Item 1. Business
EXPLANATORY NOTE
Coastway Bancorp, Inc., a Maryland corporation (the "Company"), was formed to serve as the stock holding company for Coastway Community
Bank (the "Bank") as part of its conversion from the mutual to the stock form of ownership. Prior to January 14, 2014, the Bank was 100% owned by Coastway Bancorp, LLC (the "LLC") and
the LLC was 100% owned by Coastway Bancorp, MHC (the "MHC"). Accordingly, financial and other information of the MHC, the Company's predecessor is included in this annual report for 2013.
Forward Looking Statements
This annual 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 7- "Management's Discussion and Analysis of Financial Condition and Results of Operations," including, but not limited to, statements
related to management's 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
Company 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 Company's future
results. The following important factors, among others, could cause the Company's results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein:
(i) changes in interest rates and changes in the duration of interest-earning assets and interest-bearing liabilities 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 Company's allowance for loan losses and/or reduce valuations of foreclosed properties; (iii) changes in consumer spending could negatively impact the
Company's 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 Company's competitive position within its market area and reduce demand for the Company's products and services; (v) deterioration of securities markets
could adversely affect the value or credit quality of the Company's assets and the availability of funding sources necessary to meet the Company's liquidity needs; (vi) changes in technology
could adversely impact the Company's operations and increase technology-related expenditures; (vii) increases in employee compensation and benefit expenses could adversely affect the Company's
financial results; (viii) changes in laws and regulations that apply to the Company's 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 Company's 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 Company's 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;
2
Table of Contents
and
(xii) some or all of the risks and uncertainties described in "Risk Factors" contained in Item 1A could be realized, which could have a material adverse effect on the Company's
business, financial condition and results of operation. Therefore, the Company cautions readers not to place undue reliance on any such forward-looking information and statements.
Coastway Bancorp, Inc.
Coastway Bancorp, Inc. is a Maryland corporation and owns 100% of the common stock of Coastway Community Bank. On January 14,
2014, the Company completed its initial public offering 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. Since the completion
of the initial public offering, the Company has not engaged in any significant business activity other than owning the common stock of and having deposits in the Bank. At December 31, 2017,
Coastway Bancorp, Inc. had total consolidated assets of $738.9 million, total consolidated deposits of $477.0 million, and total consolidated stockholders' equity of
$71.3 million. Our executive offices are located at One Coastway Blvd, Warwick, Rhode Island 02886. Our telephone number at this address is (401) 330-1600.
Coastway Community Bank
Coastway Community Bank is a Rhode Island chartered savings bank headquartered in Warwick, Rhode Island. Coastway Community Bank was originally
organized in 1920 as the Telephone Workers Credit Union, a Rhode Island credit union, and later we changed our name
to Coastway Credit Union. In 2000, Coastway Credit Union merged with Ocean State Community Credit Union, also located in Rhode Island. In 2009, in order to give us greater business lending authority,
Coastway Credit Union converted to a Rhode Island chartered mutual savings bank and changed its name to Coastway Community Bank. In 2013, we reorganized into the mutual holding company structure by
forming Coastway Bancorp, MHC, a Rhode Island chartered mutual holding company which was eliminated in January, 2014 when we completed our initial public offering.
We
provide financial services to individuals, families and businesses throughout Rhode Island from our nine banking offices located in Providence County and Kent County, Rhode Island.
Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations and borrowings, in
one- to four-family residential real estate loans, home equity loans and lines of credit, commercial real estate loans, U.S. Small Business Administration ("SBA") loans and, to a lesser extent,
commercial business loans, commercial construction loans and consumer loans. We sell in the secondary market the majority of the fixed-rate conforming one- to four-family residential real estate loans
that we originate, and depending on market conditions, we may also sell the guaranteed portions of SBA loans that we originate. We offer a variety of deposit accounts to consumers and small
businesses, including certificate of deposit accounts, savings accounts, demand deposit accounts, money market accounts and club accounts. We utilize national market certificates of deposit and
advances from the Federal Home Loan Bank of Boston both to fund loan growth and for additional liquidity. We also offer online and mobile banking services. Our website address is www.coastway.com.
Information on our website is not incorporated into this annual report and should not be considered part of this annual report.
Market Area
We conduct our operations from our main office and nine full-service banking offices in Rhode Island. Our primary deposit market includes the
areas surrounding our banking offices in Providence and Kent Counties, Rhode Island. Our primary lending market includes Providence and Kent Counties, greater Rhode Island and nearby communities in
the states of Connecticut and Massachusetts.
3
Table of Contents
However,
we occasionally make loans secured by properties located outside of our primary lending market, usually to borrowers with whom we have an existing relationship and who have a presence within
our primary market.
Rhode
Island is a relatively well-developed state that has a wide range of industries. Rhode Island's historical economy was based on industries such as textiles, jewelry, silverware,
metals/machinery and footwear/rubber products. The access to the Atlantic Ocean resulted in the establishment of military bases and other military-related industries and employment. Over time
manufacturing and other labor intensive industries have declined in Rhode Island and have been replaced by a more service-oriented economy. In recent decades, health care, financial services, defense
industry, tourism and gambling have become more important segments of the local economy. Notable firms headquartered in Rhode Island include CVS Pharmacy, Textron, Hasbro and Amica Insurance. Rhode
Island is also a center of higher education, with Brown University, the University of Rhode Island, Johnson & Wales University and Bryant University. The U.S. Navy has had a significant
presence in the Newport area, through the Naval Station at Newport and the Naval Undersea Warfare Center.
Unemployment
has stabilized in Rhode Island with unemployment rates of 4.4% for the entire state, 4.6% for Providence County and 3.9% for Kent County as compared to the national rate of
4.1% as of December 2017. The median household income for 2012-2016 in Rhode Island was $58,000, in Providence County it was $51,000 and in Kent County it was $66,000, as compared to the national
median of $55,000.
According
to the latest U.S. Census estimates, Rhode Island reported a population of 1.1 million as of July 1, 2017, while the Providence metropolitan statistical area
(which includes contiguous portions of Massachusetts and Connecticut), contained a total population of 1.6 million. Rhode Island recorded a 0.6% increase in population from April 1, 2010
to July 1, 2017, and the Providence metropolitan statistical area also recorded a 0.1% increase in population. Providence County, the location of seven of our branch offices, had a population
of 634,000 as of July 1, 2016 and recorded an increase in population of 1.1% from April 1, 2010 to July 1, 2016. Kent County, the location of two of our branch offices, reported a
population of 165,000 as of July 1, 2016 and recorded a slight population decrease of 0.9% over the same time period. The United States as a whole recorded an increase of 4.7% in total
population from April 1, 2010 to July 1, 2016 and an increase of 5.5% in total population from April 15, 2010 to July 1, 2017.
Competition
We face significant competition within our market both in making loans and attracting deposits. Our market area has a high concentration of
financial institutions, including large money center and regional banks, community banks and credit unions. Some of our competitors offer products and services that we currently do not offer, such as
trust services and private banking. Our competition for loans and deposits comes principally from commercial banks, savings institutions, mortgage banking firms, consumer finance companies and credit
unions. We face additional competition for deposits from short-term money market funds, brokerage firms, mutual funds and insurance companies.
As
of June 30, 2017 (the latest date for which information is available), our deposit market share was 1.59% for the State of Rhode Island, with 1.17% of total deposits in
Providence County, Rhode Island and 6.93% in Kent County, Rhode Island respectively, making us the 8th largest out of 17 financial institutions in Providence County and the 6th largest
out of 12 financial institutions in Kent County. We have been one of the top five SBA lenders in the State of Rhode Island in terms of dollars lent and number of loans originated for the last ten
years.
4
Table of Contents
Lending Activities
Our principal lending activity is originating one- to four-family residential real estate loans, home equity loans and lines of credit,
commercial real estate loans, SBA loans and, to a lesser extent, commercial business loans, commercial construction loans and consumer loans. We also sell in the secondary market the majority of the
fixed-rate conforming one- to four-family residential real estate loans that we originate, generally on a servicing-released, limited or no recourse basis, while retaining jumbo fixed-rate and
adjustable-rate one- to four-family residential real estate loans in order to manage the duration and time to re-pricing of our loan portfolio. During 2017 and 2016, we purchased individual loans
totaling $43.8 million and $17.6 million at a cost of $44.4 million and $17.8 million, respectively, of one- to four-family residential real estate loans from third party
originators, which the Bank underwrote in accordance with the Bank's lending policy prior to purchase. In recent years, we have increased and, subject to market conditions and our asset-liability
analysis, expect to continue to increase commercial real estate and commercial business lending. Depending on market conditions, we may also sell the guaranteed portions of SBA loans that we
originate. We sold $4.2 million of SBA loans for a gain on sale of $328,000 in 2015. There were no sales of SBA loans during 2017 and 2016.
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio, by type of loan at the dates
indicated, excluding
the carrying value of loans held for sale of $11.1 million, $23.2 million, $19.0 million, $11.0 million, and $8.6 million at December 31, 2017, 2016, 2015,
2014 and 2013, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
312,095
|
|
|
50.92
|
%
|
$
|
243,385
|
|
|
46.46
|
%
|
$
|
208,777
|
|
|
44.84
|
%
|
Home equity loans & lines of credit
|
|
|
71,844
|
|
|
11.72
|
|
|
76,175
|
|
|
14.54
|
|
|
76,881
|
|
|
16.51
|
|
Commercial real estate loans
|
|
|
156,024
|
|
|
25.46
|
|
|
138,946
|
|
|
26.52
|
|
|
125,782
|
|
|
27.02
|
|
Commercial business loans
|
|
|
17,158
|
|
|
2.80
|
|
|
13,308
|
|
|
2.54
|
|
|
8,918
|
|
|
1.92
|
|
SBA loans
|
|
|
41,020
|
|
|
6.69
|
|
|
39,948
|
|
|
7.63
|
|
|
39,217
|
|
|
8.42
|
|
Commercial construction loans
|
|
|
13,552
|
|
|
2.21
|
|
|
10,946
|
|
|
2.09
|
|
|
4,729
|
|
|
1.02
|
|
Consumer loans
|
|
|
1,229
|
|
|
0.20
|
|
|
1,165
|
|
|
0.22
|
|
|
1,252
|
|
|
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
612,922
|
|
|
100.00
|
%
|
|
523,873
|
|
|
100.00
|
%
|
|
465,556
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
4,591
|
|
|
|
|
|
3,835
|
|
|
|
|
|
3,661
|
|
|
|
|
Allowance for loan losses
|
|
|
(2,920
|
)
|
|
|
|
|
(2,493
|
)
|
|
|
|
|
(2,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
614,593
|
|
|
|
|
$
|
525,215
|
|
|
|
|
$
|
467,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2014
|
|
2013
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
134,084
|
|
|
34.99
|
%
|
$
|
98,180
|
|
|
29.92
|
%
|
Home equity loans & lines of credit
|
|
|
79,771
|
|
|
20.82
|
|
|
83,334
|
|
|
25.39
|
|
Commercial real estate loans
|
|
|
108,025
|
|
|
28.19
|
|
|
91,609
|
|
|
27.91
|
|
Commercial business loans
|
|
|
7,698
|
|
|
2.01
|
|
|
8,301
|
|
|
2.53
|
|
SBA loans
|
|
|
44,032
|
|
|
11.49
|
|
|
38,004
|
|
|
11.58
|
|
Commercial construction loans
|
|
|
8,181
|
|
|
2.14
|
|
|
7,099
|
|
|
2.16
|
|
Consumer loans
|
|
|
1,372
|
|
|
0.36
|
|
|
1,672
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
|
383,163
|
|
|
100.00
|
%
|
|
328,199
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
|
2,688
|
|
|
|
|
|
2,033
|
|
|
|
|
Allowance for loan losses
|
|
|
(1,942
|
)
|
|
|
|
|
(1,656
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, net
|
|
$
|
383,909
|
|
|
|
|
$
|
328,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan Portfolio Maturities and Yields.
The following table summarizes the scheduled repayments of our loan portfolio at
December 31, 2017.
Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. Maturities are based on the final contractual payment date and
do not reflect the effect of prepayments, scheduled principal amortization and weighted average rates do not reflect scheduled re-pricings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family
|
|
Home Equity Loans
and Lines of Credit
|
|
Commercial Real Estate
|
|
Commercial
Business
|
|
Due During the Years Ending
December 31,
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
2018
|
|
$
|
30
|
|
|
5.07
|
%
|
$
|
4,909
|
|
|
4.55
|
%
|
$
|
4,822
|
|
|
5.09
|
%
|
$
|
3,952
|
|
|
5.21
|
%
|
2019
|
|
|
|
|
|
|
|
|
6,138
|
|
|
4.60
|
|
|
1,478
|
|
|
5.01
|
|
|
549
|
|
|
4.44
|
|
2020
|
|
|
|
|
|
|
|
|
5,432
|
|
|
4.68
|
|
|
7,252
|
|
|
4.72
|
|
|
1,038
|
|
|
3.88
|
|
2021 to 2022
|
|
|
3
|
|
|
9.90
|
|
|
12,952
|
|
|
4.37
|
|
|
20,162
|
|
|
4.73
|
|
|
3,401
|
|
|
3.88
|
|
2023 to 2027
|
|
|
1,544
|
|
|
4.26
|
|
|
40,695
|
|
|
4.03
|
|
|
98,485
|
|
|
4.56
|
|
|
3,979
|
|
|
4.44
|
|
2028 to 2032
|
|
|
9,303
|
|
|
3.76
|
|
|
1,676
|
|
|
5.18
|
|
|
8,374
|
|
|
4.76
|
|
|
623
|
|
|
4.50
|
|
2033 and beyond
|
|
|
301,215
|
|
|
4.13
|
|
|
42
|
|
|
5.87
|
|
|
15,451
|
|
|
4.46
|
|
|
3,616
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
312,095
|
|
|
4.12
|
%
|
$
|
71,844
|
|
|
4.25
|
%
|
$
|
156,024
|
|
|
4.61
|
%
|
$
|
17,158
|
|
|
4.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
SBA
|
|
Commercial
Construction
|
|
Consumer
|
|
Total
|
|
Due During the Years Ending
December 31,
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
2018
|
|
$
|
5,236
|
|
|
6.09
|
%
|
$
|
13,552
|
|
|
4.82
|
%
|
$
|
836
|
|
|
6.64
|
%
|
$
|
33,337
|
|
|
5.11
|
%
|
2019
|
|
|
1,877
|
|
|
5.87
|
|
|
|
|
|
|
|
|
55
|
|
|
7.79
|
|
|
10,097
|
|
|
4.90
|
|
2020
|
|
|
632
|
|
|
5.17
|
|
|
|
|
|
|
|
|
102
|
|
|
8.20
|
|
|
14,456
|
|
|
4.69
|
|
2021 to 2022
|
|
|
3,427
|
|
|
5.14
|
|
|
|
|
|
|
|
|
120
|
|
|
5.44
|
|
|
40,065
|
|
|
4.58
|
|
2023 to 2027
|
|
|
9,402
|
|
|
5.15
|
|
|
|
|
|
|
|
|
51
|
|
|
4.75
|
|
|
154,156
|
|
|
4.45
|
|
2028 to 2032
|
|
|
6,932
|
|
|
4.82
|
|
|
|
|
|
|
|
|
23
|
|
|
7.99
|
|
|
26,931
|
|
|
4.45
|
|
2033 and beyond
|
|
|
13,514
|
|
|
4.96
|
|
|
|
|
|
|
|
|
42
|
|
|
4.75
|
|
|
333,880
|
|
|
4.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
41,020
|
|
|
5.18
|
%
|
$
|
13,552
|
|
|
4.82
|
%
|
$
|
1,229
|
|
|
6.59
|
%
|
$
|
612,922
|
|
|
4.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth our fixed- and adjustable-rate loans at December 31, 2017 that are due after December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After December 31, 2018
|
|
|
|
Fixed
|
|
Adjustable
|
|
Total
|
|
|
|
(In thousands)
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
262,840
|
|
$
|
49,225
|
|
$
|
312,065
|
|
Home equity loans and lines of credit
|
|
|
9,765
|
|
|
57,171
|
|
|
66,936
|
|
Commercial real estate loans
|
|
|
19,021
|
|
|
132,181
|
|
|
151,202
|
|
Commercial business loans
|
|
|
5,105
|
|
|
8,100
|
|
|
13,205
|
|
SBA loans
|
|
|
2,198
|
|
|
33,593
|
|
|
35,791
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
393
|
|
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
299,322
|
|
$
|
280,270
|
|
$
|
579,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to Four-Family Residential Real Estate Lending.
At December 31, 2017, we had $312.1 million of loans secured by
one- to
four-family residential real estate, representing 50.9% of our total loan portfolio. In
addition, at December 31, 2017, we had $11.1 million of residential mortgages held for sale at fair value. We primarily originate fixed-rate one- to four-family residential real estate
loans, but depending on market conditions and borrower preferences, we also offer adjustable-rate loans. At December 31, 2017, 83.6% of our one- to four-family residential real estate loans
were fixed-rate loans, and 16.4% of such loans were adjustable-rate loans. At December 31, 2017 and 2016, $96.8 million and $67.5 million of one-to four-family residential real
estate loans were purchased from third parties, respectively, which are located in New England, primarily in Massachusetts.
Our
fixed-rate one- to four-family residential real estate loans typically have terms of 10 to 30 years and are generally underwritten according to Fannie Mae, Freddie Mac, VA,
FHA or Rhode Island Housing guidelines and when the loan balance meets such guidelines, we refer to loans that conform to such guidelines as "conforming loans." We generally originate both fixed- and
adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which as of December 31, 2017 was generally $424,100 for
single-family homes in our market area. We typically sell servicing-released the majority of our fixed-rate conforming loans. During the years ended December 31, 2017 and 2016, proceeds from
the sale of one- to four-family residential real estate loans held for sale were $228.3 million and $219.0 million, respectively. We also originate loans above the lending limit for
conforming loans, which are referred to as "jumbo loans" that we retain in our portfolio. Jumbo loans that we originate typically have 15 to
7
Table of Contents
30 year
terms and maximum loan-to-value ratios of 95%. At December 31, 2017, we had $236.4 million in jumbo loans, which represented 75.8% of our one- to four-family residential
real estate loans. Our average loan size for jumbo loans was $603,000 at December 31, 2017. We also offer FHA, USDA and VA loans, all of which we originate for sale on a servicing-released,
non-recourse basis in accordance with FHA, USDA and VA guidelines. Virtually all of our one- to four-family originated residential real estate loans are secured by properties located in our market
area.
We
generally limit the loan-to-value ("LTV") ratios of our mortgage loans without private mortgage insurance to 80% of the sales price or appraised value, whichever is lower. Loans where
the borrower obtains private mortgage insurance ("PMI") may be made with loan-to-value ratios up to 97%. From time to time we may originate mortgage loans with loan-to-value ratios greater than 80%
with no private mortgage insurance. Such loans totaled $47.3 million and $37.0 million at December 31, 2017 and 2016, respectively or 15.1% and 14.8% of one- to four-family
mortgage loans, and have an average loan-to-value ratio of 85% at December 31, 2017 and 2016. Of the $47.3 million in residential loans with a greater than 80% LTV ratio at
December 31, 2017, $32.0 million or 66.4% are jumbo loans. During the year ended December 31, 2017, we originated $18.6 million of one- to four-family loans with a greater
than 80% loan-to-value ratio with no PMI at an average loan-to-value ratio of 89%. During the year ended December 31, 2016, we originated $9.7 million of one- to four-family loans with a
greater than 80% loan-to-value ratio with no PMI at an average loan-to-value ratio of 87%. The Bank considers the incremental credit risk on these loans as compared to the remaining residential
mortgage portfolio as a component of its concentration qualitative reserve factor. Impaired loans at December 31, 2017 included $1.3 million, or 2.7% of the loans with a greater than 80%
LTV ratio and no PMI.
Our
adjustable-rate one- to four-family residential real estate loans carry terms to maturity ranging from 10 to 30 years and generally have fixed rates for initial terms of five
years, although we also offer terms of one, two, three, seven or ten years, and adjust annually thereafter at a margin, which in recent years has been tied to a margin above the LIBOR rate. The
maximum amount by which the interest rate may be increased or decreased is generally 5% for the first adjustment period and 2% per adjustment period thereafter, with a lifetime interest rate cap of
generally 5% over the initial interest rate of the loan. We typically hold in portfolio our adjustable-rate one- to four-family residential real estate loans.
Although
adjustable-rate mortgage loans may reduce to an extent our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the
required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and
the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by our maximum periodic and
lifetime rate adjustments. Moreover, the interest rates on most of our adjustable-rate loans do not adjust until five to seven years after origination. As a result, the effectiveness of
adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We
offer on a limited basis one- to four-family residential real estate loans secured by non-owner occupied properties, which are generally originated for sale.
From
2000 until early 2006, we originated loans to borrowers who provided limited or no documentation of income, known as stated income loans. A stated income loan is a loan where the
borrower's income source is not subject to verification through the application process. At December 31, 2017, we had $2.1 million in stated income loans, or 0.7% of our one- to
four-family residential real estate loan portfolio, of which $347,000 was non-performing loans and $525,000 were accruing troubled debt restructured loans. Subsequent to 2006, we have not and we have
no intention of originating stated income loans again in the future. Approximately 38.0% of the $2.1 million in stated income loans were made to borrowers who had existing commercial
relationships and financial information on file with us.
8
Table of Contents
We do not offer "interest only" mortgage loans on permanent one- to four-family residential real estate loans (where the borrower pays interest for an initial
period, after which the loan converts to a fully amortizing loan). We also do not offer loans that provide for negative amortization of principal, such as "Option ARM" loans, where the borrower can
pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not have a "subprime lending" program for one- to four-family residential
real estate loans (
i.e.
, loans that generally target borrowers with weakened credit histories).
All
residential mortgage loans that we originate include "due-on-sale" clauses, which give us the right to declare a loan immediately due and payable in the event that, among other
things, the borrower sells or otherwise disposes of the real property subject to the mortgage and the loan is not repaid. All borrowers are required to obtain title insurance for the benefit of
Coastway Community Bank. We also require homeowner's insurance and fire and casualty insurance and, where circumstances warrant, flood insurance on properties securing real estate loans.
Commercial Real Estate Lending.
Consistent with our strategy to diversify our loan portfolio and increase our yield, we are
focused on increasing our
origination of commercial real estate loans, with a target loan size of $250,000 to $7.0 million. At December 31, 2017, we had $156.0 million in commercial real estate loans,
representing 25.5% of our total loan portfolio.
Our
commercial real estate loans generally have initial terms of five to ten years and amortization terms of 15 to 20 years, with a balloon payment at the end of the initial term,
and may be fixed-rate or adjustable-rate. Our adjustable-rate commercial real estate loans are generally tied to a margin above the five year Federal Home Loan Bank of Boston rate. The maximum
loan-to-value ratio of our commercial real estate loans is generally 75% (80% for multi-family) of the lower of cost or appraised value of the property securing the loan. Our commercial real estate
loans are typically secured by medical, retail, industrial, warehouse, service, or other commercial properties. We originate a limited number of multi-family loans generally secured by apartment
buildings. At December 31, 2017, we had $66.7 million of non-owner occupied commercial real estate loans, with an average loan size of $429,000.
Coastway
Community Bank is also qualified to make SBA loans. Loans are originated generally under the 7(a) (SBA Advantage Loan Program) and 504 (SBA Grow Loan Program). See "SBA Loans"
below for a discussion of the 7(a) program. The SBA 504 program is an economic development program which finances the expansion of small businesses. We generally originate SBA 504 loans for commercial
real estate in which we generally provide 50% of the projected costs on a long-term basis (initially up to 90% may be provided, pending repayment from SBA-backed debentures), secured by a first lien
on the real property as collateral. At December 31, 2017, we had $16.5 million in SBA 504 loans, or 10.6% of our commercial real estate loans.
At
December 31, 2017, the average loan size of our outstanding commercial real estate loans was $416,000, and the largest of such loans was a $5.7 million loan which is
primarily secured by five properties located in Providence, Rhode Island, three of which are multi-family and are non-owner occupied. This loan was performing in accordance with its original terms at
December 31, 2017. The Bank's total relationship of commercial real estate loans with this borrower was $7.8 million at December 31, 2017.
We
consider a number of factors in originating commercial real estate loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global
cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the
financial resources of the borrower, the borrower's experience in owning or managing similar property and the borrower's payment history with us and other financial institutions. In evaluating the
property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service
9
Table of Contents
and
depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally
require a debt service ratio of at least 1.20x. The collateral securing commercial real estate loans of $250,000 or more are appraised by outside independent appraisers.
Personal
guarantees are generally obtained from the principals of commercial real estate loans. We require property and casualty insurance and flood insurance if the property is
determined to be in a flood zone area.
Commercial
real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated
with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as
repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the
control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced
for commercial real estate than residential properties.
Home Equity Loans and Lines of Credit.
In addition to traditional one- to four-family residential mortgage loans, we offer home
equity loans and
lines of credit that are secured by the borrower's primary or secondary residence. At December 31, 2017, we had $71.8 million, or 11.7% of our total loan portfolio in home equity loans
and lines of credit. Home equity lines of credit totaled $62.0 million at December 31, 2017. At that date we also had $58.3 million of unused commitments related to home equity
lines of credit.
Home
equity loans and lines of credit are generally underwritten using the same criteria that we use to underwrite one- to four-family residential mortgage loans. Home equity loans and
lines of credit may be underwritten with a loan-to-value ratio of up to 80% when combined with the principal balance of the existing first mortgage loan. Our home equity loans are primarily originated
with fixed rates of interest with terms of up to 15 years. Our home equity lines of credit are originated with adjustable-rates based on the prime rate of interest plus an applicable margin and
require interest paid monthly. Home equity loans and lines of credit are generally available in amounts of between $5,000 and $2.0 million.
Home
equity loans and lines of credit secured by junior mortgages have greater risk than one- to four-family residential mortgage loans secured by first mortgages. At December 31,
2017, $39.6 million of
our home equity loans and lines of credit were in a junior lien position, with an average loan size of $39,000. We face the risk that the collateral will be insufficient to compensate us for loan
losses and costs of foreclosure, after repayment of the senior mortgages, if applicable. When customers default on their loans, we attempt to foreclose on the property and resell the property as soon
as possible to minimize foreclosure and carrying costs. However, the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in
recovering the remaining balance from those customers. Particularly with respect to our home equity loans and lines of credit, decreases in real estate values could adversely affect our ability to
fully recover the loan balance in the event of a default.
SBA Loans.
We also offer commercial business and commercial real estate loans utilizing the SBA's 7(a) (SBA Advantage Loan
Program). At
December 31, 2017, we had $41.0 million of SBA loans, representing 6.7% of our total loan portfolio. Under this SBA program, we generally originate and fund loans that currently qualify
for guarantees on up to 85% of principal and accrued interest up to a maximum SBA guarantee of $3.75 million per borrower and related entities. We are a preferred lending provider and
accordingly can determine SBA eligibility for a loan without prior SBA approval. We do not treat the SBA guarantee as a substitute for a borrower meeting reasonable credit standards.
10
Table of Contents
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 our normal underwriting criteria.
During the years ended December 31, 2017, 2016, 2015, 2014 and 2013, we originated $6.9 million, $9.7 million, $6.7 million, $12.9 million and $5.8 million,
respectively of loans under the 7(a) program. In addition, the guaranteed portion of the credit can be sold in the secondary market, servicing retained, generating significant gain on sale and fee
income opportunities. During the years ended December 31, 2015 and 2013, we sold $4.2 million and $2.5 million of loans under the 7(a) program, generating gains on sale of
$328,000 and $159,000, respectively. We did not sell any SBA loans during 2017, 2016 and 2014. Our largest SBA loan at December 31, 2017 had a balance of $4.5 million, is secured by a
hotel in Danvers, Massachusetts and has a 32% guarantee by the SBA for $1.4 million. The loan is performing in accordance with its terms at December 31, 2017.
Commercial Business Lending.
At December 31, 2017, we had $17.2 million of commercial business loans and lines of
credit, representing
2.8% of our total loan portfolio. We originate commercial business loans and lines of credit secured by non-real estate business assets. These loans are generally originated to small businesses in our
primary market area. Our commercial business loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture, and are primarily secured by business assets
other than real estate, such as business equipment, inventory and accounts receivable. Our commercial business loans are generally term loans with terms of three to seven years and lines of credit
with terms of one to two years, with a target loan size of $250,000 to $5.0 million. Our
commercial business lines of credit are generally priced on an adjustable-rate basis tied to the prime rate. Term loans are generally priced at a spread over the comparable term Federal Home Loan Bank
of Boston rate. We generally obtain personal guarantees with commercial business loans.
At
December 31, 2017, the average loan size of our outstanding commercial business loans and lines of credit was $181,000, and the largest outstanding commercial loan relationship
balance was a $3.6 million loan secured by business assets of a shipyard. This loan was performing in accordance with its original terms at December 31, 2017.
We
typically originate commercial business loans on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business, the experience and stability of
the borrower's management team, earnings projections and their underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for
the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial business
loans that we originate have greater credit risk than one- to four-family residential real estate loans. In addition, commercial business loans often result in larger outstanding balances to single
borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts.
Commercial Construction Loans.
At December 31, 2017, we had $13.6 million, or 2.2% of our total loan portfolio, in
commercial
construction loans. Our commercial construction loans generally have initial terms of up to 12 months, during which the borrower pays interest only. Upon completion of construction, these loans
convert to permanent loans. Our commercial construction loans are initially priced on an adjustable-rate basis tied to the prime rate and upon conversion to a permanent loan, rates and terms are
comparable to commercial real estate loans that we originate. The maximum loan-to-value of our commercial construction loans is generally 80% of the lesser of the appraised value of the completed
property or the contract price for the land plus the value of the improvements, and ranges from 50% to 80% depending on the collateral and the purpose of the improvements upon completion of
construction. Commercial construction loans are generally underwritten pursuant to the same guidelines used for originating permanent commercial real estate loans. Before making a commitment to fund a
construction loan, Coastway Community Bank requires detailed cost estimates to complete the project and an appraisal of the property by an independent licensed appraiser. Coastway
11
Table of Contents
Community
Bank also reviews and inspects each property before disbursement of funds during the term of the construction loan. Loan proceeds are disbursed after inspection based on the percentage of
completion method. All borrowers are required to obtain title insurance, property and casualty insurance, and, if the property is determined to be located in a flood zone area, flood insurance. At
December 31, 2017, the unadvanced portion of total construction loans totaled $7.4 million. At
December 31, 2017, our largest construction loan relationship had a balance of $3.0 million to construct 28 industrial/commercial condominiums in East Greenwich, Rhode Island and was
performing in accordance with its original terms.
Construction
financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon
the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the
estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the
estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the
property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental
of the property may not occur as anticipated.
Consumer Lending.
To a much lesser extent, we offer a variety of consumer loans to individuals who reside or work in our market
area, including new
and used automobile loans, boat loans, recreational vehicle loans and loans secured by certificates of deposit. At December 31, 2017, our consumer loan portfolio totaled $1.2 million, or
0.2% of our total loan portfolio. At this date, $224,000 of our consumer loans were unsecured.
Consumer
loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products
helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer
and other loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by
rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a
result, consumer loan collections are primarily dependent on the borrower's continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal
bankruptcy.
Originations, Sales and Purchases of Loans
Most of our loan originations are generated by our loan personnel operating at our corporate headquarters and banking office locations,
including loan offices. All loans we originate are underwritten pursuant to our policies and procedures. While we originate both fixed-rate and adjustable-rate loans, our ability to generate each type
of loan depends upon relative borrower demand and the pricing levels as set in the local marketplace by competing banks, thrifts, credit unions, and mortgage banking companies. Our volume of real
estate loan originations is influenced significantly by market interest rates, and, accordingly, the volume of our real estate loan originations can vary from period to period.
Consistent
with our interest rate risk strategy, in the low interest rate environment that has existed in recent years, we have sold on a servicing-released basis a majority of the
fixed-rate conforming one- to four-family residential mortgage loans that we have originated. In addition, based upon market conditions, we may sell the guaranteed portion of the SBA 7(a) loans in the
secondary market. We
12
Table of Contents
consider
our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold loans we originate for investment or to sell such loans to investors, choosing the
strategy that is most advantageous to us from a profitability and risk management standpoint. We sold $4.2 million in SBA loans for the year ended December 31, 2015. We did not sell any
SBA loans during 2017 and 2016. For the years ended December 31, 2017 and 2016, proceeds from the sale of residential one- to four-family real estate loans were $228.3 million and
$219.0 million, respectively.
From
time to time, we may purchase loan participations secured by properties and/or assets within and outside of our primary lending market area in which we are not the lead lender. In
these circumstances, we follow our customary loan underwriting and approval policies. At December 31, 2017, we had eight loans totaling $13.1 million in which we were not the lead lender
and which are performing in accordance with their original terms. We also have participated out portions of loans that exceeded our loans-to-one borrower legal lending limit and for risk
diversification.
We
purchased $43.8 million, $17.6 million, $56.7 million and $11.9 million of individual one- to four-family residential loans from third party originators at
a purchase price of $44.4 million, $17.8 million, $57.4 million and $12.1 million during the years ended December 31, 2017, 2016, 2015 and 2014, respectively.
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures approved by our board of
directors. The loan approval process is intended to assess the borrower's ability to repay the loan and the value of the collateral that will secure the loan. To assess the borrower's ability to
repay, our policies provide for the review of the borrower's employment and credit history and information on the historical and projected income and expenses of the borrower. We will also evaluate a
guarantor when a guarantee is provided as part of the loan.
Coastway
Community Bank's policies and loan approval limits are established by our board of directors. Residential real estate and secured consumer loans of up to $250,000 may be
approved by senior officers at branch locations and up to $1.0 million must be approved by our Chief Executive Officer, Chief Retail Officer or Senior Vice President, Branch Banking Manager.
Residential real estate and secured consumer loans exceeding $1.0 million must be approved by our Credit Committee, consisting of our Chief Executive Officer, Chief Retail Officer, Chief
Operating Officer, Senior Credit Officer, Chief Financial Officer and Chief Business Lending Officer. All commercial real estate loans and commercial business loans require two approvals. Commercial
real estate and commercial business loans up to $250,000 may be approved by the Business Lending Manager, up to $500,000 must be approved by either the Chief Business Lending Officer or the Chief
Retail Officer, up to $1.0 million must be approved by the Chief Executive Officer and up to 80% of our legal lending limit rounded to the nearest quarter million must be approved by the Credit
Committee. Any loan that exceeds the internal lending limit must be approved by the board of directors.
Delinquencies and Non-Performing Assets
Delinquency Procedures.
When a borrower fails to make a required monthly payment on a residential real estate loan, we attempt
to contact the
borrower to determine the reason for nonpayment and to discuss future payments. Our policies provide that a late notice be sent when a loan is 31 days past due. Once the loan is 45 days
past due, a Notice of Default and Mortgagee's Right to Foreclosure is sent to the borrower explaining that Coastway Community Bank will initiate foreclosure proceedings on the loan in 45 days
or take any legal action necessary to satisfy the obligation if payment is not received. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted
to continue to make payments. In certain instances, we may modify the loan or grant a limited exemption from loan payments to allow the borrower to
13
Table of Contents
reorganize
his or her financial affairs. Loan modifications are evaluated to determine if they should be classified as troubled debt restructurings if concessions are granted due to borrower financial
difficulty. We attempt to work with borrowers to establish a repayment schedule that will cure the delinquency.
Delinquent
commercial real estate and commercial business loans are initially handled by the loan officer responsible for the origination of the loan in conjunction with the Commercial
Collections Department immediately upon such loan becoming ten days past due. Our collections department works with the loan officer to ensure that the necessary steps are taken to collect on
delinquent loans, including the mailing of delinquency notices. A senior lending officer or the Collections Department Manager takes over any delinquent loan once the loan is 30 days past due
and handles any additional collection procedures, including letters from our attorneys. If we cannot reach an acceptable workout of a delinquent commercial real estate or commercial business loan
between 30 and 60 days following the due date of the first missed payment, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.
When
we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is
recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Any gains on
transfer to foreclosed real estate at fair value are first recorded as a recovery of previous charge-offs and any remaining amount would be recorded in income. Estimated fair value is based on a new
appraisal which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After
acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized to the extent of estimated fair
value less estimated costs to sell.
14
Table of Contents
Delinquent Loans.
The following table sets forth certain information with respect to our loan portfolio delinquencies by type and
amount at the dates
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
|
|
30 - 59 Days
|
|
60 - 89 Days
|
|
90 Days and
Over
|
|
Total
|
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
|
|
(Dollars in thousands)
|
|
At December 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
20
|
|
$
|
4,337
|
|
|
1
|
|
$
|
237
|
|
|
4
|
|
$
|
531
|
|
|
25
|
|
$
|
5,105
|
|
Home equity loans and lines of credit
|
|
|
11
|
|
|
611
|
|
|
3
|
|
|
100
|
|
|
4
|
|
|
132
|
|
|
18
|
|
|
843
|
|
Commercial real estate loans
|
|
|
7
|
|
|
1,404
|
|
|
1
|
|
|
376
|
|
|
1
|
|
|
254
|
|
|
9
|
|
|
2,034
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
1
|
|
|
32
|
|
|
|
|
|
|
|
|
1
|
|
|
32
|
|
SBA loans
|
|
|
13
|
|
|
1,079
|
|
|
3
|
|
|
179
|
|
|
4
|
|
|
281
|
|
|
20
|
|
|
1,539
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
1
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
52
|
|
$
|
7,442
|
|
|
9
|
|
$
|
924
|
|
|
13
|
|
$
|
1,198
|
|
|
74
|
|
$
|
9,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
4
|
|
$
|
625
|
|
|
3
|
|
$
|
587
|
|
|
5
|
|
$
|
738
|
|
|
12
|
|
$
|
1,950
|
|
Home equity loans and lines of credit
|
|
|
3
|
|
|
109
|
|
|
8
|
|
|
547
|
|
|
5
|
|
|
491
|
|
|
16
|
|
|
1,147
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
130
|
|
|
1
|
|
|
130
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
|
|
|
|
|
|
1
|
|
|
148
|
|
|
1
|
|
|
18
|
|
|
2
|
|
|
166
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
8
|
|
$
|
736
|
|
|
12
|
|
$
|
1,282
|
|
|
12
|
|
$
|
1,377
|
|
|
32
|
|
$
|
3,395
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
2
|
|
$
|
1,156
|
|
|
3
|
|
$
|
642
|
|
|
3
|
|
$
|
370
|
|
|
8
|
|
$
|
2,168
|
|
Home equity loans and lines of credit
|
|
|
11
|
|
|
1,250
|
|
|
3
|
|
|
239
|
|
|
1
|
|
|
30
|
|
|
15
|
|
|
1,519
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
239
|
|
|
2
|
|
|
239
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
467
|
|
|
2
|
|
|
467
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
5
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18
|
|
$
|
2,529
|
|
|
6
|
|
$
|
881
|
|
|
8
|
|
$
|
1,106
|
|
|
32
|
|
$
|
4,516
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
$
|
|
|
|
3
|
|
$
|
580
|
|
|
9
|
|
$
|
2,438
|
|
|
12
|
|
$
|
3,018
|
|
Home equity loans and lines of credit
|
|
|
7
|
|
|
301
|
|
|
3
|
|
|
8
|
|
|
4
|
|
|
153
|
|
|
14
|
|
|
462
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
1
|
|
|
84
|
|
|
|
|
|
|
|
|
1
|
|
|
84
|
|
SBA loans
|
|
|
|
|
|
|
|
|
1
|
|
|
20
|
|
|
6
|
|
|
189
|
|
|
7
|
|
|
209
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
1
|
|
|
8
|
|
|
|
|
|
|
|
|
1
|
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7
|
|
$
|
301
|
|
|
9
|
|
$
|
700
|
|
|
19
|
|
$
|
2,780
|
|
|
35
|
|
$
|
3,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
4
|
|
$
|
925
|
|
|
6
|
|
$
|
1,573
|
|
|
6
|
|
$
|
1,035
|
|
|
16
|
|
$
|
3,533
|
|
Home equity loans and lines of credit
|
|
|
7
|
|
|
294
|
|
|
|
|
|
|
|
|
4
|
|
|
53
|
|
|
11
|
|
|
347
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
5
|
|
|
1,131
|
|
|
2
|
|
|
81
|
|
|
8
|
|
|
977
|
|
|
15
|
|
|
2,189
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
2
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
18
|
|
$
|
2,369
|
|
|
8
|
|
$
|
1,654
|
|
|
18
|
|
$
|
2,065
|
|
|
44
|
|
$
|
6,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15
Table of Contents
At December 31, 2017, of the $1.5 million of delinquent SBA loans, guaranteed portions amounted to $1.1 million. Commercial real estate loans
30-59 days totaled $1.4 million at December 31, 2017, of which the largest loan totaling $759,000 became current subsequent to year end.
Non-Performing Loans.
We generally cease accruing interest on our loans 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 currently performing. A loan may remain on accrual status after becoming
90 days or more past due if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is
reversed. Interest received on nonaccrual loans generally is applied against principal or interest and is recognized on a cash basis. Generally, loans are restored to accrual status when the
obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is
no longer in doubt.
Non-performing
loans, increased $83,000 to $4.7 million, but improved to 0.77% of total loans, at December 31, 2017 from $4.7 million, or 0.89% of total loans, at
December 31, 2016. The increase in non-performing loans was due to a $506,000 increase in non-performing SBA loans to $524,000 at December 31, 2017, of which guaranteed portions amounted
to $276,000. Partially offsetting the increase in SBA non-performing loans, was a $277,000 decrease in non-performing one- to four-family residential real estate loans, and a $162,000 decrease in
non-performing home equity loans and lines. The improvement in the non-performing loan to total loan ratio was principally due to loan growth in 2017. Non-performing loans increased $413,000 to
$4.7 million at December 31, 2016 from $4.2 million at December 31, 2015 due to a $594,000 increase in non-performing one- to four-family residential loans and a $269,000
increase in home equity loans and lines, partially offset by a $449,000 decrease in non-performing SBA loans.
Non-performing
one- to four-family residential real estate loans totaled $3.4 million at December 31, 2017 and consisted of 13 loans of which the largest was $735,000.
Non-performing home equity loans and lines of credit totaled $573,000 at December 31, 2017, and consisted of 10 loans of which the largest was $267,000.
Troubled Debt Restructurings.
Loans are classified as restructured 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 modification 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 payments added to the principal of the loan. No additional loan commitments were outstanding to our troubled debt restructured borrowers at December 31, 2017.
Loans
on non-accrual status at the date of modification are initially classified as non-accrual troubled debt restructurings. At December 31, 2017, we had $2.8 million in
non-accruing troubled debt restructurings ("TDRs"). At December 31, 2016, we had $2.6 million in non-accruing TDRs. Our policy provides that troubled debt restructured loans are returned
to accrual status after a period of satisfactory and reasonable payment performance under the terms of the restructuring and continued payment is reasonably assured. Satisfactory payment performance
is generally no less than six consecutive months of timely payments. At December 31, 2017, 2016 and 2015, we had $5.4 million, $8.3 million and $3.5 million in accruing
troubled debt restructurings, respectively. The $4.9 million increase in accruing TDRs during the year ended December 31, 2016 was primarily due to a $4.0 million commercial real
estate loan which was moved to accruing troubled debt restructured status based on extensions of the loan maturity date as the borrower was experiencing financial difficulty. The collateral for this
loan was foreclosed upon during the year ended December 31, 2017 and is now
16
Table of Contents
included
in foreclosed real estate which is the primary reason for the decrease in accruing TDRs for the year ended December 31, 2017. As of December 31, 2017, six loans totaling
$4.8 million that were modified as troubled debt restructurings within the previous twelve months defaulted after their restructure, $4.0 million of which was transferred to foreclosed
real estate.
Nonperforming Assets.
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
1,571
|
|
$
|
1,629
|
|
$
|
193
|
|
$
|
1,642
|
|
$
|
1,913
|
|
Home equity loans and lines of credit
|
|
|
86
|
|
|
316
|
|
|
329
|
|
|
277
|
|
|
134
|
|
Commercial real estate loans
|
|
|
|
|
|
130
|
|
|
130
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
274
|
|
|
18
|
|
|
467
|
|
|
144
|
|
|
868
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonaccrual loans
|
|
|
1,931
|
|
|
2,093
|
|
|
1,119
|
|
|
2,063
|
|
|
2,918
|
|
Non-accruing troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
1,814
|
|
|
2,033
|
|
|
2,875
|
|
|
4,229
|
|
|
2,877
|
|
Home equity loans and lines of credit
|
|
|
487
|
|
|
419
|
|
|
137
|
|
|
92
|
|
|
24
|
|
Commercial real estate loans
|
|
|
254
|
|
|
108
|
|
|
109
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
250
|
|
|
|
|
|
|
|
|
60
|
|
|
640
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-accruing troubled debt restructured loans
|
|
|
2,805
|
|
|
2,560
|
|
|
3,121
|
|
|
4,381
|
|
|
3,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming loans
|
|
|
4,736
|
|
|
4,653
|
|
|
4,240
|
|
|
6,444
|
|
|
6,459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
|
|
|
|
|
|
463
|
|
|
1,035
|
|
|
1,580
|
|
Home equity loans and lines of credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial real estate loans
|
|
|
4,223
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
|
|
|
422
|
|
|
247
|
|
|
250
|
|
|
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total foreclosed real estate
|
|
|
4,223
|
|
|
422
|
|
|
710
|
|
|
1,285
|
|
|
1,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
|
$
|
8,959
|
|
$
|
5,075
|
|
$
|
4,950
|
|
$
|
7,729
|
|
$
|
8,039
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing troubled debt restructured loans
|
|
$
|
5,405
|
|
$
|
8,316
|
|
$
|
3,465
|
|
$
|
2,850
|
|
$
|
3,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
|
0.77
|
%
|
|
0.89
|
%
|
|
0.91
|
%
|
|
1.68
|
%
|
|
1.97
|
%
|
Nonperforming assets to total assets
|
|
|
1.21
|
%
|
|
0.79
|
%
|
|
0.88
|
%
|
|
1.66
|
%
|
|
1.86
|
%
|
17
Table of Contents
On
February 20, 2018, the Bank entered into a Purchase & Sale Agreement to sell the $4.2 million in foreclosed real estate for $4.4 million noted above. The
sale is expected to close in the second quarter of 2018. In addition to the non-performing assets above, the Bank had two properties classified as real estate held for sale with a carrying value of
$3.3 million and $3.8 million at December 31, 2015 and 2014, respectively, both of which were under Purchase & Sale Agreements at December 31, 2015. The sale of the
two real estate held for sale properties closed during the first quarter of 2016. There is no real estate held for sale at December 31, 2017 and 2016. For the years ended December 31,
2017 and 2016, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $182,000 and $203,000, respectively.
The amount that was included in interest income on such loans totaled $179,000 and $135,000 for the years ended December 31, 2017 and 2016, respectively.
Foreclosed Real Estate.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate
is classified as
foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition
is charged to the allowance for loan losses. Any gains on transfer to foreclosed real estate at fair value are first recorded as a recovery of previous charge-offs and any remaining amount would be
recorded in income. Estimated fair value is based on a new appraisal which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value
of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however,
are capitalized to the extent of estimated fair value less estimated costs to sell. During the year ended December 31, 2017, one loan totaling $4.0 million was transferred into
foreclosed real estate and is comprised of real estate securing a former commercial loan located in Newport, Rhode Island. On February 20, 2018, the Bank entered into a Purchase & Sale
Agreement to sell the foreclosed real estate for $4.4 million. The sale is expected to close in the second quarter of 2018. During the year ended December 31, 2016, two loans totaling
$633,000, secured by commercial real estate that had been collateral for SBA loans were transferred into foreclosed real estate.
Other Loans of Concern.
There were no other loans at December 31, 2017 that are not already disclosed where there is
information about
possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of
such loans in the future.
Classified Assets.
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 considered "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 inherent in those classified "substandard," with the added characteristic that the weaknesses present 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.
When
an insured institution classifies problem assets as either substandard or doubtful, it may establish general allowances in an amount deemed prudent by management to cover probable
losses. General allowances represent loss allowances which have been established to cover probable losses associated with lending activities, but which, unlike specific allowances, have not been
allocated to
18
Table of Contents
particular
problem assets. When an insured institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of that portion of the
asset so classified or to charge-off such amount. An institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the
regulatory authorities, which may require the establishment of additional general or specific loss allowances.
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 borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
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 delinquency status, 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. Generally, loans 90 days or more past due are placed on nonaccrual status and classified "substandard." All other loans that are not considered to be
classified assets or classified as special mention are considered to be classified as "pass". Management reviews the status of each impaired loan on our watch list on a quarterly basis. Management
evaluates classified assets that are not impaired as a component of its general allowance to cover estimated probable losses.
On
the basis of this review of our loans, we had classified or held as special mention the following loans as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Special mention
|
|
$
|
76
|
|
$
|
2,004
|
|
$
|
1,325
|
|
Substandard
|
|
|
5,632
|
|
|
5,800
|
|
|
3,664
|
|
Doubtful
|
|
|
|
|
|
|
|
|
|
|
Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total classified and special mention loans
|
|
$
|
5,708
|
|
$
|
7,804
|
|
$
|
4,989
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Classified
and special mention loans at December 31, 2017 decreased $2.1 million from December 31, 2016. Special mention loans decreased $1.9 million from
December 31, 2016. Five loans totaling $829,000 were upgraded to pass rated loans that were previously classified as "special mention", two loans totaling $115,000 were paid off, and two loans
totaling $864,000 were downgraded to "substandard" during 2017. One loan totaling $76,000 was downgraded to "special mention" in 2017. "Substandard" loans decreased $162,000 from December 31,
2016 due to the transfer of one commercial real estate loan totaling $4.0 million to foreclosed real estate, and the payoff of two commercial real estate loans totaling $692,000, partially
offset by the downgrade of three performing loans to one borrower totaling $3.1 million primarily due to operating losses; the downgrade of three loans totaling $761,000 to one borrower due to
closure of the related business; the downgrade of $864,000 of loans from "special mention" to "substandard", and the downgrade of one other loan
19
Table of Contents
totaling
$250,000. The commercial real estate loan totaling $4.0 million that was transferred to foreclosed real estate in September 2017, had been downgraded to "substandard" during the year
ended December 31, 2016 based upon tax liens and a modification of the loan's maturity date. Two substandard commercial real estate loans totaling $1.0 million were upgraded from
"substandard" based on improvement in credit quality during the year ended December 31, 2016. Two commercial real estate loans totaling $717,000 and two SBA loans totaling $487,000 were
downgraded from "pass" to special mention during the year ended December 31, 2016. One SBA loan totaling $99,000 was downgraded to
"doubtful" based on closure of the business, for which all the net carrying value is guaranteed by the SBA. At December 31, 2017 and 2016, special mention and substandard loans included
$2.0 million and $2.5 million of SBA loans, of which $1.2 million and $1.8 million, respectively, was guaranteed by the SBA.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses.
Our allowance for loan losses is the amount considered necessary to
reflect probable
incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses
is charged to earnings.
Our
methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and
(2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is
available for the entire portfolio.
We
identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about
collectability. For individually reviewed loans, the borrower's inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in our charging off the
loan or the portion of the loan that was impaired.
Among
other factors, we consider current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses
for our residential and home equity real estate portfolios. We use evidence obtained from our own loan portfolio, including loss history, as well as published housing data on our local markets from
third party sources we believe to be reliable as a basis for assumptions about the impact of housing depreciation. For SBA loans and 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. 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.
Substantially
all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and specific allowances are established.
Typically for a nonperforming 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 nonperforming 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, we will order a new independent appraisal. Any shortfall would result in immediately
charging off the portion of the loan that was impaired.
20
Table of Contents
Specific Allowances for Identified Problem Loans.
We evaluate the need for a specific allowance when loans are determined to be
impaired. Specific
reserves are 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 or the fair
value of the loan. Factors in identifying a specific problem loan include: (1) the strength of the customer's 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 our collateral position; (6) the estimated cost to sell the collateral;
and (7) the borrower's effort to cure the delinquency. In addition, for loans secured by real estate, we consider the extent of any past due and unpaid property taxes applicable to the property
serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio.
We establish a general allowance for loans that are not
classified as impaired to
recognize the incurred losses inherent 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 our historical loss experience, and qualitative factors. These qualitative factors may
include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, delinquency and credit quality trends, collateral
value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory
examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current and overall economic environment and in relation to trends in the loan portfolio.
21
Table of Contents
Allowance for Loan Losses.
The following table sets forth activity in our allowance for loan losses for the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
|
|
(Dollars in thousands)
|
|
Balance at beginning of year
|
|
$
|
2,493
|
|
$
|
2,194
|
|
$
|
1,942
|
|
$
|
1,656
|
|
$
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
(6
|
)
|
|
(95
|
)
|
|
(139
|
)
|
|
(112
|
)
|
|
(94
|
)
|
Home equity loans and lines of credit
|
|
|
(22
|
)
|
|
(78
|
)
|
|
(128
|
)
|
|
(129
|
)
|
|
(424
|
)
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
(13
|
)
|
|
(42
|
)
|
|
(27
|
)
|
|
(34
|
)
|
|
(33
|
)
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
|
|
|
(1
|
)
|
|
(6
|
)
|
|
(3
|
)
|
|
(15
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total charge-offs
|
|
|
(41
|
)
|
|
(216
|
)
|
|
(300
|
)
|
|
(278
|
)
|
|
(566
|
)
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
|
6
|
|
|
5
|
|
|
11
|
|
|
82
|
|
|
15
|
|
Home equity loans and lines of credit
|
|
|
4
|
|
|
11
|
|
|
16
|
|
|
24
|
|
|
12
|
|
Commercial real estate loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial business loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SBA loans
|
|
|
6
|
|
|
9
|
|
|
16
|
|
|
5
|
|
|
43
|
|
Commercial construction loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer loans
|
|
|
17
|
|
|
15
|
|
|
13
|
|
|
21
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total recoveries
|
|
|
33
|
|
|
40
|
|
|
56
|
|
|
132
|
|
|
86
|
|
Net (charge-offs) recoveries
|
|
|
(8
|
)
|
|
(176
|
)
|
|
(244
|
)
|
|
(146
|
)
|
|
(480
|
)
|
Provision for loan losses
|
|
|
435
|
|
|
475
|
|
|
496
|
|
|
432
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,920
|
|
$
|
2,493
|
|
$
|
2,194
|
|
$
|
1,942
|
|
$
|
1,656
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding
|
|
|
0.00
|
%
|
|
0.03
|
%
|
|
0.06
|
%
|
|
0.04
|
%
|
|
0.15
|
%
|
Allowance for loan losses to nonperforming loans at end of year
|
|
|
61.66
|
%
|
|
53.58
|
%
|
|
51.75
|
%
|
|
30.14
|
%
|
|
25.64
|
%
|
Allowance for loan losses to total loans at end of year
|
|
|
0.48
|
%
|
|
0.48
|
%
|
|
0.47
|
%
|
|
0.51
|
%
|
|
0.50
|
%
|
Allocation of Allowance for Loan Losses.
The following tables set forth the allowance for loan losses allocated by loan category,
the total loan
balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category
22
Table of Contents
is
not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
Allowance
for Loan
Losses
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
Allowance
for Loan
Losses
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
1,257
|
|
|
50.92
|
%
|
$
|
1,009
|
|
|
46.46
|
%
|
Home equity loans and lines of credit
|
|
|
489
|
|
|
11.72
|
|
|
541
|
|
|
14.54
|
|
Commercial real estate loans
|
|
|
776
|
|
|
25.46
|
|
|
596
|
|
|
26.52
|
|
Commercial business loans
|
|
|
83
|
|
|
2.80
|
|
|
60
|
|
|
2.54
|
|
SBA loans
|
|
|
239
|
|
|
6.69
|
|
|
228
|
|
|
7.63
|
|
Commercial construction loans
|
|
|
70
|
|
|
2.21
|
|
|
51
|
|
|
2.09
|
|
Consumer loans
|
|
|
6
|
|
|
0.20
|
|
|
8
|
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
2,920
|
|
|
100.00
|
%
|
$
|
2,493
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2015
|
|
2014
|
|
|
|
Allowance
for Loan
Losses
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
Allowance for
Loan
Losses
|
|
Percent of
Loans in
Each
Category to
Total Loans
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
863
|
|
|
44.84
|
%
|
$
|
654
|
|
|
34.99
|
%
|
Home equity loans and lines of credit
|
|
|
525
|
|
|
16.51
|
|
|
584
|
|
|
20.82
|
|
Commercial real estate loans
|
|
|
503
|
|
|
27.02
|
|
|
400
|
|
|
28.19
|
|
Commercial business loans
|
|
|
39
|
|
|
1.92
|
|
|
28
|
|
|
2.01
|
|
SBA loans
|
|
|
234
|
|
|
8.42
|
|
|
236
|
|
|
11.49
|
|
Commercial construction loans
|
|
|
21
|
|
|
1.02
|
|
|
30
|
|
|
2.14
|
|
Consumer loans
|
|
|
9
|
|
|
0.27
|
|
|
10
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
2,194
|
|
|
100.00
|
%
|
$
|
1,942
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2013
|
|
|
|
Allowance for Loan Losses
|
|
Percent of Loans
in Each Category
to Total Loans
|
|
|
|
(Dollars in thousands)
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
462
|
|
|
29.92
|
%
|
Home equity loans and lines of credit
|
|
|
605
|
|
|
25.39
|
|
Commercial real estate loans
|
|
|
321
|
|
|
27.91
|
|
Commercial business loans
|
|
|
29
|
|
|
2.53
|
|
SBA loans
|
|
|
197
|
|
|
11.58
|
|
Commercial construction loans
|
|
|
24
|
|
|
2.16
|
|
Consumer loans
|
|
|
18
|
|
|
0.51
|
|
|
|
|
|
|
|
|
|
Total allowance
|
|
$
|
1,656
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23
Table of Contents
At December 31, 2017 and 2016, our allowance for loan losses represented 0.48% and 0.48% of total loans and 61.66% and 53.58% of non-performing loans. At
December 31, 2015, our allowance for loan losses represented 0.47% of total loans and 51.75% of non-performing loans. At December 31, 2014, our allowance for loan losses represented
0.51% of total loans and 30.14% of non-performing loans. At December 31, 2013, our allowance for loan losses represented 0.50% of total loans and 25.64% of non-performing loans, and at
December 31, 2012, our allowance for loan losses represented 0.53% of total loans and 20.48% of non-performing loans. There were $8,000, $176,000, $244,000, $146,000, and $480,000 in net loan
charge-offs during the years ended December 31, 2017, 2016, 2015, 2014, and 2013, respectively.
Although
we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and
results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Because future events affecting borrowers and collateral
cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion
of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the FDIC and/or the Rhode Island Department of Business Regulation periodically review our
allowance for loan losses. The FDIC and/or the Rhode Island Department of Business Regulation may require that we increase
our allowance based on its judgments of information available to it at the time of its examination. Any material increase in the allowance for loan losses may adversely affect our financial condition
and results of operations.
Investment Activities
General.
Our board of directors is responsible for adopting our investment policy. The investment policy is reviewed annually by
management and any
changes to the policy are recommended to and subject to the approval of the board of directors. Our investment policy provides us with the ability to invest in short-term investments, which may
include overnight federal funds, reverse repurchase agreements, banker's acceptances and/or U.S. government or federal agency securities, and longer-term investments, which we will consider investing
in, including term federal funds, federal agency securities and certificates of deposit. Authority to make investments under the approved investment policy guidelines is delegated to our President and
Chief Executive Officer and our Chief Financial Officer. All investment transactions are reviewed at regularly scheduled monthly meetings of the board of directors.
At
December 31, 2017, 2016 and 2015, we had no investment securities other than our required investment in Federal Home Loan Bank of Boston stock. We may possibly invest in other
investments permitted by our investment policy in the future.
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use
borrowings, primarily
Federal Home Loan Bank of Boston advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we
receive funds from scheduled loan payments, loan prepayments, retained earnings and income on earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable
sources of funds, deposit inflows and outflows
can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition.
Deposits.
Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit
accounts, including
non-interest-bearing demand accounts, money market
24
Table of Contents
accounts,
savings accounts, club accounts and certificates of deposit. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must
remain on deposit and the interest rate. We have not in the past used, and currently do not hold, any brokered deposits. At December 31, 2017, we had $39.2 million in certificates of
deposit at a weighted average interest rate of 1.62% obtained through a national on-line service ("national market"), representing 8.2% of total deposits. We utilized national market certificates of
deposit in order to bolster on-balance sheet liquidity, to repay borrowed funds and to extend the duration of interest-bearing liabilities in anticipation of increasing interest rates. At
December 31, 2017, our core deposits, which are deposits other than certificates of deposit, were $313.6 million, representing 65.8% of total deposits.
Interest
rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and
market rates, liquidity requirements, rates paid by competitors and growth goals. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and
competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers' demands. Our ability to
gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits
are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates.
The
following tables set forth the distribution of total deposit accounts, by account type, at or for the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended December 31,
|
|
|
|
2017
|
|
2016
|
|
|
|
Average
Balance
|
|
Balance
|
|
Percent of
Balance
|
|
Weighted
Average
Rate
|
|
Average
Balance
|
|
Balance
|
|
Percent of
Balance
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Non-interest-bearing demand deposit accounts
|
|
$
|
107,280
|
|
$
|
116,888
|
|
|
24.51
|
%
|
|
|
%
|
$
|
97,563
|
|
$
|
106,962
|
|
|
23.91
|
%
|
|
|
%
|
Money market accounts
|
|
|
75,184
|
|
|
85,575
|
|
|
17.94
|
|
|
0.54
|
|
|
69,475
|
|
|
70,462
|
|
|
15.75
|
|
|
0.43
|
|
Savings accounts and interest-bearing checking
|
|
|
106,541
|
|
|
109,664
|
|
|
22.99
|
|
|
0.09
|
|
|
100,545
|
|
|
105,675
|
|
|
23.63
|
|
|
0.09
|
|
Club accounts
|
|
|
1,483
|
|
|
1,509
|
|
|
0.32
|
|
|
0.10
|
|
|
1,474
|
|
|
1,331
|
|
|
0.30
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transaction accounts
|
|
|
290,488
|
|
|
313,636
|
|
|
65.76
|
|
|
0.18
|
|
|
269,057
|
|
|
284,430
|
|
|
63.59
|
|
|
0.14
|
|
Certificates of deposit
|
|
|
164,916
|
|
|
163,320
|
|
|
34.24
|
|
|
1.61
|
|
|
119,321
|
|
|
162,884
|
|
|
36.41
|
|
|
1.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
455,404
|
|
$
|
476,956
|
|
|
100.00
|
%
|
|
0.67
|
|
$
|
388,378
|
|
$
|
447,314
|
|
|
100.00
|
%
|
|
0.63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended December 31, 2015
|
|
|
|
Average
Balance
|
|
Balance
|
|
Percent of
Balance
|
|
Weighted
Average
Rate
|
|
|
|
(Dollars in thousands)
|
|
Non-interest-bearing demand deposit accounts
|
|
$
|
81,364
|
|
$
|
95,960
|
|
|
25.69
|
%
|
|
|
%
|
Money market accounts
|
|
|
67,485
|
|
|
69,036
|
|
|
18.48
|
|
|
0.42
|
|
Savings accounts and interest-bearing checking
|
|
|
93,098
|
|
|
98,133
|
|
|
26.28
|
|
|
0.09
|
|
Club accounts
|
|
|
1,538
|
|
|
1,352
|
|
|
0.36
|
|
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total transaction accounts
|
|
|
243,485
|
|
|
264,481
|
|
|
70.81
|
|
|
0.14
|
|
Certificates of deposit
|
|
|
113,204
|
|
|
109,038
|
|
|
29.19
|
|
|
1.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits
|
|
$
|
356,689
|
|
$
|
373,519
|
|
|
100.00
|
%
|
|
0.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Table of Contents
The
following table sets forth the amount and maturities of certificates of deposit.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
Less Than
One Year
|
|
Over One
Year to Two
Years
|
|
Over Two
Years to
Three Years
|
|
Over Three
Years
|
|
Total
|
|
Percentage of
Total
Certificate
Accounts
|
|
|
|
(Dollars in thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 0.50%
|
|
$
|
15,474
|
|
$
|
395
|
|
$
|
81
|
|
$
|
|
|
$
|
15,950
|
|
|
9.77
|
%
|
0.51% - 1.00%
|
|
|
9,593
|
|
|
4,035
|
|
|
962
|
|
|
2
|
|
|
14,592
|
|
|
8.93
|
|
1.01% - 2.00%
|
|
|
35,758
|
|
|
12,281
|
|
|
5,412
|
|
|
9,942
|
|
|
63,393
|
|
|
38.82
|
|
2.01% - 3.00%
|
|
|
847
|
|
|
178
|
|
|
10,510
|
|
|
57,850
|
|
|
69,385
|
|
|
42.48
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
61,672
|
|
$
|
16,889
|
|
$
|
16,965
|
|
$
|
67,794
|
|
$
|
163,320
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of December 31, 2017, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was $95.9 million. The following table
sets forth the maturity of these certificates as of December 31, 2017.
|
|
|
|
|
|
|
At December 31, 2017
|
|
|
|
(In thousands)
|
|
Three months or less
|
|
$
|
5,629
|
|
Over three months through six months
|
|
|
3,686
|
|
Over six months through one year
|
|
|
31,673
|
|
Over one year
|
|
|
54,882
|
|
|
|
|
|
|
Total
|
|
$
|
95,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following table sets forth the certificates of deposit in Coastway Community Bank classified by interest rate as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
Less than 0.50%
|
|
$
|
15,950
|
|
$
|
20,196
|
|
$
|
28,032
|
|
0.51% - 1.00%
|
|
|
14,592
|
|
|
15,453
|
|
|
17,107
|
|
1.01% - 2.00%
|
|
|
63,393
|
|
|
76,998
|
|
|
35,235
|
|
2.01% - 3.00%
|
|
|
69,385
|
|
|
50,237
|
|
|
28,664
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
163,320
|
|
$
|
162,884
|
|
$
|
109,038
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowed Funds.
We may obtain advances from the Federal Home Loan Bank of Boston upon the security of our capital stock in the
Federal Home Loan Bank
of Boston and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent
such borrowings have different terms to re-pricing than our deposits, they can change our interest rate risk profile. At December 31, 2017, we had $181.7 million in outstanding advances
from the Federal Home Loan Bank of Boston. Borrowed funds at December 31, 2017 were comprised of $179.9 million in short-term advances at a weighted average rate of 1.49% and one
long-term advance of $1.8 million which matures in September 2021 at no cost as the advance was made under the FHLB's Jobs for New England Program. At December 31, 2017, based on
available collateral and our ownership of Federal Home Loan Bank of
26
Table of Contents
Boston
stock, we had access to additional Federal Home Loan Bank of Boston advances of up to $60.8 million.
The
following table sets forth information concerning balances and interest rates on our borrowings at the date and for the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Years ended
December 31,
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
|
(Dollars in thousands)
|
|
Federal Home Loan Bank of Boston Advances:
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
181,675
|
|
$
|
121,250
|
|
$
|
115,500
|
|
Average balance during year
|
|
|
134,433
|
|
|
135,523
|
|
|
68,472
|
|
Maximum outstanding at any month end
|
|
|
181,675
|
|
|
166,050
|
|
|
115,500
|
|
Weighted average interest rate at end of year
|
|
|
1.48
|
%
|
|
0.74
|
%
|
|
0.44
|
%
|
Average interest rate during year
|
|
|
1.13
|
%
|
|
0.50
|
%
|
|
0.28
|
%
|
Subsidiary and Other Activities
Following completion of the conversion, Coastway Community Bank became the wholly owned subsidiary of Coastway Bancorp, Inc. Coastway
Community Bank has no subsidiaries.
Coastway Community Bank offers various lines of insurance, including commercial, property and casualty through a joint venture with an insurance agency.
Personnel
As of December 31, 2017, we had 148 employees, all of which were full-time employees. Our employees are not represented by any collective
bargaining group. Management believes that we have a good working relationship with our employees.
SUPERVISION AND REGULATION
General
Coastway Community Bank is a Rhode Island-chartered stock savings bank that became the wholly-owned subsidiary of Coastway Bancorp, Inc.,
a Maryland corporation following completion of the mutual to stock conversion. Coastway Community Bank's deposits are insured up to applicable limits by the FDIC. Coastway Community Bank is subject to
extensive regulation by the Rhode Island Department of Business Regulation, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. Coastway Community Bank is
required to file reports with, and is periodically examined by, the FDIC and the Rhode Island Department of Business Regulation concerning its activities and financial condition and must obtain
regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company,
Coastway Bancorp, Inc. is regulated by the Federal Reserve Board.
The
regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors
and the deposit insurance fund, rather than for the protection of stockholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with
their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment
of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Rhode Island legislature, the Rhode Island Department of Business
Regulation, the FDIC, the
27
Table of Contents
Federal
Reserve Board or the United States Congress, could have a material adverse impact on the financial condition and results of operations of Coastway Bancorp, Inc. and Coastway Community
Bank. As is further described below, the Dodd-Frank Act has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository
institutions and their holding companies.
Set
forth below is a summary of certain material statutory and regulatory requirements applicable to Coastway Bancorp, Inc. and Coastway Community Bank. The summary is not
intended to be a complete description of such statutes and regulations and their effects on Coastway Bancorp, Inc. and Coastway Community Bank.
The Dodd-Frank Act
The Dodd-Frank Act significantly changed bank regulation and has affected the lending, investment, trading and operating activities of
depository institutions and their holding companies. The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to supervise and enforce consumer protection laws.
The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to
prohibit "unfair, deceptive or abusive" acts and practices. The Consumer Financial Protection Bureau also has examination and enforcement authority over all banks and savings institutions with more
than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, such as Coastway Community Bank, will continue to be examined by their applicable federal
bank regulators. The Dodd-Frank Act required the Consumer Financial Protection Bureau to issue regulations requiring lenders to make a reasonable good faith determination as to a prospective
borrower's ability to repay a residential mortgage loan. The final "Ability to Repay" rules, which were effective beginning January 2014, established a "qualified mortgage" safe harbor for loans whose
terms and features are deemed to make the loan less risky. In addition, on October 3, 2015, the new TILA-RESPA Integrated Disclosure (TRID) rules for mortgage closings took effect for new loan
applications. In 2017, the Consumer Financial Protection Bureau amended the TILA-RESPA rule with an effective date of October 1, 2018.
The
Dodd-Frank Act broadened the base for FDIC assessments for deposit insurance, permanently increased the maximum amount of deposit insurance to $250,000 per depositor. The legislation
also, among other things, requires originators of certain securitized loans to retain a portion of the credit risk, stipulates regulatory rate-setting for certain debit card interchange fees, repealed
restrictions on
the payment of interest on commercial demand deposits and contains a number of reforms related to mortgage originations. The Dodd-Frank Act increased the ability of stockholders to influence boards of
directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called "golden parachute" payments. However, as an "emerging growth company" under the JOBS
Act, we are exempt from the stockholder vote requirement until one year after we cease to be an "emerging growth company." The legislation also directed the Federal Reserve Board to promulgate rules
prohibiting excessive compensation paid to company executives, regardless of whether the company is publicly traded or not. The Dodd-Frank Act also gave state attorneys general the ability to enforce
applicable federal consumer protection laws.
Rhode Island Banking Laws and Supervision
General.
As a Rhode Island-chartered stock savings bank, Coastway Community Bank is subject to supervision, regulation and
examination by the Rhode
Island Department of Business Regulation and to various Rhode Island statutes and regulations that govern, among other things, investment powers, lending and deposit-taking activities, borrowings,
maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, a Rhode Island-chartered savings bank may exercise any power authorized for federal savings
banks or national banks. The approval of the
28
Table of Contents
Rhode
Island Department of Business Regulation is required for a Rhode Island-chartered bank to establish or relocate branches, merge with other financial institutions, issue stock and undertake
certain other activities.
Loans to One Borrower Limitations.
Rhode Island banking law grants broad lending authority. However, with certain limited
exceptions, total
obligations to one borrower may not exceed 15 percent of the total of the bank's unimpaired capital as defined under Rhode Island law.
Investment Activities.
In general, Rhode Island-chartered savings banks may invest in any bonds, obligations or real or personal
property as it may
deem prudent, subject to any restrictions or limitations imposed by Rhode Island law.
Regulatory Enforcement Authority.
Any Rhode Island savings bank that does not operate in accordance with the regulations,
policies and directives of
the Rhode Island Department of Business Regulation may be subject to sanctions for non-compliance, including revocation of its charter. The Rhode Island Department of Business Regulation may, under
certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank's business in an unsafe or unsound manner or contrary to the depositors interests or been
negligent in the performance of their duties. Upon finding that a bank has engaged in an unfair or deceptive act or practice, the Rhode Island Department of Business Regulation may issue an order to
cease and desist and impose a fine on the bank concerned. The Director also has authority to take possession of a bank and appoint a liquidating agent under certain conditions such as an unsafe and
unsound condition to transact business, the conduct of business in an unsafe or unauthorized manner of impaired capital.
Federal Regulations
Capital Requirements.
Federal regulations require FDIC-insured depository institutions to meet several minimum capital
standards: a common equity
Tier 1 capital to risk-based assets ratio of 4.5%, a Tier 1 capital to risk-based assets ratio of 6.0%, a total capital to risk-based assets of 8%, and a 4% Tier l capital to
total assets leverage ratio. The existing capital requirements were effective January 1, 2015 and are the result of a final rule implementing regulatory amendments based on recommendations of
the Basel Committee on Banking Supervision and certain requirements of the Dodd-Frank Act.
In
addition to establishing the minimum regulatory capital requirements, the regulations limit capital distributions and certain discretionary bonus payments to management if the
institution does not hold a "capital conservation buffer" consisting of 2.5% of common equity Tier 1 capital to risk-weighted asset above the amount necessary to meet its minimum risk-based
capital requirements. The capital conservation buffer requirement is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented
at 2.5% on January 1, 2019. At December 31, 2017, the minimum capital standards inclusive of the capital conservation buffer are: total capital of 8.625%, Tier I capital of 6.625%
and common equity Tier I of 5.125%. For 2018, the capital conservation buffer is 1.875% of risk-weighted assets.
For
purposes of the regulatory capital requirements, common equity Tier 1 capital is generally defined as common stockholders' equity and retained earnings. Tier l capital
is generally defined as common equity Tier 1 and additional Tier 1 capital. Additional Tier 1 capital includes certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital (common equity Tier 1 capital plus additional Tier 1 capital) and
Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus, meeting specified requirements, and may include cumulative preferred stock and long-term perpetual
preferred stock, mandatory convertible securities, intermediate preferred stock and subordinated debt. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a
maximum of 1.25% of risk-weighted assets and, for institutions such as Coastway Community Bank,
29
Table of Contents
that
have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income ("AOCI"), up to 45% of net unrealized gains on available-for-sale equity securities with
readily determinable fair market values. Calculation of all types of regulatory capital is subject to deductions and adjustments specified in the regulations.
In
determining the amount of risk-weighted assets for purposes of calculating risk-based capital ratios, all assets, including certain off-balance sheet assets
(
e.g.
, recourse obligations, direct credit substitutes, residual interests) are multiplied by a risk weight factor assigned by the regulations based on
the risks believed inherent in the type of asset. Higher levels of capital are required for asset categories believed to present greater risk. For example, a risk weight of 0% is assigned to cash and
U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four-family residential mortgages, a risk weight of 100% is assigned to commercial
and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% to 600% is assigned to permissible equity interests, depending on certain specified
factors.
In
assessing an institution's capital adequacy, the FDIC takes into consideration, not only these numeric factors, but qualitative factors as well, and has the authority to establish
higher capital requirements for individual institutions where deemed necessary.
At
December 31, 2017, Coastway Community Bank was classified as well-capitalized.
Standards for Safety and Soundness.
As required by statute, the federal banking agencies adopted final regulations and
Interagency Guidelines
Establishing Standards for Safety and Soundness to implement
safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and information systems, internal audit system, credit underwriting, loan documentation, interest rate exposure, asset growth,
asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet
any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.
Business and Investment Activities.
Under federal law, all state-chartered FDIC-insured banks, including savings banks, have
been limited in their
activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations. For
example, certain state-chartered savings banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the
shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is the lesser of 100.0% of Tier 1 capital or the maximum
amount permitted by Rhode Island law.
The
FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity
investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted
regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a
subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a "financial subsidiary," if a bank meets specified conditions and deducts its
investment in the subsidiary for regulatory capital purposes.
Prompt Corrective Regulatory Action.
Federal law requires, among other things, that federal bank regulatory authorities take
"prompt corrective
action" with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized,
undercapitalized, significantly undercapitalized and critically undercapitalized.
30
Table of Contents
The applicable FDIC regulations were amended to incorporate the previously mentioned increased regulatory capital standards that were effective January 1,
2015. Under the amended regulations, an institution is deemed to be "well capitalized" if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 8.0%
or greater, a leverage ratio of 5.0% or greater and a common equity Tier 1 ratio of 6.5% or greater. An institution is "adequately capitalized" if it has a total risk-based capital ratio of
8.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, a leverage ratio of 4.0% or greater and a common equity Tier 1 ratio of 4.5% or greater. An institution is
"undercapitalized" if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 6.0%, a leverage ratio of less than 4.0% or a common equity
Tier 1 ratio of less than 4.5%. An institution is deemed to be "significantly undercapitalized" if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital
ratio of less than 4.0%, a leverage ratio of less than 3.0% or a common equity Tier 1 ratio of less than 3.0%. An institution is considered to be "critically undercapitalized" if it has a ratio
of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.
"Undercapitalized"
banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank's compliance
with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution's total assets when deemed undercapitalized
or the amount
necessary to achieve the status of adequately capitalized. If an "undercapitalized" bank fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly
undercapitalized" banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a
requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of
executive officers and capital distributions by the parent holding company. "Critically undercapitalized" institutions are subject to additional measures including, subject to a narrow exception, the
appointment of a receiver or conservator within 270 days after it obtains such status.
Transactions with Related Parties.
Transactions between a bank (and, generally, its subsidiaries) and its related parties or
affiliates are limited
by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding
company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal
Reserve Act limit the extent to which the bank or its subsidiaries may engage in "covered transactions" with any one affiliate to 10% of such institution's capital stock and surplus and contain an
aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution's capital stock and surplus. The term "covered transaction" includes the making of loans,
purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in
accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as
those provided to non-affiliates.
Coastway
Community Bank's authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed
by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that
extensions of credit to insiders:
-
-
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those
prevailing for comparable transactions with unaffiliated
31
Table of Contents
In
addition, extensions of credit in excess of certain limits must be approved by Coastway Community Bank's board of directors. Extensions of credit to executive officers are subject to
additional limits based on the type of extension involved.
Enforcement.
The FDIC has extensive enforcement authority over insured state savings banks, including Coastway Community Bank.
That enforcement
authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, enforcement actions may be initiated
in response to violations of laws and regulations and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain
circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was "critically undercapitalized" on average during
the calendar quarter beginning 270 days after the date on which the institution became "critically undercapitalized."
Federal Insurance of Deposit Accounts.
The Dodd-Frank Act permanently increased the maximum amount of deposit insurance for
banks, savings
institutions and credit unions to $250,000 per depositor.
The
Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to
achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum
fund ratio, instead leaving it
to the discretion of the FDIC and the FDIC has exercised that discretion by establishing a long-term fund ratio of 2%.
Under
the FDIC's risk-based assessment system, insured institutions were assigned to one of four risk categories based on supervisory evaluations, regulatory capital levels and certain
other risk factors. Rates are based on each institution's risk category and certain specified risk adjustments. Stronger institutions pay lower rates while riskier institutions pay higher rates.
Assessments were based on an institution's average consolidated total assets minus average tangible equity, with the assessment rate schedule ranging from 2.5 to 45 basis points.
Effective
July 1, 2016, the FDIC adopted changes that eliminated the risk categories. Assessments for most institutions are now based on financial measures and supervisory ratings
derived from statistical modeling estimating th probability of failure within three years. In conjunction with the Deposit Insurance Fund reserve ratio achieving 1.5% the assessment range (inclusive
of possible adjustments) was reduced for most banks and savings associations to 1.5 basis points to 30 basis points.
In
addition to the FDIC assessments, the Financing Corporation ("FICO") is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance
costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO began to mature in 2017 and
will continue to mature through 2019. For the quarter ended December 31, 2017, the annualized Financing Corporation assessment was equal to 0.54 of a basis point of total average assets less
average tangible capital.
The
FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of Coastway Community
Bank. Management cannot predict what assessment rates will be in the future.
32
Table of Contents
Insurance
of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue
operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination
of our deposit insurance.
Community Reinvestment Act.
Under the Community Reinvestment Act ("CRA"), a bank has a continuing and affirmative obligation,
consistent with its
safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs
for financial institutions nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does
require the FDIC, in connection with its examination of a bank, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation
of certain applications by such institution, including applications to establish or acquire branches and merger with other depository institutions. The CRA requires the FDIC to provide a written
evaluation of an institution's CRA performance utilizing a four-tiered descriptive rating system. Coastway Community Bank's latest FDIC CRA rating, dated 2017, was "outstanding."
Federal Reserve System.
The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning
reserves against their
transaction accounts (primarily negotiable order of withdrawal (NOW) and regular checking accounts). The regulations generally provide that reserves be maintained against aggregate transaction
accounts as follows as of January 1, 2018: a 3% reserve ratio is assessed on net transaction accounts up to and including $115.1 million; a 10% reserve ratio is applied above
$115.1 million. The first $15.5 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are adjusted annually. Coastway Community Bank complies
with the foregoing requirements.
Federal Home Loan Bank System.
Coastway Community Bank is a member of the Federal Home Loan Bank System, which consists of
twelve regional Federal
Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the
Federal Home Loan Bank of Boston, Coastway Community Bank is required to acquire and hold a specified amount of shares of capital stock in the Federal Home Loan Bank of Boston. As of
December 31, 2017, Coastway Community Bank was in compliance with this requirement.
Other Regulations
Interest and other charges collected or contracted for by Coastway Community Bank are subject to state usury laws and federal laws concerning
interest rates. Coastway Community Bank's operations are also subject to federal laws applicable to credit transactions, such as the:
-
-
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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-
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive
various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
-
-
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine
whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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-
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
-
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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-
Truth in Savings Act governing disclosures of terms and conditions regarding interest and fees when giving out information on or opening a new
savings account; and
-
-
Rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
The
operations of Coastway Community Bank also are subject to the:
-
-
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for
complying with administrative subpoenas of financial records;
-
-
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit
accounts and customers' rights and liabilities arising from the use of automated teller machines and other electronic banking services;
-
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Check Clearing for the 21
st
Century Act (also known as "Check 21"), which gives "substitute checks," such as digital check
images and copies made from that image, the same legal standing as the original paper check;
-
-
USA PATRIOT Act, which requires savings banks operating to, among other things, establish broadened anti-money laundering compliance programs,
due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements, also
applicable to financial institutions, under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
-
-
Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated
third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial
institution's privacy policy and provide such customers the opportunity to "opt out" of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
Coastway Bancorp, Inc., as a bank holding company is subject to examination, regulation, and periodic reporting under the Bank Holding
Company Act of 1956, as amended, as administered by the Federal Reserve Board. Coastway Bancorp, Inc. is required to obtain the prior approval of the Federal Reserve Board to acquire all, or
substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for Coastway Bancorp, Inc. to acquire direct or indirect ownership
or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding
company.
A
bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking
activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board
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to
be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to
be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services;
(iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects
designed primarily to promote community welfare; and (vii) acquiring a savings association.
The
Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institutions subsidiaries that are "well capitalized" and "well
managed," to opt to become a "financial holding company." A "financial holding company" may engage in a broader array of financial activities than permitted a typical bank holding company. Such
activities can include insurance underwriting and investment banking. Coastway Bancorp, Inc. has elected "financial holding company" status.
In
December 2014, legislation was passed by Congress that required the Federal Reserve to revise its "Small Bank Holding Company Policy Statement" to exempt bank and savings and loan
holding companies of less than $1.0 billion of consolidated assets from the consolidated capital requirements, provided that such companies meet certain other conditions such as not engaging in
significant nonbanking activities. The Federal Reserve maintains authority to apply the consolidated capital requirements to any bank of savings and loan holding company as warranted for supervisory
purposes. 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
will still be subject to the capital rules and reporting requirements, though the Company will be exempt.
A
bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross
consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the
company's consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would
violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an
exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The
Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies. In general, the Federal Reserve Board's policies provide that
dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization's capital needs, asset
quality and overall financial condition. The Federal Reserve Board's policies also require that a bank holding company serve as a source of financial strength to its subsidiary banks by using
available resources to provide capital funds during periods of financial stress or adversity and by maintaining the financial flexibility and capital-raising capacity to obtain additional resources
for assisting its subsidiary banks where necessary. The Dodd-Frank Act codified the source of strength policy and requires the promulgation of implementing regulations. Under the prompt corrective
action laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These
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regulatory
policies could affect the ability of Coastway Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.
The
Federal Deposit Insurance Act makes depository institutions liable to the FDIC for losses suffered or anticipated by the insurance fund in connection with the default of a commonly
controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. That law would have potential applicability if Coastway Bancorp, Inc. ever
held as a separate subsidiary a depository institution in addition to Coastway Community Bank.
Coastway
Bancorp, Inc. and Coastway Community Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal
Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect
of such changes on the business or financial condition of Coastway Bancorp, Inc. or Coastway Community Bank.
Coastway
Bancorp, Inc.'s status as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations
applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.
Rhode Island Holding Company Regulation.
Coastway Bancorp, Inc. is subject to the regulation and supervision of the Rhode
Island Department of
Business Regulation. It is subject to periodic examination by the department.
Federal Securities Laws
Our common stock is registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We are subject to the
information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.
The
registration under the Securities Act of 1933 of shares of the Company's common stock issued in the stock offering does not cover the resale of those shares. Shares of common stock
purchased by persons who are not our affiliates may be resold without registration. Shares purchased by our affiliates are subject to the resale restrictions of Rule 144 under the Securities
Act of 1933. If we meet the current public information requirements of Rule 144 under the Securities Act of 1933, each affiliate of ours that complies with the other conditions of
Rule 144, including those that require the affiliate's sale to be aggregated with those of other persons, would be able to sell in the public market, without registration, a number of shares
not to exceed, in any three-month period, the greater of 1% of our outstanding shares, or the average weekly volume of trading in the shares during the preceding four calendar weeks. In the future, we
may permit affiliates to have their shares registered for sale under the Securities Act of 1933.
Emerging Growth Company Status
On April 5, 2012, the JOBS Act was signed into law. The JOBS Act made numerous changes to the federal securities laws to facilitate
access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an "emerging
growth company." We qualify as an "emerging growth company" and believe that we will continue to qualify as an "emerging growth company" for five years from the completion of the stock offering, or
January 14, 2019, or until the earliest of (a) the last day of the first fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a
"large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock that is held by
non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (c) the
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date
on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period.
As
an "emerging growth company," we have elected to use the transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such
pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or
revised accounting standards. As of December 31, 2017, there is not a significant difference in the presentation of our financial statements as compared to other public companies as a result of
this transition guidance.
Subject
to certain conditions set forth in the JOBS Act as an "emerging growth company", we may not be required to, among other things, (i) provide an auditor's attestation report
on our system of internal controls over financial reporting, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank
Act, (iii) hold non-binding stockholder votes regarding annual executive compensation or executive compensation payable in connection with a merger or similar corporate transaction,
(iv) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor's report providing
additional information about the audit and the financial statements (auditor discussion and analysis), and (v) disclose certain executive compensation related items such as the correlation
between executive compensation and performance and comparisons of the chief executive officer's compensation to median employee compensation. These exemptions will apply for a period of five years
following the completion of our initial public offering or until we are no longer an "emerging growth company," whichever is earlier.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and
enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and
annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including
having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made
certain disclosures to our auditors and the audit committee of the board of directors about our internal control over financial reporting; and they have included information in our quarterly and
annual reports about their evaluation and whether there have been changes in our internal control over financial reporting or in other factors that could materially affect internal control over
financial reporting. We prepared policies, procedures and systems designed to ensure compliance with these regulations.
Federal Taxation
General.
Coastway Bancorp, Inc. and Coastway Community Bank are subject to federal income taxation in the same general
manner as other
corporations, with some exceptions discussed below. The following
discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to Coastway Bancorp, Inc. and
Coastway Community Bank.
Method of Accounting.
For federal income tax purposes, Coastway Community Bank currently reports its income and expenses on the
accrual method of
accounting and uses a tax year ending December 31st for filing its consolidated federal income tax returns.
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Minimum Tax.
The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of
regular taxable income
plus certain tax preferences, referred to as "alternative minimum taxable income." The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption
amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax ("AMT") may be used as credits against regular
tax liabilities in future years. At December 31, 2017, Coastway Community Bank had no alternative minimum tax credit carryforward. Under the Tax Cuts and Jobs Act, which was signed into law on
December 31, 2017, AMT will no longer be imposed, commencing in 2018.
Corporate Dividends.
We may exclude from our income 100% of dividends received from Coastway Community Bank as a member of the
same affiliated group
of corporations.
Audit of Tax Returns.
Our federal and state tax returns are not currently under audit, and our federal and state tax returns have
not been audited
during the past five years. We are no longer subject to examination by federal and state taxing authorities for years prior to the year ended December 31, 2014.
State Taxation
Coastway Bancorp, Inc., and Coastway Community Bank are subject to Rhode Island's corporate income tax, which is imposed at a flat rate
of 9% on apportioned "adjusted gross income." "Adjusted gross income," for purposes of the Rhode Island corporate income tax, begins with taxable income as defined by Section 44-11 of the Rhode
Island Code, and thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several modifications pursuant to Rhode
Island tax regulation.
As
a Maryland business corporation, Coastway Bancorp, Inc. is required to file an annual report with and pay franchise taxes to the state of Maryland. Coastway
Bancorp, Inc. is also subject to an income based tax in the Commonwealth of Massachusetts.
Item 1A. Risk Factors
Our commercial real estate, commercial business loans and commercial construction loans generally carry
greater credit risk than loans secured by owner occupied one- to four-family real estate, and these risks will increase if we succeed in our plan to increase these types of loans.
At December 31, 2017, $173.2 million, or 28.3%, of our loan portfolio consisted of commercial real estate and commercial business
loans. Given their larger balances and the complexity of the underlying collateral, commercial real estate and commercial business loans generally expose a lender to greater credit risk than loans
secured by owner occupied one- to four-family real estate. Also, many of our borrowers have more than one of these types of loans outstanding. Consequently, an adverse development with respect to one
loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential real estate loan. These loans
also have greater credit risk than residential real estate for the following reasons:
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-
commercial real estate loansrepayment is generally dependent on income being generated in amounts sufficient to cover operating
expenses and debt service.
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commercial business loansrepayment is generally dependent upon the successful operation of the borrower's business.
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Commercial construction loansrepayment is generally dependent on the estimate of value of the property at completion of
construction. Upon completion of construction, these loans generally convert to permanent loans.
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If loans that are collateralized by real estate or other business assets become troubled and the value of the collateral has been significantly impaired, then we
may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses
which would in turn adversely affect our operating results and financial condition.
Furthermore,
a key component of our strategy is to continue to increase our origination of commercial real estate and commercial business loans to diversify our loan portfolio and
increase our yields. The proposed increase in these types of loans significantly increases our exposure to the risks inherent in these types of loans.
We have a high concentration of loans secured by real estate in our market area. Difficult economic
conditions, both generally and in our market area, could adversely affect our financial condition and results of operations.
At December 31, 2017, $357.5 million, or 58.3% of our total loan portfolio, consisted of loans secured by real estate in the state
of Rhode Island and $117.8 million, or 19.2% of our total loan portfolio, consisted of real estate loans in the Commonwealth of Massachusetts. We have relatively few loans outside of our market
area, and, as a result, we have a greater risk of loan defaults and losses in the event of weakness and/or a economic downturn in our market area, as adverse economic conditions may have a negative
effect on the ability of our borrowers to make timely payments of their loans.
A
deterioration in economic conditions or a recession in the market areas we serve could result in the following consequences, any of which could have a material adverse effect on our
business, financial condition and results of operations:
-
-
loan delinquencies, problem assets and foreclosures may increase;
-
-
weak economic conditions may limit the demand for loans by creditworthy borrowers, limiting our capacity to leverage our retail deposits and
maintain our net interest income;
-
-
the value of the collateral for our loans may decline;
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-
demand for our deposits and services may decline; and
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-
the amount of our low-cost or non-interest-bearing deposits may decrease.
If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings and capital
could decrease.
We are exposed to the risk that our borrowers may default on their obligations. A borrower's default on its obligations under one or more loans
may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loan. In certain
situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, we may have to charge-off the loan in whole or in part. In such situations, we may acquire
real estate or other assets, if any, that secure the loan through foreclosure or other similar available remedies, and the amount owed under the defaulted loan may exceed the value of the assets
acquired.
We
make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other
assets serving as collateral for many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate other
factors including, among other things, current economic conditions. If our assumptions are incorrect, or if delinquencies do not continue to improve or non-accrual and non-performing loans increase,
our allowance for loan
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losses
may not be sufficient to cover losses inherent in our loan portfolio, which would require additions to our allowance, which could materially decrease our net income.
In
addition, bank regulators periodically review our allowance for loan losses and, based on their judgments and information available to them at the time of their review, may require us
to increase our allowance for loan losses or recognize further loan charge-offs. An increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities may result
in a decrease of our net income and, possibly, our capital position, which may have a material adverse effect on our financial condition and results of operations.
Our nonconforming loan portfolio exposes us to increased credit risk.
A significant portion of our one- to four-family residential real estate loans are nonconforming to secondary market requirements, and are
therefore not saleable to Fannie Mae, Freddie Mac, Federal Housing Administration ("FHA") or Rhode Island Housing. At December 31, 2017, $236.4 million, or 75.8%, of our one- to
four-family residential loan portfolio consisted of loans that were considered nonconforming because they exceeded the maximum balance allowable for sale (generally $424,100 for single-family homes in
our market area), or jumbo loans. At December 31, 2017, we had three jumbo loans totaling $1.8 million that are considered impaired loans.
We
generally limit the loan-to-value ("LTV") ratios of our mortgage loans without private mortgage insurance to 80% of the sales price or appraised value, whichever is lower. Loans where
the borrower obtains private mortgage insurance ("PMI") may be made with loan-to-value ratios up to 97%. From time to time we may originate mortgage loans with loan-to-value ratios greater than
80% with no private mortgage insurance. Such loans totaled $47.3 million and $37.0 million at December 31, 2017 and 2016, respectively or 15.1% and 14.8% of one- to four-family
mortgage loans, and have an average loan-to-value ratio of 85% at December 31, 2017 and 2016. Of the $47.3 million in residential loans with a greater than 80% LTV ratio at
December 31, 2017, $32.0 million or 66.4% are jumbo loans. During the year ended December 31, 2017, we originated $18.6 million of one- to four-family loans with a greater
than 80% loan-to-value ratio with no PMI at an average loan-to-value ratio of 89%. During the year ended December 31, 2016, we originated $9.7 million of one- to four-family loans
with a greater than 80% loan-to-value ratio with no PMI at an average loan-to-value ratio of 87%. The Bank considers the incremental credit risk on these loans as compared to the remaining
residential mortgage portfolio as a component of its concentration qualitative reserve factor. Impaired loans at December 31, 2017 included $1.3 million, or 2.7% of the loans with a
greater than 80% LTV ratio and no PMI.
From
2000 until early 2006, we originated loans to borrowers who provided limited or no documentation of income, known as stated income loans. A stated income loan is a loan where the
borrower's income source is not subject to verification through the application process. At December 31, 2017, we had $2.1 million in stated income loans, or 0.7% of our one- to
four-family residential real estate loan portfolio, of which $347,000 was non-performing loans and $525,000 were accruing troubled debt restructured loans. Subsequent to 2006, we have not and we have
no intention of originating stated income loans again in the future. Approximately 38.0% of the $2.1 million in stated income loans were made to borrowers who had existing commercial
relationships and financial information on file with us.
Jumbo
one- to four-family residential loans have increased risk due to their potential for greater exposure to loss as a result of their larger balances, which cannot be sold to
government sponsored enterprises. Loans greater than 80% LTV and no PMI have a greater exposure for losses due to a higher loan balance as compared to their collateral value that is not mitigated by
private mortgage insurance. Stated income loans have increased risk due to the lack of income verification applied to such loans which could result in higher rates of default. If our nonconforming
one- to four-family
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residential
real estate loans do not perform, it will have an adverse effect on our financial condition and results of operations.
Our significant concentration of home equity loans and lines of credit exposes us to increased credit risk.
At December 31, 2017, $71.8 million, or 11.7%, of our loan portfolio consisted of home equity loans and lines of credit, of which
$39.6 million are in a junior lien position, with an average loan size of $39,000. Prior economic conditions resulted in declines in real estate values in our market areas from before the Great
Recession. These declines in real estate values coupled with the possibility of future declines in real estate values, could cause some of our home equity loans and lines of credit to be inadequately
collateralized, which could expose us to a greater risk of loss if we seek to recover on defaulted loans by foreclosing and selling the real estate collateral, or if another lender has priority over
us, and we may be unsuccessful in recovering the remaining balance on defaulted loans after the senior liens are satisfied.
Future changes in interest rates could reduce our profits.
The majority of our assets and liabilities are monetary in nature. As a result, our earnings and growth are significantly affected by interest
rates, which are subject to the influence of economic conditions generally, both domestic and foreign, to events in the capital markets and also to the monetary and fiscal policies of the United
States and its agencies, particularly the Federal Reserve Board. Changes in interest rates can affect our net interest income as well as the value of our assets and liabilities. Net interest income is
the difference between (i) interest income on interest-earning assets, such as loans, and (ii) interest expense on interest-bearing liabilities, such as deposits and borrowed funds.
Changes in market interest rates, changes in the relationships between short-term and long-term market interest rates, or the yield curve, or changes in the relationships between different interest
rate indices can affect the interest rates charged on interest-earning assets differently than the interest rates paid on interest-bearing liabilities.
Starting
in 2015 and continuing into 2017, based on the growth in our residential one- to four-family loan portfolio coupled with the level of short-term borrowed funds, our
interest-bearing liabilities may re-price more quickly than our interest-earning assets in an increasing interest rate environment. For the years ended December 31, 2017and 2016, our net
interest margin was 3.16% and 3.31%,
respectively. Our net interest income was also impacted by the increase in short-term interest rates, while long-term rates and spreads have not increased to the same degree, causing our
interest-bearing liabilities to reprice at a higher increment than our loans. Our asset/liability management committee utilizes a simulation model to provide an analysis of estimated changes in the
net present value of equity in various interest rate scenarios. Increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. The
Bank may be required to pay higher rates on deposits (including national market certificates of deposit) or other borrowed funds than the Bank is currently paying. Conversely, a reduction in interest
rates can result in increased prepayments of loans, as borrowers refinance their debt in order to reduce their borrowing costs. This creates reinvestment risk, which is the risk that we may not be
able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans. In addition, we may not be able to lower our cost of funds as quickly as certain loans mature,
re-price or are refinanced, which may cause a decline in our net interest margin.
Extension of the duration of interest-bearing liabilities could reduce our profits.
The majority of our borrowed funds mature over short term periods, generally overnight to two months. Interest rates on short-term borrowed
funds are lower than long-term advances. Our interest expense has been favorably impacted by the lower funding costs of short-term borrowed funds.
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Increases
in market interest rates or changes in the mix of short-term and long-term borrowed funds may increase our cost of funds, which may cause a decline in our net interest margin.
Similarly,
the cost of our deposits is impacted by the level of non-maturity deposits and certificates of deposit. The interest rates paid on certificates of deposit are generally higher
than non-maturity deposits. At December 31, 2017 and 2016, certificates of deposit totaled $163.3 million, or 34.2% of deposits and $162.9 million, or 36.4% of deposits
respectively. At December 31, 2017 and 2016, certificates of deposit include $39.2 million and $44.4 million of national market certificates at a weighted average rate of 1.62%
and 1.48%, respectively.
We
increased our levels of national market certificates of deposit in anticipation of an increase in interest rates, to repay borrowed funds and bolster on-balance sheet liquidity. An
increase in longer-term national market certificates of deposit as compared to utilizing short-term FHLB advances may increase our cost of funds, which may cause a decline in our net interest margin.
Increase in on-balance sheet liquidity could reduce our profits.
During the year ended December 31, 2017, we increased our on-balance sheet liquidity, with cash and cash equivalents and certificates of
deposit totaling $54.6 million, or 7.4% of consolidated assets from $44.7 million or 6.9% of consolidated assets at December 31, 2016. Cash and cash equivalents generally earn
less interest income than loans. The increase in on-balance sheet liquidity was funded through a combination of organic deposit growth, national market certificates of deposit as well as FHLB
advances. Our cost of funds may exceed the yield earned on cash and cash equivalents, which may decrease our net interest income, net interest margin and net income.
Income from secondary mortgage market operations is volatile, and we may incur losses with respect to our
secondary mortgage market operations that could negatively affect our earnings.
A key component of our strategy is to increase the extent to which we sell in the secondary market the longer term, conforming fixed-rate
residential mortgage loans that we originate, earning non-interest income in the form of gains on sale. 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. Although we generally originate loans for sale on a "best efforts" basis, and we sell,
and intend to continue selling, most loans in the secondary market with limited or no recourse, we are required, and will continue to be required, to give customary representations and warranties to
the buyers relating to compliance with applicable law. If we breach those representations and warranties, the buyers will be able to require us to repurchase the loans and we may incur a loss on the
repurchase.
The
Bank utilizes both best efforts forward loan sale commitments and effective September 1, 2015, also began utilizing mandatory delivery forward loan sale commitments, and To Be
Announced ("TBA") Securities, which are sold from approved counterparties to mitigate the risk of potential changes in the values of derivative loan commitments.
For
TBAs, the Bank sells a security in the open market with a promise to deliver a pool of loans with an aggregate specified principal amount and quality to the investor at a specified
point in the future. If the Bank fails to deliver the pool of loans, the Bank will repurchase the security at the market price on the date of repurchase, which could negatively impact our earnings.
Fair
value changes in mortgage banking derivatives 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 derived
from the Bank's internal data and adjusted using management judgment. Mortgage banking derivatives include the non-refundable costs of originating the loan based on the Bank's internal cost analysis
that
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is
not observable. Fluctuations in interest rates may impact estimated pull-through rates on mortgage originations, which in turn may affect the valuation of forward loan sale commitments, and could
negatively affect our earnings.
If our foreclosed real estate decline in value, our earnings could be reduced.
We periodically may obtain updated valuations in the form of appraisals and broker price opinions during the holding period of the foreclosed
asset. Our net book value, or NBV, is compared to the updated fair value of the foreclosed property less estimated selling costs (fair value). If property values decline, the fair value of our
foreclosed real estate may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. In addition, bank regulators periodically review our
foreclosed real estate and may require us to recognize further write-downs. Any increase in write-downs may have a material adverse effect on our financial condition and results of operations.
Strong competition within our market areas may limit our growth and profitability.
Competition in the banking and financial services industry is intense. In our market area, we compete with commercial banks, savings
institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. The financial
services industry could become even more competitive as a result of new legislative, regulatory and technological changes and continued consolidation. Banks, securities firms and insurance companies
can merge under the umbrella of a financial holding company, which can offer virtually any type of financial service, including banking, securities underwriting, insurance (both agency and
underwriting) and merchant banking. Also, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic
transfer and automatic payment systems. These competitors have fewer regulatory constraints and may have lower cost structures.
Some
of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In
addition, larger competitors may choose to price loans and deposits more aggressively than we do, which could affect our ability to grow and remain profitable on a long-term basis. Our profitability
depends upon our continued ability to successfully compete in our market area. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin
and profitability could be adversely affected.
We depend on our management team to implement our business strategy and we could be harmed by the loss of
their services.
We are dependent upon the services of the members of our senior management team who direct our strategy and operations. We have benefited from
consistency within our senior management team, with our top five executives averaging over 13 years of service with Coastway Community Bank and more than a combined 181 years of
financial institution experience. Members of our senior management team, or lending specialists who possess expertise in our markets and maintain key business relationships, could be difficult to
replace. Our loss of these persons, or our inability to hire additional qualified personnel, could impact our ability to implement our business strategy and could have a material adverse effect on our
results of operations and our ability to compete in our markets.
We may be adversely affected by recent changes in U.S. tax laws and regulations.
Changes in tax laws contained in the Tax Cuts and Jobs Act, which was enacted in December 2017, include a number of provisions that will have an
impact on the banking industry, borrowers and the market for single-family residential real estate. Included in this legislation is a reduction of the
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corporate
income tax rate from 34% to 21%. In addition, other changes include (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans,
(ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility
of property taxes and state and local income taxes. These recent changes in the tax laws may have an adverse effect on the market for, and valuation of, residential properties, and on the demand for
such loans in the future, and could make it harder for
borrowers to make their loan payments. In addition, these recent changes may also have a disproportionate effect on taxpayers in states with high residential home prices and high state and local
taxes, such as Rhode Island and Massachusetts. If home ownership becomes less attractive, demand for mortgage loans could decrease. The value of the properties securing loans in our loan portfolio may
be adversely impacted as a result of the changing economics of home ownership, which could require an increase in our provision for loan losses, which would reduce our profitability and could
materially adversely affect our business, financial condition and results of operations.
Financial reform legislation will result in new laws and regulations that are expected to increase our costs
of operations.
The Dodd-Frank Act, among other things, has changed and will continue to change the bank regulatory framework. The legislation will also result
in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. An independent Consumer Financial Protection Bureau has assumed the consumer
protection responsibilities of the various federal banking agencies and has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions
such as Coastway Community Bank, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. Banks and savings institutions with $10.0 billion or less in assets will
continue to be examined by their applicable bank regulators. The new legislation also gives state attorneys general the ability to enforce applicable federal consumer protection laws. The Dodd-Frank
Act also requires the federal banking agencies to promulgate rules requiring mortgage lenders to retain a portion of the credit risk related to securitized loans. Bank regulatory agencies also have
been responding aggressively to concerns and adverse trends identified in examinations. These measures are likely to increase our costs of doing business and increase our costs related to regulatory
compliance, and may have a significant adverse effect on our lending activities, financial performance and operating flexibility.
We have become subject to more stringent capital requirements, which may adversely impact our return on
equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.
In July 2013, the FDIC approved a new rule that substantially amends the regulatory risk-based capital rules applicable to Coastway Community
Bank. The final rule implements the "Basel III" regulatory capital reforms and changes required by the Dodd-Frank Act.
The
final rule includes new minimum risk-based capital and leverage ratios, which became effective for Coastway Community Bank on January 1, 2015, and refines the definition of
what constitutes "capital" for purposes of calculating these ratios. The new minimum capital requirements are: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a
Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of
4%. The final rule also establishes a "capital conservation buffer" of 2.5%, and will result in the following minimum ratios inclusive of the capital conservation buffer upon full implementation in
January 2019: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%.
The new capital conservation buffer requirement began to be phased in in January 2016 at 0.625% of risk-weighted assets and increases each year until fully implemented in January 2019. In 2018, the
capital conservation buffer requirement will be 1.875% of risk-weighted assets. An institution will be subject to
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limitations
on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum
percentage of eligible retained income that can be utilized for such actions.
The
application of more stringent capital requirements for Coastway Community Bank could, among other things, result in lower returns on equity, require the raising of additional
capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.
We operate in a highly regulated environment and may be adversely affected by changes in laws and
regulations.
We are subject to extensive regulation, supervision, and examination by the Federal Reserve Board, the Rhode Island Department of Business
Regulation and the FDIC. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection
with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a financial institution, the classification of assets by a financial institution, and
the adequacy of a financial institution's allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a
material impact on us and our operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Laws, rules and
regulations may be adopted in the future that could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. See "Supervision and
Regulation" for a discussion of the regulations to which we are subject.
Changes in accounting standards could affect reported earnings.
The accounting standard setters, including the Financial Accounting Standards Board ("FASB"), the Securities and Exchange Commission and other
regulatory bodies, periodically change the financial accounting and reporting guidance that governs the preparation of our consolidated financial statements. These changes can be hard to predict and
can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply new or revised guidance retroactively.
In
June 2016, the FASB issued a standard,
Financial InstrumentsCredit Losses
, that will significantly change how banks
measure and recognize credit impairment for many financial assets from an incurred loss methodology to a current expected loss model. The current expected credit loss model will require banks to
immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. We are currently evaluating the impact of
adoption of this standard, including different methodologies that may be employed to estimate credit losses, such as loss rate methods, component loss methods, and qualitative factors, as well as
additional data gathering that will be needed to adopt the standard. The standard will add new disclosures related to factors that influenced management's estimate, including current expected credit
losses, the changes in those factors, and reasons for the changes as well as the method applied to revert to historical credit loss experience.
We are a community bank and our ability to maintain our reputation is critical to the success of our business
and the failure to do so may materially adversely affect our performance.
We are a community bank, and our reputation is one of the most valuable components of our business. A key component of our business strategy is
to rely on our reputation for customer service and knowledge of local markets to expand our presence by capturing new business opportunities from existing and prospective customers in our current
market and contiguous areas. As such, we strive to
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conduct
our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the
communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees, by our
inability to conduct our
operations in a manner that is appealing to current or prospective customers, or otherwise, our business and operating results may be adversely affected.
Risks associated with system failures, interruptions, or breaches of security could negatively affect our
earnings.
Information technology systems are critical to our business. We use various technology systems to manage our customer relationships, general
ledger, deposits, and loans. We have established policies and procedures to prevent or limit the impact of system failures, interruptions, and security breaches, but such events may still occur or may
not be adequately addressed if they do occur. In addition, any compromise of our systems could deter customers from using our products and services. Although we rely on security systems to provide
security and authentication necessary to effect the secure transmission of data, these precautions may not protect our systems from compromises or breaches of security.
In
addition, we outsource a majority of our data processing to certain third-party providers. If these third-party providers encounter difficulties, or if we have difficulty
communicating with them, our ability to adequately process and account for transactions could be affected, and our business operations could be adversely affected. Threats to information security also
exist in the processing of customer information through various other vendors and their personnel.
The
occurrence of any system failures, interruption, or breach of security could damage our reputation and result in a loss of customers and business, could subject us to additional
regulatory scrutiny, or could expose us to litigation and possible financial liability. Any of these events could have a material adverse effect on our financial condition and results of operations.
There may be a limited trading market in our common stock, which would hinder your ability to sell our common
stock and may lower the market price of the stock.
Our common stock is listed on the Nasdaq Capital Market under the symbol "CWAY." The development of an active trading market depends on the
existence of willing buyers and sellers, the presence of which is not within our control, or that of any market maker. The number of active buyers and sellers of the shares of common stock at any
particular time may be limited. Under such circumstances, you could have difficulty selling your shares of common stock on short notice, and, therefore, you should not view the shares of common stock
as a short-term investment. In addition, our public "float," which is the total number of our outstanding shares less the shares held by our employee stock ownership plan, the charitable foundation
and our directors and executive officers, is likely to be quite limited. As a result, it is unlikely that an active trading market for the common stock will develop or that, if it develops, it will
continue. Purchasers of our common stock should have
long-term investment intent and should recognize that there will be a limited trading market in the common stock. This may make it difficult to sell the common stock and may have an adverse impact on
the price at which the common stock can be sold.
We are an emerging growth company within the meaning of the Securities Act, and if we decide to take
advantage of certain exemptions from various reporting requirements applicable to emerging growth companies, our common stock could be less attractive to investors.
We are an "emerging growth company," as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the JOBS Act.
We are eligible to take advantage of certain exemptions from
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various
reporting requirements that are applicable to other public companies that are not emerging growth companies, including, but not limited to, reduced disclosure about our executive compensation
and omission of compensation discussion and analysis, and an exemption from the requirement of holding a non-binding advisory vote on executive compensation. In addition, we will not be subject to
certain requirements of Section 404 of the Sarbanes-Oxley Act of 2002, including the additional level of review of our internal control over financial reporting as may occur when outside
auditors attest as to our internal control over financial reporting. As a result, our stockholders may not have access to certain information they may deem important.
We
could remain an "emerging growth company" for up to five years following completion of our initial public offering, or until the earliest of (a) the last day of the first
fiscal year in which our annual gross revenues exceed $1.0 billion, (b) the date that we become a "large accelerated filer" as defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended, which would occur if the market value of our common stock that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed
second fiscal quarter, or (c) the date on which we have issued more than $1.0 billion in non-convertible debt during the preceding three-year period. Taking advantage of any of these
exemptions may adversely affect the value and trading price of our common stock.