RANDOLPH BANCORP, INC. This section is intended to help investors understand the financial performance ofRandolph Bancorp, Inc. and its subsidiary,Envision Bank , through a discussion of the factors affecting its financial condition atJune 30, 2022 andDecember 31, 2021 , and its results of operations for the three and six month periods endedJune 30, 2022 and 2021. This section should be read in conjunction with the unaudited consolidated financial statements ofRandolph 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 toRandolph Bancorp, Inc. and its subsidiary unless the context indicates another meaning. When necessary, certain amounts in prior year financial statements have been reclassified to conform to the current year's presentation.
Proposed Transaction with
OnMarch 28, 2022 , the Company entered into an Agreement and Plan of Merger (the "merger agreement") withHometown Financial Group , MHC,Hometown Financial Group, Inc. ("Hometown"), andHometown Financial Acquisition Corp. ("Merger Sub"). Pursuant to the merger agreement, Merger Sub will be merged with and into the Company, with the Company as the surviving corporation (the "merger"). Immediately after the merger, the Company will be merged with and into Hometown as the surviving corporation (the "second step merger"). Immediately following the second step merger, the Bank will merge with and intoAbington Bank , the wholly-owned subsidiary of Hometown, withAbington Bank as the surviving entity. OnJune 29, 2022 , the shareholders ofRandolph Bancorp, Inc. voted to approve the transaction. The consummation of the merger is subject to customary closing conditions, including receipt of regulatory approvals. The merger is expected to be completed in the fourth quarter of 2022.
Cautionary Statement Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the 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. These statements, which are based on certain current assumptions, 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. The Company intends these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and are including this statement for purposes of complying with these safe harbor provisions. You should read statements that contain these words carefully because they discuss the relevant company's future expectations, contain projections of the relevant company's future results of operations or financial condition, or state other "forward-looking" information. 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"; failure to obtain necessary regulatory approvals for the proposed transaction with Hometown; failure to satisfy any of the conditions to the proposed transaction with Hometown on a timely basis or at all or other delays in completing the merger; the risk that the merger agreement may be terminated in certain circumstances; the outcome of any legal proceedings that may be instituted against the Company and/or others related to the merger agreement or the merger; disruptions to the Company's business as a result of the announcement and pendency of the merger; the reputational risks and the reaction of Randolph's customers to the proposed transaction; ongoing disruptions due to the COVID-19 pandemic and the measures taken to contain its spread on the Company's employees, customers, business operations, credit quality, financial position, liquidity and results of operations; changes in the general business and economic conditions on a national basis and in the local markets in which the Company operates, including changes that adversely affect borrowers' ability to service and repay the Company's loans; changes in interest rates; competition; inflation; changes in consumer behavior due to changing political, business and economic conditions or legislative or regulatory initiatives; reputational risk relating to the Company's participation in pandemic-related legislative and regulatory initiatives and programs; ongoing turbulence in the capital and debt markets and the impact of such conditions on the Company's business activities and the other risks and uncertainties detailed in our Annual Report on Form 10-K and updated in this Quarterly Report on Form 10-Q and other filings submitted to theSecurities and Exchange Commission . 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 net gains on loan origination and sale activities. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on interest-bearing liabilities. Our interest-earning assets consist primarily of residential mortgage loans (including loans held for sale), 31 -------------------------------------------------------------------------------- commercial real estate loans, commercial and industrial loans, home equity loans and lines of credit, construction loans, consumer loans and investment securities. Interest-bearing liabilities consist primarily of deposit accounts (including brokered deposits) and borrowings from theFederal Home Loan Bank of Boston ("FHLBB") and theFederal Reserve Bank ("FRB"). Net gains on loan origination and sale activities result from the origination and sale of such loans to investors including Fannie Mae, Freddie Mac and other financial institutions. The amount of these gains is dependent on the volume of our loan originations, profit margins earned upon sale and the prevailing fair value of mortgage servicing rights ("MSRs").
Critical Accounting Policies and Estimates
Certain of our accounting policies are important to the presentation of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in Note 1 to the consolidated financial statements included in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSecurities and Exchange Commission . Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover incurred losses inherent in the loan portfolio at the balance sheet date. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the loan is uncollectable. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as either additional information becomes available or circumstances change. The allowance for loan losses is allocated to loan types using both a formula-based approach applied to groups of loans (general component) and an analysis of certain individual loans for impairment (allocated component). Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, theFDIC and theMassachusetts Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments using information available to them at the time of their examination. Income Taxes. Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized. In 2014, we established a 100% valuation allowance for our net deferred tax assets after completing an assessment of our recent operating results, including significant non-recurring items, and projected operating results. This assessment led us to conclude that it was more likely than not that we would be unable to realize our deferred tax assets. In performing subsequent assessments through 2019, management concluded that no significant changes in the key factors affecting the realizability of our deferred tax assets had occurred and that a valuation allowance for all deferred tax assets should be maintained. After incurring losses in four of the seven previous years, the Company had net income of$9.6 million and$19.9 million in 2021 and 2020, respectively. During 2021, management concluded that the previous 100% valuation allowance for deferred tax assets was no longer needed. There was no valuation allowance as ofJune 30, 2022 orDecember 31, 2021 . We do not have any uncertain tax positions atJune 30, 2022 andDecember 31, 2021 which require accrual or disclosure. We record interest and penalties as part of income tax expense. Interest and penalties recorded for the three and six months endedJune 30, 2022 and 2021 were not significant.
Comparison of Financial Condition at
Total Assets. Total assets decreased$28.5 million to$774.8 million atJune 30, 2022 from$803.3 million atDecember 31, 2021 . Contributing to the asset decline was a$100.6 million decrease in cash and cash equivalents and a$35.0 million decrease in loans held for sale. The decrease in cash and cash equivalents was due to the funding of net loan growth of$113.0 million , primarily due to an increase of$118.6 million in one- to four-family residential loans. The decrease in loans held for sale was the result of a decline in mortgage banking production and the decision to allocate a larger portion of residential loan production to the Company's own portfolio as a result of an increase in mortgage interest rates. Loans Held for Sale. We are actively involved in the secondary mortgage market and sell a portion of our residential first mortgage loan production to investors. AtJune 30, 2022 , loans held for sale totaled$9.7 million compared to$44.8 million at 32 --------------------------------------------------------------------------------December 31, 2021 , and proceeds from sales of mortgage loans totaled$188.8 million in the six months endedJune 30, 2022 . Higher mortgage rates available during the first six months of 2022 negatively impacted loan refinancing activity, which comprised 60% of residential mortgage loan originations in the first six months of 2022, compared to 72% in the first six months of 2021. Net Loans. Net loans increased$113.0 million to$657.6 million atJune 30, 2022 from$544.6 million atDecember 31, 2021 , primarily as a result of the origination of one- to four-family residential loans, home equity loans and lines of credit and commercial real estate loans. These increases were partially offset by decreases in commercial and industrial, construction and consumer loans, where loan repayments have not been offset by increased loan originations or purchases.Investment Securities . Investment securities, all of which are classified as available for sale, decreased$4.5 million to$47.1 million atJune 30, 2022 from$51.7 million atDecember 31, 2021 , primarily due to principal payments on mortgage-backed securities and a decrease in the market value attributable to an increase in longer-term interest rates, partially offset by security purchases during the first six months of 2022. AtJune 30, 2022 , investment securities and cash and cash equivalents, primary sources of on-balance sheet liquidity, totaled$62.0 million , or 8.0% of total assets. Mortgage Servicing Rights. MSRs decreased$523,000 to$15.1 million atJune 30, 2022 from$15.6 million atDecember 31, 2021 . The principal reason for the decrease was amortization in excess of the pace of the origination of new MSRs, partially offset by a reversal of previous impairment charges of$421,000 recognized through a valuation allowance, reflecting the higher interest rate environment. AtJune 30, 2022 , the Company serviced$1.92 billion of mortgage loans for others, a decrease of$0.6 billion from$1.98 billion atDecember 31, 2021 . The average value of MSRs atJune 30, 2022 stood at 79 basis points, unchanged fromDecember 31, 2021 .
Deposits. Deposits increased
FHLBB Advances. FHLBB advances, which consist of term and overnight advances, decreased by$17.1 million to$32.9 million atJune 30, 2022 , from$50.0 million atDecember 31, 2021 . The Company's deposit gathering activities have reduced the reliance on advances. FHLBB advances, interest-bearing brokered deposits, listing and certain other deposits make up the Bank's wholesale funding which management targets at a limit of 25% of total assets. AtJune 30, 2022 , wholesale funding amounted to$132.7 million , or 17.1% of total assets. Stockholders' Equity. Stockholders' equity decreased$11.6 million to$89.3 million atJune 30, 2022 compared to$100.9 million atDecember 31, 2021 . The decrease was mainly attributed to dividends of$11.3 million , other comprehensive losses of$2.7 million and share repurchases of$1.3 million , partially offset by proceeds from the exercises of stock options of$2.1 million ,$1.1 million in ESOP shares committed to be released and net income of$13,000 .
Comparison of Operating Results for the Three Months Ended
General. The Company recognized net income of$248,000 , or$0.05 per diluted share, for the three months endedJune 30, 2022 compared to net income of$1.6 million , or$0.31 per diluted share, for the three months endedJune 30, 2021 , a decrease of$1.3 million .
Analysis of Net Interest Income
Net interest income represents the difference between income earned on
interest-earning assets and the expenses paid 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. The yields set forth
below include the effect of acquisition accounting adjustments as well as
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.
For the Three Months Ended June 30,
2022 2021
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
(Dollars in thousands) Balance Paid Rate(7) Balance Paid Rate(7)
Interest-earning assets:
Loans (1) $ 634,021 $ 6,182 3.91 % $ 592,750 $ 5,505 3.73 %
Investment securities (2) (3) 49,426 226 1.83 % 55,376 230 1.67 %
Interest-earning deposits 27,803 45 0.65 % 43,888 8 0.07 %
Total interest-earning assets 711,250 6,453 3.64 % 692,014 5,743 3.33 %
Noninterest-earning assets 41,971 40,257
Total assets $ 753,221 $ 732,271
Interest-bearing liabilities:
Savings accounts 194,944 76 0.16 % 192,434 89 0.19 %
NOW accounts 52,890 49 0.37 % 69,730 38 0.22 %
Money market accounts 98,813 79 0.32 % 72,469 43 0.24 %
Term certificates 141,279 138 0.39 % 104,604 175 0.67 %
Total interest-bearing deposits 487,926 342 0.28 % 439,237 345 0.32 %
FHLBB and FRB advances 31,058 99 1.28 % 51,502 198 1.54 %
Total interest-bearing liabilities 518,984 441 0.34 % 490,739 543 0.44 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 133,915 124,656
Other noninterest-bearing 10,642 13,606
liabilities
Total liabilities 663,541 629,001
Total stockholders' equity 89,680 103,270
Total liabilities and stockholders' $ 753,221 $ 732,271
equity
Net interest income $ 6,012 $ 5,200
Interest rate spread(4) 3.30 % 2.89 %
Net interest-earning assets(5) $ 192,266 $ 201,275
Net interest margin(6) 3.39 % 3.01 %
Ratio of interest-earning assets to
interest-
bearing liabilities 137.05 % 141.01 %
(1) Includes nonaccruing loan balances and interest received on such loans as
well as loans held for sale.
(2) Includes carrying value of securities classified as available for sale,
FHLBB stock and investment in a correspondent bank.
(3) Includes tax equivalent adjustments for municipal securities, based on an
effective tax rate of 21% of
(4) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total
interest-earning assets.
(7) During the fourth quarter of 2021, the Company changed the yield calculation method from "30/360" to the "Actual/Actual" method. Management believes that the "Actual/Actual" method provides a more consistent and relevant metric for yield performance comparisons.
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Rate/Volume Analysis. The following table presents the effects of changing rates
and volumes on our net interest income, presented on a tax equivalent basis, for
the periods indicated. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
prior rate). The net column represents the sum of the prior columns. For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately based on the changes
due to rate and the changes due to volume.
Three Months Ended June 30, 2022
Compared to
Three Months Ended June 30, 2021
Increase (Decrease) Total
Due to Changes in Increase
(In thousands) Volume Rate (Decrease)
Interest-earning assets:
Loans $ 412 $ 265 $ 677
Investment securities (24 ) 20 (4 )
Interest-earning deposits (2 ) 39 37
Total interest-earning assets 386 324 710
Interest-bearing liabilities:
Savings accounts 1 (14 ) (13 )
NOW accounts (7 ) 18 11
Money market accounts 13 23 36
Term certificates 50 (87 ) (37 )
Total interest-bearing deposits 57 (60 ) (3 )
FHLBB and FRB advances (69 ) (30 ) (99 )
Total interest-bearing liabilities (12 ) (90 ) (102 )
Change in net interest income $ 398 $ 414 $ 812
Interest and Dividend Income. Interest and dividend income, inclusive of tax
equivalent adjustments on municipal securities, increased $710,000 , or 12.4%, to
$6.5 million for the three months ended June 30, 2022 compared to $5.7 million
for the three months ended June 30, 2021 . The yield on interest-earning assets
increased 31 basis points to 3.64% in the second quarter of 2022 from 3.33% in
the same quarter of the prior year, due to a higher portion of loans and
increasing earning-asset yields in a rising interest rate environment.
Interest Expense. Interest expense decreased $102,000 , or 18.8%, to $441,000 for
the three months ended June 30, 2022 compared to $543,000 for the three months
ended June 30, 2021 . This decrease was due to a in a 10 basis point decrease in
the cost of interest-bearing liabilities to 0.34%. The decrease in cost of funds
was principally due to the downward pricing of deposits and the change in
composition of interest-bearing liabilities.
Net Interest Income. Net interest income, inclusive of tax equivalent
adjustments on municipal securities, increased $812,000 , or 15.6%, to $6.0
million for the three months ended June 30, 2022 compared to $5.2 million for
the three months ended June 30, 2021 . This increase resulted in a 38 basis point
improvement in the net interest margin, to 3.39%, in the second quarter of 2022.
The improvement in net interest margin was primarily the result of an increase
in the rate earned on loans and increases in the average balance of loans.
Provision for Loan Losses. The Company recognized a provision for loan losses of
$269,000 for the quarter ended June 30, 2022 compared to a credit of $27,000 in
the prior year quarter. The provision in the second quarter of 2022 was driven
by loan growth in one- to four-family residential real estate. The allowance for
loan losses was 1.00% and 1.19% of gross loans at June 30, 2022 and June 30,
2021 , respectively, and was 237.4% and 101.9% of non-performing assets at June
30, 2022 and June 30, 2021 , respectively.
Net Gain on Loan Origination and Sale Activities. The net gain on loan
origination and sale activities decreased $5.3 million , or 91.6%, to $484,000
for the three months ended June 30, 2022 compared to $5.7 million for the three
months ended June 30, 2021 . Lower mortgage sales and margins earned on the sale
of loans, and a decline in the fair value of loans held for sale during the
second quarter of 2022 were responsible for the decline between the periods.
Other Non-interest Income. Other non-interest income was $1.3 million in the
three months ended June 30, 2022 compared to other non-interest income of $1.1
million during the three months ended June 30, 2021 . The $265,000 increase
between periods was mainly attributed a $286,000 release to the valuation
allowance of mortgage loan servicing rights during the three months ended June
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30, 2022, compared to a $65,000 impairment charge to MSRs which was recognized
in the quarter ended June 30, 2021 as loan prepayment speeds were adjusted to
reflect changing interest rates.
Non-interest Expenses. Non-interest expenses decreased $3.1 million , or 29.6%,
to $7.5 million for the three months ended June 30, 2022 , from $10.6 million for
the three months ended June 30, 2021 .
Salaries and employee benefits decreased $2.9 million to $4.4 million in the
second quarter of 2022 from $7.3 million in the second quarter of 2021. This
decrease was primarily due to lower head count, commissions, incentives,
overtime and temporary assistance associated with lower residential loan
production during the second quarter of 2022.
Occupancy and equipment expenses decreased $62,000 in the quarter ended June 30,
2022 over the prior year period. This decrease was a result of the consolidation
of administrative office space.
Other non-interest expenses comprising data processing, professional fees,
marketing, FDIC insurance and other non-interest expenses decreased by $185,000
in the quarter ended June 30, 2022 compared to the prior year period as a result
of a $197,000 decrease in the provision for unfunded commitments from the second
quarter of 2021.
Income Tax Expense (Benefit). An income tax benefit of $165,000 for the three
months ended June 30, 2022 incorporates a federal and state income tax
provision, based on the projected effective tax rate for the year. The income
tax benefit for the three months ended June 30, 2021 was $162,000 , and consisted
of a federal and state income tax provision, offset by the reversal of a
valuation allowance on the Company's charitable contribution carryforward during
the quarter of $531,000 .
Comparison of Operating Results for the Six Months Ended
General.
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. The yields set forth
below include the effect of acquisition accounting adjustments as well as
deferred fees, discounts and premiums that are amortized or accreted to interest
income or expense.
For the Six Months Ended June 30,
2022 2021
Average Interest Average Average Interest Average
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ (Dollars in thousands)
Balance Paid Rate(7) Balance Paid Rate(7) Interest-earning assets: Loans (1)
$ 610,262 $ 11,649
3.85 %
51,168 447 1.76 % 56,590 477 1.70 %
Interest-earning deposits 67,613 87 0.26 % 39,713 15 0.08 %
Total interest-earning assets 729,043 12,183 3.37 % 689,685 11,505 3.36 %
Noninterest-earning assets 41,958 41,146
Total assets $ 771,001 $ 730,831
Interest-bearing liabilities:
Savings accounts 194,535 148 0.15 % 191,379 187 0.20 %
NOW accounts 57,439 92 0.32 % 69,621 86 0.25 %
Money market accounts 96,009 115 0.24 % 74,222 97 0.26 %
Term certificates 142,294 302 0.43 % 100,812 413 0.83 %
Total interest-bearing deposits 490,277 657 0.27 % 436,034 783 0.36 %
FHLBB and FRB advances 39,648 246 1.25 % 61,126 430 1.42 %
Total interest-bearing liabilities 529,925 903 0.34 % 497,160 1,213 0.49 %
Noninterest-bearing liabilities:
Noninterest-bearing deposits 137,167 115,841
Other noninterest-bearing 11,098 14,486
liabilities
Total liabilities 678,190 627,487
Total stockholders' equity 92,811 103,344
Total liabilities and $ 771,001 $ 730,831
stockholders' equity
Net interest income $ 11,280 $ 10,292
Interest rate spread(4) 3.03 % 2.87 %
Net interest-earning assets(5) $ 199,118 $ 192,525
Net interest margin(6) 3.12 % 3.01 %
Ratio of interest-earning assets
to interest-
bearing liabilities 137.57 % 138.72 %
(1) Includes nonaccruing loan balances and interest received on such loans as
well as loans held for sale.
(2) Includes carrying value of securities classified as available for sale,
FHLBB stock and investment in a correspondent bank.
(3) Includes tax equivalent adjustments for municipal securities, based on an
effective tax rate of 21% of
(4) Interest rate spread represents the difference between the yield on average
interest-earning assets and the cost of average interest-bearing
liabilities.
(5) Net interest-earning assets represent total interest-earning assets less
total interest-bearing liabilities.
(6) Net interest margin represents net interest income divided by average total
interest-earning assets.
(7) During the fourth quarter of 2021, the Company changed the yieldcalculation method from "30/360" to the "Actual/Actual" method. Management
believes that the "Actual/Actual" method provides a more consistent and
relevant metric for yield performance comparisons.
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Rate/Volume Analysis. The following table presents the effects of changing rates
and volumes on our net interest income, presented on a tax equivalent basis, for
the periods indicated. The rate column shows the effects attributable to changes
in rate (changes in rate multiplied by prior volume). The volume column shows
the effects attributable to changes in volume (changes in volume multiplied by
prior rate). The net column represents the sum of the prior columns. For
purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately based on the changes
due to rate and the changes due to volume.
Six Months Ended June 30, 2022
Compared to
Six Months Ended June 30, 2021
Increase (Decrease) Total
Due to Changes in Increase
(In thousands) Volume Rate (Decrease)
Interest-earning assets:
Loans $ 393 $ 243 $ 636
Investment securities (45 ) 15 (30 )
Interest-earning deposits 5 67 72
Total interest-earning assets 353 325 678
Interest-bearing liabilities:
Savings accounts 3 (42 ) (39 )
NOW accounts (13 ) 19 6
Money market accounts 26 (8 ) 18
Term certificates 132 (243 ) (111 )
Total interest-bearing deposits 148 (274 ) (126 )
FHLBB and FRB advances (138 ) (46 ) (184 )
Total interest-bearing liabilities 10 (320 ) (310 )
Change in net interest income $ 343 $ 645 $ 988
Interest and Dividend Income. Interest and dividend income, inclusive of tax
equivalent adjustments on municipal securities, increased $678,000 , or 5.9%, to
$12.2 million for the six months ended June 30, 2022 compared to $11.5 million
for the six months ended June 30, 2021 . The yield on interest-earning assets
increased 1 basis point to 3.37% in the first six months of 2022 from 3.36% in
the first six months of the prior year, and average interest-earning assets
increased between periods by $39.4 million , or 5.7%, as the Company increased
lending and continued to leverage its capital base.
Interest Expense. Interest expense decreased $310,000 , or 25.6%, to $903,000 for
the six months ended June 30, 2022 compared to $1.2 million for the six months
ended June 30, 2021 . This decrease resulted from a 15 basis point decrease in
the cost of funds to 0.34%. The decrease in cost of funds was principally due to
a decline in deposit costs and in the volume and cost of advances.
Net Interest Income. Net interest income, inclusive of tax equivalent
adjustments on municipal securities, increased $988,000 , or 9.6%, to $11.3
million for the six months ended June 30, 2022 compared to $10.3 million for the
six months ended June 30, 2021 . This improvement resulted principally from loan
growth and improved interest rate spread mainly reflecting higher loan yields
and decreased wholesale funding cost. The net interest margin increased 11 basis
points to 3.12% in the first six months of 2022 from 3.01% in the first six
months of 2021.
Provision for Loan Losses. The Company recognized a provision for loan losses of
$340,000 for the six months ended June 30, 2022 , compared to a credit for loan
losses of $240,000 in the prior year period due to loan growth.
Net Gain on Loan Origination and Sale Activities. The net gain on loan
origination and sale activities decreased $15.0 million , or 89.6%, to $1.7
million for the six months ended June 30, 2022 compared to $16.7 million for the
six months ended June 30, 2021 . The lower mortgage origination and sale levels
and compressed margins on the sale of loans were due to the rising interest rate
environment.
Other Non-interest Income. Other non-interest income was $2.3 million in the six
months ended June 30, 2022 , compared to other non-interest income of $2.5
million during the six months ended June 30, 2021 . The $237,000 decrease between
periods was mainly attributed to a decrease in mortgage loan servicing fees of
$303,000 , as the Company recognized newly incurred sub-servicing costs in
mortgage servicing fees during the six months ended June 30, 2022 .
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Non-interest Expenses. Non-interest expenses decreased $6.4 million , or 28.3%,
to $16.2 million for the six months ended June 30, 2022 , from $22.6 million for
the six months ended June 30, 2021 . Non-interest expenses in the first six
months of 2022 included $240,000 in accrued severance expenses, $290,000 in a
credit for the reversal of a cease use liability and $945,000 of merger
expenses. Non-interest expenses in the first six months of 2021 included
$254,000 in accrued severance expenses and $71,000 of outsourcing expenses
related to the Company's outsourcing of its residential loans servicing
function.
Salaries and employee benefits decreased $6.2 million to $9.6 million in the
first six months of 2022 from $15.7 million in the first six months of 2021. The
decrease from the prior year period was primarily due to lower head count,
commissions, incentives, overtime and temporary assistance associated with lower
residential loan production during the first half of 2022.
Occupancy and equipment expenses decreased $441,000 , or 32.3%, to $924,000 in
the first six months of 2022 compared to $1.4 million in the first six months of
2021. This decrease was driven by a $290,000 reversal of a cease use liability
and decreases in the Company's operating footprint.
Other non-interest expenses comprising data processing, professional fees,
marketing, FDIC insurance and other non-interest expenses increased by $232,000
in the six months ended June 30, 2022 versus the prior year period primarily as
a result of $945,000 in merger expenses, partially offset by a decrease in
residential mortgage loan origination expenses.
Income Tax Expense (Benefit). An income tax benefit of
Segments. The Company has two reportable segments:Envision Bank and Envision Mortgage. Revenue fromEnvision Bank consists primarily of interest earned on loans and investment securities and customer service fees on deposit accounts. Revenue from Envision Mortgage consists primarily of gains on loan origination and sales activities, loan servicing income and interest income on loans held for sale and residential construction loans. Also included in Envision Mortgage's revenues is income on loan originations that are retained inEnvision Bank's loan portfolio and loan servicing fees on these loans. This inter-segment profit is eliminated in consolidation. 39 --------------------------------------------------------------------------------
Comparison of Segment Results for the Three Months Ended
The following table presents a comparison of the results of operations for each segment before incomes taxes and elimination of inter-segment profit, and the changes in those results, for the three months endedJune 30, 2022 and 2021. Envision Bank Envision Mortgage Three Months Ended June 30, Increase (Decrease) Three Months Ended June 30, Increase (Decrease) 2022 2021 Dollars Percent 2022 2021 Dollars Percent (in thousands) Net interest income $ 5,741$ 4,535 $ 1,206 26.6 % $ 270$ 664 $ (394 ) -59.3 % Provision (credit) for loan losses 269 (27 ) 296 1,096.3 - - - - Net interest income after provision (credit) for loan losses 5,472 4,562 910 19.9 270 664 (394 ) (59.3 ) Non-interest income: Customer service fees 365 393 (28 ) (7.1 ) 7 26 (19 ) (73.1 ) Gain on loan origination and sale activities, net (1) - - - - 1,920 6,558 (4,638 ) (70.7 ) Mortgage servicing fees, net (240 ) (94 ) (146 ) (155.3 ) 749 475 274 57.7 Other 369 158 211 133.5 91 118 (27 ) (22.9 ) Total non-interest income 494 457 37 8.1 2,767 7,177
(4,410 ) (61.4 )
Non-interest expenses: Salaries and employee benefits 1,831 1,746 85 4.9 2,583 5,564 (2,981 ) (53.6 ) Occupancy and equipment 447 407 40 9.8 112 214 (102 ) (47.7 ) Other non-interest expenses 1,357 1,265 92 7.3 1,154 1,431 (277 ) (19.4 ) Total non-interest expenses 3,635 3,418 217 6.3 3,849 7,209 (3,360 ) (46.6 ) Income (loss) before income taxes and elimination of inter-segment profit $ 2,331$ 1,601 $ 730 45.6 % $ (812 )$ 632 $ (1,444 ) (228.5 )% Total Assets at June 30, 2022$ 718,602 $ 56,151 Total Assets at December 31, 2021 708,631 94,647 Increase (decrease) $ 9,971$ (38,496 ) (1) Before elimination of inter-segment profit.
Envision Bank Segment
The Envision Bank segment had income before income taxes and elimination of inter-segment profit of$2.3 million for the three months endedJune 30, 2022 compared to$1.6 million for the three months endedJune 30, 2021 . The increase in operating results between periods of$730,000 was driven by a number of factors as explained below. Net interest income increased$1.2 million , or 26.6%, primarily as a result of loan growth and an increase in asset yields, as well as a decrease in deposit costs. The Company recognized a provision for loan losses of$269,000 for the quarter endedJune 30, 2022 compared to a credit of$27,000 in the prior year quarter. Non-interest income increased by$37,000 between periods, driven by an increase in other fees primarily related to commercial loan customers, partially offset by greater imputed servicing costs on residential loans in portfolio. Non-interest expense increased by$217,000 in the quarter endedJune 30, 2022 as compared to the prior year period as a result of a combination of factors. Salaries and employee benefits increased by$85,000 , or 4.9%, between periods as a result normal pay increases. Occupancy and equipment expenses increased$40,000 in the quarter endedJune 30, 2022 over the prior year period, partly as a result of depreciation of office improvements to the Company's main bank branch. Other non-interest expenses increased by$92,000 between periods, due to a$357,000 in merger expenses during three months endedJune 30, 2022 . Total assets attributable to theEnvision Bank segment increased$10.0 million , or 1.4%, to$718.6 million atJune 30, 2022 from$708.6 million atDecember 31, 2021 . This increase was principally due to loan growth. 40 --------------------------------------------------------------------------------
Envision Mortgage Segment
The Envision Mortgage segment had a loss before income taxes and elimination of inter-segment profit of$812,000 for the three months endedJune 30, 2022 compared to income before income taxes and elimination of inter-segment profit of$632,000 for the three months endedJune 30, 2021 . The decline of$1.4 million in operating results occurred as a result of a decrease of$4.6 million , or 70.7%, in net gains on loan origination and sale activities. The net gain on loan origination and sale activities, the principal source of revenue for Envision Mortgage, decreased$4.6 million to$1.9 million in the second quarter of 2022 from$6.6 million in the second quarter of 2021, driven by lower mortgage loan refinancing in a rising rate environment and lower sale margins in the three months endedJune 30, 2022 , compared to the three months endedJune 30, 2021 .
Net interest income decreased
Mortgage servicing fee income increased$274,000 between periods largely due to a$286,000 release of prior impairment charges in the valuation allowance for MSRs in the 2022 period due to an increase in interest rates and a slowing of mortgage prepayments, versus an impairment charge of$65,000 in the 2021 period. Non-interest expenses of Envision Mortgage decreased$3.4 million , or 46.6%, to$3.8 million in the second quarter of 2022 from$7.2 million in the second quarter of 2021. This decrease was primarily due to a decrease of$3.0 million , or 53.6%, in salaries and employee benefits, largely related to decreased loan production volume and head count.
The decrease of
Other non-interest expenses decreased
Total assets attributable to the Envision Mortgage segment were
41
--------------------------------------------------------------------------------
Comparison of Segment Results for the Six Months Ended
The following table presents a comparison of the results of operations for each segment before incomes taxes and elimination of inter-segment profit, and the changes in those results, for the six months endedJune 30, 2022 and 2021. Envision Bank Envision Mortgage Six Months Ended June 30, Increase (Decrease) Six Months Ended June 30, Increase (Decrease) 2022 2021 Dollars Percent 2022 2021 Dollars Percent (in thousands) Net interest income$ 10,751 $ 8,736 $ 2,015 23.1 % $ 527$ 1,554 $ (1,027 ) -66.1 % Provision (credit) for loan losses 340 (240 ) 580 241.7 - - - - Net interest income after provision (credit) for loan losses 10,411 8,976 1,435 16.0 527 1,554 (1,027 ) (66.1 ) Non-interest income: Customer service fees 720 733 (13 ) (1.8 ) 17 53 (36 ) (67.9 ) Gain on loan origination and sale activities, net (1) - - - - 3,911 18,232 (14,321 ) (78.5 ) Mortgage servicing fees, net (445 ) (189 ) (256 ) (135.4 ) 1,302 1,349 (47 ) (3.5 ) Other 468 309 159 51.5 207 251 (44 ) (17.5 ) Total non-interest income 743 853 (110 ) (12.9 ) 5,437 19,885 (14,448 ) (72.7 ) Non-interest expenses: Salaries and employee benefits 3,766 3,548 218 6.1 5,802 12,199 (6,397 ) (52.4 ) Occupancy and equipment 959 851 108 12.7 (35 ) 514 (549 ) (106.8 ) Other non-interest expenses 3,268 2,349 919 39.1 2,430 3,117 (687 ) (22.0 ) Total non-interest expenses 7,993 6,748 1,245 18.4 8,197 15,830 (7,633 ) (48.2 ) Income (loss) before income taxes and elimination of inter-segment profit$ 3,161 $ 3,081 $ 80 2.6 %$ (2,233 ) $ 5,609 $ (7,842 ) (139.8 )% (1) Before elimination of inter-segment profit.
Envision Bank Segment
The Envision Bank segment had income before income taxes and elimination of inter-segment profit of$3.2 million for the six months endedJune 30, 2022 compared to$3.1 million for the six months endedJune 30, 2021 . The increase in operating results between periods of$80,000 was driven by a number of factors as explained below. Net interest income increased by$2.0 million , or 23.1%, as a result of increases in the balance and yield earned on interest-earning assets and a decline in the cost of funds. The Company recognized a provision for loan losses of$340,000 for the six months endedJune 30, 2022 compared to a credit for loan losses of$240,000 in the prior year period.
Non-interest income decreased between periods by
Non-interest expense increased by$1.2 million in the six months endedJune 30, 2022 as compared to the prior year period, primarily driven by merger expenses of$945,000 as well as normal pay increases for salaries and employee benefits expenses in the six months endedJune 30, 2021 .
Envision Mortgage Segment
The Envision Mortgage segment had a loss before income taxes and elimination of inter-segment profit of$2.2 million for the six months endedJune 30, 2022 compared to income of$5.6 million for the six months endedJune 30, 2021 . The decline of$7.8 million in operating results occurred as a result of a decrease of$14.3 million , or 78.5%, in net gains on loan origination and sale activities. The decline in net gain on loan origination and sale activities, the principal source of revenue for Envision Mortgage, was driven by lower origination levels as mortgage banking activity has decreased substantially from the prior year period as a result of an increase in interest rates. 42 -------------------------------------------------------------------------------- Net interest income decreased$1.0 million , or 66.1%, to$527,000 in the first six months of 2022 compared to$1.6 million in the first six months of 2021. This was primarily due to a decrease in the average balance of loans held for sale in the 2022 period. Mortgage servicing fee income decreased$47,000 between periods largely due to the incurring of sub-servicer expenses during the first six months of 2022, as compared to the prior year period, where loan servicing expenses were recorded in non-interest expense. Non-interest expenses of Envision Mortgage decreased$7.6 million , or 48.2%, to$8.2 million in the second quarter of 2022 from$15.8 million in the second quarter of 2021. This decrease was primarily due to a decrease of$6.4 million , or 52.4%, in salaries and employee benefits, and a decrease of$687,000 , or 22.0% in other non-interest expenses largely related to decreased closed loan production volume. The decrease of$549,000 in occupancy and equipment costs in the first six months of 2022 compared to the prior year period was related to mortgage office closures that occurred throughout 2021, in addition to a$290,000 reversal of a cease use liability during the six months endedJune 30, 2022 .
Asset Quality
Nonperforming Assets. The following table provides information with respect to
our nonperforming assets, including troubled debt restructurings, at the dates
indicated.
June 30, 2022 December 31, 2021
Nonaccrual loans: (In thousands)
Real estate loans:
One- to four-family residential $ 2,300 $ 2,133
Home equity loans and lines of credit 481 491
Total nonaccrual loans 2,781 2,624
Other real estate owned - -
Total nonperforming assets $ 2,781 $ 2,624
Performing troubled debt restructurings 1,207 1,200
Total nonperforming assets and performing troubled
debt restructurings $ 3,988 $ 3,824 Total nonperforming loans to total loans(1) 0.42 % 0.48 % Total nonperforming assets to total assets 0.36 % 0.33 %
Total nonperforming assets and performing
troubled debt restructurings to total assets 0.51 % 0.48 %
(1) Total loans exclude loans held for sale but include net deferred loan costs
and fees.
Interest income that would have been recorded for the six months endedJune 30, 2022 had nonaccruing loans been current according to their original terms amounted to$96,000 . Income related to nonaccrual loans included in interest income for the six months endedJune 30, 2022 amounted to$189,000 .
Classified Loans. The following table shows the aggregate amounts of our regulatory classified loans at the dates indicated.
June 30, 2022 December 31, 2021
(In thousands)
Classified assets:
Substandard $ 5,586 $ 5,783
Doubtful - -
Loss - -
Total classified assets $ 5,586 $ 5,783
Special mention $ 8,908 $ 11,075
Assets that do not expose the Company to risk sufficient to warrant classified
loan status, but which possess potential weaknesses that deserve close
attention, are designated as special mention. As of June 30, 2022 , there were
$8.9 million of assets designated as special mention compared to $11.1 million
at December 31, 2021 .
43
--------------------------------------------------------------------------------Allowance for Loan Losses. The following table sets forth the breakdown for loan losses by loan category at the dates indicated.
June 30, 2022 December 31, 2021
% 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
24.08 % 53.54 % $ 1,093 17.38 % 42.99 %
Commercial 3,224 48.83 % 28.56 % 3,451 54.87 % 35.91 %
Home equity loans and lines of credit 511 7.74 % 9.84 % 462 7.35 % 10.42 %
Construction 727 11.01 % 5.11 % 697 11.08 % 6.18 %
Commercial and industrial loans 475 7.19 % 1.99 % 499 7.93 % 3.14 %
Consumer loans 75 1.15 % 0.96 % 87 1.39 % 1.36 %
Total $ 6,602 100.00 % 100.00 % $ 6,289 100.00 % 100.00 %
The following table sets forth an analysis of the allowance for loan losses for
the periods indicated.
Six Months Ended June 30,
2022 2021
(In thousands)
Allowance at beginning of period $ 6,289 $ 6,784
Provision (credit) for loan losses 340 (240 )
Charge offs:
Consumer (30 ) (26 )
Total charge-offs (30 ) (26 )
Recoveries:
One- to four-family residential 2 3
Commercial and industrial - 2
Consumer 1 -
Total recoveries 3 5
Net charge-offs (27 ) (21 )
Allowance at end of period $ 6,602 $ 6,523
Total loans outstanding(1) $ 664,220 $ 547,183
Average loans outstanding $ 610,262 $ 593,382
Allowance for loan losses as a percent of total loans 0.99 % 1.19 %
outstanding(1)
Net loans charged off as a percent of average loans 0.01 %
0.01 %
outstanding(2)
Allowance for loan losses to nonperforming loans 237.40 %
101.89 %
(1) Total loans exclude loans held for sale but include net deferred loan costs
and fees.
(2) Annualized.
Liquidity and Capital Resources
AtJune 30, 2022 , we had$32.9 million of FHLBB advances outstanding. At that date, we had the ability to borrow up to an additional$100.5 million from the FHLBB,$4.2 million and$2.0 million under available lines of credit from theFHLB Federal Reserve Bank of Boston , respectively, and$12.5 million under an unsecured 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. AtJune 30, 2022 , cash and cash equivalents totaled$14.9 million . 44 -------------------------------------------------------------------------------- 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. Deposits increased$3.2 million , or 0.5%, to$641.4 million atJune 30, 2022 from$638.1 million atDecember 31, 2021 . During this period, interest-bearing brokered deposits, which management considers to be a source of wholesale funding and an alternative to FHLBB advances, decreased$2.8 million . FHLBB advances decreased$17.1 million to$32.9 million atJune 30, 2022 from$50.0 million atDecember 31, 2021 . Interest-bearing brokered deposits, FHLBB advances and listing service deposits make up the Bank's wholesale funding which management targets at a limit of 25% of assets. AtJune 30, 2022 , wholesale funding amounted to$132.7 million , or 17.1% of total assets. AtJune 30, 2022 , we had$85.7 million in loan commitments outstanding, including$10.9 million related to loans to be sold in the secondary mortgage market and to other financial institutions. In addition to commitments to originate loans, we had$71.6 million in unused lines of credit and letters of credit and$13.1 million in undisbursed construction loans to borrowers. 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 fromJune 30, 2022 totaled$101.6 million , including$24.3 million of brokered certificates of deposit. Management expects, based on historical experience, that a substantial portion of the maturing non-brokered certificates of deposit will be renewed.
The Bank is subject to various regulatory capital requirements, including a
risk-based capital measure. At
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