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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2016

Commission File Number: 001-37780

 

 

Randolph Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Massachusetts		81-1844402
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
10 Cabot Place
Stoughton, Massachusetts		02072
(Address of principal executive offices)		(Zip Code)

(781) 963-2100

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrants has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer		¨		Accelerated filer		¨
Non-accelerated filer		¨  (Do not check if a smaller reporting company)		Smaller reporting company		x

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

As of August 8, 2016 there were 5,868,726 share of the registrant’s common stock outstanding.

 

 

 

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Table of Contents

 

		Page
PART I—Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015			1
Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2016 and 2015			2
Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2016 and 2015			3
Consolidated Statements of Changes in Equity for the Six Months Ended June 30, 2016 and 2015			4
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2016 and 2015			5-6
Notes to Consolidated Financial Statements			7
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			32
Item 4. Controls and Procedures			32
PART II—OTHER INFORMATION			32
Item 1. Legal Proceedings			32
Item 1A. Risk Factors			32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			32
Item 3. Defaults Upon Senior Securities			32
Item 4. Mine Safety Disclosures			32
Item 5. Other Information			32
Item 6. Exhibits			33
SIGNATURE			34

 

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

RANDOLPH BANCORP AND SUBSIDIARIES

Consolidated Balance Sheets (Unaudited)

(In thousands)

 

		June 30,				December 31,
		2016				2015
Assets
Cash and due from banks		$	3,592			$	2,721
Interest-bearing deposits			69,262				1,925
Total cash and cash equivalents			72,854				4,646
Certificates of deposit			4,675				4,675
Securities available for sale, at fair value			55,253				62,267
Loans held for sale			4,822				2,870
Loans, net of allowance for loan losses of $3,259 and $3,239, respectively			295,599				285,151
Federal Home Loan Bank stock, at cost			1,943				2,728
Accrued interest receivable			1,036				1,065
Mortgage servicing rights			2,768				2,567
Premises and equipment, net			3,155				2,891
Bank-owned life insurance			7,935				9,620
Foreclosed real estate			350				500
Other assets			5,817				4,183
Total assets		$	456,207			$	383,163
Liabilities and Equity
Deposits:
Non-interest bearing		$	49,616			$	37,968
Interest bearing			274,526				271,227
Stock subscriptions			67,442				—
Total deposits			391,584				309,195
Federal Home Loan Bank advances			24,068				34,914
Mortgagors’ escrow accounts			1,311				1,445
Post-employment benefit obligations			2,883				3,294
Other liabilities			2,190				1,856
Total liabilities			422,036				350,704
Equity:
Retained earnings			32,917				32,198
Accumulated other comprehensive income, net of tax			1,254				261
Total equity			34,171				32,459
Total liabilities and equity		$	456,207			$	383,163

See accompanying notes to consolidated financial statements.

 

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RANDOLPH BANCORP AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

(In thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Interest and dividend income:
Loans		$	2,830			$	2,560			$	5,548			$	5,012
Securities-taxable			307				392				626				789
Securities-tax exempt			91				104				187				211
Interest-bearing deposits and certificates of deposit			32				16				54				31
Total interest and dividend income			3,260				3,072				6,415				6,043
Interest expense:
Deposits			331				297				645				587
Federal Home Loan Bank advances			57				31				118				57
Total interest expense			388				328				763				644
Net interest income			2,872				2,744				5,652				5,399
Provision for loan losses			—				125				62				125
Net interest income after provision for loan losses			2,872				2,619				5,590				5,274
Non-interest income:
Customer service fees			396				404				753				770
Net gain on sales of mortgage loans			1,058				608				1,739				1,190
Mortgage servicing			69				55				169				96
Gain (loss) on sales/calls of securities, net			—				—				62				(7	)
Increase in cash surrender value of life insurance			48				60				104				121
Gain on life insurance settlement			486				—				486				—
Other			29				7				75				9
Total non-interest income			2,086				1,134				3,388				2,179
Non-interest expenses:
Salaries and employee benefits			2,381				2,223				4,583				4,425
Occupancy and equipment			363				407				757				932
Data processing			131				257				386				496
Professional fees			338				301				740				512
Marketing			103				87				172				174
Foreclosed real estate, net			154				104				157				121
FDIC insurance			56				77				139				145
Other			714				666				1,321				1,304
Total non-interest expenses			4,240				4,122				8,255				8,109
Income (loss) before income taxes			718				(369	)			723				(656	)
Income tax expense (benefit)			—				(1	)			3				(4	)
Net income (loss)		$	718			$	(368	)		$	720			$	(652	)

See accompanying notes to consolidated financial statements

 

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RANDOLPH BANCORP AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

(In thousands)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2016				2015				2016				2015
Net income (loss)		$	718			$	(368	)		$	720			$	(652	)
Other comprehensive income (loss):
Securities available for sale:
Unrealized holding gains (losses)			229				102				1,049				(187	)
Reclassification adjustment for net (gains) losses realized in income			—				—				(62	)			7
Net unrealized gains (losses)			229				102				987				(180	)
Related tax effects			—				—				—				—
Net-of-tax amount			229				102				987				(180	)
Post-retirement benefit plans:
Defined benefit pension plan:
Reclassification adjustment for actuarial losses recognized			—				17				—				103
Supplemental retirement plan:
Reclassification adjustments:
Actuarial losses			9				5				18				11
Prior service (credits) costs recognized			(7	)			7				(13	)			16
			2				12				5				27
Net change in post-retirement benefit plans			2				29				5				130
Related tax effects			—				(17	)			—				(46	)
Net-of-tax amount			2				12				5				84
Total other comprehensive income (loss)			231				114				992				(96	)
Comprehensive income (loss)		$	949			$	(254	)		$	1,712			$	(748	)

See accompanying notes to consolidated financial statements

 

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RANDOLPH BANCORP AND SUBSIDIARIES

Consolidated Statements of Changes in Equity (Unaudited)

(In thousands)

 

		Six Months Ended June 30, 2016 and 2015
						Accumulated
						Other
		Retained				Comprehensive				Total
		Earnings				Income				Equity
		(In thousands)
Balance at December 31, 2014		$	32,952			$	704			$	33,656
Net loss			(652	)			—				(652	)
Other comprehensive loss			—				(96	)			(96	)
Balance at June 30, 2015		$	32,300			$	608			$	32,908
Balance at December 31, 2015		$	32,198			$	261			$	32,459
Net income			720				—				720
Other comprehensive income			—				992				992
Balance at June 30, 2016		$	32,918			$	1,253			$	34,171

See accompanying notes to consolidated financial statements

 

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RANDOLPH BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

		For the Six Months Ended June 30,
		2016				2015
Cash flows from operating activities:
Net income (loss)		$	720			$	(652	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Provision for loan losses			62				125
Loans originated for sale			(60,888	)			(53,778	)
Principal balance of loans sold			58,936				49,798
Net amortization of securities			113				86
Net change in deferred loan costs and fees			59				(122	)
Net (gain) loss on sales/calls of securities			(62	)			7
Depreciation and amortization			238				361
Impairment write-down on foreclosed real estate			150				100
Gain on life insurance settlement			(486	)			—
Increase in cash surrender value of life insurance			(104	)			(121	)
Net increase in mortgage servicing rights			(319	)			(50	)
Other, net			(61	)			(207	)
Net cash used in operating activities			(1,642	)			(4,453	)
Cash flows from investing activities:
Purchases of certificates of deposit			—				(735	)
Securities available for sale:
Sales			—				318
Calls/maturities			7,033				300
Purchases			(2,000	)			(549	)
Principal payments on mortgage-backed securities			2,917				3,593
Loan originations, net of principal repayments			(9,711	)			(24,091	)
Loans purchased			(859	)			(543	)
Redemption (purchases) of Federal Home Loan Bank stock			785				(542	)
Proceeds from sale of building			1,231				—
Purchases of premises and equipment			(502	)			(332	)
Net cash used in investing activities			(1,106	)			(22,581	)

See accompanying notes to consolidated financial statements

 

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RANDOLPH BANCORP AND SUBSIDIARIES

Consolidated Statements of Cash Flows (Unaudited) (concluded)

(In thousands)

 

		For the Six Months Ended June 30,
		2016				2015
Cash flows from financing activities:
Net increase in deposits			14,947				12,177
Proceeds from Federal Home Loan Bank advances			4,863				29,730
Repayments of Federal Home Loan Bank advances			(15,709	)			(15,360	)
Net decrease in mortgagors’ escrow accounts			(135	)			(15	)
Stock subscriptions received			67,442				—
Deferred stock offering costs			(452	)			(95	)
Net cash provided by financing activities			70,956				26,437
Net change in cash and cash equivalents			68,208				(597	)
Cash and cash equivalents at beginning of period			4,646				5,203
Cash and cash equivalents at end of period		$	72,854			$	4,606
Supplemental cash flow information:
Interest paid on deposits and borrowed funds		$	763			$	638
Income taxes paid		$	7			$	6

See accompanying notes to consolidated financial statements

 

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RANDOLPH BANCORP AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

June 30, 2016 and 2015

NOTE 1 – BASIS OF PRESENTATION

Overview

Randolph Bancorp, a Massachusetts-chartered mutual holding company (“Bancorp”) and the parent company of Randolph Savings Bank (the “Bank”) adopted a plan of conversion (the “Plan of Conversion”) in January 2016 which was subsequently approved by Bancorp’s Corporators in May 2016. Under the Plan of Conversion, Bancorp would convert from a mutual to a stock holding company in a series of transactions in which Randolph Bancorp, Inc. (the “Company”), a recently formed subsidiary of Bancorp, would be the surviving entity.

On July 1, 2016, the mutual-to-stock transaction was completed and the Company sold 5,686,750 shares of its common stock, representing the adjusted maximum of the offering range, at $10.00 per share, for gross proceeds of $56,867,500, including the sale of 469,498 shares to the Bank’s newly formed employee stock ownership plan (“ESOP”). The ESOP’s shares were funded by a loan from the Company to be repaid over 25 years with interest at the prime rate.

Included in deposits at June 30, 2016 are stock subscriptions of $67,442,000. As the Company’s stock offering was oversubscribed, $16,494,000 of these subscriptions were refunded on July 1, 2016.

The direct costs of the Company’s stock offering are being deferred and were deducted from the proceeds of the offering. At June 30, 2016, deferred costs of $862,000 were included in other assets in the accompanying consolidated balance sheet. The total stock offering costs to be deducted from the proceeds of the offering are approximately $2,300,000.

In connection with the Plan of Conversion, the Company established The Randolph Savings Charitable Foundation, Inc. (the “Foundation”). The Foundation was funded with 181,976 shares of the Company’s stock and $455,000 in cash. In July 2016, the Company recognized expense of $2,274,700 for this contribution. Since the Company is currently in a net operating loss (“NOL”) carryforward position and has set-up a full valuation allowance for its deferred tax assets, no tax benefit was recognized.

The Company and the Bank are required to restrict their net worth by establishing liquidation accounts (collectively, the “liquidation account”) for the benefit of eligible account holders who continue to maintain deposit accounts at the Bank after the conversion. The liquidation account will be reduced annually to the extent eligible depositors reduce their qualifying deposits and cannot be increased thereafter with additional deposits. In the event of a complete liquidation of the Bank, and only in such event, each eligible account holder would be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. Neither the Company nor the Bank may declare or pay a cash dividend on its common stock if such dividend would cause its regulatory capital to be reduced below the amount required to maintain the liquidation account.

Bancorp entered into a merger agreement in September 2015 under which it would acquire First Eastern Bankshares Corporation (“Bankshares”) and its wholly-owned subsidiary First Federal Savings Bank of Boston (“First Federal”) (collectively “First Eastern”) in a transaction to be accounted for as a business combination. First Eastern is actively engaged in the mortgage banking business as an originator, seller and servicer of residential mortgage loans. On July 1, 2016 the Company completed the acquisition of First Eastern. See Note 8 for additional information.

Basis of Financial Statement Presentation

As of June 30, 2016 the conversion had not been completed and, as of that date, the Company had no assets or liabilities and had not conducted any business other than that of an organizational nature. As a result, the accompanying unaudited interim consolidated financial statements include the accounts of Bancorp and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange Commission (“SEC”). Accordingly, the accompanying interim financial statements do not include all information required under GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial statements, primarily consisting of normal recurring adjustments, have been included. The operating results for the three and six months ended June 30, 2016 are not necessarily indicative of the results to be expected for the year ending December 31, 2016 or any other interim period.

For further information, refer to the consolidated financial statements and notes thereto included in the prospectus of Randolph Bancorp, Inc. dated May 13, 2016, as filed with the SEC.

 

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NOTE 2 – COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income (loss). Although certain changes in assets and liabilities are reported as a separate component of equity, such items, along with net income (loss), are components of comprehensive income (loss).

The components of accumulated other comprehensive income, included in total equity, are as follows:

 

		June 30,				December 31,
		2016				2015
		(In thousands)
Securities available for sale:
Net unrealized gain		$	1,872			$	886
Tax effect			(423	)			(423	)
Net-of-tax amount			1,449				463
Supplemental retirement plan
Unrecognized net actuarial loss			(725	)			(743	)
Unrecognized net prior service credit			587				598
			(138	)			(145	)
Tax effect			(57	)			(57	)
Net-of-tax amount			(195	)			(202	)
Accumulated other comprehensive income		$	1,254			$	261

NOTE 3 – RECENT ACCOUNTING PRONOUNCEMENTS

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting requirements. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for fiscal years beginning after December 15, 2018, including interim periods therein. Early adoption is permitted. The Company is currently assessing the impact of the adoption of this ASU on its consolidated balance sheet.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

 

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NOTE 4 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale, including gross unrealized gains and losses, are as follows:

 

						Gross				Gross
		Amortized				Unrealized				Unrealized				Fair
		Cost				Gains				Losses				Value
		(In thousands)
June 30, 2016
Debt securities:
U.S. Government-sponsored enterprises		$	3,999			$	158			$	—			$	4,157
Corporate			3,064				102				(6	)			3,160
Municipal			13,884				628				(1	)			14,511
Residential mortgage-backed securities:
U.S. Government-sponsored enterprises			18,414				674				(4	)			19,084
U.S. Government-guaranteed			6,619				208				—				6,827
Commercial mortgage-backed securities:
U.S. Government-guaranteed			6,856				106				—				6,962
Total debt securities			52,836				1,876				(11	)			54,701
Mutual fund			545				7				—				552
Total securities available for sale		$	53,381			$	1,883			$	(11	)		$	55,253
December 31, 2015
Debt securities:
U.S. Government-sponsored enterprises		$	6,886			$	159			$	(12	)		$	7,033
Corporate			4,250				78				(48	)			4,280
Municipal			15,327				472				(24	)			15,775
Residential mortgage-backed securities:
U.S. Government-sponsored enterprises			19,742				406				(120	)			20,028
U.S. Government-guaranteed			7,276				50				—				7,326
Commercial mortgage-backed securities:
U.S. Government-guaranteed			7,355				33				(108	)			7,280
Total debt securities			60,836				1,198				(312	)			61,722
Mutual fund			545				—				—				545
Total securities available for sale		$	61,381			$	1,198			$	(312	)		$	62,267

 

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NOTE 4 – SECURITIES AVAILABLE FOR SALE (continued)

 

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2016 are presented below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Amortized				Fair
		Cost				Value
		(In thousands)
Within 1 year		$	—			$	—
After 1 year through 5 years			13,261				13,706
After 5 years through 10 years			7,686				8,122
			20,947				21,828
Mortgage-backed securities			31,889				32,873
		$	52,836			$	54,701

Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

		Less Than Twelve Months								Over Twelve Months
		Gross								Gross
		Unrealized				Fair				Unrealized				Fair
		Losses				Value				Losses				Value
		(In thousands)
June 30, 2016
Debt securities:
Corporate		$	—			$	—			$	(6	)		$	1,009
Municipal			—				—				(1	)			487
Residential mortgage-backed securities:
U.S. Government-sponsored			—				—				(4	)			2,774
Commercial mortgage-backed securities:
U.S. Government-guaranteed			—				—				—				—
Total debt securities		$	—			$	—			$	(11	)		$	4,270
December 31, 2015
Debt securities:
U.S. Government-sponsored enterprises		$	—			$	—			$	(12	)		$	1,989
Corporate			—				—				(48	)			2,088
Municipal			—				—				(24	)			2,185
Residential mortgage-backed securities:
U.S. Government-sponsored			—				—				(120	)			5,994
Commercial mortgage-backed securities:
U.S. Government-guaranteed			—				—				(108	)			5,062
Total debt securities		$	—			$	—			$	(312	)		$	17,318

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. At June 30, 2016, 14 debt securities had unrealized losses with aggregate depreciation of less than 1% from the Company’s amortized cost basis. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of these investments. Therefore, it is expected that the bonds would not be settled at a price less than the par value of the investment. Because the Company does not intend to sell any debt securities and it is more likely than not that the Company will not be required to sell any debt securities before recovery of its amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at June 30, 2016. When possible, management actively monitors the credit rating of the underlying issuer of the debt security. As of June 30, 2016 management did not identify any securities for which the credit rating had deteriorated since purchase.

 

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

A summary of the loan portfolio is as follows:

 

		June 30,				December 31,
		2016				2015
		(In thousands)
Mortgage loans on real estate:
Residential:
One-to-four family		$	168,128			$	166,483
Home equity loans and lines of credit			35,338				33,259
Commercial			81,719				74,911
Construction			7,270				7,807
			292,455				282,460
Commercial and industrial			1,996				2,040
Consumer			3,178				2,602
Total loans			297,629				287,102
Allowance for loan losses			(3,259	)			(3,239	)
Net deferred loan costs and fees, and purchase premiums			1,229				1,288
		$	295,599			$	285,151

 

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2016 and 2015:

 

						Second
		Residential				Mortgages				Commercial								Commercial
		1-4 Family				and HELOC				Real Estate				Construction				and Industrial				Consumer				Total
		(In thousands)
Three Months Ended June 30, 2016
Allowance at March 31, 2016		$	1,054			$	431			$	1,559			$	121			$	36			$	84			$	3,285
Provision for loan losses			(9	)			13				(39	)			14				—				21				—
Loans charged-off			—				—				—				—				—				(34	)			(34	)
Recoveries			1				—				—				—				—				7				8
Balance at June 30, 2016		$	1,046			$	444			$	1,520			$	135			$	36			$	78			$	3,259
Three Months Ended June 30, 2015
Allowance at March 31, 2015		$	1,368			$	488			$	1,539			$	60			$	51			$	31			$	3,537
Provision for loan losses			(55	)			54				41				68				(8	)			25				125
Loans charged-off			—				—				—				—				—				(12	)			(12	)
Recoveries			1				—				—				—				1				1				3
Balance at June 30, 2015		$	1,314			$	542			$	1,580			$	128			$	44			$	45			$	3,653
Six Months Ended June 30, 2016
Allowance at December 31, 2015		$	1,076			$	512			$	1,402			$	159			$	37			$	53			$	3,239
Provision for loan losses			(32	)			(68	)			118				(24	)			(1	)			69				62
Loans charged-off			—				—				—				—				—				(60	)			(60	)
Recoveries			2				—				—				—				—				16				18
Balance at June 30, 2016		$	1,046			$	444			$	1,520			$	135			$	36			$	78			$	3,259
Six Months Ended June 30, 2015
Allowance at December 31, 2014		$	1,368			$	488			$	1,539			$	60			$	51			$	38			$	3,544
Provision for loan losses			(55	)			54				41				68				(8	)			25				125
Loans charged-off			—				—				—				—				—				(29	)			(29	)
Recoveries			1				—				—				—				1				11				13
Balance at June 30, 2015		$	1,314			$	542			$	1,580			$	128			$	44			$	45			$	3,653

 

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Additional information pertaining to the allowance for loan losses at June 30, 2016 and December 31, 2015 is as follows:

 

						Second
		Residential				Mortgages				Commercial								Commercial
		1-4 Family				and HELOC				Real Estate				Construction				and Industrial				Consumer				Total
		(In thousands)
June 30, 2016
Allowance for impaired loans		$	223			$	2			$	19			$	—			$	—			$	—			$	244
Allowance for non-impaired loans			823				442				1,501				135				36				78				3,015
Total allowance for loan losses		$	1,046			$	444			$	1,520			$	135			$	36			$	78			$	3,259
Impaired loans		$	4,564			$	277			$	1,221			$	—			$	—			$	—			$	6,062
Non-impaired loans			163,564				35,061				80,498				7,270				1,996				3,178				291,567
Total loans		$	168,128			$	35,338			$	81,719			$	7,270			$	1,996			$	3,178			$	297,629
December 31, 2015
Allowance for impaired loans		$	254			$	2			$	28			$	—			$	—			$	—			$	284
Allowance for non-impaired loans			822				510				1,374				159				37				53				2,955
Total allowance for loan losses		$	1,076			$	512			$	1,402			$	159			$	37			$	53			$	3,239
Impaired loans		$	4,961			$	277			$	1,449			$	—			$	16			$	—			$	6,703
Non-impaired loans			161,522				32,982				73,462				7,807				2,024				2,602				280,399
Total loans		$	166,483			$	33,259			$	74,911			$	7,807			$	2,040			$	2,602			$	287,102

The following is a summary of past due and non-accrual loans at June 30, 2016 and December 31, 2015:

 

		30 - 59 Days Past Due				60 - 89 Days Past Due				90 Days or More Past Due				Total Past Due				Non- accrual Loans
		(In thousands)
June 30, 2016
Residential one-to-four family		$	392			$	—			$	—			$	392			$	1,715
Home equity loans and lines of credit			—				—				—				—				277
Commercial real estate			—				—				—				—				—
Construction			—				—				—				—				—
Commercial and industrial			—				—				—				—				—
Consumer			—				—				—				—				—
Total		$	392			$	—			$	—			$	392			$	1,992
December 31, 2015
Residential one-to-four family		$	403			$	133			$	46			$	582			$	2,022
Home equity loans and lines of credit			—				247				—				247				30
Commercial real estate			—				—				—				—				—
Construction			—				—				—				—				—
Commercial and industrial			—				—				—				—				16
Consumer			—				—				—				—				—
Total		$	403			$	380			$	46			$	829			$	2,068

At June 30, 2016 and December 31, 2015, there were no loans past due 90 days or more and still accruing interest.

 

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The following is a summary of impaired loans at June 30, 2016 and December 31, 2015:

 

		Recorded Investment				Unpaid Principal Balance				Related Allowance
		(In thousands)
June 30, 2016
Impaired loans without a valuation allowance:
Residential one-to-four family		$	949			$	949			$	—
Home equity loans and lines of credit			247				247				—
Commercial real estate			276				276				—
Total			1,472				1,472				—
Impaired loans with a valuation allowance:
Residential one-to-four family			3,615				3,615				223
Home equity loans and lines of credit			30				30				2
Commercial real estate			945				945				19
Total			4,590				4,590				244
Total impaired loans		$	6,062			$	6,062			$	244
December 31, 2015
Impaired loans without a valuation allowance:
Residential one-to-four family		$	874			$	874			$	—
Home equity loans and lines of credit			247				247				—
Commercial real estate			422				422				—
Commercial and industrial			16				16				—
Total			1,559				1,559				—
Impaired loans with a valuation allowance:
Residential one-to-four family			4,088				4,088				254
Home equity loans and lines of credit			30				30				2
Commercial real estate			1,026				1,026				28
Total			5,144				5,144				284
Total impaired loans		$	6,703			$	6,703			$	284

 

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

Additional information pertaining to impaired loans follows:

 

		Average				Interest				Cash Basis
		Recorded				Income				Interest
		Investment				Recognized				Recognized
		(In thousands)
Six Months Ended June 30, 2016
Residential one-to-four family		$	4,942			$	89			$	29
Home equity loans and lines of credit			241				1				1
Commercial real estate			1,304				33				—
Commercial and industrial			12				—				—
Total		$	6,499			$	123			$	30
Six Months Ended June 30, 2015
Residential one-to-four family		$	6,469			$	110			$	33
Home equity loans and lines of credit			36				1				—
Commercial real estate			7,115				183				7
Commercial and industrial			17				—				—
Total		$	13,637			$	294			$	40
Three Months Ended June 30, 2016
Residential one-to-four family		$	4,783			$	48			$	16
Home equity loans and lines of credit			288				1				1
Commercial real estate			1,236				17				—
Total		$	6,307			$	66			$	17
Three Months Ended June 30, 2015
Residential one-to-four family		$	6,441			$	52			$	16
Home equity loans and lines of credit			18				—				—
Commercial real estate			6,578				93				2
Commercial and industrial			17				—				—
Total		$	13,054			$	145			$	18

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

Troubled Debt Restructurings

The Company periodically grants concessions to borrowers experiencing financial difficulties.

At June 30, 2016, the Company had 18 residential real estate loans and 5 commercial real estate loans aggregating $4,548,000 and $1,010,000, respectively, which were subject to troubled debt restructuring agreements.

At June 30, 2015, the Company had 28 residential real estate loans and 7 commercial real estate loans aggregating $6,373,000 and $4,081,000, respectively, which were subject to troubled debt restructuring agreements.

As of June 30, 2016 and 2015, $3,859,000 and $8,138,000, respectively, in troubled debt restructurings were performing in accordance with the terms of the modified loan agreements.

 

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NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES (continued)

 

The Company’s troubled debt restructurings consist primarily of interest rate concessions for periods of three months to thirty years for residential real estate loans, and for periods up to one year for commercial real estate loans. For the six months ended June 30, 2016 the Company had no modifications of loans meeting the criteria of a troubled debt restructuring. For the six months ended June 30, 2015 the Company modified 2 loans meeting the criteria of a troubled debt restructuring having a loan balance of $434,000 with rate reductions ranging from 1% to 3%.

Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings. Any reserve required is recorded as part of the allowance for loan losses. During the three and six months ended June 30, 2016 and 2015, there were no material changes to the allowance for loan losses as a result of loan modifications made which were considered a troubled debt restructuring.

During the three and six months ended June 30, 2016 and 2015, there were no troubled debt restructurings that defaulted (over 30 days past due) within twelve months of the restructure date.

Credit Quality Information

The Company utilizes an eight-grade internal loan rating system for commercial real estate, construction and commercial loans, as follows:

Loans rated 1 – 3A are considered “pass” rated loans with low to average risk.

Loans rated 4 are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 5 are considered “substandard” and are inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6 are considered “doubtful” and have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 7 are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial and industrial loans. Annually, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

The following table presents the Company’s loans by risk rating:

 

		June 30, 2016												December 31, 2015
		Commercial Real Estate				Construction				Commercial and Industrial				Commercial Real Estate				Construction				Commercial and Industrial
		(In thousands)
Loans rated 1 - 3A		$	80,706			$	7,270			$	1,946			$	73,517			$	7,807			$	2,006
Loans rated 4			802				—				50				1,145				—				—
Loans rated 5			211				—				—				249				—				34
		$	81,719			$	7,270			$	1,996			$	74,911			$	7,807			$	2,040

Residential mortgages, including home equity loans and lines of credit, and consumer loans are monitored for credit quality based primarily on their payment status.

NOTE 6 – ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Loan Commitments

Mortgage loan commitments qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.

 

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NOTE 6 – ON-BALANCE SHEET DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES (continued)

 

Outstanding derivative loan commitments expose the Company to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to an increase in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases. The notional amount of derivative loan commitments was $23,717,000 and $5,292,000 at June 30, 2016 and December 31, 2015, respectively. The fair value of such commitments was an asset of $515,000 and $93,000 as of June 30, 2016 and December 31, 2015, respectively, and is included in other assets in the consolidated balance sheets.

Forward Loan Sale Commitments

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.

With a “mandatory delivery” contract, the Company commits to deliver a certain principal amount of mortgage loans to an investor at a specified price on or before a specified date. If the Company fails to deliver the amount of mortgages necessary to fulfill the commitment by the specified date, it is obligated to pay a “pair-off” fee, based on then-current market prices, to the investor to compensate the investor for the shortfall.

With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g. on the same day the lender commits to lend funds to a potential borrower).

The Company expects that these forward loan sale commitments will experience inverse changes in fair value to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $25,745,000 and $7,371,000 at June 30, 2016 and December 31, 2015, respectively. The fair value of such commitments was an asset of $2,000 and $14,000 at June 30, 2016 and December 31, 2015, respectively, included in other assets in the consolidated balance sheets and a liability of $182,000 at June 30, 2016 included in other liabilities in the consolidated balance sheet.

NOTE 7 – FAIR VALUE OF ASSETS AND LIABILITIES

Determination of fair value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash and cash equivalents – The carrying amounts of cash and short-term instruments approximate fair values based on the short-term nature of the assets.

Certificates of deposit – Certificates of deposit are carried at cost. These assets are measured at fair value in level 2 based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Securities – All fair value measurements are obtained from a third-party pricing service and are not adjusted by management. The securities measured at fair value in Level 1 (none at June 30, 2016 and December 31, 2015) are based on quoted market prices in an active exchange market. Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

Federal Home Loan Bank (“FHLB”) stock – It is not practical to determine the fair value of FHLB stock due to restrictions on its transferability.

Loans held for sale – Fair values are based on commitments in effect from investors or prevailing market prices.

 

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NOTE 7 – FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

Determination of fair value (continued)

Loans – For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Mortgage servicing rights – Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, using various assumptions related to fees, discount rates and prepayment speeds.

Deposit liabilities – The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate term certificates are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.

FHLBB advances – The fair values of the Company’s FHLBB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest – The carrying amounts of accrued interest approximate fair value.

On-balance-sheet derivatives - Fair values of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans based on current market prices for similar assets in the secondary market. For derivative loan commitments, fair values also include the value of servicing, deferred origination fees/costs and the probability of such commitments being exercised.

Off-balance sheet credit-related instruments – Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments are not material.

Assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis are summarized below. There were no liabilities measured at fair value on a recurring basis at December 31, 2015.

 

														Total
		Level 1				Level 2				Level 3				Fair Value
		(In thousands)
June 30, 2016
Assets:
Securities available for sale:
Debt securities		$	—			$	54,701			$	—			$	54,701
Mutual fund			—				552				—				552
Derivative loan commitments			—				515				—				515
Forward loan sale commitments			—				2				—				2
Liabilities:
Forward loan sale commitments							182				—				182
December 31, 2015
Assets:
Securities available for sale:
Debt securities		$	—			$	61,722			$	—			$	61,722
Mutual fund			—				545				—				545
Derivative loan commitments			—				93				—				93
Forward loan sale commitments			—				14				—				14

 

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NOTE 7 – FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

Assets measured at fair value on a non-recurring basis

The Company may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with U.S. generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related assets as of June 30, 2016 and December 31, 2015.

 

		June 30, 2016
		Level 1				Level 2				Level 3
		(In thousands)
Loans held for sale		$	—			$	4,822			$	—
Collateral dependent impaired loans			—				—				900
Foreclosed real estate			—				—				350
Mortgage servicing rights			—				2,768				—
		$	—			$	7,590			$	1,250
		December 31, 2015
		Level 1				Level 2				Level 3
		(In thousands)
Loans held for sale		$	—			$	2,870			$	—
Collateral dependent impaired loans			—				—				552
Foreclosed real estate			—				—				500
Mortgage servicing rights			—				2,567				—
		$	—			$	5,437			$	1,052

The Company recorded a $150,000 valuation allowance for foreclosed real estate during the three months ended June 30, 2016 based on an updated appraisal.

There were no liabilities measured at fair value on a non-recurring basis at June 30, 2016 and December 31, 2015.

The following table shows the significant unobservable inputs used in the non-recurring fair value measurements of Level 3 assets. Foreclosed real estate and collateral dependent impaired loans are evaluated for non-recurring fair value adjustments as determined by third party appraisals without adjustment except as noted below.

 

Valuation

Unobservable

Discount

Measurements

Fair Value

Technique

Inputs

Applied

(In thousands)

June 30, 2016

Foreclosed real estate

$

350

Discounted appraisal

Collateral discounts

0

%

Collateral dependent impaired loans

900

Discounted appraisals

Collateral discounts

0

%

December 31, 2015

Foreclosed real estate

$

500

Discounted appraisal

Collateral discounts

32

%

Collateral dependent impaired loans

552

Discounted appraisals

Collateral discounts

0

%

 

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NOTE 7 – FAIR VALUE OF ASSETS AND LIABILITIES (continued)

 

The estimated fair values, and related carrying amounts, of the Company’s financial instruments are presented below. Certain financial instruments and all non-financial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying fair value of the Company. This table excludes financial instruments for which the carrying amount approximates fair value. Financial assets for which the fair value approximates carrying value include cash and cash equivalents and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include mortgagors’ escrow accounts and accrued interest payable.

 

		June 30, 2016
		Carrying				Fair
		Amount				Value				Level 1				Level 2				Level 3
		(In thousands)
Financial assets:
Certificates of deposit		$	4,675			$	4,746			$	—			$	4,746			$	—
Securities available for sale			55,253				55,253				—				55,253				—
Loans held for sale			4,822				4,908				—				4,908				—
Loans, net			295,599				297,897				—				—				297,897
Derivative assets			517				517				—				517				—
Financial liabilities:
Deposits		$	391,584			$	391,995			$	—			$	391,995			$	—
FHLBB advances			24,068				24,066				—				24,066				—
Derivative liabilities			182				182				—				182				—
		December 31, 2015
		Carrying				Fair
		Amount				Value				Level 1				Level 2				Level 3
		(In thousands)
Financial assets:
Certificates of deposit		$	4,675			$	4,711			$	—			$	4,711			$	—
Securities available for sale			62,267				62,267				—				62,267				—
Loans held for sale			2,870				2,931				—				2,931				—
Loans, net			285,151				283,542				—				—				283,542
Derivative assets			107				107				—				107				—
Financial liabilities:
Deposits		$	309,195			$	309,076			$	—			$	309,076			$	—
FHLBB advances			34,914				34,971				—				34,971				—

NOTE 8 – SUBSEQUENT EVENTS

On July 1, 2016, the Company acquired First Eastern for $13,907,000 in cash. Upon completion of the merger, the Company added $26,209,000 in loans held for sale, $30,824,000 in portfolio loans, $4,396,000 in mortgage servicing rights and $41,737,000 in deposits. The Company has not yet finalized its determination of the fair values of acquired assets and liabilities assumed related to the First Eastern acquisition.

 

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

This section is intended to help potential investors understand the financial performance of Randolph Bancorp and its subsidiaries through a discussion of the factors affecting its financial condition at June 30, 2016 and December 31, 2015, and its results of operations for the three and six month periods ended June 30, 2016 and June 30, 2015. This section should be read in conjunction with the consolidated financial statements of Randolph Bancorp and notes thereto that appear elsewhere in this quarterly report. For the purpose of this quarterly report, the term the “Company” refers to Randolph Bancorp, Inc. and the terms “we,” “our,” and “us” refer to Randolph Bancorp, Inc. or Randolph Bancorp, as the context indicates, and Randolph Savings Bank (the “Bank”) unless the context indicates another meaning.

Forward Looking Statements

This quarterly report contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are based on certain current assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding our strategy, goals and expectations; the effectiveness of our investment programs; evaluations of future interest rate trends and liquidity; expectations as to growth in assets, deposits and results of operations, future operations, market position and financial position; and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond our control.

Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. Our actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; our ability to successfully acquire and integrate First Federal Savings Bank of Boston; adverse conditions in the capital and debt markets and the impact of such conditions on our business activities; changes in interest rates; competitive pressures from other financial institutions; the effects of weakness in general economic conditions on a national basis or in the local markets in which we operate, including changes that adversely affect borrowers’ ability to service and repay our loans; changes in the value of securities in our investment portfolio; changes in loan default and charge-off rates; fluctuations in real estate values; the adequacy of loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; changes in accounting standards and practices; the risk that intangible assets recorded in our financial statements will become impaired; demand for loans in our market area; our ability to attract and maintain deposits; risks related to the implementation of acquisitions, dispositions, and restructurings; the risk that we may not be successful in the implementation of our business strategy; and changes in assumptions used in making such forward-looking statements. Forward-looking statements speak only as of the date on which they are made. We do not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.

Overview

Our fundamental business strategy is to:

 

•

Leverage our infrastructure;

 

•

Further expand mortgage banking;

 

•

Emphasize commercial lending;

 

•

Maintain our asset quality;

 

•

Increase core funding;

 

•

Improve our delivery channels;

 

•

Grow through acquisitions; and

 

•

Remain a community-oriented institution.

Our results of operations depend primarily on net interest income and gains on the sale of mortgage loans. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Our interest-earning assets consist primarily of residential mortgage loans, commercial real estate loans, commercial and industrial loans, home equity loans and lines of credit, construction loans, consumer loans and investment securities. Interest-bearing liabilities consist primarily of deposit accounts and borrowings from the Federal Home Loan Bank of Boston. Gains on the sale of mortgage loans result from the sale of such loans in the secondary mortgage market. The amount of these gains is dependent on the volume of our loan originations.

 

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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 Note 1 to our Consolidated Financial Statements included in our prospectus, dated May 13, 2016, filed with the SEC.

The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.

Completion of Stock Offering and Acquisition of First Eastern Bankshares Corporation

On July 1, 2016, the Company completed its mutual-to-stock conversion and stock offering, and immediately thereafter consummated its acquisition of First Eastern Bankshares Corporation and its wholly-owned subsidiary First Federal Savings Bank of Boston (“First Eastern”). Neither of these transactions are included in the accompanying financial statements as of June 30, 2016 and for the three and six month periods then ended. The direct costs incurred in connection with our stock offering have been deferred and included in other assets in the accompanying balance sheets. Costs associated with the acquisition have been expensed as incurred and consist principally of professional fees to complete the transaction and plan for the integration of the operations of the companies. The majority of such costs were incurred in the second half of 2015. See Notes 1 and 8 to the accompanying consolidated financial statements for additional information related to these transactions.

First Eastern’s primary business is the origination and sale of residential mortgage loans in the secondary market and offering a variety of insured deposit accounts and using such deposits as well as borrowings to originate portfolio loans, primarily residential mortgage and construction loans, to its customers. During the six months ended June 30, 2016, First Eastern originated $184.3 million in residential mortgage loans for sale in the secondary market.

As a result of the merger the Company’s footprint has expanded to include a branch office in downtown Boston, seven loan production offices in Massachusetts and one loan production office in New Hampshire.

Comparison of Financial Condition at June 30, 2016 and December 31, 2015

Total Assets. Total assets increased $73.0 million to $456.2 million at June 30, 2016 from $383.2 million at December 31, 2015. This increase was largely attributable to the $67.4 million in stock subscriptions received in connection with our stock offering completed on July 1, 2016. Excluding subscription deposits, assets would have increased $5.6 million, or 1.5%. Growth was concentrated in our loan portfolio which increased by $10.4 million as investment securities decreased $7.0 million during the period. This shift in assets reflected our strategy of investing a greater proportion of our interest-earning assets in loans. The overall asset growth was funded by an increase in deposits, excluding stock subscriptions, of $14.9 million.

Loans Held for Sale. The Company is involved in the secondary mortgage market and designates a significant majority of its residential first mortgage loan production for sale. At June 30, 2016, loans held for sale, which consists of closed residential first mortgage loans which the Company has committed to sell to investors, totaled $4.8 million compared to $2.9 million at December 31, 2015. This increase is due primarily to an increase in recent origination volume attributable to both seasonal factors and the dip in long-term interest rates.

Net Loans. Net loans increased $10.4 million, or 3.7%, to $295.6 million at June 30, 2016 from $285.2 million at December 31, 2015. This growth occurred primarily as a result of commercial real estate loans, which increased $6.8 million, or 9.1%, during the six months ended June 30, 2016. Smaller increases were experienced in residential mortgage loans, home equity loans and lines of credit, and consumer loans. The growth in real estate lending reflects strong local market conditions aided by the low interest rate environment that prevailed throughout the period. The increase in consumer loans is due to the purchase of loans from a third-party lender with whom we have a relationship.

 

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Investment Securities. Investment securities, all of which are classified as available for sale, decreased $7.0 million, or 11.3%, to $55.3 million at June 30, 2016 from $62.3 million at December 31, 2015. At June 30, 2016, investment securities represented 12.1% of total assets compared to 16.3% at December 31, 2015. This decrease is a consequence of our strategic shift to investing a higher proportion of interest-earning assets in loans. During the six months ended June 30, 2016, we directed a significant majority of cash flows from investment maturities and calls as well as principal payments on mortgage-backed securities aggregating $10.0 million to fund loan growth.

Bank-owned Life Insurance. Bank-owned life insurance (“BOLI”) decreased $1.7 million, or 17.5%, to $7.9 million at June 30, 2016 from $9.6 million at December 31, 2015. This decrease was caused by the liquidation of certain policies due to the passing in April 2016 of a director, partially offset by increases in the cash surrender value of the remaining underlying insurance policies. The proceeds of the life insurance policies on the deceased director totaled $2.2 million and were received in July 2016. The related receivable is included in other assets as of June 30, 2016.

Deposits. Deposits increased $82.4 million to $391.6 million at June 30, 2016 from $309.2 million at December 31, 2015. This growth occurred primarily as a result of stock subscriptions of $67.4 million received during 2016 in connection with the stock offering. Excluding stock subscriptions, deposits increased $14.9 million, or 4.8% since December 31, 2015. Deposit growth occurred in term certificate accounts which increased $6.2 million, or 7.5%, due to both special rate programs and new product offerings. Non-maturity deposits, consisting of demand deposits, NOW accounts, money market accounts and regular savings accounts increased $8.7 million, or 3.9%. This increase resulted growth in new consumer savings and checking account products introduced in recent years as well as a business checking account product.

As a result of the stock offering being over-subscribed, $16.5 million was refunded to depositors in July 2016. The remaining stock subscriptions became part of stockholders’ equity upon closing of the stock offering on July 1, 2016.

FHLB Advances. FHLB advances decreased $10.8 million, or 31.1%, to $24.1 million at June 30, 2016 from $34.9 million at December 31, 2015. New borrowings during the six months ended June 30, 2016 of $4.9 million represented community development advances which bear a discounted rate from other advances with the same maturity. These advances had a weighted average maturity of 49 months and a weighted average interest rate of 1.17%.

Total Equity. Total equity increased $1.7 million, or 5.3%, to $34.2 million at June 30, 2016 from $32.5 million at December 31, 2015. This increase was attributable to $0.7 million in earnings during the six months ended June 30, 2016 and appreciation of $1.0 million in the fair value of investment securities caused by a reduction in longer-term interest rates during 2016.

Comparison of Operating Results for the Three Months Ended June 30, 2016 and 2015

General. Net income of $718,000 for the three months ended June 30, 2016 included a gain on a life insurance settlement of $486,000. Exclusive of this item, net income would have been $232,000 for the three months ended June 30, 2016, compared to a net loss of $367,000 for the same period in 2015. The year-over-year improvement in second quarter results of operations of $599,000 was principally due to revenue growth with net interest income increasing $128,000 and gains on the sales of mortgage loans increasing $450,000 in 2016.

Analysis of Net Interest Income

Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.

 

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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 Three Months Ended June 30,
		2016												2015
		Average				Interest				Average				Average				Interest				Average
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
(Dollars in thousands)		Balance				Paid				Rate				Balance				Paid				Rate
Interest-earning assets:
Loans (1)		$	299,567			$	2,830				3.78	%		$	264,544			$	2,560				3.87	%
Investment securities(2) (6)			58,478				431				2.95	%			77,647				550				2.83	%
Interest-earning deposits			20,240				32				0.63	%			5,434				16				1.18	%
Total interest-earning assets			378,285				3,293				3.48	%			347,625				3,126				3.60	%
Noninterest-earning assets			23,692												23,026
Total assets		$	401,977											$	370,651
Interest-bearing liabilities:
Savings accounts			97,668				37				0.15	%			91,147				28				0.12	%
NOW accounts			50,803				44				0.35	%			50,971				24				0.19	%
Money market accounts			40,078				33				0.33	%			47,518				52				0.44	%
Term certificates			89,357				213				0.95	%			83,124				193				0.93	%
Stock subscriptions			15,744				4				0.10	%			—				—				0.00	%
Total interest-bearing deposits			293,650				331				0.45	%			272,760				297				0.44	%
FHLB advances			27,058				57				0.84	%			25,421				31				0.49	%
Total interest-bearing liabilities			320,708				388				0.48	%			298,181				328				0.44	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			41,983												32,617
Other noninterest-bearing liabilities			5,418												5,834
Total liabilities			368,109												336,632
Total equity			33,868												34,019
Total liabilities and equity		$	401,977											$	370,651
Net interest income						$	2,905											$	2,798
Interest rate spread(3)											3.00	%											3.16	%
Net interest-earning assets(4)		$	57,577											$	49,444
Net interest margin(5)											3.07	%											3.22	%
Ratio of interest-earning assets to interest-bearing liabilities			117.95	%											116.58	%

 

(1)	Includes nonaccruing loan balances and interest received on such loans.

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

(3)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

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

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

(6)	Includes tax equivalent adjustments for municipal securities, based on a 34% effective tax rate, of $33,000 and $54,000 for the three months ended June 30, 2016 and 2015.

 

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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.

 

		Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015
		Increase (Decrease)								Total
		Due to Changes in								Increase
(In thousands)		Volume				Rate				(Decrease)
Interest-earning assets:
Loans		$	332			$	(62	)		$	270
Investment securities			(140	)			21				(119	)
Interest-earning deposits			29				(13	)			16
Total interest-earning assets			221				(54	)			167
Interest-bearing liabilities:
Savings accounts			2				7				9
NOW accounts			—				20				20
Money market accounts			(8	)			(11	)			(19	)
Term certificates			15				5				20
Stock subscriptions			4				—				4
Total interest-bearing deposits			13				21				34
FHLB advances			3				23				26
Total interest-bearing liabilities			16				44				60
Change in net interest income		$	205			$	(98	)		$	107

Interest and Dividend Income. Interest and dividend income, inclusive of tax equivalent adjustments on municipal securities, increased $167,000, or 5.3%, to $3.3 million for the three months ended June 30, 2016 compared to $3.1 million for the three months ended June 30, 2015. This increase was entirely due to the growth in the average balances of loans between periods of $35.0 million as the average yield on loans declined 9 basis points to 3.78% in the three months ended June 30, 2016 from 3.87% in the three months ended June 30, 2015. The reduction in yield is a consequence of the continuation of the lower interest rate environment as well as competitive pressures. The overall increase in interest and dividend income was adversely affected by a $119,000 reduction in interest income due to the $19.2 million decline in the average balances of investment securities, which resulted from our strategic focus on investing a greater proportion of our interest-earnings assets in loans.

Interest Expense. Interest expense increased $60,000, or 18.3%, to $388,000 for the three months ended June 30, 2016 compared to $328,000 for the three months ended June 30, 2015. This increase was due to additional interest expense for both deposits and FHLB advances. The increase in deposit interest of $34,000 was primarily due to increases of $6.2 million and $6.5 million in the average balances of term certificate accounts and savings accounts, respectively. The increase in interest on FHLB advances of $26,000 was primarily due to the 35 basis points increase in the cost of FHLB advances to 0.84% for the three months ended June 30, 2016 from 0.49% for the three months ended June 30, 2015. This increase reflects the impact of the longer term, higher cost borrowings of $4.9 million in 2016.

Net Interest Income. Net interest income increased $107,000, or 3.8%, to $2.9 million for the three months ended June 30, 2016 compared to $2.8 million for the three months ended June 30, 2015. This improvement resulted from the growth in average interest-earning assets of $30.7 million, partially offset by a decline in the net interest margin of 15 basis points to 3.07% in the 2016 period from 3.22% in the 2015 period.

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 quarterly report, we recorded no provision for loan losses for the three months ended June 30, 2016, compared to a provision of $125,000 in the same quarter of the prior year. During the three months ended June 30, 2016, the Company experienced continuing improvement in its asset quality measures including non-accrual loans, classified assets and delinquency data. In addition, loan growth during the quarter was not significant. The allowance for loan losses as a percentage of total loans at June 30, 2016 was 1.09% compared to 1.12% at December 31, 2015.

 

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Net Gain on Sale of Mortgage Loans. The net gain on sale of mortgage loans increased $450,000 to $1.1 million for the three months ended June 30, 2016 compared to $608,000 in the three months ended June 30, 2015. During the three months ended June 30, 2016, we sold $33.8 million of residential mortgage loans compared to $25.7 million of such loans in the three months ended June 30, 2015. The increase in the net gain on loan sales was positively affected by the prevailing low interest rate environment which contributed to increases in the volume of both loans sold and interest rate lock commitments issued to customers included in the loan pipeline.

Other Non-interest Income. Non-interest income, excluding the net gain on the sale of mortgage loans, increased $502,000 to $1.0 million for the three months ended June 30, 2016 compared to $526,000 during the same quarter of the prior year. During the second quarter of 2016, the Company recognized a gain of $486,000 on the settlement of life insurance policies. Exclusive of this gain, other non-interest income would have increased $16,000, or 3.0%, in the second quarter of 2016 compared to the second quarter of 2015.

Non-interest Expenses. Non-interest expenses increased $118,000, or 2.9%, and amounted to $4.2 million for the three months ended June 30, 2016 compared to $4.1 million for the same period in 2015. This increase was principally due to an increase of $158,000, or 7.1%, in salaries and employee benefits due to higher commission expense associated with loan sales partially offset by $74,000 in savings associated with the termination and settlement of the defined benefit pension plan in July 2015. Professional fees increased $37,000, or 12.3%, to $338,000 due to preparation for the integration of operations with First Eastern. The Company recognized a $150,000 write-down in foreclosed real estate during the second quarter of 2016 causing a $50,000 increase year-over-year in this expense category. Partially offsetting these cost increases were reductions of $44,000 in occupancy and equipment expenses and $126,000 in data processing expenses. In March 2016, we entered into a new agreement with our third party core data processor which positively impacted operating results during the three months ended June 30, 2016 by approximately $100,000.

Income Tax Expense (Benefit). Due to our net operating loss carryforward position and favorable book-to-tax differences, no provision (benefit) for Federal income taxes was recorded during the three months ended June 30, 2016 and 2015.

Comparison of Operating Results for the Six Months Ended June 30, 2016 and 2015

General. Net income of $720,000 for the six months ended June 30, 2016 included a gain on a life insurance settlement of $486,000. Exclusive of this item, net income would have been $234,000 in the six months ended June 30, 2016, compared to a net loss of $652,000 in the same period of the prior year. The year-over-year improvement in results of operations of $886,000 was principally due to revenue growth with net interest income increasing $253,000 and gains on the sales of mortgage loans increasing $549,000 in 2016.

Analysis of Net Interest Income

Net interest income represents the difference between income we earn on our interest-earning assets and the expense we pay on interest-bearing liabilities. Net interest income depends on the volume of interest-earning assets and interest-bearing liabilities and the interest rates earned on such assets and paid on such liabilities.

 

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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 Six Months Ended June 30,
		2016												2015
		Average				Interest				Average				Average				Interest				Average
		Outstanding				Earned/				Yield/				Outstanding				Earned/				Yield/
(Dollars in thousands)		Balance				Paid				Rate				Balance				Paid				Rate
Interest-earning assets:
Loans (1)		$	294,976			$	5,548				3.76	%		$	259,379			$	5,012				3.86	%
Investment securities(2) (6)			60,978				879				2.88	%			78,417				1,090				2.78	%
Interest-earning deposits			13,902				55				0.79	%			5,704				31				1.09	%
Total interest-earning assets			369,856				6,482				3.51	%			343,500				6,133				3.57	%
Noninterest-earning assets			22,916												22,898.50
Total assets		$	392,772											$	366,399
Interest-bearing liabilities:
Savings accounts			96,231				72				0.15	%			89,628				53				0.12	%
NOW accounts			50,356				82				0.33	%			49,506				38				0.15	%
Money market accounts			41,144				67				0.33	%			47,888				104				0.43	%
Term certificates			88,256				420				0.95	%			83,269				392				0.94	%
Stock subscriptions			7,872				4				0.10	%			—				—				—
Total interest-bearing deposits			283,858				645				0.45	%			270,289				587				0.43	%
FHLB advances			30,075				118				0.78	%			24,366				57				0.47	%
Total interest-bearing liabilities			313,933				763				0.49	%			294,655				644				0.44	%
Noninterest-bearing liabilities:
Noninterest-bearing deposits			39,668												31,853
Other noninterest-bearing liabilities			5,513												5,783
Total liabilities			359,113												332,290
Total equity			33,659												34,109
Total liabilities and equity		$	392,772											$	366,399
Net interest income						$	5,719											$	5,489
Interest rate spread(3)											3.02	%											3.13	%
Net interest-earning assets(4)		$	55,923											$	48,846
Net interest margin(5)											3.09	%											3.20	%
Ratio of interest-earning assets to interest-bearing liabilities			117.81	%											116.58	%

 

(1)	Includes nonaccruing loan balances and interest received on such loans.

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

(3)	Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

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

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

(6)	Includes tax equivalent adjustments for municipal securities, based on a 34% effective tax rate, of $67,000 and $90,000 for the six months ended June 30, 2016 and 2015.

 

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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.

 

		Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015
		Increase (Decrease)								Total
		Due to Changes in								Increase
(In thousands)		Volume				Rate				(Decrease)
Interest-earning assets:
Loans		$	672			$	(136	)		$	536
Investment securities			(249	)			38				(211	)
Interest-earning deposits			36				(12	)			24
Total interest-earning assets			459				(110	)			349
Interest-bearing liabilities:
Savings accounts			4				15				19
NOW accounts			1				43				44
Money market accounts			(14	)			(23	)			(37	)
Term certificates			24				4				28
Stock subscriptions			4				—				4
Total interest-bearing deposits			19				39				58
FHLB advances			15				46				61
Total interest-bearing liabilities			34				85				119
Change in net interest income		$	425			$	(195	)		$	230

Interest and Dividend Income. Interest and dividend income, inclusive of tax equivalent adjustments on municipal securities, increased $349,000 or 5.7%, to $6.5 million for the six months ended June 30, 2016 compared to $6.1 million for the six months ended June 30, 2015. This increase was due to the growth in the average balances of loans between periods of $35.6 million as the average yield on loans declined 10 basis points to 3.76% in the six months ended June 30, 2016 from 3.86% in the six months ended June 30, 2015. The reduction in yield is a consequence of the continuation of the lower interest rate environment as well as competitive pressures. The overall increase in interest and dividend income was adversely affected by a $211,000 reduction in interest income due to the $17.4 million decline in the average balances of investment securities, which resulted from our strategic focus on investing a greater proportion of our interest-earnings assets in loans.

Interest Expense. Interest expense increased $119,000, or 18.4%, to $763,000 for the six months ended June 30, 2016 compared to $644,000 for the six months ended June 30, 2015. This increase was due to additional interest expense for both deposits and FHLB advances. The increase in deposit interest of $58,000 was due to increases of $4.9 million and $6.6 million in the average balances of term certificate accounts and savings accounts, respectively. The increase in interest on FHLB advances of $61,000 was due to increased utilization of FHLB advances as a funding source as the average balances of such advances increased by $5.7 million in the 2016 period compared to the 2015 period. The cost of FHLB advances increased 31 basis points to 0.78% for the six months ended June 30, 2016 from 0.47% for the six months ended June 30, 2015 primarily as a result of the longer term, higher cost borrowings of $4.9 million in 2016.

Net Interest Income. Net interest income increased $230,000, or 4.2%, to $5.7 million for the six months ended June 30, 2016 compared to $5.5 million for the six months ended June 30, 2015. This improvement resulted from the growth in average interest-earning assets of $26.4 million, partially offset by a decline in the net interest margin of 11 basis points to 3.09% in the 2016 period from 3.20% in the 2015 period.

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 quarterly report, we recorded a provision for loan losses of $62,000 for the six months ended June 30, 2016 compared to a provision of $125,000 for the same period in 2015. The provision in 2016 was in the general component of the allowance for loan losses and was reflective of the growth experienced in our commercial real estate loan portfolio while the provision in 2015 was caused by growth across the entire loan portfolio. The allowance for loan losses as a percentage of total loans at June 30, 2016 was 1.09% compared to 1.12% at December 31, 2015.

 

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Net Gain on Sale of Mortgage Loans The net gain on sale of mortgage loans increased $549,000, or 46.1%, to $1.7 million for the six months ended June 30, 2016 compared to $1.2 million in the six months ended June 30, 2015. During the six months ended June 30, 2016, we sold $58.9 million of residential mortgage loans compared to $49.8 million of such loans in the six months ended June 30, 2015. The increase in loan sales was positively affected by the prevailing low interest rate environment which contributed to increases in the volume of both loans sold and interest rate lock commitments issued to customers included in the loan pipeline.

Other Non-interest Income. Non-interest income, excluding the net gain on the sale of mortgage loans, increased $660,000 to $1.6 million for the six months ended June 30, 2016 compared to $1.0 million during the same time period of the prior year. During the second quarter of 2016, the Company recognized a gain of $486,000 on the settlement of life insurance policies. Exclusive of this gain, other non-interest income would have increased $174,000, or 17.6%, in the first half of 2016 compared to the first half of 2015. The principal causes of this increase were a gain of $62,000 on the call of an investment security and an increase of $73,000 in net mortgage servicing income.

Non-interest Expenses. Non-interest expenses increased $146,000, or 1.8%, and amounted to $8.3 million and $8.1 million for the six months ended June 30, 2016 and 2015, respectively. This increase was partially due to an increase of $158,000, or 3.6%, in salaries and employee benefits due to higher commission expense associated with loan sales partially offset by $181,000 in savings associated with termination and settlement of the defined benefit pension plan in July 2015. Professional fees increased $228,000, or 44.5%, during the first half of 2016 to $740,000 due to legal and consulting costs associated with the acquisition of First Eastern. These increases were partially offset by lower occupancy expenses of $175,000 due to the milder weather conditions experienced in 2016 and lower data processing expenses of $110,000 during the six months ended June 30, 2016 as compared to the same period in the prior year. In March 2016, the Company entered into a new agreement with our third party core data processor which positively impacted our operating results during the six months ended June 30, 2016 by approximately $150,000.

Income Tax Expense (Benefit). Due to our net operating loss carryforward position and favorable book-to-tax differences, no provision (benefit) for Federal income taxes was recorded during the six months ended June 30, 2016 and 2015. Insignificant amounts of state income taxes were recognized in each period related to our securities corporation subsidiary.

Asset Quality

Nonperforming Assets. The following table provides information with respect to our nonperforming assets, including troubled debt restructurings, at the dates indicated. We did not have any accruing loans past due 90 days or more at the dates presented.

 

		June 30, 2016				December 31, 2015
		(In thousands)
Nonaccrual loans:
Real estate loans:
One- to four-family residential		$	1,715			$	2,022
Commercial			—				—
Home equity loans and lines of credit			277				30
Construction			—				—
Commercial and industrial loans			—				16
Consumer loans			—				—
Total nonaccrual loans			1,992				2,068
Foreclosed real estate:
One- to four-family residential			—				—
Commercial			350				500
Total other real estate owned			350				500
Total nonperforming assets			2,342				2,568
Performing troubled debt restructurings			3,859				4,388
Total nonperforming assets and performing troubled debt restructurings		$	6,201			$	6,956
Total nonperforming loans to total loans(1)			0.67	%			0.72	%
Total nonperforming assets and performing troubled debt restructurings to total assets			1.36	%			1.82	%

 

(1)	Total loans exclude loans held for sale but include net deferred loan costs and fees.

 

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Interest income that would have been recorded for the six months ended June 30, 2016, had nonaccruing loans been current according to their original terms amounted to $38,000. Income related to nonaccrual loans included in interest income for the six months ended June 30, 2016, amounted to $30,000.

Classified Loans. The following table shows the aggregate amounts of our regulatory classified loans, consisting of commercial real estate, construction and commercial and industrial loans, at the dates indicated.

 

		June 30, 2016				December 31, 2015
		(In thousands)
Classified assets:
Substandard		$	211			$	283
Doubtful			—				—
Loss			—				—
Total classified assets		$	211			$	283
Special mention		$	852			$	1,145

None of the special mention loans at June 30, 2016 or December 31, 2015 were on nonaccrual.

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.

 

		June 30, 2016												December 31, 2015
		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		$	392			$	—			$	—			$	403			$	133			$	46
Commercial			—				—				—				—				—				—
Home equity loans and lines of credit			—				—				—				—				247				—
Construction			—				—				—				—				—				—
Commercial and industrial loans			—				—				—				—				—				—
Consumer loans			—				—				—				—				—				—
Total		$	392			$	—			$	—			$	403			$	380			$	46

Nonaccrual loans of $2.0 and 2.1 million at June 30, 2016 and December 31, 2015, respectively, are excluded from the preceding table.

Allowance for Loan Losses. The following table sets the breakdown for loan losses by loan category at the dates indicated.

 

		June 30, 2016												December 31, 2015
						% 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		$	1,046				32.09	%			56.49	%		$	1,076				33.22	%			57.99	%
Commercial			1,520				46.64	%			27.46	%			1,402				43.28	%			26.09	%
Home equity loans and lines of credit			444				13.62	%			11.87	%			512				15.81	%			11.58	%
Construction			135				4.14	%			2.44	%			159				4.91	%			2.72	%
Commercial and industrial loans			36				1.10	%			0.67	%			37				1.14	%			0.71	%
Consumer loans			78				2.40	%			1.07	%			53				1.64	%			0.91	%
Total		$	3,259				100.00	%			100.00	%		$	3,239				100.00	%			100.00	%

 

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The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

		Six Months Ended June 30,
		2016				2015
		(In thousands)
Allowance at beginning of period		$	3,239			$	3,544
Provision for loan losses			62				125
Charge offs:
Real estate loans:
One- to four-family residential			—				—
Commercial			—				—
Home equity loans and lines of credit			—				—
Construction			—				—
Commercial and industrial loans			—				—
Consumer loans			(60	)			(29	)
Total charge-offs			(60	)			(29	)
Recoveries:
Real estate loans:
One- to four-family residential			2				1
Commercial			—				—
Home equity loans and lines of credit			—				—
Construction			—				—
Commercial and industrial loans			—				1
Consumer loans			16				11
Total recoveries			18				13
Net charge-offs			(42	)			(16	)
Allowance at end of period		$	3,259			$	3,653
Total loans outstanding(1)		$	298,858			$	288,390
Average loans outstanding		$	294,976			$	259,379
Allowance for loan losses as a percent of total loans outstanding(1)			1.09	%			1.27	%
Net loans charged off as a percent of average loans outstanding			0.01	%			0.01	%
Allowance for loan losses to nonperforming loans			163.60	%			176.64	%

 

(1)	Total loans exclude loans held for sale but include net deferred loan costs and fees.

Liquidity and Capital Resources

At June 30, 2016, we had $24.1 million of FHLB advances outstanding. At that date, we had the ability to borrow up to an additional $83.0 million from the FHLB and $3.5 million under a line of credit with a correspondent bank.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2016, cash and cash equivalents totaled $72.9 million. On July 1, 2016, $30.4 million of this amount was used to pay refunds for stock subscriptions and to fund the acquisition of First Eastern. We anticipate that the remaining higher than normal level of liquid assets will be gradually absorbed into the investment and loan portfolios during the remainder of 2016.

Financing activities consist primarily of activity in deposit accounts and borrowings. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. We experienced a net increase in deposits of $82.3 million for the six months ended June 30, 2016. This growth occurred primarily as a result of stock subscriptions of $67.4 million received during 2016 in connection with our stock offering. Excluding stock subscriptions, deposits increased $14.9 million, or 4.8%, since December 31, 2015. As a result of the over-subscription in our stock offering, $16.5 million was refunded to depositors in July 2016. The remaining stock subscriptions became part of stockholders’ equity providing the Company with approximately $50 million of additional capital and liquid assets. We experienced a net decrease in borrowings of $10.8 million for the six months ended June 30, 2016, as deposit growth was partially used to pay-down borrowings with the FHLB.

 

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At June 30, 2016, we had $30.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $32.3 million in unused lines of credit to borrowers and letters of credit and $3.9 million in undisbursed construction loans. 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 June 30, 2016 totaled $50.4 million. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit will be renewed.

We are subject to various regulatory capital requirements, including a risk-based capital measure. At June  30, 2016, we exceeded all regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company is not required to disclose quantitative and qualitative information about market risk as it qualifies as a smaller reporting company.

Item 4. Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities and Exchange Act of 1934, as amended) as of June 30, 2016. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

During the quarter ended June 30, 2016, there have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

The Company is not involved in any material pending litigation.

Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in the Company’s prospectus dated May 13, 2016, as filed with the Securities and Exchange Commission pursuant to Securities Act Rule 424(b)(3) on May 20, 2016, under the heading “Risk Factors.” The Company’s evaluation of its risk factors has not changed materially since those discussed in the prospectus.

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

None.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

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Item 6. Exhibits.

The exhibits listed in the Exhibit Index (following the signatures section of this report) are included in, or incorporated by reference into, this Quarterly Report on Form 10-Q.

 

10.1		The Amendment to the Letter Agreement, by and among Randolph Bancorp, Inc., Randolph Savings Bank and James P. McDonough, dated as of June 30, 2016 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2016)†
10.2		The Agreement between Randolph Savings Bank and Peter J. Fraser, dated as of July 1, 2016 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2016)†
31.1		Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
31.2		Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
32.1		Certification 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		The following materials from Randolph Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statements of Changes in Equity for the six months ended June 30, 2016 and 2015, Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) Notes to Unaudited Consolidated Financial Statements.

 

†	Management contract or compensation plan or arrangement

 

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SIGNATURE

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

 

				Randolph Bancorp, Inc.
Date: August 10, 2016				By:		/s/ James P. McDonough
						James P. McDonough
						President and Chief Executive Officer
						(Principal Executive Officer)
Date: August 10, 2016				By:		/s/ Michael K. Devlin
						Michael K. Devlin
						Executive Vice President and Chief Financial Officer
						(Principal Financial Officer)

 

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EXHIBIT INDEX

The following exhibits are included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 (and are numbered in accordance with Item 601 of Regulation S-K):

 

Exhibit No.		Description
10.1		The Amendment to the Letter Agreement, by and among Randolph Bancorp, Inc., Randolph Savings Bank and James P. McDonough, dated as of June 30, 2016 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2016)†
10.2		The Agreement between Randolph Savings Bank and Peter J. Fraser, dated as of July 1, 2016 (incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 6, 2016)†
31.1		Certification of Chief Executive Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
31.2		Certification of Chief Financial Officer Required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act
32.1		Certification 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		The following materials from Randolph Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2016 and December 31, 2015, (ii) Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015, (iv) Consolidated Statements of Changes in Equity for the six months ended June 30, 2016 and 2015, Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 and (v) Notes to Unaudited Consolidated Financial Statements.

 

†	Management contract or compensation plan or arrangement