EDGAR 10-K Filing

Company CIK: 1667161
Filing Year: 2022
Filename: 1667161_10-K_2022_0001564590-22-009626.json

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ITEM 1. BUSINESS
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.
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.
Loan Portfolio. The following table sets forth the composition of our loan portfolio at the dates indicated:
At December 31,
(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
$
$
15,040
$
$
16,235
$
$
$
31,980
After one year through five years
107,938
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
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
178,625
Total
$
236,337
$
182,383
$
57,293
$
17,726
$
17,098
$
7,020
$
517,857
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
$
$
$
$
15,360
$
$
$
16,809
After one year through five years
68,207
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
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
$
$
7,780
$
13,224
$
9,155
$
273,970
Adjustable rate
76,703
59,102
47,360
7,910
7,032
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).
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.
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.
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.
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)
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
1,971
Consumer loans
1,167
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
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
-
-
-
(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.
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.
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)
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
(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.
The following table provides information with respect to our nonperforming assets, including TDRs, at the dates indicated.
At December 31,
(Dollars in thousands)
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
Consumer loans
-
-
-
-
Total nonaccrual loans (1)
2,624
7,173
3,258
3,030
2,252
Delinquent loans (>90 days) accruing interest (2)
-
-
-
-
Total non-performing loans
2,624
7,173
3,258
3,665
2,252
Other real estate owned:
One- to four-family residential
-
-
Commercial
-
-
-
-
-
Total other real estate owned
-
-
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,
(In thousands)
Classified assets:
Substandard
$
5,438
$
5,783
$
3,678
$
2,519
$
Doubtful
-
-
-
-
Loss
-
-
-
-
-
Total classified assets
$
5,438
$
5,783
$
3,678
$
2,668
$
Special mention
$
8,180
$
11,075
$
5,537
$
1,343
$
2,512
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
$
$
$
1,778
$
1,263
$
-
$
Commercial
-
-
-
-
-
-
Home equity loans and lines of credit
-
Construction
-
-
-
-
-
-
Commercial and industrial loans
-
-
-
-
-
-
Consumer loans
-
-
Total
$
1,068
$
$
2,134
$
1,396
$
$
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
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
7.35
%
10.42
%
6.52
%
9.84
%
Construction
11.08
%
6.18
%
11.07
%
6.35
%
Commercial and industrial loans
7.93
%
3.14
%
6.13
%
4.14
%
Consumer loans
1.38
%
1.37
%
1.87
%
2.10
%
Total
$
6,289
100.00
%
100.00
%
$
6,784
100.00
%
100.00
%
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,
(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
-
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
Commercial
-
-
-
-
-
Home equity loans and lines of credit
-
-
-
-
-
Construction
-
-
-
-
-
Commercial and industrial loans
-
-
Consumer loans
Total recoveries
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.
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,
(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
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
1,001
1,363
1,370
Collateralized mortgage obligations:
U.S. Government-sponsored enterprises
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
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)
-
-
5.13
%
-
-
-
-
5.13
%
Residential mortgage-
backed securities:
U.S. Government-
sponsored enterprises
-
-
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
-
-
-
-
-
-
0.97
%
0.97
%
Collateralized mortgage
obligations:
U.S. Government-
sponsored enterprises
-
-
2.70
%
-
-
2.58
%
2.64
%
U.S. Government-
guaranteed
-
-
-
-
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
%
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
1.99
%
2,729
1.10
%
1,068
2.90
%
-
-
4,300
1.65
%
Municipals(1)
-
-
4.87
%
-
-
-
-
4.87
%
Residential mortgage-
backed securities:
U.S. Government-
sponsored enterprises
-
-
2.99
%
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
-
-
-
-
-
-
2.46
%
2.46
%
Collateralized mortgage
obligations:
U.S. Government-
sponsored enterprises
-
-
-
-
2.66
%
2.75
%
2.71
%
U.S. Government-
guaranteed
-
-
-
-
-
-
3,398
2.30
%
3,398
2.31
%
Total securities
available-for-sale
$
-
$
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
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.
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,
(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)
0.00% - 1.00%
$
133,154
$
64,108
$
20,518
1.01 - 2.00%
12,957
25,256
78,583
2.01 - 3.00%
15,752
87,997
3.01 - 4.00%
-
-
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
$
$
$
133,154
%
1.01 - 2.00%
11,536
1,089
-
12,957
%
2.01 - 3.00%
-
-
%
Total
$
95,232
$
31,966
$
17,464
$
$
$
146,168
%
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
$
$
$
64,108
%
1.01 - 2.00%
17,281
6,303
1,229
25,256
%
2.01 - 3.00%
10,190
5,562
-
-
-
15,752
%
Total
$
81,319
$
20,122
$
2,270
$
$
$
105,116
%
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
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
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.
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)
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
16%
62%
2%
Members of the Board of Directors
10%
30%
10%
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.
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:
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the acquisition would result in a monopoly or substantially lessen competition;
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the financial condition of the acquiring person might jeopardize the financial stability of the institution;
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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
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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
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
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:
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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
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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
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,
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.
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.
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:
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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;
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Equal Credit Opportunity Act, which prohibits discrimination on the basis of race, creed, or other prohibited factors in extending credit;
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Fair Credit Reporting Act, which governs the use and provision of information to credit reporting agencies;
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Biggert-Waters Flood Insurance Reform Act of 2012, which mandates flood insurance for mortgage loans secured by residential real estate in certain areas; and
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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:
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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;
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Truth in Savings Act, which governs the disclosure of terms and conditions regarding interest and fees related to deposit accounts;
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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;
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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;
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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
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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
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.
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.
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:
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commercial real estate loans - repayment is generally dependent on income being generated in amounts sufficient to cover operating expenses and debt service;
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commercial and industrial loans - repayment is generally dependent upon the successful operation of the borrower’s business; and
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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
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.
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
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.
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:
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quarterly variations in our operating results or the quality of our assets;
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operating results that vary from the expectations of management, securities analysts and investors;
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changes in expectations as to our future financial performance;
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announcements of innovations, new products, strategic developments, significant contracts, acquisitions and other material events by us or our competitors;
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the operating and securities price performance of other companies that investors believe are comparable to us;
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our future dividend practices;
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future sales of our equity or equity-related securities; and
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changes in global financial markets and global economies and general market conditions, such as interest rates, stock, commodity or real estate valuations or volatility.
Our 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:
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supermajority voting requirements for certain business combinations and changes to some provisions of the articles of organization and bylaws;
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a limitation on the right to vote shares;
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the election of directors to staggered terms of three years;
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the removal of directors only for cause;
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the absence of cumulative voting by shareholders in the election of directors;
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provisions restricting the calling of special meetings of shareholders; and
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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
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:
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Available interest rate hedging may not correspond directly with the interest rate risk for which protection is sought;
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The duration of the hedge may not match the duration of the related liability;
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The party owing money in the hedging transaction may default on its obligation to pay;
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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;
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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
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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
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.
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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments.
None.

---

ITEM 2. PROPERTIES
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
N/A
50 South Franklin Street Holbrook, MA 02343
Owned
N/A
497 Washington Street Stoughton, MA 02072
Owned
N/A
87 Sharon Street Stoughton, MA 02072
Leased
March 2025
1 Rockdale Street Braintree, MA 02184
Leased
April 2023
Loan Production Offices:
303 Wyman Street, Suite 275 Waltham, MA 02451
Leased
July 2022
875 State Road Westport, MA 02790
Leased
December 2023
276 Turnpike Road Route 9 East, Westboro, MA 01581
Leased
October 2023
1 Stiles Road, Suite 204, Salem, NH, 03079
Leased
December 2022
Administrative Offices/Lending Centers:
999 South Washington Street North Attleboro, MA 02760(1)
Leased
February 2022
2 Batterymarch Park, Suite 301, Quincy, MA 02169
20 Alice Agnew Drive, Suite 4, North Attleboro, MA 02763
Leased
Leased
June 2027
April 2025
(1)This lending center was closed as of March 10, 2022.

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings.
(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.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures.
Not applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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
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.
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.)

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Reserved.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
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.
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.
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,
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
1.67
%
58,233
1,306
2.24
%
52,953
1,521
2.87
%
Interest-earning deposits
32,841
0.10
%
30,277
0.25
%
5,109
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
0.18
%
161,502
0.51
%
108,483
0.52
%
NOW accounts
65,978
0.21
%
55,396
0.33
%
39,197
0.49
%
Money market accounts
74,816
0.23
%
71,817
0.63
%
69,362
1.38
%
Term certificates
112,802
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
1.27
%
71,661
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.
(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
)
$
$
(95
)
$
(1,324
)
$
(1,419
)
Investment securities
(60
)
(323
)
(383
)
(14
)
(200
)
(214
)
Interest-earning deposits
(50
)
(44
)
(35
)
(13
)
Total interest-earning assets
1,912
(1,389
)
(87
)
(1,559
)
(1,646
)
Interest-bearing liabilities:
Savings accounts
(626
)
(496
)
NOW accounts
(78
)
(47
)
(21
)
(10
)
Money market accounts
(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
$
$
3,090
$
$
$
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
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.
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)
Dollars
Percent
Dollars
Percent
(Dollars in thousands)
Net interest income
$
18,894
$
16,235
$
2,659
16.4
%
$
3,066
$
2,632
$
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
16.5
Non-interest income:
Customer service fees
1,538
1,180
30.3
(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
(37
)
(8.0
)
(79
)
(13.6
)
Total non-interest income
1,344
1,264
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
3.1
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
$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.
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,
(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
-
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
As of and for the Years Ended December 31,
(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.
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
0.01
Accrued severance expenses
0.06
Other outsourcing expenses
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
0.11
Accelerated vesting of stock-based compensation
0.10
COVID-19 related expenses
0.03
Residential lending office closure
0.04
Accrued severance expenses
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
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
-
-
(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
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
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Information regarding quantitative and qualitative disclosures about market risk appears under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the caption “Management of Market Risk.”

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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)
• Consolidated Balance Sheets at December 31, 2021 and 2020
• Consolidated Statements of Operations For the Years Ended December 31, 2021 and 2020
• Consolidated Statements of Comprehensive Income (Loss) For the Years Ended December 31, 2021 and 2020
• Consolidated Statements of Changes Shareholders’ Equity For the Years Ended December 31, 2021 and 2020
• Consolidated Statements of Cash Flows For the Years Ended December 31, 2021 and 2020
• Notes to Consolidated Financial Statements

---

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.

---

ITEM 9A. CONTROLS AND PROCEDURES
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.

---

ITEM 9B. OTHER INFORMATION
Item 9B. Other Information.
None

---

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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
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
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.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence.
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
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.
PART IV

---

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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
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
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
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.