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Section 1: 10-K (10-K)

rndb-10k_20191231.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2019

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 001-37780

 

Randolph Bancorp, Inc.

(Exact name of Registrant as specified in its Charter)

 

 

Massachusetts

81-1844402

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

10 Cabot Place, Stoughton MA

02072

(Address of principal executive offices)

(Zip Code)

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

 

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

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $.01 per share

  

RNDB

 

NASDAQ

 

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

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

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

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

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).  YES  NO 

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

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

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

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

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, based on the closing price of the shares of common stock on The NASDAQ Stock Market on the last business day of the registrant’s most recently completed second fiscal quarter was $70,667,426.

 

The number of shares of Registrant’s Common Stock outstanding as of February 29, 2020 was 5,567,917.

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for its 2020 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

 

 

 


Randolph Bancorp, Inc.

2019 Form 10-K

Table of Contents

 

 

 

 

PAGE

PART I

 

 

  

Item 1.

Business

 

1

Item 1A.

Risk Factors

 

27

Item 1B.

Unresolved Staff Comments

 

36

Item 2.

Properties

 

37

Item 3.

Legal Proceedings

 

37

Item 4.

Mine Safety Disclosures

 

37

 

 

 

 

PART II

 

 

 

Item 5.

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

 

38

Item 6.

Selected Financial Data

 

39

Item 7.

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

 

40

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

 

51

Item 8.

Financial Statements and Supplementary Data

 

51

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

 

51

Item 9A.

Controls and Procedures

 

51

Item 9B.

Other Information

 

52

 

 

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

 

52

Item 11.

Executive Compensation

 

52

Item 12.

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

 

52

Item 13.

Certain Relationships and Related Transactions, and Director Independence

 

52

Item 14.

Principal Accounting Fees and Services

 

52

 

 

 

 

PART IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

 

53

Item 16.

Form 10-K Summary

 

54

 

 

 

 

SIGNATURES

 

55

 


Forward-Looking Statements

This report contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), such as statements relating to our financial condition, prospective results of operations, future performance or expectations, plans, objectives, prospects, loan loss allowance adequacy, simulation of changes in interest rates, capital spending, finance sources and revenue sources. These statements relate to expectations concerning matters that are not historical facts. Accordingly, statements that are based on management’s projections, estimates, assumptions, and judgments constitute forward-looking statements. These forward looking statements, which are based on various assumptions (some of which are beyond the Company’s control), may be identified by reference to a future period or periods, or by the use of forward-looking terminology such as “believe,” “expect,” “estimate,” “anticipate,” “continue,” “plan,” “view,” “approximately,” “intend,” “objective,” “goal,” “project,” or other similar terms or variations on those terms, or the future or conditional verbs, such as “will,” “may,” “should,” “could,” and “would.”

Such forward-looking statements reflect our current views and expectations based largely on information currently available to our management, and on our current expectations, assumptions, plans, estimates, judgments, and projections about our business and our industry, and they involve inherent risks and uncertainties. Although the Company believes that these forward-looking statements are based on reasonable estimates and assumptions, they are not guarantees of future performance and are subject to known and unknown risks, uncertainties, contingencies, and other factors. Accordingly, the Company cannot give you any assurance that our expectations will in fact occur or that our estimates or assumptions will be correct. The Company cautions you that actual results could differ materially from those expressed or implied by such forward-looking statements as a result of, among other factors, the factors referenced in this report under Item 1A. “Risk Factors”; changes in interest rates; competitive pressures from other financial institutions; the effects of a continuing deterioration in general economic conditions on a national basis or in the local markets in which the Company operates, including changes which adversely affect borrowers’ ability to service and repay our loans; changes in loan defaults and charge-off rates; changes in the value of securities and other assets, adequacy of loan loss reserves, or deposit levels necessitating increased borrowing to fund loans and investments; operational risks including, but not limited to, cybersecurity breaches, fraud, natural disasters and pandemics; increasing government regulation, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act; the risk that we may not be successful in the implementation of our business strategy; the risk that intangibles recorded in the Company’s financial statements will become impaired; and changes in assumptions used in making such forward-looking statements. These forward-looking statements speak only as of the date of this report and the Company does not undertake any obligation to update or revise any of these forward-looking statements to reflect events or circumstances occurring after the date of this report or to reflect the occurrence of unanticipated events.

 

 

 


 

PART I

Item 1. Business.

Randolph Bancorp, Inc.

Randolph Bancorp, Inc. (“we,” “our,” “us,” “Randolph Bancorp,” or the “Company”) is a Massachusetts corporation organized in 2016 and is the stock holding company of Envision Bank (“Bank”). Randolph Bancorp’s primary business activities are the ownership of the outstanding capital stock of Envision Bank and management of the investment of offering proceeds retained from Randolph Bancorp’s mutual-to-stock conversion (the “conversion”) and our initial public offering in 2016. On July 1, 2016, we completed an initial public offering in which we sold 5,686,750 shares of common stock at $10.00 per share for approximately $56.9 million in gross proceeds, including 469,498 shares sold to the Bank’s employee stock ownership plan (“ESOP”). In connection with the conversion and initial public offering, we also issued 181,976 shares of common stock and contributed $455,000 in cash to Envision Bank Foundation, Inc. We also completed the acquisition of First Eastern Bankshares Corporation on July 1, 2016 for cash of $14.1 million. In the future, we may pursue other business activities permitted by applicable laws and regulations for bank holding companies, which may include the issuance of additional shares of common stock to raise capital or to support mergers or acquisitions and borrowing funds for reinvestment in Envision Bank. There are no specific plans for any additional capital issuance, merger or acquisition, or other diversification of our activities at the present time. Unless the context otherwise requires, references herein to the Company include the Company and its subsidiary on a consolidated basis.

At December 31, 2019, we had total assets of $631.0 million, deposits of $497.0 million and stockholders’ equity of $78.5 million.

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

Envision Bank

Envision Bank is a Massachusetts-chartered savings bank headquartered in Stoughton, Massachusetts with its main office in Randolph, Massachusetts. Envision Bank was organized in 1851 as Randolph Savings Bank. It reorganized into the mutual holding company structure in 2002 and into a stock holding company structure in 2016 in connection with the conversion. Envision Bank is currently the wholly-owned subsidiary of Randolph Bancorp, Inc. On July 1, 2016, we acquired First Eastern Bankshares Corporation and its wholly-owned subsidiary, First Federal Savings Bank of Boston (together, “First Eastern”), which was merged with the Bank. First Eastern was actively engaged in mortgage banking including the origination and sale of residential mortgage loans in the secondary market and the servicing of a portion of sold loans for investors.

Envision Bank provides financial services to individuals, families, and small to mid-size businesses through our five full-service banking offices located in Norfolk County, Massachusetts and our twelve loan production offices and lending centers located throughout Massachusetts and southern New Hampshire. The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations, brokered deposits and borrowings, in one- to four-family residential mortgage loans, commercial real estate loans, home equity loans and lines of credit, commercial and industrial loans, construction loans, consumer loans, and investment securities. The Bank offers a full range of deposit accounts, including statement savings accounts, certificates of deposit, money market accounts, commercial and regular checking accounts, and IRAs. The Bank is also actively involved in the sale and servicing of residential mortgage loans in the secondary market and to other financial institutions.

Market Area

Our primary deposit-taking market is Norfolk County, Massachusetts. Our primary lending market is more broadly based in Bristol, Essex, Hampden, Middlesex, Norfolk, Plymouth, Suffolk and Worcester counties in Massachusetts; Kent, Newport, Providence, and Washington counties in Rhode Island; and Hillsborough county in New Hampshire.  

1


 

Due to its proximity to Boston, our market area benefits from the presence of numerous institutions of higher learning, medical care and research centers, and the corporate headquarters of several investment and financial services companies. The greater Boston metropolitan area also has many life science and high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, residential construction, office buildings, shopping centers, and other commercial properties in our market area. Communities within our market area include many residential commuter towns, which function partially as business and service centers. Although our current operations are not focused in Boston, we are affected by economic conditions in Boston because our loan portfolio includes a number of loans that are secured by real estate or that have borrowers located in Boston. In addition, a number of our customers who reside in our market area are employed in Boston, and a number of our non-owner occupied residential loan customers have properties in Boston as well as elsewhere in our market area.

Population and household data indicate that the market within a 20 minute drive time from any of our current branch locations is a mix of urban and suburban markets with a large commuter population. Norfolk County is the wealthiest county on the mainland of Massachusetts and is characterized by a high concentration of white collar professionals who work in the Boston Metropolitan Statistical Area.

Competition

We face intense competition in making loans and attracting deposits. Our most direct competition for deposits has historically come from the banking institutions operating in our primary market area and from other financial service companies, such as securities brokerage firms, credit unions, and insurance companies. We also face competition for depositors’ funds from money market funds and mutual funds. At June 30, 2019, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation (“FDIC”), we held 1.55% of the deposits in Norfolk County, which was the 17th largest market share out of 42 financial institutions with offices in Norfolk County. Many of the banks owned by large national and regional holding companies and other community-based banks that operate in our primary market area are larger than we are and, therefore, may have greater resources or offer a broader range of products and services.

Our competition for loans comes from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from non-depository financial service companies entering the mortgage market, such as insurance companies, securities companies, and specialty finance companies. Competition in mortgage banking comes from traditional mortgage competitors within our market area as well as larger, nationally active mortgage originators.

 

Lending Activities

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

2


 

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

 

 

 

At December 31,

 

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

(Dollars in thousands)

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family

     residential

 

$

244,711

 

 

 

51.85

%

 

$

246,756

 

 

 

50.69

%

 

$

198,475

 

 

 

49.29

%

 

$

179,025

 

 

 

53.43

%

 

$

166,483

 

 

 

57.99

%

Commercial

 

 

125,405

 

 

 

26.57

%

 

 

113,642

 

 

 

23.35

%

 

 

98,755

 

 

 

24.53

%

 

 

88,394

 

 

 

26.38

%

 

 

74,911

 

 

 

26.09

%

Home equity loans and

     lines of credit

 

 

41,669

 

 

 

8.83

%

 

 

43,545

 

 

 

8.95

%

 

 

38,968

 

 

 

9.68

%

 

 

35,393

 

 

 

10.56

%

 

 

33,259

 

 

 

11.58

%

Construction

 

 

35,485

 

 

 

7.52

%

 

 

42,139

 

 

 

8.66

%

 

 

25,357

 

 

 

6.30

%

 

 

23,629

 

 

 

7.05

%

 

 

7,807

 

 

 

2.72

%

Commercial and industrial

     loans

 

 

9,093

 

 

 

1.93

%

 

 

21,285

 

 

 

4.37

%

 

 

24,766

 

 

 

6.15

%

 

 

2,067

 

 

 

0.62

%

 

 

2,040

 

 

 

0.71

%

Consumer loans

 

 

15,641

 

 

 

3.30

%

 

 

19,407

 

 

 

3.98

%

 

 

16,337

 

 

 

4.05

%

 

 

6,578

 

 

 

1.96

%

 

 

2,602

 

 

 

0.91

%

 

 

 

472,004

 

 

 

100.00

%

 

 

486,774

 

 

 

100.00

%

 

 

402,658

 

 

 

100.00

%

 

 

335,086

 

 

 

100.00

%

 

 

287,102

 

 

 

100.00

%

Net deferred loan costs and fees,

   and purchase premiums

 

 

1,407

 

 

 

 

 

 

 

1,509

 

 

 

 

 

 

 

1,452

 

 

 

 

 

 

 

1,176

 

 

 

 

 

 

 

1,288

 

 

 

 

 

Allowance for loan losses

 

 

(4,280

)

 

 

 

 

 

 

(4,437

)

 

 

 

 

 

 

(3,737

)

 

 

 

 

 

 

(3,271

)

 

 

 

 

 

 

(3,239

)

 

 

 

 

Loans, net

 

$

469,131

 

 

 

 

 

 

$

483,846

 

 

 

 

 

 

$

400,373

 

 

 

 

 

 

$

332,991

 

 

 

 

 

 

$

285,151

 

 

 

 

 

 

Loan Maturities. The following table sets forth the scheduled contractual amortization of the Bank’s loan portfolio at December 31, 2019. Loans having no schedule of repayments or no stated maturity are reported as being due in greater than five years except for demand loans which are reflected as due in one year or less. The table does not include any estimate of prepayments which significantly shortens the average life of all loans and may cause our actual repayment experience to differ from that shown below. The amounts shown below exclude net deferred loan costs and fees, and purchase premiums. The following table also sets forth the rate structure of loans scheduled to mature after one year.

 

 

 

At December 31, 2019

 

(In thousands)

 

One-to Four-

Family

Residential

Real Estate

 

 

Commercial

Real Estate

 

 

Home Equity

Loans and

Lines of

Credit

 

 

Construction

 

 

Commercial

and

Industrial

 

 

Consumer

 

 

Total

Loans

 

Amounts due in:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

7,483

 

 

$

19,190

 

 

$

63

 

 

$

24,509

 

 

$

4,723

 

 

$

6,385

 

 

$

62,353

 

After one year through five years

 

 

32,131

 

 

 

33,754

 

 

 

192

 

 

 

5,998

 

 

 

1,956

 

 

 

8,959

 

 

 

82,990

 

Beyond five years

 

 

205,097

 

 

 

72,461

 

 

 

41,414

 

 

 

4,978

 

 

 

2,414

 

 

 

297

 

 

 

326,661

 

Total

 

$

244,711

 

 

$

125,405

 

 

$

41,669

 

 

$

35,485

 

 

$

9,093

 

 

$

15,641

 

 

$

472,004

 

Interest rate terms on amounts due

   after one year:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed rate

 

$

124,294

 

 

$

48,529

 

 

$

1,775

 

 

$

 

 

$

2,448

 

 

$

9,256

 

 

$

186,302

 

Adjustable rate

 

 

112,934

 

 

 

57,686

 

 

 

39,831

 

 

 

10,976

 

 

 

1,922

 

 

 

 

 

 

223,349

 

Total

 

$

237,228

 

 

$

106,215

 

 

$

41,606

 

 

$

10,976

 

 

$

4,370

 

 

$

9,256

 

 

$

409,651

 

 

Residential Mortgage Loans. We offer mortgage loans to enable borrowers to purchase homes or refinance loans on existing homes, most of which serve as the primary residence of the owner. Excluding loans maturing in one year or less, residential mortgage loans were $237.2 million, or 50.3% of total loans, and consisted of $124.3 million and $112.9 million of fixed-rate and adjustable-rate loans, respectively, at December 31, 2019. Non-owner occupied residential loans were $44.1 million, or 9.3% of total loans.

We offer fixed-rate and adjustable-rate residential mortgage loans with terms up to 30 years. Generally, our fixed-rate loans conform to Fannie Mae and Freddie Mac (together, “GSEs”) underwriting guidelines and are originated with the intention to sell. Our adjustable-rate mortgage loans generally adjust annually after an initial fixed period that ranges from three to ten years. Interest rates and payments on our current origination of adjustable-rate loans are adjusted to a rate equal to a specified percentage above the one year Constant Maturity Treasury rate. Historically, we have also used the London Interbank Offered Rate (“LIBOR”) as a “reference rate” for adjustable-rate loans but have ceased doing so as LIBOR is set based on interest rate information reported by certain banks which will stop doing so after 2021. At December 31, 2019, 75% of residential adjustable-rate mortgages re-price based on LIBOR.

3


 

Depending on the loan type, the maximum amount by which the interest rate may be increased or decreased is generally 2.0% per adjustment period and the lifetime interest rate caps range from 5.0% to 6.0% over the initial interest rate of the loan.

Borrower demand for adjustable-rate compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates, and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

While residential mortgage loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. Additionally, our current practice is generally to: (1) sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans on a servicing retained basis; (2) sell to other financial institutions newly originated conforming and non-conforming fixed and adjustable rate residential mortgage loans on a servicing released basis; and (3) hold in our portfolio a portion of non-conforming loans, including fixed-rate loans and adjustable-rate loans. We generally do not originate “interest only” mortgage loans on one- to four-family residential properties nor do we offer loans that provide for negative amortization of principal, such as “option ARM” loans where the borrower can pay less than the interest owed on their loan. Additionally, we do not offer “subprime” loans (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, or bankruptcies or to borrowers with questionable repayment capacity) or “Alt-A” loans (loans to borrowers having less than full documentation).

We will make loans with loan-to-value ratios up to 100.0% for some government insured loans; however, we generally require private mortgage insurance for residential loans secured by a first mortgage with a loan-to-value ratio over 80.0%. We generally require all properties securing mortgage loans to be appraised by a licensed real estate appraiser. Exceptions to this lending policy are based on the requirements of the secondary market program under which the loan is originated. We require title insurance on all first mortgage loans. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.

In an effort to provide financing for first-time home buyers, we offer adjustable- and fixed-rate loans to qualified individuals and originate the loans using programs with more flexible underwriting guidelines, loan conditions, and reduced closing costs.

Commercial Real Estate Loans. At December 31, 2019, commercial real estate loans were $125.4 million, or 26.6% of total loans.

We originate fixed- and adjustable-rate commercial real estate loans for terms generally up to ten years, though on an exception basis commercial real estate loans will be granted with terms up to twenty years. Excluding loans maturing in one year or less, commercial real estate loans consisted of $48.5 million of fixed-rate loans and $57.7 million of adjustable rate loans at December 31, 2019. Interest rates and payments on our adjustable-rate loans adjust every three, five or seven years and generally are adjusted to a rate equal to a specified percentage above the corresponding Federal Home Loan Bank of Boston (“FHLBB”) classic borrowing rate and, to a lesser extent, LIBOR. Most of our adjustable-rate commercial real estate loans adjust every five years and amortize over a 20-25 year term. Loan amounts do not generally exceed 75.0% of the property’s appraised value at the time the loan is originated but may be made up to 80.0% of appraised value on an exception basis.

We have historically focused our commercial real estate origination efforts on small- and mid-size owner occupants and investors in our market area seeking loans between $500,000 and $5.0 million. Beginning in 2019, we focused our efforts on larger relationships seeking loans between $2.0 million and $7.5 million. Our commercial real estate loans are generally secured by properties used for business purposes, such as office buildings, warehouses, retail facilities and apartment buildings. In addition to originating these loans, we also participate in commercial real estate loans with other financial institutions.

At December 31, 2019, the average loan balance of our outstanding commercial real estate loans was $638,000 and our largest commercial real estate loan was $5.5 million.

Loans secured by commercial real estate, including multi-family real estate, generally have larger balances and involve a greater degree of credit risk than residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater

4


 

extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, where applicable, to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history, profitability, global cash flow of the borrower, guarantor, and all related entities, and the value of the underlying property. We require an environmental risk assessment prior to funding for commercial real estate loans.

Home Equity Loans and Lines of Credit. We offer home equity loans and lines of credit, which are secured by one-to four-family residences. At December 31, 2019, home equity loans and lines of credit were $41.7 million, or 8.8% of total loans. Home equity lines of credit have monthly adjustable rates of interest with 15-year draw periods which are then amortized over 10 years. These loans are indexed to the prime rate and generally are subject to an interest rate floor. Our home equity loans generally have a fixed interest rate. We offer home equity loan and lines of credit with cumulative loan-to-value ratios generally up to 80.0%, when taking into account both the balance of the home equity loan and first mortgage loan. Any home equity loan or line of credit made with a loan-to-value ratio exceeding 80.0% is made as a policy exception.

The procedures for underwriting home equity loans and lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is the primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. The procedures for underwriting residential mortgage loans apply equally to home equity loans and lines of credit.

Construction Loans. At December 31, 2019, construction loans were $35.5 million, or 7.5% of total loans. We originate construction loans only in our market area of Massachusetts, southern New Hampshire and Rhode Island. We primarily originate construction loans to contractors and builders, and to individuals, to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including small industrial buildings as well as apartment, retail and office buildings. Our construction loans generally are floating-rate, interest-only loans that provide for the payment of interest only during the construction phase, which is usually 12 months. At the end of the construction phase, the loan may be paid in full or converted to a permanent mortgage loan. Construction loans generally can be made with a maximum loan-to-value ratio of 75.0% of appraised market value for commercial construction and 80.0% of appraised market value for owner-occupied residential construction loans estimated upon completion of the project. Before making a commitment to fund a residential construction loan, we require an appraisal of the property by an independent licensed appraiser. Our construction loans do not provide for interest payments to be funded by interest reserves. At December 31, 2019, our largest construction loan outstanding was $4.9 million.

Our commercial loan policy requires a minimum equity contribution by the borrower of 10% to 30% depending on the loan type. All borrowers are underwritten and evaluated for creditworthiness based on past experience, debt service ability, net worth analysis including available liquidity, and other credit factors. We generally require personal guarantees on all construction loans. Advances are only made following an inspection of the property confirming completion of the required progress on the project and an update to the title completed by a bank approved attorney. For owner-occupied residential construction loans, loan to value ratios of greater than 80.0% may be approved when credit enhancements or mortgage insurance is in place.

Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest.

Commercial and Industrial Loans. We make commercial and industrial loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. In 2017, we entered into a master participation agreement with a super-regional bank to purchase up to $20.0 million in loan participations. The underlying loans are to local franchisees of a major international fast food retailer. At December 31, 2019, commercial and industrial loans were $9.1 million, or 1.9% of total loans. Commercial lending products include term and time loans and revolving lines of credit. Commercial and industrial loans and lines of credit are generally made with variable rates of interest. Variable rates are based on either the 30 Day LIBOR rate or the prime rate as published in The Wall Street Journal, plus a margin. Fixed-rate business loans are generally indexed to a corresponding FHLBB Classic rate, plus a margin. Commercial and industrial loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately held companies with local or regional businesses that operate in our market area. In addition, commercial and industrial loans (excluding loan participations) are generally made only to existing customers having a business or

5


 

individual deposit account and new borrowers are expected to establish appropriate deposit relationships with us if not already a depositor.

When making commercial and industrial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, and the value of the collateral, primarily accounts receivable, inventory, and equipment. Generally, loans are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial and industrial loans (excluding loan participations) are generally made in amounts of up to 50.0% to 80.0% of the value of the collateral securing the loan.

At December 31, 2019, our largest commercial and industrial loan (excluding loan participations) was a $896,000 loan and our largest commercial line of credit was $3,000,000, of which $2,990,000 was outstanding at December 31, 2019.

The loan participations purchased in 2017 involve loans to franchisees of an international fast food retailer with multiple locations. At December 31, 2019, these loan participations totaled $4.4 million with an average loan balance per borrower (our portion) of $490,000.  These loans are secured by equipment though the most significant consideration in making these loans is the historical cash flows of the borrower.

Commercial and industrial loans also involve a greater degree of risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial and industrial loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial and industrial loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer Loans. We originate automobile loans, loans secured by passbook or certificate accounts, unsecured personal loans and overdraft loans. We also purchase consumer loans. We expanded our purchases of consumer loans in 2017 to include refinanced student loans and automobile loans. No student loans have been purchased since 2017. We purchased approximately $5.4 million and $7.2 million of automobile loans in 2019 and 2018, respectively. At December 31, 2019, total purchased consumer loans totaled $14.2 million, while the entire consumer loan portfolio totaled $15.6 million, or 3.3% of total loans.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount. Bank management assesses the underwriting criteria for each of the entities from which it purchases consumer loans as part of its pre-purchase due diligence process. Refinanced student loans, which totaled $4.8 million at December 31, 2019, were purchased from an on-line lender specializing in the origination and refinancing of such loans. Applicants are screened based on a comprehensive set of underwriting criteria designed to assess “ability to pay”, including minimum FICO scores, monthly free cash flow, maximum leverage ratios and delinquency history. On average, borrowers on refinanced student loans have demonstrated six to seven years of payment history on their existing student loan prior to refinancing. Purchased automobile loans, which totaled $8.6 million at December 31, 2019, are purchased from a local lender specializing in the origination of such loans primarily to undocumented immigrants. In addition to the vehicle collateral, these loans include credit enhancement from the lender. The Bank also purchased in prior years unsecured personal loans from a national on-line lender which have an average FICO score at loan origination of 730. At December 31, 2019, such loans totaled $837,000 and had an average balance of $8,300.

Consumer loans entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness, death or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Loan Originations, Purchases and Sales. The primary source of loan originations are our in-house loan originators, advertising, and referrals from customers. We also purchase commercial real estate loans or participation interests in commercial real estate loans, commercial and industrial loans, and consumer loans.

Our current practice is generally to: (1) sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans; (2) sell to other financial institutions newly originated non-conforming fixed and adjustable rate

6


 

residential mortgage loans; and (3) hold in our portfolio a portion of non-conforming loans, including fixed rate and adjustable-rate residential mortgage loans. Our decision to sell loans is based on prevailing market interest rate conditions and interest rate risk management. Loans are sold to third parties with servicing either retained or released. In addition, we sell participation interests in commercial real estate loans to local financial institutions, primarily the portion of loans that exceed our borrowing limits or are in an amount that is considered prudent to manage our credit risk.

Loan Originations. The following table sets forth our loan originations (excluding loans originated for sale), purchases and principal repayment activities during the periods indicated.

 

 

 

Years Ended December 31,

 

(In thousands)

 

2019

 

 

2018

 

 

2017

 

Total loans at beginning of year

 

$

486,774

 

 

$

402,658

 

 

$

335,086

 

Originations:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

48,726

 

 

 

88,500

 

 

 

56,229

 

Commercial

 

 

15,013

 

 

 

24,046

 

 

 

28,440

 

Home equity loans and lines of credit

 

 

22,088

 

 

 

14,258

 

 

 

18,224

 

Construction

 

 

22,734

 

 

 

38,335

 

 

 

24,069

 

Total real estate loan originations

 

 

108,561

 

 

 

165,139

 

 

 

126,962

 

Commercial and industrial loans

 

 

861

 

 

 

1,971

 

 

 

863

 

Consumer loans

 

 

575

 

 

 

1,167

 

 

 

301

 

Total loan originations

 

 

109,997

 

 

 

168,277

 

 

 

128,126

 

Purchases/Participations:

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

 

 

 

 

 

 

 

Commercial

 

 

5,500

 

 

 

7,750

 

 

 

 

Home equity loans and lines of credit

 

 

 

 

 

 

 

 

 

Construction

 

 

 

 

 

 

 

 

 

Total real estate loan purchases/participations

 

 

5,500

 

 

 

7,750

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

1,203

 

 

 

20,381

 

Consumer loans

 

 

5,412

 

 

 

7,227

 

 

 

15,651

 

Total loan purchases/participations

 

 

10,912

 

 

 

16,180

 

 

 

36,032

 

Other:

 

 

 

 

 

 

 

 

 

 

 

 

Principal repayments

 

 

(89,195

)

 

 

(66,504

)

 

 

(89,471

)

Unadvanced funds on originations

 

 

(17,876

)

 

 

(5,780

)

 

 

(6,922

)

Transfers to held-for-sale

 

 

(28,608

)

 

 

(28,057

)

 

 

 

Transfer to other real estate owned

 

 

 

 

 

 

 

 

(193

)

Total other

 

 

(135,679

)

 

 

(100,341

)

 

 

(96,586

)

Net loan activity

 

 

(14,770

)

 

 

84,116

 

 

 

67,572

 

Total loans at end of year

 

$

472,004

 

 

$

486,774

 

 

$

402,658

 

 

We also originate one-to four- family residential mortgage loans for sale in the secondary mortgage market or to other financial institutions. During the years ended December 31, 2019, 2018 and 2017, the Bank originated $913.7 million, $393.3 million, and $398.7 million of such loans, respectively of which 53%, 25% and 28%, respectively, were refinanced loans.

Loan Participations. We look to form relationships with other financial institutions and mitigate risk of our lending activities by participating either as the lead bank or as a participant in various loan transactions. We independently underwrite each loan using underwriting practices that generally do not differ from loans that we originate.

At December 31, 2019, the outstanding balances of loan participations purchased totaled $20.5 million and loan participations sold totaled $5.3 million.

7


 

Loan Approval Procedures and Authority. Our lending activities follow written, nondiscriminatory underwriting standards and loan origination procedures established by our board of directors and management. The president and chief executive officer is authorized to grant lending authority to officers and other employees in individual amounts up to $500,000. Delegation of such authority is made after due consideration of the individual’s lending experience, past performance and his or her area of responsibility. Our board of directors has granted loan approval authority to certain executive officers. Loans in excess of $1.0 million must be approved by the loan committee, which is comprised of five members of our board of directors. Loans in excess of $3.0 million must also be approved by the board of directors.

Loans-to-One Borrower Limit. The maximum amount that the Bank may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 20.0% of its capital, which is defined under Massachusetts law as the sum of the Bank’s capital stock, surplus account, and undivided profits. At December 31, 2019, the Bank’s regulatory limit on loans-to-one borrower was $14.5 million. At that date, our largest lending relationship totaled $6.9 million and was secured by commercial real estate properties.

Loan Commitments. We issue commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.

Mortgage Banking Activities

We originate residential mortgage loans for our portfolio, for sale into the secondary market and for sale to other financial institutions. We generally underwrite our residential mortgage loans to conform to GSE standards. Approximately 95% of the residential real estate loans that we originated in 2019 were sold or designated for sale into the secondary market. We determine whether loans will be held for investment or held for sale at the time of loan commitment. We may subsequently change our intent to hold loans for investment and sell some or all of our ARMs or fixed-rate mortgages as part of our asset/liability management function. Mortgage loans serviced for others are not included in the accompanying consolidated statements of financial condition. The unpaid principal balances of mortgage loans serviced for others were $1.05 billion and $929.3 million at December 31, 2019 and 2018, respectively. Net gains or losses recognized upon the sale of loans are included in noninterest income. For the years ended December 31, 2019 and 2018, the Bank sold $894.6 million and $383.2 million, respectively, of residential mortgage loans and recognized a net gain on loan origination and sale activities of $18.9 million and $7.5 million, respectively.

Loans sold into the secondary market and to financial institutions are sold on either a servicing retained, or servicing released basis. We retained the servicing on 38% of loans sold during the year ended December 31, 2019.

We also consider the sale of the rights to service blocks of loans from time to time when we do not otherwise have a relationship with the customer. The decision to sell the right to service loans also takes into consideration regulatory capital rules under Basel III which require that a haircut to capital be taken when mortgage servicing rights (“MSRs”) exceed 10% of Tier 1 Capital. In 2019 and 2018, no MSRs were sold.

Interest rates affect the amount and timing of origination and servicing fees because consumer demand for new mortgages and the level of refinancing activity are sensitive to changes in mortgage interest rates. Typically, a decline in mortgage interest rates will lead to an increase in mortgage originations and fees and may also lead to an increase in mortgage servicing income, a component of noninterest income, depending on the level of new loans added to the servicing portfolio and prepayments. Given the time it takes for consumer behavior to fully react to interest rate changes, as well as the time required for processing a new application, providing the commitment and selling the loan, interest rate changes will affect origination and servicing fees with a lag. The amount and timing of the impact on origination and servicing fees will depend on the magnitude, speed, and duration of the change in interest rates.

8


 

MSRs are recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets. We capitalize MSRs at their fair value upon sale of the related loans. Capitalized servicing rights are amortized into mortgage servicing income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. MSRs are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. We measure impairment of our MSRs on a disaggregate basis based on the predominant risk characteristics of the portfolio, and we discount the asset’s estimated future cash flows using a current market rate. We have determined the predominant risk characteristics to be prepayment risk and interest-rate risk. To determine the fair value of MSRs, we estimate the expected future net servicing revenue based on common industry assumptions, as well as on our historical experience.

The following table sets forth activity for our MSRs for the years ended December 31, 2019 and 2018:

 

(In thousands)

 

2019

 

 

2018

 

Balance, beginning of year

 

$

7,786

 

 

$

6,397

 

Additions through originations

 

 

2,979

 

 

 

2,380

 

Amortization

 

 

(1,281

)

 

 

(983

)

Valuation allowance

 

 

(928

)

 

 

(8

)

Balance, end of year

 

$

8,556

 

 

$

7,786

 

Fair value, end of year

 

$

8,817

 

 

$

8,554

 

 

Changes in interest rates influence a variety of significant assumptions included in the periodic valuation of MSRs, including prepayment speeds, expected returns and potential risks on the servicing asset portfolio, the value of escrow balances and other servicing valuation elements. A decline in interest rates generally increases the propensity for refinancing, reduces the expected duration of the servicing portfolio and therefore reduces the estimated fair value of MSRs. This reduction in fair value can cause a charge to mortgage servicing income. Conversely, an increase in interest rates generally increases the estimated fair value of mortgage servicing rights. Due to the decline in interest rates experienced during 2019, we increased the valuation allowance for MSRs by $920,000. Mortgage servicing income, net of amortization and changes in the valuation allowance, for the years ended December 31, 2019 and 2018 was $394,000 and $1.3 million, respectively.

Asset Quality

Nonperforming Assets. We consider foreclosed assets, loans that are maintained on a nonaccrual basis and loans that are past 90 days or more and still accruing to be nonperforming assets. Loans are generally placed on nonaccrual status when they are classified as impaired or when they become 90 days or more past due. Loans are classified as impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. At the time a loan is placed on nonaccrual status, the accrual of interest ceases and unpaid interest income previously accrued on such loans is reversed against current period interest income. Payments received on a nonaccrual loan are first applied to the outstanding principal balance when collectability of principal is in doubt.

Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as other real estate owned until it is sold. When property is acquired, it is recorded at fair market value less costs to sell at the date of foreclosure. Any holding costs and declines in fair value after acquisition of the property result in charges against income.

Troubled debt restructurings occur when we grant borrowers concessions that we would not otherwise grant but for economic or legal reasons pertaining to the borrower’s financial difficulties. We may modify the terms of loans to lower interest rates (which may be at below market rates) or to provide for temporary interest-only terms, or to forgive or defer the payment of interest. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests. We generally do not forgive principal on loans. Once the borrower has demonstrated sustained performance with the modified terms, the loan may be upgraded from its classified and/or nonperforming status. Any loan categorized as troubled debt restructurings will continue to retain that designation through the life of the loan.

9


 

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

 

 

 

At December 31,

 

(Dollars in thousands)

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

2015

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One-to four-family residential

 

$

2,922

 

 

$

2,474

 

 

$

1,976

 

 

$

1,945

 

 

$

2,022

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

336

 

 

 

407

 

 

 

276

 

 

 

276

 

 

 

30

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

16

 

Consumer loans

 

 

 

 

 

149

 

 

 

 

 

 

 

 

 

 

Total nonaccrual loans

 

 

3,258

 

 

 

3,030

 

 

 

2,252

 

 

 

2,221

 

 

 

2,068

 

Delinquent loans (>90 days) accruing interest (1)

 

 

 

 

 

635

 

 

 

 

 

 

 

 

 

 

Total non-performing loans

 

 

3,258

 

 

 

3,665

 

 

 

2,252

 

 

 

2,221

 

 

 

2,068

 

Other real estate owned:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One- to four-family residential

 

 

 

 

 

65

 

 

 

193

 

 

 

 

 

 

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

Total other real estate owned

 

 

 

 

 

65

 

 

 

193

 

 

 

 

 

 

500

 

Total nonperforming assets

 

$

3,258

 

 

$

3,730

 

 

$

2,445

 

 

$

2,221

 

 

$

2,568

 

Performing troubled debt restructurings

 

$

2,149

 

 

$

3,027

 

 

$

3,383

 

 

$

3,433

 

 

$

4,172

 

Total nonperforming loans to total loans(2)

 

 

0.69

%

 

 

0.75

%

 

 

0.56

%

 

 

0.66

%

 

 

0.72

%

Total nonperforming assets to total assets

 

 

0.52

%

 

 

0.61

%

 

 

0.46

%

 

 

0.46

%

 

 

0.67

%

 

(1)

Represents one residential mortgage loan.

(2)

Total loans exclude loans held for sale and include net deferred loan costs and fees, and purchase premiums.

Interest income that would have been recorded for the year ended December 31, 2019 had nonaccruing loans been current according to their original terms amounted to $136,000. Income related to nonaccrual loans included in interest income for the year ended December 31, 2019 amounted to $99,000.

Classified Loans. Federal regulations require us to review and classify assets on a regular basis. In addition, the FDIC and the Massachusetts Commissioner of Banks have the authority to identify problem assets and, if appropriate, require them to be classified. There are three classifications for problem assets: substandard, doubtful and loss. “Substandard assets” must have one or more defined weaknesses and are characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. “Doubtful assets” have the weaknesses of substandard assets with the additional characteristic that the weaknesses make collection or liquidation in full on the basis of currently existing facts, conditions, and values questionable, and there is a high possibility of loss. An asset classified as “loss” is considered uncollectible and of such little value that continuance as an asset of the institution is not warranted. When management classifies an asset as substandard or doubtful a specific allowance for loan losses may be established. If management classifies an asset as loss, an amount equal to 100% of the portion of the asset classified loss is charged to the allowance for loan losses. The regulations also provide for a “special mention” category, described as assets that do not currently expose us to a sufficient degree of risk to warrant classification, but do possess credit deficiencies or potential weaknesses deserving our close attention. We utilize an eight-grade internal loan rating system for commercial real estate, construction, and commercial and industrial loans. See Note 3 to the consolidated financial statements.

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

 

 

 

December 31,

 

 

 

2019

 

 

2018

 

 

 

(In thousands)

 

Classified assets:

 

 

 

 

 

 

 

 

Substandard

 

$

3,678

 

 

$

2,519

 

Doubtful

 

 

 

 

 

149

 

Loss

 

 

 

 

 

 

Total classified assets

 

$

3,678

 

 

$

2,668

 

Special mention

 

$

5,537

 

 

$

1,343

 

10


 

 

Special mention loans totaling $855,000 and $658,000 at December 31, 2019 and 2018, respectively, were on nonaccrual.

The $4.2 million increase in loans classified as special mention in 2019 consisted of a commercial real estate loan secured by a hotel property totaling $2.8 million; a commercial real estate loan secured by a retail building of $649,000; and a participation interest in a commercial and industrial loan to a franchisee of an international food retailer of $753,000.

Other than as disclosed in the above tables, there are no other loans where management has information indicating that there is serious doubt about the ability of the borrowers to comply with the present loan repayment terms.

Delinquencies. The following table provides information about delinquencies in our loan portfolio at the dates indicated.

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

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

 

$

708

 

 

$

1,233

 

 

$

1,494

 

 

$

1,519

 

 

$

833

 

 

$

1,042

 

Commercial

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home equity loans and lines of credit

 

 

524

 

 

 

244

 

 

 

 

 

 

520

 

 

 

 

 

 

407

 

Construction

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consumer loans

 

 

76

 

 

 

11

 

 

 

 

 

 

25

 

 

 

4

 

 

 

 

Total

 

$

1,308

 

 

$

1,488

 

 

$

1,494

 

 

$

2,064

 

 

$

837

 

 

$

1,449

 

 

Allowance for Loan Losses. The allowance for loan losses is a valuation allowance for probable losses inherent in the loan portfolio. We evaluate the need to establish allowances against losses on loans on a regular basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

Our methodology for assessing the appropriateness of the allowance for loan losses consists of: (1) an allocated component related to impaired loans and (2) a general component related to the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.

Allocated Component. The allocated component of the allowance for loan losses relates to loans that are individually evaluated and determined to be impaired. Residential real estate, commercial real estate, construction and commercial and industrial loans are evaluated for impairment on a loan-by-loan basis. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate, or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual consumer loans or second mortgages and home equity loans and lines of credit for impairment disclosures, unless such loans are 90 days or more past due or subject to a troubled debt restructuring agreement.

General Component. The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by our loan segments. Management uses a rolling average of historical losses based on a trailing 48-month period, a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures, and practices; experience/ability/depth of lending management and staff; national and local economic trends and conditions, regulatory, and legal factors; and risk rating concentrations.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

11


 

We periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring. All troubled debt restructurings are initially classified as impaired.

We identify loans that may need to be charged-off as a loss by reviewing all impaired loans and related loss analyses. Loan losses are charged against the allowance when we believe the uncollectability of the loan balance is confirmed. A borrower’s inability to make payments under the terms of the loan and a shortfall in collateral value would generally result in our charging off the loan to the extent of the loss deemed to be confirmed.

At December 31, 2019, our allowance for loan losses was $4.3 million, or 0.90% of total loans and 131.4% of nonperforming loans. At December 31, 2018, our allowance for loan losses was $4.4 million, or 0.91% of total loans and 121.1% of nonperforming loans. Nonperforming loans at December 31, 2019 were $3.3 million, or 0.69% of total loans, compared to $3.7 million, or 0.75% of total loans, at December 31, 2018. The allowance for loan losses is maintained at a level that represents management’s best estimate of losses in the loan portfolio at the balance sheet date. However, there can be no assurance that the allowance for loan losses will be adequate to cover losses which may be realized in the future or that additional provisions for loan losses will not be required.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles, there can be no assurance that the FDIC and the Massachusetts Commissioner of Banks, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operation.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the dates indicated.

 

 

 

December 31, 2019

 

 

December 31, 2018

 

 

 

 

 

 

 

% 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

 

$

1,096

 

 

 

25.61

%

 

 

51.85

%

 

$

1,092

 

 

 

24.61

%

 

 

50.69

%

Commercial

 

 

1,840

 

 

 

42.99

%

 

 

26.57

%

 

 

1,648

 

 

 

37.14

%

 

 

23.35

%

Home equity loans and lines of credit

 

 

289

 

 

 

6.75

%

 

 

8.83

%

 

 

292

 

 

 

6.58

%

 

 

8.95

%

Construction

 

 

692

 

 

 

16.17

%

 

 

7.52

%

 

 

765

 

 

 

17.24

%

 

 

8.66

%

Commercial and industrial loans

 

 

235

 

 

 

5.49

%

 

 

1.93

%

 

 

265

 

 

 

5.97

%

 

 

4.37

%

Consumer loans

 

 

128

 

 

 

2.99

%

 

 

3.30

%

 

 

375

 

 

 

8.46

%

 

 

3.98

%

Total

 

$

4,280

 

 

 

100.00

%