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 March 31, 2018

 

Commission File Number: 001-37780

 

Randolph Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

(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 ☒ 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 ☒ 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.

 

 

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

 

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

 

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

As of May 8, 2018 there were 6,017,276 shares of the registrant’s common stock outstanding.

 

 

 

 

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Table of Contents

 

 

 

 

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PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

RANDOLPH BANCORP, INC. AND SUBSIDIARY

Consolidated Balance Sheets (Unaudited)

(In thousands, except share data)

 

 

See accompanying notes to consolidated financial statements.

 

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RANDOLPH BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Operations (Unaudited)

(Dollars in thousands except per share amounts)

 

See accompanying notes to consolidated financial statements.

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RANDOLPH BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Loss (Unaudited)

(In thousands)

 

 

1) Amounts are included in gain on sales of securities in the consolidated statements of operations.

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

 

 

See accompanying notes to consolidated financial statements.

 

 

 

 

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RANDOLPH BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited)

Three Months Ended March 31, 2018 and 2017

 

See accompanying notes to consolidated financial statements.

 

 

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RANDOLPH BANCORP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

See accompanying notes to consolidated financial statements.

 

 

 

 

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RANDOLPH BANCORP, INC. AND SUBSIDIARY

Notes to Unaudited Consolidated Financial Statements

March 31, 2018 and 2017

 

 

The consolidated financial statements include the accounts of Randolph Bancorp, Inc. (“Bancorp”) and its wholly-owned subsidiary, Envision Bank (the “Bank”, together with Bancorp, the “Company”). The Bank has subsidiaries involved in owning investment securities and foreclosed real estate properties and a subsidiary which provides loan closing services. 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 months ended March 31, 2018 are not necessarily indicative of the results to be expected for the year ending December 31, 2018 or any other interim period.

 

Prior to 2018, the Company’s operations were managed, and financial performance was evaluated, by the chief operating decision-maker on a company-wide basis. As a result, management had determined there to be a single business segment for financial reporting purposes through December 31, 2017. Due to the significance of the Company’s mortgage banking operations and its strategic focus on this business, management prepared its 2018 operating budget by breaking-out its mortgage banking activities, including residential loan origination and loan servicing. As a result, effective January 1, 2018, the Company is reporting two business segments, namely, “Envision Bank” and “Envision Mortgage”. As part of this process, management analyzed costs incurred by departments providing services to both segments (indirect costs), such as IT, Marketing, Accounting and Administration, to determine the allocation of indirect costs to each business segment in order to fully measure each segment’s results of operations. See Note 15 for disclosure of the Company’s segment information.

 

For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC.

 

 

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. This Update provides a revenue recognition framework for any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of non-financial assets unless those contracts are within the scope of other accounting standards. This ASU, as amended by ASU 2015-14, is effective for emerging growth companies in fiscal years beginning after December 15, 2018, including interim periods therein with early adoption permitted. The timing of the Company’s revenue recognition is not expected to materially change. The Company's revenue relates principally to financial instruments, which are explicitly excluded from the scope of the new guidance. Management continues to evaluate the potential impact of this ASU on the Company’s consolidated financial statements but does not anticipate, at this time, that adoption of this standard will have a significant impact.

 

In January 2016, FASB issued ASU 2016-01, Financial Instruments. This ASU revises the accounting related to the classification and measurement of investments in equity securities, and the presentation of certain fair value changes for financial liabilities measured at fair value.  It also amends certain disclosure requirements associated with the fair value of financial instruments.  This ASU is effective for emerging growth companies for annual periods beginning after December 31, 2018, including interim periods therein.  The Company is currently assessing the impact of this ASU on the consolidated financial statements.

 

In February 2016, FASB issued ASU 2016-02, Leases. This ASU requires lessees to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting requirements. For lessors, this ASU modifies the classification criteria and the accounting for sales-type and direct financing leases. This ASU is effective for emerging growth companies in fiscal years beginning after December 15, 2019, including interim periods therein. Earlier adoption is permitted. The Company is currently assessing the impact of the adoption of this ASU on its consolidated balance sheet.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. The ASU sets forth a “current expected credit loss” (“CECL”) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing

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probable incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost and applies to some off-balance sheet credit exposures. This ASU requires enhanced disclosures to help investors and other financial statement users better understand significant estimates and judgements used in determining the allowance for loan losses, as well as the credit quality and underwriting standards of an organization’s loan portfolio. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. This ASU is effective for emerging growth companies in fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption is permitted in fiscal years beginning after December 31, 2018. The Company is currently assessing its data and system needs and is evaluating the impact of the adoption of this ASU on the consolidated financial statements.

 

In April 2017, the FASB issued ASU 2017-08 Receivables – Non-refundable Fees and Other Costs, which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. Currently, generally accepted accounting principles (“GAAP”) excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. This ASU requires that premiums on certain callable debt securities be amortized to the shortest call date. Securities within the scope of this paragraph are those that have explicit, noncontingent call features that are callable at fixed prices and on preset dates. This ASU is effective for emerging growth companies for annual periods beginning after December 15, 2019, including interim periods therein. Early adoption is permitted, including adoption in an interim period. The impact of adopting this ASU is dependent on the materiality of callable debt securities at the time of adoption.

 

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 stockholders’ equity, such items, along with net income (loss), are components of comprehensive income (loss).

The components of accumulated other comprehensive loss, included in total stockholders’ equity, are as follows:

 

 

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

 

 

For the three months ended March 31, 2018, proceeds from sales of available-for-sale securities amounted to $9.0 million with gross realized gains of $49,000 and no gross realized losses.

 

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The amortized cost and fair value of debt securities by contractual maturity at March 31, 2018 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.

 

 

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:

 

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At March 31, 2018, 22 debt securities have unrealized losses with aggregate depreciation of 3.57% from the Company’s amortized cost basis. The unrealized losses at March 31, 2018, which related primarily to securities issued by U.S. government-sponsored enterprises, were primarily caused by interest rate increases. 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 securities would not be settled at a price less than the par value of the investment. Because the Company does not intend to sell any debt securities and it is more likely than not that the Company will not be required to sell any debt securities before recovery of its amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at March 31, 2018.

 

A summary of the loan portfolio at the dates indicated is as follows:

 

 

The following table summarizes the changes in the allowance for loan losses, by portfolio segment, for the three months ended March 31, 2018 and 2017:

 

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Additional information pertaining to the allowance for loan losses at March 31, 2018 and December 31, 2017 is as follows:

 

 

The following is a summary of past due and non-accrual loans at March 31, 2018 and December 31, 2017:

 

 

    

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The following is a summary of impaired loans at March 31, 2018 and December 31, 2017:

 

Additional information pertaining to impaired loans follows:

 

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

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Troubled Debt Restructurings

 

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

At March 31, 2018, the Company had nineteen residential real estate loans and two commercial real estate loans aggregating $3,959,000 and $120,000, respectively, which were subject to troubled debt restructuring agreements.

At March 31, 2017, the Company had eighteen residential real estate loans and three commercial real estate loans aggregating $4,479,000 and $589,000, respectively, which were subject to troubled debt restructuring agreements.

As of March 31, 2018 and 2017, $4,079,000 and $5,068,000, respectively, in troubled debt restructurings were performing in accordance with the terms of the modified loan agreements.  Included in such amounts are $1,107,000 and $1,756,000, respectively, that are being accounted for as non-accrual loans.

 

For the three months ended March 31, 2018 and 2017 the Company did not enter into any loan modifications meeting the criteria of a troubled debt restructuring.

Management performs a discounted cash flow calculation to determine the amount of impairment reserve required on each of the troubled debt restructurings.  Any reserve required is recorded as part of the allowance for loan losses. During the three months ended March 31, 2018 and 2017, 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 months ended March 31, 2018 and 2017, 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 – 3B 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.

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

 

 

Residential mortgages, home equity loans and lines of credit, and consumer loans are monitored for credit quality based primarily on their payment status. When one of these loans becomes more than 90 days delinquent, it is assigned an internal loan rating.  At March 31, 2018, $706,000 in residential mortgages and $28,000 in home equity loans were rated as substandard and $2,778,000 in residential mortgages and $244,000 in home equity loans were rated as special mention. At December 31, 2017, $712,000 in residential mortgages were rated as substandard and $2,512,000 in residential mortgages and $247,000 in home equity loans were rated as special mention.  

 

 

Mortgage loans serviced for others are not included in the accompanying consolidated balance sheets. The unpaid principal balance of residential mortgage loans serviced for others was $795,123,000 and $771,407,000 at March 31, 2018 and December 31, 2017, respectively.

 

The following table summarizes the activity relating to mortgage servicing rights for the three months ended March 31, 2018 and 2017 (in thousands):

 

 

During the three months ended March 31, 2018 and 2017, the Company recorded partial reversals of the valuation allowance for its mortgage servicing rights of $57,000 and $280,000, respectively, due to increases in fair value caused by lower expected loan prepayments.

 

 

During the three months ended March 31, 2018 and 2017, the Company recorded a federal tax benefit of $0 and $26,000, respectively, and state tax expense of $4,000 and $3,000, respectively. The federal tax benefit for the 2017 period resulted from, and was limited to, an offsetting tax provision attributable to other comprehensive income, specifically, appreciation in the fair value of available-for-sale securities.

 

Since 2014, the Company has maintained a valuation allowance for all of its deferred tax assets based on a determination that it was more likely than not that such assets would not be realized. This determination was based on the Company’s net operating loss (“NOL”) carryforward position, its current period operating results exclusive of non-recurring items and its expectations for the upcoming year. In performing subsequent assessments, management has concluded that no significant changes in the key factors affecting the realizability of the deferred tax asset has occurred and that a valuation allowance for all deferred tax assets should be maintained.

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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.

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 $30,122,000 and $24,222,000 at March 31, 2018 and December 31, 2017, respectively.  The fair value of such commitments was an asset of $383,000 and $363,000 as of March 31, 2018 and December 31, 2017, 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 forward loan sale commitments was $29,973,000 and $29,613,000 at March 31, 2018 and December 31, 2017, respectively. The fair value of certain of these commitments was an asset of $20,000 and $4,000 at March 31, 2018 and December 31, 2017, respectively, and is included in other assets in the consolidated balance sheets while the fair value of other such commitments was a liability of $31,000 and $19,000 at March 31, 2018 and December 31, 2017, respectively, and is included in other liabilities in the consolidated balance sheets.

 

 

The Company maintains an Employee Stock Ownership Plan (“ESOP”), which is a tax-qualified retirement plan providing eligible employees the opportunity to own Bancorp stock. Bancorp granted a loan to the ESOP for the purchase of 469,498 shares of its common stock at $10.00 per share. The loan is payable annually over 25 years with interest at the prime rate to be reset each January 1st. The loan is secured by the shares which have not yet been allocated to participants. Loan payments are funded by cash contributions from the Bank. Such contributions are allocated to eligible participants based on their compensation, subject to federal tax limits.

 

Shares are committed to be released on a monthly basis and allocated as of December 31st of each year. The number of shares to be allocated annually is 18,780 through the year 2040. For the three months ended March 31, 2018 and 2017, the Company recognized compensation expense for the ESOP of $74,000 and $72,000, respectively. The fair value of the 427,243 unallocated ESOP shares at March 31, 2018 was $6,936,000.

 

 

In September 2017, the Company’s Board of Directors adopted a share repurchase program under which the Company may repurchase up to 10%, or 586,854 shares of its then outstanding common shares. Repurchases under the program may be made in open market or in privately negotiated transactions and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. Any repurchased shares will be held by the Company as authorized but unissued shares. The repurchase program may be suspended or terminated at any time without prior notice, and it will expire on September 14, 2018. As of March 31, 2018, the Company had repurchased 14,500 shares at a cost of $219,000 in connection with this program.

 

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Basic earnings (loss) per share represents net income (loss) divided by the weighted average of common shares outstanding during the period. Unvested restricted shares of common stock having dividend rights are treated as “participating securities” and, accordingly, are considered outstanding in computing basic earnings (loss) per share. Unallocated ESOP shares are not considered to be outstanding for purposes of computing earnings per share. None of the Company’s 336,509 stock options were included in the computation of diluted earnings (loss) per share for the three months ended March 31, 2018. Due to the net loss for the period, inclusion of the stock options in the computation would have been anti-dilutive.

 

During the three months ended March 31, 2018 and 2017, there were 6,033,476 and 5,868,726 weighted average shares outstanding, while the average of unallocated and uncommitted ESOP shares totaled 429,590 and 448,371, resulting in a total of 5,603,886 and 5,420,356 shares being used to compute basic and diluted loss per share, respectively.

 

 

Under the Randolph Bancorp, Inc. 2017 Stock Option and Incentive Plan (the “Equity Plan”), the Company may grant options, restricted stock, restricted units or performance awards to its directors, officers and employees. Both incentive stock options and non-qualified stock options may be granted under the Equity Plan with 586,872 shares reserved for options. The exercise price of each option equals the market price of the Company’s stock on the date of the grant and the maximum term of each options is 10 years. The total number of shares reserved for restricted stock is 237,749. Options and awards generally vest ratably over five years. The fair value of shares awarded is based on the market price at the date of grant.

 

Stock Options

 

The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model with the

following assumptions:

 

 

During the three months ended March 31, 2018, the Company made the following grants of options to purchase shares of common stock and used the following assumptions in measuring the fair value of such grants:

 

 

 

 

 

 

 

 

 

 

 

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A summary of the status of the Company's stock option grants for three months ended March 31, 2018 is presented in the table below:

 

 

For the three months ended March 31, 2018, stock-based compensation expense applicable to stock options was $74,000.

 

Restricted Stock

 

Shares issued upon vesting may be either authorized but unissued shares or reacquired shares held by the Company. Any shares not issued because vesting requirements are not met will again be available for issuance under the Equity Plan. The fair market value of shares awarded, based on the market price at the date of grant, is recorded as unearned compensation and amortized over the applicable vesting period. Restricted stock awarded in 2017 was at no cost to the awardee.

 

The following table presents the activity in restricted stock awards under the Equity Plan for the three months ended March 31, 2018:

 

 

For the three months ended March 31, 2018, stock-based compensation expense applicable to restricted stock was $133,000.

 

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 March 31, 2018 and December 31, 2017) are based on quoted market prices in an

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active exchange market.  Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

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

Loans held for sale – Fair values are based on commitments in effect from investors or prevailing market prices and include the servicing value of the loans.

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.

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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;

 

 

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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 March 31, 2018 and December 31, 2017.

 

The Company recorded partial reversals of the valuation allowance for its mortgage servicing rights of $57,000 and $280,000 during the three months ended March 31, 2018 and 2017, respectively, due to increases in fair value caused by lower expected loan prepayments.

There were no liabilities measured at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017.

 

Summary of fair values of financial instruments

 

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

 

 

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Loan commitments

 

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit. These instruments involve, to varying degrees, elements of market, credit and interest rate risk which are not recognized in the consolidated financial statements.

 

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

 

The following financial instruments were outstanding, at the dates indicated, whose contract amounts represent credit risk:

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The majority of these financial instruments are collateralized by real estate.

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Other contingencies

 

The Company is not currently a party to any pending legal proceedings that it believes would have a material adverse effect on its financial condition, results of operations or cash flows.

 

 

Effective January 1, 2018, management began reporting its activities in one of two business segments, namely Envision Bank (“EB”) and Envision Mortgage (“EM”). Comparative information for the 2017 period has been prepared on a basis consistent with the methodology used in 2018. Envision Bank operations primarily consist of accepting deposits from customers within the communities surrounding the Bank’s six full service branch offices and investing those funds in residential and commercial real estate loans, home equity lines of credit, construction loans, commercial and industrial loans, and consumer loans. Envision Mortgage’s operations primarily consist of the origination and sale of residential mortgage loans and the servicing of loans sold to government-sponsored entities. A portion of the loans originated by Envision Mortgage are held in the loan portfolio of Envision Bank.

 

Segment information as of and for the three months ended March 31, 2018 follows:

 

 

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

 

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

 

 

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Segment information as of and for the three months ended March 31, 2017 follows:

 

 

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

 

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

 

 

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

This section is intended to help investors understand the financial performance of Randolph Bancorp, Inc. and its subsidiary through a discussion of the factors affecting its financial condition at March 31, 2018 and December 31, 2017, and their results of operations for the three-month periods ended March 31, 2018 and 2017. This section should be read in conjunction with the consolidated financial statements of Randolph Bancorp, Inc. and notes thereto that appear elsewhere in this Quarterly Report. For the purpose of this Quarterly Report, the terms the “Company” “we,” “our,” and “us” refer to Randolph Bancorp, Inc. and its consolidated subsidiaries unless the context indicates another meaning.

Cautionary Statement Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking 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; 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”; 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 execution 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 results of operations depend primarily on net interest income and gains on the sale of mortgage loans. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Our interest-earning assets consist primarily of residential mortgage loans, commercial real estate loans, commercial and industrial loans, home equity loans and lines of credit, construction loans, consumer loans and investment securities. Interest-bearing liabilities consist primarily of deposit accounts and borrowings from the Federal Home Loan Bank of Boston (“FHLBB”). Gains on the sale of mortgage loans result from the sale of such loans in the secondary mortgage market. The amount of these gains is dependent on the volume of our loan originations.

 

Critical Accounting Policies

 

Certain of our accounting policies are important to the presentation of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in Note 2 to the consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission.

 

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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.

Comparison of Financial Condition at March 31, 2018 and December 31, 2017

 

Total Assets. Total assets increased $1.6 million to $533.5 million at March 31, 2018 from $531.9 million at December 31, 2017. An increase of $6.9 million in net loans during the first quarter of 2018 was largely offset by decreases in loans held for sale ($3.3 million) and securities available for sale ($2.0 million).

Loans Held for Sale. We are actively involved in the secondary mortgage market and designate a significant majority of our residential first mortgage loan production for sale. At March 31, 2018, loans held for sale, which consist of residential first mortgage loans which we have committed to sell to investors, totaled $22.1 million compared to $25.4 million at December 31, 2017. This decrease is due to lower origination volume attributable to rising mortgage rates, tight inventory of homes listed for sale in our market area and a reduction in the percentage of our loan production which is being sold. In addition, the winter season is a traditionally slower period for loan originations in the New England region of the U.S., particularly for purchase transactions.

 

Net Loans. Net loans increased $6.9 million, or 1.7%, to $407.3 million at March 31, 2018 from $400.4 million at December 31, 2017. This increase occurred in both residential and commercial real estate loans which increased $4.3 million and $5.4 million, respectively, in both cases due to organic growth. Consumer loans and commercial and industrial loans, which consist primarily of loan participations and purchased loans, decreased by a total of $2.6 million during the first quarter of 2018. The Company did not participate in or purchase any new loans during the quarter.

Investment Securities. Investment securities, all of which are classified as available for sale, decreased $2.0 million, or 3.2%, to $59.6 million at March 31, 2018 from $61.6 million at December 31, 2017. This decrease was primarily due to a $1.1 million decrease in the fair value of the portfolio compared to its amortized cost due to an increase in interest rates during the period. In addition, the Company sold $9.0 million of municipal securities the proceeds of which were reinvested into 15-year mortgage-backed securities. At March 31, 2018, investment securities represented 11.2% of total assets compared to 11.6% at December 31, 2017. This decrease is a consequence of our strategic intent to focus primarily on loan growth.

 

Mortgage Servicing Rights. Mortgage servicing rights (“MSRs”) increased $202,000 to $6.6 million at March 31, 2018 from $6.4 million at December 31, 2017. This increase is due to net growth of $23.7 million in serviced loans and the partial reversal in the valuation allowance for MSRs of $57,000. This reduction in the valuation allowance as of March 31, 2018 is due to the increase in the fair value of MSRs which resulted from slower loan prepayment assumptions. The Company serviced $795.1 million in residential mortgage loans for others at March 31, 2018.

 

Deposits. Deposits increased $28.8 million, or 7.8%, to $395.6 million at March 31, 2018 from $366.8 million at December 31, 2017. Included in this increase was $23.2 million of brokered deposits, including $20.2 million in term certificates with maturities ranging from one to four years. The remaining increase of $5.6 million was concentrated in money market and savings accounts. Deposit growth was primarily used to repay FHLBB overnight advances.

 

FHLBB Advances. FHLBB advances were reduced by $25.0 million to $50.9 million at March 31, 2018 from $76.0 million at December 31, 2017. No new term or amortizing advances were taken down in the first quarter of 2018.

 

Stockholders’ Equity. Stockholders’ equity decreased $1.6 million to $79.9 million at March 31, 2018 from $81.5 million at December 31, 2017. This decrease was due to the net loss from operations of $707,000 and a reduction of $1.1 million in the fair value of investment securities, partially offset by equity adjustments of $254,000 related to the stock benefit plan and the employee stock ownership plan. The Company’s Tier 1 capital to average assets ratio was 15.5% at March 31, 2018 compared to 16.0% at December 31, 2017.

 

 

 

 

 

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Comparison of Operating Results for the Three Months Ended March 31, 2018 and 2017

General. The Company incurred a net loss of $707,000 for the three months ended March 31, 2018 compared to a net loss of $447,000 for the three months ended March 31, 2017. Operating results for the 2017 period included merger and integration costs related to the July 2016 acquisition of First Eastern Bankshares Corporation (“First Eastern”), which amounted to $167,000. This non-core expense item and its financial impact is presented in the table on p. 30 under the caption “Non-GAAP Measures”.

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.

 

 

 

 

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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.

 

 

Interest and Dividend Income. Interest and dividend income, inclusive of tax equivalent adjustments on municipal securities, increased $815,000, or 20.7%, to $4.7 million for the three months ended March 31, 2018 compared to $3.9 million for the three months ended March 31, 2017. This increase was due to an increase in average interest-earning assets between periods of $61.4 million, or 14.0%, and an increase of 21 basis points in the yield on such assets from 3.59% in 2017 to 3.80% in 2018. This improvement is largely due to the shift in asset mix to loans, which have a higher yield than other interest-earning assets and which represented 86.1 % of average interest-earning assets during the 2018 period compared to 82.1% of such assets during the 2017 period.

Interest Expense. Interest expense increased $345,000, or 86.3%, to $745,000 for the three months ended March 31, 2018 compared to $400,000 for the three months ended March 31, 2017. This increase was due to interest-bearing liabilities increasing $65.4 million, or 20.6%, during the 2018 period and an increase of 28 basis points in the cost of such liabilities from 0.50% in 2017 to 0.78% in 2018. This increase reflects the greater utilization of overnight FHLBB advances to fund loan growth and the effect of increasing interest rates, due to a series of 25 basis point rate increases by the Federal Reserve over the past two years, on the cost of both deposits and FHLBB advances.

 

Net Interest Income. Net interest income increased $470,000, or 13.3%, to $4.0 million for the three months ended March 31, 2018 compared to $3.5 million for the three months ended March 31, 2017. This improvement was due to the increase in interest-earning assets of $61.4 million as the Company continued to leverage the capital raised in its 2016 initial public offering. The net margin decreased 2 basis points in the first quarter of 2018 to 3.20% from 3.22% in the first quarter of 2017, due primarily to a decrease in the ratio of interest-earning assets to interest-bearing liabilities to 130.52% during the 2018 period compared to 138.06% during the 2017 period and a 7 basis points decrease in the net interest spread. This decrease is attributable to a flattening of the yield curve experienced over the past year as the increase in short-term interest rates, which affects the cost of most of the Company’s FHLBB borrowings, has exceeded the increase in long-term interest rates, which affects the yield on loans.

Provision for Loan Losses. Based on the application of our loan loss methodology, we recorded provisions of $95,000 and $235,000 to our allowance for loan losses for the three months ended March 31, 2018 and 2017, respectively. Classified and non-accrual loans were stable during the first quarter of 2018 while regional and local economic data, including housing prices, continued their positive trend. The provision for the first quarter of 2018 was in the general component of the allowance for loan losses and reflected growth in the residential and commercial real estate loan portfolios.  The provision for the first quarter of 2017 was also in

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the general component of the allowance for loan losses and reflected growth in commercial real estate loans and commercial and industrial loans.

Net Gain on Sale of Mortgage Loans. The net gain on sale of mortgage loans decreased $491,000, or 24.1%, to $1.5 million for the three months ended March 31, 2018 compared to $2.0 million for the three months ended March 31, 2017. Loan sale gains during the first quarter of 2018 were adversely affected by a lower margin caused by rising interest rates and competitive factors, a lower percentage of loan production being sold, and lower overall production as the inventory of homes listed for sale in our market area continued to be tight during the first quarter.

Other Non-interest Income. Non-interest income, excluding the net gain on the sale of mortgage loans, decreased $511,000, or 37.2%, to $861,000 for the three months ended March 31, 2018 compared to $1.4 million during the same quarter of the prior year. The principal source of this decline was net mortgage servicing fee income which decreased $326,000 to $334,000 in the three months ended March 31, 2018 from $660,000 in the three months ended March 31, 2017. This decrease of 49.4% was due to two factors, namely 1) a decrease in servicing fees caused by the sale of $379 million in serviced loans during the third quarter of 2017, and 2) a $280,000 partial reversal of the valuation allowance for mortgage servicing rights in the 2017 period compared to a partial reversal of $57,000 in 2018. Also contributing to the decrease in non-interest income was lower customer service fees of $72,000 due to lower ATM and interchange fee income and a $31,000 reduction in fees associated with loan closing services.

 

Non-interest Expenses. Non-interest expenses decreased $131,000, or 1.8%, from $7.1 million for the three months ended March 31, 2017 to $7.0 million for the three months ended March 31, 2018. Included in non-interest expenses in the 2017 period were $167,000 of merger and integration costs associated with the First Eastern acquisition. Excluding this non-recurring item, non-interest expenses increased $36,000, or less than 1%, in the first quarter of 2018. Expenses in the 2018 period included stock-based compensation of $207,000 and increased marketing costs, largely associated with the re-branding to Envision Bank, of $155,000. These increases fully offset savings in salaries and employee benefits of $240,000 due to a 8% reduction in workforce in the fourth quarter of 2017 and lower professional fees of $50,000.

 

Salaries and employee benefits decreased $240,000, or 5.1%, from $4.7 million for the three months ended March 31, 2017 to $4.4 million for the three months ended March 31, 2018. This decrease was primarily due to lower salaries and benefits associated with the reduction in the Company’s workforce. This savings was partially offset by employee related stock-based compensation of $125,000.

 

Marketing expenses increased $155,000, or 104.7%, from $148,000 in the first quarter of 2017 to $303,000 during the first quarter of 2018. In March 2018, the bank changed its name to Envision Bank. Various advertising and related expenses were incurred to promote the new brand during the quarter and will continue over the next several months of 2018.

 

Other non-interest expenses increased $143,000, or 15.0%, from $955,000 in the first quarter of 2017 to $1.1 million in the first quarter of 2018. This increase was primarily attributable to director related stock-based compensation of $82,000.

 

Income Tax Expense (Benefit). During the three months ended March 31, 2018 and 2017, the Company recorded a federal tax benefit of $0 and $26,000, respectively, and state tax expense of $4,000 and $3,000, respectively. The federal tax benefit for the 2017 period resulted from, and was limited to, an offsetting tax provision attributable to other comprehensive income, specifically, appreciation in the fair value of available-for-sale securities.

 

Since 2014, the Company has maintained a valuation allowance for all of its deferred tax assets based on a determination that it was more likely than not that such assets would not be realized. This determination was based on the Company’s NOL carryforward position, its current period operating results exclusive of non-recurring items and its expectations for the upcoming year. In performing subsequent assessments, management has concluded that no significant changes in the key factors affecting the realizability of the deferred tax asset has occurred and that a valuation allowance for all deferred tax assets should be maintained.

 

Non-GAAP Measures

 

Management assesses the Company’s financial performance for purposes of making day-to-day and strategic decisions, it does so based upon the performance of its core banking business which is derived from the combination of net interest income and non-interest income reduced by the provision for loan losses and non-interest expenses and the impact of income taxes, if any, all as adjusted for any non-core items. The Company’s financial reporting is determined in accordance with GAAP, which sometimes includes items that management believes are unrelated to its core banking business and are not expected to have a material financial impact on operating results in future periods, such as merger and integration costs, life insurance settlements and other items. Management computes the Company’s non-GAAP operating earnings, non-interest income as a percentage of total income and the

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efficiency ratio on an operating basis, which excludes these items, in order to measure the performance of the Company’s core banking business.

 

Non-GAAP measures should not be viewed as a substitute for operating results determined in accordance with GAAP. An item that management determines to be non-core and excludes when computing these non-core measures can be of substantial importance to the Company’s results for any particular reporting period. The Company’s non-GAAP performance measures are not necessarily comparable to such measures that may be used by other companies.

 

The following table summarizes the impact of non-core items recorded for the reporting periods indicated below and reconciles them in accordance with GAAP:

 

Asset Quality

Nonperforming Assets. The following table provides information with respect to our nonperforming assets, including troubled debt restructurings, at the dates indicated. The Company did not have any accruing loans past due 90 days or more at December 31, 2017 and one loan with a balance of $635,000 at March 31, 2018.

 

 

Interest income that would have been recorded for the three months ended March 31, 2018 had nonaccruing loans been current according to their original terms amounted to $62,000. Income related to nonaccrual loans included in interest income for the three months ended March 31, 2018 amounted to $41,000.

 

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Classified Loans.  The following table shows the aggregate amounts of our regulatory classified loans at the dates indicated.

 

None of the special mention loans at March 31, 2018 and December 31, 2017 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. Past due loans which are classified as non-accrual loans are included in this table based on their delinquency status.

 

 

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

 

 

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

 

 

Liquidity and Capital Resources

At March 31, 2018, we had $50.9 million of FHLBB advances outstanding. At that date, we had the ability to borrow up to an additional $87.2 million from the FHLBB 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 March 31, 2018, cash and cash equivalents totaled $9.0 million.  

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 $28.8 million for the three months ended March 31, 2018, which includes $23.0 million in brokered deposits.

At March 31, 2018, we had $35.7 million in loan commitments outstanding. In addition to commitments to originate loans, we had $42.0 million in unused lines of credit to borrowers and letters of credit and $8.6 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 March 31, 2018 totaled $60.5 million, including $5.2 million in brokered deposits. Management expects, based on historical experience, that a substantial portion of the maturing certificates of deposit, except the brokered deposits, will be renewed.

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We are subject to various regulatory capital requirements, including a risk-based capital measure. At March 31, 2018, our Tier 1 capital to average assets ratio was 15.52%. We exceeded all regulatory capital requirements and were considered “well capitalized” under regulatory guidelines.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk.

 

Net Interest Income Analysis. We analyze our sensitivity to changes in interest rates through our net interest income simulation model which is provided to us by an independent third party. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be over specified time horizons based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. The comparative scenarios assume immediate parallel shifts in the yield curve in increments of 100 basis point (bp) rate movements. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3.0% to 4.0% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The following table shows the estimated impact on net interest income for the one-year period beginning March 31, 2018 resulting from potential changes in interest rates. The model is run quarterly showing shocks from +300bp to -100bp, as we believe a decline of greater than -100bp is currently improbable. These estimates require certain assumptions to be made, including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain. As a result, no simulation model can precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on our net interest income and will differ from actual results.

 

 

(1) The calculated changes assume an immediate shock of the static yield curve.

 

Economic Value of Equity Analysis. In order to monitor and manage interest rate risk, we also use the net present value of equity at risk, or NPV, methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities and provides a longer-term view of the Company’s interest rate risk positions by estimating longer-term repricing risk embedded in the balance sheet. As with the net interest income analysis discussed above, the model is run at least quarterly showing shocks ranging from +300bp to -100bp.

 

The table below sets forth, as of March 31, 2018, the estimated changes in the Company’s net present value of equity that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions, including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.

 

 

(1) Assumes instantaneous parallel changes in interest rates.

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(2) EVE, or Economic Value of Equity at Risk, measures the exposure of the Company’s equity to changes in a forecast interest rate environment.

(3) EVE Ratio represents EVE divided by the economic value of assets.

 

The table above indicates that at March 31, 2018, in the event of an instantaneous parallel 100 basis points decrease in interest rates, we would experience a 6.0% decrease in the Economic Value of Equity at Risk. In the event of an instantaneous 300 basis point increase in interest rates, we would experience a 2.2% decrease in Economic Value of Equity at Risk. In all scenarios presented above, the calculated variances are within policy guidelines.

 

Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in net portfolio value requires making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. In this regard, the table presented assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that a particular change in interest rates is reflected uniformly across the yield curve regardless of the duration or repricing of specific assets and liabilities. The table also does not measure the changes in credit and liquidity risk that may occur as a result of changes in general interest rates. Accordingly, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our economic value of equity and will differ from actual results.

 

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 March 31, 2018. 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 March 31, 2018, 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 Annual Report on Form 10-K as filed with the Securities and Exchange Commission under the heading “Risk Factors.” The Company’s evaluation of its risk factors has not changed materially since those discussed in the Annual Report on Form 10-K.

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

In September 2017, the Company’s Board of Directors adopted a stock repurchase program pursuant to which the Company would purchase up to 10%, or 586,854 shares, of its then outstanding common shares. This program may be suspended or terminated at any time without prior notice and it will expire on September 14, 2018. During 2017, the Company repurchased 10,000 shares of common stock at an average price per share of $14.90 for a total cost of $149,000. Repurchased shares are returned to the status of authorized but unissued shares. The following table sets forth information with respect to any purchases made by or on behalf of the Company during the indicated periods under the repurchase plan:

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

 

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.

 

 

 

 

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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.

 

 

 

 

 

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