Nature of Operations and Basis of Presentation (Policies)

12 Months Ended

Dec. 31, 2016

Accounting Policies [Abstract]

Nature of Operations

Nature of Operations

The Bank provides a variety of financial services to individuals and small businesses through its six branch offices in Massachusetts.  The Bank’s primary deposit products are checking, savings and term certificate accounts and its primary lending products are residential and commercial mortgage loans.

The Federal Deposit Insurance Corporation (“FDIC”) provides insurance coverage on all deposits up to $250,000 per depositor. As an FDIC insured institution, the Bank is subject to supervision, examination and regulation by the FDIC. Additionally, as a Massachusetts chartered savings bank, the Bank’s depositors are also insured by the Depositors Insurance Fund (“DIF”), a private industry-sponsored insurance company.  The DIF insures bank deposits in excess of the FDIC insurance limits.

Bancorp entered into a merger agreement in September 2015 under which it would acquire First Eastern Bankshares Corporation (“Bankshares”) and its wholly-owned subsidiary First Federal Savings Bank of Boston (“First Federal;” and together with Bankshares “First Eastern”) in a transaction accounted for as a business combination. First Eastern was actively engaged in the mortgage banking business as an originator, seller and servicer of residential mortgage loans. On July 1, 2016, the Company completed the acquisition of First Eastern.  See Note 3 for additional information.

Basis of Presentation

Basis of Presentation

The consolidated financial statements include the accounts of Randolph Bancorp, Inc. and its wholly-owned subsidiary, Randolph Savings Bank (together, the “Company”). The Bank has subsidiaries involved in owning investment securities and real estate properties and a subsidiary which provides loan closing services. All intercompany accounts and transactions have been eliminated in consolidation.

The following significant accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles (“GAAP”) and are used in preparing and presenting these consolidated financial statements.

Use of Estimates

Use of estimates

In preparing consolidated financial statements in conformity with GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the allowance for loan losses, mortgage servicing rights, deferred tax assets and fair value measurements.

Cash and Cash Equivalents

Cash and cash equivalents

Cash equivalents include amounts due from banks, federal funds sold on a daily basis and interest-bearing deposits with original maturities of ninety days or less.

Certificates of Deposit

Certificates of deposit

Certificates of deposit have original maturities ranging from one to five years and are carried at cost.

Fair Value Hierarchy

Fair value hierarchy

The Company groups its assets and liabilities that are measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities.  Valuations are obtained from readily available pricing sources.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.  Level 3 assets and liabilities include those for which the value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of a reporting period, if applicable.

Securities

Securities

All securities are classified as available for sale and are recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income/loss.

Purchase premiums and discounts are recognized in interest income using the level yield method over the terms of the securities.  Anticipated prepayments on mortgage-backed securities are used in applying this method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the weighted average cost method for mutual funds and the specific identification method for other securities.

On a quarterly basis, the Company evaluates all securities with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other than temporary (“OTTI”).

OTTI is required to be recognized (1) if the Company intends to sell the security; (2) if it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, if the present value of expected cash flows is not sufficient to recover the entire amortized cost basis.  Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses.  For all impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the decline in fair value is recognized as OTTI through earnings.  For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income/loss, net of applicable taxes. Because the Company’s assessments are based on available factual information as well as subjective information, the determination as to whether an OTTI exists and, if so, the amount of impairment, is subjective and, therefore, the timing and amount of OTTI constitute material estimates that are subject to significant change.

Federal Home Loan Bank Stock

Federal Home Loan Bank stock

The Bank, as a member of the Federal Home Loan Bank of Boston (“FHLBB”), is required to maintain an investment in capital stock of the FHLBB.  Based on redemption provisions of the FHLBB, the stock has no quoted market value and is carried at cost. The Company periodically evaluates for impairment based on ultimate recovery of its cost basis in the FHLBB stock.

Loans Held for Sale

Loans held for sale

The origination of residential mortgage loans is an integral part of the Company’s business. The Company generally sells its originations of such loans in the secondary market to either government-sponsored enterprises (“GSEs”) or other financial institutions. The servicing of loans sold to GSEs is initially retained while loans sold to other financial institutions are done so on a servicing released basis. From time-to-time, the rights to service loans for the GSEs are sold on a bulk basis.

Gains and losses on the sales of these loans are determined using the specific identification method. In determining the amount of the gain or loss the Company takes into consideration the direct costs of originating the loan. Also included in the net gain on sales of mortgage loans as presented in the accompanying statements of operations are fair value adjustments for mortgage banking derivatives (interest rate lock commitments with borrowers and forward loan sale commitments with investors) and loans held for sale.

Effective July 1, 2016, the Bank elected to utilize the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for its residential mortgage loans being held for sale in the secondary market. Fair value is determined based on either commitments in effect from investors or prevailing market price and include the value of mortgage servicing rights. The Bank elected the fair value option to better match changes in the fair value of the loans with changes in the fair value of the forward loan sale commitments which are used to economically hedge them against changes in interest rates between the time an interest rate lock agreement is entered into with the borrower and the time the loan is sold.

Derivative Financial Instruments

Derivative financial instruments

Derivative loan commitments

Mortgage loan commitments (interest rate locks) qualify as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding.  Loan commitments that are derivatives are recognized at fair value, including the value of mortgage servicing rights on the consolidated balance sheets in other assets and other liabilities with changes in fair value recorded in the net gain on sale of mortgage loans. In estimating fair value, the Company assigns a probability to a loan commitment based on historical experience.  Changes in the fair values of the loan commitments are recognized based on changes in the fair value of the underlying mortgage loan due to interest rate changes, changes in the probability the derivative loan commitment will be exercised, and the passage of time.

Forward loan sale commitments

The Company utilizes both “mandatory delivery” and “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.  Mandatory delivery forward loan sale commitments are accounted for as derivative instruments, and are recognized at fair value on the consolidated balance sheets in other assets and other liabilities with changes in fair value recorded in the net gain on sale of mortgage loans.  Fair values for forward loan sale commitments are based on changes in the fair values of the underlying loans.

Loans

Loans

The Company grants residential real estate, commercial real estate, construction, commercial and consumer loans to customers.  A substantial portion of the loan portfolio is represented by mortgage loans in eastern Massachusetts and Rhode Island.  The ability of the Company’s borrowers to honor their contracts is affected by real estate values and general economic conditions in these markets.

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and net deferred loan origination fees and costs.  Interest income is accrued on the unpaid principal balance.  Certain direct loan origination costs and purchase premiums, net of origination fees, are deferred and recognized in interest income using the level yield method without anticipating prepayments.

Interest is not accrued on loans which are ninety days or more past due, or when, in the judgment of management, the collectability of the principal or interest becomes doubtful.  Past due status is based on contractual terms of the loan.  Interest income previously accrued on such loans is reversed against current period earnings.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Allowance for Loan Losses

Allowance for loan losses

The allowance for loan losses is a valuation allowance for probable incurred credit losses.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  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 collectibility 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).

General component

The general component of the allowance for loan losses covers loans that are collectively evaluated for impairment and is based on historical loss experience adjusted for qualitative factors stratified by loan segments.   Management uses a rolling average of historical losses based on a trailing 48 month time frame appropriate to capture relevant loss data for each loan segment.  This historical loss factor is supplemented by 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.

The qualitative factors are determined based on the various risk characteristics of each loan segment.  Risk characteristics relevant to each portfolio segment are as follows:

Residential one-to-four family real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent. All loans in this segment are collateralized by one-to-four family owner, and non-owner-occupied, residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Second mortgages and home equity lines of credit (HELOC) – Loans in this segment are primarily secured by second-position liens, and the Company may or may not also have a first-position lien.  Regardless of which creditor is in first position, the Company does not originate loans with a combined loan-to-value ratio greater than 80 percent.  All loans in this segment are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment consist of owner-occupied and non-owner-occupied property throughout Massachusetts and Rhode Island.  The underlying cash flows generated by the operating entities of owner-occupied real estate support the associated debt.  Rental cash flows, for which management obtains periodic rent rolls, support the debt associated with non-owner-occupied real estate and can be negatively impacted by increased vacancy rates.

Construction – Loans in this segment primarily include residential real estate development loans for which payment is derived from sale of the property.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial and Industrial – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, would have an effect on the credit quality in this segment.

Consumer – Loans in this segment primarily include personal unsecured loans purchased from a third party lender based on specific credit criteria established by us.  Repayment is dependent on the credit quality of the individual borrower.

Allocated component

The allocated component of the allowance for loan losses relates to loans that are individually classified as impaired.  Residential real estate, commercial and industrial, commercial real estate and construction 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, the Company does not separately identify individual consumer loans or second mortgages and HELOCs for impairment disclosures, unless such loans are 90 days past due or are classified as a troubled debt restructuring.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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.

The Company 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 (“TDR”).  All TDRs are classified as impaired.

Bank-owned Life Insurance

Bank-owned life insurance

Bank-owned life insurance policies are reflected on the consolidated balance sheets at their cash surrender value net of charges or other amounts that are probable at settlement.  Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income in the consolidated statements of operations and are not subject to income taxes, unless such policies are surrendered prior to the death of the insured individuals.

Mortgage Servicing Rights

Mortgage servicing rights

The Company services mortgage loans for others.  Mortgage servicing rights are recognized as separate assets at fair value when rights are acquired through purchase or through sale of financial assets.  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.  Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to amortized cost.  Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms.  Fair value is based on a valuation model that calculates the present value of estimated future net servicing income, using market-based assumptions.  Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.  Changes in the valuation allowance, if any, are reported in mortgage servicing income.

Premises and Equipment

Premises and equipment

Land is carried at cost.  Buildings, equipment and leasehold improvements are stated at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter.  Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.

Premises and equipment held for sale are stated at the lower of amortized cost or fair value less costs to sell.

Transfers of Financial Assets

Transfers of financial assets

Transfers of financial assets are accounted for as sales when control over the assets has been surrendered.  Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

During the normal course of business, the Company may transfer a portion of a financial asset, for example, a participation loan.  In order to be eligible for sales treatment, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties, and no loan holder can have the right to pledge or exchange the entire loan.

In certain cases, the Company may have an obligation to repurchase mortgage loans sold to third parties and to refund fees to the purchaser if a payment default or prepayment occurs, in each case within a prescribed time period not exceeding four months after the sale date, or in the case of a violation of its representations and warranties under the provisions of its loan sale agreements. The Company evaluates its obligations under these provisions and recognizes a liability for the fair value of its recourse obligations. At December 31, 2016 and 2015, the Company determined that its obligations in connection with the recourse provisions of its loan sale agreements were insignificant.

Foreclosed Assets

Foreclosed assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less costs to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell.  Revenue and expenses from operations, changes in the valuation allowance and any direct write-downs are included in foreclosed real estate expense.

Defined Benefit Pension and Supplemental Retirement Plans

Defined benefit pension and supplemental retirement plans

The Company accounts for its defined benefit pension (terminated in 2015) and supplemental retirement plans using an actuarial model that allocates pension costs over the service period of participants in the plans.  The Company accounts for the over-funded or under-funded status of each plan as an asset or liability in its consolidated balance sheets and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income or loss.

Employee Stock Ownership Plan

Employee Stock Ownership Plan

Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is computed based on the number of shares allocated to participants during the period multiplied by the average fair market value of the Company’s shares.  This expense is recognized ratably throughout the year based on the expected allocation of shares for the year.  Unearned compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity. The difference between the average fair market value and cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.

Advertising Costs

Advertising costs

Advertising costs are expensed as incurred.

Income Taxes

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 basis 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, that some or all of the deferred tax assets will not be realized.

A tax position is recognized as a benefit if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

The Company does not have any uncertain tax positions at December 31, 2016 and 2015 which require accrual or disclosure.  The Company records interest and penalties as part of income tax expense.  No interest or penalties were recorded for the years ended December 31, 2016 and 2015.

Comprehensive Income (Loss)

Comprehensive income (loss)

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

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

	December 31,			December 31,
	2016			2015
	(In thousands)
Securities available for sale:
Net unrealized (loss) gain	$	(698	)	$	886
Tax effect		(423	)		(423	)
Net-of-tax amount		(1,121	)		463
Supplemental retirement plan
Unrecognized net actuarial loss		(679	)		(743	)
Unrecognized net prior service credit		573			598
		(106	)		(145	)
Tax effect		(57	)		(57	)
Net-of-tax amount		(163	)		(202	)
Accumulated other comprehensive income (loss)	$	(1,284	)	$	261

As the Company completed the termination of its defined benefit plan in 2015, the unrecognized net actuarial loss of $344,000 at December 31, 2014 was expensed in 2015.  In 2017, the Company expects to recognize $89,000 in prior service credits and $38,000 in net actuarial losses as a component of net periodic pension cost for the supplemental retirement plan.  These amounts are included in accumulated other comprehensive income at December 31, 2016.  Prior service credits and net actuarial gains and losses are amortized to periodic pension cost over varying periods based on the plan participants to whom they relate.

Segment Reporting

Segment reporting

While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a company-wide basis. Discrete financial information is not available other than on a company-wide basis.  Therefore, Company management has determined there to be a single segment for financial reporting purposes.

Earnings Per Share

Earnings Per Share

Basic earnings per share represents income available to common stockholders divided by the weighted average of common shares outstanding during the period. Unallocated ESOP shares are not considered outstanding in computing earnings per share. Earnings per share is not presented herein for the year ended December 31, 2016 as common stock was not outstanding for the entire year. At December 31, 2016, there were no common stock equivalents outstanding. See Note 19 for earnings (loss) per share for the quarters ended September 30, 2016 and December 31, 2016.

Business Combinations

Business combinations

We account for business combinations under the acquisition method of accounting. The application of this method of accounting requires the use of significant estimates and assumptions in the determination of the fair value of tangible and identified intangible assets acquired and liabilities assumed in order to properly allocate purchase price consideration between assets from those that are recorded as goodwill. Our estimates of the fair values of assets acquired and liabilities assumed are based upon assumptions that we believe to be reasonable, and whenever necessary, include assistance from independent third-party appraisal and valuation firms. Costs incurred to consummate a business combination are expensed as incurred.

Recent Accounting Pronouncements

Recent accounting pronouncements

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

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

Reclassifications

Reclassifications

Certain reclassifications have been made to the 2015 consolidated financial statements in order to conform to the presentations used in the 2016 consolidated financial statements.  Such reclassifications had no impact on the net loss as presented in such financial statements.