Coastway Bancorp Earnings 2018-06-30

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

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

 

or

 

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

 

FOR THE TRANSITION PERIOD FROM            TO                 .

 

For the quarterly period ended June 30, 2018

 

Commission File Number: 001-36263

 

Coastway Bancorp, Inc.

(Exact name of registrant as specified in its charter)

 

 

(401) 330-1600

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)  x Yes  o  No

 

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

 

Large accelerated filer	o	Accelerated filer	x
Non-accelerated filer	o	(Do not check if a smaller reporting company)
		Smaller reporting company		o
		Emerging growth company		x

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes  x  No

 

As of July 31, 2018 there were 4,386,351 shares of the issuer’s common stock outstanding- par value $0.01 per share

 

 

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COASTWAY BANCORP, INC. and SUBSIDIARY

Index

 

			Page Number
PART I - FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets – June 30, 2018 and December 31, 2017 (unaudited)		1
	Consolidated Statements of Net Income and Comprehensive Income – Three and Six months ended June 30, 2018 and 2017 (unaudited)		2
	Consolidated Statement of Changes in Stockholders’ Equity - Six months ended June 30, 2018 (unaudited)		3
	Consolidated Statements of Cash Flows - Six months ended June 30, 2018 and 2017 (unaudited)		4
	Notes to the Unaudited Consolidated Financial Statements		5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations		26
Item 3	Quantitative and Qualitative Disclosures About Market Risk		45
Item 4	Controls and Procedures		47
PART II - OTHER INFORMATION
Item 1	Legal Proceedings		47
Item 1A	Risk Factors		48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds		48
Item 3	Defaults Upon Senior Securities		48
Item 4	Mine Safety Disclosures		48
Item 5	Other Information		48
Item 6	Exhibits		48
	Signature page		49

 

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PART I-FINANCIAL INFORMATION

 

Item 1 -     Financial Statements

 

COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Balance Sheets

(Unaudited)

 

(Dollars in thousands except per share amounts)		June 30, 2018			December 31, 2017
Assets
Cash and cash equivalents:
Cash and due from banks		$	2,435		$	3,258
Interest-earning deposits		47,649			51,311
Total cash and cash equivalents		50,084			54,569
Federal Home Loan Bank stock, at cost		11,368			8,299
Loans, net of allowance for loan losses of $3,358 and $2,920, respectively		708,755			614,593
Loans held for sale		16,238			11,077
Premises and equipment, net		31,204			31,849
Accrued interest receivable		2,267			1,962
Foreclosed real estate		—			4,223
Bank-owned life insurance		4,646			4,585
Net deferred tax asset		1,049			1,047
Other assets		9,293			6,701
Total assets		$	834,904		$	738,905
Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing		$	368,031		$	360,068
Non-interest-bearing		133,913			116,888
Total deposits		501,944			476,956
Borrowed funds		250,950			181,675
Accrued expenses and other liabilities		8,580			8,929
Total liabilities		761,474			667,560
Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.01 par value; 20,000,000 shares authorized, none issued or outstanding at June 30, 2018 and December 31, 2017		—			—
Common stock, $0.01 par value; 50,000,000 shares authorized; 4,386,351 and 4,389,045 issued and outstanding at June 30, 2018 and December 31, 2017, respectively		44			44
Additional paid-in capital		40,217			40,065
Retained earnings		36,688			34,834
Unearned compensation - Employee Stock Ownership Plan (ESOP)		(3,248		)	(3,327		)
Accumulated other comprehensive loss		(271		)	(271		)
Total stockholders’ equity		73,430			71,345
		$	834,904		$	738,905

 

The accompanying notes are an integral part of the consolidated unaudited financial statements.

 

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COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Statements of Net Income and Comprehensive Income

(Unaudited)

 

		Three months ended June 30,						Six months ended June 30,
(in thousands except share amounts)		2018			2017			2018			2017
Interest income:
Interest and fees on loans		$	7,426		$	5,706		$	14,114		$	11,169
Other interest income		305			153			550			303
Total interest income		7,731			5,859			14,664			11,472
Interest expense:
Interest on deposits		814			733			1,621			1,439
Interest on borrowed funds		1,162			290			1,936			516
Total interest expense		1,976			1,023			3,557			1,955
Net interest income		5,755			4,836			11,107			9,517
Provision for loan losses		207			153			569			213
Net interest income after provision for loan losses		5,548			4,683			10,538			9,304
Non-interest income:
Customer service fees		950			868			1,847			1,700
Net gain on sales of loans and other mortgage banking income		1,011			1,025			1,635			1,843
Bank-owned life insurance income		31			32			61			70
Other income		34			48			27			108
Total non-interest income		2,026			1,973			3,570			3,721
Non-interest expenses:
Salary and employee benefits		2,900			2,991			5,799			5,950
Occupancy and equipment		751			795			1,575			1,665
Data processing		489			481			968			955
Professional fees		478			178			1,095			400
Deposit servicing		232			235			468			476
FDIC insurance assessment		122			73			232			152
Advertising		63			92			142			193
Foreclosed real estate		17			7			88			14
Other general and administrative		477			431			977			923
Total non-interest expenses		5,529			5,283			11,344			10,728
Income before income taxes		2,045			1,373			2,764			2,297
Income tax expense		638			556			910			918
Net income and comprehensive income		$	1,407		$	817		$	1,854		$	1,379
Weighted average common shares outstanding-basic		4,030,306			4,002,657			4,026,715			4,008,281
Weighted average common shares outstanding-diluted		4,096,031			4,028,360			4,087,301			4,030,141
Per share information:
Basic earnings per common share		$	0.35		$	0.20		$	0.46		$	0.34
Diluted earnings per common share		$	0.34		$	0.20		$	0.45		$	0.34

 

The accompanying notes are an integral part of the consolidated unaudited financial statements.

 

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COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

Six months ended June 30, 2018

(Unaudited)

 

							Additional						Unearned			Accumulated Other			Total
		Common Stock					Paid-in			Retained			Compensation-			Comprehensive			Stockholders’
		Shares		Amount			Capital			Earnings			ESOP			Loss			Equity
		(Dollars in thousands)
Balance at December 31, 2017		4,389,045		$	44		$	40,065		$	34,834		$	(3,327	)	$	(271	)	$	71,345
Net income		—		—			—			1,854			—			—			1,854
Stock-based compensation, net of awards surrendered		(2,694	)	—			32			—			—			—			32
ESOP shares committed to be allocated (7,918 shares)		—		—			120			—			79			—			199
Balance at June 30, 2018		4,386,351		$	44		$	40,217		$	36,688		$	(3,248	)	$	(271	)	$	73,430

 

The accompanying notes are an integral part of the consolidated unaudited financial statements.

 

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COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

 

		Six months ended June 30,
(Dollars in thousands)		2018			2017
Cash flows from operating activities:
Net income		$	1,854		$	1,379
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		569			213
Loans originated for sale		(84,890		)	(95,253		)
Loans sold		80,835			107,172
Gain on sale of mortgage loans, net		(1,106		)	(1,990		)
Amortization of deferred loan costs		559			493
Provision on foreclosed real estate		9			—
Depreciation and amortization expense		731			719
Income from Bank-owned life insurance		(61		)	(70		)
Deferred income tax expense (benefit)		(2		)	(134		)
ESOP expense		199			145
Stock-based compensation		91			93
Net change in:
Accrued interest receivable		(305		)	(118		)
Other, net		(2,929		)	(1,812		)
Net cash provided (used) by operating activities		(4,446		)	10,837
Cash flows from investing activities:
Purchase of FHLB stock		(3,069		)	(826		)
Redemption of FHLB stock		—			838
Loan originations, net of principal payments		(29,984		)	(25,124		)
Purchase of loans from third party originators		(65,306		)	(13,273		)
Purchases of premises and equipment		(86		)	(977		)
Proceeds from sale of foreclosed real estate		4,202			—
Net cash used by investing activities		(94,243		)	(39,362		)
Cash flows from financing activities:
Net increase in deposits		24,988			24,053
Net change in short-term borrowed funds		69,275			6,691
Restricted stock forfeited for tax withholdings		(59		)	(44		)
Repurchase of common stock		—			(333		)
Net cash provided by financing activities		94,204			30,367
Net change in cash and cash equivalents		(4,485		)	1,842
Cash and cash equivalents at beginning of period		54,569			44,658
Cash and cash equivalents at end of period		$	50,084		$	46,500
Supplemental cash flow information:
Interest paid on deposits		$	1,620		$	1,438
Interest paid on borrowed funds		1,871			515
Income taxes paid		350			1,741

 

The accompanying notes are an integral part of the consolidated unaudited financial statements.

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

 

(1)         Basis of Presentation and Consolidation

 

General information

 

Coastway Bancorp, Inc., a Maryland chartered stock corporation (“Company” or “Corporation”), was formed to serve as the holding company for Coastway Community Bank.  Coastway Community Bank (the “Bank”) is a Rhode Island-chartered savings bank.  The Bank provides a variety of financial services to individuals and small businesses throughout Rhode Island.  Its primary deposit products are savings, demand, money market and term certificate accounts and its primary lending products are one-to four-family residential mortgage loans, home equity loans and lines of credit, commercial real estate and SBA loans.

 

Acquisition

 

On March 14, 2018, the Company and HarborOne Bancorp, Inc. (“HONE”) announced they had entered into a definitive agreement (“Merger Agreement”) under which HONE will acquire the Company in an all cash transaction valued at approximately $125.6 million.  The Company’s stockholders will receive $28.25 for each share of Company common stock that they own.  The transaction is expected to close in the second half of 2018 and is subject to customary closing conditions, including required regulatory approvals.  On June 21, 2018, the Corporation’s stockholders approved and adopted the Merger Agreement.  However, it is possible that factors outside the control of both companies, including whether or when the required regulatory approvals will be received, could result in the merger being delayed or not completed at all.  In connection with the merger, the Company had incurred $278,000 and $676,000 of merger expenses for the three and six months ended June 30, 2018, primarily legal and investment banker costs, which are included in professional fees in the Statements of Net Income and Comprehensive income.

 

Basis of Presentation

 

The consolidated financial statements include the accounts of the Corporation and its subsidiary.  In June 2018, Rhode Island Passive Investment Corp. was formed which is a wholly-owned subsidiary of the Bank.  All significant intercompany transactions have been eliminated.  The unaudited consolidated financial statements of the Corporation presented herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and pursuant to the rules of the SEC for quarterly reports on Form 10-Q and Regulation S-X and do not include all of the information and note disclosures required by GAAP for a complete set of financial statements.  In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The results of operations for interim periods are not necessarily indicative of results for the full year or any other interim period. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2017, included in the Corporation’s annual report on Form 10-K.

 

In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.  Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, the valuation of loans held for sale, mortgage-banking derivatives and commitments to sell fixed-rate residential mortgages.

 

Stock-Based Compensation

 

Compensation cost is recognized for stock options and restricted stock awards issued to employees based on the fair value of these awards at the grant date.  A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s stock at the grant date is utilized for restricted stock awards.  Compensation cost is recognized over the required service period, generally defined as the vesting period.  For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

 

Income Taxes

 

The Tax Cuts and Jobs Act (the “Tax Act”) was signed into law in December 2017 which reduced the corporate federal statutory tax rate from 34% to 21% effective January 1, 2018.

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

Recent Accounting Pronouncements

 

As an “emerging growth company” as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Corporation has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies.  In June 2018, the SEC revised the definition of smaller reporting company to include companies with public float of less than $250 million, an increase from the prior $75 million threshold. This revised rule has not yet taken effect.

 

In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers.”  The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS.  This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards.  In August 2015, the FASB issued ASU 2015-14 to defer for one year the effective date of the new revenue standard.  The requirements are effective for annual periods and interim periods within fiscal years beginning after December 15, 2018.  During 2016, the FASB issued further implementation guidance regarding revenue recognition.  This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing, assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters.  The Corporation’s largest sources of income is net interest income on financial assets and liabilities and net gain on sales of loans and other mortgage banking income, which are explicitly excluded from the scope of this ASU.  Accordingly the majority of our revenues will not be affected.  The Corporation does not expect the adoption of this guidance will have a significant impact on the Corporation’s consolidated financial statements, but is expected to require additional disclosures.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments.  The ASU requires equity instruments (except those accounted for under the equity method of accounting or that result in consolidations of the investee) to be measured at fair value with changes in fair value recognized in net income.  However, an entity may choose to measure an equity investment that does not have a readily determinable fair value at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions.  For public business entities, the standard is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years.  For all other entities, including emerging growth companies, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods within fiscal periods after December 15, 2019.  We do not expect a significant impact upon adoption on January 1, 2019.

 

In February 2016, the FASB issued ASU 2016-02, Leases, which will require organizations that lease assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases.  Under the new guidance, a lessee will be required to recognize right to use assets and lease liabilities for leases with lease terms of more than 12 months.  However, unlike current Generally Accepted Accounting Principles (GAAP) — which requires only capital leases to be recognized on the balance sheet — the new ASU will require both types of leases to be recognized on the balance sheet. The accounting by organizations that own the assets leased by the lessee — also known as lessor accounting — will remain largely unchanged from current GAAP.  However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model.  The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  For all other organizations, including emerging growth companies, the ASU on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020.  We are currently evaluating the impact of adoption of this standard, including identifying contracts that are, or contain, leases, as the lease identification guidance in the new standard is different than the current standard.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit 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 credit loss model.  The current expected credit loss model will require companies 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.  The FASB also made targeted amendments to the current impairment model for available-for-sale debt securities.  The ASU is effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019, and for other companies, including emerging growth companies, for interim and annual periods in fiscal years beginning after December 15, 2020.  All entities may early adopt the standard for annual and interim periods in fiscal years after December 15, 2018.  The standard will be effective for the Corporation on January 1, 2020.  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

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

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.

 

ASU 2017-07, Compensation — Retirement Benefits (Topic 715):  Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost which in March 2017, the FASB issued amended existing guidance to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost.  The amendments require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period.  The other components of net benefit costs are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented.  The amendments allow only the service cost component to be eligible for capitalization.  The amendments are effective for public business entities for annual periods beginning after December 15, 2017, including interim periods within those periods.  For emerging growth companies, the amendments are effective for annual periods after December 15, 2018, including interim periods within those periods.  Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance.  The amendments should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost in the statement of net income and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic postretirement benefit in assets.  The amendments allow a practical expedient that permits an employer to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation basis for applying the retroactive presentation requirements.  The amendment requires disclosure that the practical expedient was used.  The adoption of this standard is not expected to have a material effect on the Company’s operating results or financial condition.

 

(2)         Loans

 

Major classifications of loans at the dates indicated, are as follows:

 

(Dollars in thousands)		June 30, 2018			December 31, 2017
Residential real estate mortgage loans:
1-4 family		$	395,185		$	312,095
Home equity loans and lines of credit		68,561			71,844
Total residential real estate mortgage loans		463,746			383,939
Commercial:
Commercial real estate		173,978			156,024
Commercial business		13,984			17,158
Commercial construction		13,262			13,552
SBA		40,533			41,020
Consumer		1,215			1,229
Total loans		706,718			612,922
Allowance for loan losses		(3,358		)	(2,920		)
Net deferred loan costs		5,395			4,591
Loans, net		$	708,755		$	614,593

 

Residential one- to four-family loans of $395.2 million at June 30, 2018 and $312.1 million at December 31, 2017 include purchased loans which were individually underwritten based on the Bank’s credit standards, totaling $151.5 million and $96.8 million at June 30, 2018 and December 31, 2017, respectively.  During the six months ended June 30, 2018 and 2017, the Bank purchased $64.5 million and $13.1 million of loans at a cost of $65.3 million and $13.3 million, respectively.  The loans purchased from third parties are located in New England, primarily Massachusetts.

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

Loan Segments

 

One-to four-family residential real estate and home equity — Loans in these segments are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower.  The Bank generally has first liens on one-to four-family residential real estate loans and first or second liens on property securing home equity loans and equity lines-of-credit.  Jumbo one- to four-family loans generally have maximum loan-to-value ratios of 95%.  Loan-to-value ratios of one- to four-family loans without private mortgage insurance may be made with loan-to-value ratios up to 95%.  Home equity loans and lines of credit may be underwritten with a loan-to-value ratio up to 80%.  The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in these segments.

 

Commercial — Commercial loan segments include commercial real estate, commercial and industrial loans for businesses and construction financing for business/properties located principally in Rhode Island.  For commercial real estate loans, the underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Non-real estate commercial loans are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  Commercial construction generally represent loans to finance construction of retail and office space.  Commercial loans also include loans made under the SBA 504 program which is an economic development program that finances the expansion of small businesses.  The Bank generally provides 50% of the projected costs, and the loan is secured by a first lien on the commercial property.  The SBA does not provide a guarantee on loans made under the SBA 504 program.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.  Management monitors the cash flows of these loans.

 

SBA — Loans in this segment include commercial loans underwritten using SBA guidelines for the SBA’s 7(a) program and include both guaranteed and unguaranteed portions of the same loans.  Currently, under the SBA 7(a) program, loans may qualify for guarantees up to 85% of principal and accrued interest up to a maximum SBA guarantee of $3.75 million per borrower and related entities.  The Bank does not treat the SBA guarantee as a substitute for a borrower meeting reasonable credit standards.  SBA guarantees are generally sought on loans to borrowers that exhibit minimum capital levels, a short time in business, lower collateral coverage or maximum loan terms beyond the Bank’s normal underwriting criteria.  For a number of SBA loans, the Bank has sold portions of certain loans and retains the unguaranteed portion while continuing to service the entire loan.  The guaranteed portion of SBA loans in the Bank’s portfolio is not allocated a general reserve because the Bank has not experienced losses on such loans and management expects the guarantees will be effective, if necessary.  Guaranteed portions of SBA loans totaled $26.6 million and $26.7 million at June 30, 2018 and December 31, 2017, respectively.

 

Consumer — This segment includes unsecured and vehicle loans and repayment is dependent on the credit quality of the individual borrower.  Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

 

Allowance for Loan Losses

 

Allowance for Loan Loss Methodology

 

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed.  For impaired loans that are deemed collateral dependent, the recorded balance of the loan is reduced by a charge-off to fair value of the collateral net of estimated selling costs.

 

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general and specific components as described below.

 

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segments.  Management uses a ten year historical loss period to capture relevant loss data for each loan segment.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; charge-off trends over the past three and five year periods; weighted average risk ratings; loan concentrations; management’s assessment of internal factors; and management’s assessment of external factors such as interest rates, real estate markets and local and national economic factors.  There were no changes in the Bank’s policies or methodology pertaining to the general component of the allowance for loan losses during the three and six months ended June 30, 2018 and the year ended December 31, 2017.

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

The Corporation evaluates the need for a specific allowance when loans are determined to be impaired.  Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses.  Factors in identifying a specific problem loan and the need for a specific allowance 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 the 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, the Corporation considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage when evaluating the need for a specific allowance on loans determined to be impaired.

 

Credit Quality Indicators

 

Commercial and SBA loans are risk rated based on key factors such as management ability, financial condition, debt repayment ability, collateral, industry conditions and loan structure.

 

Risk Rating 6 — Special Mention:  these loans have potential weaknesses and require management’s close attention.  If these weaknesses are not addressed, they may weaken the prospects for repayment at a future date.  Special mention assets do not expose the institution to sufficient risk to warrant a classified rating.

 

Risk Rating 7 — Substandard:  loans in this category are inadequately protected by the current financial condition and repayment ability of the borrower or pledged collateral, if any.  These assets have a well-defined weakness(es) that jeopardizes the repayment of the debt in full, and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

 

Risk Rating 8 — Doubtful:  loans have all the weaknesses of those classified substandard.  In addition, it is highly unlikely that a doubtful asset can be collected or liquidated in full.  The possibility of loss is extremely high.  However, because of certain important and reasonably specific pending factors, which may work to strengthen the asset, its classification as a loss is deferred until the asset’s status can be better determined.

 

Risk Rating 9 — Loss:  loans classified as loss are considered uncollectible and of such little value that they are no longer considered bankable.  This classification does not mean that the asset has no recovery or salvage value.  However, it is not practical or desirable to defer writing off the asset even though partial recovery may occur in the future.

 

Loans not meeting the criteria above that are analyzed individually as part of the above process are considered to be pass-rated.

 

On an annual basis, or more often if needed, the Bank formally reviews the ratings on commercial and SBA loans over $250,000.  On an annual basis, the Bank engages an independent third-party to review a significant portion of loans within these segments.  Management uses the results of these reviews as part of its annual review of its control process related to loan ratings.  Credit quality for residential real estate mortgage and consumer loans is determined by monitoring loan payment history and on-going communications with borrowers, and are not risk graded.  Non-performing homogenous loans are individually evaluated for impairment.  The following table presents the credit risk profile by internally assigned risk rating category at the dates indicated:

 

		June 30, 2018
		Commercial			Commercial			Commercial
(Dollars in thousands)		Real Estate			Business			Construction			SBA			Total
Pass		$	170,330		$	13,984		$	13,262		$	39,542		$	237,118
Loans rated 6		—			—			—			47			47
Loans rated 7		3,648			—			—			819			4,467
Loans rated 8		—			—			—			125			125
		$	173,978		$	13,984		$	13,262		$	40,533		$	241,757

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

		December 31, 2017
		Commercial			Commercial			Commercial
(Dollars in thousands)		Real Estate			Business			Construction			SBA			Total
Pass		$	152,296		$	17,158		$	13,552		$	39,040		$	222,046
Loans rated 6		—			—			—			76			76
Loans rated 7		3,728			—			—			1,904			5,632
Loans rated 8		—			—			—			—			—
		$	156,024		$	17,158		$	13,552		$	41,020		$	227,754

 

Past Due and Non-Accrual Loans

 

The accrual of interest on loans is discontinued at the time the loan is 90 days past due unless the loan is both well secured and in the process of collection.  Past due status is based on the contractual terms of the loan.  In all cases, loans are placed on non-accrual at an earlier date if collection of principal or interest is considered doubtful.  All interest accrued, but not collected for loans that are placed on non-accrual, is reversed against interest income.  The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual.  Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms for a reasonable period of time, typically a minimum of six months and future payments are reasonably assured.

 

The following table presents past due loans as of the dates indicated.

 

June 30, 2018

 

(Dollars in thousands)		30-59 Days Past Due			60-89 Days Past Due			90 Days or More Past Due			Total Past Due			Past Due > 90 Days and Still Accruing			Loans on Non-accrual
Residential real estate:
1-4 family		$	728		$	—		$	310		$	1,038		$	—		$	2,966
Home equity loans and lines of credit		794			220			61			1,075			—			701
Commercial real estate		—			—			254			254			—			254
Commercial business		—			17			—			17			—			—
Commercial construction		—			—			—			—			—			—
SBA		—			—			261			261			—			347
Consumer		—			—			—			—			—			—
Total gross loans		$	1,522		$	237		$	886		$	2,645		$	—		$	4,268

 

December 31, 2017

 

(Dollars in thousands)		30-59 Days Past Due			60-89 Days Past Due			90 Days or More Past Due			Total Past Due			Past Due > 90 Days and Still Accruing			Loans on Non-accrual
Residential real estate:
1-4 family		$	4,337		$	237		$	531		$	5,105		$	—		$	3,385
Home equity loans and lines of credit		611			100			132			843			—			573
Commercial real estate		1,404			376			254			2,034			—			254
Commercial business		—			32			—			32			—			—
Commercial construction		—			—			—			—			—			—
SBA		1,079			179			281			1,539			—			524
Consumer		11			—			—			11			—			—
Total gross loans		$	7,442		$	924		$	1,198		$	9,564		$	—		$	4,736

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

The balance of loans on non-accrual at June 30, 2018 and December 31, 2017 exceeds loans 90 days or more past due, due to a combination of loans that are current, but that have been modified in a troubled debt restructuring and/or loans for which future payments are not reasonably assured.

 

Impaired Loans

 

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

 

The Bank periodically may agree to modify the contractual terms of loans, such as a reduction in interest rate of the loan for some period of time, an extension of the maturity date or an extension of time to make payments with the delinquent payments added to the end of the loan term.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”).  All TDRs are classified as impaired.  Loans on non-accrual status at the date of modification are initially classified as non-accruing troubled debt restructurings.  TDRs may be returned to accrual status after a period of satisfactory payment performance according to the terms of the restructuring, generally six months of current payments.

 

The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated as of the dates indicated.

 

June 30, 2018

 

(Dollars in thousands)		Unpaid contractual principal balance			Total recorded investment in impaired loans			Recorded investment with no allowance			Recorded investment with allowance			Related allowance
Residential real estate:
1-4 family		$	4,941		$	4,682		$	4,367		$	315		$	5
Home equity loans & lines of credit		1,873			1,832			1,795			37			6
Commercial real estate		465			465			465			—			—
SBA		2,175			2,025			2,025			—			—
Consumer		119			119			41			78			13
Total		$	9,573		$	9,123		$	8,693		$	430		$	24

 

December 31, 2017

 

(Dollars in thousands)		Unpaid contractual principal balance			Total recorded investment in impaired loans			Recorded investment with no allowance			Recorded investment with allowance			Related allowance
Residential real estate:
1-4 family		$	5,382		$	5,125		$	4,810		$	314		$	6
Home equity loans & lines of credit		1,888			1,845			1,807			39			6
Commercial real estate		475			476			475			—			—
SBA		2,660			2,640			2,492			149			8
Consumer		55			55			43			12			2
Total		$	10,460		$	10,141		$	9,627		$	514		$	22

 

Of the $2.0 million and $2.6 million of impaired SBA loans at June 30, 2018 and at December 31, 2017, respectively, guaranteed portions of such loans amounted to $1.6 million and $1.9 million at June 30, 2018 and December 31, 2017, respectively.

 

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

 

The following table presents the average recorded investment in impaired loans and the related interest recognized during the periods indicated.

 

		Three Months Ended June 30, 2018						Three Months Ended June 30, 2017
(Dollars in thousands)		Average recorded investment			Interest income recognized			Average recorded investment			Interest income recognized
Residential 1-4 family		$	4,584		$	54		$	4,742		$	69
Home equity loans & lines of credit		1,827			24			1,854			25
Commercial real estate		467			2			4,411			52
SBA		2,341			29			1,606			22
Consumer		103			1			24			—
Total		$	9,322		$	110		$	12,637		$	168

 

		Six Months Ended June 30, 2018						Six Months Ended June 30, 2017
(Dollars in thousands)		Average recorded investment			Interest income recognized			Average recorded investment			Interest income recognized
Residential 1-4 family		$	4,795		$	126		$	5,115		$	122
Home equity loans & lines of credit		1,829			54			1,759			50
Commercial real estate		470			5			4,405			100
SBA		2,461			57			1,550			46
Consumer		82			1			19			—
Total		$	9,637		$	243		$	12,848		$	318

 

Troubled Debt Restructurings

 

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan, the Bank grants a concession on the terms, that would not otherwise be considered, as a result of financial difficulties of the borrower.  Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment or reduction of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination.  All loans that are modified are reviewed by the Bank to identify if a TDR has occurred.  TDRs are included in the impaired loan category and as such, these loans are individually evaluated for impairment and a specific reserve is assigned for the amount of the estimated credit loss. Total TDR loans, included in impaired loans as of June 30, 2018 and December 31, 2017 were $7.4 million and $8.2 million, respectively.  No additional funds are committed to be advanced in connection with TDR loans.  TDR loans on accrual status amounted to $4.9 million and $5.4 million at June 30, 2018 and December 31, 2017, respectively.

 

Troubled debt restructuring agreements entered into during the period indicated are as follows:

 

		Three Months Ended June 30, 2018								Six Months Ended June 30, 2018
(Dollars in thousands)		Number of restructurings		Pre-modification outstanding recorded investment			Post-modification outstanding recorded investment			Number of restructurings		Pre-modification outstanding recorded investment			Post-modification outstanding recorded investment
Residential 1-4 family		—		$	—		$	—		1		$	155		$	155
Home equity		1		67			56			2		83			72
Commercial real estate		—		—			—			—		—			—
SBA		—		—			—			—		—			—
Consumer		—		—			—			—		—			—
Total		1		$	67		$	56		3		$	238		$	227

 

The troubled debt restructurings described above had a $11,000 impact to the allowance for loan losses and resulted in no charge-offs during the three and six months ended June 30, 2018.

 

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