Attached files
file | filename |
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EX-10.2 - EX-10.2 - Coastway Bancorp, Inc. | a16-6629_1ex10d2.htm |
EX-31.2 - EX-31.2 - Coastway Bancorp, Inc. | a16-6629_1ex31d2.htm |
EX-31.1 - EX-31.1 - Coastway Bancorp, Inc. | a16-6629_1ex31d1.htm |
EX-32 - EX-32 - Coastway Bancorp, Inc. | a16-6629_1ex32.htm |
EX-10.1 - EX-10.1 - Coastway Bancorp, Inc. | a16-6629_1ex10d1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
or
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
For the quarterly period ended March 31, 2016
Commission File Number: 001-36263
Coastway Bancorp, Inc.
(Exact name of registrant as specified in its charter)
Maryland |
|
46-4149994 |
(State or other jurisdiction of |
|
(I.R.S. Employer Identification No.) |
incorporation or organization) |
|
|
|
|
|
One Coastway Blvd, Warwick, Rhode Island |
|
02886 |
(Address of principal executive offices) |
|
(Zip code) |
(401) 330-1600
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files) x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition for large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act (Check one):
Large accelerated filer o |
|
Accelerated filer o |
|
|
|
Non-accelerated filer o |
|
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of April 30, 2016 there were 4,773,379 shares of the issuer's common stock outstanding- par value $0.01 per share
COASTWAY BANCORP, INC. and SUBSIDIARY
COASTWAY BANCORP, INC. and SUBSIDIARY
(Unaudited)
(Dollars in thousands except per share amounts) |
|
March 31, |
|
December 31, |
| ||
Assets |
|
|
|
|
| ||
Cash and cash equivalents: |
|
|
|
|
| ||
Cash and due from banks |
|
$ |
3,007 |
|
$ |
3,041 |
|
Interest-earning deposits |
|
10,012 |
|
15,281 |
| ||
Total cash and cash equivalents |
|
13,019 |
|
18,322 |
| ||
Certificates of deposit |
|
6,084 |
|
6,074 |
| ||
Federal Home Loan Bank stock, at cost |
|
5,500 |
|
5,283 |
| ||
Loans, net of allowance for loan losses of $2,283 and $2,194, respectively |
|
491,103 |
|
467,023 |
| ||
Loans held for sale |
|
12,677 |
|
18,952 |
| ||
Premises and equipment, net |
|
31,478 |
|
31,407 |
| ||
Accrued interest receivable |
|
1,530 |
|
1,414 |
| ||
Real estate held for sale |
|
|
|
3,305 |
| ||
Foreclosed real estate |
|
710 |
|
710 |
| ||
Bank-owned life insurance |
|
4,358 |
|
4,326 |
| ||
Net deferred tax asset |
|
308 |
|
815 |
| ||
Other assets |
|
6,237 |
|
7,506 |
| ||
Total assets |
|
$ |
573,004 |
|
$ |
565,137 |
|
|
|
|
|
|
| ||
Liabilities and Stockholders Equity |
|
|
|
|
| ||
Deposits: |
|
|
|
|
| ||
Interest-bearing |
|
$ |
282,321 |
|
$ |
277,559 |
|
Non-interest-bearing |
|
93,657 |
|
95,960 |
| ||
Total deposits |
|
375,978 |
|
373,519 |
| ||
Borrowed funds |
|
121,000 |
|
115,500 |
| ||
Accrued expenses and other liabilities |
|
5,025 |
|
5,196 |
| ||
Total liabilities |
|
502,003 |
|
494,215 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies (Note 7) |
|
|
|
|
| ||
Stockholders equity: |
|
|
|
|
| ||
Preferred stock, $0.01 par value; 20,000,000 shares authorized, none issued or outstanding |
|
|
|
|
| ||
Common stock, $0.01 par value; 50,000,000 shares authorized; and 4,773,379 and 4,822,279 issued and outstanding at March 31, 2016 and December 31, 2015, respectively |
|
48 |
|
48 |
| ||
Additional paid-in capital |
|
45,494 |
|
46,094 |
| ||
Retained earnings |
|
29,336 |
|
28,697 |
| ||
Unearned compensation - Employee Stock Ownership Plan (ESOP) |
|
(3,603 |
) |
(3,643 |
) | ||
Accumulated other comprehensive loss |
|
(274 |
) |
(274 |
) | ||
Total stockholders equity |
|
71,001 |
|
70,922 |
| ||
|
|
$ |
573,004 |
|
$ |
565,137 |
|
The accompanying notes are an integral part of the consolidated unaudited financial statements.
COASTWAY BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Net Income and Comprehensive Income
(Unaudited)
|
|
Three months ended March 31, |
| ||||
(Dollars in thousands, except per share amounts) |
|
2016 |
|
2015 |
| ||
Interest income: |
|
|
|
|
| ||
Interest and fees on loans |
|
$ |
4,950 |
|
$ |
4,092 |
|
Other interest income |
|
73 |
|
37 |
| ||
Total interest income |
|
5,023 |
|
4,129 |
| ||
Interest expense: |
|
|
|
|
| ||
Interest on deposits |
|
486 |
|
545 |
| ||
Interest on borrowed funds |
|
144 |
|
35 |
| ||
Total interest expense |
|
630 |
|
580 |
| ||
Net interest income |
|
4,393 |
|
3,549 |
| ||
Provision for loan losses |
|
109 |
|
99 |
| ||
Net interest income after provision for loan losses |
|
4,284 |
|
3,450 |
| ||
Non-interest income: |
|
|
|
|
| ||
Customer service fees |
|
770 |
|
737 |
| ||
Net gain on sales of loans, and other mortgage banking income |
|
884 |
|
1,061 |
| ||
Bank-owned life insurance income |
|
32 |
|
34 |
| ||
Other income |
|
46 |
|
41 |
| ||
Total non-interest income |
|
1,732 |
|
1,873 |
| ||
Non-interest expenses: |
|
|
|
|
| ||
Salary and employee benefits |
|
2,711 |
|
2,382 |
| ||
Occupancy and equipment |
|
816 |
|
915 |
| ||
Data processing |
|
400 |
|
434 |
| ||
Professional fees |
|
199 |
|
181 |
| ||
Deposit servicing |
|
209 |
|
180 |
| ||
Foreclosed real estate |
|
16 |
|
80 |
| ||
FDIC insurance assessment |
|
97 |
|
93 |
| ||
Advertising |
|
47 |
|
58 |
| ||
Other general and administrative |
|
456 |
|
385 |
| ||
Total non-interest expenses |
|
4,951 |
|
4,708 |
| ||
Income before income taxes |
|
1,065 |
|
615 |
| ||
Income tax expense |
|
426 |
|
242 |
| ||
Net income and comprehensive income |
|
$ |
639 |
|
$ |
373 |
|
|
|
|
|
|
| ||
Weighted average common shares outstanding basic |
|
4,439,846 |
|
4,570,390 |
| ||
Weighted average common shares outstanding diluted |
|
4,440,276 |
|
4,570,390 |
| ||
|
|
|
|
|
| ||
Per share information: |
|
|
|
|
| ||
Basic earnings per common share |
|
$ |
0.14 |
|
$ |
0.08 |
|
Diluted earnings per common share |
|
$ |
0.14 |
|
$ |
0.08 |
|
The accompanying notes are an integral part of the consolidated unaudited financial statements.
COASTWAY BANCORP, INC. and SUBSIDIARY
Consolidated Statement of Changes in Stockholders Equity
Three months ended March 31, 2016
(Unaudited)
|
|
Common Stock |
|
Additional |
|
Retained |
|
Unearned |
|
Accumulated |
|
Total |
| ||||||||
|
|
Shares |
|
Amount |
|
Capital |
|
Earnings |
|
ESOP |
|
Loss |
|
Equity |
| ||||||
|
|
(Dollars in thousands) |
| ||||||||||||||||||
Balance at December 31, 2015 |
|
4,822,279 |
|
$ |
48 |
|
$ |
46,094 |
|
$ |
28,697 |
|
$ |
(3,643 |
) |
$ |
(274 |
) |
$ |
70,922 |
|
Net income and comprehensive income |
|
|
|
|
|
|
|
639 |
|
|
|
|
|
639 |
| ||||||
Common stock repurchased |
|
(48,900 |
) |
|
|
(628 |
) |
|
|
|
|
|
|
(628 |
) | ||||||
Stock-based compensation |
|
|
|
|
|
18 |
|
|
|
|
|
|
|
18 |
| ||||||
ESOP shares committed to be allocated (3,959 shares) |
|
|
|
|
|
10 |
|
|
|
40 |
|
|
|
50 |
| ||||||
Balance at March 31, 2016 |
|
4,773,379 |
|
$ |
48 |
|
$ |
45,494 |
|
$ |
29,336 |
|
$ |
(3,603 |
) |
$ |
(274 |
) |
$ |
71,001 |
|
The accompanying notes are an integral part of the consolidated unaudited financial statements.
COASTWAY BANCORP, INC. and SUBSIDIARY
Consolidated Statements of Cash Flows
(Unaudited)
|
|
Three months ended March 31, |
| ||||
(Dollars in thousands) |
|
2016 |
|
2015 |
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
|
$ |
639 |
|
373 |
| |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Provision for loan losses |
|
109 |
|
99 |
| ||
Loans originated for sale |
|
(33,905 |
) |
(37,710 |
) | ||
Loans sold |
|
40,978 |
|
37,671 |
| ||
Gain on sale of mortgage loans, net |
|
(798 |
) |
(549 |
) | ||
Gain on sale of portfolio loans, net |
|
|
|
(328 |
) | ||
Amortization of deferred loan costs |
|
226 |
|
183 |
| ||
Loss on sale of real estate held for sale |
|
11 |
|
|
| ||
Loss on foreclosed real estate |
|
|
|
60 |
| ||
Depreciation and amortization expense |
|
320 |
|
316 |
| ||
Income from Bank-owned life insurance |
|
(32 |
) |
(34 |
) | ||
Deferred income tax expense (benefit) |
|
507 |
|
83 |
| ||
ESOP expense |
|
50 |
|
44 |
| ||
Stock-based compensation |
|
18 |
|
|
| ||
Net change in: |
|
|
|
|
| ||
Accrued interest receivable |
|
(116 |
) |
|
| ||
Other, net |
|
1,098 |
|
2,037 |
| ||
Net cash provided by operating activities |
|
9,105 |
|
2,245 |
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Purchase of and increases in certificates of deposit |
|
(10 |
) |
(5 |
) | ||
Purchase of FHLB stock |
|
(317 |
) |
|
| ||
Redemption of FHLB stock |
|
100 |
|
|
| ||
Loan originations, net of principal payments |
|
(16,678 |
) |
(6,015 |
) | ||
Purchase of loans from third party originations |
|
(7,737 |
) |
(5,764 |
) | ||
Proceeds from portfolio loans sold |
|
|
|
4,492 |
| ||
Proceeds from the sale of real estate held for sale |
|
3,294 |
|
|
| ||
Proceeds from sale of foreclosed real estate |
|
|
|
354 |
| ||
Purchases of premises and equipment |
|
(391 |
) |
(355 |
) | ||
Net cash used by investing activities |
|
(21,739 |
) |
(7,293 |
) | ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net increase in deposits |
|
2,459 |
|
15,648 |
| ||
Net change in short-term borrowed funds |
|
5,500 |
|
(9,500 |
) | ||
Repayments of long-term borrowed funds |
|
|
|
(1,300 |
) | ||
Repurchase of common stock |
|
(628 |
) |
(97 |
) | ||
Net cash provided (used) by financing activities |
|
7,331 |
|
4,751 |
| ||
|
|
|
|
|
| ||
Net change in cash and cash equivalents |
|
(5,303 |
) |
(297 |
) | ||
Cash and cash equivalents at beginning of period |
|
18,322 |
|
14,582 |
| ||
Cash and cash equivalents at end of period |
|
$ |
13,019 |
|
$ |
14,285 |
|
|
|
|
|
|
| ||
Supplemental cash flow information: |
|
|
|
|
| ||
Interest paid on deposits |
|
$ |
485 |
|
$ |
544 |
|
Interest paid on borrowed funds |
|
140 |
|
40 |
| ||
Income taxes paid |
|
475 |
|
100 |
|
The accompanying notes are an integral part of the consolidated unaudited financial statements.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements
(1) Basis of Presentation and Consolidation
General information
Coastway Bancorp, Inc., a Maryland chartered stock corporation (Company or Corporation), was formed to serve as the holding company for Coastway Community Bank. Coastway Community Bank (the Bank) is a Rhode Island-chartered savings bank. The Bank provides a variety of financial services to individuals and small businesses throughout Rhode Island. Its primary deposit products are savings, demand, money market and term certificate accounts and its primary lending products are one-to four-family residential mortgage loans, home equity loans and lines of credit, commercial real estate and SBA loans. .
Basis of Presentation
The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany transactions have been eliminated.
The unaudited consolidated financial statements of the Corporation presented herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP) for interim financial information and pursuant to the rules of the SEC for quarterly reports on Form 10-Q and Article 8 of Regulation S-X and do not include all of the information and note disclosures required by GAAP for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The results of operations for interim periods are not necessarily indicative of results for the full year. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2015, included in the Corporations annual report on Form 10-K.
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the 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 determination of the allowance for loan losses, the valuation of deferred tax assets.
Stock-Based Compensation
Compensation cost is recognized for stock options and restricted stock awards issued to employees based on the fair value of these awards at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporations stock at the grant date is utilized for restricted stock awards.
Compensatoin cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.
Recent Accounting Pronouncements
As an emerging growth company as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Corporation has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As of March 31, 2016, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The ASU requires equity instruments (except those accounted for under the equity method of accounting or that result in consolidations of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure an equity investment that does not have a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions. For public business entities, the standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. For all other entities, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal periods after December 15, 2019. We do not expect a significant impact upon adoption on January 1, 2019.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
In February 2016, the FASB issued ASU 2016-02, which will require organizations that lease assets referred to as lessees to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet the new ASU will require both types of leases to be recognized on the balance sheet.
The accounting by organizations that own the assets leased by the lessee also known as lessor accounting will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, the ASU on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating the impact of adoption of this standard.
On March 30, 2016, the Financial Accounting Standards Board (FASB) issued an ASU intended to improve the accounting for employee share-based payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU, Compensation Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, simplifies several aspects of the accounting for share-based payment award transactions, including:
· The income tax consequences
· Classification of awards as either equity or liabilities, and
· Classification on the statement of cash flows.
For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period. We are currently evaluating the impact adoption of this standard but do not anticipate a material impact as share-based awards were first granted during the first quarter of 2016.
(2) Certificates of Deposit
At March 31, 2016, a certificate of deposit totaling $3.0 million with an interest rate of 0.65% matures in December 2016 and a $3.1 million certificate of deposit with an interest rate of 0.65% matured in April 2016, and was not renewed. Certificates of deposit are carried at cost which approximates fair value.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
(3) Loans
Major classifications of loans at the dates indicated, are as follows:
(Dollars in thousands) |
|
March 31, |
|
December 31, |
| ||
Residential real estate mortgage loans: |
|
|
|
|
| ||
1-4 family |
|
$ |
224,591 |
|
$ |
208,777 |
|
Home equity loans and lines of credit |
|
76,913 |
|
76,881 |
| ||
Total residential real estate mortgage loans |
|
301,504 |
|
285,658 |
| ||
|
|
|
|
|
| ||
Commercial: |
|
|
|
|
| ||
Commercial real estate |
|
129,226 |
|
125,782 |
| ||
Commercial business |
|
11,662 |
|
8,918 |
| ||
Commercial construction |
|
7,053 |
|
4,729 |
| ||
SBA |
|
38,978 |
|
39,217 |
| ||
Total commercial loans |
|
186,919 |
|
178,646 |
| ||
Consumer |
|
1,176 |
|
1,252 |
| ||
Total loans |
|
489,599 |
|
465,556 |
| ||
|
|
|
|
|
| ||
Allowance for loan losses |
|
(2,283 |
) |
(2,194 |
) | ||
Net deferred loan costs |
|
3,787 |
|
3,661 |
| ||
Loans, net |
|
$ |
491,103 |
|
$ |
467,023 |
|
Residential one- to four-family loans of $224.6 million at March 31, 2016 and $208.8 million at December 31, 2015 include purchased loans which were individually underwritten based on the Banks credit standards, totaling $70.1 million and $64.1 million, respectively. During the three months ended March 31, 2016 and 2015, the Bank purchased $7.6 million and $5.7 million of loans at a cost of $7.7 million and $5.8 million, respectively. The loans purchased from third parties are located in New England, primarily Massachusetts.
Loan Segments
One-to four-family residential real estate and home equity Loans in these segments are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The Bank generally has first liens on one-to four-family residential real estate loans and first or second liens on property securing home equity loans and equity lines-of-credit. Jumbo one- to four-family loans generally have maximum loan-to-value ratios of 95%. Loan-to-value ratios of one- to four-family loans without private mortgage insurance may be made with loan-to-value ratios up to 95%. Home equity loans and lines of credit may be underwritten with a loan-to-value ratio up to 80%. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in these segments.
Commercial Commercial loan segments include commercial real estate, commercial and industrial loans for businesses and construction financing for business/properties located principally in Rhode Island. For commercial real estate loans, the underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Non-real estate commercial loans are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. Commercial construction generally represent loans to finance construction of retail and office space. Commercial loans also include loans made under the SBA 504 program which is an economic development program that finances the expansion of small businesses. The Bank generally provides 50% of the projected costs, and the loan is secured by a first lien on the commercial property. The SBA does not provide a guarantee on loans made under the SBA 504 program. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
SBA Loans in this segment include commercial loans underwritten using SBA guidelines for the SBAs 7(a) program and include both guaranteed and unguaranteed portions of the same loans. Currently, under the SBA 7(a) program, loans may qualify for guarantees up to 85% of principal and accrued interest up to a maximum SBA guarantee of $3.75 million per borrower and related entities. The Bank does not treat the SBA guarantee as a substitute for a borrower meeting reasonable credit standards. SBA guarantees are generally sought on loans that exhibit minimum capital levels, a short time in business, lower collateral coverage or maximum loan terms beyond the Banks normal underwriting criteria. For a number of SBA loans, the Bank has sold portions of certain loans and retains the unguaranteed portion while continuing to service the entire loan. The guaranteed portion of SBA loans in the Banks portfolio is not allocated a general reserve because the Bank has not experienced losses on such loans and management expects the guarantees will be effective, if necessary. Guaranteed portions of SBA loans totaled $24.6 million and $24.8 million at March 31, 2016 and December 31, 2015.
Consumer This segment includes unsecured and vehicle loans and repayment is dependent on the credit quality of the individual borrower. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.
Allowance for Loan Losses
Allowance for Loan Loss Methodology
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 when management believes the uncollectibility of a loan balance is confirmed. For impaired loans that are deemed collateral dependent, the recorded balance of the loan is reduced by a charge-off to fair value of the collateral net of estimated selling costs.
The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general and specific components as described below.
The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segments. Management uses a ten year historical loss period to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; charge-off trends over the past three year period; weighted average risk ratings; loan concentrations; managements assessment of internal factors; and managements assessment of external factors such as interest rates, real estate markets and local and national economic factors. There were no changes in the Banks policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended March 31, 2016 and the year ended December 31, 2015.
The Corporation evaluates the need for a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customers personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the borrowers effort to cure the delinquency. In addition, for loans secured by real estate, the Corporation considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
Credit Quality Indicators
Commercial and SBA loans are risk rated based on key factors such as management ability, financial condition, debt repayment ability, collateral, industry conditions and loan structure. Risk ratings 1 through 5 are considered pass rated, risk rating 5.5 is considered watch list, risk rating 6 is considered special mention, while risk ratings 7, 8 and 9 are considered classified ratings.
Risk Ratings 1-5: Loans in this category are pass rated loans with low to average risk.
Risk rating 5.5 Watch List: loans in this category exhibit the characteristics associated with 5 risk-rated loans, but possess negative factors that warrant increased oversight yet do not warrant a negative risk rating. Factors may include short-term negative operating trends, temporary liquidity shortfalls, modest delinquency, missing or incomplete financial information, or negative balance sheet trends.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Risk Rating 6 Special Mention: these loans have potential weaknesses and require managements close attention. If these weaknesses are not addressed, they may weaken the prospects for repayment at a future date. Special mention assets do not expose the institution to sufficient risk to warrant a classified rating.
Risk Rating 7 Substandard: loans in this category are inadequately protected by the current financial condition and repayment ability of the borrower or pledged collateral, if any. These assets have a well-defined weakness(es) that jeopardizes the repayment of the debt in full, and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Risk Rating 8 Doubtful: loans have all the weaknesses of those classified substandard. In addition, it is highly unlikely that a doubtful asset can be collected or liquidated in full. The possibility of loss is extremely high. However, because of certain important and reasonably specific pending factors, which may work to strengthen the asset, its classification as a loss is deferred until the assets status can be better determined.
Risk Rating 9 Loss: loans classified as loss are considered uncollectible and of such little value that they are no longer considered bankable. This classification does not mean that the asset has no recovery or salvage value. However, it is not practical or desirable to defer writing off the asset even though partial recovery may occur in the future.
On an annual basis, or more often if needed, the Bank formally reviews the ratings on commercial and SBA loans over $250,000. On an annual basis, the Bank engages an independent third-party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review of its control process related to loan ratings. Credit quality for residential real estate mortgage and consumer loans is determined by monitoring loan payment history and on-going communications with borrowers, and are not risk graded. Non-performing homogenous loans are individually evaluated for impairment.
The following table presents the credit risk profile by internally assigned risk rating category at the dates indicated:
|
|
March 31, 2016 |
| |||||||||||||
|
|
Commercial |
|
Commercial |
|
Commercial |
|
|
|
|
| |||||
(Dollars in thousands) |
|
Real Estate |
|
Business |
|
Construction |
|
SBA |
|
Total |
| |||||
Loans rated 1-5 |
|
$ |
121,942 |
|
$ |
11,574 |
|
$ |
7,053 |
|
$ |
33,955 |
|
$ |
174,524 |
|
Loans rated 5.5 |
|
5,549 |
|
88 |
|
|
|
1,348 |
|
6,985 |
| |||||
Loans rated 6 |
|
74 |
|
|
|
|
|
1,647 |
|
1,721 |
| |||||
Loans rated 7 |
|
1,661 |
|
|
|
|
|
2,028 |
|
3,689 |
| |||||
Loans rated 8 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
$ |
129,226 |
|
$ |
11,662 |
|
$ |
7,053 |
|
$ |
38,978 |
|
$ |
186,919 |
|
|
|
December 31, 2015 |
| |||||||||||||
|
|
Commercial |
|
Commercial |
|
Commercial |
|
|
|
|
| |||||
(Dollars in thousands) |
|
Real Estate |
|
Business |
|
Construction |
|
SBA |
|
Total |
| |||||
Loans rated 1-5 |
|
$ |
122,466 |
|
$ |
8,826 |
|
$ |
4,729 |
|
$ |
34,182 |
|
$ |
170,203 |
|
Loans rated 5.5 |
|
1,563 |
|
92 |
|
|
|
1,799 |
|
3,454 |
| |||||
Loans rated 6 |
|
75 |
|
|
|
|
|
1,250 |
|
1,325 |
| |||||
Loans rated 7 |
|
1,678 |
|
|
|
|
|
1,986 |
|
3,664 |
| |||||
Loans rated 8 |
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
$ |
125,782 |
|
$ |
8,918 |
|
$ |
4,729 |
|
$ |
39,217 |
|
$ |
178,646 |
|
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Past Due and Non-Accrual Loans
The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is both well secured and in the process of collection. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on non-accrual, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table presents past due loans as of the dates indicated.
March 31, 2016
(Dollars in thousands) |
|
30-59 Days |
|
60-89 Days |
|
90 Days |
|
Total |
|
Past Due > 90 |
|
Loans on |
| ||||||
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential 1-4 family |
|
$ |
397 |
|
$ |
|
|
$ |
1,107 |
|
$ |
1,504 |
|
$ |
|
|
$ |
3,779 |
|
Home equity loans and lines of credit |
|
912 |
|
11 |
|
247 |
|
1,170 |
|
|
|
783 |
| ||||||
Commercial real estate |
|
|
|
|
|
130 |
|
130 |
|
|
|
235 |
| ||||||
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial construction |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
SBA |
|
146 |
|
|
|
525 |
|
671 |
|
|
|
532 |
| ||||||
Consumer |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total gross loans |
|
$ |
1,455 |
|
$ |
11 |
|
$ |
2,009 |
|
$ |
3,475 |
|
$ |
|
|
$ |
5,329 |
|
December 31, 2015
(Dollars in thousands) |
|
30-59 Days |
|
60-89 Days |
|
90 Days |
|
Total |
|
Past Due > 90 |
|
Loans on |
| ||||||
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Residential 1-4 family |
|
$ |
1,156 |
|
$ |
642 |
|
$ |
370 |
|
$ |
2,168 |
|
$ |
|
|
$ |
3,068 |
|
Home equity loans and lines of credit |
|
1,250 |
|
239 |
|
30 |
|
1,519 |
|
|
|
466 |
| ||||||
Commercial real estate |
|
|
|
|
|
239 |
|
239 |
|
|
|
239 |
| ||||||
Commercial business |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Commercial construction |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
SBA |
|
|
|
|
|
467 |
|
467 |
|
|
|
467 |
| ||||||
Consumer |
|
123 |
|
|
|
|
|
123 |
|
|
|
|
| ||||||
Total gross loans |
|
$ |
2,529 |
|
$ |
881 |
|
$ |
1,106 |
|
$ |
4,516 |
|
$ |
|
|
$ |
4,240 |
|
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Impaired Loans
A loan is considered impaired when, based on current information and events, it is probable that the Bank 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 borrowers prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Bank periodically may agree to modify the contractual terms of loans, such as a reduction in interest rate of the loan for some period of time, an extension of the maturity date or an extension of time to make payments with the delinquent payments added to the end of the loan term. 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 initially classified as impaired. Loans on non-accrual status at the date of modification are initially classified as non-accruing troubled debt restructurings. TDRs may be returned to accrual status after a period of satisfactory payment performance according to the terms of the restructuring, generally six months of current payments.
The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated as of the dates indicated.
March 31, 2016
(Dollars in thousands) |
|
Unpaid |
|
Total recorded |
|
Recorded |
|
Recorded |
|
Related |
| |||||
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential 1-4 family |
|
$ |
5,192 |
|
$ |
4,925 |
|
$ |
4,098 |
|
$ |
827 |
|
$ |
23 |
|
Home equity loans & lines of credit |
|
1,394 |
|
1,369 |
|
1,128 |
|
241 |
|
15 |
| |||||
Commercial real estate |
|
394 |
|
394 |
|
394 |
|
|
|
|
| |||||
SBA |
|
2,072 |
|
2,053 |
|
1,987 |
|
66 |
|
1 |
| |||||
Consumer |
|
14 |
|
14 |
|
|
|
14 |
|
3 |
| |||||
Total |
|
$ |
9,066 |
|
$ |
8,755 |
|
$ |
7,607 |
|
$ |
1,148 |
|
$ |
42 |
|
December 31, 2015
(Dollars in thousands) |
|
Unpaid |
|
Total recorded |
|
Recorded |
|
Recorded |
|
Related |
| |||||
Residential real estate: |
|
|
|
|
|
|
|
|
|
|
| |||||
Residential 1-4 family |
|
$ |
4,458 |
|
$ |
4,224 |
|
$ |
3,287 |
|
$ |
937 |
|
$ |
43 |
|
Home equity loans & lines of credit |
|
1,035 |
|
1,055 |
|
834 |
|
221 |
|
17 |
| |||||
Commercial real estate |
|
398 |
|
398 |
|
398 |
|
|
|
|
| |||||
SBA |
|
2,032 |
|
2,013 |
|
2,013 |
|
|
|
|
| |||||
Consumer |
|
14 |
|
14 |
|
|
|
14 |
|
3 |
| |||||
Total |
|
$ |
7,937 |
|
$ |
7,704 |
|
$ |
6,532 |
|
$ |
1,172 |
|
$ |
63 |
|
Of the $2.1 million and $2.0 million of impaired SBA loans at March 31, 2016 and at December 31, 2015, respectively, guaranteed portions of such loans amounted to $1.7 million and $1.7 million, respectively.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
The following table presents the average recorded investment in impaired loans and the related interest recognized during the periods indicated.
|
|
Three Months Ended |
|
Three Months Ended |
| ||||||||
(Dollars in thousands) |
|
Average recorded |
|
Interest income |
|
Average recorded |
|
Interest income |
| ||||
Residential 1-4 family |
|
$ |
4,384 |
|
$ |
36 |
|
$ |
6,428 |
|
$ |
45 |
|
Home equity loans & lines of credit |
|
1,234 |
|
13 |
|
850 |
|
3 |
| ||||
Commercial real estate |
|
397 |
|
3 |
|
60 |
|
|
| ||||
SBA |
|
2,017 |
|
39 |
|
1,740 |
|
35 |
| ||||
Consumer |
|
14 |
|
|
|
22 |
|
|
| ||||
Total |
|
$ |
8,046 |
|
$ |
91 |
|
$ |
9,100 |
|
$ |
83 |
|
Troubled Debt Restructurings
Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan, the Bank grants a concession on the terms, that would not otherwise be considered, as a result of financial difficulties of the borrower. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment or reduction of payments, principal or interest, which materially alters the Banks position or significantly extends the notes maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loans origination. All loans that are modified are reviewed by the Bank to identify if a TDR has occurred. TDRs are included in the impaired loan category and as such, these loans are individually evaluated for impairment and a specific reserve is assigned for the amount of the estimated credit loss. Total TDR loans, included in impaired loans as of March 31, 2016 and December 31, 2015 were $6.5 million and $6.6 million, respectively. No additional funds are committed to be advanced in connection with TDR loans. TDR loans on accrual status amounted to $3.4 million and $3.5 million at March 31, 2016 and December 31, 2015, respectively.
Troubled debt restructuring agreements entered into during the period indicated are as follows:
|
|
Three Months Ended March 31, 2016 |
| ||||||
(Dollars in thousands) |
|
Number of |
|
Pre-modification |
|
Post-modification |
| ||
Home equity |
|
1 |
|
$ |
10 |
|
$ |
10 |
|
Total |
|
1 |
|
$ |
10 |
|
$ |
10 |
|
The troubled debt restructurings described above had no impact to the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2016.
Troubled debt restructurings that subsequently defaulted within 12 months of restructuring are as follows during the period indicated:
|
|
Three Months Ended March 31, 2016 |
| |||
(Dollars in thousands) |
|
Number of TDRs |
|
Post-modification |
| |
Residential 1-4 family |
|
3 |
|
$ |
669 |
|
Total |
|
3 |
|
$ |
669 |
|
The troubled debt restructuring agreements described above resulted in a $20,000 charge-off during the three months ended March 31, 2016.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Troubled debt restructuring agreements entered into during the period indicated are as follows:
|
|
Three Months Ended March 31, 2015 |
| ||||||
(Dollars in thousands) |
|
Number of |
|
Pre-modification |
|
Post-modification |
| ||
Residential 1-4 family |
|
1 |
|
$ |
289 |
|
$ |
289 |
|
Home equity |
|
3 |
|
113 |
|
113 |
| ||
Commercial real estate |
|
1 |
|
119 |
|
119 |
| ||
Total |
|
5 |
|
$ |
521 |
|
$ |
521 |
|
The troubled debt restructurings described above had a $4,000 impact to the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2015.
Troubled debt restructuring agreements that subsequently defaulted within 12 months of restructuring are as follows during the period indicated:
|
|
Three Months Ended March 31, 2015 |
| |||
(Dollars in thousands) |
|
Number of TDRs |
|
Post-modification |
| |
Residential 1-4 family |
|
2 |
|
$ |
470 |
|
SBA |
|
1 |
|
9 |
| |
Total |
|
3 |
|
$ |
479 |
|
Allowance for loan loss activity
Changes in the allowance for loan losses by segment are presented below:
Three Months Ended March 31, 2016
(Dollars in thousands) |
|
Residential |
|
Home |
|
Commercial |
|
Commercial |
|
Commercial |
|
SBA |
|
Consumer |
|
Total |
| ||||||||
Allowance at December 31, 2015 |
|
$ |
863 |
|
$ |
525 |
|
$ |
503 |
|
$ |
39 |
|
$ |
21 |
|
$ |
234 |
|
$ |
9 |
|
$ |
2,194 |
|
Provision (credit) |
|
63 |
|
1 |
|
24 |
|
12 |
|
10 |
|
3 |
|
(4 |
) |
109 |
| ||||||||
Loans charged-off |
|
(20 |
) |
(5 |
) |
|
|
|
|
|
|
|
|
|
|
(25 |
) | ||||||||
Recoveries |
|
|
|
1 |
|
|
|
|
|
|
|
1 |
|
3 |
|
5 |
| ||||||||
Allowance at March 31, 2016 |
|
$ |
906 |
|
$ |
522 |
|
$ |
527 |
|
$ |
51 |
|
$ |
31 |
|
$ |
238 |
|
$ |
8 |
|
$ |
2,283 |
|
Three Months Ended March 31, 2015
(Dollars in thousands) |
|
Residential |
|
Home |
|
Commercial |
|
Commercial |
|
Commercial |
|
SBA |
|
Consumer |
|
Total |
| ||||||||
Allowance at December 31, 2014 |
|
$ |
654 |
|
$ |
584 |
|
$ |
400 |
|
$ |
28 |
|
$ |
30 |
|
$ |
236 |
|
$ |
10 |
|
$ |
1,942 |
|
Provision (credit) |
|
111 |
|
10 |
|
25 |
|
(4 |
) |
(4 |
) |
(34 |
) |
(5 |
) |
99 |
| ||||||||
Loans charged-off |
|
|
|
(75 |
) |
|
|
|
|
|
|
(9 |
) |
|
|
(84 |
) | ||||||||
Recoveries |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
4 |
|
18 |
| ||||||||
Allowance at March 31, 2015 |
|
$ |
765 |
|
$ |
519 |
|
$ |
425 |
|
$ |
24 |
|
$ |
26 |
|
$ |
207 |
|
$ |
9 |
|
$ |
1,975 |
|
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
The allowance for loan losses and loan balances by impaired and non-impaired components are as follows at the dates indicated:
March 31, 2016
(Dollars in thousands) |
|
Residential |
|
Home |
|
Commercial |
|
Commercial |
|
Commercial |
|
SBA |
|
Consumer |
|
Total |
| ||||||||
Allowance for impaired loans |
|
$ |
23 |
|
$ |
15 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
1 |
|
$ |
3 |
|
$ |
42 |
|
Allowance for non-impaired loans |
|
883 |
|
507 |
|
527 |
|
51 |
|
31 |
|
237 |
|
5 |
|
2,241 |
| ||||||||
Total |
|
$ |
906 |
|
$ |
522 |
|
$ |
527 |
|
$ |
51 |
|
$ |
31 |
|
$ |
238 |
|
$ |
8 |
|
$ |
2,283 |
|
Impaired loans |
|
$ |
4,925 |
|
$ |
1,369 |
|
$ |
394 |
|
$ |
|
|
$ |
|
|
$ |
2,053 |
|
$ |
14 |
|
$ |
8,755 |
|
Non-impaired loans |
|
219,666 |
|
75,544 |
|
128,832 |
|
11,662 |
|
7,053 |
|
36,925 |
|
1,162 |
|
480,844 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total loans |
|
$ |
224,591 |
|
$ |
76,913 |
|
$ |
129,226 |
|
$ |
11,662 |
|
$ |
7,053 |
|
$ |
38,978 |
|
$ |
1,176 |
|
$ |
489,599 |
|
December 31, 2015
(Dollars in thousands) |
|
Residential |
|
Home |
|
Commercial |
|
Commercial |
|
Commercial |
|
SBA |
|
Consumer |
|
Total |
| ||||||||
Allowance for impaired loans |
|
$ |
43 |
|
$ |
17 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
3 |
|
$ |
63 |
|
Allowance for non-impaired loans |
|
820 |
|
508 |
|
503 |
|
39 |
|
21 |
|
234 |
|
6 |
|
2,131 |
| ||||||||
Total |
|
$ |
863 |
|
$ |
525 |
|
$ |
503 |
|
$ |
39 |
|
$ |
21 |
|
$ |
234 |
|
$ |
9 |
|
$ |
2,194 |
|
Impaired loans |
|
$ |
4,224 |
|
$ |
1,055 |
|
$ |
398 |
|
$ |
|
|
$ |
|
|
$ |
2,013 |
|
$ |
14 |
|
$ |
7,704 |
|
Non-impaired loans |
|
204,553 |
|
75,826 |
|
125,384 |
|
8,918 |
|
4,729 |
|
37,204 |
|
1,238 |
|
457,852 |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
Total loans |
|
$ |
208,777 |
|
$ |
76,881 |
|
$ |
125,782 |
|
$ |
8,918 |
|
$ |
4,729 |
|
$ |
39,217 |
|
$ |
1,252 |
|
$ |
465,556 |
|
(4) Employee Benefits
Deferred Compensation Supplemental Executive Plan
The Bank maintains a non-qualified deferred compensation supplemental executive retirement plan (DCSERP) with a senior executive. Effective during the first quarter of 2015, the DCSERP was amended to allow the executive to invest all or a portion of the deferred compensation in Corporation stock, provided that such stock will only be settled in Corporation stock. The Rabbi Trust which holds the assets invested on behalf of the deferred compensation DCSERP, was also similarly amended and effective during the first quarter of 2015. The assets invested in bonds related to this Plan total $1.0 million at March 31, 2016 and $930,000 at December 31, 2015, and are included in other assets at fair value in the consolidated balance sheet. The liability for the benefit obligation reported in accrued expenses and other liabilities totaled $1.0 million at March 31, 2016 and $930,000 at December 31, 2015. Additionally, the Rabbi Trust holds 8,900 shares of Corporation stock at March 31, 2016 which is accounted for at its cost basis of $100,000, which is offset in stockholders equity by the benefit obligation of $100,000.
Supplemental Retirement Agreements
The Bank has entered into supplemental retirement agreements (SERP) with seven executive officers, which provide for payments upon attaining the retirement age specified in the agreements, generally ages 65-67. The present value of these future payments is accrued over the remaining service or vesting term. Supplemental retirement benefits generally accrue as they are vested; however a termination of employment subsequent to a change in control will result in the vesting of all benefits that would have accrued to the officers normal retirement date. During the three months ended March 31, 2016 and 2015, SERP expense totaled $192,000 and $151,000, respectively.
Defined Benefit Pension Plan
Pension expense (income) totaled $5,000 and $5,000 for the three months ended March 31, 2016 and 2015, respectively. The Bank expects to contribute $19,000 during the plan year ending December 31, 2016.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Employee Stock Ownership Plan
The Corporation maintains an Employee Stock Ownership Plan (ESOP) to provide eligible employees the opportunity to own Corporation stock. This plan is a tax-qualified retirement plan for the benefit of all Corporation employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits.
The Corporation granted a loan to the ESOP for the purchase of shares of the Corporations common stock at the Conversion date. As of March 31, 2016, the ESOP holds 395,543 shares, or 8% of the common stock outstanding on that date. The loan obtained by the ESOP from the Corporation to purchase common stock is payable annually over 25 years at the prime rate, as published in The Wall Street Journal, which is currently 3.50% per annum at March 31, 2016. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Any cash dividends paid on allocated shares will, at the direction of the Corporation, be credited to the participant accounts and invested in the Investment Fund; be distributed to the participants in proportion with the participants stock fund account balance; be distributed to the participants within 90 days of the calendar year in which paid in proportion with the participants stock fund account balance; or be used to make payments on the outstanding debt of the ESOP. Cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP then due. If the amount of dividends exceeds the outstanding debt of the ESOP, then, in the sole discretion of the Corporation, cash dividends may be allocated to active participants on a non-discriminatory basis, or be deemed to be general earnings of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.
Shares held by the ESOP include the following:
|
|
March 31, |
|
Allocated |
|
31,674 |
|
Distributions |
|
(391 |
) |
Committed to be allocated |
|
3,959 |
|
Unallocated |
|
360,301 |
|
|
|
395,543 |
|
The fair value of unallocated shares was approximately $4.5 million at March 31, 2016.
Total expense recognized in connection with the ESOP for the three month period ended March 31, 2016 and 2015 was $50,000 and $44,000, respectively.
(5) Other Stock-Based Compensation
On May 21, 2015, the Coastway Bancorp, Inc. stockholders approved the 2015 Equity Incentive Plan (EIP). Types of awards permitted by the EIP include stock options, restricted stock awards, restricted stock units, and performance awards. The number of shares available for issuance under the EIP was 692,885 at December 31, 2015. Stock options under the EIP will generally expire ten years after the date of grant. Unless otherwise determined by the Compensation Committee, awards under the EIP (other than Performance Awards) shall be granted with a vesting rate not exceeding twenty percent per year, with the first installment vesting no earlier than one year after the date of grant. Upon an involuntary termination following a change in control, all stock options, restricted stock awards and units will become fully vested and performance awards will be deemed earned. There were no awards granted under the EIP during the year ended December 31, 2015.
In February 2016, the Compensation Committee of the Board of Directors authorized the grant of 91,225 options at a strike price of $12.41 and 39,045 shares of restricted stock to directors and certain key senior executives. The options and the restricted stock both vest over a five year period. The $12.41 fair value of the restricted stock is based on the closing price of the Companys common stock on the date of the grant. The holders of restricted stock participate fully in rewards of stock ownership of the Company, including voting, and dividend rights when vested. Restricted stock expense for the three month period ended March 31, 2016 was $12,000. At March 31, 2016, there was $473,000 of unrecognized salary and employee benefits cost related to restricted stock. The grant-date fair value of stock options of $2.59 was estimated using the Black-Scholes Option-Pricing Model. Stock option expense for the three months ended March 31, 2016 was $6,000. At March 31, 2016, there was $231,000 of unrecognized salary and employee benefits cost related to stock options.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
The following presents the assumptions were used in determining the grant-date fair value of stock options:
Volatility |
|
13.52 |
% |
|
|
|
|
Weighted average forfeiture rate |
|
00.00 |
|
|
|
|
|
Weighted average dividend yield |
|
00.00 |
|
|
|
|
|
Expected Term |
|
8 years |
|
|
|
|
|
Weighted average risk free rate |
|
1.56 |
% |
(6) Earnings per Common Share
Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. There were no potentially dilutive common stock equivalents as of March 31, 2015. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.
Earnings per common share have been computed as follows three months ended March 31, 2016 and 2015:
|
|
2016 |
|
2015 |
| ||
(Dollars in thousands except per share amounts) |
|
|
|
|
| ||
Net income applicable to common stock |
|
$ |
639 |
|
$ |
373 |
|
Average number of common shares outstanding |
|
4,802,121 |
|
4,948,502 |
| ||
Less: Average unallocated ESOP shares |
|
(362,275 |
) |
(378,112 |
) | ||
Average number of common shares outstanding used to calculate basic earnings per share |
|
4,439,846 |
|
4,570,390 |
| ||
Less: dilutive impact of stock options |
|
|
|
|
| ||
dilutive effect unvested restricted stock awards |
|
430 |
|
|
| ||
Average number of common shares outstanding used to calculate basic and fully diluted earnings per common share |
|
4,440,276 |
|
4,570,390 |
| ||
Earnings per share basic |
|
$ |
0.14 |
|
$ |
0.08 |
|
Earnings per share diluted |
|
$ |
0.14 |
|
$ |
0.08 |
|
Stock options for 4,998 shares of common stock were not considered in computing diluted earnings per share for the three months ended March 31, 2016 because they were anti-dilutive. There were no stock options granted for the three months ended March 31, 2015 and as such, there was no impact on dilutive earnings per share.
On January 30, 2015, the Corporation authorized a program to repurchase, from time to time and as market and business conditions warrant, up to 247,499 shares of the Corporations common stock. During the three months ended March 31, 2016, and 2015, 48,900 and 8,700 shares were repurchased for a cost of $628,000 and $97,000, respectively. There are 71,659 shares remaining that may yet be repurchased under this program.
(7) Off-Balance Sheets Activities and Derivatives
In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated financial statements.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Loan Commitments
The Bank is a party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit which include commercial lines of credit and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Banks exposure to credit loss is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts represent credit risk:
|
|
March 31, |
|
December 31, |
| ||
|
|
2016 |
|
2015 |
| ||
|
|
(In thousands) |
| ||||
|
|
|
|
|
| ||
Commitments to originate loans for portfolio |
|
$ |
12,923 |
|
$ |
14,905 |
|
Commitments to originate loans to be sold |
|
24,939 |
|
13,142 |
| ||
Commitments to purchase loans from third parties |
|
1,446 |
|
5,988 |
| ||
Unfunded commitments under home equity lines of credit |
|
52,507 |
|
51,639 |
| ||
Unfunded commitments under commercial lines of credit |
|
14,004 |
|
11,542 |
| ||
Unfunded commitments under SBA lines of credit |
|
5,105 |
|
4,340 |
| ||
Unfunded commitments under overdraft lines of credit |
|
180 |
|
181 |
| ||
Unadvanced funds on construction loans |
|
7,233 |
|
7,225 |
| ||
The commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines-of-credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customers creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon managements credit evaluation of the counterparty. Collateral held generally consists of real estate.
Mortgage Banking
At March 31, 2016, the Bank had $24.9 million of interest rate lock commitments to borrowers and loans held for sale of $12.7 million with $34.2 million of forward commitments for the future delivery of residential mortgage loans. Included in the forward commitments total are open To Be Announced securities (TBAs) with a notional amount of $9.3 million, mandatory delivery contracts with a notional amount of $2.3 million, and best efforts contracts with a notional amount of $22.7 million. The Bank has $2.8 million of closed hedge instruments that are not settled at March 31, 2016.
At December 31, 2015, the Bank had $13.1 million of interest rate lock commitments to borrowers and loans held for sale of $19.0 million with $31.3 million of forward commitments for the future delivery of residential mortgage loans. Included in the forward commitments total are open TBAs with a notional amount of $4.0 million, mandatory delivery contracts with a notional amount of $2.8 million, and best efforts contracts with a notional amount of $24.5 million. The Bank had $4.8 million of closed hedge instruments that are not settled at December 31, 2015.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
The following table presents the fair values of derivative instruments and forward loan sale commitments in the consolidated balance sheets:
|
|
Assets |
|
Liabilities |
| ||||||
|
|
Balance |
|
|
|
Balance |
|
|
| ||
|
|
Sheet |
|
Fair |
|
Sheet |
|
Fair |
| ||
|
|
Location |
|
Value |
|
Location |
|
Value |
| ||
|
|
(In thousands) |
| ||||||||
March 31, 2016 |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Derivative loan commitments |
|
|
|
|
|
|
|
|
| ||
Commitments hedged with best efforts |
|
Other assets |
|
$ |
507 |
|
N/A |
|
$ |
|
|
Commitments hedged with TBA |
|
Other assets |
|
260 |
|
N/A |
|
|
| ||
Total derivative commitments |
|
|
|
767 |
|
N/A |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Forward loan sale commitments |
|
|
|
|
|
|
|
|
| ||
Best efforts contracts |
|
N/A |
|
|
|
Other liabilities |
|
413 |
| ||
Mandatory delivery contracts |
|
N/A |
|
|
|
Other liabilities |
|
5 |
| ||
TBA securities |
|
N/A |
|
|
|
Other liabilities |
|
66 |
| ||
Total forward loans sale commitments |
|
|
|
|
|
|
|
484 |
| ||
Total derivative loan and forward loan sale commitments |
|
|
|
$ |
767 |
|
|
|
$ |
484 |
|
|
|
|
|
|
|
|
|
|
| ||
December 31, 2015 |
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Derivative loan commitments |
|
|
|
|
|
|
|
|
| ||
Commitments hedged with best efforts |
|
Other assets |
|
$ |
162 |
|
N/A |
|
$ |
|
|
Commitments hedged with TBA |
|
Other assets |
|
55 |
|
N/A |
|
|
| ||
Total derivative commitments |
|
|
|
217 |
|
N/A |
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
Forward loan sale commitments |
|
|
|
|
|
N/A |
|
|
| ||
Best efforts contracts |
|
N/A |
|
|
|
Other liabilities |
|
175 |
| ||
Mandatory delivery contracts |
|
Other assets |
|
3 |
|
N/A |
|
|
| ||
TBA securities |
|
N/A |
|
|
|
Other liabilities |
|
5 |
| ||
Total forward loans sale commitments |
|
|
|
3 |
|
|
|
180 |
| ||
Total derivative loan and forward loan sale commitments |
|
|
|
$ |
220 |
|
|
|
$ |
180 |
|
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
The following table presents information pertaining to the gains and losses on Banks derivative loan commitments not designated as hedging instruments and forward loan sale commitments:
|
|
|
|
Three Months Ended March 31, |
| ||||
|
|
Location of Gain/(Loss) |
|
2016 |
|
2015 |
| ||
|
|
|
|
(In thousands) |
| ||||
Derivative loan commitments |
|
Net gain on sales of loans and other mortgage banking income |
|
$ |
550 |
|
$ |
61 |
|
Best efforts contracts |
|
Net gain (loss) on sales of loans and other mortgage banking income |
|
(238 |
) |
60 |
| ||
Mandatory delivery contracts |
|
Net gain (loss) on sales of loans and other mortgage banking income |
|
(8 |
) |
|
| ||
TBA securities |
|
Net gain (loss) on sales of loans and other mortgage banking income |
|
(61 |
) |
|
| ||
|
|
|
|
$ |
243 |
|
$ |
121 |
|
(8) Fair Value Measurements
The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of an asset or liability is the price which a seller would receive in an orderly transaction between market participants (an exit price). Assets and liabilities are placed in a fair value hierarchy based on fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed on the basis of the best information available under the circumstances.
Effective January 1, 2015, the Bank elected the fair value option pursuant to Accounting Standards Codification (ASC) 825, Financial Instruments for certain closed mortgage loans intended for sale and transferred the placement of loans held for sale to Level 2 in the fair value hierarchy. ASC 825 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Bank elected the fair value option for certain residential real estate mortgage loans held for sale pursuant to forward sale commitments in order to better match changes in fair values for the loans with changes in the fair value of the forward loan sale contracts used to economically hedge them. The aggregate fair value of loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $12.7 million, $12.2 million and $526,000 at March 31, 2016. The aggregate fair value of loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $19.0 million, $18.3 million and $684,000 at December 31, 2015. The change in fair value of loans held for sale reported as a component of net gains on sale of loans and other mortgage banking income was $(158,000) and $60,000 for the three months ended March 31, 2016 and 2015, respectively.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:
|
|
March 31, 2016 |
| |||||||
(Dollars in thousands) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| |||
Assets measured on a recurring basis: |
|
|
|
|
|
|
| |||
Loans held for sale |
|
$ |
|
|
$ |
12,677 |
|
$ |
|
|
Derivative loan commitments |
|
|
|
|
|
767 |
| |||
Liabilities measured on a recurring basis: |
|
|
|
|
|
|
| |||
Forward loan sale commitments: |
|
|
|
|
|
|
| |||
Best efforts contracts |
|
|
|
|
|
413 |
| |||
TBA securities |
|
|
|
66 |
|
|
| |||
Mandatory delivery contracts |
|
|
|
5 |
|
|
| |||
Assets measured on a non-recurring basis: |
|
|
|
|
|
|
| |||
Impaired loans (collateral dependent) |
|
|
|
|
|
791 |
| |||
Foreclosed real estate |
|
|
|
|
|
710 |
| |||
|
|
December 31, 2015 |
| |||||||
(Dollars in thousands) |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
| |||
Assets measured on a recurring basis: |
|
|
|
|
|
|
| |||
Loans held for sale |
|
$ |
|
|
$ |
18,952 |
|
$ |
|
|
Derivative loan commitments |
|
|
|
|
|
217 |
| |||
Forward sale mandatory delivery contracts |
|
|
|
3 |
|
|
| |||
Liabilities measured on a recurring basis: |
|
|
|
|
|
|
| |||
Forward loan sale commitments: |
|
|
|
|
|
|
| |||
Best efforts contracts |
|
|
|
|
|
175 |
| |||
TBA securities |
|
|
|
5 |
|
|
| |||
Assets measured on a non-recurring basis: |
|
|
|
|
|
|
| |||
Impaired loans (collateral dependent) |
|
|
|
|
|
1,084 |
| |||
Foreclosed real estate |
|
|
|
|
|
710 |
| |||
Real estate held for sale |
|
|
|
3,305 |
|
|
| |||
The Bank did not have cause to transfer any assets between the fair value measurement levels during the three months ended March 31, 2016 or the year ended December 31, 2015.
Impaired loan balances in the table above represent those collateral dependent impaired loans where management has estimated the credit loss by comparing the loans carrying value against the expected realizable fair value of the collateral (appraised value or internal analysis less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance or partial charge-off is recorded to the collateral dependent impaired loan for the amount of managements estimated credit loss. The provision to the allowance for loan losses related to collateral dependent impaired loans recorded at fair value for the three months ended March 31, 2016 and 2015, totaled $1,000 and $108,000, respectively. The carrying value of impaired loans recorded at fair value is $791,000, net of $20,000 in charge-offs and specific reserves of $16,000 at March 31, 2016. The carrying value of impaired loans recorded at fair value was $1.1 million net of $28,000 in charge-offs and $15,000 in specific reserves at December 31, 2015.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Real estate acquired by the Bank through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as foreclosed real estate. When property is acquired, it is generally recorded at the estimated fair value of the property acquired, less estimated costs to sell. The estimated fair value is based on market appraisals and the Banks internal analysis. Certain inputs used in appraisals or the Banks internal analysis, are not always observable, and therefore, foreclosed real estate may be categorized as Level 3 within the fair value hierarchy. There were no losses on foreclosed real estate held at period end for the three months ended March 31, 2016 and 2015.
When real estate is determined to be held for sale, it is recorded at the lower of estimated fair value less estimated cost to sell. The fair value less costs to sell is determined based on current appraisals that utilize prices in observed transactions involving similar assets or estimated selling price less costs to sell. There were no write-downs on real estate held for sale during the three months ended March 31, 2016 and 2015. The Bank recorded a loss of $11,000 upon the sale of its two real estate held for sale properties during the three months ended March 31, 2016.
Derivatives fair value methodology
Fair value changes in mortgage banking derivatives (interest rate lock commitments and commitments to sell fixed-rate residential mortgages) subsequent to inception are estimated using anticipated market prices based on pricing indications provided from syndicate banks and consideration of pull-through and fallout rates. The fair value of the mortgage banking derivatives are considered to be Level 3 assets.
The table below presents for the three months ended March 31, 2016 and 2015, the change in Level 3 assets and liabilities that are measured on a recurring basis:
|
|
Derivative Loan Commitments and |
| ||||
(Dollars in thousands) |
|
2016 |
|
2015 |
| ||
|
|
|
|
|
| ||
Balance at beginning of period |
|
$ |
42 |
|
$ |
2 |
|
Gains on new commitments during the period |
|
375 |
|
121 |
| ||
Gains (losses) arising during the period |
|
|
|
|
| ||
Reclassifications of realized gains (losses) on settled commitments |
|
(63 |
) |
(1 |
) | ||
Balance at end of period |
|
$ |
354 |
|
$ |
122 |
|
The following tables present additional quantitative information about assets and liabilities measured at fair value on a recurring and non-recurring basis for which the Bank utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value:
March 31, 2016
(Dollars in thousands) |
|
Fair |
|
Valuation Technique |
|
Unobservable Input |
|
Unobservable |
| |
Assets measured on a recurring basis: |
|
|
|
|
|
|
|
|
| |
Derivative loan commitments |
|
$ |
767 |
|
Investor pricing |
|
Pull-through rate |
|
79.2% 100% |
|
Liabilities measured on a recurring basis: |
|
|
|
|
|
|
|
|
| |
Forward loan sale commitments |
|
(413 |
) |
Investor pricing |
|
Pull-through rate |
|
82.5% 100% |
| |
Assets measured on a non-recurring basis: |
|
|
|
|
|
|
|
|
| |
Impaired loans (collateral dependent) |
|
791 |
|
Discounted appraisal |
|
Collateral discounts |
|
5 30% |
| |
Foreclosed real estate |
|
710 |
|
Discounted appraisal |
|
Collateral discounts |
|
5 30% |
| |
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
December 31, 2015
(Dollars in thousands) |
|
Fair |
|
Valuation Technique |
|
Unobservable Input |
|
Unobservable |
| |
Assets measured on a recurring basis: |
|
|
|
|
|
|
|
|
| |
Derivative commitments |
|
$ |
217 |
|
Investor pricing |
|
Pull-through rate |
|
79.6% 100% |
|
|
|
|
|
|
|
|
|
|
| |
Liabilities measured on a recurring basis: |
|
|
|
|
|
|
|
|
| |
Forward loan sale commitments |
|
(175 |
) |
Investor pricing |
|
Pull-through rate |
|
82.5% 100% |
| |
|
|
|
|
|
|
|
|
|
| |
Assets measured on a non-recurring basis: |
|
|
|
|
|
|
|
|
| |
Impaired loans (collateral dependent) |
|
1,084 |
|
Discounted appraisals |
|
Collateral discounts |
|
5 30% |
| |
Foreclosed real estate |
|
710 |
|
Discounted appraisals |
|
Collateral discounts |
|
5 30% |
| |
Estimated Fair Values of Assets and Liabilities
In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the balance sheet, the Corporation is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted fair values are not available, fair values are based upon estimates using various valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The following methods and assumptions were used by the Corporation in estimating fair values of its financial instruments.
The following methods and assumptions were used by the Corporation in estimating fair value disclosures:
Cash and cash equivalents The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.
Certificates of deposit The carrying value of certificates of deposit is deemed to approximate fair value, based on both the current interest rate and the maturity date.
Federal Home Loan Bank stock It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.
Loans, net For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
Loans held for sale Fair values of loans held for sale are based on prevailing market rates for loans with similar characteristics.
Deposits The fair values of deposits with no stated maturity, such as demand deposits, savings, club and money market accounts, are equal to the amount payable on demand at the reporting date. Fair values for term certificates are estimated using a discounted cash flow calculation that applies market interest rates currently being offered for deposits of similar remaining maturities.
Borrowed funds The fair values of the Banks FHLB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
COASTWAY BANCORP, INC. AND SUBSIDIARY
Notes to the Unaudited Consolidated Financial Statements (continued)
Accrued interest The carrying amounts of accrued interest approximate fair value.
Off-balance sheet credit-related instruments Fair values for off-balance-sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing.
The estimates of fair value of financial instruments were based on information available at March 31, 2016 and December 31, 2015 and are not indicative of the fair market value of those instruments as of the date of this report. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporations entire holdings of a particular financial instrument. The fair value of the Corporations time deposit liabilities do not take into consideration the value of the Corporations long-term relationships with depositors, which may have significant value.
Because no active market exists for a portion of the Corporations financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates were based on existing on- and off-balance sheet financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate, and real estate held for sale.
The carrying values, estimated fair values and placement in the fair value hierarchy of the Corporations financial instruments(1) for which fair value is only disclosed but not recognized on the balance sheet at the dates indicated are summarized as follows:
|
|
March 31, 2016 |
|
Fair value measurement |
| |||||||||||
(Dollars in thousands) |
|
Carrying |
|
Fair Value |
|
Level 1 inputs |
|
Level 2 Inputs |
|
Level 3 Inputs |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans, net |
|
$ |
491,103 |
|
$ |
501,084 |
|
$ |
|
|
$ |
|
|
$ |
501,084 |
|
FHLB stock |
|
5,500 |
|
N/A |
|
|
|
|
|
N/A |
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Certificates of deposit |
|
111,209 |
|
111,602 |
|
|
|
111,602 |
|
|
| |||||
Borrowed funds |
|
121,000 |
|
120,997 |
|
|
|
120,997 |
|
|
| |||||
|
|
December 31, 2015 |
|
Fair value measurement |
| |||||||||||
(Dollars in thousands) |
|
Carrying |
|
Fair Value |
|
Level 1 inputs |
|
Level 2 Inputs |
|
Level 3 Inputs |
| |||||
Financial assets: |
|
|
|
|
|
|
|
|
|
|
| |||||
Loans, net |
|
$ |
467,023 |
|
$ |
471,245 |
|
$ |
|
|
$ |
|
|
$ |
471,245 |
|
FHLB stock |
|
5,283 |
|
N/A |
|
|
|
|
|
N/A |
| |||||
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
| |||||
Certificates of deposit |
|
109,038 |
|
109,423 |
|
|
|
109,423 |
|
|
| |||||
Borrowed funds |
|
115,500 |
|
115,495 |
|
|
|
115,495 |
|
|
| |||||
(1) Excluded from this table are certain financial instruments that approximate fair value, as they were short-term in nature or payable on demand. These include cash and cash equivalents, certificates of deposit, accrued interest receivable, non-term deposit accounts, and accrued interest payable. The respective carrying values of cash and cash equivalents, certificates of deposit and non-term deposit accounts would all be considered to be classified within Level 1 of their fair value hierarchy. The $1.5 million and $1.4 million carrying value of accrued interest receivable on loans would generally be considered Level 3 in the fair value hierarchy and the carrying value of accrued interest payable of $28,000 and $24,000 at March 31, 2016 and December 31, 2015, respectively would be considered Level 2.
Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations
Managements discussion and analysis should be read in conjunction with the Corporations (also referred to herein as, Companys us, we or our) consolidated financial statements and notes thereto contained in this report and the Corporations 2015 consolidated financial statements.
Special Note Regarding Forward-Looking Statements
This report contains certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning plans, objectives, future events or performance and assumptions and other statements that are other than statements of historical fact. Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as anticipates, believes, expects, intends, may, plans, pursue, views and similar terms or expressions. Various statements contained in Item 2 - Managements Discussion and Analysis of Financial Condition and Results of Operations including, but not limited to, statements related to managements views on the banking environment and the economy, competition and market expansion opportunities, the interest rate environment, credit risk and the level of future non-performing assets and charge-offs, potential asset and deposit growth, future non-interest expenditures and non-interest income growth, and borrowing capacity are forward-looking statements. The Corporation wishes to caution readers that such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties that may adversely affect the Corporations future results. The following important factors, among others, could cause the Corporations results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) changes in interest rates could negatively impact net interest income; (ii) changes in the business cycle and downturns in the local, regional or national economies, including deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Corporations allowance for loan losses and/or valuations of foreclosed properties and real estate held for sale; (iii) changes in consumer spending could negatively impact the Corporations credit quality and financial results; (iv) increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Corporations competitive position within its market area and reduce demand for the Corporations products and services; (v) deterioration of securities markets could adversely affect the value or credit quality of the Corporations assets and the availability of funding sources necessary to meet the Corporations liquidity needs; (vi) changes in technology could adversely impact the Corporations operations and increase technology-related expenditures; (vii) increases in employee compensation and benefit expenses and other non-interest expenses could adversely affect the Corporations financial results; (viii) changes in laws and regulations that apply to the Corporations business and operations, including without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), the Jumpstart Our Business Startups Act (the JOBS Act) and the additional regulations that will be forthcoming as a result thereof, could adversely affect the Corporations business environment, operations and financial results; (ix) changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies, the Financial Accounting Standards Board (the FASB) or the Public Company Accounting Oversight Board (PCAOB) could negatively impact the Corporations financial results; (x) our ability to enter new markets successfully and capitalize on growth opportunities; (xi) future regulatory compliance costs, including any increase caused by new regulations imposed by the Consumer Finance Protection Bureau; and (xii) some or all of the risks and uncertainties described in Risk Factors of the Corporations annual report on Form 10-K could be realized, which could have a material adverse effect on the Corporations business, financial condition and results of operation. Therefore, the Corporation cautions readers not to place undue reliance on any such forward-looking information and statements.
Accounting Policies/Critical Accounting Estimates
As discussed in the 2015 consolidated financial statements included in the Corporations annual report on Form 10-K, the most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the valuation of real estate held for sale and the valuation of loans held for sale, mortgage banking derivatives and commitments to sell fixedrate residential mortgages. The Corporation has not changed its significant accounting and reporting policies from those disclosed in its 2015 consolidated financial statements.
Overview
Coastway Bancorp, Inc. is a Maryland corporation and owns 100% of the common stock of Coastway Community Bank. On January 14, 2014, we completed our initial public offering (IPO) of common stock in connection with the mutual-to-stock Conversion of Coastway Bancorp, MHC, selling 4,827,125 shares of common stock at $10.00 per share (contributing $300,000 in cash and 122,054 shares of common stock to Coastway Cares Charitable Foundation II) and raising $48.3 million of gross proceeds.
The Corporations earnings are largely dependent on net interest income which is the difference between interest earned on loans, investments and cash and cash equivalents, and the cost of funding (primarily deposits and borrowed funds). The re-pricing frequency of the Corporations assets and liabilities are not identical, and therefore subject the Corporation to the risk of adverse changes in interest rates. Historically, our interest-earning assets had re-priced more quickly than our interest-bearing liabilities, which make us vulnerable to decreases in interest rates. Due to the growth in the residential one- to four-family residential loan portfolio, coupled with the increase in short-term borrowed funds, our interest-bearing liabilities may re-price more quickly than our interest-earning assets in the first two to three of years in an increasing interest rate environment, and then revert back to interest-earning assets re-pricing more quickly than our interest-bearing liabilities thereafter. The Corporations earnings are also dependent on the net gains on sales of loans, and other mortgage banking income, which is volatile. When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans we can originate for sale. Weak or deteriorating economic conditions also tend to reduce loan demand. The Corporations operating expenses are high as a percentage of net interest income and non-interest income, due to prior branch growth and increase in personnel as we positioned the Bank for future growth.
Net income was $639,000 for the three months ended March 31, 2016 as compared to a net income of $373,000 for the three months ended March 31, 2015. The earnings results for the three months ended March 31, 2016 as compared to the same period in 2015 were impacted by an $844,000 increase in net interest income, primarily due to growth in loan interest income of $858,000. During the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, we recorded an increase in the provision for loan losses of $10,000, and had a decrease in total non-interest income of $141,000, an increase of $243,000 in non-interest expense, and an increase in income tax expense of $184,000. The decrease in non-interest income was primarily the result of SBA loans sold totaling $4.2 million for a gain of $328,000 during the three months ended March 31, 2015 as compared to no SBA loan sales during the three months ended March 31, 2016. Excluding the impact of the SBA loan sale in 2015, non-interest income increased $217,000, primarily due to an increase in the net gain on sale of mortgage loans, and other mortgage banking income of $181,000. The $243,000 increase in non-interest expense for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 was primarily due to increases in salary and employee benefits expense of $329,000 primarily due to an increase in full time equivalent employees (FTEs), a $41,000 increase in SERP expense, general merit increases, and $18,000 in stock-based compensation related to awards made under our 2015 Equity Incentive Plan. Partially offsetting the increase in salary and employee benefits expense, occupancy and equipment expense decreased $99,000 primarily due to decreased snow removal costs and a decrease in real estate taxes due to the sale of real estate held for sale. The increase in income tax expense was primarily due to increased pre-tax income.
Comparison of Financial Condition at March 31, 2016 and December 31, 2015
Assets. Our total assets increased $7.9 million, or 1.4%, to $573.0 million at March 31, 2016 from $565.1 million at December 31, 2015 primarily due to loan growth. Total loans (excluding loans held for sale) increased $24.0 million, or 5.2%, to $489.6 million at March 31, 2016 from $465.6 million at December 31, 2015. The increase in total loans was primarily due to an increase in residential one- to four-family loans of $15.8 million, or 7.6%, to $224.6 million at March 31, 2016 from $208.8 million at December 31, 2015. Residential one-to four-family loans increased due to purchases of $7.6 million of loans at a purchase price of $7.7 million from third parties as well as organic loan growth. Commercial real estate loans increased $3.4 million, or 2.7% to $129.2 million at March 31, 2016 as compared to $125.8 million at December 31, 2015. Commercial business loans increased $2.7 million or 30.8% to $11.7 million at March 31, 2016 from $8.9 million at December 31, 2015, primarily due to an increase in the drawn amount related to a business line of credit. Cash and cash equivalents declined $5.3 million during the three months ended March 31, 2016 due to an inflow of deposits on December 31, 2015 based on the holiday weekend.
Loans. A summary of the balances of loans are as follows:
|
|
March 31, 2016 |
|
December 31, 2015 |
| ||||||
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
| ||
Residential real estate: |
|
|
|
|
|
|
|
|
| ||
1-4 family |
|
$ |
224,591 |
|
45.87 |
% |
$ |
208,777 |
|
44.84 |
% |
Home equity loans and lines of credit |
|
76,913 |
|
15.71 |
|
76,881 |
|
16.51 |
| ||
Commercial real estate |
|
129,226 |
|
26.40 |
|
125,782 |
|
27.02 |
| ||
Commercial business |
|
11,662 |
|
2.38 |
|
8,918 |
|
1.92 |
| ||
Commercial construction |
|
7,053 |
|
1.44 |
|
4,729 |
|
1.02 |
| ||
SBA loans |
|
38,978 |
|
7.96 |
|
39,217 |
|
8.42 |
| ||
Consumer |
|
1,176 |
|
0.24 |
|
1,252 |
|
0.27 |
| ||
|
|
|
|
|
|
|
|
|
| ||
Total loans |
|
489,599 |
|
100.00 |
% |
465,556 |
|
100.00 |
% | ||
Net deferred loan costs |
|
3,787 |
|
|
|
3,661 |
|
|
| ||
Allowance for loan losses |
|
(2,283 |
) |
|
|
(2,194 |
) |
|
| ||
Total loans, net |
|
$ |
491,103 |
|
|
|
$ |
467,023 |
|
|
|
Deposits. Our primary source of funds is retail deposits held by individuals and businesses within our market area. Deposits increased $2.5 million, or 0.7%, to $376.0 million at March 31, 2016 from $373.5 million at December 31, 2015. The increase in deposits was primarily as a result of an increase in certificates of deposit and savings accounts. Certificates of deposit increased $2.2 million, or 2.0%. The increase in certificates of deposit was primarily in the five-year maturity category as we increased our interest rates paid in September 2015. Savings and interest bearing demand deposit accounts increased $2.3 million, or 2.3%. Non-interest bearing demand deposits decreased $2.3 million, or 2.4% from $96.0 million at December 31, 2015 to $93.7 million at March 31, 2016.
The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits.
|
|
March 31, 2016 |
|
December 31, 2015 |
| ||||||
(Dollars in thousands) |
|
Amount |
|
Percent |
|
Amount |
|
Percent |
| ||
Non-interest bearing demand deposits |
|
$ |
93,657 |
|
24.91 |
% |
$ |
95,960 |
|
25.69 |
% |
Money market accounts |
|
69,257 |
|
18.42 |
|
69,036 |
|
18.48 |
| ||
Savings and interest bearing demand deposit accounts |
|
100,430 |
|
26.71 |
|
98,133 |
|
26.28 |
| ||
Club accounts |
|
1,425 |
|
0.38 |
|
1,352 |
|
0.36 |
| ||
Total transaction accounts |
|
264,769 |
|
70.42 |
|
264,481 |
|
70.81 |
| ||
Certificates of deposit |
|
111,209 |
|
29.58 |
|
109,038 |
|
29.19 |
| ||
Total deposits |
|
$ |
375,978 |
|
100.00 |
% |
$ |
373,519 |
|
100.00 |
% |
Borrowed Funds. We utilize borrowings from the Federal Home Loan Bank of Boston as an alternate funding source. Borrowed funds at March 31, 2016 totaled $121.0 million as compared to $115.5 million at December 31, 2015, an increase of $5.5 million, or 4.8%. Borrowed funds at March 31, 2016 were comprised of $121.0 million of short-term advances at a weighted average rate of 0.48% as compared to short-term advances of $115.5 million at December 31, 2015 at a weighted average rate of 0.44%. The increase in overnight advances during the three months ended March 31, 2016 was to fund loan growth.
Total Stockholders Equity. Total stockholders equity increased to $71.0 million at March 31, 2016 from $70.9 million at December 31, 2015. The increase in stockholders equity was due to net income of $639,000, $50,000 of ESOP shares committed to be allocated, and $18,000 of stock-based compensation partially offset by stock repurchases of $628,000.
Nonperforming Assets
Loans on which the accrual of interest has been discontinued are designated as non-performing loans. Accrual of interest on loans is generally discontinued when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is performing. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans is applied against principal or interest or is recognized in income on a cash basis, until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms for a reasonable period of time and future payments are reasonably assured.
Loans are classified as troubled debt restructured loans when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The modifications of the terms of such loans were one of the following: a reduction of the stated interest rate of the loan for some period of time, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or an extension of time to make payments with the delinquent payment added to the principal of the loan. Loans on nonaccrual status at the date of modification are initially classified as non-accruing troubled debt restructurings. Troubled debt restructured loans may be returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally six months of current payments.
Non-performing loans increased to $5.3 million, or 1.09% of total loans at March 31, 2016, from $4.2 million, or 0.91% of total loans, at December 31, 2015 primarily due to a $711,000 increase in non-performing one- to four-family residential loans. A residential one- to four-family loan with a balance of $762,000 was moved to non-performing status at March 31, 2016. The estimated fair value of the collateral securing the $762,000 loan appears sufficient to protect against a potential loss. Further, two home equity lines of credit totaling $250,000 were also added to non-performing based on their delinquency or maturity status during the three months ended March 31, 2016.
Foreclosed real estate consists of property acquired through formal foreclosure or the acceptance of a deed in lieu of foreclosure, and is recorded at fair value less costs to sell.
Non-performing assets are comprised of non-performing loans, and foreclosed real estate. The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses. Despite prudent loan underwriting, adverse changes within the Banks market area, or deterioration in local, regional or national economic conditions, could negatively impact the Banks level of non-performing loans and assets in the future.
Non-performing assets increased $1.1 million during the three months ended March 31, 2016 to $6.0 million at March 31, 2016 from $4.9 million at December 31, 2015 due to the increase in non-performing loans discussed above.
The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated. For the dates presented, there were no loans delinquent 90 days or more and still accruing.
(Dollars in thousands) |
|
March 31, |
|
December 31, |
| ||
Nonaccrual loans: |
|
|
|
|
| ||
Residential real estate mortgage loans: |
|
|
|
|
| ||
1-4 family |
|
$ |
952 |
|
$ |
193 |
|
Home equity loans and lines of credit |
|
648 |
|
329 |
| ||
Commercial real estate loans |
|
130 |
|
130 |
| ||
Commercial business loans |
|
|
|
|
| ||
SBA loans |
|
532 |
|
467 |
| ||
Commercial construction loans |
|
|
|
|
| ||
Consumer loans |
|
|
|
|
| ||
Total nonaccrual loans |
|
2,262 |
|
1,119 |
| ||
Non-accruing troubled debt restructured loans: |
|
|
|
|
| ||
Residential real estate mortgage loans: |
|
|
|
|
| ||
1-4 family |
|
2,827 |
|
2,875 |
| ||
Home equity loans and lines of credit |
|
135 |
|
137 |
| ||
Commercial real estate loans |
|
105 |
|
109 |
| ||
Commercial business loans |
|
|
|
|
| ||
SBA loans |
|
|
|
|
| ||
Commercial construction loans |
|
|
|
|
| ||
Consumer loans |
|
|
|
|
| ||
Total non-accruing troubled debt restructured loans |
|
3,067 |
|
3,121 |
| ||
Total nonperforming loans |
|
5,329 |
|
4,240 |
| ||
Foreclosed real estate: |
|
|
|
|
| ||
Residential real estate mortgage loans: |
|
|
|
|
| ||
1-4 family |
|
463 |
|
463 |
| ||
Home equity loans and lines of credit |
|
|
|
|
| ||
Commercial loans |
|
|
|
|
| ||
Commercial business loans |
|
|
|
|
| ||
SBA loans |
|
247 |
|
247 |
| ||
Commercial construction loans |
|
|
|
|
| ||
Consumer loans |
|
|
|
|
| ||
Total foreclosed real estate |
|
710 |
|
710 |
| ||
Total nonperforming assets |
|
$ |
6,039 |
|
$ |
4,950 |
|
|
|
|
|
|
| ||
Total accruing troubled debt restructured loans |
|
$ |
3,427 |
|
$ |
3,465 |
|
Delinquent loans 60 89 days past due |
|
$ |
11 |
|
$ |
881 |
|
Loans 60-89 days past due to total loans |
|
0.00 |
% |
0.19 |
% | ||
Ratios: |
|
|
|
|
| ||
Non-performing loans to total loans |
|
1.09 |
% |
0.91 |
% | ||
Non-performing assets to total assets |
|
1.05 |
% |
0.88 |
% |
For the three months ended March 31, 2016 and 2015, and for the year ended December 31, 2015, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $75,000, $78,000 and $190,000, respectively. The amount that was included in interest income on such loans totaled $43,000, $40,000 and $123,000 for the three months ended March 31, 2016 and 2015, and the year ended December 31, 2015, respectively.
Asset Quality
Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as substandard, doubtful, or loss. An asset is substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those characterized by the distinct possibility that the insured institution will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses present to make collection or liquidation in full on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Assets classified as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as special mention by our management.
In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the watch list initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality the classification is changed to special mention, substandard doubtful or loss depending on the circumstances and the evaluation. Based on this review, we had classified or held as special mention the following loans as of the date indicated:
(Dollars in thousands) |
|
March 31, |
|
December 31, |
| ||
Special mention |
|
$ |
1,721 |
|
$ |
1,325 |
|
Substandard |
|
3,689 |
|
3,664 |
| ||
Doubtful |
|
|
|
|
| ||
Loss |
|
|
|
|
| ||
Total classified and special mention loans |
|
$ |
5,410 |
|
$ |
4,989 |
|
The level of classified and special mention loans increased by $421,000 to $5.4 million at March 31, 2016 from $5.0 million at December 31, 2015 principally due to downgrades on SBA loans previously classified as watch list.
Allowance for Loan Losses
The allowance for loan losses is the amount necessary to reflect probable incurred losses in the portfolio. The Corporation evaluates the adequacy of the allowance for loan losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
The Corporations methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the portfolio. Although the Corporation determines the amount of each element of the allowance separately, the entire allowance is available for the entire portfolio.
The Corporation identifies loans that may need to be charged off by reviewing delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrowers inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in a charge-off of the loan or the portion of the loan that was impaired.
Among other factors, the Corporation considers current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for the Corporations residential real estate portfolio. The Corporation uses evidence obtained from its own loan portfolio, including loss history, as well as published housing data in its local markets from third party sources believed to be reliable as a basis for assumptions about the impact of housing depreciation.
Substantially all of the Corporations loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a non-performing impaired real estate loan, the value of the underlying collateral is estimated using an independent appraisal, adjusted for property specific conditions and other factors, and related specific reserves are adjusted on a quarterly basis. If a non-performing impaired real estate loan is in the process of foreclosure, and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, a new appraisal may be ordered. Any shortfall would result in immediately charging off the portion of the loan that was impaired.
The Corporation evaluates the need for a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral dependent loans, the fair value of the collateral less estimated selling expenses.
The general component of the allowance for loan losses is established for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category (segments) and assigning allowance percentages based on a ten year historical loss period to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; charge-off trends over the past three year period; weighted average risk ratings; loan concentrations; managements assessment of internal factors; and managements assessment of external factors such as interest rates, real estate markets and local and national economic factors. Although the allowance for loan losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. The allowance may be adjusted for significant factors that in managements judgment, affect the collectability of the portfolio as of the evaluation date. The applied loss factors are reevaluated quarterly to ensure their relevance in the current and overall economic environment and in relation to trends in the loan portfolio.
Despite prudent loan underwriting, adverse changes within the Corporations market area, or further deterioration in the local, regional or national economic conditions including a decline in real estate market values in Rhode Island, an increase in interest rates, as well as bank regulatory examination and/or independent loan review results could negatively impact the Corporations level of allowance for loan losses and non-performing assets in the future.
The following table summarizes the activity in the allowance for loan losses for the periods indicated:
|
|
Three months ended March 31, |
| ||||
(Dollars in thousands) |
|
2016 |
|
2015 |
| ||
Balance at beginning of period |
|
$ |
2,194 |
|
$ |
1,942 |
|
|
|
|
|
|
| ||
Provision for loan losses |
|
109 |
|
99 |
| ||
|
|
|
|
|
| ||
Charge-offs: |
|
|
|
|
| ||
Residential 1-4 family |
|
(20 |
) |
|
| ||
Home equity loans and lines of credit |
|
(5 |
) |
(75 |
) | ||
Commercial real estate loans |
|
|
|
|
| ||
Commercial business loans |
|
|
|
|
| ||
SBA |
|
|
|
(9 |
) | ||
Commercial construction |
|
|
|
|
| ||
Consumer |
|
|
|
|
| ||
Total charge-offs |
|
(25 |
) |
(84 |
) | ||
Recoveries on charged-off loans |
|
|
|
|
| ||
Residential 1-4 family |
|
|
|
|
| ||
Home equity loans and lines of credit |
|
1 |
|
|
| ||
Commercial real estate loans |
|
|
|
|
| ||
Commercial business loans |
|
|
|
|
| ||
SBA |
|
1 |
|
14 |
| ||
Commercial construction |
|
|
|
|
| ||
Consumer |
|
3 |
|
4 |
| ||
Total recoveries |
|
5 |
|
18 |
| ||
|
|
|
|
|
| ||
Net charge-offs |
|
(20 |
) |
(66 |
) | ||
Balance at end of period |
|
$ |
2,283 |
|
$ |
1,975 |
|
Annualized net loans charge-offs to average loans outstanding |
|
0.02 |
% |
0.07 |
% | ||
Allowance for loan losses to non-performing loans at end of period |
|
42.84 |
% |
32.64 |
% | ||
Allowance for loan losses to total loans at end of period |
|
0.47 |
% |
0.51 |
% |
The allowance reflects managements estimate of loan loss reserves necessary to support the level of credit risk inherent in the portfolio during the periods. Refer to the Corporations annual report on Form 10-K for additional information regarding the Corporations credit risk management process and allowance for loan losses.
Comparison of Operating Results for the Three Months Ended March 31, 2016 and March 31, 2015.
General. Net income was $639,000 for the three months ended March 31, 2016 as compared to net income of $373,000 for the three months ended March 31, 2015. The earnings results for the three months ended March 31, 2016 as compared to the same period in 2015 were impacted by an $844,000 increase in net interest income, primarily due to growth in loan interest income of $858,000. During the three months ended March 31, 2016 as compared to the three months ended March 31, 2015, we recorded an increase in the provision for loan losses of $10,000, and had a decrease in total non-interest income of $141,000, an increase of $243,000 in non-interest expense, and an increase in income tax expense of $184,000. The decrease in non-interest income was primarily the result of SBA loans sold totaling $4.2 million for a gain of $328,000 during the three months ended March 31, 2015 as compared to no SBA loan sales during the three months ended March 31, 2016. Excluding the impact of the SBA loan sale in 2015, non-interest income increased $217,000, primarily due to an increase in the net gain on sale of mortgage loans, and other mortgage banking income of $181,000. The $243,000 increase in non-interest expense for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 was primarily due to increases in salary and employee benefits expense of $329,000 primarily due to an increase in full time equivalent employees (FTEs), a $41,000 increase in SERP expense, general merit increases, and $18,000 in stock-based compensation related to awards made under our 2015 Equity Incentive Plan. Partially offsetting the increase in salary and employee benefits expense, occupancy and equipment expense decreased $99,000 primarily due to decreased snow removal costs and a decrease in real estate taxes due to the sale of real estate held for sale. The increase in income tax expense was primarily due to increased pre-tax income.
Interest Income. Interest income increased $894,000, or 21.7%, to $5.0 million for the three months ended March 31, 2016 from $4.1 million for the three months ended March 31, 2015. The increase reflected an increase in the average balance of interest earning assets of $97.9 million to $520.2 million for the three months ended March 31, 2016 as compared to $422.3 million for the three months ended March 31, 2015, partially offset by a decrease in the average yield on interest-earning assets to 3.88% for the three months ended March 31, 2016 as compared to 3.97% for the three months ended March 31, 2015. The majority of our interest income was derived from interest and fees on loans.
Interest and fees on loans increased $858,000, or 21.0%, to $5.0 million for the three months ended March 31, 2016 from $4.1 million for the three months ended March 31, 2015. Interest and fees on loans increased due to an increase in the average balance of loans and loans held for sale of $95.5 million to $494.8 million for the three months ended March 31, 2016 as compared to $399.3 million for the three months ended March 31, 2015. The increase in our average balance of loans was principally due to the growth in our residential one-to four- family and commercial real estate loan portfolios. Partially offsetting the increase in average balance of loans, our average yield on loans decreased to 4.02% for the three months ended March 31, 2016 from 4.16% for the three months ended March 31, 2015 primarily due to a decline in market interest rates as well as the increase in residential one-to four- family residential loans as a percentage of our total loan portfolio which generally are originated at lower interest rates as compared to commercial real estate and SBA loans.
Interest Expense. Interest expense increased $50,000, or 8.6%, to $630,000 for the three months ended March 31, 2016 from $580,000 for the three months ended March 31, 2015 due to an increase in interest expense on borrowed funds of $109,000 partially offset by a $59,000, or 10.8%, decline in deposit interest expense. Deposit interest expense declined due to a decline in the average cost of deposits of ten basis points to 0.71% for the three months ended March 31, 2016 as compared to 0.81% for the three months ended March 31, 2015 as a result of lower interest rates. The average cost of certificates of deposit declined from 1.56% for the three months ended March 31, 2015 to 1.42% for the three months ended March 31, 2016. The average balance of certificates of deposit decreased $8.5 million to $110.6 million for the three months ended March 31, 2016 as compared to $119.1 million for the three months ended March 31, 2015 as certain depositors chose not to extend maturity dates based on possible future interest rate increases.
Interest expense on borrowed funds increased $109,000 to $144,000 for the three months ended March 31, 2016 from $35,000 for the three months ended March 31, 2015 due to an increase in the average balance of borrowed funds as well as an increase in the cost of borrowed funds. The average balance of borrowed funds increased $76.4 million to $117.9 million for the three months ended March 31, 2016 from $41.5 million for the three months ended March 31, 2015, as we increased short-term borrowings to fund loan growth. The cost of borrowed funds increased to 0.49% for the three months ended March 31, 2016 from 0.34% for the three months ended March 31, 2015 due to the December 2015 increase in short-term interest rates.
Net Interest Income. Net interest income increased $844,000 or 23.8%, to $4.4 million for the three months ended March 31, 2016 from $3.5 million for the three months ended March 31, 2015. This increase was due to both a $18.5 million increase in net interest-earning assets to $125.2 million for the three months ended March 31, 2016 and an increase in our interest rate spread of two basis points to 3.24% for the three months ended March 31, 2016 as compared to 3.22% for the prior year period. The net interest margin increased one basis point to 3.42% for the three months ended March 31, 2016 from 3.41% for the three months ended March 31, 2015.
Rate / Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities for the periods indicated. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
|
|
Three months ended March 31, |
| |||||||
|
|
Net |
|
Increase (decrease) due to |
| |||||
(Dollars in thousands) |
|
Change |
|
Volume |
|
Rate |
| |||
Interest-earning assets: |
|
|
|
|
|
|
| |||
Loans and loans held for sale |
|
$ |
858 |
|
$ |
957 |
|
$ |
(99 |
) |
Cash and cash equivalents |
|
9 |
|
(4 |
) |
13 |
| |||
Federal Home Loan Bank of Boston stock and other investments |
|
27 |
|
26 |
|
1 |
| |||
Total interest-earning assets |
|
894 |
|
979 |
|
(85 |
) | |||
Interest-bearing liabilities: |
|
|
|
|
|
|
| |||
Money Market accounts |
|
7 |
|
5 |
|
2 |
| |||
Savings accounts |
|
1 |
|
2 |
|
(1 |
) | |||
Club accounts |
|
|
|
|
|
|
| |||
Certificates of deposit |
|
(67 |
) |
(54 |
) |
(13 |
) | |||
Borrowed funds |
|
109 |
|
103 |
|
6 |
| |||
Total interest-bearing liabilities |
|
50 |
|
56 |
|
(6 |
) | |||
Net interest income |
|
$ |
844 |
|
$ |
923 |
|
$ |
(79 |
) |
The following table sets forth average balance sheets, average yields and costs, and certain other information for the three months ended March 31, 2016 and 2015. No tax-equivalent yield adjustments were made, as we had no non-taxable interest-earning assets during the periods presented. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred loan fees, discounts and premiums that are amortized or accreted to interest income or interest expense.
AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS
|
|
Three months ended |
|
Three months ended |
| ||||||||||||
(Dollars in thousands) |
|
Average |
|
Interest |
|
Average |
|
Average |
|
Interest |
|
Average |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Loans and loans held for sale |
|
$ |
494,778 |
|
$ |
4,950 |
|
4.02 |
% |
$ |
399,321 |
|
$ |
4,092 |
|
4.16 |
% |
Cash and cash equivalents |
|
13,829 |
|
30 |
|
0.87 |
% |
16,778 |
|
21 |
|
0.51 |
% | ||||
Federal Home Loan Bank of Boston stock and other investments |
|
11,586 |
|
43 |
|
1.49 |
% |
6,222 |
|
16 |
|
1.04 |
% | ||||
Total interest-earning assets |
|
520,193 |
|
5,023 |
|
3.88 |
% |
422,321 |
|
4,129 |
|
3.97 |
% | ||||
Non-interest-earning assets |
|
41,849 |
|
|
|
|
|
45,479 |
|
|
|
|
| ||||
Total assets |
|
$ |
562,042 |
|
|
|
|
|
$ |
467,800 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Liabilities and Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Money market accounts |
|
$ |
69,581 |
|
73 |
|
0.42 |
% |
$ |
64,756 |
|
66 |
|
0.41 |
% | ||
Savings accounts |
|
95,538 |
|
23 |
|
0.10 |
% |
88,940 |
|
22 |
|
0.10 |
% | ||||
Club accounts |
|
1,358 |
|
|
|
0.00 |
% |
1,300 |
|
|
|
|
% | ||||
Certificates of deposit |
|
110,555 |
|
390 |
|
1.42 |
% |
119,101 |
|
457 |
|
1.56 |
% | ||||
Total interest-bearing deposits |
|
277,032 |
|
486 |
|
0.71 |
% |
274,097 |
|
545 |
|
0.81 |
% | ||||
Borrowed funds |
|
117,944 |
|
144 |
|
0.49 |
% |
41,506 |
|
35 |
|
0.34 |
% | ||||
Total interest bearing liabilities |
|
394,976 |
|
630 |
|
0.64 |
% |
315,603 |
|
580 |
|
0.75 |
% | ||||
Non-interest bearing deposits |
|
90,213 |
|
|
|
|
|
76,317 |
|
|
|
|
| ||||
Other liabilities |
|
6,163 |
|
|
|
|
|
5,367 |
|
|
|
|
| ||||
Total liabilities |
|
491,352 |
|
|
|
|
|
397,287 |
|
|
|
|
| ||||
Stockholders equity |
|
70,690 |
|
|
|
|
|
70,513 |
|
|
|
|
| ||||
Total liabilities and stockholders equity |
|
$ |
562,042 |
|
|
|
|
|
$ |
467,800 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest income |
|
|
|
$ |
4,393 |
|
|
|
|
|
$ |
3,549 |
|
|
| ||
Net interest rate spread(1) |
|
|
|
|
|
3.24 |
% |
|
|
|
|
3.22 |
% | ||||
Net interest-earning assets(2) |
|
$ |
125,217 |
|
|
|
|
|
$ |
106,718 |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net interest margin(3) |
|
|
|
|
|
3.42 |
% |
|
|
|
|
3.41 |
% | ||||
Average interest-earning assets to interest-bearing liabilities |
|
|
|
|
|
131.70 |
% |
|
|
|
|
133.81 |
% |
(1) Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average total interest-earning assets.
(4) Annualized.
Provision for loan losses. A provision for loan losses of $109,000 was recorded to the allowance for loan losses during the three months ended March 31, 2016, an increase of $10,000 as compared to a provision of $99,000 for the three months ended March 31, 2015. During the three months ended March 31, 2016, a provision of $63,000 was recorded to the residential one-to four- family loan portfolio and a provision of $24,000 was recorded to the commercial real estate loan portfolio primarily due to loan growth in both portfolios. Our provisions are based on our assessment of loss history, current asset quality and economic trends.
During the three months ended March 31, 2015, a provision of $111,000 was recorded relating to the residential one-to-four family loan portfolio primarily due to loan growth. A provision $25,000 was recorded related to the commercial real estate portfolio due to loan growth and a credit of $34,000 was recorded relating to the SBA portfolio due to both improved credit quality as well as a decrease in SBA loans. We recorded charge-offs of $75,000 on the home equity loan portfolio during the three months ended March 31, 2015.
Non-Interest income. Non-interest income decreased $141,000, or 7.5%, to $1.7 million for the three months ended March 31, 2016 from $1.9 million for the three months ended March 31, 2015. The decrease in non-interest income was primarily the result of a decrease in net gains on sales of loans, and other mortgage banking income of $177,000 for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. During the three months ended March 31, 2015, SBA loans totaling $4.2 million were sold for a gain of $328,000 as compared to no SBA loan sales during the three months ended March 31, 2016. Gains on sales of mortgage loans increased $249,000 from $549,000 for the three months ended March 31, 2015 to $798,000 for the three months ended March 31, 2016 due to increased loan sale volume as well as improved net margins on sale. Mortgage loans sold during the three months ended March 31, 2015 totaled $37.7 million as compared to $41.0 million during the three months ended March 31, 2016. A gain in the fair value of our mortgage derivatives and change in the fair value of loans held for sale of $70,000 were recorded during the three months ended March 31, 2016 as compared to $180,000 during the three months ended March 31, 2015. The 2015 increase was impacted by the election of fair value accounting for loans held for sale as of January 1, 2015.
Non-Interest expense. Non-interest expense increased $243,000, or 5.2%, to $5.0 million for the three months ended March 31, 2016 from $4.7 million for the three months ended March 31, 2015. Salary and employee benefits expense increased $329,000 for the three months ended March 31, 2016 as compared to the three months ended March 31, 2015 primarily due to an increase in FTEs to 141 at March 31, 2016 from 133 at March 31, 2015, an increase in supplemental executive retirement plan expense of $41,000 during the three months ended March 31, 2016 as compared to the same period in 2015, general merit increases, and $18,000 in stock-based compensation expense related to awards made under our 2015 Equity Incentive Plan. Occupancy expense decreased $99,000 from the first quarter of 2015 to the first quarter of 2016 primarily due to decreased snow removal costs as well as a decrease of $29,000 in real estate taxes due to the sale of real estate held for sale. Data processing expenses decreased $34,000 due to lower transaction costs as well as lower costs for home banking. Foreclosed real estate expenses decreased $64,000 from $80,000 for the three months ended March 31, 2015 as compared to $16,000 for the three months ended March 31, 2016 primarily due to lower provisions for losses on foreclosed properties. Other general and administrative expenses increased $71,000 to $456,000 for the three months ended March 31, 2016 as compared to $385,000 for the comparable 2015 period primarily due to higher operational expenses.
Income tax expense). Income tax expense of $426,000 was recorded for the three months ended March 31, 2016, an increase of $184,000, or 76.0%, as compared to $242,000 of income tax expense for the three months ended March 31, 2015. The increase in income tax expense was primarily due to an increase in pre-tax income of $450,000 during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015. The effective tax rate for the three months ended March 31, 2016 and 2015 were 40.0% and 39.3%, respectively.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loans repayments, advances from the Federal Home Loan Bank of Boston, principal repayments and loans sales. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee, under the direction of the Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2016.
The Corporation regularly monitors and adjusts its investments in liquid assets based upon an assessment of:
(i) Expected loan demand including commitments to purchase loans;
(ii) Expected deposit flows and borrowing maturities;
(iii) Yields available on interest-earning deposits; and
(iv) The objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits and are also used to pay off short-term borrowings.
The Corporations most liquid assets are cash and cash equivalents. The level of these assets is dependent on operating, financing, lending and investing activities during any given period. At March 31, 2016, cash and cash equivalents totaled $13.0 million. The Corporation also has $6.1 million of certificates of deposit. In April 2016, a $3.0 million certificate of deposit was transferred into cash and cash equivalents upon its maturity.
The Corporations cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.
At March 31, 2016, the Bank had $37.9 million in commitments to originate loans, $24.9 million of which will be sold. In addition to commitments to originate loans, the Bank had $71.8 million in unused lines of credit to borrowers. Commitments to purchase loans from third parties totaled $1.4 million. Certificates of deposit due within one year of March 31, 2016 totaled $43.9 million, or 11.6%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including utilizing additional Federal Home Loan Bank of Boston advances and selling the guaranteed portions of SBA loans of $15.6 million as of March 31, 2016. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowed funds than it currently pays on the certificates of deposit due on or before March 31, 2017. Management believes, however, based on historical experience and current market interest rates, that the Bank will retain upon maturity, a large portion of certificates of deposit with maturities of one year or less as of March 31, 2016.
The Corporations primary investing activity is originating loans. During the three months ended March 31, 2016 and for the year ended December 31, 2015, loan originations, net of principal repayments totaled $16.7 million, and $146.8 million, respectively. During the three months ended March 31, 2016 and year ended December 31, 2015, purchases of loans from third party originators totaled $7.7 million and $57.4 million, respectively. During the three months ended March 31, 2016, proceeds from the sale of real estate held for sale totaled $3.3 million.
Financing activities consist primarily of activity in deposit accounts, borrowed funds from the Federal Home Loan Bank of Boston (FHLB) advances and stock repurchases. We experienced a net increase in deposits of $2.5 million and $30.0 million for the three months ended March 31, 2016 and for the year ended December 31, 2015, respectively. 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. The net change in short term borrowed funds was $5.5 million during the three months ended March 31, 2016 as compared to $69.0 million for the year ended December 31, 2015 and $1.3 million in repayments of matured long-term advances for the year ended December 31, 2015. The Corporation repurchased $628,000 of its common stock as part of a previously announced 5% stock repurchase program during the three months ended March 31, 2016.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston that provide an additional source of funds. Borrowed funds were $121.0 million and $115.5 million at March 31, 2016 and December 31, 2015, respectively. At March 31, 2016, we had the ability to borrow up to an additional $67.9 million from the Federal Home Loan Bank of Boston. We also have the ability to borrow with the Federal Reserve discount window. At March 31, 2016, the Bank had the capacity to borrow up to $14.1 million from the Federal Reserve discount window, but had no outstanding borrowings as of that date.
Capital Resources
The Corporation believes its current capital is adequate to support ongoing operations. In July 2013, the Banks primary federal regulator, the FDIC, published final rules (the Basel III Capital Rules) that implement, in part, agreements reached by the Basel Committee on Banking Supervision (Basel Committee) in Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems (Basel III) and imposed new capital requirements on the Bank, effective January 1, 2015. When fully phased in, the Basel III Capital Rules will additionally require institutions to retain a capital conservation buffer, composed of CET1, of 2.5% above these required minimum capital ratio levels. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. Restrictions would begin phasing in where the banking organizations capital conservation buffer was below 2.5% at the beginning of a quarter, and distributions and discretionary bonus payments would be completely prohibited if no capital conservation buffer exists. When the capital conservation buffer is fully phased in on January 1, 2019, the Holding Company and the Bank will effectively have the following minimum capital to risk-weighted assets ratios: a) 7.0% based upon CET1; b) 8.5% based upon tier 1 capital; and c) 10.5% based upon total regulatory capital. The implementation of the capital conservation buffer will begin on January 1, 2016 at 0.625% and increase by 0.625% each subsequent January 1, until it reaches 2.5% on January 1, 2019. As of March 31, 2016, the Bank qualifies as well capitalized under applicable regulations of the Rhode Island Department of Business Regulation and the FDIC. To be categorized as well capitalized under Basel III, framework, the Bank must maintain minimum Total Capital, Tier 1 and Common Equity Tier 1 Capital ratios of 10%, 8% and 6.5% respectively, and, maintain a leverage capital ratio (Tier 1 capital to average assets) of at least 5%.
The Banks actual capital amounts and ratios are presented as of March 31, 2016 in the table below.
|
|
Actual |
|
Minimum Capital for Capital Adequacy Purposes |
|
Minimum Capital for |
|
Minimum Capital To Be |
| ||||||||||||
(Dollars in thousands) |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
|
Amount |
|
Ratio |
| ||||
Total Capital (to risk weighed assets) |
|
$ |
56,096 |
|
13.505 |
% |
$ |
33,229 |
|
8.000 |
% |
$ |
35,825 |
|
8.625 |
% |
$ |
41,536 |
|
10.000 |
% |
Tier 1 Capital (to risk weighed assets) |
|
$ |
53,813 |
|
12.956 |
% |
$ |
24,922 |
|
6.000 |
% |
$ |
27,518 |
|
6.625 |
% |
$ |
33,229 |
|
8.000 |
% |
Common Equity Tier 1 (to risk weighed assets) |
|
$ |
53,813 |
|
12.956 |
% |
$ |
18,691 |
|
4.500 |
% |
$ |
21,287 |
|
5.125 |
% |
$ |
26,998 |
|
6.500 |
% |
Tier 1 Leverage Capital (to average assets) |
|
$ |
53,813 |
|
9.797 |
% |
$ |
21,972 |
|
4.000 |
% |
$ |
21,972 |
|
4.000 |
% |
$ |
27,464 |
|
5.000 |
% |
On April 9, 2015, the Board of Governors of the Federal Reserve System issued the Final Rule to implement Public Law 113-250 enacted on December 18, 2014 that updates the Small Bank Holding Company Policy Statement (Policy Statement), which became effective in May 2015. Pursuant to the Policy Statement, capital rules and reporting requirements will not apply to the small bank holding companies (defined as less than $1.0 billion in assets) which meet the following criteria: (1) not engaged in significant non-bank activities; (2) no significant off-balance sheet activities conducted through a non-bank subsidiary, and (3) no material amount of SEC registered debt or equity securities outstanding (other than trust preferred). The Bank is subject to the capital rules and reporting requirements though the holding company is exempt.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Not required for smaller reporting companies.
Item 4 - Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Corporation carried out an evaluation as defined in Rule 13a-15(e) under the Exchange Act of 1934, under the supervision and with the participation of the Corporations principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Corporations disclosure controls and procedures. Based on this evaluation, the Corporations principal executive officer and principal financial officer concluded that the Corporations disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There has been no change in the Corporations internal control over financial reporting that has occurred during the Corporations most recent fiscal quarter (i.e., the three months ended March 31, 2016) that has materially affected, or is reasonably likely to materially affect, such internal controls.
At March 31, 2016 there were no material legal proceedings to which the Corporation is a party or of which any of its property is subject. From time to time, the Corporation is a party to various legal proceedings incident to its business.
Not required for smaller reporting companies.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
a) Unregistered Sales of Equity Securities. None
b) Use of Proceeds. None
c) Repurchase of Equity Securities
The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2016.
Period |
|
(a) Total |
|
(b) Average |
|
(c) Total |
|
(d) |
| |
January 1 January 31, 2016 |
|
12,900 |
|
$ |
12.76 |
|
12,900 |
|
107,659 |
|
February 1 February 29, 2016 |
|
10,200 |
|
$ |
12.72 |
|
10,200 |
|
97,459 |
|
March 1 March 31, 2016 |
|
25,800 |
|
$ |
12.92 |
|
25,800 |
|
71,659 |
|
Total |
|
48,900 |
|
$ |
12.84 |
|
48,900 |
|
|
|
(1) The Corporation authorized its first stock repurchase program during the first quarter of 2015. The Corporations Board of Directors authorized a stock repurchase program to acquire up to 247,459 shares, or 5.0% of the Corporations then outstanding common stock. Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Corporation.
Item 3 - Defaults upon Senior Securities
Not Applicable
Item 4 - Mine Safety Disclosures
Not Applicable
Not Applicable
EXHIBIT INDEX
Exhibit No. |
|
Description |
|
|
|
10.1* |
|
Form of award of non-qualified stock option agreement |
10.2* |
|
Form of restricted Stock award agreement |
31.1* |
|
Certification of Principal Executive Officer under Securities Exchange Act Rule 13a-14(a) |
31.2* |
|
Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a) |
32* |
|
Certification of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. § 1350 Furnished Pursuant to Securities Exchange Act Rule 13a-14(b) |
|
|
|
101 |
|
The following materials from Coastway Bancorp, Inc.s Quarterly Report on Form 10-Q for the quarter ended March 31, 2016 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015, (ii) Consolidated Statements of Net Income for the three months ended March 31, 2016 and 2015, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015, (iv) Consolidated Statements of Changes in Stockholders Equity for the three months ended March 31, 2016 and (v) Notes to Unaudited Consolidated Financial Statements. |
*Filed herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
COASTWAY BANCORP, INC. | ||
|
| ||
Dated: May 6, 2016 |
| ||
|
| ||
|
By: |
/s/ William A. White | |
|
|
President and Chief Executive Officer | |
|
|
(Principal Executive Officer) | |
|
| ||
|
| ||
|
|
/s/ Jeanette Fritz | |
|
|
Executive Vice President and | |
|
|
Chief Financial Officer | |
|
|
(Principal Financial Officer) | |