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Randolph Bancorp, Inc. - Annual Report: 2021 (Form 10-K)

 

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, 2021

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

incorporation or organization)

(I.R.S. Employer

Identification No.)

2 Batterymarch Park, Suite 301, Quincy, MA

02169

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: (781) 963-2100

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $.01 per share

  

RNDB

 

NASDAQ

 

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 

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

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 every Interactive Data File required to be submitted 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 such files).  Yes  No 

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.  

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on the last business day of the registrant’s most recently completed second fiscal quarter was $92,148,669.

 

The number of shares of Registrant’s Common Stock outstanding as of February 28, 2022 was 5,180,670.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2021 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 


 

Randolph Bancorp, Inc.

2021 Form 10-K

Table of Contents

 

 

 

 

PAGE

PART I

 

 

  

Item 1.

Business

 

1

Item 1A.

Risk Factors

 

31

Item 1B.

Unresolved Staff Comments

 

41

Item 2.

Properties

 

41

Item 3.

Legal Proceedings

 

41

Item 4.

Mine Safety Disclosures

 

41

 

 

 

 

PART II

 

 

 

Item 5.

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

 

42

Item 6.

Reserved

 

44

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

45

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

57

Item 8.

Financial Statements and Supplementary Data

 

58

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

58

Item 9A.

Controls and Procedures

 

58

Item 9B.

Other Information

 

59

Item 9C.

Disclosure Regarding Foreign Jurisdictions That Prevent Inspections

 

59

 

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

60

Item 11.

Executive Compensation

 

60

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

60

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

60

Item 14.

Principal Accounting Fees and Services

 

60

 

 

 

 

PART IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

61

Item 16.

Form 10-K Summary

 

62

 

 

 

 

SIGNATURES

 

63

 


 

Forward-Looking Statements

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, the impact of the COVID-19 pandemic, 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”; ongoing disruptions due to the COVID-19 pandemic; changes in employment levels and other general business and economic conditions on a national basis and in the local markets in which the Company operates and which adversely affect borrowers’ ability to service and repay our loans; changes in interest rates; competitive pressures from other financial institutions; changes in customer behavior; the possibility that future credit losses, loan defaults and charge-off rates are higher than expected due to changes in economic assumptions or adverse economic developments; 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; operational risks including, but not limited to, cybersecurity breaches, fraud, natural disasters and future pandemics; increasing government regulation; 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.

 

 

 


 

 

PART I

Item 1. Business.

Randolph Bancorp, Inc.

Randolph Bancorp, Inc. (“we,” “our,” “us,” “Randolph Bancorp,” or the “Company”) is a Massachusetts corporation organized in 2016 and is the stock holding company of Envision Bank (the “Bank”). Randolph Bancorp’s primary business activities are the ownership of the outstanding capital stock of the 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 in which we sold 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 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, we may pursue other business activities permitted by applicable laws and regulations for bank 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 the Bank. There are no specific plans for any additional capital issuance, merger or acquisition, or other diversification of our 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, 2021, we had total assets of $803.3 million, deposits of $638.1 million and stockholders’ equity of $100.9 million.

Our cash flows depend upon repayments on the loan made to the ESOP, repurchases of stock and any dividends received from the Bank or paid to shareholders of the Company. We do not own or lease any property, but instead use the premises, equipment, and other property of the Bank.

Envision Bank

Envision Bank is a Massachusetts-chartered savings bank headquartered in Quincy, 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 in connection with the conversion. Envision Bank is currently the wholly-owned subsidiary of Randolph Bancorp. 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 sold loans for investors.

Envision Bank provides financial services to individuals, families, and small to mid-size businesses through our five full-service banking offices located in Norfolk County, Massachusetts, our four loan production offices and lending centers located throughout Massachusetts and southern New Hampshire, and our digital channels via our mobile application and website. The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations, brokered deposits 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. The Bank’s digital banking services through our mobile banking site and the internet provide the ability for customers to use a variety of mobile devices to check balances, track account activity, pay bills, search transactions, deposit checks, and set up alerts for text or e-mail messages for changes in their account. The Bank is also actively involved in the sale and servicing of residential mortgage loans in the secondary market and to other financial institutions.

Market Area

Our primary deposit-taking market is Norfolk County, Massachusetts. Our primary lending market is more broadly based in Bristol, Essex, Middlesex, Norfolk, Plymouth, Suffolk and Worcester counties in Massachusetts; Kent, Newport, Providence, and Washington counties in Rhode Island; and Hillsborough county in 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 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, 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 on the mainland 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 depositors’ funds from out of market banks and credit unions through their internet offerings, money market funds and mutual funds. At June 30, 2021, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (“FDIC”), we held 1.6% of the deposits in Norfolk County, which was the 15th largest market share out of 43 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, 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.

 

Lending Activities

Our primary lending activities are the origination of real estate secured loans including one- to four-family residential mortgage loans, commercial real estate loans, home equity loans and lines of credit and construction loans and, to a lesser extent, commercial and industrial loans and consumer loans, predominantly in our core market areas in Massachusetts, Rhode Island, southern New Hampshire and via the Bank’s digital banking services through our mobile application and the internet. We sell in the secondary market the majority of the fixed rate conforming one- to four-family residential mortgage loans that we originate. We also sell a portion of the non-conforming one- to four-family residential mortgage loans we originate, primarily jumbo and adjustable-rate mortgage loans (“ARMs”), to other financial institutions.

2


 

Loan Portfolio. The following table sets forth the composition of our loan portfolio at the dates indicated:

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

(Dollars in thousands)

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

236,364

 

 

 

42.99

%

 

$

235,648

 

 

 

48.16

%

 

$

244,711

 

 

 

51.85

%

 

$

246,756

 

 

 

50.69

%

 

$

198,475

 

 

 

49.29

%

Commercial

 

 

197,423

 

 

 

35.91

%

 

 

143,893

 

 

 

29.41

%

 

 

125,405

 

 

 

26.57

%

 

 

113,642

 

 

 

23.35

%

 

 

98,755

 

 

 

24.53

%

Home equity loans and lines of credit

 

 

57,295

 

 

 

10.42

%

 

 

48,166

 

 

 

9.84

%

 

 

41,669

 

 

 

8.83

%

 

 

43,545

 

 

 

8.95

%

 

 

38,968

 

 

 

9.68

%

Construction

 

 

33,961

 

 

 

6.18

%

 

 

31,050

 

 

 

6.35

%

 

 

35,485

 

 

 

7.52

%

 

 

42,139

 

 

 

8.66

%

 

 

25,357

 

 

 

6.30

%

Commercial and industrial loans

 

 

17,242

 

 

 

3.14

%

 

 

20,259

 

 

 

4.14

%

 

 

9,093

 

 

 

1.93

%

 

 

21,285

 

 

 

4.37

%

 

 

24,766

 

 

 

6.15

%

Consumer loans

 

 

7,552

 

 

 

1.37

%

 

 

10,289

 

 

 

2.10

%

 

 

15,641

 

 

 

3.31

%

 

 

19,407

 

 

 

3.99

%

 

 

16,337

 

 

 

4.06

%

 

 

 

549,837

 

 

 

100.00

%

 

 

489,305

 

 

 

100.00

%

 

 

472,004

 

 

 

100.00

%

 

 

486,774

 

 

 

100.00

%

 

 

402,658

 

 

 

100.00

%

Net deferred loan costs and fees,

   and purchase premiums

 

 

1,073

 

 

 

 

 

 

 

1,123

 

 

 

 

 

 

 

1,407

 

 

 

 

 

 

 

1,509

 

 

 

 

 

 

 

1,452

 

 

 

 

 

Allowance for loan losses

 

 

(6,289

)

 

 

 

 

 

 

(6,784

)

 

 

 

 

 

 

(4,280

)

 

 

 

 

 

 

(4,437

)

 

 

 

 

 

 

(3,737

)

 

 

 

 

Loans, net

 

$

544,621

 

 

 

 

 

 

$

483,644

 

 

 

 

 

 

$

469,131

 

 

 

 

 

 

$

483,846

 

 

 

 

 

 

$

400,373

 

 

 

 

 

 

Loan Maturities. The following table sets forth the scheduled contractual amortization of the Bank’s loan portfolio at December 31, 2021. Loans having no schedule of repayments or no stated maturity are reported as being due in greater than five years except for demand loans which are reflected as due in one year or less. The table does not include any estimate of prepayments which significantly shortens the average life of all loans and may cause our actual repayment experience to differ from that shown below. 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.

 

 

 

At December 31, 2021

 

(In thousands)

 

One-to Four-

Family

Residential

Real Estate

 

 

Commercial

Real Estate

 

 

Home Equity

Loans and

Lines of

Credit

 

 

Construction

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

27

 

 

$

15,040

 

 

$

2

 

 

$

16,235

 

 

$

144

 

 

$

532

 

 

$

31,980

 

After one year through five years

 

 

871

 

 

 

107,938

 

 

 

202

 

 

 

359

 

 

 

4,496

 

 

 

3,220

 

 

 

117,086

 

After five years through fifteen years

 

 

24,923

 

 

 

71,849

 

 

 

1,617

 

 

 

8,925

 

 

 

12,170

 

 

 

2,878

 

 

 

122,362

 

Beyond fifteen years

 

 

210,543

 

 

 

2,596

 

 

 

55,474

 

 

 

8,442

 

 

 

432

 

 

 

922

 

 

 

278,409

 

Total

 

$

236,364

 

 

$

197,423

 

 

$

57,295

 

 

$

33,961

 

 

$

17,242

 

 

$

7,552

 

 

$

549,837

 

Interest rate terms on amounts due

   after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

196,786

 

 

$

111,570

 

 

$

9,928

 

 

$

9,184

 

 

$

5,201

 

 

$

6,563

 

 

$

339,232

 

Adjustable rate

 

 

39,551

 

 

 

70,813

 

 

 

47,365

 

 

 

8,542

 

 

 

11,897

 

 

 

457

 

 

 

178,625

 

Total

 

$

236,337

 

 

$

182,383

 

 

$

57,293

 

 

$

17,726

 

 

$

17,098

 

 

$

7,020

 

 

$

517,857

 

 

3


 

 

 

 

At December 31, 2020

 

(In thousands)

 

One-to Four-

Family

Residential

Real Estate

 

 

Commercial

Real Estate

 

 

Home Equity

Loans and

Lines of

Credit

 

 

Construction

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

84

 

 

$

644

 

 

$

3

 

 

$

15,360

 

 

$

3

 

 

$

715

 

 

$

16,809

 

After one year through five years

 

 

915

 

 

 

68,207

 

 

 

324

 

 

 

7,428

 

 

 

12,037

 

 

 

6,548

 

 

 

95,459

 

After five years through fifteen years

 

 

23,709

 

 

 

72,573

 

 

 

1,617

 

 

 

3,662

 

 

 

7,591

 

 

 

1,606

 

 

 

110,758

 

Beyond fifteen years

 

 

210,940

 

 

 

2,469

 

 

 

46,222

 

 

 

4,600

 

 

 

628

 

 

 

1,420

 

 

 

266,279

 

Total

 

$

235,648

 

 

$

143,893

 

 

$

48,166

 

 

$

31,050

 

 

$

20,259

 

 

$

10,289

 

 

$

489,305

 

Interest rate terms on amounts due

   after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

158,861

 

 

$

84,147

 

 

$

803

 

 

$

7,780

 

 

$

13,224

 

 

$

9,155

 

 

$

273,970

 

Adjustable rate

 

 

76,703

 

 

 

59,102

 

 

 

47,360

 

 

 

7,910

 

 

 

7,032

 

 

 

419

 

 

 

198,526

 

Total

 

$

235,564

 

 

$

143,249

 

 

$

48,163

 

 

$

15,690

 

 

$

20,256

 

 

$

9,574

 

 

$

472,496

 

One- to Four-Family 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 $236.3 million, or 43.0% of total loans, and consisted of $196.8 million and $39.6 million of fixed-rate and adjustable-rate loans, respectively, at December 31, 2021. Non-owner occupied residential loans were $55.0 million, or 10.0% 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 (together, “GSEs”) 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 current origination of adjustable-rate loans are adjusted to a rate equal to a specified percentage above the one year Constant Maturity Treasury rate. Historically, we have also used the London Interbank Offered Rate (“LIBOR”) as a “reference rate” for adjustable-rate loans but have ceased doing so as LIBOR is set based on interest rate information reported by certain banks which will stop doing so after June 2023. At December 31, 2021, 61% of residential adjustable-rate mortgages re-price based on 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. Given the complexity of the transition, as well as the different risk characteristics between LIBOR and the replacement reference rate, we continue to evaluate the impact of the transition.

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 on a servicing retained basis; (2) sell to other financial institutions newly originated conforming and non-conforming fixed and adjustable rate residential mortgage loans on a servicing released basis; and (3) hold in our portfolio a portion of non-conforming loans, including fixed-rate loans and adjustable-rate loans. 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).

4


 

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 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. At times we will rely on proprietary valuation data and methodology through the automated underwriting systems available through GSEs in lieu of a full appraisal. For home equity lines of credit, if a full appraisal is not available we may utilized a drive-by appraisal or other automated valuation method using online property record data.

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.

Commercial Real Estate Loans. At December 31, 2021, commercial real estate loans were $197.4 million, or 35.9% 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 $111.6 million of fixed-rate loans and $70.8 million of adjustable rate loans at December 31, 2021. 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 (“FHLBB”) classic borrowing rate and, to a lesser extent, LIBOR. Most of our adjustable-rate commercial real estate loans adjust every five years and amortize over a 25-30 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 have historically focused 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. Beginning in 2019, we focused our efforts on larger relationships seeking loans between $2.0 million and $7.5 million. Our commercial real estate loans are generally secured by properties used for business purposes, such as industrial, flex, 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.

At December 31, 2021, the average loan balance of our outstanding commercial real estate loans was $977,000 and our largest commercial real estate loan was $12.9 million in outstanding balance, with a total commitment of $13.0 million.

Loans secured by commercial real estate, including multi-family real estate, generally have larger balances and involve a greater degree of credit 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, end of loan analysis, 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 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, 2021, home equity loans and lines of credit were $57.3 million, or 10.4% of total loans. Home equity lines of credit have monthly adjustable rates of interest with 15-year draw periods 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.

5


 

Construction Loans. At December 31, 2021, construction loans were $34.0 million, or 6.2% of total loans. We originate construction loans only in our market area of Massachusetts, southern 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 as well as apartment, 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 require an appraisal of the property by an independent licensed appraiser. Our construction loans generally do not provide for interest payments to be funded by interest reserves. At December 31, 2021, our largest construction loan outstanding was $5.3 million.

Our commercial loan policy requires 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.

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. At December 31, 2021, commercial and industrial loans were $17.2 million, or 3.1% of total loans. As discussed in more  detail below, this amount included $3.6 million of PPP (as defined below) 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 published in The Wall Street Journal, plus a margin. Fixed-rate business loans are generally indexed to a corresponding FHLBB 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, 2021, our largest commercial and industrial loan (excluding loan participations) was a $5,000,000 loan and our largest commercial line of credit was $650,000, none of which was outstanding at December 31, 2021. 

6


 

 

The COVID-19 pandemic has caused, and continues to cause, substantial disruptions to the global economy and to the customers and communities that we serve. In response to the COVID-19 pandemic, legislation has been enacted, such as the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) to address the economic effects of the COVID-19 pandemic, including the establishment of participating in the Small Business Administration’s (the “SBA”) Paycheck Protection Program (the “PPP”). The CARES Act appropriated $349 billion for “paycheck protection loans” through the PPP. The amount appropriated for the PPP was subsequently increased to $659 billion. Loans under the PPP that meet SBA requirements may be forgiven in certain circumstances and are 100% guaranteed by SBA. PPP loans have an initial term of up to five years and earn interest at a rate of 1% with payments deferred for the first 10 months following the covered period, which is eight to twenty-four weeks following the date the loan is made. Additionally, on December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act (the “Economic Aid Act”) was enacted which, among other items provided an additional $284 billion for an additional round of PPP loans, which also introduced new borrower eligibility for the program. The Company participated in this additional round of PPP. On May 4, 2021, the SBA announced that PPP funding has been exhausted and that it has stopped accepting application from most lenders, including the Company, because PPP funding has been exhausted.

During 2020 and 2021, the Company funded 385 PPP loans totaling $26.4 million, for which it received $1.3 million in origination fees from the SBA, of which, $221,000 remained to be recognized as income as of December 31, 2021. These fees are amortized over the expected life of the loans, which is two years for loans originated prior to June 4, 2020 and five years for loans originated June 5, 2020 or later, but which is accelerated and recognized as interest income upon forgiveness of the loan. The Company had $3.6 million of PPP loans outstanding at December 31, 2021. Through December 31, 2021, 360 of our PPP loans totaling $22.8 million had been forgiven by the SBA, resulting in $1.3 million in origination fees recognized in interest income. We currently expect that a significant portion of our remaining PPP loans will ultimately be forgiven by the SBA in accordance with the terms of the program.

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 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. No student loans have been purchased since 2017 and we reduced our purchases of consumer loans from third parties in 2020 and 2021 from prior periods. We purchased approximately $2.6 million and $1.0 million of automobile loans in 2021 and 2020, respectively. At December 31, 2021, total purchased consumer loans totaled $6.6 million, while the entire consumer loan portfolio totaled $7.6 million, or 1.4% of total loans.

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 $2.0 million at December 31, 2021, were 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 $4.4 million at December 31, 2021, 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 a credit enhancement from the originator. The Bank also purchased in prior years unsecured personal loans from a national on-line lender which have an average FICO score at loan origination of 730. At December 31, 2021, such loans totaled $124,000.

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.

7


 

Loan Originations, Purchases and Sales. The primary source of loan originations are our in-house loan originators, advertising, and referrals from customers. We also purchase commercial real estate loans or participation interests in commercial real estate loans, commercial and industrial loans, and 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; (2) sell to other financial institutions newly originated non-conforming fixed and adjustable rate residential mortgage loans; and (3) hold in our portfolio a portion of non-conforming loans, including fixed rate and adjustable-rate residential mortgage loans. 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), purchases and principal repayment activities during the periods indicated.

 

 

 

Years Ended December 31,

 

(In thousands)

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

Total loans at beginning of year

 

$

489,305

 

 

$

472,004

 

 

$

486,774

 

 

$

402,658

 

 

$

335,086

 

Originations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

138,144

 

 

 

105,253

 

 

 

48,726

 

 

 

88,500

 

 

 

56,229

 

Commercial

 

 

49,392

 

 

 

52,747

 

 

 

15,013

 

 

 

24,046

 

 

 

28,440

 

Home equity loans and lines of credit

 

 

53,973

 

 

 

43,249

 

 

 

22,088

 

 

 

14,258

 

 

 

18,224

 

Construction

 

 

49,134

 

 

 

21,311

 

 

 

22,734

 

 

 

38,335

 

 

 

24,069

 

Total real estate loan originations

 

 

290,643

 

 

 

222,560

 

 

 

108,561

 

 

 

165,139

 

 

 

126,962

 

Commercial and industrial loans (1)

 

 

16,275

 

 

 

21,568

 

 

 

861

 

 

 

1,971

 

 

 

863

 

Consumer loans

 

 

293

 

 

 

446

 

 

 

575

 

 

 

1,167

 

 

 

301

 

Total loan originations

 

 

307,211

 

 

 

244,574

 

 

 

109,997

 

 

 

168,277

 

 

 

128,126

 

Purchases/Participations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

24,000

 

 

 

4,000

 

 

 

5,500

 

 

 

7,750

 

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

4,675

 

 

 

 

 

 

 

 

 

 

Total real estate loan purchases/participations

 

 

24,000

 

 

 

8,675

 

 

 

5,500

 

 

 

7,750

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

1,203

 

 

 

20,381

 

Consumer loans

 

 

2,633

 

 

 

998

 

 

 

5,412

 

 

 

7,227

 

 

 

15,651

 

Total loan purchases/participations

 

 

26,633

 

 

 

9,673

 

 

 

10,912

 

 

 

16,180

 

 

 

36,032

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal repayments

 

 

(188,711

)

 

 

(233,940

)

 

 

(89,195

)

 

 

(66,504

)

 

 

(89,471

)

Unadvanced funds on originations

 

 

(45,453

)

 

 

(8,631

)

 

 

(17,876

)

 

 

(5,780

)

 

 

(6,922

)

Transfers to held-for-sale

 

 

(48,597

)

 

 

 

 

 

(28,608

)

 

 

(28,057

)

 

 

 

Transfers of held-for-sale loans to one- to four-family residential

 

 

9,449

 

 

 

5,493

 

 

 

 

 

 

 

 

 

 

 

Transfer to other real estate owned

 

 

 

 

 

132

 

 

 

 

 

 

 

 

 

(193

)

Total other

 

 

(273,312

)

 

 

(236,946

)

 

 

(135,679

)

 

 

(100,341

)

 

 

(96,586

)

Net loan activity

 

 

60,532

 

 

 

17,301

 

 

 

(14,770

)

 

 

84,116

 

 

 

67,572

 

Total loans at end of year

 

$

549,837

 

 

$

489,305

 

 

$

472,004

 

 

$

486,774

 

 

$

402,658

 

  

(1)

Includes $11.0 and $15.4 million of SBA PPP loan originations during 2021 and 2020, respectively.

 

We also originate one- to four- family residential mortgage loans for sale in the secondary mortgage market or to other financial institutions. During the years ended December 31, 2021, 2020 and 2019, the Bank originated $1.3 billion, $1.6 billion, and $0.9 billion of such loans, respectively of which 75%, 77% and 53%, respectively, were refinanced loans.

8


 

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, 2021, the outstanding balances of loan participations purchased totaled $32.6 million and loan participations sold totaled $6.2 million. At December 31, 2020, the outstanding balances of loan participations purchased totaled $20.5 million and loan participations sold totaled $2.4 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. The senior lending officer is authorized to grant lending authority to officers and other employees in individual amounts up to $1,500,000. The president and chief executive officer is authorized to grant lending authority to officers and other employees in individual amounts up to $3,000,000. Delegation of such authority is made after due consideration of the individual’s lending experience, past performance and his or her area of responsibility. Our board of directors has granted loan approval authority to certain executive officers. Loans in excess of $3.0 million must be approved by the credit committee, which is comprised of seven members of our management team. Loans in excess of $5.0 million must also be approved by the board of directors.

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, 2021, the Bank’s regulatory limit on loans-to-one borrower was $18.7 million. At that date, our largest lending relationship totaled $12.9 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 to other financial institutions. We generally underwrite our residential mortgage loans to conform to GSE standards. Approximately 90% of the residential real estate loans that we originated in 2021 were sold or designated for sale into the secondary market. We determine whether loans will be held for investment or held for sale at the time of loan 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 $1.98 billion and $1.76 billion at December 31, 2021 and 2020, respectively. Net gains or losses recognized upon the sale of loans are included in noninterest income. For the years ended December 31, 2021 and 2020, the Bank sold $1.44 billion and $1.50 billion, respectively, of residential mortgage loans and recognized a net gain on loan origination and sale activities of $27.7 million and $54.2 million, respectively.

Loans sold into the secondary market and to financial institutions are sold on either a servicing retained, or servicing released basis. We retained the servicing on 56% of loans sold during the year ended December 31, 2021. During 2021, we outsourced our residential loan servicing activities, which improved our customer service experience and our operational and financial efficiency.

We also consider the sale of 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 Committee on Banking Supervision’s capital guidelines for U.S. banks (“Basel III”) which require that a haircut to capital be taken when mortgage servicing rights (“MSRs”) exceed 25% (10% in 2019 and prior) of Tier 1 Capital. In 2021 and 2020, no MSRs were sold.

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 but may also lead to a decrease in mortgage servicing income, a component of noninterest income, depending on the level of new loans added to the servicing portfolio and the level of prepayments. 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.

9


 

MSRs are recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets. We capitalize MSRs 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. MSRs are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. We measure impairment of our MSRs 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. To determine the fair value of MSRs, we estimate the expected future net servicing revenue based on common industry assumptions, as well as on our historical experience.

The following table sets forth activity for our MSRs for the years indicated:   

 

(In thousands)

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

Balance, beginning of year

 

$

12,377

 

 

$

8,556

 

 

$

7,786

 

 

$

6,397

 

 

$

8,486

 

Additions through originations

 

 

5,998

 

 

 

8,432

 

 

 

2,979

 

 

 

2,380

 

 

 

2,310

 

Amortization

 

 

(3,197

)

 

 

(2,544

)

 

 

(1,281

)

 

 

(983

)

 

 

(1,071

)

Sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,238

)

Decrease (increase) in valuation allowance

 

 

438

 

 

 

(2,067

)

 

 

(928

)

 

 

(8

)

 

 

(90

)

Balance, end of year

 

$

15,616

 

 

$

12,377

 

 

$

8,556

 

 

$

7,786

 

 

$

6,397

 

Fair value, end of year

 

$

16,355

 

 

$

12,490

 

 

$

8,817

 

 

$

8,554

 

 

$

6,485

 

 

Changes in interest rates influence a variety of significant assumptions included in the periodic valuation of MSRs, 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 MSRs. 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. Due to the increase in interest rates during 2021 we decreased the valuation allowance for MSRs by $438,000 and due to the decline in interest rates experienced during 2020, we increased the valuation allowance for MSRs by $2.1 million. Mortgage servicing income (loss), net of amortization and changes in the valuation allowance, for the years ended December 31, 2021 and 2020 was $1.7 million and $(1.2 million), 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 unpaid 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 (“TDRs”) 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 a TDR will continue to retain that designation through the life of the loan.

10


 

The following table provides information with respect to our nonperforming assets, including TDRs, at the dates indicated.

 

 

 

At December 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

$

2,133

 

 

$

1,876

 

 

$

2,922

 

 

$

2,474

 

 

$

1,976

 

Commercial

 

 

 

 

 

4,713

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

491

 

 

 

584

 

 

 

336

 

 

 

407

 

 

 

276

 

Consumer loans

 

 

 

 

 

 

 

 

 

 

 

149

 

 

 

 

Total nonaccrual loans (1)

 

 

2,624

 

 

 

7,173

 

 

 

3,258

 

 

 

3,030

 

 

 

2,252

 

Delinquent loans (>90 days) accruing interest (2)

 

 

 

 

 

 

 

 

 

 

 

635

 

 

 

 

Total non-performing loans

 

 

2,624

 

 

 

7,173

 

 

 

3,258

 

 

 

3,665

 

 

 

2,252

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

 

 

 

132

 

 

 

 

 

 

65

 

 

 

193

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other real estate owned

 

 

 

 

 

132

 

 

 

 

 

 

65

 

 

 

193

 

Total nonperforming assets

 

$

2,624

 

 

$

7,305

 

 

$

3,258

 

 

$

3,730

 

 

$

2,445

 

Performing troubled debt restructurings

 

$

1,200

 

 

$

1,749

 

 

$

2,149

 

 

$

3,027

 

 

$

3,433

 

Total nonperforming loans to total loans(3)

 

 

0.48

%

 

 

1.46

%

 

 

0.69

%

 

 

0.75

%

 

 

0.56

%

Total nonperforming assets to total assets

 

 

0.33

%

 

 

1.01

%

 

 

0.52

%

 

 

0.62

%

 

 

0.46

%

 

(1)     Included in the amounts were nonaccrual TDRs of $1.0 million at December 31, 2021, $1.2 million at December 31, 2020, $1.4 million at December 31, 2019, $1.4 million at December 31, 2018, and $1.5 million at December 31, 2017.

(2)

Represents one residential mortgage loan.

(3)

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, 2021 had nonaccruing loans been current according to their original terms amounted to $108,000. Income related to nonaccrual loans included in interest income for the year ended December 31, 2021 amounted to $5,000.

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% 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 an eight-grade internal loan rating system for commercial real estate, construction, and commercial and industrial loans. See Note 3 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, commercial and industrial loans and consumer loans, at the dates indicated.

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

 

(In thousands)

 

Classified assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Substandard

 

$

5,438

 

 

$

5,783

 

 

$

3,678

 

 

$

2,519

 

 

$

911

 

Doubtful

 

 

 

 

 

 

 

 

 

 

 

149

 

 

 

 

Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total classified assets

 

$

5,438

 

 

$

5,783

 

 

$

3,678

 

 

$

2,668

 

 

$

911

 

Special mention

 

$

8,180

 

 

$

11,075

 

 

$

5,537

 

 

$

1,343

 

 

$

2,512

 

11


 

 

 

Special mention loans totaling $742,000 and $1.4 million at December 31, 2021 and 2020, respectively, were on nonaccrual. All other nonaccrual loans were included in classified loans at December 31, 2021 and 2020, respectively.

Included in the above table are $7.5 million in special mention loans which were granted short-term loan payment deferrals for customers experiencing a hardship due to the COVID-19 pandemic. The $7.5 million in special mention loans relate to commercial real estate loans in the hospitality industry and were directly impacted industries where full repayment of the loan was in question beyond the initial deferral period. There were also $4.7 million in substandard loans which were granted short-term loan payment deferrals for customers experiencing hardship due to the COVID-19 pandemic. Finally, there were $27.6 million in pass rated loans which were granted short-term loan payment deferrals for customers that experienced hardship due to the COVID-19 pandemic. As of December 31, 2021, there were no substandard loans that were still in forbearance, and there were $239,000 of special mention loans in forbearance. The remaining $1.8 million of loans in forbearance as of December 31, 2021, were not classified.

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. Loans which have been granted pandemic-related short-term loan payment deferrals totaling $55.3 million, of which $1.9 million remain in forbearance, at December 31, 2021 are considered current based on compliance with the modified repayment terms.

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

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

 

$

806

 

 

$

405

 

 

$

1,778

 

 

$

1,263

 

 

$

 

 

$

248

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

186

 

 

 

215

 

 

 

356

 

 

 

95

 

 

 

 

 

 

317

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

76

 

 

 

9

 

 

 

 

 

 

38

 

 

 

64

 

 

 

 

Total

 

$

1,068

 

 

$

629

 

 

$

2,134

 

 

$

1,396

 

 

$

64

 

 

$

565

 

 

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) an allocated component related to impaired loans and (2) a general component related to the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

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 real estate, construction and commercial and industrial 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 TDR agreement.

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: changes in the volume and severity of past due loans and adversely classified or graded loans, the volume of nonaccrual loans and trends in charge-offs and recoveries; changes in the nature and volume of the portfolio and in the terms of loans; changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in the experience, ability, and depth of lending management and other relevant staff; changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; changes in the quality

12


 

of the institution’s review system; the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio; changes in the value of underlying collateral-dependent loans; and the existence of concentrations of credit, and changes in the level of such concentrations.

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 TDR, unless deemed insignificant. All TDRs are initially classified as impaired.

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 uncollectability 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, 2021, our allowance for loan losses was $6.3 million, or 1.14% of total loans, or 1.15% of total loans, excluding PPP loans of $3.6 million and 239.7% of nonperforming loans. At December 31, 2020, our allowance for loan losses was $6.8 million, or 1.39% of total loans, or 1.41% of total loans, excluding PPP loans of $10.9 million, and 94.6% of nonperforming loans. Nonperforming loans at December 31, 2021 were $2.6 million, or 0.48% of total loans, compared to $7.2 million, or 1.46% of total loans, at December 31, 2020. 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, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

% 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

 

$

1,093

 

 

 

17.38

%

 

 

42.99

%

 

$

1,646

 

 

 

24.26

%

 

 

48.16

%

Commercial

 

 

3,451

 

 

 

54.87

%

 

 

35.91

%

 

 

3,402

 

 

 

50.15

%

 

 

29.41

%

Home equity loans and lines of credit

 

 

462

 

 

 

7.35

%

 

 

10.42

%

 

 

442

 

 

 

6.52

%

 

 

9.84

%

Construction

 

 

697

 

 

 

11.08

%

 

 

6.18

%

 

 

751

 

 

 

11.07

%

 

 

6.35

%

Commercial and industrial loans

 

 

499

 

 

 

7.93

%

 

 

3.14

%

 

 

416

 

 

 

6.13

%

 

 

4.14

%

Consumer loans

 

 

87

 

 

 

1.38

%

 

 

1.37

%

 

 

127

 

 

 

1.87

%

 

 

2.10

%

Total

 

$

6,289

 

 

 

100.00

%

 

 

100.00

%

 

$

6,784

 

 

 

100.00

%

 

 

100.00

%

 

13


 

 

Analysis of Loan Loss Experience. The following table sets forth activity in our allowance for loan losses for the periods indicated.

 

 

 

At or For the Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands)

 

Allowance at beginning of period

 

$

6,784

 

 

$

4,280

 

 

$

4,437

 

 

$

3,737

 

 

$

3,271

 

Provision (credit) for loan losses

 

 

(438

)

 

 

2,553

 

 

 

 

 

 

762

 

 

 

540

 

Charge offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

(67

)

 

 

(68

)

 

 

(192

)

 

 

(119

)

 

 

(153

)

Total charge-offs

 

 

(67

)

 

 

(71

)

 

 

(192

)

 

 

(121

)

 

 

(153

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

5

 

 

 

7

 

 

 

25

 

 

 

41

 

 

 

23

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

2

 

 

 

2

 

 

 

 

 

 

 

 

 

35

 

Consumer loans

 

 

3

 

 

 

13

 

 

 

10

 

 

 

18

 

 

 

21

 

Total recoveries

 

 

10

 

 

 

22

 

 

 

35

 

 

 

59

 

 

 

79

 

Net charge-offs

 

 

(57

)

 

 

(49

)

 

 

(157

)

 

 

(62

)

 

 

(74

)

Allowance at end of period

 

$

6,289

 

 

$

6,784

 

 

$

4,280

 

 

$

4,437

 

 

$

3,737

 

Total loans outstanding(1)

 

$

549,837

 

 

$

489,305

 

 

$

472,004

 

 

$

486,774

 

 

$

402,658

 

Average loans outstanding

 

$

557,293

 

 

$

483,061

 

 

$

490,638

 

 

$

471,849

 

 

$

388,623

 

Allowance for loan losses as a percent of total loans

   outstanding(1)

 

 

1.14

%

 

 

1.39

%

 

 

0.91

%

 

 

0.91

%

 

 

0.93

%

Net charge-offs as a percent of average loans

   outstanding

 

 

0.01

%

 

 

0.01

%

 

 

0.03

%

 

 

0.01

%

 

 

0.02

%

Allowance for loan losses to nonperforming loans

 

 

239.67

%

 

 

94.58

%

 

 

131.37

%

 

 

121.06

%

 

 

165.94

%

 

(1)

Total loans exclude loans held for sale and 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 do not engage in securities trading activities.

14


 

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 FHLBB, certificates of deposit of federally insured institutions, investment grade corporate bonds and marketable equity securities. We also are required to maintain an investment in FHLBB stock. While we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities at December 31, 2021.

Investment Securities. The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.

 

 

 

At December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

(In thousands)

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

Cost

 

 

Fair

Value

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

10,939

 

 

$

10,771

 

 

$

 

 

$

 

 

$

 

 

$

 

U.S. Government-sponsored enterprises

 

 

1,995

 

 

 

1,978

 

 

 

1,993

 

 

 

1,996

 

 

 

4,000

 

 

 

4,012

 

Corporates

 

 

2,510

 

 

 

2,536

 

 

 

4,300

 

 

 

4,356

 

 

 

1,513

 

 

 

1,528

 

Municipals

 

 

351

 

 

 

353

 

 

 

595

 

 

 

600

 

 

 

744

 

 

 

753

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

23,349

 

 

 

23,479

 

 

 

32,538

 

 

 

33,457

 

 

 

35,238

 

 

 

35,410

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

8,733

 

 

 

8,956

 

 

 

8,857

 

 

 

9,382

 

 

 

8,977

 

 

 

8,924

 

U.S. Government guaranteed

 

 

103

 

 

 

103

 

 

 

977

 

 

 

1,001

 

 

 

1,363

 

 

 

1,370

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

796

 

 

 

810

 

 

 

996

 

 

 

1,048

 

 

 

1,395

 

 

 

1,418

 

U.S. Government-guaranteed

 

 

2,641

 

 

 

2,680

 

 

 

3,398

 

 

 

3,526

 

 

 

4,106

 

 

 

4,088

 

Total securities available-for-sale

 

$

51,417

 

 

$

51,666

 

 

$

53,654

 

 

$

55,366

 

 

$

57,336

 

 

$

57,503

 

 

15


 

 

The following table sets forth the stated maturities and weighted average yields of investment securities, all of which are classified as available-for-sale, at December 31, 2021 and 2020. 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 tables below. 

 

 

As of December 31, 2021

 

 

 

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

 

U.S Treasury

 

$

 

 

 

 

 

$

6,279

 

 

 

0.61

%

 

$

4,660

 

 

 

1.03

%

 

$

 

 

 

 

 

$

10,939

 

 

 

0.79

%

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

1,995

 

 

 

0.25

%

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,995

 

 

 

0.25

%

Corporates

 

 

 

 

 

 

 

 

1,448

 

 

 

0.69

%

 

 

1,062

 

 

 

3.11

%

 

 

 

 

 

 

 

 

2,510

 

 

 

1.71

%

Municipals(1)

 

 

 

 

 

 

 

 

351

 

 

 

5.13

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

351

 

 

 

5.13

%

Residential mortgage-

   backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

320

 

 

 

2.81

%

 

 

1,752

 

 

 

3.25

%

 

 

21,277

 

 

 

1.57

%

 

 

23,349

 

 

 

1.72

%

Commercial mortgage-

   backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

8,733

 

 

 

2.11

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,733

 

 

 

2.11

%

U.S. Government-

   guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

103

 

 

 

0.97

%

 

 

103

 

 

 

0.97

%

Collateralized mortgage

   obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

370

 

 

 

2.70

%

 

 

 

 

 

 

 

 

426

 

 

 

2.58

%

 

 

796

 

 

 

2.64

%

U.S. Government-

   guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

476

 

 

 

2.73

%

 

 

2,165

 

 

 

2.22

%

 

 

2,641

 

 

 

2.31

%

Total securities

   available-for-sale

 

$

 

 

 

 

 

$

19,496

 

 

 

1.41

%

 

$

7,950

 

 

 

1.90

%

 

$

23,971

 

 

 

1.64

%

 

$

51,417

 

 

 

1.60

%

16


 

 

 

As of December 31, 2020

 

 

 

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

 

U.S. Government-

   sponsored enterprises

 

$

 

 

 

 

 

$

1,993

 

 

 

0.25

%

 

$

 

 

 

 

 

$

 

 

 

 

 

$

1,993

 

 

 

0.25

%

Corporates

 

 

503

 

 

 

1.99

%

 

 

2,729

 

 

 

1.10

%

 

 

1,068

 

 

 

2.90

%

 

 

 

 

 

 

 

 

4,300

 

 

 

1.65

%

Municipals(1)

 

 

 

 

 

 

 

 

595

 

 

 

4.87

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

595

 

 

 

4.87

%

Residential mortgage-

   backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

301

 

 

 

2.99

%

 

 

421

 

 

 

3.09

%

 

 

31,816

 

 

 

1.81

%

 

 

32,538

 

 

 

1.84

%

Commercial mortgage-

   backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

3,761

 

 

 

2.05

%

 

 

5,096

 

 

 

2.16

%

 

 

 

 

 

 

 

 

8,857

 

 

 

2.11

%

U.S. Government-

   guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

977

 

 

 

2.46

%

 

 

977

 

 

 

2.46

%

Collateralized mortgage

   obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-

   sponsored enterprises

 

 

 

 

 

 

 

 

 

 

 

 

 

 

451

 

 

 

2.66

%

 

 

545

 

 

 

2.75

%

 

 

996

 

 

 

2.71

%

U.S. Government-

   guaranteed

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,398

 

 

 

2.30

%

 

 

3,398

 

 

 

2.31

%

Total securities

   available-for-sale

 

$

503

 

 

 

 

 

$

9,379

 

 

 

1.60

%

 

$

7,036

 

 

 

2.36

%

 

$

36,736

 

 

 

1.89

%

 

$

53,654

 

 

 

1.90

%

 

(1)

Yields for municipal investments are presented on a tax equivalent basis.

U.S. Treasury At December 31, 2021, we had U.S. Treasury securities totaling $10.9 million, which constituted 21.3% of our securities portfolio. While these securities may provide lower yields than other investments in our securities portfolio, we maintain these investments, to the extent we deem appropriate for liquidity purposes, as collateral for borrowings and for prepayment protection.

U.S. Government-Sponsored Enterprises. At December 31, 2021, we had U.S. government and agency securities totaling $2.0 million, which constituted 3.9% 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, 2021, we had corporate debt securities totaling $2.5 million, which constituted 4.9% of our securities portfolio. All of our corporate debt securities are investment grade and have remaining maturities of less than ten years. These securities generally provide slightly higher yields than U.S. government and agency securities and mortgage-backed securities.

Municipal Securities. At December 31, 2021, we had municipal securities totaling $351,000, which constituted 0.7% of our securities portfolio. All of our current municipal securities have remaining maturities of less than 10 years. These securities generally provide higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as other

17


 

investments, so we typically maintain investments in municipal securities, to the extent appropriate, for generating returns in our investment portfolio.

Mortgage-Backed Securities. At December 31, 2021, we had residential mortgage-backed securities totaling $23.3 million, which constituted 45.4% of our securities portfolio, and commercial mortgage-backed securities totaling $8.8 million, which constituted 17.2% 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 the 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, 2021, we had collateralized mortgage obligations issued by U.S. government-sponsored enterprises totaling $796,000, which constituted 1.5% of our securities portfolio, and collateralized mortgage obligations guaranteed by a U.S. government agency totaling $2.6 million, which constituted 5.1% 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 FHLBB in connection with our borrowing activities totaling $2.9 million at December 31, 2021. The FHLBB common stock is carried at cost.

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, 2021, our balance in bank-owned life insurance totaled $8.8 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 retail, business development and commercial lending officers, advertising (including direct mail), 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. We also utilize brokered, listing and other wholesale deposits to help fund loan growth.

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. 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.

18


 

Business Banking. We also offer a variety of deposit accounts designed for businesses. 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 and we offer a limited suite of cash management solutions directly or through third parties including: ACH origination, wire transfer, positive pay and account reconciliation. 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 Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

(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

 

$

121,378

 

 

 

21.45

%

 

 

 

 

$

80,957

 

 

 

15.65

%

 

 

 

 

$

62,314

 

 

 

13.60

%

 

 

 

NOW

 

 

65,978

 

 

 

11.66

%

 

 

0.05

%

 

 

55,396

 

 

 

10.71

%

 

 

0.14

%

 

 

39,197

 

 

 

8.55

%

 

 

0.49

%

Money market

   deposits

 

 

74,816

 

 

 

13.22

%

 

 

0.26

%

 

 

71,817

 

 

 

13.88

%

 

 

0.37

%

 

 

69,362

 

 

 

15.14

%

 

 

1.38

%

Regular and other

   savings

 

 

190,865

 

 

 

33.73

%

 

 

0.16

%

 

 

161,502

 

 

 

31.22

%

 

 

0.26

%

 

 

108,483

 

 

 

23.67

%

 

 

0.52

%

Term certificates

 

 

112,802

 

 

 

19.94

%

 

 

0.45

%

 

 

147,665

 

 

 

28.54

%

 

 

1.05

%

 

 

178,901

 

 

 

39.04

%

 

 

2.02

%

Total

 

$

565,839

 

 

 

100.00

%

 

 

0.18

%

 

$

517,337

 

 

 

100.00

%

 

 

0.45

%

 

$

458,257

 

 

 

100.00

%

 

 

1.16

%

 

The Bank began to utilize brokered deposits in 2017. The average balance of brokered money market deposits was $10.1 million in 2021 and 2020. The average balance of brokered certificates of deposit was $32.5 million in 2021 and $48.7 million in 2020.

 

The following table sets forth our term certificates classified by interest rate as of the dates indicated.

 

 

 

At December 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2019

 

0.00% - 1.00%

 

$

133,154

 

 

$

64,108

 

 

$

20,518

 

1.01 - 2.00%

 

 

12,957

 

 

 

25,256

 

 

 

78,583

 

2.01 - 3.00%

 

 

57

 

 

 

15,752

 

 

 

87,997

 

3.01 - 4.00%

 

 

 

 

 

 

 

 

725

 

Total

 

$

146,168

 

 

$

105,116

 

 

$

187,823

 

 

The following table sets forth the amount and maturities of our term certificates by interest rate at December 31, 2021.

 

 

 

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%

 

$

83,684

 

 

$

30,842

 

 

$

17,159

 

 

$

719

 

 

$

750

 

 

$

133,154

 

 

 

91

%

1.01 - 2.00%

 

 

11,536

 

 

 

1,089

 

 

 

295

 

 

 

37

 

 

 

 

 

 

12,957

 

 

 

9

%

2.01 - 3.00%

 

 

12

 

 

 

35

 

 

 

10

 

 

 

 

 

 

 

 

 

57

 

 

 

0

%

Total

 

$

95,232

 

 

$

31,966

 

 

$

17,464

 

 

$

756

 

 

$

750

 

 

$

146,168

 

 

 

100

%

           

19


 

 

          The following table sets forth the amount and maturities of our term certificates by interest rate at December 31, 2020.

 

 

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%

 

$

53,848

 

 

$

8,257

 

 

$

1,041

 

 

$

376

 

 

$

586

 

 

$

64,108

 

 

 

61

%

1.01 - 2.00%

 

 

17,281

 

 

 

6,303

 

 

 

1,229

 

 

 

405

 

 

 

38

 

 

 

25,256

 

 

 

24

%

2.01 - 3.00%

 

 

10,190

 

 

 

5,562

 

 

 

 

 

 

 

 

 

 

 

 

15,752

 

 

 

15

%

Total

 

$

81,319

 

 

$

20,122

 

 

$

2,270

 

 

$

781

 

 

$

624

 

 

$

105,116

 

 

 

100

%

As of December 31, 2021, the aggregate amount of our term certificates in amounts greater than or equal to $100,000 was $110.5 million. The following table sets forth the maturity of these certificates as of December 31, 2021 and 2020.

 

(In thousands)

Maturity Period

 

2021

 

 

2020

 

Three months or less

 

$

18,690

 

 

$

28,599

 

Over three through six months

 

 

30,478

 

 

 

18,938

 

Over six through twelve months

 

 

29,333

 

 

 

3,380

 

Over twelve months

 

 

32,003

 

 

 

14,295

 

Total

 

$

110,504

 

 

$

65,212

 

 The table below shows the remaining balance of term certificates of deposit in excess of FDIC deposit insurance limits, by maturity, at the dates indicated:

 

(In thousands)

Maturity Period

 

2021

 

 

2020

 

Three months or less

 

$

4,038

 

 

$

12,580

 

Over three through six months

 

 

7,259

 

 

 

4,208

 

Over six through twelve months

 

 

5,503

 

 

 

1,570

 

Over twelve months

 

 

3,446

 

 

 

5,060

 

Total

 

$

20,246

 

 

$

23,418

 

The Bank is an FDIC insured institution and is a member of the Depositors Insurance Fund. As such, all deposits at the Bank are insured.

 

Borrowings. We may utilize advances from the FHLBB to supplement our supply of investable funds. The FHLBB 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 FHLBB 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 FHLBB’s assessment of the institution’s creditworthiness. At December 31, 2021 and December 31, 2020, we had $50.0 million and $61.9 million, respectively, in outstanding advances from the FHLBB. At December 31, 2021 and December 31, 2020, based on available collateral and our ownership of FHLBB stock, and based upon our internal policy, we had access to additional FHLBB advances of up to $111.5 million and $93.9 million, respectively. We also have a $4.2 million available line of credit with FHLBB and a $12.5 million available line of credit with a correspondent bank at December 31, 2021. We had no borrowings outstanding under either of these lines of credit at December 31, 2021 and 2020. 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.

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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)

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

Balance of short-term borrowings outstanding at end of period

 

$

 

 

$

 

 

$

19,822

 

 

$

82,684

 

 

$

64,739

 

Average amount of short-term borrowings outstanding during the period

 

$

4,357

 

 

$

6,049

 

 

$

73,551

 

 

$

63,552

 

 

$

34,656

 

Maximum short-term borrowings outstanding at any month end

 

$

28,032

 

 

$

23,939

 

 

$

128,283

 

 

$

108,819

 

 

$

64,739

 

Weighted average interest rate during the period on short-term borrowings

 

 

0.32

%

 

 

0.81

%

 

 

2.36

%

 

 

2.11

%

 

 

1.31

%

Weighted average interest rate at end of period of short-term borrowings

 

 

 

 

 

 

 

 

1.85

%

 

 

2.55

%

 

 

1.59

%

 

In conjunction with the PPP, the Federal Reserve has created the Paycheck Protection Liquidity Facility (“PPPLF”) to facilitate lending by eligible financial institutions to small businesses under the PPP. Pursuant to the PPPLF, the applicable Federal Reserve Bank extended credit to depository institutions on a non-recourse basis with a term of up to five years at an interest rate of 0.35%. Only loans issued under the PPP can be pledged as collateral to access the facility. The Company utilized $15.4 million in advances from the PPPLF to fund its PPP loans, none of which was outstanding at December 31, 2021 and $11.4 million of which remained outstanding at December 31, 2020. The FDIC allows the Company to neutralize the effect of PPP loans financed under the PPPLF on Tier 1 leverage capital ratios.

Human Capital Resources

As of December 31, 2021, we had 186 total employees, including 170 full-time and 16 part-time employees, none of whom is represented by a collective bargaining unit. We believe we have a good standing relationship with our employees.

We encourage and support the growth and development of our employees. Continual learning and career development is advanced through ongoing performance and development conversations with employees, internally developed training programs, customized corporate training engagements and educational reimbursement programs.

The safety, health and wellness of our employees is a top priority. The COVID-19 pandemic presented a unique challenge with regard to maintaining employee safety while continuing successful operations. Through teamwork and the adaptability of our management and staff, we were able to transition, over a short period of time, 80% of our employees to effectively working from remote locations and ensure a safely-distanced working environment for employees performing customer facing activities at branches and operations centers. All employees are asked not to come to work when they experience signs or symptoms of a possible COVID-19 illness and have been provided additional paid time off to cover compensation during such absences. On an ongoing basis, we further promote the health and wellness of our employees by strongly encouraging work-life balance, offering flexible work schedules, reimbursing certain child care costs, keeping the employee portion of health care premiums to a minimum and sponsoring various wellness programs.

Diversity, Equity and Inclusion

We are committed to implementing diverse, equitable and inclusive policies and practices across the organization. Our corporate values speak directly to the spirit of inclusion as well as the importance of embracing diversity and equitable practices to ensure we are representative of the communities we serve. We are committed to building togetherness and a culture where integrity, personal responsibility, extraordinary communication and selfless leadership are at the center of what we do. We continuously focus our efforts on recruiting, employing and advancing diverse talent that includes consideration for race, gender and age diversity. We monitor our workforce demographics on a routine basis and take pride in diverse talent we employ and retain.

As of December 31, 2021, the race and gender diversity of our workforce was as follows:

 

 

Total Number of Employees or Members

 

People of Color

 

Percent

 

 

Women

 

Percent

 

 

Members of LGBTQ+ Community

 

Percent

 

Employees

 

186

 

30

 

16%

 

 

115

 

62%

 

 

4

 

2%

 

Members of the Board of Directors

 

10

 

1

 

10%

 

 

3

 

30%

 

 

1

 

10%

 

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Subsidiaries

The Bank has four 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. is a Massachusetts corporation formed to hold certain real estate owned. First Eastern Mortgage Corporation is an inactive Massachusetts corporation. Prime Title Services, Inc. is a Massachusetts corporation that provides mortgage loan closing services.

Supervision and Regulation

General

Envision Bank is a Massachusetts stock savings bank and is the wholly-owned subsidiary of Randolph Bancorp, a Massachusetts corporation, which is a registered bank holding company. The Bank’s deposits are insured up to applicable limits by the FDIC and by the Depositors Insurance Fund, a private industry-sponsored insurance fund, for amounts in excess of the FDIC insurance limits. The 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. The 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. The 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. The Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau (the “CFPB”). The Bank is a member of and owns stock in the FHLBB.

As a bank holding company, Randolph Bancorp is subject to examination and supervision by, and is required to file certain reports with the Federal Reserve. Randolph Bancorp is also subject to the rules and regulations of the Securities and Exchange Commission (the “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 CFPB, 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 and the Bank.

Set forth below are certain material regulatory requirements that are applicable to Randolph Bancorp and the 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 and the Bank.

Pandemic Response

Paycheck Protection Program. As of December 31, 2021, the Bank had collected $1.3 million in PPP origination fee income. The average loan size is $68,000 and the aggregate number of jobs positively impacted is approximately 2,800. In conjunction with the PPP, the Federal Reserve created a lending facility for qualified financial institutions. The PPPLF extended credit to depository institutions with a term equal to the term of the pledged collateral at an interest rate of 0.35%.

 

Troubled Debt Restructuring Relief. From March 1, 2020 through January 1, 2022, a financial institution may elect to suspend the requirements under accounting principles generally accepted in the U.S. for loan modifications related to the COVID–19 pandemic that would otherwise be categorized as a TDR, including impairment accounting. This TDR relief is applicable for the term of the loan modification that occurs during the applicable period for a loan that was not more than 30 days past due as of December 31, 2019. Financial institutions are required to maintain records of the volume of loans involved in modifications to which TDR relief is applicable.

 

Holding Company Regulation

General. Randolph Bancorp is a bank holding company within the meaning of the Bank Holding Company Act of 1956 (the “BHCA”). As such, Randolph Bancorp 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. 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’s subsidiary insured depository institution.

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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 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 hearing, 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, 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;

23


 

 

 

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. Upon reaching $3 billion in total consolidated assets, Randolph Bancorp will become subject to the Federal Reserve’s capital adequacy regulations for bank holding companies (on a consolidated basis). Subject to certain exceptions, including an exception for bank holding companies with less than $1 billion of assets, regulations enacted by the Federal Reserve subject bank holding companies to regulatory capital requirements that are the same as or more stringent than the capital requirements applicable to the Bank. These capital requirements include provisions that, when applicable, might limit the ability of Randolph Bancorp to pay dividends to its shareholders or repurchase its shares. See “—Federal Banking Regulation—Capital Requirements.” Randolph Bancorp is not subject to these capital requirements as its total consolidated assets are below $3 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.

Source of Strength. Under federal law, a bank holding company must act as a source of financial and managerial strength to its depository institution subsidiaries. As a result, Randolph Bancorp is expected to commit resources to support the Bank, including at times when Randolph Bancorp 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 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 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 to pay dividends, repurchase shares of common stock, or otherwise engage in capital distributions. In addition, the ability of Randolph Bancorp to pay dividends may be restricted if the 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 BHCA. 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. There is 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.

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

24


 

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.

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 ended in 2019, the FDIC’s capital rules require the 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 2.50% of total risk-weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases. If Randolph Bancorp becomes subject to the Federal Reserve’s capital adequacy rules for bank holding companies, then Randolph Bancorp would also become subject to a similar capital conservation buffer requirement that could restrict its ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases. 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 the 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 (v) 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. The 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, the Bank’s ability to pay dividends may be limited if the Bank does not have the capital conservation buffer required by the capital rules, which may limit the ability of Randolph Bancorp 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 (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. The 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 the 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. The 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

25


 

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 the Bank; however, a subsidiary of a bank that engages in bank permissible activities is generally not treated as an affiliate. Randolph Bancorp is an affiliate of the Bank because of its control of the 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.

The 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. Under federal law, 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 the Bank’s capital.

In addition, extensions of credit in excess of certain limits must be approved by the 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, federal law requires asset sale transactions with insiders to be on market terms, and if the transaction represents more than 10.0% of the capital and surplus of the Bank, it must be approved by a majority of the disinterested directors of the 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, banks are permitted, subject to regulatory approval, to acquire other banks in any state, provided that certain deposit concentration

26


 

limits and other conditions are satisfied, and 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.”

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.

Community Bank Leverage Ratio. Section 201 of the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Growth Act”), which was enacted on May 24, 2018, directs the federal banking agencies to establish a community bank leverage ratio (“CBLR”) of tangible capital to average total consolidated assets of not less than 8.0% or more than 10.0%. In September 2019, the federal banking agencies adopted a final rule to implement Section 201 of the Growth Act, effective January 1, 2020, establishing a community bank leverage ratio framework for community banking organizations having total consolidated assets of less than $10 billion, having a leverage ratio of greater than 9.0%, and satisfying other criteria, such as limitations on the amount of off-balance sheet exposures and on trading assets and liabilities. A community banking organization that elects to use the community bank leverage ratio framework and that maintains a leverage ratio of greater than 9.0% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies’ generally applicable capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The final rule includes a two-quarter grace period during which a qualifying banking organization that temporarily fails to meet any of the qualifying criteria, including the greater than 9.0% leverage ratio requirement, generally would still be deemed well-capitalized so long as the banking organization maintains a leverage ratio greater than 8.0%. At the end of the grace period, the banking organization must meet all qualifying criteria to remain in the community bank leverage ratio framework or otherwise must comply with and report under the generally applicable rule. As required by Section 4012 the CARES Act, the federal banking agencies temporarily lowered the community bank leverage ratio, issuing two interim final rules to set the community bank leverage ratio at 8.0%. Effective January 1, 2022, the community bank leverage ratio reverted to 9.0%. At this time, the Company does not anticipate opting in to the CBLR.

Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured depository institutions, such as the Bank. Deposit accounts in the 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 requires 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.

Deposit insurance premiums are based on assets. To determine its deposit insurance premium, the 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. The FDIC calculates deposit insurance assessment rates for established small banks, generally those banks with less than $10 billion of assets that have been insured for at least five years taking 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,

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brokered deposit ratio, one year asset growth, the ratio of net income before taxes to total assets, and considerations related to asset quality.

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 the Bank. Management cannot predict what assessment rates will be in the future.

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. Section 202 of the Growth Act amended Section 29 of the FDIA to exempt a capped amount of reciprocal deposits from treatment as brokered deposits for certain insured depository institutions.

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). The 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 “FRB”). Effective March 26, 2020, the FRB reduced the reserve requirement ratios to zero percent to eliminate the need for depository institutions, such as the Bank, to maintain balances in accounts at the FRB to satisfy reserve requirements. As a result, there were no reserve balances include in cash and cash equivalents in the Consolidated Balance Sheets at December 31, 2021 and 2020.

Federal Home Loan Bank System. The Bank is a member of the FHLBB, 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, the Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of December 31, 2021, the 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. The Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank stock. As of December 31, 2021, no impairment has been recognized.

Massachusetts Banking Laws and Supervision

General. As a Massachusetts stock savings bank, the 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, the 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 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.

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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. The Bank does not currently sell or refer insurance products.

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 the 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 the 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 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 are similar to those of 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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Other Regulations

Interest and other charges collected or contracted for by the Bank are subject to state usury laws and federal laws concerning interest rates. The 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. The 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 the 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 are subject to the periodic reporting, proxy solicitation, insider trading restrictions, and other requirements of the Exchange Act.

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Item 1A. Risk Factors.

 

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.

 

RISK RELATED TO COVID-19

 

The COVID-19 pandemic, and the measures taken to control its spread, will continue to adversely impact our employees, customers, business operations and financial results, and the ultimate impact will depend on future developments, which are highly uncertain and cannot be predicted.

The COVID-19 pandemic has impacted and is likely to continue to impact the national economy and the regional and local markets in which we operate, and create significant volatility in equity market valuations and disruption in capital and debt markets. Our business operations may be disrupted if significant portions of our workforce are unable to work effectively, including because of illness, quarantines, government actions, or other restrictions in connection with the pandemic. We are subject to heightened cybersecurity, information security and operational risks as a result of work-from-home arrangements that we have put in place for our employees. Government policies and directives relating to the pandemic response are subject to change. Changes in customer behavior due to work-from-home arrangement and other pandemic related responses may impact the demand for our products and services, which could adversely affect our revenue. Increases in deposit balances due, among other things, to government stimulus and relief programs could adversely affect our financial performance if we are unable to successfully lend or invest those funds.

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Our participation in the SBA’s PPP may expose us to reputational harm as well as the risk that the SBA may not fund some or all of the guarantees associated with PPP loans.

As of December 31, 2021, we originated 385 loans aggregating $26.4 million through the PPP. We depend on our reputation as a trusted and responsible financial services company to compete effectively in the communities that we serve, and any negative public or customer response to, or any litigation or claims that might arise out of, our participation in the PPP and any other legislative or regulatory initiatives and programs that may be enacted in response to the COVID-19 pandemic, could adversely impact our business. In addition, if the SBA determines that there is a deficiency in the manner in which a PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

We have incurred operating losses in several recent years and our ability to generate future profitability is uncertain.

We achieved net income of $9.6 million for the year ended December 31, 2021, but experienced losses in four of the seven previous fiscal years. Our ability to achieve future profitability depends upon a number of factors, including our ability to successfully implement our strategic plan, our ability to achieve improved operating efficiency, 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 volume of mortgage loans originated, sold and corresponding 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.

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Our business may be adversely affected by credit risk associated with residential property.

At December 31, 2021, one- to four-family residential loans comprised $236.4 million, or 43.0%, of our total loan portfolio, and home equity loans and lines of credit comprised $57.3 million, or 10.4%, 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.

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, 2021, $248.6 million, or 45.2%, 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 loans, 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 loan portfolio at December 31, 2021 totaled $549.8 million, an increase of $147.2 million, or 37%, since December 31, 2017. It is difficult to assess the future performance of these loans added to our portfolio during this four-year period 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, 2021, our allowance for loan losses totaled $6.3 million, which represented 1.14% of total loans and 239.7% 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

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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.

Loss of deposits or a change in deposit mix could increase our cost 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 customers 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 retail 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 retail deposits and funds from the repayments and maturities of loans and investments. These include “wholesale” funding sources, including FHLBB and FRB advances, brokered deposits, listing service deposits, and proceeds from the sale of loans. We may become more dependent on these sources in the future. At December 31, 2021, we had $50.0 million of FHLBB advances outstanding with an additional $111.5 million available borrowing capacity from the FHLBB, $2.0 million of available borrowing capacity from the FRB, and $12.5 million of available borrowing capacity under a line of credit with a correspondent bank. Brokered deposits as of December 31, 2021 totaled $50.1 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 FHLBB and the FRB. 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 all banking 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 and to other financial institutions longer term, conforming and non-conforming fixed-rate and, to a lesser extent, ARMs 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 servicing mortgage loans. As a result of our mortgage servicing business, we have a sizeable portfolio of MSRs which represent the right to service a mortgage loan – collect principal, interest, and escrow amounts – for a fee. We acquire MSRs 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 (including commissions), 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 $41.7 million and $46.3 million for the years ended December 31, 2021 and 2020, 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 77.3% and 62.4% for the years ended December 31, 2021 and 2020, respectively. Failure to control or maintain our expenses could hurt future profitability.

Changes in the valuation of our securities portfolio 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. 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.

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 lending market, such as insurance companies, securities companies, Fintech 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

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broader offering of deposit and loan products of some of our competitors may also limit our ability to increase our interest-earning assets.

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.

Our business may be adversely affected if we fail to adapt our products and services to evolving industry standards and consumer preferences.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services. We might not be successful in developing or introducing new products and services, integrating new or modified products or services into our existing offerings, responding or adapting to changes in consumer behavior, preferences, spending, investing and/or saving habits, achieving market acceptance of our products and services, reducing costs in response to pressures to deliver products and services at lower prices or sufficiently developing and maintaining loyal customers.

35


 

Development of new products and services may impose additional costs on us and may expose us to increased operational risk.

The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from clients, the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices and the preparation of marketing, sales and other materials that fully and accurately describe the product or service and its underlying risks. Our failure to manage these risks and uncertainties also exposes us to enhanced risk of operational lapses which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine if such initiatives can be brought to market in a manner that is timely and attractive to our clients. Products and services relying on internet and mobile technologies may expose us to fraud and cybersecurity risks. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation, as well as on its consolidated results of operations and financial condition.

Climate change, severe weather, natural disasters, acts of terrorism and other external events could harm our business.

Natural disasters including severe weather events of increasing strength and frequency due to climate change 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, or pandemics 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, core application processing and residential mortgage loan servicing. 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 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.

 

36


 

 

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 sold in the initial public offering, with funds borrowed from Randolph Bancorp. We record annual employee stock ownership plan expense in an amount equal to the fair value of shares 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.

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. 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;

 

a limitation on the right to vote shares;

 

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, 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.

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.

We may not be able to successfully implement our strategic plan.

Growth is essential to improving our recurring profitability, and we may continue to incur expenses related to the implementation of our strategic plan. We also may not be able to successfully implement our strategic plan, or do so in the timeframe that we expect, and therefore may not be able to increase profitability in the timeframe that we expect or at all, resulting in a decrease in the profitability of the Company.

The successful implementation of our strategic plan will require, among other things that we attract and retain new and existing 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 continued favorable market conditions, the competitive responses from other financial institutions in our market area, our ability to attract and retain experienced staff, 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

37


 

successfully achieve and manage our future growth, growth opportunities may not be available and we may not be successful in implementing our business strategy.

Environmental liability associated with commercial lending could result in losses.

In the course of business, we may acquire, through foreclosure or other similar proceedings, properties securing loans we have originated that are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered at these properties. In this event, we might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of this remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties as a result of their condition. These events could have an adverse effect on our business, results of operations and financial condition.

We use significant assumptions and estimates in our financial models to determine the fair value of certain assets, including MSRs, origination commitments and loans held for sale. If our assumptions or estimates are incorrect, that may have a negative impact on the fair value of such assets and adversely affect our earnings.

We use internal and third-party financial models that utilize market data to value certain assets, including mortgage servicing rights when they are initially acquired and on a quarterly basis thereafter. The methodology used to estimate these values is complex and uses asset-specific collateral data and market inputs for interest and discount rates and liquidity dates. Valuations are highly dependent upon the reasonableness of our assumptions and the predictability of the relationships that drive the results of our valuation methodologies. If prepayment speeds increase more than estimated, or if delinquency or default levels are higher than anticipated, we may be required to write down the value of certain assets, which could adversely affect our earnings. Prepayment speeds are significantly impacted by fluctuations in interest rates and are therefore difficult to predict. During periods of declining interest rates, prepayment speeds increase resulting in a decrease in the fair value of the MSRs. In addition, there can be no assurance that, even if our models are correct, these assets could be sold for our carrying value should we choose or be forced to sell them in the open market.

If we are required to repurchase mortgage loans that we have previously sold, it could negatively affect our earnings.

In connection with selling residential mortgage loans in the secondary market, our agreements with investors contain standard representations and warranties and early payment default clauses that could require us to repurchase mortgage loans sold to these investors or reimburse the investors for losses incurred on loans in the event of borrower default within a defined period after origination or, in the event of breaches of contractual representations or warranties made at the time of sale that are not remedied within a defined period after we receive notice of such breaches, to provide indemnification or other recourse, or to refund the profit received from the sale of a loan to an investor if the borrower pays off the loan within a defined period after origination. If we are required to repurchase mortgage loans or provide indemnification or other recourse, this could significantly increase our costs and thereby affect our future earnings.

Hedging against interest rate exposure may adversely affect our earnings.

We employ techniques that limit, or “hedge,” the adverse effects of rising interest rates on our loans held for sale and commitments to fund residential mortgage loans at specified rates under certain terms and conditions. Our hedging activity varies based on the level and volatility of interest rates and other changing market conditions. These techniques may include purchasing or selling futures contracts, or entering into commitments with investors to sell loans. There are, however, no perfect hedging strategies, and interest rate hedging may fail to protect us from loss. Moreover, hedging activities could result in losses if the event against which we hedge does not occur. Additionally, interest rate hedging could fail to protect us or adversely affect us because, among other things:

 

Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;

 

The duration of the hedge may not match the duration of the related liability;

 

The party owing money in the hedging transaction may default on its obligation to pay;

 

The credit quality of the party owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

38


 

 

The value of derivatives used for hedging may be adjusted from time to time in accordance with accounting rules to reflect changes in fair value; and/or

 

Downward adjustments, or “mark-to-market losses,” would reduce our stockholders’ equity.

We may be unable to attract and retain highly qualified employees.

 

Our success depends on the talent and ability of our employees. Competition for the best people can be intense, and we may not be able to hire or retain the employees that we depend upon for success, or the employees that we do hire may be restricted for a period of time in the activities that they may perform for us as a result of agreements with their previous employers. The unexpected loss of services of one or more of our key employees could jeopardize our relationships with our clients and lead to the loss of client accounts and relationships, causing an adverse impact on our business, due to the loss of employee skills, institutional knowledge, and client relationships. Frequently, we compete in the market for talent with entities that are not subject to comprehensive regulation, including with respect to the structure of incentive compensation. Our inability to attract new employees and retain and motivate our existing employees could adversely impact our business.

 

Uncertainty about the future of LIBOR may adversely affect our business.

LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including funding sources, adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks, which will stop reporting such information after June 30, 2023. It is uncertain at this time whether LIBOR will change or cease to exist or the extent to which those entering into financial contracts will transition to any other particular benchmark. Other benchmarks may perform differently than LIBOR or may have other consequences that cannot currently be anticipated. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which of those instruments may remain outstanding or be renegotiated if LIBOR ceases to exist. The uncertainty regarding the future of LIBOR as well as the transition from LIBOR to another benchmark rate or rates, such as the Secured Overnight Financing Rate (“SOFR”), could have adverse impacts on our funding costs or net interest margins, as well as any floating-rate obligations, loans, deposits, derivatives, and other financial instruments that currently use LIBOR as a benchmark rate and, ultimately, adversely affect our financial condition and results of operations.

We may need to raise additional capital in the future, but that capital may not be available when it is needed or the cost of that capital may be very high.

We are required by our regulators to maintain adequate levels of capital to support our operations, which may result in our need to raise additional capital to support continued growth. Our ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside our control, and on our financial condition and performance. Accordingly, we may not be able to raise additional capital if needed on terms that are acceptable to us, or at all. If we cannot raise additional capital when needed, our operations could be materially impaired and our financial condition and liquidity could be materially and adversely affected. In addition, if we are unable to raise additional capital when required by the Massachusetts Commissioner of Banks, the FDIC or the Federal Reserve, we may be subject to adverse regulatory action.

If we raise capital through the issuance of additional of common stock or other securities, it would dilute the ownership interests of existing shareholders and may dilute the per share value of our common stock. New investors may also have rights, preferences and privileges senior to our current shareholders.

Changes in accounting standards could affect reported earnings.

The bodies responsible for establishing accounting standards, including the Financial Accounting Standards Board, or “FASB,” the SEC and other regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.

Of the newly issued guidance, the most significant to us is the FASB Accounting Standards Update (ASU) 2016-13, Financial Instruments—Credit Losses (Topic 326), commonly referred to as “CECL,” which introduces new guidance for the accounting for credit losses on instruments within its scope. CECL requires loss estimates for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. It also modifies the impairment model for debt securities available for sale and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The impact of this update will be dependent on the portfolio composition, credit quality and economic conditions at the time of adoption. We are required to implement the CECL methodology by 2023. While we currently cannot

39


 

reasonably estimate the impact of adopting this standard, we expect the impact will be influenced by the composition, characteristics and quality of our loan and securities portfolios, as well as the general economic conditions and forecast as of the adoption date.

Securities issued by us, including our common stock, are not FDIC insured.

Securities issued by us, including our common stock, are not savings or deposit accounts or other obligations of any bank and are not insured by the FDIC, or any other governmental agency or instrumentality, or any private insurer, and are subject to investment risk, including the possible loss of principal.

RISKS RELATED TO OUR REGULATORY ENVIRONMENT

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 the 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 the Bank may conduct business and obtain financing.

Federal regulations establish minimum capital requirements for insured depository institutions, including minimum risk-based capital and leverage ratios, and define “capital” for calculating these ratios. The minimum capital requirements are: (i) a common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6%; (iii) a total capital ratio of 8%; and (iv) a Tier 1 leverage ratio of 4%. The regulations also establish a “capital conservation buffer” of 2.5%. An institution will be subject to limitations on paying dividends, engaging in share repurchases and paying discretionary bonuses if its capital level falls below the capital conservation buffer amount. The application of these capital requirements could, among other things, require us to maintain higher capital resulting in lower returns on equity, and we may be required to obtain additional capital to comply or result in regulatory actions if we are unable to comply with such requirements.

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 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 CFPB, 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.

We face significant legal risks, both from regulatory investigations and proceedings from private actions brought against us.

As a participant in the financial services industry, many aspects of our business involve substantial risk of legal liability. From time to time we are named as a defendant or are otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future. Actions currently pending against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could materially adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us.

40


 

 

Changes in tax laws and regulations and differences in interpretation of tax laws and regulations may adversely impact our financial statements.

From time to time, local, state or federal tax authorities change tax laws and regulations, which may result in a decrease or increase to our deferred tax liability. Local, state or federal tax authorities may interpret laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest, penalties, or litigation costs that could have a material adverse effect on our results.

 

Item 1B. Unresolved Staff Comments.

None.

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
Leased

 

Month of Lease
Expiration

Banking Offices:

 

 

 

 

 

 

 

129 North Main Street Randolph, MA 02368

 

Owned

 

 

1976

 

N/A

50 South Franklin Street Holbrook, MA 02343

 

Owned

 

 

1997

 

N/A

497 Washington Street Stoughton, MA 02072

 

Owned

 

 

2017

 

N/A

87 Sharon Street Stoughton, MA 02072

 

Leased

 

 

1995

 

March 2025

1 Rockdale Street Braintree, MA 02184

 

Leased

 

 

2018

 

April 2023

 

 

 

 

 

 

 

 

Loan Production Offices:

 

 

 

 

 

 

 

303 Wyman Street, Suite 275 Waltham, MA 02451

 

Leased

 

 

2019

 

July 2022

875 State Road Westport, MA 02790

 

Leased

 

 

2007

 

December 2023

276 Turnpike Road Route 9 East, Westboro, MA 01581

 

Leased

 

 

2018

 

October 2023

1 Stiles Road, Suite 204, Salem, NH, 03079

 

Leased

 

 

2020

 

December 2022

 

 

 

 

 

 

 

 

Administrative Offices/Lending Centers:

 

 

 

 

 

 

 

999 South Washington Street North Attleboro, MA 02760(1)

 

Leased

 

 

2014

 

February 2022

2 Batterymarch Park, Suite 301, Quincy, MA 02169

20 Alice Agnew Drive, Suite 4, North Attleboro, MA 02763

 

Leased

Leased

 

 

2021

2022

 

June 2027

April 2025

 

(1)This lending center was closed as of March 10, 2022.

 

(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.

41


 

PART II

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

Randolph Bancorp’s common stock trades on the NASDAQ Global Market under the symbol RNDB.

Holders

At February 28, 2022, there were approximately 219 holders of record of the Randolph Bancorp’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

Holders of our common stock are entitled to receive dividends that our board of directors may declare out of funds legally available for such payments. We may 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,” “Business—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, 2021 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 12 of the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data located elsewhere in this report.

 

 

 

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

 

 

558,207

 

 

$

14.17

 

 

 

78,699

 

Equity Compensation Plans

     Not Approved by Security Holders

 

 

41,176

 

 

 

8.78

 

 

 

 

Total

 

 

599,383

 

 

$

13.80

 

 

 

78,699

 

 

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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 programs originally announced on October 27, 2020 and October 26, 2021. Under the repurchase program announced October 27, 2020, the Company may repurchase up to 552,000 shares of its common stock, or approximately 10% of its outstanding shares at the time the program was announced. This program expired on October 29, 2021. Under the repurchase program announced October 26, 2021, the Company may repurchase up to 510,000 shares of its common stock, or approximately 10% of its outstanding shares at the time the program was announced. On January 25, 2022, the Company announced that a modification to the program which changed the program so that the Company may purchase up to 62,000 shares, or approximately 1% of the Company’s outstanding stock at the time of the modification. 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

 

Plan Announcement Date

 

Total Number of Shares Purchased

 

 

Average Price Paid per Share

 

 

Maximum Number of Shares that May Yet be Purchased Under the Modified Plans or Programs(1)

 

October 2021

 

October 27, 2020

 

 

1,965

 

 

$

22.08

 

 

 

62,000

 

November 2021

 

October 26, 2021

 

 

1,417

 

 

$

23.31

 

 

 

60,583

 

December 2021

 

October 26, 2021

 

 

2,920

 

 

$

23.05

 

 

 

57,663

 

 

 

6,302

 

 

$

22.81

 

 

 

 

 

(1) The maximum number of shares that may yet be purchased under the buyback program announced on October 26, 2021, reflects the amended size of the program of 62,000 shares.

 

43


 

 

Performance Graph

 

The performance graph compares the cumulative total shareholder return on Randolph Bancorp’s common stock for the period beginning at the close of trading on July 1, 2016 (the end of the first day of trading of Randolph Bancorp’s common stock on the NASDAQ Global Market) to December 31, 2021, with the cumulative total return of the S&P 500 Total Return Index and the S&P U.S. SmallCap Banks Index for the same period. Dividend reinvestment has been assumed. The Performance Graph assumes $100 invested on July 1, 2016 in Randolph Bancorp’s common stock and on June 30, 2016 in the S&P 500 Total Return Index and the S&P U.S. SmallCap Banks Index. The historical stock price performance for Randolph Bancorp’s common stock shown on the graph below is not necessarily indicative of future stock performance.

 

 

 

*

$100 invested on July 1, 2016 in Randolph Bancorp’s common stock or June 30, 2016 in index, including reinvestment of dividends. Fiscal year ending December 31.

 

 

 

July 1, 2016

 

 

December 31, 2016

 

 

December 31, 2017

 

 

December 31, 2018

 

 

December 31, 2019

 

 

December 31, 2020

 

 

December 31, 2021

 

Randolph Bancorp

 

$

100.00

 

 

$

132.24

 

 

$

125.92

 

 

$

116.08

 

 

$

144.79

 

 

$

180.97

 

 

$

198.06

 

S&P 500

 

$

100.00

 

 

$

107.82

 

 

$

131.36

 

 

$

125.60

 

 

$

165.15

 

 

$

195.54

 

 

$

251.67

 

S&P U.S. SmallCap Banks

 

$

100.00

 

 

$

142.83

 

 

$

149.02

 

 

$

124.34

 

 

$

156.00

 

 

$

141.68

 

 

$

197.23

 

(Source: S&P Global, Inc.)

Item 6. Reserved.

 

 

44


 

 

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 and its subsidiary through a discussion of the factors affecting its financial condition at December 31, 2021 and December 31, 2020, and their results of operations for the years then ended. This section should be read in conjunction with the consolidated financial statements of Randolph Bancorp and notes thereto that appear elsewhere in this report.

Overview

Our results of operations depend primarily on net interest income and net gains on loan origination and sale activities. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our 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, including brokered deposits, and borrowings from the FHLBB and the FRB. Net gains on loan origination and sale activities result from the origination of loan commitments to customers and the ultimate sale of the related residential mortgage loans in either the secondary mortgage market or to other financial institutions. Our results of operations also depend on mortgage servicing fees which we earn by servicing mortgages for third parties but which also include valuation adjustments whenever the fair value of MSRs is less than their amortized cost. Such adjustments are affected by a variety of factors including both actual and projected loan prepayment speeds that are sensitive to prevailing mortgage interest rates.

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 1 to our Consolidated Financial Statements included elsewhere in this report.

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 loan is uncollectable. 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 collectability 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 using information available to them at the time of their examination. See Notes 1 and 3 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 through 2019, 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. After incurring losses in four of the seven previous years, the Company had net income of $9.6 million and $19.9 million in 2021 and 2020, respectively. During 2021, management concluded that the previous 100% valuation allowance for deferred tax assets was no longer needed. There was no valuation allowance as of December 31, 2021.

45


 

We do not have any uncertain tax positions at December 31, 2021 and 2020 which require accrual or disclosure. We record interest and penalties as part of income tax expense. Interest and penalties recorded for the years ended December 31, 2021 and 2020 were not significant.

Comparison of Financial Condition at December 31, 2021 and 2020 - Consolidated

Total Assets. Total assets increased $82.2 million, or 11.4%, to $803.3 million at December 31, 2021 from $721.1 million at December 31, 2020. This growth resulted from an increase of $61.0 million in net loans and an increase of $101.7 million in cash and cash equivalents. The increase in net loans was a result of the $53.5 million, or 37.2%, increase in commercial real estate loans during the year ended December 31, 2021, as compared to the prior year. The increase in cash and cash equivalents occurred largely as a result of the increase in non-interest bearing deposits of $48.9 million, or 50.6%, and an increase in retail term certificates of deposit of $22.7 million, or  27.2%, during the year ended December 31, 2021.

Investment Securities. Investment securities, all of which are classified as available for sale, decreased $3.7 million, or 6.7%, to $51.7 million at December 31, 2021 from $55.4 million at December 31, 2020. At December 31, 2021, investment securities represented 6.4% of total assets compared to 7.7% at December 31, 2020. Investment securities as a percentage of total assets are below the low end of our target range of 10%, but that is offset by the level of cash and cash equivalents at December 31, 2021. We regularly evaluate the diversification of our interest-earning assets in terms of both liquidity and yield and consider changes in our target levels for both investments and loans taking into consideration both on-and off-balance sheet sources of liquidity.

Loans Held for Sale. We are actively involved in the secondary mortgage market and designate a significant majority of our residential first mortgage loan production for sale. Total originations of one- to four-family residential mortgage loans for sale in either the secondary mortgage market or to other financial institutions decreased $265.9 million, or 17.0%, to $1.3 billion in 2021 from $1.6 billion in 2020. This decrease was a consequence of an increase in mortgage rates, which led to a decrease in our production of refinanced loans by $244.0 million to $1.0 billion in 2021 from $1.2 billion in 2020. For the years ended December 31, 2021 and 2020, refinanced residential mortgage loans accounted for 75% and 77%, respectively, of overall residential mortgage loan production.

At December 31, 2021, loans held for sale totaled $44.8 million compared to $119.1 million at December 31, 2020. This decrease reflects the decline in the loan refinancing market through the end of the year as mortgage interest rates increased during 2021, compared to all-time low rates at the end of 2020.

Net Loans. Net loans increased $61.0 million, or 12.6%, from $483.6 million at December 31, 2020 to $544.6 million at December 31, 2021. This increase was largely attributable to an increase in commercial real estate loans, which had an ending balance of $197.4 million at December 31, 2021. Commercial real estate loans consist of loans primarily to small- and mid-size owner occupants and investors in our market area seeking loans between $500,000 and $15.0 million. During 2021, home equity and construction loans increased $9.1 million and $2.9 million, respectively.

Residential one- to four-family residential real estate secured loans increased $0.7 million, or 0.3%, in 2021. This slight increase in the balance was the result of management’s decision to reduce the proportion of these loans in the loan portfolio and to manage interest-rate risk in anticipation of increasing interest rates during 2022. Commercial and industrial loans decreased by $3.0 million, or 14.9%, during 2021, primarily as a result of forgiveness of PPP loans by the SBA.

Mortgage Servicing Rights. MSRs increased $3.2 million to $15.6 million at December 31, 2021 from $12.4 million at December 31, 2020. This increase was due to the retained servicing rights associated with 2021 residential loan originations sold in the secondary market. We serviced $1.98 billion in loans for others at December 31, 2021 compared to $1.76 billion at December 31, 2020. The fair value of MSRs was $16.4 million, or 83 basis points at December 31, 2021 compared to $12.5 million, or 71 basis points, at December 31, 2020. This increase in value was directly attributable to the increase in mortgage rates in 2021 and the concomitant deceleration of actual and projected loan prepayment speeds. The refinance market shows signs of significant slowing in 2022, and as a result we expect to continue to see an increase in the fair value of MSRs.

Deposits. Deposits increased $109.8 million, or 20.8%, to $638.1 million at December 31, 2021 from $528.3 million at December 31, 2020.  This increase included a $91.5 million increase in non-brokered deposits. This positive development in non-brokered deposit generation has led to a decrease in the cost of funds and reduced our reliance on wholesale funding.

FHLBB and FRB Advances. FHLBB advances decreased $11.9 million from $61.9 million at December 31, 2020 to $50.0 million at December 31, 2021. This decrease reflects the payoff of short-term and long-term borrowings during the year. At December 31, 2021, the Bank had $111.5 million in available borrowing capacity at the FHLBB based on its qualified collateral as of that date. FRB advances utilized during 2020 as part of the PPP were paid off in full during 2021. There were no FRB advances outstanding at December 31, 2021 and the ending balance of FRB advances was $11.4 million at December 31, 2020. Accordingly, total advances declined by $23.3 million in 2021, reducing our cost of funds and reliance on wholesale funding sources.

46


 

Total Stockholders’ Equity. Total stockholders’ equity increased $1.1 million to $100.9 million at December 31, 2021 from $99.8 million at December 31, 2020. This increase was due to net income of $9.6 million and stock-based compensation of $1.2 million, partially offset by share repurchases of $8.5 million, common stock dividends paid of $766,000 and other comprehensive loss of $1.1 million.

Comparison of Operating Results for the Years Ended December 31, 2021 and 2020 - Consolidated

General. We recorded net income of $9.6 million, or $1.96 per basic share and $1.88 per diluted share, for the year ended December 31, 2021 compared to net income of $19.9 million, or $3.89 per basic and $3.86 per diluted share, for the year ended December 31, 2020. Results of operations in 2021 included the following items:

 

Losses on disposals of fixed assets of $84,000;

 

Severance expenses of $419,000 related to the outsourcing of our residential loan servicing activities, which improved our customer service experience and our operational and financial efficiency; and

 

Other outsourcing expenses related to the outsourcing of residential loan servicing activities of $261,000.

 

Exclusive of these items totaling $764,000, or $545,000 after taxes, we would have reported net income of $10.1 million in 2021, compared to net income, also on a non-GAAP basis, of $21.5 million in 2020. See “—Non-GAAP Measures.”

Results of operations in 2020 included the following items:

 

One time charges related to the retirement of senior executives of $1.4 million;

 

Expenses related to addressing the COVID-19 pandemic of $229,000;

 

Expenses related to the closing of a residential lending office of $294,000; and

 

Severance expenses of $69,000 related to a plan to outsource our residential loan servicing activities, to improve our customer service experience and our operational and financial efficiency.

Exclusive of these items totaling $2.0 million, or $1.5 million after taxes, we would have reported net income of $21.5 million in 2020. See “—Non-GAAP Measures.”

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 our 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.

 

 

47


 

 

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,

 

 

 

2021

 

 

2020

 

 

2019

 

 

 

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)

 

$

613,427

 

 

$

23,162

 

 

 

3.78

%

 

$

561,912

 

 

$

22,212

 

 

 

3.95

%

 

$

547,454

 

 

$

23,632

 

 

 

4.32

%

Investment securities (2) (3)

 

 

55,421

 

 

 

923

 

 

 

1.67

%

 

 

58,233

 

 

 

1,306

 

 

 

2.24

%

 

 

52,953

 

 

 

1,521

 

 

 

2.87

%

Interest-earning deposits

 

 

32,841

 

 

 

32

 

 

 

0.10

%

 

 

30,277

 

 

 

76

 

 

 

0.25

%

 

 

5,109

 

 

 

90

 

 

 

1.76

%

Total interest-earning assets

 

 

701,689

 

 

 

24,117

 

 

 

3.44

%

 

 

650,422

 

 

 

23,594

 

 

 

3.63

%

 

 

605,516

 

 

 

25,243

 

 

 

4.17

%

Noninterest-earning assets

 

 

42,608

 

 

 

 

 

 

 

 

 

 

 

39,395

 

 

 

 

 

 

 

 

 

 

 

27,903

 

 

 

 

 

 

 

 

 

Total assets

 

$

744,297

 

 

 

 

 

 

 

 

 

 

$

689,817

 

 

 

 

 

 

 

 

 

 

$

633,419

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

190,865

 

 

 

335

 

 

 

0.18

%

 

 

161,502

 

 

 

831

 

 

 

0.51

%

 

 

108,483

 

 

 

560

 

 

 

0.52

%

NOW accounts

 

 

65,978

 

 

 

138

 

 

 

0.21

%

 

 

55,396

 

 

 

185

 

 

 

0.33

%

 

 

39,197

 

 

 

194

 

 

 

0.49

%

Money market accounts

 

 

74,816

 

 

 

174

 

 

 

0.23

%

 

 

71,817

 

 

 

456

 

 

 

0.63

%

 

 

69,362

 

 

 

955

 

 

 

1.38

%

Term certificates

 

 

112,802

 

 

 

743

 

 

 

0.66

%

 

 

147,655

 

 

 

2,305

 

 

 

1.56

%

 

 

178,901

 

 

 

3,619

 

 

 

2.02

%

Total interest-bearing deposits

 

 

444,461

 

 

 

1,390

 

 

 

0.31

%

 

 

436,370

 

 

 

3,777

 

 

 

0.87

%

 

 

395,943

 

 

 

5,328

 

 

 

1.35

%

FHLBB and FRB advances

 

 

59,963

 

 

 

763

 

 

 

1.27

%

 

 

71,661

 

 

 

943

 

 

 

1.32

%

 

 

86,724

 

 

 

2,070

 

 

 

2.39

%

Total interest-bearing

   liabilities

 

 

504,424

 

 

 

2,153

 

 

 

0.43

%

 

 

508,031

 

 

 

4,720

 

 

 

0.93

%

 

 

482,667

 

 

 

7,398

 

 

 

1.53

%

Noninterest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

 

121,378

 

 

 

 

 

 

 

 

 

 

 

80,957

 

 

 

 

 

 

 

 

 

 

 

62,314

 

 

 

 

 

 

 

 

 

Other noninterest-bearing

   liabilities

 

 

15,331

 

 

 

 

 

 

 

 

 

 

 

12,384

 

 

 

 

 

 

 

 

 

 

 

8,845

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

641,133

 

 

 

 

 

 

 

 

 

 

 

601,372

 

 

 

 

 

 

 

 

 

 

 

553,826

 

 

 

 

 

 

 

 

 

Total stockholders' equity

 

 

103,164

 

 

 

 

 

 

 

 

 

 

 

88,445

 

 

 

 

 

 

 

 

 

 

 

79,593

 

 

 

 

 

 

 

 

 

Total liabilities and

   stockholders' equity

 

$

744,297

 

 

 

 

 

 

 

 

 

 

$

689,817

 

 

 

 

 

 

 

 

 

 

$

633,419

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

21,964

 

 

 

 

 

 

 

 

 

 

$

18,874

 

 

 

 

 

 

 

 

 

 

$

17,845

 

 

 

 

 

Interest rate spread (4)

 

 

 

 

 

 

 

 

 

 

3.01

%

 

 

 

 

 

 

 

 

 

 

2.70

%

 

 

 

 

 

 

 

 

 

 

2.64

%

Net interest-earning assets (5)

 

$

197,265

 

 

 

 

 

 

 

 

 

 

$

142,391

 

 

 

 

 

 

 

 

 

 

$

122,849

 

 

 

 

 

 

 

 

 

Net interest margin (6)

 

 

 

 

 

 

 

 

 

 

3.13

%

 

 

 

 

 

 

 

 

 

 

2.90

%

 

 

 

 

 

 

 

 

 

 

2.95

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ratio of interest-earning assets to

   interest-bearing liabilities

 

 

139.11

%

 

 

 

 

 

 

 

 

 

 

128.03

%

 

 

 

 

 

 

 

 

 

 

125.45

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets

 

 

1.29

%

 

 

 

 

 

 

 

 

 

 

2.89

%

 

 

 

 

 

 

 

 

 

 

0.54

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average equity

 

 

9.31

%

 

 

 

 

 

 

 

 

 

 

22.54

%

 

 

 

 

 

 

 

 

 

 

4.31

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average equity to average assets

 

 

13.86

%

 

 

 

 

 

 

 

 

 

 

12.82

%

 

 

 

 

 

 

 

 

 

 

12.57

%

 

 

 

 

 

 

 

 

 

(1)

Includes nonaccruing loan balances and interest received on such loans.

(2)

Includes carrying value of securities classified as available-for-sale, FHLBB stock and investment in the Depositors Insurance Fund.

(3)

Includes tax equivalent adjustments for municipal securities, based on a statutory tax rate of 21% for 2021, 2020 and 2019, of $4,000, $5,000 and $12,000, respectively.

(4)

Interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

48


 

(5)

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

(6)

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

 

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, 2021

 

 

For the Year Ended December 31, 2020

 

 

 

Compared to

 

 

Compared to

 

 

 

Year Ended December 31, 2020

 

 

Year Ended December 31, 2019

 

 

 

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

 

$

1,966

 

 

$

(1,016

)

 

$

950

 

 

$

(95

)

 

$

(1,324

)

 

$

(1,419

)

Investment securities

 

 

(60

)

 

 

(323

)

 

 

(383

)

 

 

(14

)

 

 

(200

)

 

 

(214

)

Interest-earning deposits

 

 

6

 

 

 

(50

)

 

 

(44

)

 

 

22

 

 

 

(35

)

 

 

(13

)

Total interest-earning assets

 

 

1,912

 

 

 

(1,389

)

 

 

523

 

 

 

(87

)

 

 

(1,559

)

 

 

(1,646

)

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Savings accounts

 

 

130

 

 

 

(626

)

 

 

(496

)

 

 

265

 

 

 

5

 

 

 

270

 

NOW accounts

 

 

31

 

 

 

(78

)

 

 

(47

)

 

 

11

 

 

 

(21

)

 

 

(10

)

Money market accounts

 

 

18

 

 

 

(300

)

 

 

(282

)

 

 

(15

)

 

 

(484

)

 

 

(499

)

Term certificates

 

 

(453

)

 

 

(1,109

)

 

 

(1,562

)

 

 

(570

)

 

 

(744

)

 

 

(1,314

)

Total interest-bearing deposits

 

 

(274

)

 

 

(2,113

)

 

 

(2,387

)

 

 

(309

)

 

 

(1,244

)

 

 

(1,553

)

FHLBB and FRB advances

 

 

(150

)

 

 

(30

)

 

 

(180

)

 

 

(315

)

 

 

(812

)

 

 

(1,127

)

Total interest-bearing liabilities

 

 

(424

)

 

 

(2,143

)

 

 

(2,567

)

 

 

(624

)

 

 

(2,056

)

 

 

(2,680

)

Change in net interest income

 

$

2,336

 

 

$

754

 

 

$

3,090

 

 

$

537

 

 

$

497

 

 

$

1,034

 

 

Comparison of Results of Operations for the Years Ended December 31, 2021 and 2020

 

Interest and Dividend Income. Interest and dividend income, inclusive of tax equivalent adjustments on municipal securities, increased $523,000, or 2.2%, to $24.1 million in 2021 compared to $23.6 million in 2020. This increase was due to a $51.3 million, or 7.9%, increase in the average balance of interest earning assets from $650.4 million in 2020 to $701.7 million in 2021. The yield on loans decreased 0.17% to 3.78% in 2021 from 3.95% in 2020. In 2021 and 2020, average loans represented 82.4% and 81.5% of total average assets, respectively.

Interest Expense. Interest expense decreased $2.6 million, or 54.4%, to $2.2 million in 2021 compared to $4.7 million in 2020. This decrease was due to the downward pricing and improved composition of deposit liabilities. Average noninterest-bearing deposits increased by $40.4 million, or 49.9%, in 2021. The decrease in cost of funds was also caused by a decrease in the utilization of higher cost wholesale funding (including brokered deposits and FHLBB and FRB advances) to fund loan growth. In 2021, term funding and advances represented 34.2% of total average interest-bearing liabilities compared to 43.2% in 2020, resulting in a shortening of interest-bearing liabilities. The cost of certificates of deposit decreased 90 basis points in 2021 while the cost of FHLBB and FRB advances decreased 5 basis points. The decreasing cost of funds, especially wholesale funding, is mainly attributable to a sharp decline in interest rates as a result of actions taken by the Federal Reserve to counteract the negative economic effects of the pandemic during 2020, which remained in effect during 2021.  

 

Net Interest Income. Net interest income increased $3.1 million, or 16.4%, to $22.0 million in 2021 compared to $18.9 million in 2020. The change reflects the downward pricing and improved composition of deposit liabilities, as well as loan growth. The composition of our funding base improved with an increase of $48.9 million, or 50.6%, of non-interest bearing deposits and a decrease of $23.3 million, or 31.8%, of borrowings. The composition change resulted in a 50 basis point decrease in the cost of interest-bearing liabilities. Average loan growth of $51.5 million, or 9.2%, from the prior year more than offset a 17 basis point decline in loan yields.

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, the Company recognized a credit for loan losses of $438,000 in 2021 while a provision for loan losses was recognized in 2020 of $2.6 million. The credit for loan losses during 2021 was primarily the result of

49


 

improvements in qualitative factors related to the impact of the COVID-19 pandemic, the economic outlook, commercial lending and credit quality trends, partially offset by provisions for loan growth. The provision for loan losses in 2020 was primarily the result of an uncertain economic environment caused by the COVID-19 pandemic. The allowance for loan losses as a percentage of total loans was 1.14% at December 31, 2021 compared to 1.39% at December 31, 2020.

Net Gain on Loan Origination and Sale Activities. The net gain on loan origination and sale activities decreased $26.6 million, or 49.0%, to $27.7 million in 2021 compared to $54.2 million in 2020. Mortgage loans sold were $1.4 billion in 2021, compared to $1.5 billion in the prior year. This decrease in net gain on sale activities was the result of both lower loan sales and the impact of a shrinking mortgage banking pipeline during 2021, compared to an increasing mortgage banking pipeline during 2020. The pipeline decreased by $310.7 million, or 78.3%, to $85.9 million as of December 31, 2021, from $396.6 million at the end of 2020. Loan refinancing activity represented 75% of loan production in 2021 compared to 77% in 2020.

Other Non-interest Income. Non-interest income, excluding the net gain on loan origination and sale activities, increased $3.1 million to $4.2 million in 2021, from $1.2 million in 2020. This increase was caused by a $2.8 million improvement in net mortgage servicing fees in 2021, attributable to an increase in the fair value of MSRs from 71 basis points at December 31, 2020 to 83 basis points at December 31, 2021, because of decreased prepayment speeds. During 2021, a release to the provision to the valuation allowance of mortgage loan servicing rights of $438,000 was recognized, compared to an increase in the valuation allowance of $2.1 million during 2020.

Non-interest Expenses. Non-interest expenses decreased $4.7 million, or 10.1%, to $41.7 million in 2021 compared to $46.3 million in 2020. Non-interest expenses in 2020 included one-time charges of $1.4 million related to the retirement of senior executives, as well as $229,000 of COVID-19 pandemic related expenses. Occupancy and equipment expenses decreased $753,000 in 2021, as the Company migrated to a hybrid work environment and reduced its overall real estate footprint by closing six loan production offices, and reducing the office space for the Bank’s headquarters and loan operations office since the prior year, and reduced COVID-19 pandemic related spending. These decreases were partially offset by an increase in other non-interest expenses of $307,000, related to one-time conversion expenses for the bank’s new mortgage sub-servicer, and increases to board fees and stock-based compensation paid to new members of the bank’s Board of Directors.

Salaries and employee benefits decreased $4.9 million in 2021, primarily due to the absence of a one-time charge of $1.4 million related to the retirement of senior executives in 2020 and a decrease of $2.0 million in commissions and loan production incentives related to the decrease in loan production. In addition, reductions in the bank’s workforce related to the outsourcing of residential loan servicing activities, and other bank staffing reductions, reduced salaries and benefits expense by $1.2 million from the prior year.

Occupancy and equipment expense decreased $753,000, or 21.2%, to $2.8 million in 2021 compared to $3.5 million in 2020. Occupancy and equipment expenses decreased from the prior year period as the Company migrated to a hybrid work environment and reduced its overall real estate footprint by closing six loan production offices, and reducing the office space for the bank’s headquarters and loan operations office since the prior year, and reduced COVID-19 pandemic related spending.

Data processing expenses increased $225,000, or 23.9%, to $1.2 million in 2021 from $943,000 in 2020. This increase was largely due to new expenses related to the outsourced servicing of portfolio residential loans, increased customer use of mobile and online technology as well as volume related increases as the bank continues to grow its customer base.

Marketing expenses increased $60,000, or 8.7%, from $689,000 in 2020 to $749,000 in 2021 principally due to materials sent to the bank’s residential mortgage customers to help borrowers migrate to the bank’s new residential loan sub-servicer during the year.

Other non-interest expenses increased $307,000, or 4.7%, to $6.8 million in 2021 from $6.5 million in 2020. This increase was primarily due to one-time conversion expenses for the bank’s new mortgage sub-servicer, and increased board fees and stock-based compensation paid to new members of the bank’s Board of Directors.

Income Tax Expense. Federal income taxes were $2.0 million in 2021, compared to $3.1 million in 2020. The Company recognized state income tax expense of $1.1 million and $2.3 million in 2021 and 2020, respectively. The Company fully reversed its charitable contribution valuation allowance of $531,000 during 2021.

 

 

 

50


 

 

Comparison of Results of Segment Operations for the Years Ended December 31, 2021 and 2020

Segments. The Company has two reporting segments: Envision Bank and Envision Mortgage. Revenue from Envision Bank consists primarily of interest earned on loans and investment securities and customer service fees on deposit accounts. Revenue from Envision Mortgage consists primarily of gains on loan origination and sales activities, loan servicing income and interest income on loans held for sale and residential construction loans. Envision Mortgage’s revenues also include income on loan originations that are retained in Envision Bank’s loan portfolio and loan servicing fees on these loans. This inter-segment profit is eliminated in consolidation. The following table presents a comparison of the results of operations for each segment before incomes taxes and elimination of inter-segment profit, and the changes in those results, for the years ended December 31, 2021 and 2020.

 

 

 

Envision Bank

 

 

Envision Mortgage

 

 

 

Years Ended December 31,

 

 

Increase (Decrease)

 

 

Years Ended December 31,

 

 

Increase (Decrease)

 

 

 

2021

 

 

2020

 

 

Dollars

 

 

Percent

 

 

2021

 

 

2020

 

 

Dollars

 

 

Percent

 

 

 

(Dollars in thousands)

 

Net interest income

 

$

18,894

 

 

$

16,235

 

 

$

2,659

 

 

 

16.4

%

 

$

3,066

 

 

$

2,632

 

 

$

434

 

 

 

16.5

%

Provision (credit) for loan losses

 

 

(438

)

 

 

2,553

 

 

 

(2,991

)

 

 

(117.2

)

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income after provision (credit) for loan losses

 

 

19,332

 

 

 

13,682

 

 

 

5,650

 

 

 

41.3

 

 

 

3,066

 

 

 

2,632

 

 

 

434

 

 

 

16.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Customer service fees

 

 

1,538

 

 

 

1,180

 

 

 

358

 

 

 

30.3

 

 

 

80

 

 

 

103

 

 

 

(23

)

 

 

(22.3

)

Gain on loan origination and sale activities, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30,347

 

 

 

55,729

 

 

 

(25,382

)

 

 

(45.5

)

Mortgage servicing fees, net

 

 

(622

)

 

 

(381

)

 

 

(241

)

 

 

(63.3

)

 

 

2,313

 

 

 

(772

)

 

 

3,085

 

 

 

(399.6

)

Other

 

 

428

 

 

 

465

 

 

 

(37

)

 

 

(8.0

)

 

 

501

 

 

 

580

 

 

 

(79

)

 

 

(13.6

)

Total non-interest income

 

 

1,344

 

 

 

1,264

 

 

 

80

 

 

 

6.3

 

 

 

33,241

 

 

 

55,640

 

 

 

(22,399

)

 

 

(40.3

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,031

 

 

 

9,161

 

 

 

(2,130

)

 

 

(23.3

)

 

 

21,181

 

 

 

24,000

 

 

 

(2,819

)

 

 

(11.7

)

Occupancy and equipment

 

 

1,825

 

 

 

1,770

 

 

 

55

 

 

 

3.1

 

 

 

967

 

 

 

1,775

 

 

 

(808

)

 

 

(45.5

)

Other non-interest expenses

 

 

4,435

 

 

 

5,228

 

 

 

(793

)

 

 

(15.2

)

 

 

6,219

 

 

 

4,382

 

 

 

1,837

 

 

 

41.9

 

Total non-interest expenses

 

 

13,291

 

 

 

16,159

 

 

 

(2,868

)

 

 

(17.7

)

 

 

28,367

 

 

 

30,157

 

 

 

(1,790

)

 

 

(5.9

)

Income (loss) before income taxes and elimination of inter-segment profit

 

$

7,385

 

 

$

(1,213

)

 

$

8,598

 

 

 

(708.8

)%

 

$

7,940

 

 

$

28,115

 

 

$

(20,175

)

 

 

(71.8

)%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

708,631

 

 

$

537,722

 

 

$

170,909

 

 

 

31.8

%

 

$

94,647

 

 

$

183,350

 

 

$

(88,703

)

 

 

(48.4

)%

Envision Bank Segment

The Envision Bank segment had income before income taxes and elimination of inter-segment profit of $7.4 million for the year ended December 31, 2021 compared to a loss before income taxes and elimination of inter-segment profit of $1.2 million for the year ended December 31, 2020. The improvement was partially the result of an increase in net interest income of $2.7 million, or 16.4%, to $18.9 million in 2021, from $16.2 million in 2020, given the downward pricing and improved composition of liabilities, as well as loan growth from the prior year. A credit for loan losses of $438,000 in 2021, compared to a provision for loan losses in 2020 was the result of improvements to qualitative factors related to the impact of COVID-19 pandemic, the economic outlook, commercial lending and credit quality trends. The 2020 results also included a $1.03 million charge related to the retirement of senior executives and operating expenses of $229,000 related to addressing the COVID-19 pandemic. Excluding these charges, the segment would have generated income before income taxes and elimination of inter-segment profit of $46,000 in 2020.

Total assets attributable to the Envision Bank segment increased $170.9 million, or 31.8%, to $708.6 million at December 31, 2021 from $537.7 million at December 31, 2020.

Envision Mortgage Segment

The Envision Mortgage segment generated income before income taxes and elimination of inter-segment profit of $7.9 million in 2021 compared to income before income taxes and elimination of inter-segment profit of $28.1 million in 2020. The decrease was the result of a decrease in net gain on loan origination and sale activities of $25.4 million, or 45.5% from $55.7 million in 2020 to

51


 

$30.3 million in 2021. The 2021 results included $419,000 of accrued severance expenses and $261,000 of other outsourcing expenses related to the conversion of residential loan servicing operations to an outsourced model. Excluding these items, Envision Mortgage’s income before income taxes and elimination of inter-segment profit would have been $8.6 million in 2021. The 2020 results included a $344,000 charge related to the retirement of senior executives, $294,000 in expenses related to the closing of a residential lending office and $69,000 in severance expenses. Excluding these items, Envision Mortgage’s income before income taxes and elimination of inter-segment profit would have been $28.8 million.

The net gain on loan origination and sale activities, the principal source of revenue for Envision Mortgage, decreased $25.4 million to $30.3 million in 2021 from $55.7 million in 2020. This decrease was a result of both lower loan sales and the impact of a shrinking mortgage banking pipeline during 2021, compared to an increasing mortgage banking pipeline during 2020. Refinanced loan production decreased $244.0 million to $956.1 million in 2021 from $1.2 billion in 2020. During 2021, residential mortgage loan sales to third parties totaled $1.4 billion compared to $1.5 billion in 2020.

Higher mortgage rates also directly led to an increase of $3.1 million in Envision Mortgage’s net servicing fee income in 2021, including loan servicing fees charged to Envision Bank. This increase was primarily due to an improvement of $2.5 million in the valuation allowance for MSRs, whose fair value increased from 71 basis points in 2020 to 83 basis points in 2021. This increase was a direct result of the impact of both actual and expected deceleration of loan pre-payments on the fair value of MSRs. In 2021, Envision Mortgage had recognized a release to the valuation allowance of mortgage loan servicing rights of $438,000 compared to an increase of $2.1 million in the valuation allowance for MSRs during 2020.

Non-interest expenses of Envision Mortgage decreased $1.8 million to $28.4 million in 2021 from $30.2 million in 2020. This improvement is due primarily to a decrease in salaries and benefits expense of $2.8 million and occupancy and equipment expenses of $808,000, partially offset by increases to other non-interest expenses of $1.8 million.

The decrease in salaries and employee benefits was due to a decrease in commissions and production incentives of $2.0 million, or 13.2%, directly attributable to the decrease in 2021 residential refinance production, partially offset by one-time accrued severance expenses of $419,000.

The decrease of $808,000, or 45.5%, in occupancy and equipment costs in 2021 was caused by the closing of a number of residential loan offices during the year.

Other non-interest expenses increased $1.8 million, or 41.9%, to $6.2 million in 2021 from $4.4 million in 2020. This increase is primarily due to one-time expenses associated with the bank scanning residential mortgage servicing documents to complete the outsourcing of residential loan servicing.

Total assets attributable to the Envision Mortgage segment decreased $88.7 million, or 48.4%, to $94.6 million at December 31, 2021 from $183.4 million at December 31, 2020. This decrease was principally due to decreases in loans held for sale of $74.3 million. The decrease in loans held for sale resulted from decreased fourth quarter loan production in 2021 compared to 2020.

52


 

Selected Financial Data

The following table sets forth our historical consolidated financial data for the periods and dates as indicated. Certain selected historical consolidated financial data as of and for the years ended December 31, 2021 and 2020 is derived from our audited consolidated financial statements, which are included elsewhere in this Annual Report on form 10-K. The selected historical consolidated financial data as of and for the years ended December 31, 2019, 2018 and 2017 are derived from our audited consolidated financial statements not included in this Annual Report on Form 10-K. Our historical results from any prior period are not necessarily indicative of future performance.

 

 

As of and for the Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except share and per share data)

 

Selected Period End Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

115,449

 

 

$

13,774

 

 

$

8,252

 

 

$

7,118

 

 

$

8,822

 

Securities available for sale, at fair value

 

 

51,666

 

 

 

55,366

 

 

 

57,503

 

 

 

50,556

 

 

 

61,576

 

Loans held for sale, at fair value

 

 

44,766

 

 

 

119,112

 

 

 

62,792

 

 

 

38,474

 

 

 

25,390

 

Loans held for investment

 

 

550,910

 

 

 

490,428

 

 

 

473,411

 

 

 

488,283

 

 

 

404,110

 

Allowance for loan losses

 

 

6,289

 

 

 

6,784

 

 

 

4,280

 

 

 

4,437

 

 

 

3,737

 

Mortgage servicing rights, net

 

 

15,616

 

 

 

12,377

 

 

 

8,556

 

 

 

7,786

 

 

 

6,397

 

Total assets

 

 

803,278

 

 

 

721,072

 

 

 

631,004

 

 

 

614,340

 

 

 

531,892

 

Noninterest-bearing deposits

 

 

145,666

 

 

 

96,731

 

 

 

61,603

 

 

 

64,229

 

 

 

62,130

 

Interest bearing deposits

 

 

492,481

 

 

 

431,576

 

 

 

435,439

 

 

 

372,901

 

 

 

304,706

 

Total deposits

 

 

638,147

 

 

 

528,307

 

 

 

497,042

 

 

 

437,130

 

 

 

366,836

 

Federal Home Loan Bank of Boston and Federal Reserve Bank advances

 

 

50,000

 

 

 

73,326

 

 

 

44,403

 

 

 

89,036

 

 

 

75,954

 

Total shareholders' equity

 

 

100,903

 

 

 

99,819

 

 

 

78,462

 

 

 

77,961

 

 

 

81,483

 

Selected Income Statement Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

21,960

 

 

$

18,867

 

 

$

17,833

 

 

$

16,696

 

 

$

14,830

 

Provision (credit) for loan losses

 

 

(438

)

 

 

2,553

 

 

 

-

 

 

 

762

 

 

 

540

 

Net interest income after provision for loan losses

 

 

22,398

 

 

 

16,314

 

 

 

17,833

 

 

 

15,934

 

 

 

14,290

 

Noninterest income

 

 

31,923

 

 

 

55,411

 

 

 

21,663

 

 

 

13,683

 

 

 

12,963

 

Noninterest expense

 

 

41,658

 

 

 

46,316

 

 

 

35,950

 

 

 

31,672

 

 

 

29,822

 

Net income (loss) before income taxes

 

 

12,663

 

 

 

25,409

 

 

 

3,546

 

 

 

(2,055

)

 

 

(2,569

)

Net income (loss)

 

 

9,601

 

 

 

19,932

 

 

 

3,428

 

 

 

(2,086

)

 

 

(2,126

)

Selected Per Share Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share, basic

 

$

1.96

 

 

$

3.89

 

 

$

0.64

 

 

$

(0.37

)

 

$

(0.39

)

Earnings (loss) per common share, diluted

 

 

1.88

 

 

 

3.86

 

 

 

0.64

 

 

 

(0.37

)

 

 

(0.39

)

Dividends paid per common share

 

 

0.15

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Book value per common share

 

 

19.73

 

 

 

18.16

 

 

 

14.07

 

 

 

13.21

 

 

 

13.50

 

Tangible book value per common share(1)

 

 

19.73

 

 

 

18.16

 

 

 

14.06

 

 

 

13.19

 

 

 

13.49

 

Weighted average common shares outstanding, basic

 

 

4,896,641

 

 

 

5,126,561

 

 

 

5,383,617

 

 

 

5,570,720

 

 

 

5,468,514

 

Weighted average common shares outstanding, diluted

 

 

5,108,738

 

 

 

5,163,042

 

 

 

5,383,617

 

 

 

5,570,720

 

 

 

5,468,514

 

Shares outstanding at end of period

 

 

5,113,825

 

 

 

5,495,514

 

 

 

5,576,855

 

 

 

5,903,793

 

 

 

6,034,276

 

 

53


 

 

 

 

As of and for the Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

 

(Dollars in thousands, except share and per share data)

 

Selected Performance Metrics:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets(2)

 

 

1.29

%

 

 

2.89

%

 

 

0.54

%

 

 

-0.37

%

 

 

-0.43

%

Return on average equity(3)

 

 

9.31

%

 

 

22.54

%

 

 

4.31

%

 

 

-2.62

%

 

 

-2.54

%

Net interest margin

 

 

3.13

%

 

 

2.90

%

 

 

2.95

%

 

 

3.10

%

 

 

3.22

%

Efficiency ratio(4)

 

 

77.31

%

 

 

62.35

%

 

 

91.02

%

 

 

104.26

%

 

 

107.30

%

Loans to deposits ratio

 

 

86.33

%

 

 

92.83

%

 

 

95.25

%

 

 

111.70

%

 

 

110.16

%

Non-interest income to total income

 

 

59.25

%

 

 

74.60

%

 

 

54.85

%

 

 

45.04

%

 

 

46.64

%

Selected Credit Quality Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-performing assets as a percentage to total assets

 

 

0.33

%

 

 

1.01

%

 

 

0.52

%

 

 

0.61

%

 

 

0.46

%

Allowance for loan losses as a percentage of total loans(5)

 

 

1.14

%

 

 

1.39

%

 

 

0.91

%

 

 

0.91

%

 

 

0.93

%

Allowance for loan losses as a percentage of total loans, excluding PPP loans(5)

 

 

1.15

%

 

 

1.41

%

 

 

0.90

%

 

 

0.91

%

 

 

0.92

%

Net charge-offs to average loans

 

 

0.01

%

 

 

0.01

%

 

 

0.03

%

 

 

0.01

%

 

 

0.02

%

Allowance for loan losses as a percentage of non-performing loans

 

 

239.67

%

 

 

94.58

%

 

 

131.37

%

 

 

121.06

%

 

 

165.94

%

Allowance for loan losses as a percentage of non-performing assets

 

 

239.67

%

 

 

92.87

%

 

 

131.37

%

 

 

118.95

%

 

 

152.84

%

Envision Bank Capital Ratios:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital to risk weighted assets

 

 

17.4

%

 

 

15.7

%

 

 

16.7

%

 

 

16.1

%

 

 

20.4

%

Tier 1 risk-based capital

 

 

16.2

%

 

 

14.5

%

 

 

15.8

%

 

 

15.1

%

 

 

19.4

%

Common equity Tier 1 capital

 

 

16.2

%

 

 

14.5

%

 

 

15.8

%

 

 

15.1

%

 

 

19.4

%

Tier 1 capital to average assets

 

 

12.2

%

 

 

12.7

%

 

 

11.3

%

 

 

10.9

%

 

 

12.4

%

 

(1)

This non-GAAP measure represents total stockholders’ equity, minus intangible assets of $24,000, $33,000, $56,000, $69,000, and $86,000 at December 31, 2021, 2020, 2019, 2018 and 2017, respectively, divided by outstanding shares at period end.

 

(2)

This non-GAAP measure represents net income divided by average total assets.

 

(3)

This non-GAAP measure represents net income divided by average stockholders’ equity.

 

(4)

This non-GAAP measure represents total non-interest expenses divided by net interest income and non-interest income.

 

(5)

Total loans exclude loans held for sale.

 

54


 

 

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, restructuring charges 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 items unrelated to its core banking business, 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 that is therefore excluded 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 in 2021 and 2020 and reconciles them in accordance with GAAP:

 

 

 

For the Year Ended December 31, 2021

 

(In thousands)

 

Income Before Taxes

 

 

Provision for Income Taxes

 

 

Net Income

 

 

Earnings per Common Share (diluted)

 

GAAP basis

 

$

12,663

 

 

$

3,062

 

 

$

9,601

 

 

$

1.88

 

Non-interest expense adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on disposal of fixed assets

 

 

84

 

 

 

24

 

 

 

60

 

 

 

0.01

 

Accrued severance expenses

 

 

419

 

 

 

120

 

 

 

299

 

 

 

0.06

 

Other outsourcing expenses

 

 

261

 

 

 

75

 

 

 

186

 

 

 

0.04

 

Non-GAAP basis

 

$

13,427

 

 

$

3,281

 

 

$

10,146

 

 

$

1.99

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Year Ended December 31, 2020

 

(In thousands)

 

Income Before Taxes

 

 

Provision for Income Taxes

 

 

Net Income

 

 

Earnings per Common Share (diluted)

 

GAAP basis

 

$

25,409

 

 

$

5,477

 

 

$

19,932

 

 

$

3.86

 

Non-interest expense adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retirement salary and benefits compensation

 

 

692

 

 

 

149

 

 

 

543

 

 

 

0.11

 

Accelerated vesting of stock-based compensation

 

 

683

 

 

 

147

 

 

 

536

 

 

 

0.10

 

COVID-19 related expenses

 

 

229

 

 

 

49

 

 

 

180

 

 

 

0.03

 

Residential lending office closure

 

 

294

 

 

 

63

 

 

 

231

 

 

 

0.04

 

Accrued severance expenses

 

 

69

 

 

 

15

 

 

 

54

 

 

 

0.01

 

Non-GAAP basis

 

$

27,376

 

 

$

5,900

 

 

$

21,476

 

 

$

4.15

 

Management of Market Risk

 

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 rate movements. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. The following table shows the estimated impact on net interest income for the one-year period beginning December 31, 2021 resulting from potential changes in interest rates. The model is run quarterly and currently is showing shocks from +400 basis points to -100 basis points. 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

55


 

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.

 

Changes in Interest Rates (basis points)(1)

 

Change in Net Interest Income Year One

 

 

Change in Net Interest Income Years One and Two

 

+400

 

 

8.9

%

 

 

11.8

%

+300

 

 

7.4

%

 

 

10.0

%

+200

 

 

5.5

%

 

 

7.7

%

+100

 

 

3.1

%

 

 

4.4

%

Level

 

 

 

 

 

 

-100

 

 

(2.5

)%

 

 

(3.5

)%

 

(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 +400 basis points to -100 basis points.

Our economic value of equity analysis as of December 31, 2021 indicated that, in the event of an instantaneous 100, 200, 300 and 400 basis point increase in interest rates, we would experience an estimated 1.03%, 4.47%, 8.73% and 13.69% decrease, respectively, in the economic value of equity. Finally, in the event of an instantaneous 100 basis point decrease in interest rates, we would experience an estimated 2.61% increase in the economic value of equity.

  Certain shortcomings are inherent in the methodology used in 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 methodology 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 methodology 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 methodology 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 and Federal Reserve. 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 (used in) operating activities was $125.1 million and $(43.4) million for the years ended December 31, 2021 and 2020, respectively. Net cash used in investing activities, which consists primarily of disbursements for portfolio loan originations and loan purchases, and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities, proceeds from maturing securities, pay downs on mortgage-backed securities and proceeds from the sale of portfolio loans, was $100.7 million and $9.9 million for the years ended December 31, 2021 and 2020, respectively. Net cash provided by financing activities, consisting primarily of the activity in deposit accounts and FHLBB and FRB advances, net of stock repurchases and dividends paid was $77.3 million and $58.7 million for the years ended December 31, 2021 and 2020, respectively.

At December 31, 2021, the Bank exceeded all of its regulatory capital requirements with Tier 1 leverage capital of $93.3 million, or 12.2% of average assets, which is above the required level of $30.5 million, or 4.0% of average assets, and total risk-based

56


 

capital of $100.2 million, or 17.4% of risk-weighted assets, which is above the required level of $46.0 million, or 8.0% of risk-weighted assets.

At December 31, 2021, we had outstanding commitments to originate loans of $107.9 million, unadvanced funds on loans of $13.9 million and unused lines of credit of $79.0 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, 2021 totaled $95.2 million, including $12.0 million in brokered deposits. Management expects, based on historical experience, that a substantial portion of the maturing non-brokered certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize FHLBB advances, listing service deposits or brokered deposits to meet our liquidity needs. Available borrowing capacity at December 31, 2021 was $111.5 million under the blanket pledge agreement with FHLBB. We also have a $4.2 million available line of credit with FHLBB, a $2.0 million available line of credit with the Federal Reserve and a $12.5 million available line of credit with a correspondent bank at December 31, 2021.

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 16 to our Consolidated Financial Statements located elsewhere in this report.

For the years ended December 31, 2021 and 2020, 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.

Impact of Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 1 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 GAAP, 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.”

 

57


 

 

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.

 

•  Report of Independent Registered Public Accounting Firm (PCAOB ID: 173)

 

F-1

 

 

 

•  Consolidated Balance Sheets at December 31, 2021 and 2020

 

F-3

 

 

 

•  Consolidated Statements of Operations For the Years Ended December 31, 2021 and 2020

 

F-4

 

 

 

•  Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2021 and 2020

 

F-5

 

 

 

•  Consolidated Statements of Changes Shareholders’ Equity For the Years Ended December 31, 2021 and 2020

 

F-6

 

 

 

•  Consolidated Statements of Cash Flows For the Years Ended December 31, 2021 and 2020

 

F-7

 

 

 

•  Notes to Consolidated Financial Statements

 

F-9

 

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, 2021. 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.

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. The Company’s independent registered public accounting firm has not issued an integrated audit report on the Company’s internal control over financial reporting.

There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

58


 

Item 9B. Other Information.  

None

Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections.

None

 

59


 

 

PART III

Item 10. Directors, Executive Officers and Corporate Governance.

The information required by this item will be included in Randolph Bancorp’s definitive Proxy Statement (the “Proxy Statement”) for the 2022 Annual Meeting of Shareholders and is incorporated herein by reference.

Item 11. Executive Compensation.

The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.

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

The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.

The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.

Item 14. Principal Accounting Fees and Services.

The information required by this item will be included in the Proxy Statement and is incorporated herein by reference.

 

60


 

 

PART IV

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

 

 

 

  3.1

  

Articles of Organization of Randolph Bancorp, Inc.(1)

 

 

 

  3.2

  

By-Laws of Randolph Bancorp, Inc.(1)

 

 

 

  4.1

 

Form of Common Stock Certificate of Randolph Bancorp, Inc.(1)

 

 

 

  4.2

 

Description of Registrant’s Securities(6)

 

 

 

10.1†

  

Randolph Savings Bank Supplemental Retirement Plan(1)

 

 

 

10.2†

  

Form of Randolph Savings Bank Employee Stock Ownership Plan(1)

 

 

 

10.3†

  

Form of Change in Control Agreement(1)

 

 

 

10.4†

  

Randolph Bancorp, Inc. 2017 Stock Option and Incentive Plan, Randolph Bancorp Inc. Inducement Non-Qualified Stock Option and Restricted Stock Award Agreement Dated April 1, 2020 (3)(7)

 

 

 

10.5†

  

Employment Agreement, entered into on January 28, 2020, by and among the Company, the Bank and William M. Parent (4)

 

 

 

10.6†

  

Change in Control Agreement, entered into on January 28, 2020, by and among the Company, the Bank and Lauren B. Messmore (4)

 

 

 

10.7†

 

Retirement Agreement, entered into on January 28, 2020, by and among the Company, the Bank and James P. McDonough(4)

10.8

 

Form of Inducement Non-Qualified Stock Option Agreement(7)

 

 

 

10.9

 

Form of Inducement Restricted Stock Award Agreement(7)

 

10.10

 

Randolph Bancorp, Inc. 2021 Equity Incentive Plan(8)

 

10.11

 

Form of Restricted Stock Award Agreement under the Randolph Bancorp, Inc. 2021 Equity Incentive Plan(8)

 

10.12

 

Form of Restricted Stock Unit Award Agreement under the Randolph Bancorp, Inc. 2021 Equity Incentive Plan(8)

 

 

 

14.1

 

Code of Business Conduct and Ethics (5)

 

 

 

21.1

  

Subsidiaries of the Registrant

 

 

 

23

  

Consent of Independent Registered Public Accounting Firm

 

 

 

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*

 

Certifications of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.  

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

61


 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

(1)

Incorporated by reference to the Registration Statement on Form S-1 (File No. 333-209935), originally filed 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 on August 23, 2017.

(4)

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on January 29, 2020.

(5)

Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 as filed SEC on March 28, 2017.

(6)

Incorporated by reference to the Registrant’s Annual Report of Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 12, 2020.

(7)

Incorporated by reference to the Registration Statement on Form S-8 (File No. 333- 237865) originally filed with the SEC on April 28, 2020.

(8)

Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on May 25, 2021.

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.

Item 16. Form 10-K Summary.

 

Not applicable.

62


 

Signatures

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

 

 

 

 

RANDOLPH BANCORP, INC.

 

 

 

(Registrant)

 

 

 

 

Date: March 10, 2022

 

By

/s/ William M. Parent

 

 

 

William M. Parent

 

 

 

Director, President, and Chief Executive Officer

(principal executive officer)

 

 

 

 

Date: March 10, 2022

 

By

/s/ Lauren B. Messmore

 

 

 

Lauren B. Messmore

 

 

 

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 10, 2022

 

 

/s/ Kenneth K. Quigley, Jr., Esq.

 

 

 

Kenneth K. Quigley, Jr., Esq., Director and Chairman

 

 

 

 

Date: March 10, 2022

 

 

/s/ Daniel M. Joyce

 

 

 

Daniel M. Joyce, Director

 

 

 

 

Date: March 10, 2022

 

 

/s/ Evelyn C. Kaupp

 

 

 

Evelyn C. Kaupp, Director

 

 

 

 

Date: March 10, 2022

 

 

/s/ Ronald K. Perry

 

 

 

Ronald K. Perry, Director

 

 

 

 

Date: March 10, 2022

 

 

/s/ Richard C. Pierce, Esq.

 

 

 

Richard C. Pierce, Esq., Director

 

 

 

 

Date: March 10, 2022

 

 

/s/ Pamela C. Scott

 

 

 

Pamela C. Scott, Director

 

 

 

 

Date: March 10, 2022

 

 

/s/ Louis J. Trubiano

 

 

 

Louis J. Trubiano, Director

 

 

 

 

Date: March 10, 2022

 

 

/s/ James G. Welch

 

 

 

James G. Welch, Director

 

 

 

63


 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

Shareholders and the Board of Directors of

Randolph Bancorp, Inc. and Subsidiary

Quincy, Massachusetts

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Randolph Bancorp, Inc. and Subsidiary (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, 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, 2021 and 2020, 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.  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.

 

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.

 

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.  The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Loan Losses – Qualitative Factors

As described in Notes 1 and 3 to the consolidated financial statements, the allowance for loan losses is a valuation allowance for probable incurred credit losses inherent in the loan portfolio. The Company’s consolidated allowance for loan losses was $6,289,000 at December 31, 2021, which consisted of the allowance for loans losses allocated to loans individually evaluated for impairment (“allocated component”), representing $100,000 and loans collectively evaluated for impairment (“general component”), representing $6,189,000. The general component is based on historical loss experience adjusted for qualitative factors which are determined based on the various risk characteristics of each loan segment.

The general component of the Company’s allowance for loan losses involves consideration of various qualitative factors. Management’s analysis of these qualitative factors requires significant judgment, and management’s allocation of qualitative factors relies on a subjective analysis to determine the quantitative impact the qualitative factors have on the general component. We identified auditing management’s analysis and allocation of the qualitative factors to the general component of the allowance for loan losses for the residential one-to four-family real estate, commercial real estate, construction, and commercial and industrial loan segment as a critical audit matter as it involved especially subjective auditor judgment.

 

F-1


 

 

The primary audit procedures we performed to address this critical audit matter included:

 

Evaluation of the data used as a basis for the adjustments relating to the qualitative factors; 

 

Evaluation of the reasonableness of management’s significant assumptions and judgments used in the determination of qualitative factors, the resulting allocation, and whether such assumptions were applied consistently period over period;  

 

Analytically evaluating the qualitative factor allocation year over year for reasonableness; and,  

 

Evaluation of mathematical accuracy of the qualitative factor reserve calculation.  

 

/s/ Crowe LLP

 

 

We have served as the Company's auditor since 2013.

 

New York, New York

March 10, 2022

 

 

 

 

 

 

 

F-2


 

 

Randolph Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets

(In thousands, except share data)

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

3,501

 

 

$

4,206

 

Interest-bearing deposits

 

 

111,948

 

 

 

9,568

 

Total cash and cash equivalents

 

 

115,449

 

 

 

13,774

 

Securities available for sale, at fair value

 

 

51,666

 

 

 

55,366

 

Loans held for sale, at fair value

 

 

44,766

 

 

 

119,112

 

Loans, net of allowance for loan losses of $6,289 in 2021 and $6,784 in 2020

 

 

544,621

 

 

 

483,644

 

Federal Home Loan Bank of Boston stock, at cost

 

 

2,940

 

 

 

3,576

 

Accrued interest receivable

 

 

1,500

 

 

 

1,562

 

Mortgage servicing rights, net

 

 

15,616

 

 

 

12,377

 

Premises and equipment, net

 

 

7,684

 

 

 

4,781

 

Bank-owned life insurance

 

 

8,784

 

 

 

8,622

 

Foreclosed real estate, net

 

 

 

 

 

132

 

Other assets

 

 

10,252

 

 

 

18,126

 

Total assets

 

$

803,278

 

 

$

721,072

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

Noninterest-bearing

 

$

145,666

 

 

$

96,731

 

Interest bearing

 

 

492,481

 

 

 

431,576

 

Total deposits

 

 

638,147

 

 

 

528,307

 

Federal Reserve Bank advances

 

 

-

 

 

 

11,431

 

Federal Home Loan Bank of Boston advances

 

 

50,000

 

 

 

61,895

 

Mortgagors' escrow accounts

 

 

2,128

 

 

 

2,338

 

Post-employment benefit obligations

 

 

2,222

 

 

 

2,382

 

Other liabilities

 

 

9,878

 

 

 

14,900

 

Total liabilities

 

 

702,375

 

 

 

621,253

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

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: 5,113,825 shares at December 31, 2021 and 5,495,514 shares

   at December 31, 2020

 

 

50

 

 

 

54

 

Additional paid-in capital

 

 

44,078

 

 

 

50,937

 

Retained earnings

 

 

60,524

 

 

 

51,689

 

ESOP-Unearned compensation

 

 

(3,568

)

 

 

(3,756

)

Accumulated other comprehensive income (loss), net of tax

 

 

(181

)

 

 

895

 

Total stockholders' equity

 

 

100,903

 

 

 

99,819

 

Total liabilities and stockholders' equity

 

$

803,278

 

 

$

721,072

 

 

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

F-3


 

Randolph Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations

(In thousands, except share data)

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Interest and dividend income:

 

 

 

 

 

 

 

 

Loans

 

$

23,162

 

 

$

22,212

 

Securities-taxable

 

 

899

 

 

 

1,273

 

Securities-tax exempt

 

 

20

 

 

 

28

 

Interest-bearing deposits and certificates of deposit

 

 

32

 

 

 

75

 

Total interest and dividend income

 

 

24,113

 

 

 

23,588

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

Deposits

 

 

1,390

 

 

 

3,778

 

Federal Reserve Bank and Federal Home Loan Bank of Boston advances

 

 

763

 

 

 

943

 

Total interest expense

 

 

2,153

 

 

 

4,721

 

 

 

 

 

 

 

 

 

 

Net interest income

 

 

21,960

 

 

 

18,867

 

Provision (credit) for loan losses

 

 

(438

)

 

 

2,553

 

Net interest income after provision (credit) for loan losses

 

 

22,398

 

 

 

16,314

 

 

 

 

 

 

 

 

 

 

Non-interest income:

 

 

 

 

 

 

 

 

Customer service fees

 

 

1,618

 

 

 

1,283

 

Gain on loan origination and sale activities, net

 

 

27,685

 

 

 

54,236

 

Mortgage servicing fees, net

 

 

1,691

 

 

 

(1,153

)

Increase in cash surrender value of life insurance

 

 

163

 

 

 

181

 

Other

 

 

766

 

 

 

864

 

Total non-interest income

 

 

31,923

 

 

 

55,411

 

 

 

 

 

 

 

 

 

 

Non-interest expenses:

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

28,212

 

 

 

33,161

 

Occupancy and equipment

 

 

2,792

 

 

 

3,545

 

Data processing

 

 

1,168

 

 

 

943

 

Professional fees

 

 

1,699

 

 

 

1,277

 

Marketing

 

 

749

 

 

 

689

 

FDIC insurance

 

 

217

 

 

 

187

 

Other

 

 

6,821

 

 

 

6,514

 

Total non-interest expenses

 

 

41,658

 

 

 

46,316

 

Income before income taxes

 

 

12,663

 

 

 

25,409

 

Income tax expense

 

 

3,062

 

 

 

5,477

 

Net income

 

$

9,601

 

 

$

19,932

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

Basic

 

$

1.96

 

 

$

3.89

 

Diluted

 

$

1.88

 

 

$

3.86

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

4,896,641

 

 

 

5,126,561

 

Diluted

 

 

5,108,738

 

 

 

5,163,042

 

 

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

F-4


 

Randolph Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Net income

 

$

9,601

 

 

$

19,932

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

Unrealized holding gains (losses)

 

 

(1,464

)

 

 

1,546

 

Related tax effects

 

 

249

 

 

 

 

Net-of-tax amount

 

 

(1,215

)

 

 

1,546

 

 

 

 

 

 

 

 

 

 

Supplemental retirement plan:

 

 

 

 

 

 

 

 

Reclassification adjustments (2):

 

 

 

 

 

 

 

 

Actuarial gains

 

 

48

 

 

 

45

 

Prior service credits recognized

 

 

(32

)

 

 

(57

)

Actuarial gains (losses) arising during the year

 

 

18

 

 

 

(105

)

Net change in supplemental retirement plan

 

 

34

 

 

 

(117

)

Related tax effects

 

 

105

 

 

 

 

Net-of-tax amount

 

 

139

 

 

 

(117

)

Total other comprehensive income (loss)

 

 

(1,076

)

 

 

1,429

 

Comprehensive income

 

$

8,525

 

 

$

21,361

 

 

(1)

Amounts are included in gain (loss) on sales/calls of securities and impairment write-down, net in the consolidated statements of operations.

(2)

Amounts are included in other non-interest expenses in the consolidated statements of operations.

 

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

 

F-5


 

 

Randolph Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

Years Ended December 31, 2021 and 2020

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Unearned

 

 

Other

 

 

Total

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Compensation

 

 

Comprehensive

 

 

Stockholders’

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

ESOP

 

 

Loss

 

 

Equity

 

Balance at December 31, 2019

 

 

5,576,855

 

 

 

56

 

 

 

51,127

 

 

 

31,757

 

 

 

(3,944

)

 

 

(534

)

 

 

78,462

 

Net income

 

 

 

 

 

 

 

 

 

 

 

19,932

 

 

 

 

 

 

 

 

 

19,932

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,429

 

 

 

1,429

 

Stock repurchased

 

 

(131,388

)

 

 

(2

)

 

 

(1,747

)

 

 

 

 

 

 

 

 

 

 

 

(1,749

)

Restricted stock awards granted

 

 

65,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock awards forfeited

 

 

(9,251

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share redemption for tax withholdings for restricted stock vesting

 

 

(6,332

)

 

 

 

 

 

(75

)

 

 

 

 

 

 

 

 

 

 

 

(75

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,564

 

 

 

 

 

 

 

 

 

 

 

 

1,564

 

ESOP shares committed to be released

 

 

 

 

 

 

 

 

68

 

 

 

 

 

 

188

 

 

 

 

 

 

256

 

Balance at December 31, 2020

 

 

5,495,514

 

 

$

54

 

 

$

50,937

 

 

$

51,689

 

 

$

(3,756

)

 

$

895

 

 

$

99,819

 

Net income

 

 

 

 

 

 

 

 

 

 

 

9,601

 

 

 

 

 

 

 

 

 

9,601

 

Common stock dividends paid

 

 

 

 

 

 

 

 

 

 

 

(766

)

 

 

 

 

 

 

 

 

(766

)

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,076

)

 

 

(1,076

)

Stock repurchased

 

 

(415,894

)

 

 

(4

)

 

 

(8,525

)

 

 

 

 

 

 

 

 

 

 

 

(8,529

)

Restricted stock awards granted

 

 

19,750

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted stock awards forfeited

 

 

(2,112

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share redemption for tax withholdings for restricted stock vesting

 

 

(2,709

)

 

 

 

 

 

(39

)

 

 

 

 

 

 

 

 

 

 

 

(39

)

Stock-based compensation

 

 

 

 

 

 

 

 

1,231

 

 

 

 

 

 

 

 

 

 

 

 

1,231

 

ESOP shares committed to be released

 

 

 

 

 

 

 

 

213

 

 

 

 

 

 

188

 

 

 

 

 

 

401

 

Proceeds from exercise of options, net

 

 

19,276

 

 

 

 

 

 

261

 

 

 

 

 

 

 

 

 

 

 

 

261

 

Balance at December 31, 2021

 

 

5,113,825

 

 

$

50

 

 

$

44,078

 

 

$

60,524

 

 

$

(3,568

)

 

$

(181

)

 

$

100,903

 

 

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

 

F-6


 

 

Randolph Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

9,601

 

 

$

19,932

 

Adjustments to reconcile net income to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Provision (credit) for loan losses

 

 

(438

)

 

 

2,553

 

Loans originated for sale

 

 

(1,298,647

)

 

 

(1,564,552

)

Net gain on sales of mortgage loans

 

 

(27,685

)

 

 

(54,236

)

Proceeds from sales of mortgage loans

 

 

1,436,418

 

 

 

1,560,043

 

Net amortization of securities

 

 

364

 

 

 

307

 

Net change in deferred loan costs and fees, and purchase premiums

 

 

51

 

 

 

284

 

Depreciation and amortization

 

 

707

 

 

 

1,508

 

Loss on sale of foreclosed real estate

 

 

5

 

 

 

 

Stock-based compensation

 

 

1,231

 

 

 

1,564

 

ESOP expense

 

 

339

 

 

 

256

 

Increase in cash surrender value of life insurance

 

 

(162

)

 

 

(182

)

Amortization of  mortgage servicing rights

 

 

3,197

 

 

 

2,544

 

Increase (decrease) in valuation allowance of mortgage servicing rights

 

 

(438

)

 

 

(2,067

)

Loss on disposal of assets

 

 

 

 

 

49

 

Other, net

 

 

574

 

 

 

(11,296

)

Net cash provided by (used in) operating activities

 

 

125,117

 

 

 

(43,293

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Redemptions of certificates of deposit

 

 

 

 

 

490

 

Securities available for sale:

 

 

 

 

 

 

 

 

Calls/maturities

 

 

1,945

 

 

 

4,650

 

Purchases

 

 

(13,196

)

 

 

(15,493

)

Principal payments on mortgage-backed securities

 

 

13,124

 

 

 

14,218

 

Loan originations, net of principal repayments

 

 

(121,703

)

 

 

(10,224

)

Proceeds from sale of portfolio loans

 

 

48,597

 

 

 

 

Loan purchases and participations

 

 

(26,632

)

 

 

(1,803

)

Redemptions (purchases) of Federal Home Loan Bank of Boston stock, net

 

 

636

 

 

 

(1,159

)

Proceeds from sale of foreclosed real estate

 

 

127

 

 

 

 

Purchases of premises and equipment

 

 

(3,694

)

 

 

(589

)

Loss on disposal of fixed assets

 

 

84

 

 

 

 

Net cash provided by (used in) investing activities

 

 

(100,712

)

 

 

(9,910

)

 

(continued)

F-7


 

Randolph Bancorp, Inc. and Subsidiary

Consolidated Statements of Cash Flows (Concluded)

(In thousands)

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Net increase in non-interest bearing deposits

 

 

48,935

 

 

 

35,128

 

Net increase (decrease) in interest bearing deposits

 

 

60,905

 

 

 

(3,863

)

Net increase (decrease) in Federal Reserve Bank borrowings

 

 

(11,431

)

 

 

11,431

 

Net increase (decrease) in short-term Federal Home Loan Bank of Boston borrowings

 

 

5,000

 

 

 

(19,822

)

Issuance of long-term Federal Home Loan Bank of Boston advances

 

 

5,000

 

 

 

40,000

 

Repayments of long-term Federal Home Loan Bank of Boston advances

 

 

(21,895

)

 

 

(2,686

)

Net increase (decrease) in mortgagors' escrow accounts

 

 

(210

)

 

 

286

 

Repurchases of common stock

 

 

(8,529

)

 

 

(1,749

)

Proceeds from exercise of stock options

 

 

261

 

 

 

 

Common stock dividends paid

 

 

(766

)

 

 

 

Net cash provided by financing activities

 

 

77,270

 

 

 

58,725

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

101,675

 

 

 

5,522

 

Cash and cash equivalents at beginning of year

 

 

13,774

 

 

 

8,252

 

Cash and cash equivalents at end of year

 

$

115,449

 

 

$

13,774

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Interest paid on deposits and borrowed funds

 

$

2,305

 

 

$

5,018

 

Income taxes paid, net

 

$

3,914

 

 

$

4,225

 

Non-cash items:

 

 

 

 

 

 

 

 

Transfer of held for sale loans to portfolio

 

$

9,449

 

 

$

3,262

 

Transfer of portfolio loans to held for sale

 

$

48,597

 

 

$

 

Transfer of portfolio loans to foreclosed real estate

 

$

 

 

$

132

 

 

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

 

 

 

F-8


 

Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements

December 31, 2021 and 2020

1.

BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

Randolph Bancorp, Inc. (the “Company”) is a bank holding company whose principal subsidiary is the Bank. The Bank provides a variety of financial services to individuals and small businesses through its five branch offices in Massachusetts and six loan production offices and lending centers located throughout Massachusetts and Southern New Hampshire.  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 Bank is also actively involved in the sale and servicing of residential mortgage loans in the secondary market.

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.

Basis of Presentation

 

The consolidated financial statements include the accounts of Randolph Bancorp, Inc. (a Massachusetts corporation) and its wholly-owned subsidiary, Envision Bank (together, the “Company”). The Bank has subsidiaries involved in owning investment securities and foreclosed real estate 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.

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.

F-9

 


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

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 specific identification method.

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 of Boston 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 and related derivatives

 

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 generally retained while loans sold to other financial institutions are generally done on a servicing released basis.

 

The Bank utilizes the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for its residential mortgage loans being held for sale. Fair value is determined based on either commitments in effect from investors or prevailing market price and include the value of mortgage servicing rights.

 

Gains and losses on the sales of 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 loan origination and sale activities 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 for the delivery of mortgage loans to third party investors including To Be Announced securities (“TBAs”)) and loans held for sale.

 

F-10


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

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 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.

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 TDR.  All TDRs are initially classified as impaired and placed on nonaccrual status. Generally, a nonaccrual loan that is restructured remains on nonaccrual for a period of six months to demonstrate that the borrower can meet the restructured terms. If the borrower’s ability to meet the revised terms is not reasonably assured, the loan remains on nonaccrual status.

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 uncollectability 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 collectability 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: changes in the volume and severity of past due loans and adversely classified or graded loans, the volume of nonaccrual loans and trends in charge-offs and recoveries; changes in the nature and volume of the portfolio and in the terms of loans; changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses; changes in the experience, ability, and depth of lending management and other relevant staff; changes in international, national, regional and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments; changes in the quality of the institution’s review system; the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution’s existing portfolio; changes in the value of underlying collateral-dependent loans; and the existence of concentrations of credit, and changes in the level of such 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:

F-11


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

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 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 primarily located in 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. As of December 31, 2021, the Company funded 385 PPP loans totaling $26.4 million. The Company had $3.6 million of Paycheck Protection Program (“PPP”) loans outstanding at December 31, 2021. These loans are fully guaranteed by the SBA and the Company does not reserve for these loans.

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 generally 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 TDR.

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.

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.

F-12


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

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 (“MSRs”).  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.  MSRs are evaluated for impairment based upon the fair value of the rights as compared to amortized 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 predominantly 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, 2021 and 2020, the Company determined that its obligations in connection with the recourse provisions of its loan sale agreements were insignificant.

Foreclosed real estate

Real estate 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.

 

F-13


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

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.

 

Stock-based compensation

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, 2021 and 2020 which require accrual or disclosure.  The Company records interest and penalties as part of income tax expense.  No material interest or penalties were recorded for the years ended December 31, 2021 and 2020.

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 accumulated other comprehensive income (loss) (“AOCI”).

F-14


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

The components of AOCI, included in stockholders’ equity, are as follows:

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Securities available for sale:

 

 

 

 

 

 

 

 

Net unrealized gain

 

$

249

 

 

$

1,713

 

Tax effect

 

 

(64

)

 

 

(313

)

Net-of-tax amount

 

 

185

 

 

 

1,400

 

 

 

 

 

 

 

 

 

 

Supplemental retirement plan

 

 

 

 

 

 

 

 

Unrecognized net actuarial loss

 

 

(646

)

 

 

(712

)

Unrecognized net prior service credit

 

 

222

 

 

 

254

 

 

 

 

(424

)

 

 

(458

)

Tax effect

 

 

58

 

 

 

(47

)

Net-of-tax amount

 

 

(366

)

 

 

(505

)

 

 

 

 

 

 

 

 

 

Accumulated other comprehensive income (loss)

 

$

(181

)

 

$

895

 

 

In 2022, the Company expects to recognize $45,000 in prior service credits and $55,000 in net actuarial losses as components of cost for the supplemental retirement plan.  These amounts are included in AOCI at December 31, 2021.  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.

Segment reporting

 

An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision-maker in determining how to allocate resources and evaluate performance. The Company has two reporting business segments, namely, “Envision Bank” and “Envision Mortgage”. Management allocates indirect costs, such as IT, Marketing, Accounting and Administration, to each business segment in order to fully measure each segment’s results of operations. See Note 18 for disclosure of the Company’s segment information.

Earnings per share

 

Basic earnings per share represents income 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 per share. Unallocated ESOP shares are not considered outstanding in computing earnings per share. 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 stock method.  

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.

 

F-15


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

Leases

 

The Company leases office space, certain loan production offices and certain branch locations under noncancelable operating leases, several of which have renewal options to extend lease terms. Upon commencement of a new lease, the Company will recognize a right of use (“ROU”) asset and corresponding lease liability. The Company makes the decision on whether to renew an option to extend a lease by considering various factors. The Company will recognize an adjustment to its ROU asset and lease liability when lease agreements are amended and executed. The discount rate used in determining the present value of lease payments in based on the Company’s incremental borrowing rate for borrowings with terms similar to each lease at commencement date. The Company has lease agreements with lease and non-lease components, which are generally accounted for separately. For real estate leases, non-lease components and other non-components, such as common area maintenance charges, real estate taxes, and insurance are not included in the measurement of the lease liability since they are generally able to be separated. The Company has elected the short-term lease recognition exemption for all leases that qualify.

Recent accounting pronouncements

 

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. In May 2020, FASB amended the effective date of the new guidance on leases. Previously, the amendments and related new guidance on leases were effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022. Early adoption is still permitted, and the Company adopted the standard during 2021. See Note 23 for additional information.

 

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. In November 2019, FASB issued ASU 2019-10 which extended the effective date for adoption of ASU 2016-13 for smaller reporting companies to fiscal years beginning after December 31, 2022, including interim periods therein. Early adoption is permitted. The Company has formed a working group consisting of accounting, credit and data systems personnel to lead our implementation of this ASU. The working group is evaluating the alternative methodologies which are available and has engaged professional advisors to assist in implementation.

 

In December 2019, FASB issued ASU 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. This ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including eliminating the exception to the requirement that the tax effect of income from continuing operations should be determined without considering the tax effect of items that are not included in continuing operations such as items included in other comprehensive income (loss). This ASU became effective for the Company during 2021, when the Company lost emerging growth company status. The impact of adoption of this ASU is not material.

  

F-16


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

2.

SECURITIES AVAILABLE FOR SALE

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

10,939

 

 

$

 

 

$

(168

)

 

$

10,771

 

U.S. Government-sponsored enterprises

 

 

1,995

 

 

 

 

 

 

(17

)

 

 

1,978

 

Corporate

 

 

2,510

 

 

 

33

 

 

 

(7

)

 

 

2,536

 

Municipal

 

 

351

 

 

 

2

 

 

 

 

 

 

353

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

23,349

 

 

 

324

 

 

 

(194

)

 

 

23,479

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

8,733

 

 

 

223

 

 

 

 

 

 

8,956

 

U.S. Government-guaranteed

 

 

103

 

 

 

 

 

 

 

 

 

103

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

796

 

 

 

14

 

 

 

 

 

 

810

 

U.S. Government-guaranteed

 

 

2,641

 

 

 

39

 

 

 

 

 

 

2,680

 

Total securities available for sale

 

$

51,417

 

 

$

635

 

 

$

(386

)

 

$

51,666

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

$

1,993

 

 

$

3

 

 

$

 

 

$

1,996

 

Corporate

 

 

4,300

 

 

 

56

 

 

 

 

 

 

4,356

 

Municipal

 

 

595

 

 

 

5

 

 

 

 

 

 

600

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

32,538

 

 

 

919

 

 

 

 

 

 

33,457

 

Commercial mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

8,857

 

 

 

525

 

 

 

 

 

 

9,382

 

U.S. Government-guaranteed

 

 

977

 

 

 

24

 

 

 

 

 

 

1,001

 

Collateralized mortgage obligations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

996

 

 

 

52

 

 

 

 

 

 

1,048

 

U.S. Government-guaranteed

 

 

3,398

 

 

 

128

 

 

 

 

 

 

3,526

 

Total securities available for sale

 

$

53,654

 

 

$

1,712

 

 

$

 

 

$

55,366

 

 

The amortized cost and fair value of debt securities by contractual maturity at December 31, 2021 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

 

$

 

 

$

 

After 1 year through 5 years

 

 

10,073

 

 

 

9,974

 

After 5 years through 10 years

 

 

5,722

 

 

 

5,664

 

 

 

 

15,795

 

 

 

15,638

 

Mortgage-backed securities and collateralized

     mortgage obligations

 

 

35,622

 

 

 

36,028

 

 

 

$

51,417

 

 

$

51,666

 

 

F-17


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

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, 2021 and 2020, investment securities having a fair value of $1,979,000 and $1,958,000, respectively, were pledged as collateral for a line of credit with the Federal Reserve Bank of Boston (the “FRB”).

There were no individual holdings of investment securities at December 31, 2021 and 2020, other than holdings of the U.S. Government and its agencies, which exceeded 10% of the Company’s stockholders’ equity as of such dates.

The Company had 17 securities in a loss position at December 31, 2021, and no securities in a loss position at December 31, 2020. 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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury

 

$

(168

)

 

$

10,771

 

 

$

 

 

$

 

U.S. Government-sponsored enterprises

 

 

(17

)

 

 

1,978

 

 

 

 

 

 

 

Corporate

 

 

(7

)

 

 

723

 

 

 

 

 

 

 

Residential mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government-sponsored enterprises

 

 

(194

)

 

 

11,477

 

 

 

 

 

 

 

Total debt securities

 

$

(386

)

 

$

24,949

 

 

$

 

 

$

 

 

  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 its investments.  Therefore, it is expected that the securities 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 its investments to be other-than-temporarily impaired at December 31, 2021.

There were no security sales for the year ended December 31, 2021 and 2020.   

    

F-18


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

3.

LOANS

A summary of the loan portfolio is as follows:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Mortgage loans on real estate:

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

One- to four-family

 

$

236,364

 

 

$

235,648

 

Home equity loans and lines of credit

 

 

57,295

 

 

 

48,166

 

Commercial

 

 

197,423

 

 

 

143,893

 

Construction

 

 

33,961

 

 

 

31,050

 

Total real estate loans

 

 

525,043

 

 

 

458,757

 

Commercial and industrial

 

 

17,242

 

 

 

20,259

 

Consumer

 

 

7,552

 

 

 

10,289

 

Total loans

 

 

549,837

 

 

 

489,305

 

Allowance for loan losses

 

 

(6,289

)

 

 

(6,784

)

Net deferred loan costs and fees, and purchase premiums

 

 

1,073

 

 

 

1,123

 

Total loans, net

 

$

544,621

 

 

$

483,644

 

 

The Company periodically transfers 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 continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments to participating lenders and disburses required escrow funds to relevant parties. At December 31, 2021 and 2020, the Company was servicing loans for participants aggregating $6,222,000 and $2,410,000, respectively. See Note 4 for information relating to the Company’s servicing of residential mortgage loans for others.

 

The following tables present activity in the allowance for loan losses, by loan category, for the years ended December 31, 2021 and 2020 and allocation of the allowance to each category as of such dates:

 

 

 

 

 

 

 

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, 2019

 

 

1,096

 

 

 

289

 

 

 

1,840

 

 

 

692

 

 

 

235

 

 

 

128

 

 

 

4,280

 

Provision for loan losses

 

 

543

 

 

 

156

 

 

 

1,562

 

 

 

59

 

 

 

179

 

 

 

54

 

 

 

2,553

 

Loans charged-off

 

 

 

 

 

(3

)

 

 

 

 

 

 

 

 

 

 

 

(68

)

 

 

(71

)

Recoveries

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

13

 

 

 

22

 

Balance at December 31, 2020

 

$

1,646

 

 

$

442

 

 

$

3,402

 

 

$

751

 

 

$

416

 

 

$

127

 

 

$

6,784

 

Provision (credit) for loan losses

 

 

(558

)

 

 

20

 

 

 

49

 

 

 

(54

)

 

 

81

 

 

 

24

 

 

 

(438

)

Loans charged-off

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(67

)

 

 

(67

)

Recoveries

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

2

 

 

 

3

 

 

 

10

 

Balance at December 31, 2021

 

$

1,093

 

 

$

462

 

 

$

3,451

 

 

$

697

 

 

$

499

 

 

$

87

 

 

$

6,289

 

F-19


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

 

 

 

 

 

 

 

Second

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential

 

 

Mortgages

 

 

Commercial

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

1-4 Family

 

 

and HELOC

 

 

Real Estate

 

 

Construction

 

 

and Industrial (1)

 

 

Consumer

 

 

Total

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans

 

$

81

 

 

$

19

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

100

 

Allowance for non-impaired loans

 

 

1,012

 

 

 

443

 

 

 

3,451

 

 

 

697

 

 

 

499

 

 

 

87

 

 

 

6,189

 

Total allowance for loan losses

 

$

1,093

 

 

$

462

 

 

$

3,451

 

 

$

697

 

 

$

499

 

 

$

87

 

 

$

6,289

 

Impaired loans

 

$

3,255

 

 

$

603

 

 

$

-

 

 

$

 

 

$

 

 

$

 

 

$

3,858

 

Non-impaired loans

 

 

233,109

 

 

 

56,692

 

 

 

197,423

 

 

 

33,961

 

 

 

17,242

 

 

 

7,552

 

 

 

545,979

 

Total loans

 

$

236,364

 

 

$

57,295

 

 

$

197,423

 

 

$

33,961

 

 

$

17,242

 

 

$

7,552

 

 

$

549,837

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for impaired loans

 

$

133

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

133

 

Allowance for non-impaired loans

 

 

1,513

 

 

 

442

 

 

 

3,402

 

 

 

751

 

 

 

416

 

 

 

127

 

 

 

6,651

 

Total allowance for loan losses

 

$

1,646

 

 

$

442

 

 

$

3,402

 

 

$

751

 

 

$

416

 

 

$

127

 

 

$

6,784

 

Impaired loans

 

$

3,575

 

 

$

623

 

 

$

4,751

 

 

$

 

 

$

 

 

$

 

 

$

8,949

 

Non-impaired loans

 

 

232,073

 

 

 

47,543

 

 

 

139,142

 

 

 

31,050

 

 

 

20,259

 

 

 

10,289

 

 

 

480,356

 

Total loans

 

$

235,648

 

 

$

48,166

 

 

$

143,893

 

 

$

31,050

 

 

$

20,259

 

 

$

10,289

 

 

$

489,305

 

 

 

(1)

Non-impaired loan balance includes $3.6 million and $10.9 million of PPP loans as of December 31, 2021 and 2020, respectively, for which no allowance is provided due to the full guarantee from the SBA.

 

The following table presents past due and non-accrual loans, by loan category, at December 31, 2021 and 2020:

 

 

 

30 - 59 Days

Past Due

 

 

60 - 89 Days

Past Due

 

 

90 Days or

More Past

Due

 

 

Total Past

Due (1)

 

 

Non-accrual

Loans

 

 

 

(In thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

701

 

 

$

193

 

 

$

 

 

$

894

 

 

$

2,133

 

Home equity loans and lines of credit

 

 

186

 

 

 

215

 

 

 

 

 

 

401

 

 

 

491

 

Commercial real estate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

76

 

 

 

9

 

 

 

 

 

 

85

 

 

 

 

Total

 

$

963

 

 

$

417

 

 

$

 

 

$

1,380

 

 

$

2,624

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

 

 

$

 

 

$

 

 

$

 

 

$

1,876

 

Home equity loans and lines of credit

 

 

95

 

 

 

 

 

 

317

 

 

 

412

 

 

 

584

 

Commercial real estate

 

 

 

 

 

 

 

 

26

 

 

 

26

 

 

 

4,713

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer

 

 

38

 

 

 

64

 

 

 

 

 

 

102

 

 

 

 

Total

 

$

133

 

 

$

64

 

 

$

343

 

 

$

540

 

 

$

7,173

 

 

 

(1)

Excludes non-accrual loans which are separately presented.

F-20


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

Further information pertaining to impaired loans, which includes both non-accrual loans and TDRs, follows:

 

 

 

Recorded

Investment

 

 

Unpaid

Principal

Balance

 

 

Related

Allowance

 

 

 

(In thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

2,364

 

 

$

2,377

 

 

$

 

Home equity loans and lines of credit

 

 

479

 

 

 

485

 

 

 

 

Total

 

 

2,843

 

 

 

2,862

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

 

874

 

 

 

878

 

 

 

81

 

Home equity loans and lines of credit

 

 

108

 

 

 

118

 

 

 

19

 

Total

 

 

982

 

 

 

996

 

 

 

100

 

Total impaired loans

 

$

3,825

 

 

$

3,858

 

 

$

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans without a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

2,160

 

 

$

2,181

 

 

$

 

Home equity loans and lines of credit

 

 

626

 

 

 

623

 

 

 

 

Commercial real estate

 

 

4,753

 

 

 

4,751

 

 

 

 

Total

 

 

7,539

 

 

 

7,555

 

 

 

 

Impaired loans with a valuation allowance:

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

 

1,382

 

 

 

1,394

 

 

 

133

 

Total

 

 

1,382

 

 

 

1,394

 

 

 

133

 

Total impaired loans

 

$

8,921

 

 

$

8,949

 

 

$

133

 

 

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, 2021

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

3,132

 

 

$

202

 

 

$

125

 

Home equity loans and lines of credit

 

 

525

 

 

 

30

 

 

 

4

 

Commercial real estate

 

 

2,491

 

 

 

-

 

 

 

 

Total

 

$

6,148

 

 

$

232

 

 

$

129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

3,550

 

 

$

399

 

 

$

159

 

Home equity loans and lines of credit

 

 

588

 

 

 

60

 

 

 

 

Commercial real estate

 

 

2,838

 

 

 

8

 

 

 

 

Total

 

$

6,976

 

 

$

467

 

 

$

159

 

 

No additional funds are committed to be advanced in connection with impaired loans.

F-21


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

Troubled Debt Restructurings

The Company periodically grants concessions to borrowers experiencing financial difficulties. The Company’s TDRs consist primarily of interest rate concessions for periods of three months to thirty years for residential real estate loans and home equity loans, and for periods up to one year for commercial real estate loans.        

          

            

 

 

Number of

Contracts

 

 

TDRs Listed

as Accrual

 

 

Number of

Contracts

 

 

TDRs Listed

as Non-accrual

 

 

Total

Number of

Contracts

 

 

Total

TDRs

 

 

 

(In thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

 

9

 

 

$

1,103

 

 

 

3

 

 

$

919

 

 

 

12

 

 

$

2,022

 

Home equity loans and lines of credit

 

 

2

 

 

 

97

 

 

 

1

 

 

 

109

 

 

 

3

 

 

 

206

 

Total

 

 

11

 

 

$

1,200

 

 

 

4

 

 

$

1,028

 

 

 

15

 

 

$

2,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential one- to four-family

 

$

12

 

 

$

1,666

 

 

$

4

 

 

$

1,167

 

 

 

16

 

 

$

2,833

 

Home equity loans and lines of credit

 

 

1

 

 

 

42

 

 

 

 

 

 

 

 

 

1

 

 

 

42

 

Commercial real estate

 

 

1

 

 

 

40

 

 

 

 

 

 

 

 

 

1

 

 

 

40

 

Total

 

 

14

 

 

 

1,748

 

 

 

4

 

 

$

1,167

 

 

 

18

 

 

$

2,915

 

For the year ended December 31, 2021, the Company entered into one loan modification meeting the criteria of a TDR in which a long term concession was granted to a borrower. For the year ended December 31, 2020, the Company also entered into one loan modification meeting the criteria of a TDR.

Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the TDRs. Any reserve is recorded as part of the allowance for loan losses. At December 31, 2021 and 2020, the Company had allowances of $100,000 and $133,000, respectively, related to TDRs.

During the years ended December 31, 2021 and 2020, there were no TDRs that defaulted (over 30 days past due) within twelve months of the restructuring date. No additional funds are committed to be advanced on loans being accounted for as TDRs.

At December 31, 2021 there was one residential real estate troubled debt restructuring that was granted a payment deferral plan. That loan, totaling $213,000, was not performing in accordance with its modified terms.

Credit Quality Information

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.

F-22


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

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, 2021 and 2020:

 

 

 

Residential 1-4 Family

 

 

Second Mortgages and HELOC

 

 

Commercial Real Estate

 

 

Construction

 

 

Commercial and Industrial

 

 

Consumer

 

 

Total

 

 

 

(In thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Rated

 

$

234,225

 

 

$

56,797

 

 

$

 

 

$

 

 

$

 

 

$

7,552

 

 

$

298,574

 

Loans rated 1 - 3A (Pass rated)

 

 

 

 

 

 

 

 

186,774

 

 

 

33,961

 

 

 

16,910

 

 

 

 

 

 

237,645

 

Loans rated 4

 

 

361

 

 

 

381

 

 

 

7,106

 

 

 

 

 

 

332

 

 

 

 

 

 

8,180

 

Loans rated 5

 

 

1,778

 

 

 

117

 

 

 

3,543

 

 

 

 

 

 

 

 

 

 

 

 

5,438

 

Total

 

$

236,364

 

 

$

57,295

 

 

$

197,423

 

 

$

33,961

 

 

$

17,242

 

 

$

7,552

 

 

$

549,837

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Not Rated

 

$

233,773

 

 

$

47,582

 

 

$

 

 

$

 

 

$

 

 

$

10,289

 

 

$

291,644

 

Loans rated 1 - 3A (Pass rated)

 

 

 

 

 

 

 

 

129,925

 

 

 

31,050

 

 

 

19,828

 

 

 

 

 

 

180,803

 

Loans rated 4

 

 

803

 

 

 

584

 

 

 

9,257

 

 

 

 

 

 

431

 

 

 

 

 

 

11,075

 

Loans rated 5

 

 

1,072

 

 

 

 

 

 

4,711

 

 

 

 

 

 

-

 

 

 

 

 

 

5,783

 

Total

 

$

235,648

 

 

$

48,166

 

 

$

143,893

 

 

$

31,050

 

 

$

20,259

 

 

$

10,289

 

 

$

489,305

 

 

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.          

4.

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 $1,975,876,000 and $1,760,306,000 at December 31, 2021 and 2020, respectively. In connection with these serviced loans, we maintained $16.6 million and $14.2 million of custodial escrow balances at December 31, 2021 and 2020, respectively.

The following table summarizes the activity in the Company’s MSRs for the indicated periods:

 

 

 

For the Years Ended December 31,

 

 

 

2021

 

 

2020

 

Mortgage servicing rights:

 

(In thousands)

 

Balance at beginning of year

 

$

15,372

 

 

$

9,484

 

Additions through originations

 

 

5,998

 

 

 

8,432

 

Amortization

 

 

(3,197

)

 

 

(2,544

)

Balance at end of year

 

$

18,173

 

 

$

15,372

 

Valuation allowance:

 

 

 

 

 

 

 

 

Balance at beginning of year

 

$

2,995

 

 

$

928

 

Provision (credit)

 

 

(438

)

 

 

2,067

 

Balance at end of year

 

$

2,557

 

 

$

2,995

 

Mortgage servicing rights, amortized cost

 

$

15,616

 

 

$

12,377

 

Mortgage servicing rights, fair value

 

$

16,355

 

 

$

12,490

 

 

F-23


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

At December 31, 2021 and 2020, the fair value of MSRs was determined using a discount rate of 12% and projected annual prepayment speeds ranging from 15% to 18% for 2021 and 19% to 27% for 2020.

During the year ended December 31, 2021 the Company decreased the valuation allowance for its MSRs by $438,000 and the Company increased the valuation allowance for its MSRs by $2,067,000 for the year ended December 31, 2020. Such adjustments were due to changes in fair value caused by the impact of interest rate movements on actual and expected loan prepayments.

Contractually specified servicing fees for the years ended December 31, 2021 and 2020 amounted to $5,012,000 and $3,458,000, respectively, and are included in mortgage servicing fees, net.

5.

PREMISES AND EQUIPMENT

A summary of the cost and accumulated depreciation and amortization of premises and equipment is as follows:

 

 

 

December 31,

 

 

Estimated

 

 

2021

 

 

2020

 

 

Useful Life

 

 

(In thousands)

 

 

(In years)

Land and improvements

 

$

953

 

 

$

953

 

 

 

Buildings and improvements

 

 

6,325

 

 

 

3,343

 

 

5 to 50

Leasehold improvements

 

 

1,097

 

 

 

2,236

 

 

3 to 10

Furniture and equipment

 

 

4,295

 

 

 

5,558

 

 

3 to 10

Construction-in-progress

 

 

-

 

 

 

145

 

 

 

 

 

 

12,670

 

 

 

12,235

 

 

 

Less accumulated depreciation and amortization

 

 

(4,986

)

 

 

(7,454

)

 

 

 

 

$

7,684

 

 

$

4,781

 

 

 

 

Total depreciation and amortization expense for the years ended December 31, 2021 and 2020 amounted to $707,000 and $1,508,000, respectively.

  

6.

DEPOSITS

A summary of deposit balances, by type, is as follows:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Demand deposits

 

$

145,666

 

 

$

96,731

 

NOW accounts

 

 

53,996

 

 

 

53,530

 

Money market deposits

 

 

90,544

 

 

 

77,393

 

Regular and other savings accounts

 

 

191,712

 

 

 

185,481

 

Brokered deposits

 

 

10,061

 

 

 

10,056

 

Total non-certificate accounts

 

 

491,979

 

 

 

423,191

 

Term certificates less than $250,000

 

 

85,877

 

 

 

60,026

 

Term certificates of $250,000 or more

 

 

20,235

 

 

 

23,418

 

Term certificates - brokered

 

 

40,056

 

 

 

21,672

 

Total certificate accounts

 

 

146,168

 

 

 

105,116

 

 

 

$

638,147

 

 

$

528,307

 

 

   

F-24


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

A summary of term certificates, including brokered deposits, by maturity is as follows:

 

 

 

December 31, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

Maturing during:

 

Amount

 

 

Rate

 

 

Amount

 

 

Rate

 

 

 

(Dollars in thousands)

 

2021

 

$

 

 

 

%

 

$

81,320

 

 

 

0.95

%

2022

 

 

95,232

 

 

 

0.53

 

 

 

20,122

 

 

 

1.46

 

2023

 

 

31,966

 

 

 

0.30

 

 

 

2,269

 

 

 

1.06

 

2024

 

 

17,464

 

 

 

0.30

 

 

 

781

 

 

 

1.15

 

2025

 

 

755

 

 

 

0.53

 

 

 

624

 

 

 

0.64

 

2026

 

 

751

 

 

 

0.27

 

 

 

 

 

 

 

 

 

$

146,168

 

 

 

0.45

%

 

$

105,116

 

 

 

1.05

%

 

7.

BORROWINGS

A summary of borrowings from the FHLBB at December 31, 2021 and 2020 is as follows:

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

Average

 

 

 

Amount

 

 

Rate

 

 

Amount

 

 

Rate

 

 

 

(Dollars in thousands)

 

Fixed-rate advances maturing:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2021*

 

$

 

 

 

%

 

 

21,895

 

 

 

1.27

 

2022

 

 

5,000

 

 

 

0.30

 

 

 

10,000

 

 

 

2.20

 

2023

 

 

5,000

 

 

 

0.46

 

 

 

 

 

 

 

2024

 

 

 

 

 

 

 

 

 

 

 

 

2025

 

 

40,000

 

 

 

1.39

 

 

 

30,000

 

 

 

1.35

 

 

 

$

50,000

 

 

 

1.18

%

 

$

61,895

 

 

 

1.46

%

 

*

Includes amortizing advances which require monthly principal and interest payments.

There were no overnight advances or advances having a one-month maturity at December 31, 2021 and 2020.   Selected information for such short-term borrowings for the years presented is as follows (in 000’s):

 

 

 

2021

 

 

2020

 

Average daily balance

 

$

4,357

 

 

$

2,265

 

Maximum outstanding at any month end

 

 

28,032

 

 

 

16,181

 

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, 2021 was $111.5 million.  At December 31, 2021, 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, 2021 and 2020, there were no advances outstanding.

The Bank also has a $2,000,000 available line of credit with the FRB and a $12,500,000 available line of credit with a correspondent bank. No advances were outstanding under either of these lines at December 31, 2021 and 2020.

As a participating lender in the PPP, the Company had access to borrowing capacity through the Federal Reserve’s Paycheck Protection Program Lending Facility (the “PPPLF”). Only loans issued through the PPP could be pledged as collateral. At December 31, 2020, the bank had $11.4 million in outstanding advances. The bank prepaid all remaining outstanding PPPLF advances during 2021. The bank had no outstanding advances at December 31, 2021.  

F-25


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

8.

INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Current tax expense:

 

 

 

 

 

 

 

 

Federal

 

$

2,797

 

 

$

789

 

State

 

 

1,384

 

 

 

1,393

 

Total current tax expense

 

 

4,181

 

 

 

2,182

 

Deferred tax expense (benefit):

 

 

 

 

 

 

 

 

Federal

 

 

(301

)

 

 

4,174

 

State

 

 

(287

)

 

 

887

 

 

 

 

(588

)

 

 

5,061

 

Change in valuation allowance

 

 

(531

)

 

 

(1,766

)

Total deferred tax expense (benefit)

 

 

(1,119

)

 

 

3,295

 

Total tax expense

 

$

3,062

 

 

$

5,477

 

 

The reasons for the differences between the statutory federal income tax expense (benefit) and the actual tax expense are summarized as follows (in thousands):

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Statutory federal tax rate of 21%

 

$

2,659

 

 

$

5,341

 

Increase (decrease) resulting from:

 

 

 

 

 

 

 

 

State taxes, net of federal tax effect

 

 

867

 

 

 

1,801

 

Bank-owned life insurance

 

 

(34

)

 

 

(38

)

Tax-exempt income

 

 

(4

)

 

 

(6

)

Change in valuation allowance

 

 

(531

)

 

 

(1,766

)

Other, net

 

 

105

 

 

 

145

 

Total tax expense

 

$

3,062

 

 

$

5,477

 

   

The components of the net deferred tax asset are as follows (in thousands):

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Deferred tax assets:

 

 

 

 

 

 

 

 

Federal

 

$

3,977

 

 

$

2,962

 

State

 

 

1,867

 

 

 

1,286

 

 

 

 

5,844

 

 

 

4,248

 

Valuation allowance

 

 

-

 

 

 

(531

)

 

 

 

5,844

 

 

 

3,717

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Federal

 

 

(5,160

)

 

 

(4,837

)

State

 

 

(2,423

)

 

 

(2,175

)

 

 

 

(7,583

)

 

 

(7,012

)

Net deferred tax liability

 

$

(1,739

)

 

$

(3,295

)

 

F-26


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,

 

 

 

2021

 

 

2020

 

Employee benefit plans

 

$

729

 

 

$

785

 

Allowance for loan losses

 

 

1,938

 

 

 

2,071

 

Funded status of post-retirement benefits

 

 

143

 

 

 

(47

)

Securities available for sale

 

 

(64

)

 

 

(313

)

Depreciation and amortization

 

 

62

 

 

 

144

 

Net deferred loan origination costs

 

 

(276

)

 

 

(281

)

Mortgage servicing rights

 

 

(4,390

)

 

 

(3,479

)

Charitable contribution carryforward

 

 

 

 

 

531

 

Derivatives

 

 

(374

)

 

 

(2,722

)

Right-of-use asset

 

 

(508

)

 

 

 

Lease liability

 

 

508

 

 

 

 

Stock-based compensation

 

 

390

 

 

 

290

 

Other, net

 

 

103

 

 

 

257

 

 

 

 

(1,739

)

 

 

(2,764

)

Valuation allowance on net deferred tax assets

 

 

 

 

 

(531

)

Net deferred tax liability

 

$

(1,739

)

 

$

(3,295

)

 

From 2014 to June 30, 2019, the Company has maintained a valuation allowance on its net deferred tax asset 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 carryforward position, its current period operating results exclusive of non-recurring items and its expectations for the upcoming year. As a result, the 100% valuation allowance for deferred tax assets relating to the net operating loss carryforwards was maintained. Due to the level of income earned during the year ended 2020 and the Company being in a net deferred tax liability position at December 31, 2020, the full amount of the Company’s net operating loss carryforwards was absorbed and the previously held valuation allowance was reversed.              

At December 31, 2020, the Company had a charitable contribution valuation allowance carryforward of $531,000 which was reversed during 2021. There was no charitable contribution valuation allowance carryforward at December 31, 2021.

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, 2018 through 2021.  The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2016 are open.

9.

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 or to other financial institutions.

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 $85,887,000 and $396,551,000

F-27


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

at December 31, 2021 and 2020, respectively.  The fair value of such commitments at December 31, 2021 and 2020 was an asset of $1,364,000 and $11,821,000, respectively, and is included in other assets in the accompanying consolidated balance sheets. During the year ended December 31, 2021, the decrease in aggregate fair value of $10,457,000 and the increase in aggregate fair value of $10,349,000 for the year ended December 31, 2020, related to interest rate lock commitments were recognized and included in the net gain on loan origination and sales activities in the accompanying consolidated statements of operations.

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments and, effective in the fourth quarter of 2018, TBA securities to hedge the financial impact of changes in interest rates on the value 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 may be obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor in the event of a loss in value.

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 and TBA securities will experience changes in fair value that serve to substantially offset the change in fair value of derivative loan commitments the degree to which depends on the notional amount of such sale commitments.  The aggregate notional amount of forward loan sale commitments and TBA securities was $80,407,000 and $390,248,000 at December 31, 2021 and 2020, respectively. The fair value of such commitments at December 31, 2021 and 2020 consisted of liabilities of $84,000 and $2,180,000, respectively, included in other liabilities in the consolidated balance sheets and assets of $50,000 and $44,000, respectively, included in other assets in the consolidated balance sheets. During the years ended December 31, 2021 and 2020, net increases (reductions) in the aggregate fair value liability of $(2,102,000) and $2,007,000, respectively, related to forward loan sale commitments and TBA securities were recognized and included in net gain on loan originations and sales activities in the accompanying consolidated statements of operations.

 

10.

MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Bank is subject to various regulatory capital requirements administered by federal banking agencies.  Capital adequacy guidelines and 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 Bank 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.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following tables) of total, Tier 1 capital and common equity Tier 1 capital to risk weighted assets, and Tier 1 capital to average assets (all as defined). Management believes, as of December 31, 2021 and 2020, that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 2021, 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-28


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

The Bank’s actual and minimum capital amounts and ratios, exclusive of the capital conservation buffer, are presented in the following table:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

To Be Well

 

 

 

 

 

 

 

 

 

 

 

For Minimum

 

 

Capitalized Under

 

 

 

 

 

 

 

 

 

 

 

Capital

 

 

Prompt Corrective

 

 

 

Actual

 

 

Adequacy Purposes

 

 

Action Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(Dollars in thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 

$

100,180

 

 

 

17.4

%

 

$

45,956

 

 

 

8.0

%

 

$

57,445

 

 

 

10.0

%

Tier 1 capital (to risk weighted assets)

 

 

93,288

 

 

 

16.2

 

 

 

34,467

 

 

 

6.0

 

 

 

45,956

 

 

 

8.0

 

Common equity Tier 1 capital (to risk weighted

   assets)

 

 

93,288

 

 

 

16.2

 

 

 

25,850

 

 

 

4.5

 

 

 

37,339

 

 

 

6.5

 

Tier 1 capital (to average assets)

 

 

93,288

 

 

 

12.3

 

 

 

30,355

 

 

 

4.0

 

 

 

37,943

 

 

 

5.0

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total capital (to risk weighted assets)

 

$

97,406

 

 

 

15.7

%

 

$

49,682

 

 

 

8.0

%

 

$

62,102

 

 

 

10.0

%

Tier 1 capital (to risk weighted assets)

 

 

90,037

 

 

 

14.5

 

 

 

37,261

 

 

 

6.0

 

 

 

49,682

 

 

 

8.0

 

Common equity Tier 1 capital (to risk weighted

   assets)

 

 

90,037

 

 

 

14.5

 

 

 

27,946

 

 

 

4.5

 

 

 

40,366

 

 

 

6.5

 

Tier 1 capital (to average assets)

 

 

90,037

 

 

 

12.7

 

 

 

28,466

 

 

 

4.0

 

 

 

35,582

 

 

 

5.0

 

 

11.

POST-RETIREMENT PLANS

Supplemental retirement agreements

The Company maintains supplemental retirement agreements with certain officers and directors 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, 2021 and 2020, the accrued benefits related to the agreements amounted to $391,000 and $453,000, respectively.  Total expense, included in other non-interest expenses, related to these supplemental agreements amounted to $152,000 and $65,000 for the years ended December 31, 2021 and 2020, respectively.

F-29


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

Supplemental retirement plan

The Company has a master supplemental retirement plan (“Plan”) which covers certain officers and directors of the Company.  In 2021 and 2020, the only active participants in the Plan were certain directors, as the Plan is frozen to new participants.  Information pertaining to activity in the Plan follows:

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Change in plan assets:

 

 

 

 

 

 

 

 

Fair value of plan assets at beginning of year

 

$

 

 

$

 

Employer contributions

 

 

201

 

 

 

201

 

Benefits paid

 

 

(201

)

 

 

(201

)

Fair value of plan assets at end of year

 

 

 

 

 

 

Change in benefit obligation:

 

 

 

 

 

 

 

 

Benefit obligation at beginning of year

 

 

1,457

 

 

 

1,506

 

Service cost

 

 

13

 

 

 

11

 

Interest cost

 

 

17

 

 

 

36

 

Actuarial (gain) loss

 

 

(19

)

 

 

105

 

Benefits paid

 

 

(201

)

 

 

(201

)

Benefit obligation at end of year

 

 

1,267

 

 

 

1,457

 

Unfunded status and accrued supplemental pension cost at

   year end

 

$

(1,267

)

 

$

(1,457

)

Accumulated benefit obligation at year end

 

$

1,267

 

 

$

1,457

 

 

The assumptions used to determine the benefit obligation are as follows:

 

 

 

December 31,

 

 

 

2021

 

 

2020

 

Discount rate

 

 

1.90

%

 

 

1.25

%

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, 2021 and 2020, consists of the following:

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Service cost

 

$

13

 

 

$

11

 

Interest cost

 

 

17

 

 

 

36

 

Amortization of net actuarial loss

 

 

62

 

 

 

45

 

Amortization of prior service credit

 

 

(45

)

 

 

(57

)

 

 

$

47

 

 

$

35

 

 

The following assumptions were used to determine the net periodic benefit cost for the years ended December 31, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Discount rate

 

 

1.25

%

 

 

2.50

%

Annual inflation factor

 

 

1.00

%

 

 

1.00

%

 

F-30


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)

 

2022

 

$

209

 

2023

 

 

345

 

2024

 

 

204

 

2025

 

 

200

 

2026

 

 

90

 

2027-2031

 

 

187

 

Endorsement split-dollar life insurance arrangements

The Company is the sole owner of life insurance policies pertaining to certain of the Company’s current and former 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, 2021 and 2020 amounted to $14,000 and $20,000, respectively.  At December 31, 2021 and 2020, the accrued benefits related to the split-dollar arrangements amounted to $486,000 and $472,000, 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 requires 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, 2021 and 2020, expense attributable to the 401(k) Plan amounted to $898,000 and $852,000, respectively, with no additional discretionary contribution made.

 

F-31


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

12.

STOCK-BASED COMPENSATION

Under the Randolph Bancorp, Inc. 2017 Stock Option and Incentive Plan (the “2017 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 option is 10 years.  The total number of shares reserved for restricted stock is 234,749. Options and awards generally vest ratably over three to five years. In addition, the Company granted 15,000 shares of restricted stock and 44,118 options in 2020 as an inducement for senior executives to accept employment (the “2020 Inducement Plan”). The inducement awards and options vest ratably over five years.  The fair value of shares awarded is based on the market price at the date of grant.

At the Annual Meeting of Shareholders held on May 24, 2021, the Company’s shareholders approved the 2021 Equity Incentive Plan (the “2021 Equity Plan”). The 2021 Equity Plan permits equity awards to employees and directors in the form of stock options, restricted stock and other forms of compensation. The maximum number of shares of common stock that may be issued under the 2021 Equity Plan is 100,000. On August 13, 2021, the Company granted 18,000 performance-based restricted stock unit awards to certain senior level employees. These performance-based restricted stock unit awards were issued from the 2021 Equity Plan and were determined to have a grant fair value per share of $20.15. The number of stock units to be vested is contingent upon the attainment of certain performance criteria to be measured at the end of a three-year performance period, ending December 31, 2023. The awards will vest upon the earlier of the date on which it is determined if the performance goal is achieved subsequent to the performance period or April 15, 2024. Also on August 13, 2021, the Company granted 19,750 restricted stock awards to certain senior level employees and members of the Board of Directors. These restricted stock awards were issued from the 2021 Equity Plan and were determined to have a grant fair value per share of $20.15. The shares vest ratably over a three-year period.

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 incorporates 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.

 

 

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.

The Company made the following grants of options to purchase shares of common stock during the years ended December 31, 2021 and 2020:

 

 

 

2021

 

 

2020

 

Options granted

 

 

40,491

 

 

 

333,118

 

Vesting period (years)

 

5

 

 

3 - 5

 

Expiration period (years)

 

10

 

 

10

 

Expected volatility

 

 

30.98

%

 

24.94% - 29.87%

 

Expected life (years)

 

6.2

 

 

6 - 6.5

 

Expected dividend yield

 

 

 

 

 

 

Risk free interest rate

 

 

0.64

%

 

0.44%-1.47%

 

Option fair value

 

$

6.20

 

 

$2.69 - $4.87

 

 

F-32


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

The following table presents the activity and certain other information related to stock option grants under the 2017 Equity Plan and the 2020 Inducement Plan for the year ended December 31, 2021:

 

Options

 

Stock Option Grants

 

 

Weighted Average Exercise Price

 

 

Weighted Average Remaining Contractual Term

 

 

Aggregate Intrinsic Value

 

Balance at January 1, 2021

 

 

587,168

 

 

$

13.32

 

 

 

8.40

 

 

$

 

Granted

 

 

40,491

 

 

 

20.06

 

 

 

 

 

 

 

 

 

Exercised

 

 

(19,276

)

 

 

13.48

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(9,000

)

 

 

11.48

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

 

599,383

 

 

$

13.80

 

 

 

8.50

 

 

$

6,115,920

 

Exercisable at December 31, 2021

 

 

261,733

 

 

$

14.26

 

 

 

7.61

 

 

$

2,548,314

 

Unrecognized compensation cost (inclusive of directors' options)

 

$

1,072,768

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average remaining recognition period (years)

 

 

2.08

 

 

 

 

 

 

 

 

 

 

 

 

 

For the years ended December 31, 2021 and 2020, stock-based compensation expense applicable to stock options was $591,000 and $703,000, respectively.

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.

 

The following table presents the activity and certain other information related to restricted stock awards under the Equity Plan for the year ended December 31, 2021:

 

 

Restricted Stock Awards

 

 

Weighted Average Grant Price

 

 

Performance-Based Restricted Stock Units(1)

 

 

Weighted Average Grant Price

 

 

Total Restricted Stock Awards and Performance-Based Restricted Stock Units

 

 

Weighted Average Grant Price

 

Restricted stock awards at January 1, 2021

 

 

122,012

 

 

$

12.72

 

 

 

 

 

$

 

 

 

122,012

 

 

$

12.72

 

Granted

 

 

19,750

 

 

 

20.15

 

 

 

18,000

 

 

 

20.15

 

 

 

37,750

 

 

 

20.15

 

Vested

 

 

(40,165

)

 

 

13.44

 

 

 

 

 

 

 

 

 

(40,165

)

 

 

13.44

 

Forfeited

 

 

(2,112

)

 

 

11.48

 

 

 

 

 

 

 

 

 

(2,112

)

 

 

11.48

 

Non-vested stock awards at December 31, 2021

 

 

99,485

 

 

$

13.93

 

 

 

18,000

 

 

$

20.15

 

 

 

117,485

 

 

$

14.89

 

Unrecognized compensation cost

 

$

1,124,787

 

 

 

 

 

 

$

310,355

 

 

 

 

 

 

$

1,435,142

 

 

 

 

 

Weighted average remaining recognition period (years)

 

 

2.60

 

 

 

 

 

 

 

2.29

 

 

 

 

 

 

 

2.55

 

 

 

 

 

 

(1)

Performance-based restricted stock units granted reflects the estimated number able to be earned under a given award. The maximum number of shares that could vest is 27,000. Estimates are based on the most recent performance assumption available and is adjusted as assumptions change.

 

Total expense for the restricted stock awards was $641,000 and $891,000 for the years ended December 31, 2021 and 2020, respectively.

F-33


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

13.

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 Company stock. The Company 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 years ended December 31, 2021 and 2020 was 3.25% and 4.75%, respectively. 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, 2021 and 2020, the Company recognized compensation expense for the ESOP of $339,000 and $256,000, respectively. The fair value of the 356,818 unallocated ESOP shares at December 31, 2021 was $8,564,000.

 

14.

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 expired on September 14, 2020, at which time, the Company had repurchased 568,403 shares at a cost of $8,452,000 in connection with this program.

In October 2020, the Company’s Board of Directors adopted a share repurchase program under which the Company may repurchase up to 10%, or 552,000 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 expired on October 29, 2021, at which time, the Company had repurchased 435,601 shares at a cost of $8,819,000 in connection with this program.

In October 2021, the Company announced a new share repurchase program under which the Company may repurchase up to 10%, or 510,000 of its then outstanding 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. As of December 31, 2021, the Company had repurchased 4,337 shares at a cost of $100,000 in connection with this program. On January 25, 2022, the Company announced a modification to this program. The modification changes the program so that the Company may purchase up to 62,000 shares, or approximately 1% of the Company’s outstanding common stock.

 

15.

EARNINGS PER SHARE

Basic earnings per share represents net income 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 per share. Unallocated ESOP shares are not considered to be outstanding for purposes of computing earnings per share.    

The following table sets forth the calculation of the average number of shares outstanding used to calculate the basic and diluted earnings per share for the periods indicated:

 

 

 

2021

 

 

2020

 

Average number of common shares outstanding

 

 

5,262,824

 

 

 

5,511,524

 

Less: Average unallocated ESOP shares

 

 

(366,183

)

 

 

(384,963

)

Average number of common shares outstanding used to calculate basic earnings per share

 

 

4,896,641

 

 

 

5,126,561

 

Effect of dilutive stock options

 

 

212,097

 

 

 

36,481

 

Average number of common shares outstanding used to calculate dilutive earnings per share

 

 

5,108,738

 

 

 

5,163,042

 

F-34


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

 

16.

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: 

     

 

Loan commitments

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, 2021 and 2020, the following financial instruments were outstanding whose contract amounts represent credit risk:

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Commitments to originate loans

 

$

107,889

 

 

$

411,401

 

Unused lines and letters of credit

 

 

79,012

 

 

 

71,458

 

Unadvanced funds on construction loans

 

 

13,879

 

 

 

9,110

 

Overdraft lines of credit

 

 

7,967

 

 

 

7,969

 

 

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 three years 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 five members of senior management which provide that if, within two years of a change of control of the Company or the Bank, the executive is 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. The Company has also entered into change in control agreements with four members of senior management which provide that if, within one year of a change of control of the Company or the Bank, the executive is 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 one 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.

F-35


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

17.

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.

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 – Fair values are based on the exit price notion, which is what would be received to sell the loan in an orderly transaction between market participants at the measurement date. The valuation model takes into consideration internal financial reports, charge-off history for the Bank and peers and market interest rate information.

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 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, including TBAs, 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, costs to be incurred to close loans and the probability of such commitments being exercised. Significant management judgment and estimation is required in determining these fair value measurements.

F-36


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

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.

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

 

December 31, 2021

 

(In thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

 

 

$

51,666

 

 

$

 

 

$

51,666

 

Portfolio loans (fair value option)

 

 

 

 

 

 

13,780

 

 

 

 

 

 

13,780

 

Loans held for sale (fair value option)

 

 

 

 

 

44,766

 

 

 

 

 

 

44,766

 

Derivative loan commitments

 

 

 

 

 

1,364

 

 

 

 

 

 

1,364

 

Forward loan sale commitments

 

 

 

 

 

50

 

 

 

 

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward loan sale commitments, including TBAs

 

 

 

 

 

84

 

 

 

 

 

 

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt securities

 

$

 

 

$

55,366

 

 

$

 

 

$

55,366

 

Portfolio loans (fair value option)

 

 

 

 

 

13,780

 

 

 

 

 

 

13,780

 

Loans held for sale (fair value option)

 

 

 

 

 

119,112

 

 

 

 

 

 

119,112

 

Derivative loan commitments

 

 

 

 

 

11,821

 

 

 

 

 

 

11,821

 

Forward loan sale commitments

 

 

 

 

 

44

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward loan sale commitments, including TBAs

 

 

 

 

 

2,180

 

 

 

 

 

 

2,180

 

 

There were no transfers between levels for assets and liabilities recorded at fair value on a recurring basis during 2021 or 2020.

Assets and liabilities 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 and liabilities.  The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets and liabilities as of December 31, 2021 and 2020.  The gains and losses represent the amounts recorded during 2021 and 2020 on the assets and liabilities held at year-end. There no liabilities recorded at fair value on a non-recurring basis as of December 31, 2021 and 2020.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31, 2021

 

 

December 31, 2021

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total Gains (Losses)

 

Assets:

 

(In thousands)

 

Collateral dependent impaired loans

 

$

 

 

$

 

 

$

2,551

 

 

$

 

Mortgage servicing rights

 

 

 

 

 

15,616

 

 

 

 

 

 

438

 

 

 

$

 

 

$

15,616

 

 

$

2,551

 

 

$

438

 

F-37


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Year Ended

 

 

 

December 31, 2020

 

 

December 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total Gains (Losses)

 

 

 

(In thousands)

 

Collateral dependent impaired loans

 

$

 

 

$

 

 

$

6,318

 

 

$

 

Mortgage servicing rights

 

 

 

 

 

12,377

 

 

 

 

 

 

(2,067

)

Foreclosed real estate

 

 

 

 

 

 

 

132

 

 

 

 

 

 

$

 

 

$

12,377

 

 

$

6,450

 

 

$

(2,067

)

 

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 changes 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, 2021, the valuation allowance decreased due to slower actual and projected loan prepayment speeds attributable to the increase in interest rates on residential mortgage loans during the period. During the year ended December 31, 2020, the valuation allowance increased due to faster actual and projected loan prepayment speeds attributable to the decrease in interest rates on residential mortgage loans during the period.

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 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, 2021

 

 

 

Carrying

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

 

51,666

 

 

 

51,666

 

 

 

 

 

 

51,666

 

 

 

 

Loans held for sale

 

 

44,766

 

 

 

44,766

 

 

 

 

 

 

44,766

 

 

 

 

Loans, net

 

 

544,621

 

 

 

549,674

 

 

 

 

 

 

 

 

 

549,674

 

Derivative assets

 

 

1,414

 

 

 

1,414

 

 

 

 

 

 

1,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

638,147

 

 

$

637,538

 

 

$

 

 

$

637,538

 

 

$

 

FHLBB advances

 

 

50,000

 

 

 

50,001

 

 

 

 

 

 

50,001

 

 

 

 

Derivative liabilities

 

 

84

 

 

 

84

 

 

 

 

 

 

84

 

 

 

 

 

F-38


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

 

 

December 31, 2020

 

 

 

Carrying

 

 

Fair

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(In thousands)

 

Financial assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available for sale

 

$

55,366

 

 

$

55,366

 

 

$

 

 

$

55,366

 

 

$

 

Loans held for sale

 

 

119,112

 

 

 

119,112

 

 

 

 

 

 

119,112

 

 

 

 

Loans, net

 

 

483,644

 

 

 

490,914

 

 

 

 

 

 

 

 

 

490,914

 

Derivative assets

 

 

11,865

 

 

 

11,865

 

 

 

 

 

 

11,865

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

528,307

 

 

$

528,786

 

 

$

 

 

$

528,786

 

 

$

 

FRB advances

 

 

11,431

 

 

 

11,431

 

 

 

 

 

 

11,431

 

 

 

 

FHLBB advances

 

 

61,895

 

 

 

63,071

 

 

 

 

 

 

63,071

 

 

 

 

Derivative liabilities

 

 

2,180

 

 

 

2,180

 

 

 

 

 

 

2,180

 

 

 

 

 

18.

SEGMENT INFORMATION

 

The Company reports its activities in one of two business segments, namely Envision Bank (“EB”) and Envision Mortgage (“EM”). EB operations primarily consist of accepting deposits from customers within the communities surrounding the Bank’s five full service branch offices, through the internet, and investing those funds in residential and commercial real estate loans, home equity lines of credit, construction loans, commercial and industrial loans, and consumer loans. EM’s operations primarily consist of the origination and sale of residential mortgage loans and the servicing of loans sold to government-sponsored entities. A portion of the loans originated by EM are held in the loan portfolio of EB.

 

Segment information as of and for the year ended December 31, 2021, follows:

 

 

 

For the Year Ended December 31, 2021

 

 

 

Envision Bank

 

 

Envision Mortgage

 

 

Consolidated Total

 

 

 

(in thousands)

 

Net interest income

 

$

18,894

 

 

$

3,066

 

 

$

21,960

 

Provision (credit) for loan losses

 

 

(438

)

 

 

 

 

 

(438

)

Net interest income after provision (credit) for loan losses

 

 

19,332

 

 

 

3,066

 

 

 

22,398

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Customer service fees

 

 

1,538

 

 

 

80

 

 

 

1,618

 

Gain on loan origination and sale activities, net (1)

 

 

 

 

 

30,347

 

 

 

30,347

 

Mortgage servicing fees, net

 

 

(622

)

 

 

2,313

 

 

 

1,691

 

Other

 

 

428

 

 

 

501

 

 

 

929

 

Total non-interest income

 

 

1,344

 

 

 

33,241

 

 

 

34,585

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

7,031

 

 

 

21,181

 

 

 

28,212

 

Occupancy and equipment

 

 

1,825

 

 

 

967

 

 

 

2,792

 

Other non-interest expenses

 

 

4,435

 

 

 

6,219

 

 

 

10,654

 

Total non-interest expenses

 

 

13,291

 

 

 

28,367

 

 

 

41,658

 

Income before income taxes and elimination of inter-segment profit

 

$

7,385

 

 

$

7,940

 

 

 

15,325

 

Elimination of inter-segment profit

 

 

 

 

 

 

 

 

 

 

(2,662

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

12,663

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

3,062

 

Net income

 

 

 

 

 

 

 

 

 

$

9,601

 

Total assets, December 31, 2021

 

$

708,631

 

 

$

94,647

 

 

$

803,278

 

 

(1) Before elimination of inter-segment profit

 

F-39


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

The information above was derived from the internal management reporting system used by management to measure performance of the segments.

 

The Company’s internal transfer pricing arrangements determined by management primarily consist of the following:

 

1.

EM’s cost of funds is based on the weighted average rate of overnight advances from the FHLBB for the period.

 

2.

EM is credited with service released premiums and a sales premium totaling 1.50% for new loans transferred to EB’s loans held for investment, and a 1.00% fee for HELOC originations. This income for the year ended December 31, 2021 totaled $2,662,000.

 

3.

Loan servicing fees are charged to EB by EM based on the balance of residential mortgage loans held in portfolio at a rate of 0.14% per annum for the first six months of 2021. The rate was changed to 0.25% per annum for the last six months of the year and will be used thereafter. These loan servicing fees amounted to $622,000 for the year ended December 31, 2021.

 

4.

Certain cost centers provide services to both business segments. The cost centers include Accounting, Marketing, IT and Administration. Costs which are common to both business segments are referred to as “indirect costs” and are allocated using relevant benchmarks, e.g. headcount, number of accounts, etc.

 

Segment information as of and for the year ended December 31, 2020 follows:

 

 

 

For the Year Ended December 31, 2020

 

 

 

Envision Bank

 

 

Envision Mortgage

 

 

Consolidated Total

 

 

 

(in thousands)

 

Net interest income

 

$

16,235

 

 

$

2,632

 

 

$

18,867

 

Provision for loan losses

 

 

2,553

 

 

 

 

 

 

2,553

 

Net interest income after provision for loan losses

 

 

13,682

 

 

 

2,632

 

 

 

16,314

 

Non-interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Customer service fees

 

 

1,180

 

 

 

103

 

 

 

1,283

 

Gain on loan origination and sale activities, net (1)

 

 

 

 

 

55,729

 

 

 

55,729

 

Mortgage servicing fees, net

 

 

(381

)

 

 

(772

)

 

 

(1,153

)

Other

 

 

465

 

 

 

580

 

 

 

1,045

 

Total non-interest income

 

 

1,264

 

 

 

55,640

 

 

 

56,904

 

Non-interest expenses:

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,161

 

 

 

24,000

 

 

 

33,161

 

Occupancy and equipment

 

 

1,770

 

 

 

1,775

 

 

 

3,545

 

Other non-interest expenses

 

 

5,228

 

 

 

4,382

 

 

 

9,610

 

Total non-interest expenses

 

 

16,159

 

 

 

30,157

 

 

 

46,316

 

Income (loss) before income taxes and elimination of inter-segment profit

 

$

(1,213

)

 

$

28,115

 

 

 

26,902

 

Elimination of inter-segment profit

 

 

 

 

 

 

 

 

 

 

(1,493

)

Income before income taxes

 

 

 

 

 

 

 

 

 

 

25,409

 

Income tax expense

 

 

 

 

 

 

 

 

 

 

5,477

 

Net income

 

 

 

 

 

 

 

 

 

$

19,932

 

Total assets, December 31, 2020

 

$

537,722

 

 

$

183,350

 

 

$

721,072

 

 

(1) Before elimination of inter-segment profit

 

The information above was derived from the internal management reporting system used by management to measure performance of the segments.

 

The Company’s internal transfer pricing arrangements determined by management primarily consist of the following:

 

1.

EM’s cost of funds is based on the weighted average rate of overnight advances from the FHLBB for the period.

 

2.

E

F-40


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

M is credited with service released premiums and a sales premium totaling 1.50% for new loans transferred to EB’s loans held for investment, and a 1.00% fee for HELOC originations. This income for the year ended December 31, 2020 totaled $1,493,000.

 

3.

Loan servicing fees are charged to EB by EM based on the balance of residential mortgage loans held in portfolio at a rate of 0.14% per annum and amounted to $381,000 for the year ended December 31, 2020.

 

4.

Certain cost centers provide services to both business segments. The cost centers include Accounting, Marketing, IT and Administration. Costs which are common to both business segments are referred to as “indirect costs” and are allocated using relevant benchmarks, e.g. headcount, number of accounts, etc.

19.

OTHER NON-INTEREST EXPENSES

Included in other non-interest expenses in 2021 and 2020 are certain items exceeding 1% of the Company’s total interest and non-interest income as follows:

 

 

 

2021

 

 

2020

 

 

 

(In thousands)

 

Software amortization, licenses and maintenance

 

$

1,667

 

 

$

1,303

 

Credit reports

 

 

769

 

 

 

820

 

Card related expenses

 

 

468

 

 

 

429

 

Data communication and telephone

 

 

397

 

 

 

391

 

Directors' fees, including stock-based compensation

 

 

777

 

 

 

579

 

 

20.

GLOBAL PANDEMIC AFFECTING RANDOLPH BANCORP, INC.

 

The following summarizes the more significant financial repercussions of this national emergency for the Company.

 

Credit Quality and Allowance for Loan Losses

 

The Company increased the allowance for loan losses during 2020 directly related to its estimate, based on available information, of probable incurred losses resulting from the impact of the COVID-19 pandemic. As the Company acquires additional information on overall economic prospects together with further assessments of the impact on individual borrowers, the loss estimated will be revised as needed, and these revisions could be material. The Company’s approach to estimating the impact of this pandemic on credit quality is presented in Note 3 – “Loans and Allowance for Loan Losses.”

 

Disaster Response Plan Costs

 

The Company implemented its disaster response plans when the national emergency was declared and a stay-at-home order was issued in the Commonwealth of Massachusetts. To operate in this mode the Company incurred expenses for, among other things, compensation for front-line and quarantined employees, buying equipment for a remote workforce, cleaning of office and branch buildings, and communications with customers regarding the status of the Company’s operations. These plan costs amounted to $229,000 for the year ended December 31, 2020.

 

Loan Payment Deferral and Paycheck Protection Program

 

In response to the pandemic’s effect on our customers, the Company implemented a series of measures, including participating in the PPP and granting payment deferrals for residential mortgage, home equity and certain commercial borrowers who were current in their payments. The table below summarizes lending activity and outstanding balances of PPP loans and the associated pledges to the PPPLF: 

 

 

 

 

 

 

PPP Loan Balance

 

 

 

 

 

 

FRB Advances

 

 

 

PPP Loans

 

 

Outstanding at

 

 

Amount Pledged

 

 

Outstanding at

 

 

 

Originated

 

 

December 31, 2021

 

 

to PPPLF

 

 

December 31, 2021 (1)

 

 

 

(In thousands)

 

2020 PPP loans

 

$

15,387

 

 

$

16

 

 

$

15,387

 

 

$

-

 

2021 PPP loans

 

 

10,967

 

 

 

3,569

 

 

 

-

 

 

 

-

 

Total Activity

 

$

26,354

 

 

$

3,585

 

 

$

15,387

 

 

$

-

 

 

(1)

FRB advances were fully repaid during the first quarter of 2021 and the associated PPP loans are no longer pledged.

 

The Company has granted short-term loan payment deferrals for residential mortgage, home equity and certain commercial borrowers who were current on their payment and experiencing a hardship due to the COVID-19 pandemic. In accordance with interagency

F-41


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

guidance issued in March 2020 and/or the CARES Act enacted in March 2020 and as modified by the Consolidated Appropriations Act, these short-term deferrals are not considered TDRs, provided the loan modification is made between March 1, 2020 and as modified by the Consolidated Appropriations Act, the earlier of January 1, 2022 or 60 days after the end of the coronavirus emergency declaration and the applicable loan was not more than 30 days past due as of December 31, 2019.

 

The Company has agreed to loan payment deferrals on commercial loans totaling $37.5 million, residential real estate loans in portfolio totaling $19.1 million and residential real estate loans serviced for others totaling $68.4 million as of December 31, 2021.    The commercial loan payment deferrals are concentrated in the hotel and hospitality, restaurant and retail service industries. The qualifying residential real estate and commercial loan borrowers were required to contact the Company to receive loan payment deferrals.

 

The table below summarizes the status of the bank’s loan deferral activity:

 

 

Deferrals

 

 

Suspended/

 

 

Resumed

 

 

Full

 

 

Granted (1)

 

 

Reduced Payment (2)

 

 

Payment (2)

 

 

Payoff (3)

 

 

(In thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to-four family

$

15,771

 

 

$

1,949

 

 

$

8,063

 

 

$

5,759

 

Home equity loans and lines of credit

 

2,936

 

 

 

42

 

 

 

1,458

 

 

 

1,436

 

Construction

 

341

 

 

 

 

 

 

341

 

 

 

 

Commercial

 

34,176

 

 

 

 

 

 

26,463

 

 

 

7,713

 

Total real estate loans

 

53,224

 

 

 

1,991

 

 

 

36,325

 

 

 

14,908

 

Commercial and industrial

 

3,362

 

 

 

 

 

 

1,352

 

 

 

2,010

 

Consumer

 

58

 

 

 

 

 

 

58

 

 

 

 

Total

$

56,644

 

 

$

1,991

 

 

$

37,735

 

 

$

16,918

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to-four family

$

15,514

 

 

$

12,974

 

 

$

2,109

 

 

$

431

 

Home equity loans and lines of credit

 

3,179

 

 

 

626

 

 

 

1,287

 

 

 

1,266

 

Construction

 

350

 

 

 

350

 

 

 

 

 

 

 

Commercial

 

34,754

 

 

 

6,544

 

 

 

25,406

 

 

 

2,804

 

Total real estate loans

 

53,797

 

 

 

20,494

 

 

 

28,802

 

 

 

4,501

 

Commercial and industrial

 

3,645

 

 

 

 

 

 

1,635

 

 

 

2,010

 

Consumer

 

68

 

 

 

68

 

 

 

 

 

 

 

Total

$

57,510

 

 

$

20,562

 

 

$

30,437

 

 

$

6,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

(1)

This column equals the current outstanding balance of loans that received a deferral, plus the balance of loans that were deferred and were paid in full.

 

(2)

These two columns are the current balance of all loans that received a deferral. The Suspended/Reduced Payment column represents loans currently in a deferral period and the Resumed Payment column represents loans that are no longer in a deferral period and have resumed normal payment.

 

(3)

This column represents the balance of deferred loans that were paid off in full.

 

The payment deferral programs were applied prospectively from the respective dates of the events and did not change the delinquency status of the loans as of such dates. Accordingly, if all payments were current at the date of the event, the loan will not be reported as past due during the deferral period. Furthermore, for loans subject to the deferral programs on which payments were past due prior to the event, the delinquency status of such loans was frozen to the status that existed at the date of the event until the end of the deferral period.

F-42


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

Accordingly, the table below summarizes the risk rating and for all loans that were granted deferral, and any loans that were listed in nonaccrual status:

 

 

Pass Rated /

 

 

Special

 

 

Sub-

 

 

Non-

 

 

Not Rated

 

 

Mention

 

 

standard (1)

 

 

accrual (1)(2)

 

 

(In thousands)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

8,678

 

 

$

212

 

 

$

1,122

 

 

$

1,334

 

Home equity loans and lines of credit

 

1,500

 

 

 

 

 

 

 

 

 

 

Construction

 

341

 

 

 

 

 

 

 

 

 

 

Commercial

 

16,004

 

 

 

6,916

 

 

 

3,543

 

 

 

 

Total real estate loans

 

26,523

 

 

 

7,128

 

 

 

4,665

 

 

 

1,334

 

Commercial and industrial

 

1,020

 

 

 

332

 

 

 

 

 

 

 

Consumer

 

58

 

 

 

 

 

 

 

 

 

 

Total

$

27,601

 

 

$

7,460

 

 

$

4,665

 

 

$

1,334

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

$

14,887

 

 

$

196

 

 

$

 

 

$

196

 

Home equity loans and lines of credit

 

1,913

 

 

 

 

 

 

 

 

 

 

Construction

 

350

 

 

 

 

 

 

 

 

 

 

Commercial

 

19,020

 

 

 

8,748

 

 

 

4,182

 

 

 

4,182

 

Total real estate loans

 

36,170

 

 

 

8,944

 

 

 

4,182

 

 

 

4,378

 

Commercial and industrial

 

1,204

 

 

 

431

 

 

 

 

 

 

 

Consumer

 

68

 

 

 

 

 

 

 

 

 

 

Total

$

37,442

 

 

$

9,375

 

 

$

4,182

 

 

$

4,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

These three columns indicate the risk rating and subsequent outstanding balance of loans that have received a deferral. The Pass Rated/Not Rated, Special Mention and Substandard columns reconcile to the Suspended Payment/Reduced Payment columns in the preceding table.

 

(2)

Nonaccrual loans are risk rated as either special mention or substandard and are included as a balance in those columns. 

  

 

F-43


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

21.

PARENT COMPANY CONDENSED FINANCIAL STATEMENTS

 

Financial information as of December 31, 2021 and 2020 and for the years then ended pertaining to Randolph Bancorp, Inc. is as follows:

 

BALANCE SHEETS

 

 

 

December 31,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Cash and due from bank

 

$

3,240

 

 

$

4,829

 

Investment in Envision Bank

 

 

93,126

 

 

 

90,959

 

Income taxes receivable

 

 

661

 

 

 

-

 

ESOP loan

 

 

3,895

 

 

 

4,042

 

Total assets

 

$

100,922

 

 

$

99,830

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Income taxes payable

 

$

 

 

$

8

 

Due to Envision Bank

 

 

4

 

 

 

3

 

Other liabilities

 

 

15

 

 

 

 

Total liabilities

 

 

19

 

 

 

11

 

 

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Common stock

 

 

50

 

 

 

54

 

Additional paid-in capital

 

 

44,078

 

 

 

50,937

 

Retained earnings

 

 

60,524

 

 

 

51,689

 

ESOP-Unearned compensation

 

 

(3,568

)

 

 

(3,756

)

Accumulated other comprehensive loss, net of tax

 

 

(181

)

 

 

895

 

Total stockholders' equity

 

 

100,903

 

 

 

99,819

 

Total liabilities and stockholders' equity

 

$

100,922

 

 

$

99,830

 

 

STATEMENTS OF OPERATIONS

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Interest income

 

$

131

 

 

$

198

 

Dividend income

 

 

8,000

 

 

 

5,000

 

Operating expenses

 

 

191

 

 

 

171

 

Income before incomes taxes and equity in undistributed net

   income of Envision Bank

 

 

7,940

 

 

 

5,027

 

Applicable income tax (credit)

 

 

(12

)

 

 

7

 

Income before equity in undistributed net income of Envision Bank

 

 

7,952

 

 

 

5,020

 

Equity in undistributed net income of Envision Bank

 

 

1,649

 

 

 

14,912

 

Net income

 

$

9,601

 

 

$

19,932

 

F-44


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

STATEMENTS OF CASH FLOWS

 

 

 

Years Ended December 31,

 

 

 

2021

 

 

2020

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

9,601

 

 

$

19,932

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Equity in undistributed net income of Envision Bank

 

 

(1,649

)

 

 

(14,912

)

Dividends received from Envision Bank

 

 

(8,000

)

 

 

(5,000

)

Increase (decrease) in income taxes payable (receivable)

 

 

(669

)

 

 

8

 

Increase in other liabilities

 

 

15

 

 

 

 

Change in intercompany receivable/payable

 

 

 

 

 

(15

)

Net cash provided by (used in) operating activities

 

 

(702

)

 

 

13

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Principal payments received on ESOP loan

 

 

147

 

 

 

120

 

Dividends received from Envision Bank

 

 

8,000

 

 

 

5,000

 

Net cash provided by investing activities

 

 

8,147

 

 

 

5,120

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Stock repurchases

 

 

(8,529

)

 

 

(1,749

)

Stock repurchase payable

 

 

 

 

 

 

Proceeds from the exercise of options, net

 

 

261

 

 

 

 

Common stock dividend paid

 

 

(766

)

 

 

 

Net cash used in financing activities

 

 

(9,034

)

 

 

(1,749

)

Net change in cash and due from bank

 

 

(1,589

)

 

 

3,384

 

Cash and due from bank at the beginning of year

 

 

4,829

 

 

 

1,445

 

Cash and due from bank at end of year

 

$

3,240

 

 

$

4,829

 

 

 

 

22. LEASES

 

The Company adopted the new lease accounting standard (“the lease standard”) under Accounting Standards Codification 842 (“ASC 842”) using the modified retrospective transition method with an effective date as of January 1, 2021. Therefore, periods prior to that date were not restated, and accordingly disclosures are not presented on a comparable basis. The Company elected the package of practical expedients, which permits the Company not to reassess prior conclusions about lease identifications, lease classification and direct costs. The Company did not elect to apply the hindsight expedient pertaining to using hindsight knowledge as of the effective date when determining lease terms and impairment.

 

As of December 31, 2021, the Company had entered into 10 noncancelable operating lease agreements for office space and branch locations, several of which contain renewal options to extend lease terms for a period of 1 to 10 years. The Company had no financing leases outstanding and no leases with residual value guarantees.

 

The Company’s ROU asset related to operating leases totaled $1.8 million at December 31, 2021 and is recognized in the Company’s Consolidated Balance Sheet in other assets.

 

The Company’s operating lease cost for 2021 was $834,000. As of December 31, 2021, the weighted average remaining lease term for operating leases was 4.5 years and the weighted average discount rate used in the measurement of operating lease liabilities was 1.99%.

 

F-45


Randolph Bancorp, Inc. and Subsidiary

Notes to Consolidated Financial Statements (continued)

 

 

The following table sets forth the undiscounted cash flows of base rent related to operating leases outstanding at December 31, 2021 with payments scheduled over the next five years and thereafter, including a reconciliation to the operating lease liability recognized in the Company’s Consolidated Balance Sheet in other liabilities.

 

 

 

(In thousands)

 

2022

 

$

619

 

2023

 

 

396

 

2024

 

 

309

 

2025

 

 

245

 

2026

 

 

226

 

Thereafter

 

 

95

 

Total minimum lease payments

 

 

1,890

 

Less: amount representing interest

 

 

(84

)

Present value of future minimum lease payments

 

$

1,806

 

 

23. MORTGAGE BANKING INCOME

 

The components of gain on loan origination and sale activities and mortgage servicing fees for the years ended December 31, 2021 and 2020 are as follows:

 

For the Year Ended December 31,

 

 

2021

 

 

2020

 

 

(In thousands)

 

Gain on loan origination and sale activities, net

 

 

 

 

 

 

 

Gain on sale of mortgage loans and realized gain from derivative financial instruments, net

$

33,578

 

 

$

34,203

 

Net change in fair value of loans held for sale and portfolio loans accounted for at fair value

 

(3,536

)

 

 

3,263

 

Capitalized residential mortgage loan servicing rights

 

5,998

 

 

 

8,428

 

Net change in fair value of derivative loan commitments and forward loan sale commitments

 

(8,355

)

 

 

8,342

 

Gain on loan origination and sales activities, net

$

27,685

 

 

$

54,236

 

 

 

 

 

 

 

 

 

Mortgage servicing fees, net

 

 

 

 

 

 

 

Residential mortgage loan servicing fees

$

5,012

 

 

$

3,458

 

Amortization of residential mortgage loan servicing rights

 

(3,197

)

 

 

(2,543

)

Release (provision) to the valuation allowance of mortgage loan servicing rights

 

438

 

 

 

(2,068

)

Sub-servicer expenses (1)

 

(562

)

 

 

-

 

Mortgage servicing fees, net

$

1,691

 

 

$

(1,153

)

Total gain on loan origination and sales activities and mortgage servicing fees, net

$

29,376

 

 

$

53,083

 

 

(1)

Sub-servicer expenses were first incurred during the third quarter of 2021, due to the conversion of the Company’s mortgage loan servicing activities. Previously, all expenses related to servicing mortgage loans serviced for others were included in non-interest expenses.

 

 

F-46