flows. If that were to happen, the trading price of our common stock could decline, and you could lose all or part of your investment.
We may not be able to implement our strategic plan.
We believe that we have built an infrastructure for future growth and that our initial public offering and the acquisition of First Eastern Bankshares Corporation enable us to generate additional revenues. If we are not successful in generating additional revenues, we may not be able to improve profitability. In addition, we expect to incur expenses related to the implementation of our strategic plan, including branch expansion, hiring initiatives, and the development and marketing of new products and services. We may not be able to successfully implement our strategic plan, and therefore may not operate at a profit or improve profitability in the timeframe that we expect or at all.
The successful implementation of our strategic plan will require, among other things, that we increase our market share by attracting new customers that currently bank at other financial institutions in our market area or adjacent markets. In addition, our ability to successfully grow will depend on several factors, including favorable market conditions, the competitive responses from other financial institutions in our market area, and our ability to maintain high asset quality as we increase our loan portfolio. While we believe we have the management resources and internal systems in place to successfully manage our future growth, growth opportunities may not be available, and we may not be successful in implementing our business strategy. Further, it will take time to implement our business strategy, especially for our lenders to originate enough loans and for our branches to attract enough deposits to generate the revenue needed to offset the associated expenses. Our strategic plan, even if successfully implemented, may not ultimately produce positive results.
We have incurred operating losses in several recent years and our ability to generate future profitability is uncertain.
We incurred a loss of $2.1 million for the year ended December 31, 2017, and experienced losses in four of the five most recent fiscal years. Our ability to achieve future profitability depends upon a number of factors, including our ability to successfully implement our strategic plan and expand our mortgage banking business, our ability to manage nonperforming and classified assets, general economic conditions, competition with other financial institutions, changes to the interest rate environment that may reduce our profit margins or impair our business strategy, adverse changes in the securities markets, changes in laws or government regulations, changes in consumer spending, borrowing, or saving, and changes in accounting policies, as well as other risks and uncertainties described in this “Risk Factors” section. Because of the numerous risks and uncertainties associated with our business, we are unable to predict the extent of our future profitability.
Our business may be adversely affected by credit risk associated with residential property.
At December 31, 2017, one- to four-family residential loans comprised $198.5 million, or 49.3%, of our total loan portfolio, and home equity loans and lines of credit comprised $39.0 million, or 9.7%, of our total loan portfolio. One- to four-family residential mortgage lending, whether owner occupied or non-owner occupied, is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.
Residential loans with combined higher loan-to-value ratios are more sensitive to declining property values than those with lower combined loan-to-value ratios and therefore may experience a higher incidence of default and severity of losses. In addition, if the borrowers sell their homes, they may be unable to repay their loans in full from the sale proceeds. Further, a significant amount of our home equity loans and lines of credit consist of second mortgage loans. For those home equity loans and lines of credit secured by a second mortgage, it is unlikely that we will be successful in recovering all or a portion of our loan proceeds in the event of default unless we are prepared to repay the first mortgage loan and such repayment and the costs associated with a foreclosure are justified by the value of the property. For these reasons, we may experience higher rates of delinquencies, default and losses on our home equity loans.
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We are focused on growing our loan portfolio. Commercial real estate, commercial and industrial and construction loans generally carry greater credit risk than loans secured by owner occupied one- to four-family real estate, and these risks will increase if we succeed in our plan to increase these types of loans.
At December 31, 2017, $148.9 million, or 36.9%, of our loan portfolio consisted of commercial real estate, commercial and industrial and construction loans. Given their larger balances and the complexity of the underlying collateral, commercial real estate, commercial and industrial loans, and construction loans generally expose a lender to greater credit risk than loans secured by owner occupied one- to four-family real estate. Also, many of our borrowers or related groups of borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential real estate loan. These loans also have greater credit risk than residential real estate for the following reasons:
| • | commercial real estate loans – repayment is generally dependent on income being generated in amounts sufficient to cover operating expenses and debt service; |
| • | commercial and industrial loans – repayment is generally dependent upon the successful operation of the borrower’s business; and |
| • | construction loans – repayment is dependent upon completion, the ability of the owner to make payments during the construction process, and the subsequent ability of the owner to either sell the completed project or obtain permanent financing on the completed project. |
If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses which would in turn adversely affect our operating results and financial condition. Further, if we foreclose on the collateral, our holding period for the collateral may be longer than for one- to four-family real estate loans because there are fewer potential purchasers of the collateral, which can result in substantial holding costs.
Our loan portfolio contains a significant portion of loans that are unseasoned. It is difficult to judge the future performance of unseasoned loans.
Our net loan portfolio has grown to $400.4 million at December 31, 2017 from $333.0 million at December 31, 2016, $285.2 million at December 31, 2015, and $249.0 million at December 31, 2014. In 2017, 2016, and 2015, as part of our strategy to focus a greater proportion of our interest-earning assets on loans, we grew our residential mortgage loans (first mortgages and home equity loans and lines of credit) by $23.0 million, $14.7 million (including loans acquired in our acquisition of First Eastern Bankshares Corporation) and $22.2 million, respectively. In addition, our commercial real estate, commercial and industrial and construction loans increased $34.8 million, or 30.5%, in 2017, $29.3 million, or 34.6%, in 2016; and $12.0 million, or 16.5%, in 2015. It is difficult to assess the future performance of these loans recently added to our portfolio because our relatively limited experience with such loans does not provide us with a significant payment history from which to judge future collectability. These loans may experience higher delinquency or charge-off levels than our historical loan portfolio experience, which could adversely affect our future performance.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital could decrease.
At December 31, 2017, our allowance for loan losses totaled $3.7 million, which represented 0.92% of total loans and 165.9% of our non-performing loans. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate other factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies or non-performing loans increase, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance, which could materially affect our operating results.
In addition, our regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs could have a material adverse effect on our financial condition and results of operations.
29
The building of market share through branch relocations, de novo branching and expansion of our commercial lending capacity could cause our expenses to increase faster than revenues.
We intend to continue to build market share through branch relocations, de novo branching and the expansion of our commercial lending capacity. There can be considerable costs involved in opening branches and expanding our lending capacity that generally require a period of time to generate the necessary revenues to offset their costs, especially in areas in which we do not have an established presence. Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in the opening of any of our new branches. Finally, our business expansion may not be successful after establishment.
Loss of deposits or a change in deposit mix could increase our cost of funding.
Deposits are a low cost and stable source of funding. We compete with banks and other financial intermediaries for deposits. Funding costs may increase if we lose deposits and are forced to replace them with more expensive sources of funding, if clients shift their deposits into higher cost products or if we need to raise interest rates to avoid losing deposits. Higher funding costs reduce our net interest margin, net interest income and profitability.
Our wholesale funding sources may prove insufficient to replace deposits at maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to deposits and funds from the repayments and maturities of loans and investments. As we continue to grow, we may become more dependent on these sources, which include Federal Home Loan Bank advances, brokered deposits, listing service deposits, borrowings from the Federal Reserve Bank of Boston, and proceeds from the sale of loans. At December 31, 2017, we had $76.0 million of Federal Home Loan Bank advances outstanding with an additional $67.6 million available borrowing capacity, no borrowings from the Federal Reserve Bank of Boston outstanding with $245,000 of available borrowing capacity and $3.5 million of available borrowing capacity under a line of credit with a correspondent bank. Brokered deposits as of December 31, 2017 totaled $7.1 million. If we were no longer considered to be “well capitalized,” as defined by applicable federal regulations, it would materially restrict our ability to acquire and retain brokered deposits in the future and could reduce the maximum borrowing limits we currently have available through the Federal Home Loan Bank and the Federal Reserve Bank of Boston. Additionally, adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. Finally, if we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.
Changes in interest rates may adversely impact our financial condition and results of operations.
Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and interest paid on deposits and borrowings. Changes in the general level of interest rates as well as the relative changes in both short and long-term rates can affect our net interest income by affecting the difference between the weighted-average yield earned on our interest-earning assets and the weighted-average rate paid on our interest-bearing liabilities, or interest rate spread, and the average life of our interest-earning assets and interest-bearing liabilities. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions, and other factors beyond our control.
While we pursue an asset/liability strategy designed to mitigate our risk from changes in interest rates, changes in interest rates may still have a material adverse effect on our financial condition and results of operations. Changes in the level of interest rates also may negatively affect our ability to originate loans, the value of our assets, and our ability to realize gains from the sale of our assets, all of which ultimately affect our earnings.
Our mortgage banking revenue and the value of our mortgage servicing rights can be volatile.
We sell in the secondary market longer term, conforming fixed-rate and adjustable rate residential mortgage loans that we originate, which provides a significant portion of our noninterest income in the form of gains on the sale of mortgage loans. We also earn revenue from fees we receive for originating mortgage loans and for servicing mortgage loans. As a result of our mortgage servicing business, we have a sizeable portfolio of mortgage servicing rights. A mortgage servicing right is the right to service a mortgage loan – collect principal, interest, and escrow amounts – for a fee. We acquire mortgage servicing rights when we keep the servicing rights after we sell the loans we have originated.
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Changes in interest rates may impact our mortgage banking revenues, which could negatively impact our noninterest income. When rates rise, the demand for mortgage loans usually tends to fall, reducing loan origination volume and the related amount of gains on the sales of loans. Under the same conditions, net revenue from our mortgage servicing activities can increase due to slower prepayments, which reduces our amortization expense for mortgage servicing rights. When rates fall, mortgage originations usually tend to increase and the value of our mortgage servicing rights usually tends to decline, also with some offsetting revenue effect. Even though they can act as a “natural hedge,” the hedge is not perfect, either in amount or timing. For example, the negative effect on revenue from a decrease in the fair value of residential mortgage servicing rights is generally immediate, but any offsetting revenue benefit from more originations and the mortgage servicing rights relating to the new loans would generally accrue over time. It is also possible that, because of economic conditions and/or a weak or deteriorating housing market, even if interest rates were to fall or remain low, mortgage originations may also fall or any increase in mortgage originations may not be enough to offset the decrease in the mortgage servicing rights value caused by the lower rates.
In addition, our results of operations are affected by the amount of non-interest expenses associated with mortgage banking activities, such as salaries and employee benefits, occupancy, equipment and data processing expense, and other operating costs. During periods of reduced loan demand, our results of operations may be adversely affected to the extent that we are unable to reduce expenses commensurate with the decline in mortgage loan origination activity.
The geographic concentration of our loan portfolio and lending activities makes us vulnerable to a downturn in the local economy.
While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is composed of loans secured by property located in eastern Massachusetts and Rhode Island. This makes us vulnerable to a downturn in the local economy and real estate markets. Adverse conditions in the local economy, such as unemployment, recession, a catastrophic event, or other factors beyond our control could impact the ability of our borrowers to repay their loans, which could impact our net interest income. Decreases in local real estate values caused by economic conditions or other events could adversely affect the value of the property used as collateral for our loans, which could cause us to realize a loss in the event of a foreclosure.
Our cost of operations is high relative to our assets. Our failure to maintain or reduce our operating expenses could hurt our operating results.
Our non-interest expenses totaled $29.8 million and $27.1 million for the years ended December 31, 2017 and 2016, respectively. We continue to analyze our expenses and seek to achieve efficiencies where available. Although we strive to generate increases in both net interest income and non-interest income, our efficiency ratio remains high. Our efficiency ratio totaled 107.0% and 97.9% for the years ended December 31, 2017 and 2016, respectively. Failure to control or maintain our expenses could hurt future profitability.
Changes in the valuation of our securities could adversely affect us.
All securities in our portfolio are classified as available-for-sale. Accordingly, a decline in the fair value of our securities could cause a material decline in our reported equity and/or operating results. At least quarterly, and more frequently when warranted by economic or market conditions, management evaluates all securities classified as available-for-sale with a decline in fair value below the amortized cost of the investment to determine whether the impairment is deemed to be other-than-temporary, or OTTI. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For impaired debt securities that are intended to be sold, or more likely than not will be required to be sold, the full amount of market decline is recognized as OTTI through earnings. Credit-related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. A decline in the market value of our securities portfolio could adversely affect our earnings.
We depend on our management team to implement our business strategy and we could be harmed by the loss of their services.
We are dependent upon the services of the members of our senior management team who direct our strategy and operations. Members of our senior management team, and lending specialists who possess expertise in our markets and key business relationships, could be difficult to replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our results of operations and our ability to compete in our markets.
31
Strong competition within our market area could hurt our profits and slow growth.
We face intense competition in making loans and attracting deposits. Price competition for loans and deposits sometimes results in us charging lower interest rates on our loans and paying higher interest rates on our deposits and may reduce our net interest income. Competition also makes it more difficult and costly to attract and retain qualified employees. Many of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We also face competition from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from nondepository financial service companies entering the mortgage market, such as insurance companies, securities companies, and specialty finance companies. Competition in mortgage banking comes from traditional mortgage competitors within our market area as well as larger, nationally active mortgage originators. We expect competition to increase in the future as a result of legislative, regulatory, and technological changes and the continuing trend of consolidation in the financial services industry. If we are not able to effectively compete in our market area, our profitability may be negatively affected. The greater resources and broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.
Our banking business is highly regulated, and laws and regulations, or changes in them, could limit or restrict our activities and could have a material adverse effect on our operations.
We are subject to regulation and supervision by the Federal Reserve, and Envision Bank is subject to regulation and supervision by the Massachusetts Commissioner of Banks and the FDIC. Federal and state laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies, maintenance of adequate capital and the financial condition of a financial institution, permissible types, amounts and terms of extensions of credit and investments, permissible non-banking activities, the level of reserves against deposits, and restrictions on dividend payments. The FDIC and the Massachusetts Commissioner of Banks have the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the Federal Reserve possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we and Envision Bank may conduct business and obtain financing.
Because our business is highly regulated, the laws, rules, regulations, and supervisory guidance and policies applicable to us are subject to regular modification and change. Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations.
We are subject to capital and liquidity standards that require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case.
We became subject to new capital requirements in 2015. These new standards, which now apply and will be fully phased-in over the next several years, force bank holding companies and their bank subsidiaries to maintain substantially higher levels of capital as a percentage of their assets, with a greater emphasis on common equity as opposed to other components of capital. The need to maintain more and higher quality capital, as well as greater liquidity, and generally increased regulatory scrutiny with respect to capital levels, may at some point limit our business activities, including lending, and our ability to expand. It could also result in our being required to take steps to increase our regulatory capital and may dilute shareholder value or limit our ability to pay dividends or otherwise return capital to our investors through stock repurchases.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
32
We face continuing and growing security risks to our information base, including the information we maintain relating to our customers.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store sensitive data, including financial information regarding customers. Our electronic communications and information systems infrastructure, as well as the systems infrastructures of the vendors we use to meet our data processing and communication needs, could be susceptible to cyber-attacks, such as denial of service attacks, hacking, terrorist activities or identity theft. Financial services institutions and companies engaged in data processing have reported breaches in the security of their websites or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disable or degrade service or sabotage systems, often through the introduction of computer viruses or malware, cyber-attacks and other means. Denial of service attacks have been launched against a number of large financial services institutions. Hacking and identity theft risks, in particular could cause serious reputational harm. Cyber threats are rapidly evolving and we may not be able to anticipate or prevent all such attacks. Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, there can be no assurance that we will not suffer such losses in the future. No matter how well designed or implemented our controls are, we will not be able to anticipate all security breaches of these types, and we may not be able to implement effective preventive measures against such security breaches in a timely manner. A failure or circumvention of our security systems could have a material adverse effect on our business operations and financial condition.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. Accordingly, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of our system security could result in disruption of our operations, unauthorized access to confidential customer information, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of available insurance coverage, if any, and would adversely affect our earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging our reputation and undermining our ability to attract and keep customers.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and profitability.
We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. We may not be able to successfully implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements, which could result in sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs and/or result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.
Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
Natural disasters, acts of terrorism and other external events could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have a material adverse effect on our results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have a material adverse effect on our business, operations and financial condition.
We rely on other companies to provide key components of our business infrastructure.
Third-party vendors provide key components of our business infrastructure, such as internet connections, network access, and core application processing. While we have selected these third-party vendors carefully, we do not control their actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their
33
services poorly, could adversely affect our ability to deliver products and services to our customers or otherwise conduct our business efficiently and effectively. Replacing these third-party vendors could also entail significant delay and expense.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
| • | quarterly variations in our operating results or the quality of our assets; |
| • | operating results that vary from the expectations of management, securities analysts and investors; |
| • | changes in expectations as to our future financial performance; |
| • | announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by us or our competitors; |
| • | the operating and securities price performance of other companies that investors believe are comparable to us; |
| • | our future dividend practices; |
| • | future sales of our equity or equity-related securities; and |
| • | changes in global financial markets and global economies and general market conditions, such as interest rates, stock, commodity or real estate valuations or volatility. |
Our low return on equity could negatively affect the trading price of our shares of common stock.
Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. For the year ended December 31, 2017, we had a return on average equity of (2.5)%, which is lower than our peers. We expect our return on equity to remain relatively low until we are able to leverage the additional capital we received from the initial public offering. Although we have increased net interest income using proceeds of the initial public offering, our return on equity is reduced by higher expenses from the costs of being a public company, and added expenses associated with our employee stock ownership plan and stock-based benefit plan. Until we can increase our net interest income and noninterest income, our return on equity may reduce the value of our shares of common stock.
Our stock-based benefit plans have increased our costs, which will reduce our profitability.
Our employee stock ownership plan purchased 8.0% of the total shares of common stock solid in the initial public offering and contributed to our charitable foundation, with funds borrowed from Randolph Bancorp, Inc. We record annual employee stock ownership plan expense in an amount equal to the fair value of shrews of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
We also adopted a stock-based benefit plan, which allows us to award participants restricted shares of our common stock (at no cost to them) and/or grant options to purchase shares of our common stock. The issuance of restricted stock or granting stock options result in increased compensation expense to us, which reduces profitability.
Our articles of organization and bylaws and certain regulations may prevent or make more difficult to pursue certain transactions, including a sale or merger of Randolph Bancorp, Inc.
Provisions of our articles of organization and bylaws, state corporate law, and federal and state banking regulations may make it more difficult for companies or persons to acquire control of Randolph Bancorp, Inc. Consequently, our shareholders may not have the opportunity to participate in such a transaction and the trading price of our common stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers.
Provisions of our articles of organization, bylaws, and state corporate law that may make it more difficult and expensive to pursue a takeover attempt that the board of directors opposes include:
| • | supermajority voting requirements for certain business combinations and changes to some provisions of the articles of organization and bylaws; |
34
| • | the election of directors to staggered terms of three years; |
| • | the removal of directors only for cause; |
| • | the absence of cumulative voting by shareholders in the election of directors; |
| • | provisions restricting the calling of special meetings of shareholders; and |
| • | provisions regarding the timing and content of shareholder proposals and nominations. |
In addition, Massachusetts banking regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10.0% of any class of equity security of a converted institution without the prior approval of the Massachusetts Commissioner of Banks. Additional state corporate law and federal banking regulations place limitations on the acquisition of certain percentages of our common stock and impose restrictions on these significant shareholders.
Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the U.S., we are required to use certain assumptions and estimates in preparing our financial statements, including in determining loan loss reserves and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material losses.
If our risk management framework does not effectively identify or mitigate our risks, we could suffer losses.
Our risk management framework seeks to mitigate risk and appropriately balance risk and return. We have established processes and procedures intended to identify, measure, monitor, and report the types of risk to which we are subject, including credit risk, operations risk, compliance risk, reputation risk, strategic risk, market risk, and liquidity risk. We seek to monitor and control our risk exposure through a framework of policies, procedures and reporting requirements. Management of our risks in some cases depends upon the use of analytical and/or forecasting models. If the models used to mitigate these risks are inadequate, we may incur losses. In addition, there may be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
Item 1B. Unresolved Staff Comments.
None.
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Item 2. Description of Property.
The following table sets forth information with respect to our banking and other offices, including the expiration date of leases with respect to leased facilities.
Office Name |
| Leased or Owned |
|
| Year Acquired or |
| Month of Lease |
Banking Offices: |
|
|
|
|
|
|
|
50 South Franklin Street Holbrook, MA 02343 |
| Owned |
|
| 1997 |
| N/A |
129 North Main Street Randolph, MA 02368 |
| Owned |
|
| 1976 |
| N/A |
1125 North Main Street Randolph, MA 02368 |
| Owned |
|
| 2000 |
| N/A |
497 Washington Street Stoughton, MA 02072 |
| Owned |
|
| 2017 |
| N/A |
87 Sharon Street Stoughton, MA 02072 |
| Leased |
|
| 1995 |
| March 2020 |
19 School Street Boston, MA 02108 |
| Owned |
|
| 2016 |
| N/A |
Loan Production Offices: |
|
|
|
|
|
|
|
225 Water Street, Suite B-126 Plymouth, MA 02360 |
| Leased |
|
| 2015 |
| Tenant at-will |
20 Main Street Leominster, MA 01453 |
| Leased |
|
| 1993 |
| Tenant at-will |
875 State Road Westport, MA 02790 |
| Leased |
|
| 2007 |
| December 2021 |
167 South River Road, Unit 1 Bedford, NH 03110 |
| Leased |
|
| 2008 |
| Tenant at-will |
Administrative Offices/Lending Centers: |
|
|
|
|
|
|
|
300 Brickstone Square, Andover, MA 01810 |
| Leased |
|
| 2017 |
| March 2023 |
999 South Washington Street North Attleboro, MA 02760 |
| Leased |
|
| 2014 |
| February 2022 |
10 Cabot Place Stoughton, MA 02072 |
| Leased |
|
| 2016 |
| January 2021 |
In addition to the properties listed in the preceding table, the Company’s former branch located at 15 Pleasant Street, Stoughton, MA was closed at the time the branch at 497 Washington Street, Stoughton, MA was opened. This building is being marketed for sale. Also, the Company has entered into a lease agreement for a branch to be opened at One Rockdale Street, Braintree, MA. This lease has an initial term of five years and is expected to commence in April 2018. At that time the branch located at 1125 North Main Street, Randolph, MA will be closed and customer accounts will be transferred to the Braintree branch. The branch at 1125 North Main Street, Randolph, MA is currently under agreement to be sold.
| (a) | We are not currently a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations, or cash flows. |
| (b) | Not applicable. |
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.
Randolph Bancorp, Inc.’s common stock trades on the NASDAQ Global Market under the symbol RNDB.
The following table summarizes quarterly high and low stock price ranges, the end of quarter closing price and dividends paid per share for the years ended December 31, 2017 and 2016 (the common stock was not publicly-traded prior to July 1, 2016):
|
| 2017 Quarters |
| |||||||||||||
|
| 1 |
|
| 2 |
|
| 3 |
|
| 4 |
| ||||
Stock Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
| $ | 16.12 |
|
| $ | 16.49 |
|
| $ | 16.17 |
|
| $ | 15.85 |
|
Low |
| $ | 14.55 |
|
| $ | 14.64 |
|
| $ | 13.36 |
|
| $ | 14.36 |
|
Close |
| $ | 15.50 |
|
| $ | 15.90 |
|
| $ | 15.31 |
|
| $ | 15.35 |
|
Cash dividend declared per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 Quarters |
| |||||||||||||
|
| 1 |
|
| 2 |
|
| 3 |
|
| 4 |
| ||||
Stock Prices: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
| — |
|
|
| — |
|
| $ | 13.69 |
|
| $ | 16.50 |
|
Low |
|
| — |
|
|
| — |
|
| $ | 12.06 |
|
| $ | 13.52 |
|
Close |
|
| — |
|
|
| — |
|
| $ | 13.63 |
|
| $ | 16.12 |
|
Cash dividend declared per share |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Holders
At February 28, 2018, there were approximately 270 holders of record of the Randolph Bancorp, Inc.’s common stock. We believe the number of beneficial owners of our common stock is greater than the number of record holders as a large amount of our common stock is held of record through brokerage firms in “street name”.
Dividends
At the present time, we do not pay cash dividends. Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. We may also be limited in the payment of dividends under statutory and regulatory provisions. See “Risks Factors—We are subject to capital and liquidity standards that require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has been historically the case,” “Supervision and Regulation—Holding Company Regulation—Capital,” “—Holding Company Regulation—Dividends and Repurchases,” “—Federal Banking Regulation—Capital Requirements,” “—Federal Banking Regulation—Dividends,” and “—Massachusetts Banking Laws and Supervision—Dividends.”
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
Not applicable.
Securities Authorized for Issuance Under Equity Compensation Plans
Set forth below is information as of December 31, 2017 with respect to compensation plans (other than our employee stock ownership plan) under which equity securities of the Registrant are authorized for issuance. Additional information regarding stock-based compensation plans is presented in Note 14 -Stock Based Compensation in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data located elsewhere in this report.
37
| Number of Securities to be Issued Upon Exercise of Outstanding Option, Warrants and Rights | Weighted Average Exercise Price of Outstanding Options, Warrants and Rights | Number of Securities Remaining Available for Future Issuance Under Share-Based Compensation Plans |
Equity Compensation Plans Approved by Security Holders | 316,009 | $14.66 | 270,863 |
Equity Compensation Plans Not Approved by Security Holders | — | — | — |
Purchases of Equity Securities by the Issuer and Affiliated Purchases
The following table sets forth information with respect to any purchases by or on behalf of the Company during the indicated periods under the stock repurchase program announced on September 15, 2017. The timing of purchases will depend on certain factors, including but not limited to, market condition and prices, available funds and alternative uses of capital. The stock repurchase program may be carried out through open market purchases, block trades, negotiated private transactions or pursuant to a trading plan adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934.
Period |
| Total Number of Shares Purchased |
|
| Average Price Paid per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Programs |
|
| Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs |
| ||||
October 1, 2017 – October 31, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 586,854 |
|
November 1, 2017 – November 30, 2017 |
|
| 10,000 |
|
| $ | 14.89 |
|
|
| 10,000 |
|
|
| 576,854 |
|
December 1, 2017 – December 31, 2017 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 576,854 |
|
|
| 10,000 |
|
| $ | 14.89 |
|
|
| 10,000 |
|
|
| 576,854 |
|
Item 6. Selected Financial Data.
Not required for a smaller reporting company.
38
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section is intended to help readers understand the financial performance of Randolph Bancorp, Inc. and its subsidiary through a discussion of the factors affecting its financial condition at December 31, 2017 and December 31, 2016, and its results of operations for the years then ended. This section should be read in conjunction with the consolidated financial statements of Randolph Bancorp, Inc. and notes thereto that appear elsewhere in this report.
Overview
Our results of operations depend primarily on net interest income and gains on the sale of mortgage loans. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Our interest-earning assets consist primarily of residential mortgage loans, commercial real estate loans, commercial and industrial loans, home equity loans and lines of credit, construction loans, consumer loans and investment securities. Interest-bearing liabilities consist primarily of deposit accounts and borrowings from the Federal Home Loan Bank of Boston (“FHLBB”). Gains on the sale of mortgage loans result from the sale of such loans in the secondary mortgage market. The amount of these gains is dependent on the volume of our loan originations.
Critical Accounting Policies
Certain of our accounting policies are important to the presentation of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 2 to our Consolidated Financial Statements included elsewhere in this report.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company,” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover incurred losses inherent in the loan portfolio at the balance sheet date. 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 for loan losses 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 regular basis and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as either additional information becomes available or circumstances change. The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans (general component) and an analysis of certain individual loans for impairment (allocated component). Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the FDIC and the Massachusetts Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. See Notes 2 and 5 to our consolidated financial statements included in this report.
Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.
In 2014, we established a 100% valuation allowance for our net deferred tax assets after completing an assessment of our recent operating results, including significant non-recurring items, and projected operating results. This assessment led us to conclude that it was more likely than not that we would be unable to realize our deferred tax assets. In performing subsequent assessments, management concluded that no significant changes in the key factors affecting the realizability of our deferred tax assets had occurred and that a valuation allowance for all deferred tax assets should be maintained. Because we maintain a full valuation allowance, reduction of the corporate tax rate from 35% to 21% under the Tax Cuts and Jobs Act of 2017 (the “Act”) required no adjustment to our net deferred tax assets.
39
We do not have any uncertain tax positions at December 31, 2017 and 2016 which require accrual or disclosure. We record interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2017 and 2016.
Comparison of Financial Condition at December 31, 2017 and 2016
Total Assets. Total assets increased $50.7 million, or 10.5%, to $531.9 million at December 31, 2017 from $481.2 million at December 31, 2016. The growth in assets was concentrated in our loan portfolio which increased by $67.4 million, or 20.2%, and was funded by $37.3 million of additional net advances from the FHLBB, $15.7 million in deposit growth and $7.1 million from maturities and principal payments from the investment portfolio. Premises and equipment increased by $2.4 million in 2017. Cash and cash equivalents and loans held for sale decreased by $6.0 million and $5.1 million in 2017, respectively.
Investment Securities. Investment securities, all of which are classified as available for sale, decreased $7.1 million, or 10.3%, to $61.6 million at December 31, 2017 from $68.6 million at December 31, 2016. At December 31, 2017, investment securities represented 11.6% of total assets compared to 14.3% at December 31, 2016. This decrease is a consequence of our strategic shift to investing a higher proportion of interest-earning assets in loans. Investment securities as a percentage of total assets are currently at the low end of our target range of 10% - 15%. We expect to make investment purchases in 2018 as part of our plan to continue to increase our interest-earning assets.
Loans Held for Sale. We are actively involved in the secondary mortgage market and designate the majority of our residential first mortgage loan production for sale. Total originations of one-to four-family residential mortgage loans for sale in the secondary mortgage market were $398.7 million in 2017 and $404.5 million in 2016. Loan originations in 2017 included First Eastern for the entire year while loan originations in 2016 included First Eastern for the six-month period subsequent to its acquisition on July 1, 2016. If the Company had owned First Eastern for all of 2016, originations of loan for sale in the secondary market would have decreased by 32% in 2017 compared to 2016 based on First Eastern’s originations in 2016 prior to the acquisition. This decrease is principally due to lower loan refinancing activity in 2017 and a decline in the percentage of loan originations that were sold in the secondary market from 93% in 2016 to 88% in 2017. For the years ended December 31, 2017 and 2016, refinanced residential mortgage loans accounted for 28% and 45%, respectively, of total residential loan production. The decrease in loan refinancing activity in 2017 is due to the rise in mortgage rates during the year.
At December 31, 2017, loans held for sale, which consist of closed residential first mortgage loans which the Bank intends to sell to investors, totaled $25.4 million compared to $30.5 million at December 31, 2016. Included in loans held for sale at December 31, 2017 are $6.5 million of loans not readily saleable to Fannie Mae or Freddie Mac due to one or more exceptions to their requirements. The Bank expects to sell these loans in 2018.
Net Loans. Net loans increased $67.4 million, or 20.2%, to $400.4 million at December 31, 2017 from $333.0 million at December 31, 2016. Included in this increase are $38.1 million of organic growth in real estate secured loans, as well as increases of $19.7 million in commercial and industrial loans due to the purchase of loan participations and $9.8 million in consumer loans due to purchases of student loans and auto loans. The increase during 2017 in real estate secured loans occurred in all categories of such loans led by commercial real estate loans, which increased by $13.4 million and residential real estate loans, which increased by $19.5 million. This growth reflects the continuation of strong local market conditions aided by the favorable interest rate environment that prevailed throughout the year as well as our strategic focus on loan growth. The increase in commercial and industrial loans relates entirely to loan participations with a super-regional bank. These loans are with local franchisees of a major international fast food retailer. Student loan purchases represent refinanced loans originated by an online lender specializing in the origination of student loans. Auto loan purchases represent primarily loans to undocumented immigrants originated by a third party specializing in such loans.
Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”) decreased $2.1 million to $6.4 million at December 31, 2017 from $8.5 million at December 31, 2016. This decrease was primarily due to the sale in July 2017 of the rights to service $379.0 million in loans. This sale was completed consistent with our strategic goal of managing the size of the loan serving portfolio due to existing regulatory capital considerations. The decrease caused by sale of MSRs was partially offset by new originations, net of amortization, of $1.2 million and a $334,000 partial reversal of the valuation allowance. This reversal resulted from an increase in the fair value of MSRs due to a decrease in the discount rate from 14% to 13% and slower projected loan prepayment speeds. We serviced $771.4 million in loans for others at December 31, 2017 compared to $1,046.6 million at December 31, 2016.
Deposits. Deposits increased $15.7 million, or 4.5%, to $366.8 million at December 31, 2017 from $351.2 million at December 31, 2016. This increase was adversely affected by a decline of $4.6 million in custodial account balances associated with serviced loans due to the transfer of $575.0 million of serviced loans during 2017 (including loans sold in December 2016). An increase of $6.9 million in brokered deposits contributed to this increase. Excluding the impact of these two items, deposits increased by $13.3 million, or 3.8%, in 2017 primarily due to increases in business related non-maturity deposits and, to a lesser extent, term certificates. The increase in term certificates amounted to $3.5 million and primarily related to special offerings throughout the year.
40
FHLBB Advances. FHLBB advances increased $37.3 million to $76.0 million at December 31, 2017 from $38.7 million at December 31, 2016 to help fund loan growth. This increase consisted entirely of overnight advances. At December 31, 2017, the Company had $67.6 million in available FHLBB advances based on its qualified collateral as of that date.
Total Stockholders’ Equity. Total stockholders’ equity decreased $1.8 million to $81.5 million at December 31, 2017 from $83.3 million at December 31, 2016. This decrease is due to the net loss of $2.1 million, partially offset by equity adjustments associated with the employee stock ownership plan and restricted stock awards totaling $406,000. In addition, the Company repurchased shares of its common stock, primarily in connection with a stock repurchase program, at a cost of $160,000.
Comparison of Operating Results for the Years Ended December 31, 2017 and 2016
General. We recorded a net loss of $2.1 million for the year ended December 31, 2017 compared to net income of $463,000 for the year ended December 31, 2016. Results of operations in 2017 and 2016 included the following items:
| • | Pre-tax expense of $531,000 in 2017 and $980,000 in 2016 associated with the acquisition of First Eastern and subsequent merger integration; |
| • | Pre-tax expense of $594,000 in 2017 associated with a right-sizing of the workforce in the Company’s mortgage banking operations; |
| • | Pre-tax income of $427,000 in 2016 due to death benefits received on bank-owned life insurance, net of costs associated with a supplemental retirement plan and split dollar life insurance agreement; |
| • | Pre-tax income of $1.3 million in 2016 representing a bargain purchase gain on the acquisition of First Eastern; and |
| • | Pre-tax expense of $2.3 million in 2016 for a contribution made to the Randolph Savings Charitable Foundation in connection with our mutual-to-stock conversion. |
Exclusive of these items, we would have reported a net loss of $1.0 million in 2017 compared to net income $2.0 million in 2016.
41
Analysis of Net Interest Income
Net interest income represents the difference between interest we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.
Average Balances and Yields. The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.
|
| For the Year Ended December 31, |
| |||||||||||||||||||||||||||||||||
|
| 2017 |
|
| 2016 |
|
| 2015 |
| |||||||||||||||||||||||||||
|
| Average |
|
| Interest |
|
| Average |
|
| Average |
|
| Interest |
|
| Average |
|
| Average |
|
| Interest |
|
| Average |
| |||||||||
|
| Outstanding |
|
| Earned/ |
|
| Yield/ |
|
| Outstanding |
|
| Earned/ |
|
| Yield/ |
|
| Outstanding |
|
| Earned/ |
|
| Yield/ |
| |||||||||
(Dollars in thousands) |
| Balance |
|
| Paid |
|
| Rate |
|
| Balance |
|
| Paid |
|
| Rate |
|
| Balance |
|
| Paid |
|
| Rate |
| |||||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans(1) |
| $ | 388,623 |
|
| $ | 15,099 |
|
|
| 3.89 | % |
| $ | 328,192 |
|
| $ | 12,438 |
|
|
| 3.79 | % |
| $ | 271,337 |
|
| $ | 10,488 |
|
|
| 3.87 | % |
Investment securities(2) (6) |
|
| 68,995 |
|
|
| 1,920 |
|
|
| 2.78 | % |
|
| 63,258 |
|
|
| 1,815 |
|
|
| 2.87 | % |
|
| 72,585 |
|
|
| 2,059 |
|
|
| 2.84 | % |
Interest-earning deposits |
|
| 8,505 |
|
|
| 100 |
|
|
| 1.18 | % |
|
| 20,460 |
|
|
| 151 |
|
|
| 0.74 | % |
|
| 6,180 |
|
|
| 73 |
|
|
| 1.18 | % |
Total interest-earning assets |
|
| 466,123 |
|
|
| 17,119 |
|
|
| 3.67 | % |
|
| 411,910 |
|
|
| 14,404 |
|
|
| 3.50 | % |
|
| 350,102 |
|
|
| 12,620 |
|
|
| 3.60 | % |
Noninterest-earning assets |
|
| 29,304 |
|
|
|
|
|
|
|
|
|
|
| 29,788 |
|
|
|
|
|
|
|
|
|
|
| 25,823 |
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 495,427 |
|
|
|
|
|
|
|
|
|
| $ | 441,698 |
|
|
|
|
|
|
|
|
|
| $ | 375,925 |
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts |
|
| 103,670 |
|
|
| 163 |
|
|
| 0.16 | % |
|
| 99,764 |
|
|
| 149 |
|
|
| 0.15 | % |
|
| 91,458 |
|
|
| 123 |
|
|
| 0.13 | % |
NOW accounts |
|
| 46,259 |
|
|
| 217 |
|
|
| 0.47 | % |
|
| 55,773 |
|
|
| 173 |
|
|
| 0.31 | % |
|
| 44,587 |
|
|
| 84 |
|
|
| 0.19 | % |
Money market accounts |
|
| 56,535 |
|
|
| 277 |
|
|
| 0.49 | % |
|
| 44,937 |
|
|
| 173 |
|
|
| 0.38 | % |
|
| 53,245 |
|
|
| 221 |
|
|
| 0.42 | % |
Term certificates |
|
| 90,879 |
|
|
| 899 |
|
|
| 0.99 | % |
|
| 92,597 |
|
|
| 850 |
|
|
| 0.92 | % |
|
| 81,925 |
|
|
| 760 |
|
|
| 0.93 | % |
Total interest-bearing deposits |
|
| 297,343 |
|
|
| 1,556 |
|
|
| 0.52 | % |
|
| 293,071 |
|
|
| 1,345 |
|
|
| 0.46 | % |
|
| 271,215 |
|
|
| 1,188 |
|
|
| 0.44 | % |
FHLB advances |
|
| 46,019 |
|
|
| 554 |
|
|
| 1.20 | % |
|
| 33,860 |
|
|
| 261 |
|
|
| 0.77 | % |
|
| 32,569 |
|
|
| 168 |
|
|
| 0.52 | % |
Total interest-bearing liabilities |
|
| 343,362 |
|
|
| 2,110 |
|
|
| 0.61 | % |
|
| 326,931 |
|
|
| 1,606 |
|
|
| 0.49 | % |
|
| 303,784 |
|
|
| 1,356 |
|
|
| 0.45 | % |
Noninterest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing deposits |
|
| 61,871 |
|
|
|
|
|
|
|
|
|
|
| 45,142 |
|
|
|
|
|
|
|
|
|
|
| 32,515 |
|
|
|
|
|
|
|
|
|
Other noninterest-bearing liabilities |
|
| 6,040 |
|
|
|
|
|
|
|
|
|
|
| 6,850 |
|
|
|
|
|
|
|
|
|
|
| 5,682 |
|
|
|
|
|
|
|
|
|
Total liabilities |
|
| 411,273 |
|
|
|
|
|
|
|
|
|
|
| 378,923 |
|
|
|
|
|
|
|
|
|
|
| 341,981 |
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
|
| 84,154 |
|
|
|
|
|
|
|
|
|
|
| 62,775 |
|
|
|
|
|
|
|
|
|
|
| 33,944 |
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 495,427 |
|
|
|
|
|
|
|
|
|
| $ | 441,698 |
|
|
|
|
|
|
|
|
|
| $ | 375,925 |
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
|
|
| $ | 15,009 |
|
|
|
|
|
|
|
|
|
| $ | 12,798 |
|
|
|
|
|
|
|
|
|
| $ | 11,264 |
|
|
|
|
|
Interest rate spread(3) |
|
|
|
|
|
|
|
|
|
| 3.06 | % |
|
|
|
|
|
|
|
|
|
| 3.01 | % |
|
|
|
|
|
|
|
|
|
| 3.15 | % |
Net interest-earning assets(4) |
| $ | 122,761 |
|
|
|
|
|
|
|
|
|
| $ | 84,979 |
|
|
|
|
|
|
|
|
|
| $ | 46,318 |
|
|
|
|
|
|
|
|
|
Net interest margin(5) |
|
|
|
|
|
|
|
|
|
| 3.22 | % |
|
|
|
|
|
|
|
|
|
| 3.11 | % |
|
|
|
|
|
|
|
|
|
| 3.22 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratio of interest-earning assets to interest-bearing liabilities |
|
| 135.75 | % |
|
|
|
|
|
|
|
|
|
| 125.99 | % |
|
|
|
|
|
|
|
|
|
| 115.25 | % |
|
|
|
|
|
|
|
|
(1) | Includes nonaccruing loan balances and interest received on such loans. |
(2) | Includes carrying value of securities classified as available-for-sale, FHLB of Boston stock and investment in the Depositors Insurance Fund. |
(3) | Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities. |
(4) | Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities. |
(5) | Net interest margin represents net interest income divided by average total interest-earning assets. |
(6) | Includes tax equivalent adjustments for municipal securities, based on a 34.0% effective tax rate, of $179,000, $189,000 and $138,000 for 2017, 2016 and 2015, respectively. |
42
Rate/Volume Analysis. The following table presents the effects of changing rates and volumes on our net interest income, presented on a tax equivalent basis, 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 net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately based on the changes due to rate and the changes due to volume.
|
| For the Year Ended December 31, 2017 |
|
| For the Year Ended December 31, 2016 |
| ||||||||||||||||||
|
| Compared to |
|
| Compared to |
| ||||||||||||||||||
|
| Year Ended December 31, 2016 |
|
| Year Ended December 31, 2015 |
| ||||||||||||||||||
|
| Increase (Decrease) |
|
| Total |
|
| Increase (Decrease) |
|
| Total |
| ||||||||||||
|
| Due to Changes in |
|
| Increase |
|
| Due to Changes in |
|
| Increase |
| ||||||||||||
(In thousands) |
| Volume |
|
| Rate |
|
| (Decrease) |
|
| Volume |
|
| Rate |
|
| (Decrease) |
| ||||||
Interest-earning assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans |
| $ | 2,341 |
|
| $ | 320 |
|
| $ | 2,661 |
|
| $ | 2,158 |
|
| $ | (208 | ) |
| $ | 1,950 |
|
Investment securities |
|
| 161 |
|
|
| (56 | ) |
|
| 105 |
|
|
| (267 | ) |
|
| 23 |
|
|
| (244 | ) |
Interest-earning deposits |
|
| (114 | ) |
|
| 63 |
|
|
| (51 | ) |
|
| 114 |
|
|
| (36 | ) |
|
| 78 |
|
Total interest-earning assets |
|
| 2,388 |
|
|
| 327 |
|
|
| 2,715 |
|
|
| 2,005 |
|
|
| (221 | ) |
|
| 1,784 |
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Savings accounts |
|
| 6 |
|
|
| 8 |
|
|
| 14 |
|
|
| 12 |
|
|
| 14 |
|
|
| 26 |
|
NOW accounts |
|
| (33 | ) |
|
| 77 |
|
|
| 44 |
|
|
| 25 |
|
|
| 64 |
|
|
| 89 |
|
Money market accounts |
|
| 51 |
|
|
| 53 |
|
|
| 104 |
|
|
| (33 | ) |
|
| (15 | ) |
|
| (48 | ) |
Term certificates |
|
| (16 | ) |
|
| 65 |
|
|
| 49 |
|
|
| 98 |
|
|
| (8 | ) |
|
| 90 |
|
Total interest-bearing deposits |
|
| 8 |
|
|
| 203 |
|
|
| 211 |
|
|
| 102 |
|
|
| 55 |
|
|
| 157 |
|
FHLBB advances |
|
| 114 |
|
|
| 179 |
|
|
| 293 |
|
|
| 7 |
|
|
| 86 |
|
|
| 93 |
|
Total interest-bearing liabilities |
|
| 122 |
|
|
| 382 |
|
|
| 504 |
|
|
| 109 |
|
|
| 141 |
|
|
| 250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in net interest income |
| $ | 2,266 |
|
| $ | (55 | ) |
| $ | 2,211 |
|
| $ | 1,896 |
|
| $ | (362 | ) |
| $ | 1,534 |
|
Interest and Dividend Income. Interest and dividend income, inclusive of tax equivalent adjustments on municipal securities, increased $2.7 million, or 18.8%, to $17.1 million in 2017 compared to $14.4 million in 2016. This increase was due to the growth in the average balance of interest-earning assets between years of $54.2 million and an increase in average yield of 17 basis points from 3.50% in 2016 to 3.67% in 2017. The increase in yield is a consequence of the Company’s continuing emphasis on loan growth. At December 31, 2017, net loans and loans held for sale comprised 80.1% of total assets compared to 75.5% at December 31, 2016.
Interest Expense. Interest expense increased $504,000, or 31.4%, to $2.1 million in 2017 compared to $1.6 million in 2016. This increase was primarily due to an increase of $16.4 million in the average balance of interest-bearing liabilities and a 12 basis points increase in the cost of funds from 0.49% in 2016 to 0.61% in 2017. This increase was primarily caused by greater utilization of FHLBB advances to fund loan growth and the 43 basis points increase in this source of funds due to multiple increases by the Federal Reserve Board in the federal funds rate. The cost of deposits increased 6 basis points from 0.46% in 2016 to 0.52% in 2017 reflecting the impact of rising deposit rates in the local market.
\
Net Interest Income. Net interest income increased $2.2 million, or 17.6%, to $14.8 million in 2017 compared to $12.6 million in 2016. This improvement resulted from the growth in average interest-earning assets of $54.2 million and an increase in the net interest margin of 11 basis points to 3.22% in 2017 from 3.11% in 2016.
Provision for Loan Losses. Based on the application of our loan loss methodology, as described in the notes to the consolidated financial statements presented elsewhere in this report, we recorded a provision for loan losses of $540,000 in 2017 and $103,000 in 2016. We experienced steady improvement in our asset quality measures including loan charge-offs, non-accrual loans, classified assets and delinquency data in recent years and maintained our favorable asset quality measures in 2017. The increase of $437,000 in the provision for loan losses between years is primarily a result of the increase in portfolio loans of $57.8 million during 2017. The allowance for loan losses as a percentage of total loans at December 31, 2017 was 0.92% compared to 0.97% at December 31, 2016.
Net Gain on Sale of Mortgage Loans. The net gain on sale of mortgage loans decreased $1.3 million to $9.2 million in 2017 compared to $10.4 million in 2016. During 2017, we sold $403.8 million of residential mortgage loans compared to $403.6 million in 2016, which included only six months of loan sales attributable to First Eastern. In 2016, the Company elected the fair value option in accounting for loans held for sale. Related fair value adjustments are accounted for as a component of the net gain on the sale of mortgage loans as are changes in the fair value of mortgage banking derivatives. The decrease in loan sale gains experienced in 2017
43
is primarily due to these fair value adjustments. The decrease in fair value adjustments for loans held for sale and mortgage banking derivatives in 2017 is due to both lower fourth quarter volume of interest rate lock commitments and smaller average gains.
Other Non-interest Income. Non-interest income, excluding the net gain on sale of mortgage loans, decreased $837,000 to $3.8 million in 2017 compared to $4.6 million in 2016. In 2016, we recognized a bargain purchase gain of $1.3 million in connection with the acquisition of First Eastern and a gain of $486,000 on a life insurance settlement. Exclusive of these items, other non-interest income increased $909,000, or 31.5%, to $3.8 million in 2017 from $2.9 million in 2016. The principal cause of this improvement was a $1.0 million increase in 2017 in net mortgage servicing fees. Mortgage servicing fees in 2017 included First Eastern for the entire year while mortgage servicing fees in 2016 included First Eastern for the six-month period subsequent to its acquisition in July 2016. In addition, changes in the valuation allowance for MSRs contributed $334,000 to the increase in net mortgage servicing fees between years. An increase of $166,000 in income from loan closing services (First Eastern related) also contributed to the increase in other non-interest income between years. These increases were partially offset by a decrease of $162,000 in gains on the sale of investment securities and a $225,000 impairment write-down on a branch office to be closed in 2018.
Non-interest Expenses. Non-interest expenses increased $2.8 million to $29.8 million in 2017 compared to $27.1 million in 2016. This increase was due largely to the acquisition of First Eastern in July 2016. As a result, non-interest expenses in 2016 include six-months of operations related to First Eastern compared to a full year in 2017. Also contributing to the change between years are certain non-recurring items, including merger and integration costs in 2017 and 2016, a restructuring charge due to a reduction in workforce in mortgage banking operations in 2017 and a contribution to the Randolph Savings Charitable Foundation in connection with our mutual-to-stock conversion in 2016. Exclusive of these items, non-interest expenses increased $4.9 million, or 20.6%, in 2017 compared to 2016.
The increase in salaries and employee benefits of $3.6 million in 2017 was principally due to increases in non-commission compensation expense of $3.0 million. Also contributing to this increase were higher health insurance costs of $626,000, payroll taxes of $280,000, stock-based compensation associated with a new equity plan of $111,000 and 401(k) contributions of $104,000. These increases, except for the stock-based compensation, were primarily attributable to the acquisition of First Eastern in July 2016. Partially offsetting these increases were reductions in commissions of $419,000 due to lower residential loan originations and incentive compensation of $196,000.
Occupancy and equipment expense increased $527,000 to $2.7 million in 2017 compared to $2.1 million in 2016. This increase was primarily attributable to a full year of rent and other related operating costs, including real estate taxes and utilities, associated with facilities used by First Eastern as well as costs associated with the new branch located in Stoughton, MA.
Data processing costs were essentially unchanged between years decreasing $3,000 to $758,000 in 2017 compared to $761,000 in 2016. Volume related increases due to a full year of costs attributable to the First Eastern acquisition were offset by a full year of savings in 2017 resulting from the March 2016 revised agreement with our third-party core data processor compared to only ten months of savings in 2016.
We incurred merger and integration costs directly attributable to the First Eastern acquisition of $531,000 in 2017 and $980,000 in 2016. Costs incurred in 2017 were for severance benefits, system conversion costs and consulting fees. Costs incurred in 2016 were primarily for employee severance obligations, retention bonuses, system conversion costs and professional fees.
During the fourth quarter of 2017, the Company recognized a restructuring charge of $594,000 in connection with a workforce reduction in its mortgage banking operations intended to better align staffing levels with the current volume of residential mortgage loan originations. This reduction involved 8% of the Company’s employees including the former President of First Eastern.
Other non-interest expenses increased $567,000 to $4.1 million in 2017 from $3.5 million in 2016. This increase was primarily due to volume related expenses attributable to the acquisition of First Eastern and an increase in the compensation of directors of $156,000, including stock-based compensation.
Income Tax Expense (Benefit). The Company recognized a tax benefit of $443,000 for the year ended December 31, 2017 compared to a tax provision of $13,000 for the year ended December 31, 2016. The tax benefit in 2017 results from repeal of the Alternative Minimum Tax (“AMT”) beginning in 2018 as set forth in the Act. The Act also provides that existing AMT credit carryforwards become refundable during the period 2018-2021. As a result, the Company reversed the valuation allowance of $462,000 which had been established in prior years and recognized a tax benefit for this amount. The remaining tax provisions of $19,000 in 2017 and $13,000 in 2016 are due to state income taxes.
The Company continues to maintain the 100% valuation allowance for its net deferred tax assets originally recorded in 2014. The valuation allowance amounted to $3.3 million at December 31, 2017 and $4.7 million at December 31, 2016. The decrease in
44
2017 was attributable to two tax law changes under the Act, namely, a reduction in the federal corporate tax rate from 35% to 21% and the provisions related to the AMT discussed in the preceding paragraph.
Non-GAAP Measures
When management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business which is derived from the combination of net interest income and non-interest income reduced by the provision for loan losses and non-interest expenses and the impact of income taxes, if any, all as adjusted for any non-core items. The Company’s financial reporting is determined in accordance with GAAP, which sometimes includes items that management believes are unrelated to its core banking business and are not expected to have a material financial impact on operating results in future periods, such as merger and integration costs, acquisition related bargain purchase gains, life insurance settlements and other items. Management computes the Company’s non-GAAP operating earnings, non-interest income as a percentage of total income and the efficiency ratio on an operating basis, which excludes these items, in order to measure the performance of the Company’s core banking business.
Non-GAAP measures should not be viewed as a substitute for operating results determined in accordance with GAAP. An item that management determines to be non-core and excludes when computing these non-core measures can be of substantial importance to the Company’s results for any particular reporting period. The Company’s non-GAAP performance measures are not necessarily comparable to such measures that may be used by other companies. The following table summarizes the impact of non-core items recorded for the reporting periods indicated below and reconciles them in accordance with GAAP:
|
| Years Ended December 31, |
| |||||
(In thousands) |
| 2017 |
|
| 2016 |
| ||
Net income (loss) - GAAP basis |
| $ | (2,126 | ) |
| $ | 463 |
|
Non-interest income adjustments: |
|
|
|
|
|
|
|
|
Bargain purchase gain |
|
| — |
|
|
| (1,276 | ) |
Gain on life insurance settlement |
|
| — |
|
|
| (486 | ) |
|
|
|
|
|
|
|
|
|
Non-interest expense adjustments: |
|
|
|
|
|
|
|
|
Charitable foundation contribution |
|
| — |
|
|
| 2,275 |
|
First Eastern acquisition merger and integration costs |
|
| 531 |
|
|
| 980 |
|
Restructuring charge |
|
| 594 |
|
|
| — |
|
SERP expense on life insurance settlement |
|
| — |
|
|
| 59 |
|
Net income (loss) - Non-GAAP basis |
| $ | (1,001 | ) |
| $ | 2,015 |
|
Management of Market Risk
Overview. Market risk is the risk that the market value, or estimated fair value, of our assets, liabilities and derivatives will decline as a result of changes in interest rates or that our net interest income and results of operations will be adversely affected by interest rate changes.
Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to change in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee (“ALCO”) is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity, and performance objectives, and for managing risk consistent with the policy and guidelines approved by our Board of Directors.
Interest Rate Risk Management. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment on net interest income. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes originating shorter-term commercial real estate loans and consumer loans; loans that re-price either daily or monthly, such as home equity lines of credit, commercial and industrial loans, and constructions loans; and adjustable-rate residential mortgage loans for retention in our loan portfolio. We also promote core deposit products and time deposits. We also manage interest rate risk by selling newly originated conforming fixed rate residential mortgage loans in the secondary market. We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments except for interest rate lock agreements with borrowers and forward loan sale commitments with investors both in connection with our mortgage banking activities.
45
Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model which is provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be over specified time horizons based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. The comparative scenarios assume immediate parallel shifts in the yield curve in increments of 100 basis point (bp) rate movements. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3.0% to 4.0% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The following table shows the estimated impact on net interest income for the one-year period beginning December 31, 2017 resulting from potential changes in interest rates. The model is run quarterly showing shocks from +300bp to -100bp, as we believe a decline of greater than -100bp is currently improbable. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.
Change in Interest Rates (basis points)(1) |
| Net Interest Income Year 1 Forecast |
|
| Year 1 Change from Level |
| ||
|
| (Dollars in thousands) |
|
|
|
|
| |
+300 |
| $ | 15,349 |
|
|
| (7.6 | )% |
+200 |
|
| 15,883 |
|
|
| (4.4 | )% |
+100 |
|
| 16,360 |
|
|
| (1.5 | )% |
Level |
|
| 16,606 |
|
|
| — |
|
-100 |
|
| 16,384 |
|
|
| (1.3 | )% |
(1) | The calculated changes assume an immediate shock of the static yield curve. |
Economic Value of Equity Analysis. In order to monitor and manage interest rate risk, we also use the net present value of equity at risk, or NPV, methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities and provides a longer-term view of the Company’s interest rate risk positions by estimating longer-term repricing risk embedded in the balance sheet. As with the net interest income analysis discussed above, the model is run at least quarterly showing shocks ranging from +300bp to -100bp.
The table below sets forth, as of December 31, 2017, the estimated changes in the Company’s net present value of equity that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
|
|
|
|
|
| Estimated Increase (Decrease) in EVE |
|
| EVE as Percentage of Economic Value of Assets(3) |
| ||||||||||
Changes in Interest Rates (basis points)(1) |
| Estimated EVE(2) |
|
| Amount |
|
| Percent |
|
| EVE Ratio |
|
| Changes in Basis Points |
| |||||
|
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
+300 |
| $ | 90,436 |
|
| $ | (3,402 | ) |
|
| (3.6 | )% |
|
| 18.51 | % |
|
| 66 |
|
+200 |
|
| 92,061 |
|
|
| (1,777 | ) |
|
| (1.9 | )% |
|
| 18.39 | % |
|
| 54 |
|
+100 |
|
| 93,911 |
|
|
| 73 |
|
|
| 0.1 | % |
|
| 18.28 | % |
|
| 43 |
|
0 |
|
| 93,838 |
|
|
| — |
|
|
| — |
|
|
| 17.85 | % |
|
| — |
|
-100 |
|
| 86,976 |
|
|
| (6,862 | ) |
|
| (7.3 | )% |
|
| 16.26 | % |
|
| (159 | ) |
(1) | Assumes instantaneous parallel changes in interest rates. |
(2) | EVE, or Economic Value of Equity at Risk, measures the exposure of the Company’s equity to changes in a forecast interest rate environment. |
(3) | EVE Ratio represents EVE divided by the economic value of assets. |
The table above indicates that at December 31, 2017, in the event of an instantaneous parallel 100 basis points decrease in interest rates, we would experience a 7.3% decrease in the Economic Value of Equity at Risk. In the event of an instantaneous 300
46
basis point increase in interest rates, we would experience a 3.6% decrease in Economic Value of Equity at Risk. In all scenarios presented above, the calculated variances are within policy guidelines.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. The table also does not measure the changes in credit and liquidity risk that may occur as a result of changes in general interest rates. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our economic value of equity and will differ from actual results.
Liquidity and Capital Resources. Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLBB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of investment securities and borrowed funds and prepayments on loans are greatly influenced by general interest rates, economic conditions, and competition.
Management regularly adjusts our investments in liquid assets based upon an assessment of: (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our interest-rate risk and investment policies.
Our cash flows are composed of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $6.6 million and $914,000 for the years ended December 31, 2017 and 2016, respectively. Net cash used in investing activities, which consists primarily of disbursements for portfolio loan originations and loan purchases, the purchase of securities and certificates of deposit, offset by principal collections on loans, proceeds from the sale of securities, proceeds from maturing securities and pay downs on mortgage-backed securities, was $64.7 million and $31.2 million for the years ended December 31, 2017 and 2016, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts, FHLBB advances and stock offering transactions (in 2016) was $52.1 million and $40.5 million for the years ended December 31, 2017 and 2016, respectively.
At December 31, 2017, we exceeded all of our regulatory capital requirements with a Tier 1 leverage capital of $82.6 million, or 16.0% of average assets, which is above the required level of $20.7 million, or 4.00% of average assets, and total risk-based capital of $86.3 million, or 23.9% of risk-weighted assets, which is above the required level of $28.9 million, or 8.00% of risk-weighted assets.
At December 31, 2017, we had outstanding commitments to originate loans of $35.5 million, unadvanced funds on loans of $7.0 million and unused lines of credit of $40.0 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from December 31, 2017 totaled $49.5 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank of Boston advances listing service deposits or brokered deposits to meet our liquidity needs. Available borrowing capacity at December 31, 2017 was $67.6 million under the blanket pledge agreement with FHLBB. We also have a $4.2 million available line of credit with FHLBB and a $3.5 million available line of credit with a correspondent bank at December 31, 2017.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit, see Note 13 to our Consolidated Financial Statements located elsewhere in this report.
For the years ended December 31, 2017 and 2016, we did not engage in any off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.
47
Impact of Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 2 to our consolidated financial statements included elsewhere in this report.
Effect of Inflation and Changing Prices
The consolidated financial statements and related financial data presented in this report have been prepared according to generally accepted accounting principles in the United States, which require the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs and the effect that general inflation may have on both short-term and long-term interest rates. Virtually all the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant impact on a financial institution’s performance than do general levels of inflation. Although inflation expectations do affect interest rates, interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Management of Market Risk.”
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data required by this item are presented on the following pages which appear elsewhere herein.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, the Company carried out an evaluation under the supervision and with the participation of the Company’s management, including the Company’s principal executive officer and principal financial officer, of the Company’s disclosure controls and procedures as of the end of the period ended December 31, 2017. Based upon that evaluation, the principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures are effective and designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Company will continue to review and document its disclosure controls and procedures and consider such changes in future evaluations of the effectiveness of such controls and procedures, as it deems appropriate.
48
Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control system was designed to provide reasonable assurance to its management and the board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. The Company’s management assessed the effectiveness of its internal control over financial reporting as of the end of the period covered by this report using the criteria described in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and the Company’s management has determined the Company’s internal control over financial reporting is effective.
There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
None.
49
Item 10. Directors, Executive Officers and Corporate Governance.
The information in Randolph Bancorp, Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Shareholders under the captions “Proposal 1 – Election of Directors – Information Regarding Directors and Nominees,” “– Biographical Information Regarding Executive Officers Who Are Not Directors,” “Role of the Board; Corporate Governance Matters – Board Leadership Structure and the Role of the Board in Risk Oversight,” “– The Board and Its Committees,” “– Shareholder Nomination Procedure,” “Security Ownership of Certain Beneficial Owners and Management – Section 16(a) Beneficial Ownership Reporting Compliance,” “Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm,” and “Audit Committee Report” is incorporated herein by reference.
Item 11. Executive Compensation.
The information in Randolph Bancorp, Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the caption “Executive Compensation,” “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information in Randolph Bancorp, Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the caption “Security Ownership of Certain Beneficial Owners and Management” is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information in Randolph Bancorp, Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders under the captions “Transactions with Related Parties” and “Role of the Board; Corporate Governance Matters - Director Independence” is incorporated herein by reference
Item 14. Principal Accounting Fees and Services.
The information in Randolph Bancorp, Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Shareholders under the captions “Proposal 2 – Ratification of Appointment of Independent Registered Public Accounting Firm – Fee Disclosure,” and “– Pre-Approval Policies and Procedures of Our Audit Committee” is incorporated herein by reference.
50
Item 15. Exhibits, Financial Statement Schedules.
(a) | 1. | Financial Statements. The financial statements of the Company required in response to this Item are listed in response to Part II, Item 8 of this Annual Report on Form 10-K. |
| 2. | Financial Statement Schedules. All financial statement schedules have been omitted because the required information is either not required, not applicable, or is included in the consolidated financial statements or notes thereto. |
| 3. | Exhibits. The following exhibits set forth in the Exhibit Index are included as part of this Form 10-K. |
Exhibit Index
|
|
|
2.1 |
| |
|
|
|
2.2 |
| |
|
|
|
2.3 |
| |
|
|
|
3.1 |
| |
|
|
|
3.2 |
| |
|
|
|
4.1 |
| Form of Common Stock Certificate of Randolph Bancorp, Inc.(1) |
|
|
|
10.1† |
| |
|
|
|
10.2† |
| Form of Randolph Savings Bank Employee Stock Ownership Plan(1) |
|
|
|
10.3† |
| |
|
|
|
10.4† |
|
|
10.5† |
| |
|
|
|
10.6 |
| Randolph Bancorp, Inc. 2017 Stock Option and Incentive Plan (3) |
|
|
|
14.1 |
| |
|
|
|
21.1 |
| |
|
|
|
23 |
| |
|
|
|
31.1 |
| Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
31.2 |
| Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|
|
|
32.1* |
| |
|
|
|
101 |
| The following financial statements for the years ended December 31, 2017 and 2016, formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Loss, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. |
|
|
|
(1) | Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-209935), originally filed with the SEC on March 4, 2016. |
(2) | Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on July 6, 2016. |
(3) | Incorporated by reference to the Registrant’s Current Report on the Form 8-K filed with the SEC on August 23, 2017. |
(4) | Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed with the SEC on March 28, 2017. |
† | Management contract or compensation plan or arrangement |
* | These certifications are not “filed” for purposes of Section 18 of the Exchange Act or incorporated by reference into any filing under the Securities Act or the Exchange Act. |
(b) | See (a)(3) above for all exhibits filed herewith and the Exhibit Index. |
(c) | Financial Statement Schedules. None. |
51
Not applicable.
52
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
| RANDOLPH BANCORP, INC. |
|
|
| (Registrant) |
|
|
|
|
Date: March 15, 2018 |
| By | /s/ James P. McDonough |
|
|
| James P. McDonough |
|
|
| Director, President, and Chief Executive Officer (principal executive officer) |
|
|
|
|
Date: March 15, 2018 |
| By | /s/ Michael K. Devlin |
|
|
| Michael K. Devlin |
|
|
| Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: March 15, 2018 |
|
| /s/ Louis J. Trubiano |
|
|
| Louis J. Trubiano, Director and Chairman |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ Paul R. Donovan |
|
|
| Paul R. Donovan, Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ Daniel M. Joyce |
|
|
| Daniel M. Joyce, Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ John J. Connor, III |
|
|
| John J. O’Connor, III, Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ Richard A. Phillips, Sr. |
|
|
| Richard A. Phillips, Sr., Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ Richard C. Pierce, Esq. |
|
|
| Richard C. Pierce, Esq., Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ Kenneth K. Quigley, Jr. |
|
|
| Kenneth K. Quigley, Jr., Esq., Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ James G. Welch |
|
|
| James G. Welch, Director |
|
|
|
|
Date: March 15, 2018 |
|
| /s/ Janis E. Wentzell |
|
|
| Janis E. Wentzell, Director |
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and the Board of Directors of
Randolph Bancorp, Inc.
Stoughton, Massachusetts
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Randolph Bancorp, Inc. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting in accordance with the standards of the PCAOB. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion in accordance with the standards of the PCAOB.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2013.
/s/ Crowe Horwath LLP
New York, New York
March 15, 2018
F-1
Randolph Bancorp, Inc. and Subsidiary
(In thousands, except share data)
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
| $ | 3,562 |
|
| $ | 4,370 |
|
Interest-bearing deposits |
|
| 5,260 |
|
|
| 10,479 |
|
Total cash and cash equivalents |
|
| 8,822 |
|
|
| 14,849 |
|
Certificates of deposit |
|
| 2,940 |
|
|
| 3,675 |
|
Securities available for sale, at fair value |
|
| 61,576 |
|
|
| 68,637 |
|
Loans held for sale, at fair value |
|
| 25,390 |
|
|
| 30,452 |
|
Loans, net of allowance for loan losses of $3,737 in 2017 and $3,271 in 2016 |
|
| 400,373 |
|
|
| 332,991 |
|
Federal Home Loan Bank of Boston stock, at cost |
|
| 3,310 |
|
|
| 2,478 |
|
Accrued interest receivable |
|
| 1,432 |
|
|
| 1,163 |
|
Mortgage servicing rights |
|
| 6,397 |
|
|
| 8,486 |
|
Premises and equipment, net |
|
| 8,670 |
|
|
| 6,280 |
|
Bank-owned life insurance |
|
| 8,037 |
|
|
| 7,884 |
|
Foreclosed real estate |
|
| 193 |
|
|
| - |
|
Other assets |
|
| 4,752 |
|
|
| 4,329 |
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 531,892 |
|
| $ | 481,224 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity |
|
|
|
|
|
|
|
|
Deposits: |
|
|
|
|
|
|
|
|
Noninterest-bearing |
| $ | 62,130 |
|
| $ | 59,646 |
|
Interest bearing |
|
| 304,706 |
|
|
| 291,533 |
|
Total deposits |
|
| 366,836 |
|
|
| 351,179 |
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank of Boston advances |
|
| 75,954 |
|
|
| 38,667 |
|
Mortgagors' escrow accounts |
|
| 907 |
|
|
| 1,572 |
|
Post-employment benefit obligations |
|
| 2,750 |
|
|
| 2,886 |
|
Other liabilities |
|
| 3,962 |
|
|
| 3,618 |
|
Total liabilities |
|
| 450,409 |
|
|
| 397,922 |
|
Commitments and contingencies (Note 17) |
|
|
|
|
|
|
|
|
Stockholders' Equity: |
|
|
|
|
|
|
|
|
Preferred stock, no par value; authorized: 1,000,000 shares; issued: none |
|
| — |
|
|
| — |
|
Common stock, $.01 par value; authorized: 15,000,000 shares; issued and outstanding: 6,034,276 at December 31, 2017 and 5,868,726 shares at December 31, 2016 |
|
| 61 |
|
|
| 59 |
|
Additional paid-in capital |
|
| 56,493 |
|
|
| 56,373 |
|
Retained earnings |
|
| 30,415 |
|
|
| 32,661 |
|
ESOP-Unearned compensation |
|
| (4,319 | ) |
|
| (4,507 | ) |
Accumulated other comprehensive loss, net of tax |
|
| (1,167 | ) |
|
| (1,284 | ) |
Total stockholders' equity |
|
| 81,483 |
|
|
| 83,302 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 531,892 |
|
| $ | 481,224 |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-2
Randolph Bancorp, Inc. and Subsidiary
Consolidated Statements of Operations
(In thousands, except share data)
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Interest and dividend income: |
|
|
|
|
|
|
|
|
Loans |
| $ | 15,099 |
|
| $ | 12,438 |
|
Securities-taxable |
|
| 1,259 |
|
|
| 1,260 |
|
Securities-tax exempt |
|
| 347 |
|
|
| 366 |
|
Interest-bearing deposits and certificates of deposit |
|
| 235 |
|
|
| 151 |
|
Total interest and dividend income |
|
| 16,940 |
|
|
| 14,215 |
|
|
|
|
|
|
|
|
|
|
Interest expense: |
|
|
|
|
|
|
|
|
Deposits |
|
| 1,556 |
|
|
| 1,345 |
|
Federal Home Loan Bank of Boston advances |
|
| 554 |
|
|
| 261 |
|
Total interest expense |
|
| 2,110 |
|
|
| 1,606 |
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
| 14,830 |
|
|
| 12,609 |
|
Provision for loan losses |
|
| 540 |
|
|
| 103 |
|
|
|
|
|
|
|
|
|
|
Net interest income after provision for loan losses |
|
| 14,290 |
|
|
| 12,506 |
|
|
|
|
|
|
|
|
|
|
Non-interest income: |
|
|
|
|
|
|
|
|
Customer service fees |
|
| 1,455 |
|
|
| 1,502 |
|
Net gain on sales of mortgage loans |
|
| 9,151 |
|
|
| 10,381 |
|
Mortgage servicing fees, net |
|
| 1,473 |
|
|
| 430 |
|
Gain on sales/calls of securities |
|
| — |
|
|
| 162 |
|
Increase in cash surrender value of life insurance |
|
| 153 |
|
|
| 172 |
|
Gain on life insurance settlement |
|
| — |
|
|
| 486 |
|
Bargain purchase gain |
|
| — |
|
|
| 1,276 |
|
Other |
|
| 731 |
|
|
| 621 |
|
Total non-interest income |
|
| 12,963 |
|
|
| 15,030 |
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
Salaries and employee benefits |
|
| 18,731 |
|
|
| 15,168 |
|
Occupancy and equipment |
|
| 2,655 |
|
|
| 2,128 | �� |
Data processing |
|
| 758 |
|
|
| 761 |
|
Professional fees |
|
| 1,344 |
|
|
| 1,378 |
|
Marketing |
|
| 989 |
|
|
| 448 |
|
Foreclosed real estate, net |
|
| — |
|
|
| 168 |
|
FDIC deposit insurance |
|
| 145 |
|
|
| 246 |
|
Charitable foundation contribution |
|
| — |
|
|
| 2,275 |
|
Merger and integration costs |
|
| 531 |
|
|
| 980 |
|
Restructuring charge |
|
| 594 |
|
|
| — |
|
Other |
|
| 4,075 |
|
|
| 3,508 |
|
Total non-interest expenses |
|
| 29,822 |
|
|
| 27,060 |
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
| (2,569 | ) |
|
| 476 |
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) |
|
| (443 | ) |
|
| 13 |
|
Net income (loss) |
| $ | (2,126 | ) |
| $ | 463 |
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (basic and diluted) |
|
| 5,468,514 |
|
| N/A |
| |
Earnings (loss) per common share (basic and diluted) |
| $ | (0.39 | ) |
| N/A |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Randolph Bancorp, Inc. and Subsidiary
Consolidated Statements of Comprehensive Loss
(In thousands)
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Net income (loss) |
| $ | (2,126 | ) |
| $ | 463 |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Unrealized holding gains (losses) |
|
| 74 |
|
|
| (1,422 | ) |
Reclassification adjustment for net gains |
|
|
|
|
|
|
|
|
realized in income (1) |
|
| — |
|
|
| (162 | ) |
Net unrealized gain (loss) |
|
| 74 |
|
|
| (1,584 | ) |
Related tax effects |
|
| — |
|
|
| — |
|
Net-of-tax amount |
|
| 74 |
|
|
| (1,584 | ) |
|
|
|
|
|
|
|
|
|
Supplemental retirement plan: |
|
|
|
|
|
|
|
|
Reclassification adjustments (2): |
|
|
|
|
|
|
|
|
Actuarial losses |
|
| 38 |
|
|
| 30 |
|
Prior service credits recognized |
|
| (89 | ) |
|
| (25 | ) |
Settlement cost |
|
| — |
|
|
| 59 |
|
Actuarial losses arising during the year |
|
| (26 | ) |
|
| (25 | ) |
Net change in supplemental retirement plan |
|
| (77 | ) |
|
| 39 |
|
Related tax effects |
|
| — |
|
|
| — |
|
Net-of-tax amount |
|
| (77 | ) |
|
| 39 |
|
Total other comprehensive loss |
|
| (3 | ) |
|
| (1,545 | ) |
Comprehensive loss |
| $ | (2,129 | ) |
| $ | (1,082 | ) |
1) | Amounts are included in gain on sales/calls of securities in the consolidated statements of operations. |
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Randolph Bancorp, Inc. and Subsidiary
Consolidated Statements of Changes in Stockholders’ Equity
Years Ended December 31, 2017 and 2016
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Unearned |
|
| Other |
|
| Total |
| ||||
|
| Common Stock |
|
| Paid-in |
|
| Retained |
|
| Compensation |
|
| Comprehensive |
|
| Stockholders’ |
| ||||||||||
|
| Shares |
|
| Amount |
|
| Capital |
|
| Earnings |
|
| ESOP |
|
| Income (Loss) |
|
| Equity |
| |||||||
Balance at December 31, 2015 |
|
| — |
|
| $ | — |
|
| $ | — |
|
| $ | 32,198 |
|
| $ | — |
|
| $ | 261 |
|
| $ | 32,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 463 |
|
|
| — |
|
|
| — |
|
|
| 463 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,545 | ) |
|
| (1,545 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock for initial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
public offering, net of costs of $2,325 |
|
| 5,686,750 |
|
|
| 57 |
|
|
| 54,486 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 54,543 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Randolph Savings Charitable Foundation |
|
| 181,976 |
|
|
| 2 |
|
|
| 1,818 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,820 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock purchased by ESOP |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (4,695 | ) |
|
| — |
|
|
| (4,695 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares committed to be released |
|
| — |
|
|
| — |
|
|
| 69 |
|
|
| — |
|
|
| 188 |
|
|
| — |
|
|
| 257 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016 |
|
| 5,868,726 |
|
|
| 59 |
|
|
| 56,373 |
|
|
| 32,661 |
|
|
| (4,507 | ) |
|
| (1,284 | ) |
|
| 83,302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (2,126 | ) |
|
| — |
|
|
| — |
|
|
| (2,126 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3 | ) |
|
| (3 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock repurchased |
|
| (10,689 | ) |
|
| — |
|
|
| (160 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (160 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards granted |
|
| 192,491 |
|
|
| 2 |
|
|
| (2 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards forfeited |
|
| (16,252 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation |
|
| — |
|
|
| — |
|
|
| 184 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ESOP shares committed to be released |
|
| — |
|
|
| — |
|
|
| 98 |
|
|
| — |
|
|
| 188 |
|
|
| — |
|
|
| 286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption impact - ASU 2018-02 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (120 | ) |
|
| — |
|
|
| 120 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017 |
|
| 6,034,276 |
|
| $ | 61 |
|
| $ | 56,493 |
|
| $ | 30,415 |
|
| $ | (4,319 | ) |
| $ | (1,167 | ) |
| $ | 81,483 |
|
The accompanying notes are an integral part of these consolidated financial statements
F-5
Randolph Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(In thousands)
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (2,126 | ) |
| $ | 463 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| 540 |
|
|
| 103 |
|
Bargain purchase gain |
|
| — |
|
|
| (1,276 | ) |
Loans originated for sale |
|
| (398,696 | ) |
|
| (404,555 | ) |
Principal balance of loans sold |
|
| 403,758 |
|
|
| 403,632 |
|
Net amortization of securities |
|
| 271 |
|
|
| 250 |
|
Net change in deferred loan costs and fees, and purchase premiums |
|
| (276 | ) |
|
| 111 |
|
Gain on sales/calls of securities |
|
| — |
|
|
| (162 | ) |
Depreciation and amortization |
|
| 605 |
|
|
| 588 |
|
Impairment write-down on property and equipment |
|
| 225 |
|
|
| — |
|
Impairment write-down on foreclosed real estate |
|
| — |
|
|
| 150 |
|
Gain on life insurance settlement, net |
|
| — |
|
|
| (486 | ) |
Charitable foundation contribution |
|
| — |
|
|
| 1,820 |
|
Stock-based compensation |
|
| 184 |
|
|
| — |
|
ESOP expense |
|
| 286 |
|
|
| 257 |
|
Increase in cash surrender value of life insurance |
|
| (153 | ) |
|
| (172 | ) |
Net decrease (increase) in mortgage servicing rights |
|
| 2,089 |
|
|
| (297 | ) |
Other, net |
|
| (797 | ) |
|
| 488 |
|
Net cash provided by operating activities |
|
| 5,910 |
|
|
| 914 |
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Redemption of certificates of deposit |
|
| 735 |
|
|
| 1,000 |
|
Securities available for sale: |
|
|
|
|
|
|
|
|
Sales |
|
| — |
|
|
| 2,521 |
|
Calls/maturities |
|
| 2,586 |
|
|
| 6,970 |
|
Purchases |
|
| — |
|
|
| (23,405 | ) |
Principal payments on mortgage-backed securities |
|
| 4,278 |
|
|
| 5,872 |
|
Loan originations, net of principal repayments |
|
| (31,614 | ) |
|
| (12,175 | ) |
Loan purchases and participations |
|
| (36,032 | ) |
|
| (4,426 | ) |
Redemption (purchases) of Federal Home Loan Bank of Boston stock |
|
| (832 | ) |
|
| 899 |
|
Proceeds from sale of building |
|
| — |
|
|
| 1,231 |
|
Proceeds from life insurance settlement |
|
| — |
|
|
| 2,157 |
|
Proceeds from sale of foreclosed real estate |
|
| — |
|
|
| 367 |
|
Acquisition of First Eastern, net of cash acquired |
|
| — |
|
|
| (11,131 | ) |
Purchases of premises and equipment |
|
| (3,177 | ) |
|
| (1,071 | ) |
Net cash used in investing activities |
|
| (64,056 | ) |
|
| (31,191 | ) |
|
|
|
|
|
|
|
|
|
(continued)
F-6
Randolph Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows (Concluded)
(In thousands)
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
| 15,657 |
|
|
| 194 |
|
Net increase in short-term Federal Home Loan Bank of Boston borrowings |
|
| 44,841 |
|
|
| 12,497 |
|
Proceeds from long-term Federal Home Loan Bank of Boston advances |
|
| — |
|
|
| 1,449 |
|
Repayments of long-term Federal Home Loan Bank of Boston advances |
|
| (7,554 | ) |
|
| (23,381 | ) |
Net decrease in mortgagors' escrow accounts |
|
| (665 | ) |
|
| (448 | ) |
Net proceeds from the issuance of common stock |
|
| — |
|
|
| 56,868 |
|
Acquisition of common stock by ESOP |
|
| — |
|
|
| (4,695 | ) |
Stock offering costs |
|
| — |
|
|
| (2,004 | ) |
Repurchases of common stock |
|
| (160 | ) |
|
| — |
|
Net cash provided by financing activities |
|
| 52,119 |
|
|
| 40,480 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| (6,027 | ) |
|
| 10,203 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of year |
|
| 14,849 |
|
|
| 4,646 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
| $ | 8,822 |
|
| $ | 14,849 |
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
Interest paid on deposits and borrowed funds |
| $ | 2,122 |
|
| $ | 1,604 |
|
Income taxes paid, net of refunds |
| $ | 10 |
|
| $ | 74 |
|
Non-cash items: |
|
|
|
|
|
|
|
|
Leasehold improvements funded by landlord |
| $ | 646 |
|
| $ | — |
|
Transfer of loan to foreclosed real estate |
| $ | 193 |
|
| $ | — |
|
Transfer of property and equipment to assets held for sale |
| $ | 828 |
|
| $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements
December 31, 2017 and 2016
1. | CONVERSION |
Randolph Bancorp, a Massachusetts-chartered mutual holding company and the parent company of Envision Bank, formerly Randolph Savings Bank (the “Bank”), adopted a plan of conversion (the “Plan of Conversion”) in January 2016 which was subsequently approved by Randolph Bancorp’s Corporators in May 2016. Under the Plan of Conversion, Randolph Bancorp would convert from a mutual to a stock holding company in a series of transactions in which Randolph Bancorp, Inc. (“Bancorp”) a recently formed subsidiary of Randolph Bancorp, became the surviving entity.
On July 1, 2016, the mutual-to-stock transaction was completed and Bancorp sold 5,686,750 shares of its common stock, representing the adjusted maximum of the offering range, at $10.00 per share, for gross proceeds of $56,867,500, including the sale of 469,498 shares to the Bank’s newly formed employee stock ownership plan (“ESOP”). The ESOP’s shares were funded by a loan from Bancorp to be repaid over 25 years with interest at the prime rate.
The direct costs of stock offering were deducted from the proceeds of the offering and amounted to $2,325,000.
In connection with the Plan of Conversion, Bancorp established The Randolph Savings Charitable Foundation, Inc., subsequently re-named Envision Bank Foundation, Inc. (the “Foundation”). The Foundation was funded with 181,976 shares of Bancorp’s common stock and $455,000 in cash. Bancorp recognized expense of $2,274,700 in 2016 for this contribution.
The Bancorp and the Bank are required to restrict their net worth by establishing liquidation accounts (collectively, the “liquidation account”) for the benefit of eligible account holders who continue to maintain deposit accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent eligible depositors reduce their qualifying deposits and cannot be increased thereafter with additional deposits. In the event of a complete liquidation of the Bank, each eligible account holder would be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. Neither the Bancorp nor the Bank may declare or pay a cash dividend on its common stock if such dividend would cause its regulatory capital to be reduced below the amount required to maintain the liquidation account.
2. | NATURE OF OPERATIONS AND BASIS OF PRESENTATION |
Nature of Operations
The Bank, which changed its name from Randolph Savings Bank to Envision Bank on March 12, 2018, provides a variety of financial services to individuals and small businesses through its six branch offices in Massachusetts. The Bank’s primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgage loans.
The Federal Deposit Insurance Corporation (“FDIC”) provides insurance coverage on all deposits up to $250,000 per depositor. As an FDIC insured institution, the Bank is subject to supervision, examination and regulation by the FDIC. Additionally, as a Massachusetts chartered savings bank, the Bank’s depositors are also insured by the Depositors Insurance Fund (“DIF”), a private industry-sponsored insurance company. The DIF insures bank deposits in excess of the FDIC insurance limits.
Bancorp entered into a merger agreement in September 2015 under which it would acquire First Eastern Bankshares Corporation (“Bankshares”) and its wholly-owned subsidiary First Federal Savings Bank of Boston (“First Federal;” and together with Bankshares “First Eastern”) in a transaction accounted for as a business combination. First Eastern was actively engaged in the mortgage banking business as an originator, seller and servicer of residential mortgage loans. On July 1, 2016, the Company completed the acquisition of First Eastern. See Note 3 for additional information.
F-8
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The consolidated financial statements include the accounts of Randolph Bancorp, Inc. and its wholly-owned subsidiary, Envision Bank (together, the “Company”). The Bank has subsidiaries involved in owning investment securities and real estate properties and a subsidiary which provides loan closing services. All intercompany accounts and transactions have been eliminated in consolidation.
The following significant accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (“GAAP”) and are used in preparing and presenting these consolidated financial statements.
Use of estimates
In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, mortgage servicing rights, deferred tax assets and fair value measurements.
Cash and cash equivalents
Cash equivalents include amounts due from banks, federal funds sold on a daily basis and interest-bearing deposits with original maturities of ninety days or less.
Certificates of deposit
Certificates of deposit have original maturities ranging from one to five years and are carried at cost.
Fair value hierarchy
The Company groups its assets and liabilities that are measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. Valuations are obtained from readily available pricing sources.
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets and liabilities include those for which the value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Transfers between levels are recognized at the end of a reporting period, if applicable.
Securities
All securities are classified as available for sale and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss.
Purchase premiums and discounts are recognized in interest income using the level yield method over the terms of the securities. Anticipated prepayments on mortgage-backed securities are used in applying this method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the weighted average cost method for mutual funds and the specific identification method for other securities.
F-9
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
On a quarterly basis, the Company evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other than temporary (“OTTI”).
OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the decline in fair value is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. Because the Company’s assessments are based on available factual information as well as subjective information, the determination as to whether an OTTI exists and, if so, the amount of impairment, is subjective and, therefore, the timing and amount of OTTI constitute material estimates that are subject to significant change.
Federal Home Loan Bank stock
The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB. Based on redemption provisions of the FHLBB, the stock has no quoted market value and is carried at cost. The Company periodically evaluates for impairment based on ultimate recovery of its cost basis in the FHLBB stock.
Loans held for sale
The origination of residential mortgage loans is an integral part of the Company’s business. The Company generally sells its originations of such loans in the secondary market to either government-sponsored enterprises (“GSEs”) or other financial institutions. The servicing of loans sold to GSEs is initially retained while loans sold to other financial institutions are done so on a servicing released basis. From time-to-time, the rights to service loans for the GSEs are sold on a bulk basis.
Gains and losses on the sales of these loans are determined using the specific identification method. In determining the amount of the gain or loss the Company takes into consideration the direct costs of originating the loan. Also included in the net gain on sales of mortgage loans as presented in the accompanying statements of operations are fair value adjustments for mortgage banking derivatives (interest rate lock commitments with borrowers and forward loan sale commitments with investors) and loans held for sale.
Effective July 1, 2016, the Bank elected to utilize the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for its residential mortgage loans being held for sale in the secondary market. Fair value is determined based on either commitments in effect from investors or prevailing market price and include the value of mortgage servicing rights. The Bank elected the fair value option to better match changes in the fair value of the loans with changes in the fair value of the forward loan sale commitments which are used to economically hedge them against changes in interest rates between the time an interest rate lock agreement is entered into with the borrower and the time the loan is sold.
Derivative financial instruments
Derivative loan commitments
Mortgage loan commitments (interest rate locks) qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. Loan commitments that are derivatives are recognized at fair value, including the value of mortgage servicing rights on the consolidated balance sheets in other assets and other liabilities with changes in fair value recorded in the net gain on sale of mortgage loans. In estimating fair value, the Company assigns a probability to a loan commitment becoming a closed loan based on historical experience. Changes in the fair values of the loan commitments are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time.
Forward loan sale commitments
The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. Mandatory delivery forward loan sale commitments are accounted for as derivative instruments, and are recognized at fair value on the
F-10
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
consolidated balance sheets in other assets and other liabilities with changes in fair value recorded in the net gain on sale of mortgage loans. Fair values for forward loan sale commitments are based on changes in the fair values of the underlying loans.
Loans
The Company grants residential real estate, commercial real estate, construction, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in eastern Massachusetts and Rhode Island. The ability of the Company’s borrowers to honor their contracts is affected by real estate values and general economic conditions in these markets.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and net deferred loan origination fees and costs and purchase premiums. Interest income is accrued on the unpaid principal balance. Certain direct loan origination costs and purchase premiums, net of origination fees, are deferred and recognized in interest income using the level yield method without anticipating prepayments.
Interest is not accrued on loans which are ninety days or more past due, or when, in the judgment of management, the collectability of the principal or interest becomes doubtful. Past due status is based on contractual terms of the loan. Interest income previously accrued on such loans is reversed against current period earnings. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for loan losses
The allowance for loan losses is a valuation allowance for probable incurred credit losses. 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 regular basis and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as either additional information becomes available or circumstances change. The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans (general component) and an analysis of certain individual loans for impairment (allocated component).
General component
The general component of the allowance for loan losses covers loans that are collectively evaluated for impairment and is based on historical loss experience adjusted for qualitative factors stratified by loan segments. Management uses a rolling average of historical losses based on a trailing 48 month time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is supplemented by the following qualitative factors: levels/trends in delinquencies; 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; national and local economic trends and conditions, regulatory and legal factors; and risk rating concentrations.
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 one-to-four family real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent. All loans in this segment are collateralized by one-to-four family owner, and non-owner-occupied, residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Second mortgages and home equity lines of credit (HELOC) – Loans in this segment are primarily secured by second-position liens, and the Company may or may not also have a first-position lien. Regardless of which creditor is in first position, the Company does not originate loans with a combined loan-to-value ratio greater than 80 percent. All loans in this segment are
F-11
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. 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 consist of owner-occupied and non-owner-occupied property throughout Massachusetts and Rhode Island. The underlying cash flows generated by the operating entities of owner-occupied real estate support the associated debt. Rental cash flows, for which management obtains periodic rent rolls, support the debt associated with non-owner-occupied real estate and can be negatively impacted by increased vacancy rates.
Construction – Loans in this segment primarily include residential real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.
Commercial and Industrial – 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, would have an effect on the credit quality in this segment.
Consumer – Loans in this segment primarily include personal unsecured loans, refinanced student loans and auto loans purchased from third party lenders. Repayment is dependent on the credit quality of the individual borrower.
Allocated component
The allocated component of the allowance for loan losses relates to loans that are individually classified as impaired. Residential real estate, commercial and industrial, commercial real estate and construction loans are evaluated for impairment on a loan-by-loan basis. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer loans or second mortgages and HELOCs for impairment disclosures, unless such loans are 90 days past due or are classified as a troubled debt restructuring.
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.
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.
Bank-owned life insurance
Bank-owned life insurance policies are reflected on the consolidated balance sheets at their cash surrender value net of charges or other amounts that are probable at settlement. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income in the consolidated statements of operations and are not subject to income taxes, unless such policies are surrendered prior to the death of the insured individuals.
Mortgage servicing rights
The Company services mortgage loans for others. Mortgage servicing rights are recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets. Capitalized servicing rights are amortized into mortgage servicing income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized
F-12
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, using market-based assumptions. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum. Changes in the valuation allowance, if any, are reported in mortgage servicing income.
Premises and equipment
Land is carried at cost. Buildings, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.
Premises and equipment held for sale are stated at the lower of amortized cost or fair value less costs to sell.
Transfers of financial assets
Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan. In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan.
In certain cases, the Company may have an obligation to repurchase mortgage loans sold to third parties and to refund fees to the purchaser if a payment default or prepayment occurs, in each case within a prescribed time period not exceeding four months after the sale date, or in the case of a violation of its representations and warranties under the provisions of its loan sale agreements. The Company evaluates its obligations under these provisions and recognizes a liability for the fair value of its recourse obligations. At December 31, 2017 and 2016, the Company determined that its obligations in connection with the recourse provisions of its loan sale agreements were insignificant.
Foreclosed assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations, changes in the valuation allowance and any direct write-downs are included in foreclosed real estate expense.
Supplemental retirement plan
The Company accounts for its supplemental retirement plan using an actuarial model that allocates cost over the service period of participants in the plan. The Company accounts for the over-funded or under-funded status of the plan as an asset or liability in its consolidated balance sheets and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income/loss.
Employee Stock Ownership Plan
Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is computed based on the number of shares allocated to participants during the period multiplied by the average fair market value of the Company’s shares. This expense is recognized ratably throughout the year based on the expected allocation of shares for the year. Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity. The difference between the average fair market value and cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.
F-13
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The fair value of restricted stock and stock options is determined on the date of grant and amortized to compensation expense with a corresponding increase to additional paid-in capital over the required service period, but in no event beyond the date of an employee’s or director’s date of termination. Forfeitures of unvested awards and grants are recorded as incurred.
Advertising costs
Advertising costs are expensed as incurred.
Income taxes
Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon available evidence including historical and projected taxable income, that some or all of the deferred tax assets will not be realized.
A tax position is recognized as a benefit if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.
The Company does not have any uncertain tax positions at December 31, 2017 and 2016 which require accrual or disclosure. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2017 and 2016.
Comprehensive income (loss)
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities are reported as a separate component of equity, such items, along with net income (loss), are components of comprehensive income (loss).
The components of accumulated other comprehensive loss (“AOCI”), included in stockholders’ equity, are as follows:
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Securities available for sale: |
|
|
|
|
|
|
|
|
Net unrealized loss |
| $ | (624 | ) |
| $ | (698 | ) |
Tax effect |
|
| (313 | ) |
|
| (423 | ) |
Net-of-tax amount |
|
| (937 | ) |
|
| (1,121 | ) |
|
|
|
|
|
|
|
|
|
Supplemental retirement plan |
|
|
|
|
|
|
|
|
Unrecognized net actuarial loss |
|
| (667 | ) |
|
| (679 | ) |
Unrecognized net prior service credit |
|
| 484 |
|
|
| 573 |
|
|
|
| (183 | ) |
|
| (106 | ) |
Tax effect |
|
| (47 | ) |
|
| (57 | ) |
Net-of-tax amount |
|
| (230 | ) |
|
| (163 | ) |
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
| $ | (1,167 | ) |
| $ | (1,284 | ) |
In 2018, the Company expects to recognize $89,000 in prior service credits and $41,000 in net actuarial losses as components of cost for the supplemental retirement plan. These amounts are included in accumulated other comprehensive income (loss) at December 31, 2017. Prior service credits and net actuarial gains and losses are amortized to periodic pension cost over varying periods based on the plan participants to whom they relate.
F-14
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Discrete financial information is not available other than on a company-wide basis. Therefore, Company management has determined there to be a single segment for financial reporting purposes at December 31, 2017 and 2016.
Earnings (Loss) Per Share
Basic earnings (loss) per share represents income (loss) available to common stockholders divided by the weighted average of common shares outstanding during the period. Unvested restricted shares of common stock having dividend rights are treated as “participating securities” and, accordingly, are considered outstanding in computing basic earnings (loss) per share. Unallocated ESOP shares are not considered outstanding in computing earnings (loss) per share. Earnings per share is not presented herein for the year ended December 31, 2016 as common stock was not outstanding for the entire year. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential shares had been issued. Stock options represent potential dilutive shares with the number of such shares computed using the treasury method. No potential dilutive shares were considered in the computation of loss per share in 2017 as the impact would be anti-dilutive.
Business combinations
We account for business combinations under the acquisition method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of tangible and identified intangible assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms. Costs incurred to consummate a business combination are expensed as incurred.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This Update provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. This ASU, as amended by ASU 2015-14, is effective for emerging growth companies in fiscal years beginning after December 15, 2018, including interim periods within that reporting period with early adoption permitted. The timing of the Company’s revenue recognition is not expected to materially change. The Company's revenue relates principally to financial instruments, which are explicitly excluded from the scope of the new guidance. The Company will continue to evaluate any impact as additional guidance is issued and as our internal assessment progresses.
In February 2016, FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting requirements. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for emerging growth companies in fiscal years beginning after December 15, 2019, including interim periods therein. Earlier adoption is permitted. The Company is currently assessing the impact of the adoption of this ASU on its consolidated balance sheet.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing probable incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgements used in determining the allowance for loan losses, as well as the credit quality and underwriting standards of an organization’s loan portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This ASU is effective for emerging growth companies in fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Early adoption is permitted in fiscal years beginning after December
F-15
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
31, 2018. The Company is currently assessing its data and system needs and is evaluating the impact of the adoption of this ASU on the consolidated financial statements.
In April 2017, the FASB issued ASU 2017-08 Receivables – Non-refundable Fees and Other Costs, which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. Currently, generally accepted accounting principles (“GAAP”) excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. This ASU requires that premiums on certain callable debt securities be amortized to the shortest call date. Securities within the scope of this paragraph are those that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. This ASU is effective for emerging growth companies for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted, including adoption in an interim period. The impact of adopting this ASU is dependent on the materiality of callable debt securities at the time of adoption.
In February 2018, the FASB issued ASU 2018-02 Income Statement – Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which allows reclassification of certain stranded income tax effects in accumulated other comprehensive income (loss) to retained earnings resulting from the Tax Cuts and Jobs Act of 2017 (the “Act”). The Company adopted ASU 2018-02 as of December 31, 2017 and recorded a reclassification adjustment from accumulated other comprehensive loss to retained earnings of $120,000, which is reflected in the accompanying consolidated statement of changes in stockholders’ equity.
Reclassifications
Certain reclassifications have been made to the 2016 consolidated financial statements in order to conform to the presentations used in the 2017 consolidated financial statements. Such reclassifications had no impact on net income as presented in such financial statements.
F-16
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
On July 1, 2016, the Company acquired all of the outstanding common stock of Bankshares for cash of $14.1 million. First Eastern operated eight residential loan production offices in eastern Massachusetts and New Hampshire and a retail banking branch in downtown Boston. As a result of the transaction, Bankshares merged into Randolph Bancorp, Inc. and First Federal merged into Envision Bank. This business combination significantly increases the Company’s mortgage banking operations. The results of First Eastern’s operations are included in the Company’s consolidated statement of operations from the date of acquisition. First Eastern’s assets and liabilities were recorded at their fair value as of the date of acquisition based on management’s estimates using currently available information. Cash consideration paid, and fair values of First Eastern’s assets acquired and liabilities assumed, along with the resulting bargain purchase gain, are summarized in the following table (in thousands):
|
|
|
|
|
| Fair Value |
|
|
|
|
| |
|
| As Acquired |
|
| Adjustments |
|
| As Recorded |
| |||
|
| (In thousands) |
| |||||||||
Cash and cash equivalents |
| $ | 2,951 |
|
| $ | — |
|
| $ | 2,951 |
|
Loans held for sale |
|
| 26,209 |
|
|
| 450 |
| (a) |
| 26,659 |
|
Loans |
|
| 30,824 |
|
|
| 482 |
| (b) |
| 31,306 |
|
Mortgage servicing rights |
|
| 4,396 |
|
|
| 1,820 |
| (c) |
| 6,216 |
|
Premises and equipment |
|
| 1,566 |
|
|
| 1,534 |
| (d) |
| 3,100 |
|
Core deposit intangible |
|
| — |
|
|
| 118 |
| (e) |
| 118 |
|
Goodwill |
|
| 789 |
|
|
| (789 | ) | (f) |
| — |
|
Other assets |
|
| 2,046 |
|
|
| (55 | ) | (g) |
| 1,991 |
|
Deposits |
|
| (41,737 | ) |
|
| (53 | ) | (h) |
| (41,790 | ) |
Federal Home Loan Bank of Boston advances |
|
| (13,128 | ) |
|
| (60 | ) | (h) |
| (13,188 | ) |
Other liabilities |
|
| (1,917 | ) |
|
| (88 | ) | (i) |
| (2,005 | ) |
Total identifiable net assets |
| $ | 11,999 |
|
| $ | 3,359 |
|
|
| 15,358 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash consideration paid to seller |
|
|
|
|
|
|
|
|
|
| 14,082 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bargain purchase gain |
|
|
|
|
|
|
|
|
| $ | 1,276 |
|
Explanation of the fair value adjustments is as follows:
| (a) | The adjustment represents the write-up of the book value of loans held for sale to their estimated fair value based on current selling prices, including the value of their servicing rights. |
| (b) | The adjustment represents the write-up of the book value of loans, to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan losses inherent in the portfolio. The balance of impaired loans was not significant. |
| (c) | The adjustment represents the write-up of the book value of mortgage servicing rights associated with $789.3 million of serviced loans to their estimated fair value based on an independent appraisal. The fair value was determined based on the discounted present value of estimated future net servicing income using market-based assumptions including prepayment speeds, costs of servicing, risk characteristics and interest rates. |
| (d) | The adjustment represents the write-up of the Boston retail branch based on an independent appraisal. |
| (e) | This amount represents the estimated fair value of core deposit relationships (equal to 1.1% of core deposits) based on an independent appraisal. |
| (f) | The adjustment eliminates existing goodwill. |
| (g) | The adjustment eliminates deferred origination costs for loans-in-process. |
| (h) | The adjustments represent the write-up of the book value of term certificate accounts and FHLB advances based on interest rates currently offered on instruments having similar remaining maturities. |
| (i) | The adjustment represents the fair value of forward loan sale commitments written on a best efforts basis. |
The bargain purchase gain is presented in the accompanying statement of operations as a separate component of non-interest income. This gain is primarily attributable to the write-ups of the mortgage servicing rights and premises and equipment to fair value as determined by independent third-party specialists based on market assumptions that were reviewed for reasonableness.
F-17
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Direct acquisition and merger integration costs of the First Eastern business combination are being expensed as incurred and are presented separately in the accompanying statements of operations. Costs incurred in 2017 consist principally of employee severance benefits, systems conversion costs and consulting fees. Costs incurred in 2016 consist of retention bonuses, severance obligations, systems conversion costs as well as legal and consulting fees.
The following table presents selected unaudited pro forma financial information assuming that the acquisition was completed as of January 1, 2016. The pro forma amounts reflect adjustments related to: (a) reversal of non-recurring merger and integration costs; (b) reversal of a special bonus of $1.6 million paid in June 2016 to First Eastern executives in connection with the merger; (c) amortization and accretion of acquisition accounting fair value adjustments; and (d) reversal of the bargain purchase gain. No provision for income taxes is included in the determination of pro forma net income for the period presented due to the Company’s net operating loss carryforward position. Furthermore, the unaudited pro forma financial information do not reflect management’s estimate of any revenue enhancement opportunities or anticipated potential cost savings nor any adjustments related to the stock offering completed on July 1, 2016.
The unaudited pro forma financial information is presented for illustrative purposes only and is not necessarily indicative of the combined financial results of the Company and First Eastern had the acquisition transaction actually been completed at the beginning of the period presented, nor does it indicate future results for any interim or annual period. Pro forma basic and diluted earnings (loss) per common share are not presented as such information is not being presented as part of our 2016 historical financial statements due to the completion of the stock offering on July 1, 2016.
Unaudited pro forma financial information for the year ended December 31, 2016 is as follows (in thousands):
Net Interest Income |
| $ | 13,463 |
|
Non-interest Income |
|
| 20,539 |
|
Net Income |
|
| 1,658 |
|
Due to the conversion of First Eastern’s core processing system in the fourth quarter of 2016, separate revenue and earnings information for First Eastern since the date of acquisition is not available.
F-18
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The amortized cost and fair value of securities available for sale, including gross unrealized gains and losses, are as follows:
|
|
|
|
|
| Gross |
|
| Gross |
|
|
|
|
| ||
|
| Amortized |
|
| Unrealized |
|
| Unrealized |
|
| Fair |
| ||||
|
| Cost |
|
| Gains |
|
| Losses |
|
| Value |
| ||||
|
| (In thousands) |
| |||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
| $ | 3,999 |
|
| $ | 50 |
|
| $ | (24 | ) |
| $ | 4,025 |
|
Corporate |
|
| 2,005 |
|
|
| 27 |
|
|
| (8 | ) |
|
| 2,024 |
|
Municipal |
|
| 12,707 |
|
|
| 179 |
|
|
| (18 | ) |
|
| 12,868 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 18,729 |
|
|
| 118 |
|
|
| (450 | ) |
|
| 18,397 |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 14,451 |
|
|
| 13 |
|
|
| (403 | ) |
|
| 14,061 |
|
U.S. Government-guaranteed |
|
| 2,132 |
|
|
| — |
|
|
| (6 | ) |
|
| 2,126 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 1,871 |
|
|
| 12 |
|
|
| (5 | ) |
|
| 1,878 |
|
U.S. Government-guaranteed |
|
| 5,760 |
|
|
| 4 |
|
|
| (100 | ) |
|
| 5,664 |
|
Total debt securities |
|
| 61,654 |
|
|
| 403 |
|
|
| (1,014 | ) |
|
| 61,043 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund |
|
| 545 |
|
|
| — |
|
|
| (12 | ) |
|
| 533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
| $ | 62,199 |
|
| $ | 403 |
|
| $ | (1,026 | ) |
| $ | 61,576 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
| $ | 3,999 |
|
| $ | 92 |
|
| $ | (10 | ) |
| $ | 4,081 |
|
Corporate |
|
| 3,044 |
|
|
| 54 |
|
|
| (18 | ) |
|
| 3,080 |
|
Municipal |
|
| 13,857 |
|
|
| 254 |
|
|
| (56 | ) |
|
| 14,055 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 21,130 |
|
|
| 172 |
|
|
| (580 | ) |
|
| 20,722 |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 14,676 |
|
|
| 56 |
|
|
| (554 | ) |
|
| 14,178 |
|
U.S. Government-guaranteed |
|
| 9,589 |
|
|
| 12 |
|
|
| (144 | ) |
|
| 9,457 |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| 2,127 |
|
|
| 28 |
|
|
| — |
|
|
| 2,155 |
|
U.S. Government-guaranteed |
|
| 368 |
|
|
| 3 |
|
|
| — |
|
|
| 371 |
|
Total debt securities |
|
| 68,790 |
|
|
| 671 |
|
|
| (1,362 | ) |
|
| 68,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund |
|
| 545 |
|
|
| — |
|
|
| (7 | ) |
|
| 538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities available for sale |
| $ | 69,335 |
|
| $ | 671 |
|
| $ | (1,369 | ) |
| $ | 68,637 |
|
F-19
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The amortized cost and fair value of debt securities by contractual maturity at December 31, 2017 are presented below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
|
| Amortized |
|
| Fair |
| ||
|
| Cost |
|
| Value |
| ||
|
| (In thousands) |
| |||||
Within 1 year |
| $ | 2,078 |
|
| $ | 2,085 |
|
After 1 year through 5 years |
|
| 14,377 |
|
|
| 14,525 |
|
After 5 years through 10 years |
|
| 2,256 |
|
|
| 2,307 |
|
|
|
| 18,711 |
|
|
| 18,917 |
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities and collaterlized mortgage obligations |
|
| 42,943 |
|
|
| 42,126 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 61,654 |
|
| $ | 61,043 |
|
Obligations of U.S. Government-sponsored enterprises consist primarily of securities issued by the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association.
At December 31, 2017 and 2016, investment securities having a fair value of $2,004,000 and $2,107,000, respectively, were pledged as collateral for certain deposits and FHLBB borrowings.
There were no individual holdings of investment securities at December 31, 2017 and 2016, other than holdings of the U.S. Government and its agencies, which exceeded 10% of the Company’s stockholders’ equity as of such dates.
F-20
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position follows:
|
| Less Than Twelve Months |
|
| Over Twelve Months |
| ||||||||||
|
| Gross |
|
|
|
|
|
| Gross |
|
|
|
|
| ||
|
| Unrealized |
|
| Fair |
|
| Unrealized |
|
| Fair |
| ||||
|
| Losses |
|
| Value |
|
| Losses |
|
| Value |
| ||||
December 31, 2017 |
| (In thousands) |
| |||||||||||||
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
| $ | — |
|
| $ | — |
|
| $ | (24 | ) |
| $ | 19,676 |
|
Corporate |
|
| — |
|
|
| — |
|
|
| (8 | ) |
|
| 988 |
|
Municipal |
|
| (11 | ) |
|
| 1,919 |
|
|
| (7 | ) |
|
| 479 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| (1 | ) |
|
| 1,623 |
|
|
| (449 | ) |
|
| 13,163 |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| — |
|
|
| — |
|
|
| (403 | ) |
|
| 8,805 |
|
U.S. Government-guaranteed |
|
| (6 | ) |
|
| 2,126 |
|
|
| — |
|
|
| — |
|
Collateralized mortgage obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| (5 | ) |
|
| 678 |
|
|
| — |
|
|
| — |
|
U.S. Government-guaranteed |
|
| (1 | ) |
|
| 295 |
|
|
| (99 | ) |
|
| 3,756 |
|
Total debt securities |
|
| (24 | ) |
|
| 6,641 |
|
|
| (990 | ) |
|
| 46,867 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund |
|
| — |
|
|
| — |
|
|
| (12 | ) |
|
| 533 |
|
|
| $ | (24 | ) |
| $ | 6,641 |
|
| $ | (1,002 | ) |
| $ | 47,400 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
| $ | (10 | ) |
| $ | 1,990 |
|
| $ | — |
|
| $ | — |
|
Corporate |
|
| (14 | ) |
|
| 519 |
|
|
| (4 | ) |
|
| 996 |
|
Municipal |
|
| (46 | ) |
|
| 3,310 |
|
|
| (10 | ) |
|
| 477 |
|
Residential mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| (580 | ) |
|
| 16,261 |
|
|
| — |
|
|
| — |
|
Commercial mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government-sponsored enterprises |
|
| (554 | ) |
|
| 8,766 |
|
|
| — |
|
|
| — |
|
U.S. Government-guaranteed |
|
| (144 | ) |
|
| 5,927 |
|
|
| — |
|
|
| — |
|
Total debt securities |
|
| (1,348 | ) |
|
| 36,773 |
|
|
| (14 | ) |
|
| 1,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mutual fund |
|
| (7 | ) |
|
| 538 |
|
|
| — |
|
|
| — |
|
|
| $ | (1,355 | ) |
| $ | 37,311 |
|
| $ | (14 | ) |
| $ | 1,473 |
|
At December 31, 2017, 37 debt securities have unrealized losses with aggregate depreciation of 1.90% from the Company’s amortized cost basis. The unrealized losses at December 31, 2017, which related primarily to securities issued by U.S. government-sponsored enterprises, were primarily caused by interest rate increases over the past fifteen months. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of these investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because the Company does not intend to sell any debt securities and it is more likely than not that the Company will not be required to sell any debt securities before recovery of its amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at December 31, 2017.
F-21
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
A summary of the loan portfolio is as follows:
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Mortgage loans on real estate: |
|
|
|
|
|
|
|
|
Residential: |
|
|
|
|
|
|
|
|
One-to-four family |
| $ | 198,475 |
|
| $ | 179,025 |
|
Home equity loans and lines of credit |
|
| 38,968 |
|
|
| 35,393 |
|
Commercial |
|
| 101,755 |
|
|
| 88,394 |
|
Construction |
|
| 25,357 |
|
|
| 23,629 |
|
|
|
| 364,555 |
|
|
| 326,441 |
|
|
|
|
|
|
|
|
|
|
Commercial and industrial |
|
| 21,766 |
|
|
| 2,067 |
|
Consumer |
|
| 16,337 |
|
|
| 6,578 |
|
|
|
|
|
|
|
|
|
|
Total loans |
|
| 402,658 |
|
|
| 335,086 |
|
Allowance for loan losses |
|
| (3,737 | ) |
|
| (3,271 | ) |
Net deferred loan costs and fees, and purchase premiums |
|
| 1,452 |
|
|
| 1,176 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 400,373 |
|
| $ | 332,991 |
|
The Company has transferred a portion of its originated commercial real estate loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Company’s accompanying consolidated balance sheets. The Company and participating lenders share ratably in any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Company continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At December 31, 2017 and 2016, the Company was servicing loans for participants aggregating $5,902,000 and $6,197,000, respectively. See Note 6 for information relating to the Company’s servicing of residential mortgage loans for others.
The following table summarizes the changes in loans to directors, executive officers and their affiliates for the years ended December 31, 2017 and 2016:
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Balance at beginning of the year |
| $ | — |
|
| $ | 32 |
|
New loans |
|
| — |
|
|
| — |
|
Repayments |
|
| — |
|
|
| (32 | ) |
Balance at end of year |
| $ | — |
|
| $ | — |
|
F-22
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The following table presents activity in the allowance for loan losses, by loan category, for the years ended December 31, 2017, and 2016 and allocation of the allowance to each category as of December 31, 2017 and 2016:
|
|
|
|
|
| Second |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Residential |
|
| Mortgages |
|
| Commercial |
|
|
|
|
|
| Commercial |
|
|
|
|
|
|
|
|
| ||||
|
| 1-4 Family |
|
| and HELOC |
|
| Real Estate |
|
| Construction |
|
| and Industrial |
|
| Consumer |
|
| Total |
| |||||||
|
| (In thousands) |
| |||||||||||||||||||||||||
Allowance for loan losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2015 |
| $ | 1,076 |
|
| $ | 512 |
|
| $ | 1,367 |
|
| $ | 159 |
|
| $ | 72 |
|
| $ | 53 |
|
| $ | 3,239 |
|
Provision (credit) for loan losses |
|
| (66 | ) |
|
| (76 | ) |
|
| 43 |
|
|
| 66 |
|
|
| (20 | ) |
|
| 156 |
|
|
| 103 |
|
Loans charged-off |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15 | ) |
|
| (81 | ) |
|
| (96 | ) |
Recoveries |
|
| 8 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 17 |
|
|
| 25 |
|
Balance at December 31, 2016 |
|
| 1,018 |
|
|
| 436 |
|
|
| 1,410 |
|
|
| 225 |
|
|
| 37 |
|
|
| 145 |
|
|
| 3,271 |
|
Provision (credit) for loan losses |
|
| (187 | ) |
|
| (77 | ) |
|
| 210 |
|
|
| 126 |
|
|
| 263 |
|
|
| 205 |
|
|
| 540 |
|
Loans charged-off |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (153 | ) |
|
| (153 | ) |
Recoveries |
|
| 23 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 35 |
|
|
| 21 |
|
|
| 79 |
|
Balance at December 31, 2017 |
| $ | 854 |
|
| $ | 359 |
|
| $ | 1,620 |
|
| $ | 351 |
|
| $ | 335 |
|
| $ | 218 |
|
| $ | 3,737 |
|
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired loans |
| $ | 160 |
|
| $ | 1 |
|
| $ | 1 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 162 |
|
Allowance for non-impaired loans |
|
| 694 |
|
|
| 358 |
|
|
| 1,619 |
|
|
| 351 |
|
|
| 335 |
|
|
| 218 |
|
|
| 3,575 |
|
Total allowance for loan losses |
| $ | 854 |
|
| $ | 359 |
|
| $ | 1,620 |
|
| $ | 351 |
|
| $ | 335 |
|
| $ | 218 |
|
| $ | 3,737 |
|
Impaired loans |
| $ | 5,205 |
|
| $ | 276 |
|
| $ | 352 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 5,833 |
|
Non-impaired loans |
|
| 193,270 |
|
|
| 38,692 |
|
|
| 101,403 |
|
|
| 25,357 |
|
|
| 21,766 |
|
|
| 16,337 |
|
|
| 396,825 |
|
Total loans |
| $ | 198,475 |
|
| $ | 38,968 |
|
| $ | 101,755 |
|
| $ | 25,357 |
|
| $ | 21,766 |
|
| $ | 16,337 |
|
| $ | 402,658 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired loans |
| $ | 190 |
|
| $ | 2 |
|
| $ | 8 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 200 |
|
Allowance for non-impaired loans |
|
| 828 |
|
|
| 434 |
|
|
| 1,402 |
|
|
| 225 |
|
|
| 37 |
|
|
| 145 |
|
|
| 3,071 |
|
Total allowance for loan losses |
| $ | 1,018 |
|
| $ | 436 |
|
| $ | 1,410 |
|
| $ | 225 |
|
| $ | 37 |
|
| $ | 145 |
|
| $ | 3,271 |
|
Impaired loans |
| $ | 4,506 |
|
| $ | 276 |
|
| $ | 832 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
|
| $ | 5,614 |
|
Non-impaired loans |
|
| 174,519 |
|
|
| 35,117 |
|
|
| 87,562 |
|
|
| 23,629 |
|
|
| 2,067 |
|
|
| 6,578 |
|
|
| 329,472 |
|
Total loans |
| $ | 179,025 |
|
| $ | 35,393 |
|
| $ | 88,394 |
|
| $ | 23,629 |
|
| $ | 2,067 |
|
| $ | 6,578 |
|
| $ | 335,086 |
|
F-23
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The following table presents past due and non-accrual loans, by loan category, at December 31, 2017 and 2016:
|
| 30 - 59 Days Past Due |
|
| 60 - 89 Days Past Due |
|
| 90 Days or More Past Due |
|
| Total Past Due |
|
| Non-accrual Loans |
| |||||
|
| (In thousands) |
| |||||||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
| $ | 737 |
|
| $ | — |
|
| $ | — |
|
| $ | 737 |
|
| $ | 1,975 |
|
Home equity loans and lines of credit |
|
| 96 |
|
|
| — |
|
|
| — |
|
|
| 96 |
|
|
| 276 |
|
Commercial real estate |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial and industrial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Consumer |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 833 |
|
| $ | — |
|
| $ | — |
|
| $ | 833 |
|
| $ | 2,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
| $ | 1,168 |
|
| $ | 201 |
|
| $ | — |
|
| $ | 1,369 |
|
| $ | 1,945 |
|
Home equity loans and lines of credit |
|
| 258 |
|
|
| — |
|
|
| — |
|
|
| 258 |
|
|
| 276 |
|
Commercial real estate |
|
| 400 |
|
|
| — |
|
|
| — |
|
|
| 400 |
|
|
| — |
|
Construction |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Commercial and industrial |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Consumer |
|
| 59 |
|
|
| — |
|
|
| — |
|
|
| 59 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,885 |
|
| $ | 201 |
|
| $ | - |
|
| $ | 2,086 |
|
| $ | 2,221 |
|
At December 31, 2017 and 2016, there were no loans past due 90 days or more and still accruing interest.
F-24
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Further information pertaining to impaired loans, which includes both non-accrual loans and troubled debt restructurings, follows:
|
| Recorded Investment |
|
| Unpaid Principal Balance |
|
| Related Allowance |
| |||
|
| (In thousands) |
| |||||||||
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans without a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
| $ | 2,685 |
|
| $ | 2,641 |
|
| $ | — |
|
Home equity loans and lines of credit |
|
| 247 |
|
|
| 247 |
|
|
| — |
|
Commercial real estate |
|
| 257 |
|
|
| 257 |
|
|
| — |
|
Total |
|
| 3,189 |
|
|
| 3,145 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
|
| 2,584 |
|
|
| 2,564 |
|
|
| 160 |
|
Home equity loans and lines of credit |
|
| 29 |
|
|
| 29 |
|
|
| 1 |
|
Commercial real estate |
|
| 95 |
|
|
| 95 |
|
|
| 1 |
|
Total |
|
| 2,708 |
|
|
| 2,688 |
|
|
| 162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
| $ | 5,897 |
|
| $ | 5,833 |
|
| $ | 162 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans without a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
| $ | 1,922 |
|
| $ | 1,877 |
|
| $ | — |
|
Home equity loans and lines of credit |
|
| 246 |
|
|
| 246 |
|
|
| — |
|
Commercial real estate |
|
| 270 |
|
|
| 270 |
|
|
| — |
|
Total |
|
| 2,438 |
|
|
| 2,393 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans with a valuation allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
|
| 2,648 |
|
|
| 2,629 |
|
|
| 190 |
|
Home equity loans and lines of credit |
|
| 31 |
|
|
| 30 |
|
|
| 2 |
|
Commercial real estate |
|
| 562 |
|
|
| 562 |
|
|
| 8 |
|
Total |
|
| 3,241 |
|
|
| 3,221 |
|
|
| 200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impaired loans |
| $ | 5,679 |
|
| $ | 5,614 |
|
| $ | 200 |
|
F-25
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Information related to the average balances of impaired loans and the interest income recognized on such loans, follows:
|
| Average |
|
| Interest |
|
| Cash Basis |
| |||
|
| Recorded |
|
| Income |
|
| Interest |
| |||
|
| Investment |
|
| Recognized |
|
| Recognized |
| |||
|
| (In thousands) |
| |||||||||
Year Ended December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
| $ | 4,956 |
|
| $ | 195 |
|
| $ | 82 |
|
Home equity loans and lines of credit |
|
| 276 |
|
|
| 1 |
|
|
| 1 |
|
Commercial real estate |
|
| 655 |
|
|
| 36 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 5,887 |
|
| $ | 232 |
|
| $ | 83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
Residential one-to-four family |
| $ | 4,738 |
|
| $ | 158 |
|
| $ | 56 |
|
Home equity loans and lines of credit |
|
| 260 |
|
|
| 1 |
|
|
| 1 |
|
Commercial real estate |
|
| 1,122 |
|
|
| 51 |
|
|
| — |
|
Commercial and industrial |
|
| 5 |
|
|
| 2 |
|
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 6,125 |
|
| $ | 212 |
|
| $ | 58 |
|
No additional funds are committed to be advanced in connection with impaired loans.
Troubled Debt Restructurings
The Company periodically grants concessions to borrowers experiencing financial difficulties. The Company’s troubled debt restructurings consist primarily of interest rate concessions for periods of three months to thirty years for residential real estate loans, and for periods up to one year for commercial real estate loans.
At December 31, 2017, the Company had 13 residential real estate loans and 2 commercial real estate loans aggregating $3,230,000 and $153,000, respectively, which were subject to troubled debt restructuring agreements.
At December 31, 2016, the Company had 13 residential real estate loans and 3 commercial real estate loans aggregating $2,809,000 and $624,000, respectively, which were subject to troubled debt restructuring agreements.
As of December 31, 2017 and 2016, all troubled debt restructurings were performing in accordance with the terms of the modified loan agreements.
For the years ended December 31, 2017 and 2016 the Company did not enter into any loan modifications meeting the criteria of a troubled debt restructuring.
Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required is recorded as part of the allowance for loan losses. At December 31, 2017 and 2016 allowances of $162,000 and $200,000, respectively, related to troubled debt restructurings.
During the years ended December 31, 2017 and 2016, there were no troubled debt restructurings that defaulted (over 30 days past due) within twelve months of the restructure date.
F-26
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The Company utilizes an eight-grade internal loan rating system for commercial real estate, construction and commercial loans, as follows:
Loans rated 1 – 3A are considered “pass” rated loans with low to average risk.
Loans rated 4 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 5 are considered “substandard” and are 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 6 are considered “doubtful” and 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 7 are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. Annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.
The following table presents the Company’s loans by risk rating at December 31, 2017 and 2016:
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||||||||||
|
| Commercial Real Estate |
|
| Construction |
|
| Commercial and Industrial |
|
| Commercial Real Estate |
|
| Construction |
|
| Commercial and Industrial |
| ||||||
|
| (In thousands) |
| |||||||||||||||||||||
Loans rated 1 - 3A |
| $ | 101,556 |
|
| $ | 25,357 |
|
| $ | 21,766 |
|
| $ | 88,186 |
|
| $ | 23,286 |
|
| $ | 2,067 |
|
Loans rated 4 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 343 |
|
|
| — |
|
Loans rated 5 |
|
| 199 |
|
|
| — |
|
|
| — |
|
|
| 208 |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 101,755 |
|
| $ | 25,357 |
|
| $ | 21,766 |
|
| $ | 88,394 |
|
| $ | 23,629 |
|
| $ | 2,067 |
|
Residential mortgages, home equity loans and lines of credit, and consumer loans are monitored for credit quality based primarily on their payment status. When one of these loans becomes more than 90 days delinquent it is assigned an internal loan rating. At December 31, 2017, $712,000 in residential mortgages were rated as substandard and $2,512,000 in residential mortgages and $247,000 in home equity loans were rated as special mention. At December 31, 2016, $890,000 in residential mortgages were rated as substandard and $1,471,000 in residential mortgages and $400,000 in home equity loans were rated as special mention.
6. | LOAN SERVICING |
Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balances of mortgage loans serviced for others were $771,407,000 and $1,046,551,000 at December 31, 2017 and 2016, respectively.
F-27
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The following table summarizes the activity in the Company’s mortgage servicing rights for the indicated periods:
|
| For the Year Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Mortgage servicing rights: |
| (In thousands) |
| |||||
Balance at beginning of year |
| $ | 8,486 |
|
| $ | 2,601 |
|
Additions through originations |
|
| 2,310 |
|
|
| 2,348 |
|
Acquisition of First Eastern |
|
| — |
|
|
| 6,216 |
|
Amortization |
|
| (1,071 | ) |
|
| (1,064 | ) |
Sales |
|
| (3,238 | ) |
|
| (1,191 | ) |
Balance at end of year |
| $ | 6,487 |
|
| $ | 8,910 |
|
Valuation allowance: |
|
|
|
|
|
|
|
|
Balance at beginning of year |
| $ | 424 |
|
| $ | 34 |
|
Provision (credit) |
|
| (334 | ) |
|
| 390 |
|
Balance at end of year |
| $ | 90 |
|
| $ | 424 |
|
Mortgage servicing rights, amortized cost |
| $ | 6,397 |
|
| $ | 8,486 |
|
Mortgage servicing rights, fair value |
| $ | 6,485 |
|
| $ | 8,520 |
|
At December 31, 2017 and 2016, the fair value of servicing rights was determined using a discount rate of 13% and 14%, respectively, and projected annual prepayment speeds ranging from 6% to 24% for 2017 and 6% to 39% for 2016.
Contractually specified servicing fees for the years ended December 31, 2017 and 2016 amounted to $2,434,000 and $1,884,000, respectively, and are included in mortgage servicing fees, net.
7. | PREMISES AND EQUIPMENT |
A summary of the cost and accumulated depreciation and amortization of premises and equipment is as follows:
|
| December 31, |
|
| Estimated | |||||
|
| 2017 |
|
| 2016 |
|
| Useful Life | ||
|
| (In thousands) |
|
| (In years) | |||||
Land and improvements |
| $ | 2,525 |
|
| $ | 2,676 |
|
|
|
Buildings and improvements |
|
| 4,457 |
|
|
| 4,176 |
|
| 5 to 50 |
Leasehold improvements |
|
| 1,503 |
|
|
| 393 |
|
| 3 to 5 |
Equipment |
|
| 4,765 |
|
|
| 3,722 |
|
| 3 to 10 |
Construction-in-progress |
|
| 101 |
|
|
| 611 |
|
|
|
|
|
| 13,351 |
|
|
| 11,578 |
|
|
|
Less accumulated depreciation and amortization |
|
| (4,681 | ) |
|
| (5,298 | ) |
|
|
|
| $ | 8,670 |
|
| $ | 6,280 |
|
|
|
Total depreciation and amortization expense for the years ended December 31, 2017 and 2016 amounted to $605,000 and $588,000, respectively.
During 2017, the Company amended the lease for its Andover loan operations center relocating offices within an office complex. As part of this lease amendment, the landlord funded the cost of leasehold improvements which amounted to $646,000. These costs have been capitalized as part of premises and equipment and a tenant improvement allowance has been recorded as part of other liabilities in the accompanying consolidated balance sheet. Both the leasehold improvements and tenant improvement allowance are being amortized over the initial lease term of approximately five years.
During 2017, the Company relocated one of its branch offices and entered into a lease for a new location to which it will transfer the deposits of an existing branch office in 2018. The premises and equipment of these branches have been reclassified to assets held for sale at the lower of their net book value or fair value and amounted to $828,000 at December 31, 2017. Included in other non-interest income for the year ended December 31, 2017 is an impairment charge of $225,000 related to one of these branches.
F-28
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
A summary of deposit balances, by type, is as follows:
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Demand deposits |
| $ | 62,130 |
|
| $ | 59,646 |
|
NOW accounts |
|
| 44,988 |
|
|
| 49,112 |
|
Money market deposits |
|
| 63,774 |
|
|
| 50,956 |
|
Regular and other savings |
|
| 102,528 |
|
|
| 101,575 |
|
Total non-certificate accounts |
|
| 273,420 |
|
|
| 261,289 |
|
Term certificates less than $250,000 |
|
| 80,538 |
|
|
| 83,410 |
|
Term certificates of $250,000 or more |
|
| 12,878 |
|
|
| 6,480 |
|
Total certificate accounts |
|
| 93,416 |
|
|
| 89,890 |
|
|
| $ | 366,836 |
|
| $ | 351,179 |
|
Included in term certificates less than $250,000 at December 31, 2016 were brokered deposits of $249,000. Included in money market deposits at December 31, 2017 were brokered deposits of $7.1 million.
A summary of term certificates by maturity is as follows:
|
| December 31, 2017 |
|
| December 31, 2016 |
| ||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
|
| Weighted |
| ||
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| ||
Maturing during: |
| Amount |
|
| Rate |
|
| Amount |
|
| Rate |
| ||||
|
| (Dollars in thousands) |
| |||||||||||||
2017 |
| $ | — |
|
|
| — | % |
| $ | 55,582 |
|
|
| 0.83 | % |
2018 |
|
| 49,550 |
|
|
| 0.84 |
|
|
| 15,257 |
|
|
| 1.01 |
|
2019 |
|
| 22,470 |
|
|
| 1.20 |
|
|
| 8,703 |
|
|
| 1.21 |
|
2020 |
|
| 8,754 |
|
|
| 1.44 |
|
|
| 5,856 |
|
|
| 1.62 |
|
2021 |
|
| 4,873 |
|
|
| 1.57 |
|
|
| 4,492 |
|
|
| 1.52 |
|
2022 |
|
| 7,769 |
|
|
| 1.65 |
|
|
| — |
|
|
| — |
|
|
| $ | 93,416 |
|
|
| 1.09 | % |
| $ | 89,890 |
|
|
| 0.98 | % |
9. | BORROWINGS |
A summary of borrowings from the FHLBB at December 31, 2017 and 2016 is as follows:
|
| 2017 |
|
| 2016 |
| ||||||||||
|
|
|
|
|
| Weighted |
|
|
|
|
|
| Weighted |
| ||
|
|
|
|
|
| Average |
|
|
|
|
|
| Average |
| ||
|
| Amount |
|
| Rate |
|
| Amount |
|
| Rate |
| ||||
|
| (Dollars in thousands) |
| |||||||||||||
Fixed-rate advances maturing: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017* |
| $ | — |
|
|
| — | % |
| $ | 26,932 |
|
|
| 0.81 | % |
2018* |
|
| 69,337 |
|
|
| 1.55 |
|
|
| 4,858 |
|
|
| 1.07 |
|
2019 |
|
| 1,500 |
|
|
| 1.00 |
|
|
| 1,500 |
|
|
| 1.00 |
|
2020* |
|
| 3,129 |
|
|
| 1.52 |
|
|
| 3,359 |
|
|
| 1.55 |
|
2021* |
|
| 1,988 |
|
|
| 1.34 |
|
|
| 2,018 |
|
|
| 1.35 |
|
|
| $ | 75,954 |
|
|
| 1.54 | % |
| $ | 38,667 |
|
|
| 0.94 | % |
* | Includes amortizing advances which require monthly principal and interest payments. |
F-29
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Included in FHLBB borrowings at December 31, 2017 and 2016 are overnight advances of $64.7 million and $19.9 million, respectively. Selected information for such short-term borrowings for the years presented is as follows (in 000’s):
|
| 2017 |
|
| 2016 |
| ||
Average daily balance |
| $ | 34,656 |
|
| $ | 15,497 |
|
Maximum outstanding at any month end |
|
| 64,739 |
|
|
| 19,898 |
|
Advances from the FHLBB are secured by a blanket pledge agreement on the Bank’s qualified collateral, defined principally as 75% of the carrying value of pledged first mortgage loans on owner-occupied residential property and 65% on pledged commercial real estate loans. Available borrowing capacity at December 31, 2017 was $67,564,000. At December 31, 2017, the Bank was in compliance with the FHLBB collateral requirements.
The Bank also has a $4,195,000 available line of credit with the FHLBB at an interest rate that adjusts daily. Borrowings under the line are limited to 2% of the Bank’s total assets. At December 31, 2017 and 2016, there were no advances outstanding.
The Bank also has a $3,500,000 available line of credit with a correspondent bank. No advances were outstanding at December 31, 2017 and 2016.
10. | INCOME TAXES |
Allocation of federal and state income taxes between current and deferred portions is as follows (in thousands):
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Current tax expense (benefit): |
|
|
|
|
|
|
|
|
Federal |
| $ | (462 | ) |
| $ | — |
|
State |
|
| 19 |
|
|
| 13 |
|
Total current tax expense (benefit) |
|
| (443 | ) |
|
| 13 |
|
Deferred tax expense (benefit): |
|
|
|
|
|
|
|
|
Federal |
|
| (518 | ) |
|
| (550 | ) |
Effect of change in federal tax rate |
|
| 1,627 |
|
|
| — |
|
State |
|
| (23 | ) |
|
| 23 |
|
|
|
| 1,086 |
|
|
| (527 | ) |
Change in valuation allowance |
|
| 541 |
|
|
| 527 |
|
Effect of change in federal tax rate - valuation allowance |
|
| (1,627 | ) |
|
| — |
|
Total deferred tax expense |
|
| — |
|
|
| — |
|
Total tax expense (benefit) |
| $ | (443 | ) |
| $ | 13 |
|
F-30
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The reasons for the differences between the statutory federal income tax expense (benefit) and the actual tax expense (benefit) are summarized as follows (in thousands):
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Statutory federal tax at 34% |
| $ | (874 | ) |
| $ | 162 |
|
Increase (decrease) resulting from: |
|
|
|
|
|
|
|
|
State taxes, net of federal tax effect |
|
| (3 | ) |
|
| 24 |
|
Bank-owned life insurance |
|
| (52 | ) |
|
| (81 | ) |
Tax exempt income |
|
| (118 | ) |
|
| (125 | ) |
Dividends received deduction |
|
| (5 | ) |
|
| (4 | ) |
Change in valuation allowance |
|
| 541 |
|
|
| 527 |
|
Change in AOCI deferred effect |
|
| (36 | ) |
|
| (525 | ) |
Effect of change in federal tax rate |
|
| 1,627 |
|
|
| — |
|
Effect of change in federal tax rate-valuation allowance |
|
| (1,627 | ) |
|
| — |
|
Other, net |
|
| 104 |
|
|
| 35 |
|
Total tax expense (benefit) |
| $ | (443 | ) |
| $ | 13 |
|
The federal tax benefit in 2017 results from repeal of the alternative minimum tax (“AMT”) under the Tax Cuts and Jobs Act of 2017 (the “Act”) which was signed into law on December 22, 2017. The Act also provides that existing AMT credit carryforwards be refunded over the next four years.
The Act includes a number of changes in existing tax law impacting businesses including, among other things, a permanent reduction in the corporate income tax rate from 35% to 21% effective on January 1, 2018 and repeal of the AMT. As a result of these changes, the Company revalued its net deferred tax asset as of December 22, 2017 resulting in a reduction in the value of the net deferred tax asset of $1,627,000 which was offset by a corresponding decrease in the valuation allowance.
The components of the net deferred tax asset are as follows (in thousands):
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Deferred tax assets: |
|
|
|
|
|
|
|
|
Federal |
| $ | 4,436 |
|
| $ | 6,332 |
|
State |
|
| 1,008 |
|
|
| 875 |
|
|
|
| 5,444 |
|
|
| 7,207 |
|
Valuation allowance |
|
| (3,326 | ) |
|
| (4,652 | ) |
|
|
| 2,118 |
|
|
| 2,555 |
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Federal |
|
| (1,447 | ) |
|
| (1,982 | ) |
State |
|
| (671 | ) |
|
| (573 | ) |
|
|
| (2,118 | ) |
|
| (2,555 | ) |
Net deferred tax asset |
| $ | — |
|
| $ | — |
|
F-31
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The tax effects of items giving rise to deferred tax assets (liabilities) are as follows (in thousands):
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Employee benefit plans |
| $ | 951 |
|
| $ | 1,211 |
|
Allowance for loan losses |
|
| 1,050 |
|
|
| 1,306 |
|
Funded status of post-retirement benefits |
|
| 52 |
|
|
| 36 |
|
Securities available for sale |
|
| 137 |
|
|
| 237 |
|
Alternative minimum tax credit |
|
| — |
|
|
| 462 |
|
Depreciation and amortization |
|
| 193 |
|
|
| 179 |
|
Net deferred loan origination costs |
|
| (321 | ) |
|
| (445 | ) |
Mortgage servicing rights |
|
| (1,624 | ) |
|
| (1,738 | ) |
Net operating loss carryforward |
|
| 2,171 |
|
|
| 2,682 |
|
Charitable contribution carryforward |
|
| 702 |
|
|
| 988 |
|
Derivatives |
|
| (98 | ) |
|
| (254 | ) |
Stock-based compensation |
|
| 48 |
|
|
| — |
|
Other, net |
|
| 65 |
|
|
| (12 | ) |
|
|
| 3,326 |
|
|
| 4,652 |
|
Valuation allowance on deferred tax assets |
|
| (3,326 | ) |
|
| (4,652 | ) |
Net deferred tax asset |
| $ | — |
|
| $ | — |
|
At December 31, 2017, the Company has a federal net operating loss carryforward of $10,337,000, of which $4,745,000 expires on December 31, 2033, $406,000 expires on December 31, 2034, $1,542,000 expires on December 31, 2035, $501,000 expires on December 31, 2036 and $3,143,000 expires on December 31, 2037.
At December 31, 2017, the Company has a charitable contribution carryforward of $2,488,000 of which all but $174,000 expires on December 31, 2021.
Since 2014, the Company has maintained a valuation allowance for all of its deferred tax assets based on a determination that it was more likely than not that such assets would not be realized. This determination was based on the Company’s net operating loss (“NOL”) carryforward position, its current period operating results exclusive of non-recurring items and its expectations for the upcoming year. In performing subsequent assessments, management has concluded that no significant changes in the key factors affecting the realizability of the deferred tax asset has occurred and that a valuation allowance for all deferred tax assets should be maintained.
The federal income tax reserve for loan losses at the Company’s base year amounted to $2,033,000. If any portion of the reserve is used for purposes other than to absorb the losses for which it was established, approximately 150% of the amount actually used (limited to the amount of the reserve) would be subject to taxation in the fiscal year in which used. As the Company intends to use the reserve only to absorb loan losses, a deferred income tax liability of $571,000 has not been provided.
The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2014 through 2017. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2014 are open.
11. | ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
Derivative Loan Commitments
Mortgage loan interest rate lock commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.
F-32
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to an increase in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of derivative loan commitments was $24,222,000 and $32,904,000 at December 31, 2017 and 2016, respectively. The fair value of such commitments at December 31, 2017 and 2016 was an asset of $363,000 and $617,000, respectively, and is included in other assets in the consolidated balance sheets. During the years ended December 31, 2017 and 2016, reductions in aggregate fair value of $254,000 and $81,000, respectively, related to interest rate lock commitments were recognized and included in the net gain on sales of mortgage loans in the accompanying consolidated statements of operations.
Forward Loan Sale Commitments
The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.
With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.
With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower).
The Company expects that these forward loan sale commitments will experience changes in fair value that serve to offset the change in fair value of derivative loan commitments the degree to which depends on the notional amount of such sale commitments. The notional amount of undesignated forward loan sale commitments was $29,613,000 and $29,481,000 at December 31, 2017 and 2016, respectively and liabilities of $19,000 and $47,000 at December 31, 2017 and 2016, respectively, are included in other liabilities in the consolidated balance sheets. The fair value of such commitments was an asset of $4,000 and $65,000 at December 31, 2017 and 2016, respectively, and are included in other assets in the consolidated balance sheets. During the years ended December 31, 2017 and 2016, an increase (reduction) in aggregate fair value of $(66,000) and $103,000, respectively, related to forward loan sale commitments was recognized and is included in net gain on sales of mortgage loans in the accompanying consolidated statements of operations.
12. | MINIMUM REGULATORY CAPITAL REQUIREMENTS |
Banks and bank holding companies are subject to various regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective actions regulations, involve qualitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgement by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel Committee on Banking Supervision’s capital guidelines for U.S. banks (Basel III rules) became effective for the Company on January 1, 2015. Under BASEL III, community banking 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 bonuses. The capital conservation buffer is being phased in over three years with an initial phase-in of 0.625% (1.25% at December 31, 2017).
Quantitative measures established by regulation to ensure capital adequacy require the Bancorp and Bank to maintain minimum amounts and ratios (set forth in the following tables) of total and Tier 1 capital to risk weighted assets Tier 1 capital to average assets and common equity Tier 1 capital (all as defined). Management believes, as of December 31, 2017 and 2016, that Randolph Bancorp, Inc. and Envision Bank met all capital adequacy requirements to which they are subject.
As of December 31, 2017, the most recent notification from the FDIC categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category.
F-33
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Bancorp Inc.’s and the Bank’s actual and minimum capital amounts and ratios are presented in the following tables.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Minimum | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| To Be Well | ||
|
|
|
|
|
|
|
|
|
| For Minimum |
|
| Capitalized Under | |||||||
|
|
|
|
|
|
|
|
|
| Capital |
|
| Prompt Corrective | |||||||
|
| Actual |
|
| Adequacy Purposes |
|
| Action Provisions | ||||||||||||
Bancorp |
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Amount |
| Ratio | ||||
|
| (Dollars in thousands) | ||||||||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
| $ | 86,318 |
|
|
| 23.9 | % |
| $ | 28,885 |
|
|
| 8.0 | % |
| N/A |
| N/A |
Tier 1 capital (to risk weighted assets) |
|
| 82,581 |
|
|
| 22.9 |
|
|
| 21,664 |
|
|
| 6.0 |
|
| N/A |
| N/A |
Common equity Tier 1 capital (to risk weighted assets) |
|
| 82,581 |
|
|
| 22.9 |
|
|
| 16,248 |
|
|
| 4.5 |
|
| N/A |
| N/A |
Tier 1 capital (to average assets) |
|
| 82,581 |
|
|
| 16.0 |
|
|
| 20,663 |
|
|
| 4.0 |
|
| N/A |
| N/A |
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
|
| 84,565 |
|
|
| 28.5 |
|
|
| 23,762 |
|
|
| 8.0 |
|
| N/A |
| N/A |
Tier 1 capital (to risk weighted assets) |
|
| 81,294 |
|
|
| 27.4 |
|
|
| 17,822 |
|
|
| 6.0 |
|
| N/A |
| N/A |
Common equity Tier 1 capital (to risk weighted assets) |
|
| 81,294 |
|
|
| 27.4 |
|
|
| 13,366 |
|
|
| 4.5 |
|
| N/A |
| N/A |
Tier 1 capital (to average assets) |
|
| 81,294 |
|
|
| 16.9 |
|
|
| 19,277 |
|
|
| 4.0 |
|
| N/A |
| N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Minimum |
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| To Be Well |
| |||||
|
|
|
|
|
|
|
|
|
| For Minimum |
|
| Capitalized Under |
| ||||||||||
|
|
|
|
|
|
|
|
|
| Capital |
|
| Prompt Corrective |
| ||||||||||
|
| Actual |
|
| Adequacy Purposes |
|
| Action Provisions |
| |||||||||||||||
Bank |
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
|
| Amount |
|
| Ratio |
| ||||||
|
| (Dollars in thousands) |
| |||||||||||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
| $ | 73,612 |
|
|
| 20.4 | % |
| $ | 28,896 |
|
|
| 8.0 | % |
| $ | 36,120 |
|
|
| 10.0 | % |
Tier 1 capital (to risk weighted assets) |
|
| 69,875 |
|
|
| 19.4 |
|
|
| 21,667 |
|
|
| 6.0 |
|
|
| 28,889 |
|
|
| 8.0 |
|
Common equity Tier 1 capital (to risk weighted assets) |
|
| 69,875 |
|
|
| 19.4 |
|
|
| 16,250 |
|
|
| 4.5 |
|
|
| 23,472 |
|
|
| 6.5 |
|
Tier 1 capital (to average assets) |
|
| 69,875 |
|
|
| 12.4 |
|
|
| 22,564 |
|
|
| 4.0 |
|
|
| 28,205 |
|
|
| 5.0 |
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets) |
|
| 73,991 |
|
| 24.9 |
|
|
| 23,763 |
|
|
| 8.0 |
|
|
| 29,703 |
|
|
| 10.0 |
| |
Tier 1 capital (to risk weighted assets) |
|
| 70,720 |
|
|
| 23.8 |
|
|
| 17,822 |
|
|
| 6.0 |
|
|
| 23,762 |
|
|
| 8.0 |
|
Common equity Tier 1 capital (to risk weighted assets) |
|
| 70,720 |
|
|
| 23.8 |
|
|
| 13,366 |
|
|
| 4.5 |
|
|
| 19,307 |
|
|
| 6.5 |
|
Tier 1 capital (to average assets) |
|
| 70,720 |
|
|
| 14.7 |
|
|
| 19,277 |
|
|
| 4.0 |
|
|
| 24,096 |
|
|
| 5.0 |
|
13. | POST-RETIREMENT PLANS |
Supplemental retirement agreements
The Company maintains supplemental retirement agreements with certain officers and directors (none of whom currently provide services to the Company) that provide for supplemental benefits commencing with retirement. The present value of future benefits payable is accrued over the terms of employment or anticipated term of each participating director’s position, as applicable, taking into consideration the vesting provisions in the agreements.
At December 31, 2017 and 2016, the accrued benefits related to the agreements amounted to $607,000 and $654,000, respectively. Total expense, included in other non-interest expenses, related to these supplemental agreements amounted to $64,000 and $54,000 for the years ended December 31, 2017 and 2016, respectively.
F-34
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The Company has a master supplemental retirement plan (“Plan”) which covers certain officers and directors of the Company. In 2017 and 2016, the only active participants in the Plan were directors. Information pertaining to activity in the Plan follows:
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
| $ | — |
|
| $ | — |
|
Employer contributions |
|
| 201 |
|
|
| 371 |
|
Benefits paid |
|
| (201 | ) |
|
| (371 | ) |
Fair value of plan assets at end of year |
|
| — |
|
|
| — |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
| 1,836 |
|
|
| 2,105 |
|
Service cost |
|
| 10 |
|
|
| 12 |
|
Interest cost |
|
| 53 |
|
|
| 65 |
|
Actuarial loss |
|
| 26 |
|
|
| 25 |
|
Benefits paid |
|
| (201 | ) |
|
| (371 | ) |
Benefit obligation at end of year |
|
| 1,724 |
|
|
| 1,836 |
|
Unfunded status and accrued supplemental pension cost at year end |
| $ | (1,724 | ) |
| $ | (1,836 | ) |
Accumulated benefit obligation at year end |
| $ | 1,724 |
|
| $ | 1,836 |
|
The assumptions used to determine the benefit obligation are as follows:
|
| December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Discount rate |
|
| 2.90 | % |
|
| 3.05 | % |
Annual inflation factor |
|
| 1.00 | % |
|
| 1.00 | % |
Net periodic benefit cost, included in other non-interest expenses, attributable to the Plan for the years ended December 31, 2017 and 2016, consists of the following:
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Service cost |
| $ | 10 |
|
| $ | 12 |
|
Interest cost |
|
| 53 |
|
|
| 65 |
|
Amortization of net actuarial loss |
|
| 38 |
|
|
| 30 |
|
Amortization of prior service credit |
|
| (89 | ) |
|
| (25 | ) |
Settlement cost |
|
| — |
|
|
| 59 |
|
|
| $ | 12 |
|
| $ | 141 |
|
The following assumptions were used to determine the net periodic benefit cost for the years ended December 31, 2017 and 2016:
|
| 2017 |
|
| 2016 |
| ||
Discount rate |
|
| 3.05 | % |
|
| 3.35 | % |
Annual inflation factor |
|
| 1.00 | % |
|
| 1.00 | % |
The Company expects to contribute $201,000 to the Plan for the year ending December 31, 2018.
F-35
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Estimated future benefit payments, which reflect expected future services, as appropriate, are as follows:
Years Ending |
|
|
|
|
December 31, |
| Amount |
| |
|
| (In thousands) |
| |
2018 |
| $ | 201 |
|
2019 |
|
| 201 |
|
2020 |
|
| 201 |
|
2021 |
|
| 201 |
|
2022 |
|
| 213 |
|
2023-2027 |
|
| 898 |
|
In 2016, a Company director who was a participant in the supplemental retirement plan passed away. Included in other non-interest income and other non-interest expense is $486,000 and $59,000, respectively, from settlement of the underlying life insurance policies and payment of benefits under the supplemental retirement plan.
Endorsement split-dollar life insurance arrangements
The Company is the sole owner of life insurance policies pertaining to certain of the Company’s directors and executives. The Company has entered into agreements with these directors and executives whereby the Company will pay to the directors’ and executives’ estates or beneficiaries a portion of the death benefit that the Company will receive as beneficiary of such policies. Expense associated with this post-retirement benefit for the years ended December 31, 2017 and 2016 amounted to $22,000 and $26,000, respectively. At December 31, 2017 and 2016, the accrued benefits related to the split-dollar arrangements amounted to $419,000 and $397,000, respectively.
401(k) Plan
The Company maintains a 401(k) Plan whereby each employee reaching the age of 21 automatically becomes a participant in the plan. Employees may contribute up to 15% of their compensation subject to certain limits based on federal tax laws. All employees who have worked for one year or 1,000 hours are eligible for an automatic employer contribution of 3% of employees’ compensation, which includes no vesting period. The Company also matches 50% of the first 2% of an eligible employee’s contributions, allowing for a total employer contribution of 4% of employees’ compensation. Matching contributions vest over a four year service period. In addition, a profit sharing provision allows for an additional discretionary contribution by the Company upon approval of the Board of Directors. For the years ended December 31, 2017 and 2016, expenses attributable to the plan amounted to $583,000 and $479,000, respectively.
14. | STOCK-BASED COMPENSATION |
Under the Randolph Bancorp, Inc. 2017 Stock Option and Incentive Plan (the “Equity Plan”), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan with 586,872 shares reserved for options. The exercise price of each option equals the market price of the Company’s stock on the date of the grant and the maximum term of each options is 10 years. The total number of shares reserved for restricted stock is 237,749. Options and awards generally vest ratably over five years. The fair value of shares awarded is based on the market price at the date of grant.
Stock Options
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the following assumptions:
| • | Volatility is based on peer group volatility because the Company does not have a sufficient trading history. |
| • | Expected life represents the period of time that the option is expected to be outstanding, taking into account the contractual term, and the vesting period. |
| • | Expected dividend yield is based on the Company's history and expectation of dividend payouts. |
F-36
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
| • | The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option. |
In 2017, the Company made the following grants of options to purchase shares of common stock and used the following assumptions in measuring the fair value of such grants:
Date of grant |
| October 12, 2017 |
| |
Options granted |
|
| 340,387 |
|
Vesting period (years) |
| 3-5 |
| |
Expiration period (years) |
|
| 10 |
|
Expected volatility |
| 23.59% - 29.87% |
| |
Expected life (years) |
| 3.0 - 6.5 |
| |
Expected dividend yield |
|
| — |
|
Risk free interest rate |
| 1.66% - 2.06% |
| |
Option fair value |
| $2.71 - $5.05 |
|
A summary of the status of the Company's stock option grants for the year ended December 31, 2017 is presented in the table below:
Options |
| Stock Option Grants |
|
| Weighted Average Exercise Price |
|
| Weighted Average Remaining Contractual Term |
|
| Aggregate Intrinsic Value |
| ||||
Balance at January 1, 2017 |
|
| — |
|
| $ | — |
|
|
| — |
|
| $ | — |
|
Granted |
|
| 340,387 |
|
|
| 14.66 |
|
|
| 9.78 |
|
|
| — |
|
Forfeited |
|
| (24,378 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
Balance at December 31, 2017 (all non-vested) |
|
| 316,009 |
|
| $ | 14.66 |
|
|
| 9.78 |
|
| $ | 219,374 |
|
Exercisable at December 31, 2017 |
|
| — |
|
| $ | — |
|
|
| — |
|
|
| — |
|
Unrecognized compensation cost |
| $ | 1,338,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average remaining recognition period (years) |
|
| 4.78 |
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017, stock-based compensation expense applicable to the stock options was $65,000. There was no stock-based compensation expense for the year ended December 31, 2016.
Restricted Stock
Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the plan. The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Restricted stock awarded in 2017 was at no cost to the awardee.
The following table presents the activity in restricted stock awards under the Equity Plan for the year ended December 31, 2017:
|
| Restricted Stock Awards |
|
| Weighted Average Grant Price |
| ||
Restricted stock awards at January 1, 2017 |
|
| — |
|
| $ | — |
|
Granted |
|
| 192,491 |
|
|
| 14.66 |
|
Forfeited |
|
| (16,252 | ) |
|
| 14.66 |
|
Restricted stock awards at December 31, 2017 (all non-vested) |
|
| 176,239 |
|
| $ | 14.66 |
|
Unrecognized compensation cost |
| $ | 2,464,000 |
|
|
|
|
|
Weighted average remaining recognition period (years) |
|
| 4.61 |
|
|
|
|
|
F-37
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Total expense for the restricted stock awards was $120,000 for the year ended December 31, 2017. There was no expense related to restricted stock awards for the year ended December 31, 2016.
15. | EMPLOYEE STOCK OWNERSHIP PLAN |
The Company maintains an Employee Stock Ownership Plan (“ESOP”), which is a tax-qualified retirement plan providing eligible employees the opportunity to own Bancorp stock. Bancorp granted a loan to the ESOP for the purchase of 469,498 shares of its common stock at $10.00 per share. The loan is payable annually over 25 years with interest at the prime rate to be reset each January 1st. The interest rate in effect for the period July 1, 2016 through December 31, 2016 was 3.50% and for the year ended December 31, 2017 was 3.75%. The loan is secured by the shares which have not yet been allocated to participants. Loan payments are funded by cash contributions from the Bank. Such contributions are allocated to eligible participants based on their compensation, subject to federal tax limits. Shares are committed to be released on a monthly basis and allocated as of December 31st of each year. The number of shares to be allocated annually is 18,780 through the year 2040. For the years ended December 31, 2017 and 2016, the Company recognized compensation expense for the ESOP of $286,000 and $257,000, respectively. The fair value of the 431,938 unallocated ESOP shares at December 31, 2017 was $6,630,000.
16. | SHARE REPURCHASE PROGRAM |
In September 2017, the Company’s Board of Directors adopted a share repurchase program under which the Company may repurchase up to 10%, or 586,854 shares of its then outstanding common shares. Repurchases under the program may be made in open market or in privately negotiated transactions and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. Any repurchased shares will be held by the Company as authorized but unissued shares. The repurchase program may be suspended or terminated at any time without prior notice, and it will expire on September 14, 2018. As of December 31, 2017, the Company had repurchased 10,000 shares at a cost of $149,000 in connection with this program.
17. | COMMITMENTS AND CONTINGENCIES |
In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements.
Lease commitments
Pursuant to the terms of non-cancelable lease agreements in effect at December 31, 2017, future minimum rent commitments are as follows:
Years Ending |
|
|
|
|
December 31, |
| Amount |
| |
|
| (In thousands) |
| |
2018 |
| $ | 867 |
|
2019 |
|
| 858 |
|
2020 |
|
| 822 |
|
2021 |
|
| 658 |
|
2022 |
|
| 526 |
|
Thereafter |
|
| 95 |
|
|
| $ | 3,826 |
|
The leases contain options to extend for periods of three to ten years. The cost of unexercised options periods is not included above. Total rent expense for the years ended December 31, 2017 and 2016 amounted to $883,000 and $568,000, respectively.
F-38
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
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. These instruments involve, to varying degrees, elements of market, credit and interest rate risk which are not recognized in the consolidated financial statements.
The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
At December 31, 2017 and 2016, the following financial instruments were outstanding whose contract amounts represent credit risk:
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Commitments to originate loans |
| $ | 35,549 |
|
| $ | 35,682 |
|
Unused lines and letters of credit |
|
| 39,968 |
|
|
| 37,045 |
|
Unadvanced funds on construction loans |
|
| 6,967 |
|
|
| 2,699 |
|
Overdraft lines of credit |
|
| 8,996 |
|
|
| 9,189 |
|
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. The commitments for lines of credit may expire without being drawn upon. Therefore, 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 majority of these financial instruments are collateralized by real estate.
Employment Arrangement and Change in Control Agreements
The Company has entered into an employment arrangement with its President and Chief Executive Officer that provides for one year of salary continuation in the event his employment is terminated without cause or he resigns for good reason, subject to his providing a release of claims and complying with a non-solicitation and non-disclosure agreement.
The Company has also entered into change in control agreements with six members of senior management which provide that if, within two years of a change of control of the Company or the Bank, the executive in involuntarily terminated other than for cause, disability or death, or voluntarily resigns for good reason, the executive will be entitled to a lump-sum payment equal to two times salary plus bonus.
Other contingencies
The Company is not currently a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, results of operations or cash flows.
18. | FAIR VALUE OF ASSETS AND LIABILITIES |
Determination of fair value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.
F-39
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
The following methods and assumptions were used by the Company in estimating fair value disclosures:
Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.
Certificates of deposit – Certificates of deposit are carried at cost. These assets are measured at fair value in level 2 based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.
Securities – All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. The securities measured at fair value in Level 1 are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.
Federal Home Loan Bank of Boston stock – It is not practical to determine the fair value of FHLBB stock due to restrictions on its transferability.
Loans held for sale – Fair values are based on commitments in effect from investors or prevailing market prices.
Loans – For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Mortgage servicing rights – Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, using various assumptions related to fees, discount rates and prepayment speeds.
Deposit liabilities – The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate term certificates are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.
FHLBB advances - The fair values of the Company’s FHLBB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
Accrued interest - The carrying amounts of accrued interest approximate fair value.
On-balance-sheet derivatives Fair values of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and, for derivative loan commitments, fair values also include the value of servicing, deferred origination fees/costs and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.
Off-balance sheet credit-related instruments - Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments are not material.
F-40
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis are summarized below. .
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
| |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Fair Value |
| ||||
|
| (In thousands) |
| |||||||||||||
December 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
| $ | — |
|
| $ | 61,043 |
|
| $ | — |
|
| $ | 61,043 |
|
Mutual fund |
|
| — |
|
|
| 533 |
|
|
| — |
|
|
| 533 |
|
Loans held for sale |
|
| — |
|
|
| 25,390 |
|
|
| — |
|
|
| 25,390 |
|
Derivative loan commitments |
|
| — |
|
|
| 363 |
|
|
| — |
|
|
| 363 |
|
Forward loan sale commitments |
|
| — |
|
|
| 4 |
|
|
| — |
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward loan sale commitments |
|
| — |
|
|
| 19 |
|
|
| — |
|
|
| 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
| $ | — |
|
| $ | 68,099 |
|
| $ | — |
|
| $ | 68,099 |
|
Mutual fund |
|
| — |
|
|
| 538 |
|
|
| — |
|
|
| 538 |
|
Loans held for sale |
|
| — |
|
|
| 30,452 |
|
|
| — |
|
|
| 30,452 |
|
Derivative loan commitments |
|
| — |
|
|
| 617 |
|
|
| — |
|
|
| 617 |
|
Forward loan sale commitments |
|
| — |
|
|
| 65 |
|
|
| — |
|
|
| 65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
Forward loan sale commitments |
|
| — |
|
|
| 47 |
|
|
| — |
|
|
| 47 |
|
There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during 2017 or 2016.
Effective July 1, 2016, the Company elected the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for its residential mortgage loans being held for sale in the secondary market. ASC 825 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Company elected the fair value option to better match changes in fair values of the loans with changes in the fair value of the forward loan sale commitments which are used to economically hedge them against changes in interest rates between the time an interest rate lock agreement is entered into with the borrower and the time the completed loan is sold. The aggregate fair value of the loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $25.4 million, $24.9 million and $467,000, respectively, at December 31, 2017. The gains on loans held for sale is reported as a component of net gains on sale of mortgage loans in the accompanying statement of operations for the year ended December 31, 2017.
F-41
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Assets measured at fair value on a non-recurring basis
The Company may also be required, from time to time, to measure certain other assets on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets as of December 31, 2017 and 2016. The gains and losses represent the amounts recorded during 2017 and 2016 on the assets held at year-end. There are no liabilities measured at fair value on a non-recurring basis.
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| |
|
| December 31, 2017 |
|
| December 31, 2017 |
| ||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total Gains (Losses) |
| ||||
|
| (In thousands) |
| |||||||||||||
Collateral dependent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired loans |
| $ | — |
|
| $ | — |
|
| $ | 1,630 |
|
| $ | — |
|
Mortgage servicing rights |
|
| — |
|
|
| 6,397 |
|
|
| — |
|
|
| 334 |
|
Assets held for sale |
|
| — |
|
|
| — |
|
|
| 828 |
|
|
| (225 | ) |
Foreclosed real estate |
|
| — |
|
|
| — |
|
|
| 193 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | — |
|
| $ | 6,397 |
|
| $ | 2,651 |
|
| $ | 109 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended |
| |
|
| December 31, 2016 |
|
| December 31, 2016 |
| ||||||||||
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
|
| Total Gains (Losses) |
| ||||
|
| (In thousands) |
| |||||||||||||
Collateral dependent |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
impaired loans |
| $ | — |
|
| $ | — |
|
| $ | 518 |
|
| $ | — |
|
Mortgage servicing rights |
|
| — |
|
|
| 8,486 |
|
|
| — |
|
|
| (390 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | — |
|
| $ | 8,486 |
|
| $ | 518 |
|
| $ | (390 | ) |
Gains or losses applicable to impaired loans are based on the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of charges in market conditions, less estimated selling costs, and are not recorded directly to current earnings but rather as a component in determining the allowance for loan losses.
The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes loan prepayment assumptions based on current market conditions and applies a discount rate based on indicated rates of return required by market participants. During the year ended December 31, 2016 there were partial impairments in certain strata and, as a result, an increase of $390,000 in the valuation allowance was recorded. During the year ended December 31, 2017, the fair value of these strata increased due to slower loan prepayment speeds and a reduction in the discount rate from 14% to 13% resulting in a partial reversal of $334,000 in the valuation allowance.
During the year ended December 31, 2017, the Company recognized an impairment write-down of $225,000 upon transferring a branch location scheduled to be sold in 2018 to assets held for sale. The amount of the write-down is based on the terms of an executed purchase and sale agreement.
F-42
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
Summary of fair values of financial instruments
The estimated fair values, and related carrying amounts, of the Company’s financial instruments are presented below. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, certificates of deposit and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include mortgagor’s escrow accounts and accrued interest payable.
|
| December 31, 2017 |
| |||||||||||||||||
|
| Carrying |
|
| Fair |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Amount |
|
| Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
|
| (In thousands) |
| |||||||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
| $ | 2,940 |
|
| $ | 2,932 |
|
| $ | — |
|
| $ | 2,932 |
|
| $ | — |
|
Securities available for sale |
|
| 61,576 |
|
|
| 61,576 |
|
|
| — |
|
|
| 61,576 |
|
|
| — |
|
Loans held for sale |
|
| 25,390 |
|
|
| 25,390 |
|
|
| — |
|
|
| 25,390 |
|
|
| — |
|
Loans, net |
|
| 400,373 |
|
|
| 398,407 |
|
|
| — |
|
|
| — |
|
|
| 398,407 |
|
Derivative assets |
|
| 367 |
|
|
| 367 |
|
|
| — |
|
|
| 367 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 366,836 |
|
| $ | 365,997 |
|
| $ | — |
|
| $ | 365,997 |
|
| $ | — |
|
FHLBB advances |
|
| 75,954 |
|
|
| 75,821 |
|
|
| — |
|
|
| 75,821 |
|
|
| — |
|
Derivative liabilities |
|
| 19 |
|
|
| 19 |
|
|
| — |
|
|
| 19 |
|
|
| — |
|
|
| December 31, 2016 |
| |||||||||||||||||
|
| Carrying |
|
| Fair |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Amount |
|
| Value |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| |||||
|
| (In thousands) |
| |||||||||||||||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit |
| $ | 3,675 |
|
| $ | 3,687 |
|
| $ | — |
|
| $ | 3,687 |
|
| $ | — |
|
Securities available for sale |
|
| 68,637 |
|
|
| 68,637 |
|
|
| — |
|
|
| 68,637 |
|
|
| — |
|
Loans held for sale |
|
| 30,452 |
|
|
| 30,452 |
|
|
| — |
|
|
| 30,452 |
|
|
| — |
|
Loans, net |
|
| 332,991 |
|
|
| 331,132 |
|
|
| — |
|
|
| — |
|
|
| 331,132 |
|
Derivative assets |
|
| 682 |
|
|
| 682 |
|
|
| — |
|
|
| 682 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
| $ | 351,179 |
|
| $ | 350,979 |
|
| $ | — |
|
| $ | 350,979 |
|
| $ | — |
|
FHLBB advances |
|
| 38,667 |
|
|
| 38,531 |
|
|
| — |
|
|
| 38,531 |
|
|
| — |
|
Derivative liabilities |
|
| 47 |
|
|
| 47 |
|
|
| — |
|
|
| 47 |
|
|
| — |
|
19. | OTHER NON-INTEREST EXPENSES |
Included in other non-interest expenses in 2017 and 2016 are certain items exceeding 1% of the Company’s total interest and non-interest income as follows:
|
| 2017 |
|
| 2016 |
| ||
|
| (In thousands) |
| |||||
Software amortization and maintenance |
| $ | 789 |
|
| $ | 445 |
|
Debit card expense |
|
| 322 |
|
|
| 310 |
|
Directors fees |
|
| 333 |
|
|
| 251 |
|
F-43
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
During the fourth quarter of 2017, the Company finalized a plan to reduce operating expenses through a workforce reduction in its mortgage banking operations to better align staffing levels with the then current volume of residential mortgage loan originations. The workforce reduction involved approximately 8% of the Company’s employees and took effect in 2017. The involuntary termination benefits accrued and charged to expense amounted to $594,000 and have been separately presented in the accompanying statement of operations for the year ended December 31, 2017.
21. | PARENT COMPANY CONDENSED FINANCIAL STATEMENTS |
Financial information as of December 31, 2017 and 2016 and for the years then ended pertaining to only Randolph Bancorp, Inc. is as follows:
BALANCE SHEETS
|
| December 31, |
|
| December 31, |
| ||
|
| 2017 |
|
| 2016 |
| ||
Assets |
|
|
|
|
|
|
|
|
Cash and due from banks |
| $ | 8,187 |
|
| $ | 8,496 |
|
Due from Envision Bank |
|
| 141 |
|
|
| 169 |
|
Investment in Envision Bank |
|
| 68,777 |
|
|
| 70,130 |
|
ESOP loan |
|
| 4,378 |
|
|
| 4,507 |
|
|
|
|
|
|
|
|
|
|
Total assets |
| $ | 81,483 |
|
| $ | 83,302 |
|
|
|
|
|
|
|
|
|
|
Stockholders' Equity |
|
|
|
|
|
|
|
|
Preferred stock |
| $ | — |
|
| $ | — |
|
Common stock |
|
| 61 |
|
|
| 59 |
|
Additional paid-in capital |
|
| 56,493 |
|
|
| 56,373 |
|
Retained earnings |
|
| 30,415 |
|
|
| 32,661 |
|
ESOP-Unearned compensation |
|
| (4,319 | ) |
|
| (4,507 | ) |
Accumulated other comprehensive loss, net of tax |
|
| (1,167 | ) |
|
| (1,284 | ) |
Total stockholders' equity |
|
| 81,483 |
|
|
| 83,302 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity |
| $ | 81,483 |
|
| $ | 83,302 |
|
STATEMENTS OF OPERATIONS
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Total income |
| $ | 169 |
|
| $ | 82 |
|
Charitable foundation contribution |
|
| — |
|
|
| 2,275 |
|
Operating expenses |
|
| 308 |
|
|
| 141 |
|
Loss before incomes taxes and equity in undistributed net income (loss) of Envision Bank |
|
| (139 | ) |
|
| (2,334 | ) |
Applicable income taxes |
|
| — |
|
|
| — |
|
Loss before equity in undistributed net income (loss) of Envision Bank |
|
| (139 | ) |
|
| (2,334 | ) |
|
|
|
|
|
|
|
|
|
Equity in undistributed net income (loss) of Envision Bank |
|
| (1,987 | ) |
|
| 2,797 |
|
Net income (loss) |
| $ | (2,126 | ) |
| $ | 463 |
|
F-44
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
|
| Years Ended December 31, |
| |||||
|
| 2017 |
|
| 2016 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | (2,126 | ) |
| $ | 463 |
|
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Equity in undistributed net (income) loss of Envision Bank |
|
| 1,987 |
|
|
| (2,797 | ) |
Charitable foundation contribution of Company stock |
|
| — |
|
|
| 1,820 |
|
Change in intercompany receivable |
|
| (139 | ) |
|
| — |
|
Net cash used in operating activities |
|
| (278 | ) |
|
| (514 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Acquisition of First Eastern, net of cash acquired |
|
| — |
|
|
| (11,131 | ) |
Investment in Envision Bank |
|
| — |
|
|
| (29,991 | ) |
ESOP loan |
|
| — |
|
|
| (4,695 | ) |
Payments received on ESOP loan |
|
| 129 |
|
|
| 188 |
|
Net cash used in investing activities |
|
| 129 |
|
|
| (45,629 | ) |
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock |
|
| — |
|
|
| 56,868 |
|
Stock offering costs |
|
| — |
|
|
| (2,325 | ) |
Stock repurchases |
|
| (160 | ) |
|
| — |
|
Net cash provided by financing activities |
|
| (160 | ) |
|
| 54,543 |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents |
|
| (309 | ) |
|
| 8,400 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at the beginning of year |
|
| 8,496 |
|
|
| 96 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of year |
| $ | 8,187 |
|
| $ | 8,496 |
|
|
|
|
|
|
|
|
|
|
Non-cash item: |
|
|
|
|
|
|
|
|
Contribution of net assets of First Eastern to Envision Bank |
| $ | — |
|
| $ | 12,407 |
|
F-45
Randolph Bancorp, Inc. and Subsidiary
Notes to Consolidated Financial Statements (continued)
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| ||||||||||||||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| ||||||||
| (Dollars in thousands, except per share data) |
| |||||||||||||||||||||||||||||
Interest and dividend income | $ | 3,884 |
|
| $ | 3,155 |
|
| $ | 4,175 |
|
| $ | 3,260 |
|
| $ | 4,389 |
|
| $ | 3,876 |
|
| $ | 4,492 |
|
| $ | 3,923 |
|
Interest expense |
| 400 |
|
|
| 375 |
|
|
| 485 |
|
|
| 388 |
|
|
| 573 |
|
|
| 455 |
|
|
| 652 |
|
|
| 388 |
|
Net interest and dividend income |
| 3,484 |
|
|
| 2,780 |
|
|
| 3,690 |
|
|
| 2,872 |
|
|
| 3,816 |
|
|
| 3,421 |
|
|
| 3,840 |
|
|
| 3,535 |
|
Provision (credit) for loan losses |
| 235 |
|
|
| 62 |
|
|
| 100 |
|
|
| — |
|
|
| — |
|
|
| (160 | ) |
|
| 205 |
|
|
| 200 |
|
Gain on sales of mortgage loans |
| 2,038 |
|
|
| 681 |
|
|
| 2,520 |
|
|
| 1,058 |
|
|
| 2,705 |
|
|
| 5,401 |
|
|
| 1,888 |
|
|
| 3,241 |
|
Other non-interest income |
| 1,372 |
|
|
| 622 |
|
|
| 914 |
|
|
| 1,028 |
|
|
| 866 |
|
|
| 1,959 |
|
|
| 660 |
|
|
| 1,041 |
|
Total non-interest income |
| 3,410 |
|
|
| 1,303 |
|
|
| 3,434 |
|
|
| 2,086 |
|
|
| 3,571 |
|
|
| 7,360 |
|
|
| 2,548 |
|
|
| 4,282 |
|
Merger and integration costs |
| 167 |
|
|
| 117 |
|
|
| 357 |
|
|
| 33 |
|
|
| 7 |
|
|
| 514 |
|
|
| — |
|
|
| 316 |
|
Other non-interest expense |
| 6,962 |
|
|
| 3,899 |
|
|
| 7,071 |
|
|
| 4,207 |
|
|
| 7,202 |
|
|
| 10,138 |
|
|
| 8,056 |
|
|
| 7,837 |
|
Total non-interest expense |
| 7,129 |
|
|
| 4,016 |
|
|
| 7,428 |
|
|
| 4,240 |
|
|
| 7,209 |
|
|
| 10,652 |
|
|
| 8,056 |
|
|
| 8,153 |
|
Provision (benefit) for income taxes |
| (23 | ) |
|
| 3 |
|
|
| (254 | ) |
|
| — |
|
|
| 129 |
|
|
| — |
|
|
| (295 | ) |
|
| 10 |
|
Net income (loss) | $ | (447 | ) |
| $ | 2 |
|
| $ | (150 | ) |
| $ | 718 |
|
| $ | 49 |
|
| $ | 289 |
|
| $ | (1,578 | ) |
| $ | (546 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings (loss) per share | $ | (0.08 | ) |
| N/A |
|
| $ | (0.03 | ) |
| N/A |
|
| $ | 0.01 |
|
| $ | 0.05 |
|
| $ | (0.28 | ) |
| $ | (0.10 | ) | ||
Weighted average common shares (basic and diluted) |
| 5,420,356 |
|
| N/A |
|
|
| 5,425,033 |
|
| N/A |
|
|
| 5,429,564 |
|
|
| 5,403,923 |
|
|
| 5,597,762 |
|
|
| 5,413,313 |
|
During the fourth quarter of 2017, the Company recognized a restructuring charge of $594,000 in connection with a workforce reduction in its mortgage banking operation intended to better align staffing levels with the current volume of residential mortgage loan originations. In addition, the Company recognized an impairment write-down of $225,000 on a branch office to be closed in 2018 and expenses of $160,000 associated with a planned transfer of loan servicing. Partially offsetting the impact of these expenses was a reduction of $200,000 in the valuation allowance for mortgage servicing rights due to an increase in their fair value. In connection with passage of the Act in December 2017, the Company recognized a tax benefit of $462,000 due to repeal of the AMT. Existing AMT credit carryforwards become refundable in future periods.
During the fourth quarter of 2016, the Company resolved the amount of tax reimbursement owed to the seller of First Eastern. A payment of $175,000 was made in December 2016 resulting in a reduction of the bargain purchase gain (included in other non-interest income) recognized in connection with this acquisition.
F-46