Table of Contents
As filed with the Securities and Exchange Commission on September 12, 2013
Registration No. 333-
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
Coastway Bancorp, Inc.
Coastway Community Bank 401(k) Retirement Plan
(Exact Name of Registrant as Specified in Its Charter)
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Maryland
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6712
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To be Applied For
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(State or Other Jurisdiction of
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(Primary Standard Industrial
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(I.R.S. Employer
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Incorporation or Organization)
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Classification Code Number)
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Identification Number)
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One Coastway Plaza
Cranston, Rhode Island 02910
(401) 330-1600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant’s Principal Executive Offices)
Mr. William A. White
President and Chief Executive Officer
One Coastway Plaza
Cranston, Rhode Island 02910
(401) 330-1600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Agent for Service)
Copies to:
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Benjamin M. Azoff, Esq.
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Samantha M. Kirby, Esq.
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Richard S. Garabedian, Esq.
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Goodwin Procter LLP
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Luse Gorman Pomerenk & Schick, P.C.
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Exchange Place
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5335 Wisconsin Avenue, N.W., Suite 780
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Boston, Massachusetts 02109
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Washington, D.C. 20015
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(617) 570-1000
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(202) 274-2000
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:
x
If this Form is filed to register additional shares for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
o
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
o
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering:
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
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o
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Smaller reporting company
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x
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(Do not check if a smaller reporting company)
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CALCULATION OF REGISTRATION FEE
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Title of each class of
securities to be registered
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Amount to be
registered
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Proposed maximum
offering price per share
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Proposed maximum
aggregate offering price
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Amount of
registration fee
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Common Stock, $0.01 par value per share
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4,949,179 shares
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$
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10.00
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$
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49,491,790
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(1)
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$
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6,751
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Participation Interests
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925,985 interests (2)
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(2)
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(1)
Estimated solely for the purpose of calculating the registration fee.
(2)
The securities of Coastway Bancorp, Inc. to be purchased by the Coastway Community Bank 401(k) Retirement Plan are included in the amount shown for the common stock. Accordingly, no separate fee is required for the participation interests. The number of participation interests will be determined supplementally.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Table of Contents
Prospectus Supplement
Interests in
COASTWAY COMMUNITY BANK 401(k) RETIREMENT PLAN
Offering of Participation Interests in up to 925,985 Shares of
COASTWAY BANCORP, INC.
Common Stock
In connection with the conversion and reorganization of Coastway Bancorp, MHC from the mutual holding company to the stock holding company form of organization, Coastway Bancorp, Inc., a newly formed Maryland corporation (the “Company”) which will own 100% of Coastway Community Bank (the “Bank”), is offering shares of common stock for sale. Currently, the Bank is a wholly-owned subsidiary of Coastway Bancorp, LLC, a Rhode Island limited liability corporation that is a wholly-owned subsidiary of Coastway Bancorp, MHC, a mutual holding company. The Company is allowing participants in the Coastway Community Bank 401(k) Retirement Plan (the “Plan”) to invest all or a portion of their accounts in the common stock of the Company.
Based upon the value of the Plan assets at September 3, 2013, the trustee of the Plan could purchase or acquire up to 925,985 shares of the common stock of the Company, at the purchase price of $10.00 per share. This prospectus supplement relates to the initial election of Plan participants to direct the trustee of the Plan to invest all or a portion of their Plan accounts in the Company Stock Fund at the time of the stock offering.
The Company’s prospectus, dated , 2013, accompanies this prospectus supplement. It contains detailed information regarding the conversion and stock offering of Company common stock and the financial condition, results of operations and business of the Bank. This prospectus supplement provides information regarding the Plan. You should read this prospectus supplement together with the prospectus and keep both for future reference.
For a discussion of risks that you should consider, see the “Risk Factors” section of the prospectus.
The interests in the Plan and the offering of common stock of the Company have not been approved or disapproved by the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, the Rhode Island Department of Business Regulation, the Federal Deposit Insurance Corporation or any other federal or state agency. Any representation to the contrary is a criminal offense.
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The securities offered in this prospectus supplement and in the prospectus are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
This prospectus supplement may be used only in connection with offers and sales by the Company, in the stock offering, of interests or shares of common stock in the Company Stock Fund of the Plan. No one may use this prospectus supplement to re-offer or resell interests or shares of common stock of the Company acquired through the Plan.
You should rely only on the information contained in this prospectus supplement and the accompanying prospectus. The Company, the Bank and the Plan have not authorized anyone to provide you with information that is different.
This prospectus supplement does not constitute an offer to sell or solicitation of an offer to buy any securities in any jurisdiction to any person to whom it is unlawful to make an offer or solicitation in that jurisdiction. Neither the delivery of this prospectus supplement and the prospectus nor any sale of common stock of the Company shall under any circumstances imply that there has been no change in the affairs of the Bank or any of its subsidiaries or the Plan since the date of this prospectus supplement, or that the information contained in this prospectus supplement or incorporated by reference is correct as of any time after the date of this prospectus supplement.
The date of this prospectus supplement is , 2013.
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THE OFFERING
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Securities Offered
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The Company is offering participants in the Coastway Community Bank 401(k) Retirement Plan (the “Plan”) the opportunity to purchase participation interests in the common stock of the Company. The ownership of common stock of the Company in the Plan is referred to as a “participation interest” since the common stock will be titled in the name of the Plan and not directly in a participant’s name. Given the purchase price of $10.00 per share in the stock offering, the Plan may purchase (or acquire) up to 925,985 shares of the Company common stock in the stock offering.
Only employees of the Bank may become participants in the Plan and only participants may purchase stock in the Company Stock Fund. Your investment in stock in connection with the stock offering through the Company Stock Fund is subject to the purchase priorities contained in the Plan of Conversion and Reorganization of Coastway Bancorp, MHC.
Information with regard to the Plan is contained in this prospectus supplement and information with regard to the financial condition, results of operations and business of the Company is contained in the accompanying prospectus. The address of the principal executive office of the Company and the Bank is One Coastway Plaza, Cranston, Rhode Island 02910.
All questions about completing the Special Investment Election Form should be addressed to Susan DiCicco, Coastway Community Bank, One Coastway Plaza, Cranston, Rhode Island 02910; telephone number (401) 330-1661; or e-mail at sdicicco@coastway.com.
Questions about the common stock being offered or about the prospectus may be directed to the Stock Information Center at 1- .
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Company Stock Fund
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In connection with the stock offering, you may elect to transfer all or part of your account balance in the Plan to the Company Stock Fund, to be used to purchase common stock of Company issued in the stock offering. The Company Stock Fund is a new fund in the Plan established to hold shares of common stock of the Company.
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Purchase Priorities
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All Plan participants are eligible to direct a transfer of funds to the Company Stock Fund. However, such directions are subject to the purchase priorities in the Plan of Conversion and Reorganization of Coastway Bancorp, MHC, which provides for a subscription
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offering and a community offering. In the offering, the purchase priorities are as follows and apply in case more shares are ordered than are available for sale (an “oversubscription”):
Subscription Offering:
(1)
Depositors of Coastway Community Bank with $50 or more on deposit at the close of business on July 30, 2012, get first priority.
(2)
Coastway Community Bank’s tax-qualified plans, including the employee stock ownership plan and the 401(k) plan, get second priority.
(3)
Depositors of Coastway Community Bank with $50 or more on deposit at the close of business on who are not eligible under priority #1 get third priority.
(4)
Depositors of Coastway Community Bank as of the close of business on , 2013 who are not eligible under priority #1 or #3 get fourth priority.
Community Offering:
(5)
Natural persons (including trusts of natural persons) residing in the State of Rhode Island get fifth priority.
If you fall into subscription offering categories (1), (3) or (4), you have subscription rights to purchase shares of Company common stock in the subscription offering and you may use funds in the Plan to pay for the common stock. You may also be able to purchase shares of Company common stock in the subscription offering even though you are ineligible to purchase through subscription offering categories (1), (3) or (4) by purchasing stock in the Plan through subscription offering category (2), reserved for the Bank’s tax-qualified employee plans.
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Purchases in the Offering and Oversubscriptions
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The trustee of the Company Stock Fund will purchase common stock of the Company in the stock offering in accordance with your directions. Once you make your election, the amount that you elect to transfer from your existing investment options for the purchase of common stock in connection with the stock offering will be sold from your existing investment options and transferred to the Company Stock Fund and held in a money market account pending the formal closing of the stock offering, several weeks later. After the end of the stock offering period, we will determine whether all
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or any portion of your order will be filled (if the offering is oversubscribed you may not receive any or all of your order, depending on your purchase priority, as described above). The amount that can be used toward your order will be applied to the purchase of common stock of the Company and will be denominated in stock in the Plan.
In the event the offering is oversubscribed,
i.e.
, there are more orders for common stock of the Company than shares available for sale in the offering, and the trustee is unable to use the full amount allocated by you to purchase interests in common stock of the Company in the offering, the amount that cannot be invested in common stock of the Company, and any interest earned on such amount, will be reinvested in the existing funds of the Plan, in accordance with your then existing investment election (in proportion to your investment direction for future contributions). The prospectus describes the allocation procedures in the event of an oversubscription. If you choose not to direct the investment of your account balances towards the purchase of any shares of common stock of the Company through the Company Stock Fund in connection with the offering, your account balance will remain in the investment funds of the Plan as previously directed by you.
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Value of Plan Assets
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As of September 3, 2013, the market value of the assets of the Plan was approximately $9,259,857.00.
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Election to Purchase
Stock
in the Stock Offering
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In connection with the stock offering, the Plan will permit you to direct the trustee to transfer all or part of the funds which represent your current beneficial interest in the assets of the Plan to the Company Stock Fund. The trustee of the Plan will subscribe for Company common stock offered for sale in connection with the stock offering, in accordance with each participant’s direction. In order to purchase stock representing an ownership interest in common stock of the Company in the stock offering through the Plan, you must order at least 25 shares in the offering through the Plan. The prospectus describes maximum purchase limits for investors in the stock offering. The trustee will pay $10.00 per share of stock in the offering, which will be the same price paid by all other persons who purchase shares in the subscription and community offerings.
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How to Order Stock in the Offering
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Enclosed is a Special Investment Election Form on which you can elect to purchase stock through the Company Stock Fund in connection with the stock offering. Please note the following stipulations concerning this election:
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You can direct all or a portion of your current account to the Company Stock Fund in increments of $10.00.
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Your election is subject to a minimum purchase of 25 shares of common stock, which equals $250.
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Your election, plus any order you placed outside the Plan, are together subject to a maximum purchase of 20,000 shares, which equals $200,000.00.
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The election period closes at , Eastern Time, on , 2013.
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During the stock offering period, you will continue to have the ability to transfer amounts that are not directed to purchase stock in the Company Stock Fund among all other investment funds. However, you will not be permitted to change the investment amounts that you designated to be transferred to the Company Stock Fund on your Special Investment Election Form.
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The amount you elect to transfer to the Company Stock Fund will be held separately until the offering closes. Therefore, this money is not available for distributions, or withdrawals until the transaction is completed, which is expected to be several weeks after the closing of the subscription offering period.
If you wish to use all or part of your account balance in the Plan to purchase common stock of the Company issued in the stock offering, you should indicate that decision on the Special Investment Election Form.
If you do not wish to make an election, you should check Box E in Section D of the Special Investment Election Form and return the form to Susan DiCicco in the Human Resources Department at Coastway Community Bank, One Coastway Plaza, Cranston, Rhode Island 02910
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to be received no later than , Eastern Time, on , 2013. You may return your Special Investment Election Form by hand delivery, inter-office mail or by mailing it to Susan DiCicco at the above address in the enclosed self-addressed envelope, so long as it is received by the time specified.
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Order Deadline
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You must return your Special Investment Election Form
to Susan DiCicco at Coastway Community Bank, to be received
no later than , Eastern Time, on ,
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2013
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Irrevocability of Transfer Direction
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Once you make an election to transfer amounts to the Company Stock Fund
in
connection with the stock offering, you may not change your election
. Your election is irrevocable. You will, however, continue to have the ability to transfer amounts not directed towards the purchase of stock among all of the other investment funds on a daily basis.
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Future Direction to Purchase Common Stock
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You will be able to purchase Company stock
after
the offering through your investment in the Company Stock Fund. You may direct that your future contributions or your account balance in the Plan be transferred to the Company Stock Fund. After the offering, to the extent that shares are available, the trustee of the Plan will acquire common stock of Company at your election in open market transactions at the prevailing price. You may change your investment allocation on a daily basis. Special restrictions may apply to transfers directed to and from the Company Stock Fund by the participants who are subject to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, relating to the purchase and sale of securities by officers, directors and principal shareholders of the Company.
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Voting Rights of Common Stock
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The Plan provides that you may direct the trustee as to how to vote any shares of Company common stock held by the Company Stock Fund, and the interest in such shares that is credited to your account. If the trustee does not receive your voting instructions, the plan administrator will exercise these rights as it determines in its discretion and will direct the trustee accordingly. All voting instructions will be kept confidential.
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DESCRIPTION OF THE PLAN
Introduction
The Bank originally adopted the Coastway Community Bank 401(k) Retirement Plan effective as of January 1, 1969. The Plan is a tax-qualified plan with a cash or deferred compensation feature established in accordance with the requirements under Section 401(a) and Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Code”). The Plan has been amended and restated over the years to maintain compliance with the tax laws.
The Bank intends that the Plan, in operation, will comply with the requirements under Section 401(a) and Section 401(k) of the Code. Coastway Community Bank will adopt any amendments to the Plan that may be necessary to ensure the continuing qualified status of the Plan under the Code and applicable Treasury Regulations.
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Employee Retirement Income Security Act of 1974 (“ERISA”).
The Plan is an “individual account plan” other than a “money purchase pension plan” within the meaning of ERISA. As such, the Plan is subject to all of the provisions of Title I (Protection of Employee Benefit Rights) and Title II (Amendments to the Code Relating to Retirement Plans) of ERISA, except to the funding requirements contained in Part 3 of Title I of ERISA, which by their terms do not apply to an individual account plan (other than a money purchase plan). The Plan is not subject to Title IV (Plan Termination Insurance) of ERISA. The funding requirements contained in Title IV of ERISA are not applicable to participants or beneficiaries under the Plan.
Reference to Full Text of Plan.
The following portions of this prospectus supplement summarize certain provisions of the Plan. They are not complete and are qualified in their entirety by the full text of the Plan. Copies of the Plan are available to all employees by filing a request with the Plan Administrator c/o Coastway Community Bank, Attn: Susan DiCicco, Human Resources Manager; telephone number: (401) 330-1661; email: sdicco@coastway.com. You are urged to read carefully the full text of the Plan.
Eligibility and Participation
As an employee of Coastway Community Bank, you are eligible to become a participant in the Plan on January 1, April 1, July 1 or October 1 coinciding with or next following the later of your completion of six months of service or attainment of age 18. Union employees, leased employees and nonresident aliens who receive no earned income from the U.S. are not eligible to participate in the Plan. The Plan year is January 1 to December 31 (the “Plan Year”).
As of September 3, 2013, there were approximately 143 employees, former employees and beneficiaries eligible to participate in the Plan.
Contributions Under the Plan
The Plan provides for employee pre-tax contributions, employer safe harbor matching contributions and employer discretionary matching contributions made on behalf of employees who make employee before-tax contributions, and discretionary employer contributions. Each type is summarized below. In determining contribution amounts under the Plan, an employee’s annual compensation in excess of $255,000 is disregarded, as are certain other amounts of employee compensation.
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Employee Pre-tax Contributions
. If you are an eligible employee, you may elect to contribute to the plan on a pre-tax basis. However, the most you can contribute is $17,500 for 2013. You may change the amount of your employee pre-tax contributions, including discontinuing or resuming them, by
contacting Principal Financial Group.
Catch-Up Contributions
. If you are over age 50 or will attain age 50 before the close of the plan year and have made the maximum elective deferral set forth above (or are prevented from making the maximum contribution due to one or more Plan limitations that prohibit you from otherwise contributing an additional before-tax contribution), you may also make “catch-up” contributions, in accordance with the tax laws and subject to the tax law limits (for 2013, the limit on catch-up contributions is $5,500).
Employer Matching Contribution
. The Bank makes a safe harbor matching contribution equal to 100% of your elective deferrals that do not exceed 5% of your compensation. The safe harbor matching contribution is fully vested at all times.
Discretionary Employer Matching Contributions
. Discretionary employer matching contributions may be made for each plan year as determined by the Bank.
Discretionary Employer Contributions
. Discretionary employer contributions may be made for each plan year in an amount determined by the Bank. Discretionary employer contributions will be allocated to your account based on the ratio of your credited compensation during the plan year for which the contribution is made to the total credited compensation of all employees eligible for a discretionary employer contribution for that year. Credited compensation is the sum of your compensation plus your compensation in excess of the integration level. The integration level is 80.1% of the Social Security taxable wage base for the plan year.
Rollover Contributions
. You are permitted to make rollover contributions to the Plan.
Limitations on Contributions
Limitations on Employee Pre-Tax Contributions.
For the plan year beginning January 1, 2013, the amount of your employee pre-tax contributions may not exceed $17,500 per calendar year. This amount may be adjusted periodically by law, based on changes in the cost of living. Contributions in excess of this limit are known as excess deferrals. If you defer amounts in excess of this limitation, your gross income for federal income tax purposes will include the excess in the year of the deferral. In addition, unless the excess deferral is distributed before April 15 of the following year, it will be taxed again in the year distributed. Income on the excess deferral distributed by April 15 of the immediately succeeding year will be treated, for federal income tax purposes, as earned and received by you in the tax year in which the contribution is made.
Benefits Under the Plan
Vesting.
At all times, you have a fully vested and non-forfeitable interest in your elective deferral contributions, safe harbor matching contributions and any rollover contributions.
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Discretionary employer matching contributions and discretionary employer contributions credited to your account are subject to a five-year graded vesting schedule pursuant to which such amounts vest in 20% increments, , beginning upon the completion of one year of service, until a participant becomes 100% vested upon completion of five years of service. In addition, you will also become 100% vested in the employer contributions credited to your account upon your normal retirement upon attainment of age 65.
To earn a year of service, you must be credited with at least 1,000 hours of service during any Plan Year.
In-Service Distributions from the Plan
Rollover Withdrawals from the Plan
. A substantial federal tax penalty may be imposed on withdrawals made prior to your attainment of age 59½, regardless of whether such a withdrawal occurs during your employment with the Bank or after termination of employment. If you have not yet reached age 59½, you may request a withdrawal from rollover funds within your Plan accounts for any reason.
Age 59½ Withdrawals
. Upon attainment of age 59½, you may withdraw from your vested
pre-tax contributions, catch-up contributions and safe harbor matching contributions for any reason.
Discretionary Employer Matching Contributions and Discretionary Employer Contributions
. You may withdraw from your vested discretionary employer matching contributions and discretionary employer contributions accounts at any time if such amounts have been in the plan for a period of more than two years or, alternatively, you have been a participant in the plan for five or more years.
Hardship Withdrawals
. You may be eligible for a hardship withdrawal of your vested pre-tax contributions, excluding earnings on those contributions, if you have an immediate and substantial financial need to meet certain expenses and you have no other reasonably available resources to meet your need. Among other requirements, you must first withdraw all amounts available to you under the non-hardship provisions of the Plan before you may apply for a hardship withdrawal. Your hardship withdrawal may include amounts necessary to pay any federal, state or local income taxes or penalties expected to result from the withdrawal. The financial needs for which you can receive a hardship withdrawal are:
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Payment of post-secondary school education for the next 12 months for you, your spouse or dependents;
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Unreimbursed medical expenses which were previously incurred, or expenses which are necessary to obtain medical care for you, your spouse or dependents;
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Purchase of your principal residence (not including mortgage payments);
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Prevention of eviction from your principal residence or foreclosure on the mortgage of your principal residence;
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Payment of funeral expenses for your parent, spouse, child, or dependent; and
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Expenses for the repair of damage to your principal residence that would qualify for a casualty loss deduction under the Internal Revenue Code.
You must show that the amount does not exceed the amount you need to meet your financial need, you must have obtained all other distributions and non-taxable loans available to you under any employer plan, and you may not make any employee before-tax contributions, for at least six months.
Distribution Upon Retirement, Disability, or Upon Termination of Employment
You may choose to have retirement benefits begin on or after your normal retirement date (age 65). If you continue working after your normal retirement date, your distribution will generally be deferred at least until your actual retirement date (your postponed retirement date). You are also eligible for a benefit distribution if you become disabled while you are an active employee of Coastway Community Bank. In addition, if you terminate your employment before you are eligible to retire, you will be entitled to the vested value of your Plan accounts.
Forms of Distributions
All Plan distributions will generally be made in a cash lump sum. However, if you are married on the date that benefits are to be paid, your account will be automatically paid in a 50% joint and survivor annuity, unless you and your spouse elect otherwise. This means that if you die and you are survived by a spouse, your spouse will receive a monthly benefit for the remainder of his/her life equal to 50% of the benefit that you were receiving. If you terminate employment at your normal or postponed retirement date, or upon becoming permanently disabled, and the value of your Plan account is $1,000 or less, your benefits will be paid to you in a single cash payment as soon as administratively possible following your termination of employment. If the value of your Plan account is more than $1,000 but less than $5,000, and you have not elected to have such distribution paid to you or rolled over tax-free into an IRA or into another employer’s tax-qualified retirement plan, then the Plan will automatically make a tax-free rollover of Plan account into an IRA at the Bank.
You may elect to defer receipt of your vested Plan accounts until after your normal retirement date or after your actual retirement date (if you retire after your normal retirement date), provided you receive at least a portion of your account balance no later than the first day of April following the calendar year in which you retire (or terminate employment due to disability) or, if later, you attain age 70 ½.
Regardless of the reason for which you terminate employment, you may request that the value of your Plan accounts be transferred to an IRA, or another employer’s tax qualified plan,
Investment of Contributions and Account Balances
All amounts credited to your accounts under the Plan are held in the Plan trust (the “Trust”), which is administered by the trustee appointed by the Bank’s Board of Directors.
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Prior to the effective date of the stock offering, you were provided the opportunity to direct the investment of your account into various mutual funds. In connection with the stock offering, the Plan now provides that in addition to the funds specified above, you may direct the trustee, or its representative, to invest all or a portion of your account in the Company Stock Fund.
Special rules apply to investment in the Company Stock Fund for certain officers who are subject to restrictions on distributions under Section 16 of the Securities Exchange Act of 1934. These special rules affect withdrawals, investment direction and transfers of investment account balances for the officers who are subject to these restrictions.
Pending investment in shares of Company common stock, amounts allocated towards the purchase of Company common stock in the stock offering will be held in a the Plan’s default investment alternative, which is the Principal RetireView Moderate Conservative Risk Model. In the event of an oversubscription that prevents you from purchasing all of the Company stock that you ordered in the stock offering, the amounts that you elected to invest but were unable to invest, plus any earnings on those amounts, will be reinvested among the other funds of the Plan in accordance with your then existing investment election (in proportion to your investment direction for future contributions).
Following the stock offering, you may elect to have both past contributions and earnings, as well as future contributions to your account invested among the funds listed above and the Company Stock Fund.
Performance History and Fund Description
The following table provides performance data with respect to the investment funds available under the Plan through June 30, 2013:
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Average Annual Total Returns as of June 30, 2013
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Fund Name
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Year to
Date
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1 Year
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3 Year
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5 Year
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10 Year
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Since
Inception
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Principal Fixed Income Guaranteed Option –
See discussion under Description of the Investment Funds
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Income Separate Account
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-1.88
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2.70
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5.44
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7.24
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5.60
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7.92
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Loomis Sayles Bond Retail Fund
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0.71
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8.60
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9.27
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7.95
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8.10
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8.44
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Bond Market Index Separate Account
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-2.79
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-1.26
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2.99
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—
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—
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3.88
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PIMCO Real Return A Fund
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-8.38
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-5.27
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4.25
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4.66
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5.13
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6.58
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PIMCO Total Return A Fund
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-3.21
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0.81
|
|
4.25
|
|
6.81
|
|
5.50
|
|
6.59
|
|
|
Templeton Global Bond A Fund
|
|
-1.48
|
|
7.66
|
|
6.58
|
|
9.35
|
|
8.97
|
|
8.25
|
|
|
BlackRock Global Allocation Inv A Fund
|
|
4.31
|
|
10.90
|
|
8.37
|
|
3.66
|
|
8.92
|
|
9.54
|
|
|
ClearBridge Aggressive Growth A Fund
|
|
22.22
|
|
30.04
|
|
25.20
|
|
9.41
|
|
8.01
|
|
12.03
|
|
|
MFS Massachusetts Investors Growth Stock R3 Fund
|
|
10.69
|
|
19.89
|
|
17.93
|
|
7.93
|
|
7.02
|
|
6.95
|
|
|
LargeCap S&P 500 Index Separate Account
|
|
13.62
|
|
20.17
|
|
18.06
|
|
6.69
|
|
6.97
|
|
8.60
|
|
|
RidgeWorth Large Cap Value Equity I Fund
|
|
14.36
|
|
25.18
|
|
17.67
|
|
8.47
|
|
8.67
|
|
9.01
|
|
|
American Beacon Small Cap Value Investor Fund
|
|
16.37
|
|
27.65
|
|
18.18
|
|
9.76
|
|
10.22
|
|
11.20
|
|
|
ClearBridge Small Cap Growth A Fund
|
|
17.66
|
|
23.57
|
|
22.45
|
|
9.43
|
|
10.89
|
|
10.29
|
|
|
MidCap S&P 400 Index Separate Account
|
|
14.36
|
|
24.71
|
|
19.01
|
|
8.51
|
|
10.36
|
|
9.01
|
|
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|
|
|
|
|
Average Annual Total Returns as of June 30, 2013
|
|
|
Fund Name
|
|
Year to
Date
|
|
1 Year
|
|
3 Year
|
|
5 Year
|
|
10 Year
|
|
Since
Inception
|
|
|
SmallCap S&P 600 Index Separate Account
|
|
15.97
|
|
24.72
|
|
19.81
|
|
9.61
|
|
10.43
|
|
9.20
|
|
|
RidgeWorth Mid-Cap Value Equity I Fund
|
|
12.60
|
|
27.45
|
|
17.55
|
|
12.21
|
|
12.17
|
|
9.37
|
|
|
Wells Fargo Advantage Discovery Adm Fund
|
|
18.10
|
|
23.08
|
|
22.14
|
|
8.33
|
|
11.95
|
|
10.83
|
|
|
American Funds EuroPacific Growth R4 Fund
|
|
2.00
|
|
15.49
|
|
9.06
|
|
1.12
|
|
9.54
|
|
7.78
|
|
|
Oppenheimer Global A Fund
|
|
8.50
|
|
25.35
|
|
14.53
|
|
5.68
|
|
9.37
|
|
11.49
|
|
|
Wells Fargo Advantage Emerging Markets Equity Adm Fund
|
|
-7.71
|
|
3.38
|
|
4.88
|
|
1.56
|
|
15.48
|
|
7.67
|
|
|
Ivy Science & Technology A Fund
|
|
20.09
|
|
30.59
|
|
21.08
|
|
11.61
|
|
13.47
|
|
5.89
|
|
Description of the Investment Funds
The following is a description of each of the funds:
Principal Fixed Income Guaranteed Option
. The Fixed Income Guaranteed Option is a guaranteed general-account backed group annuity contract that has been issued by Principal Life Insurance Company (Principal Life) to Principal Trust Company as custodian. This contract provides an interest rate guaranteed for set period of time by Principal Life Insurance Company. Below is a history of the various rates at which interest has been credited under the Principal Fixed Income Guaranteed Option since March 2007. As a guarantee, it does not have an investment management fee or expense ratio. However, there is a 0.35 Rate Level Service Fee which represents part of the overall fee arrangement that the Plan pays for services from Principal Life as a provider of administrative services to the Plan, as agreed to in the Service and Expense Agreement for the Plan.
Crediting Rate History
|
06/13
|
|
12/12
|
|
06/12
|
|
12/11
|
|
06/11
|
|
12/10
|
|
06/10
|
|
12/09
|
|
06/09
|
|
12/08
|
|
06/08
|
|
12/07
|
|
03/07
|
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
11/13
|
|
05/13
|
|
11/12
|
|
05/12
|
|
11/11
|
|
05/11
|
|
11/10
|
|
05/10
|
|
11/09
|
|
05/09
|
|
11/08
|
|
05/08
|
|
11/07
|
|
|
1.65
|
%
|
1.75
|
%
|
2.05
|
%
|
2.30
|
%
|
2.50
|
%
|
2.50
|
%
|
2.85
|
%
|
2.90
|
%
|
2.90
|
%
|
4.25
|
%
|
4.25
|
%
|
4.30
|
%
|
4.30
|
%
|
The crediting rate history is shown based on actual past interest rates and does not guarantee future rates.
Income Separate Account
. The investment seeks to provide a high level of current income consistent with preservation of capital. The fund invests primarily in a diversified pool of fixed-income securities including corporate securities, U.S. government securities, and mortgage-backed securities, up to 35% of which may be in below investment grade bonds which are rated at the time of purchase Ba1 or lower by Moody’s and BB+ or lower by S&P. It maintains an average portfolio duration that is within 25% of the duration of the Barclays Aggregate Bond Index. The fund also invests in foreign securities, including those from emerging markets, and REIT securities.
Loomis Sayles Bond Retail Fund.
The investment seeks high total investment return through a combination of current income and capital appreciation. The fund normally invests at least 80% of its net assets in fixed-income securities. It will invest primarily in investment-grade fixed-income securities, although it may also invest up to 35% of its assets in below investment-grade
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fixed-income securities and up to 20% of its assets in equity securities, such as common stocks and preferred stocks (with up to 10% of its assets in common stocks). The fund’s fixed-income securities investments may include unrated securities. It may invest in fixed-income securities of any maturity.
Bond Market Index Separate Account
. The investment seeks to provide current income. The fund normally invests at least 80% of its net assets, plus any borrowings for investment purposes, in debt securities held by the Barclays U.S. Aggregate Bond Index at the time of purchase. The index is composed of investment grade, fixed rate debt issues, including government, corporate, asset-backed, and mortgage-backed securities, with maturities of one year or more. It employs a passive investment approach designed to attempt to track the performance of the index.
PIMCO Real Return A Fund
. The investment seeks maximum real return, consistent with preservation of capital and prudent investment management. The fund normally invests at least 80% of its net assets in inflation-indexed bonds of varying maturities issued by the U.S. and non-U.S. governments, their agencies or instrumentalities, and corporations, which may be represented by forwards or derivatives such as options, futures contracts or swap agreements. It invests primarily in investment grade securities, but may invest up to 10% of its total assets in high yield securities (“junk bonds”) rated B or higher. The fund is non-diversified.
PIMCO Total Return A Fund
. The investment seeks maximum total return, consistent with preservation of capital and prudent investment management. The fund normally invests at least 65% of its total assets in a diversified portfolio of Fixed Income Instruments of varying maturities, which may be represented by forwards or derivatives such as options, futures contracts, or swap agreements. It invests primarily in investment-grade debt securities, but may invest up to 10% of its total assets in high yield securities (“junk bonds”) rated B or higher by Moody’s, or equivalently rated by S&P or Fitch, or, if unrated, determined by PIMCO to be of comparable quality.
Templeton Global Bond A Fund
. The investment seeks current income with capital appreciation and growth of income. Under normal market conditions, the fund invests at least 80% of its net assets in “bonds.” Bonds include debt securities of any maturity, such as bonds, notes, bills and debentures. It invests predominantly in bonds issued by governments and government agencies located around the world. The fund may invest up to 25% of its total assets in bonds that are rated below investment grade. It regularly uses various currency related transactions involving derivative instruments. The fund is non-diversified.
BlackRock Global Allocation Inv A Fund
. The investment seeks to provide high total investment return. The fund invests in a portfolio of equity, debt and money market securities. It may invest up to 35% of its total assets in “junk bonds,” corporate loans and distressed securities. The fund may also invest in Real Estate Investment Trusts (“REITs”). It has no geographic limits on where it may invest and may invest in the securities of companies of any market capitalization.
ClearBridge Aggressive Growth A Fund
. The investment seeks capital appreciation. The fund invests primarily in common stocks of companies the portfolio managers believe are
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experiencing, or will experience, growth in earnings exceeding the average rate of earnings growth of the companies which comprise the S&P 500 Index. It may invest in the securities of large, well-known companies offering prospects of long-term earnings growth. The fund may invest up to 25% of assets in foreign securities.
MFS Massachusetts Investors Growth Stock R3 Fund
. The investment seeks capital appreciation. The fund normally invests at least 80% of the fund’s net assets in stocks. The adviser focuses on investing the fund’s assets in the stocks of companies it believes to have above average earnings growth potential compared to other companies (growth companies). While it may invest the fund’s assets in companies of any size, the adviser generally focuses on companies with large capitalizations.
LargeCap S&P 500 Index Separate Account
. The investment option normally invests the majority of assets in common stocks of companies that compose the S&P 500 Index. Management attempts to mirror the investment performance of the index by allocating assets in approximately the same weightings as the S&P 500 Index. Over the long-term, management seeks a very close correlation between the performance of the Separate Account before expenses and that of the S&P 500 Index.
RidgeWorth Large Cap Value Equity I Fund
. The investment seeks to provide a high level of capital appreciation; current income is as a secondary objective. The fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in U.S.-traded equity securities of large-capitalization companies. U.S.-traded equity securities may include American Depositary Receipts. The subadviser considers large-capitalization companies to be companies with market capitalizations similar to those of companies in the Russell 1000(R) Value Index.
American Beacon Small Cap Value Investor Fund
. The investment seeks long-term capital appreciation and current income. The fund normally invests at least 80% of its net assets (plus the amount of any borrowings for investment purposes) in equity securities of small market capitalization U.S. companies. Its investments may include common stocks, preferred stocks, securities convertible into common stocks, real estate investment trusts (“REITs”), American Depositary Receipts (“ADRs”) and U.S. dollar-denominated foreign stocks trading on U.S. exchanges (collectively, “stocks”).
ClearBridge Small Cap Growth A Fund
. The investment seeks long-term growth of capital. The fund normally invests at least 80% of its assets in equity securities of companies with small market capitalizations and related investments. The portfolio managers use a growth-oriented investment style that emphasizes small U.S. companies.
MidCap S&P 400 Index Separate Account
. The investment option normally invests the majority of assets in common stocks of companies that compose the S&P MidCap 400 Index. Management attempts to mirror the investment performance of the index by allocating assets in approximately the same weightings as the S&P MidCap 400 Index. Over the long-term, management seeks a very close correlation between the performance of the Separate Account before expenses and that of the S&P MidCap 400 Index.
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Table of Contents
SmallCap S&P 600 Index Separate Account
. The investment seeks long-term growth of capital and normally invests the majority of assets in common stocks of companies that compose the S&P SmallCap 600 Index. Management attempts to mirror the investment performance of the index by allocating assets in approximately the same weightings as the S&P 600 Index. Over the long-term, management seeks a very close correlation between the performance of the Separate Account before expenses and that of the S&P 600 Index.
RidgeWorth Mid-Cap Value Equity I Fund
. The investment seeks to provide capital appreciation; current income is as a secondary objective. The fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in U.S.-traded equity securities of mid-capitalization companies. The sub-adviser considers mid-capitalization companies to be companies with market capitalizations similar to those of companies in the Russell Midcap(R) Value Index.
Wells Fargo Advantage Discovery Adm Fund
. The investment seeks long-term capital appreciation. The fund normally invests at least 80% of its net assets in equity securities of small- and medium-capitalization companies and up to 25% of the fund’s total assets in equity securities of foreign issuers through ADRs and similar investments. It may invest in any sector, and at times the fund may emphasize one or more particular sectors. The fund may choose to sell a holding when it no longer offers favorable growth prospectus or to take advantage of a better investment opportunity.
American Funds EuroPacific Growth R4 Fund
. The investment seeks long-term growth of capital. The fund invests primarily in common stocks of issuers in Europe and the Pacific Basin that the investment adviser believes have the potential for growth. Growth stocks are stocks that the investment adviser believes have the potential for above-average capital appreciation. It normally invests at least 80% of net assets in securities of issuers in Europe and the Pacific Basin. The fund may invest a portion of its assets in common stocks and other securities of companies in countries with developing economies and/or markets.
Oppenheimer Global A Fund
. The investment seeks capital appreciation. The fund invests mainly in common stock of U.S. and foreign companies. It can invest without limit in foreign securities and can invest in any country, including countries with developing or emerging markets. However, the fund currently emphasizes its investments in developed markets such as the United States, Western European countries and Japan. It does not limit its investments to companies in a particular capitalization range, but primarily invests in mid- and large-cap companies. The fund normally will invest in at least three countries (one of which may be the United States).
Wells Fargo Advantage Emerging Markets Equity Adm Fund.
The investment seeks long-term capital appreciation. The fund normally invests at least 80% of its net assets in emerging market equity securities. It invests principally in equity or other listed securities of emerging market companies. The fund’s managers consider emerging market companies to include companies that are traded in, have their primary operations in, are domiciled in or derive a majority of their revenues from emerging market countries as defined by the MSCI Emerging
14
Table of Contents
Market Index. It may have exposure to stocks across all capitalizations and styles and will be diversified across countries and sectors.
Ivy Science & Technology A Fund
. The investment seeks to provide growth of capital. The fund invests primarily in the equity securities of science and technology companies around the globe. Under normal circumstances, it invests at least 80% of its net assets in securities of science or technology companies. Science and technology companies are companies whose products, processes or services, are being or are expected to be significantly benefited by the use or commercial application of scientific or technological developments or discoveries.
An investment in any of the funds
listed
above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund investment, there is always a risk that you may lose money on your investment in any of the funds listed above.
Investment in Common Stock of Company
The Company Stock Fund will consist primarily of investments in common stock of Company. The trustee will use all amounts allocated to the Company Stock Fund pursuant to the Special Investment Election Form to acquire shares in the conversion and common stock offering. After the offering, the trustee will, to the extent practicable, use amounts held by it in the Company Stock Fund, including cash dividends paid on common stock held in the Company Stock Fund, to purchase shares of Company common stock. It is expected that all purchases will be made at prevailing market prices. Under certain circumstances, the trustee may be required to limit the daily volume of shares purchased. Pending investment in Company stock, amounts allocated towards the purchase of shares in the offering will be held in the Company Stock Fund in an interest-bearing account. In the event of an oversubscription, any earnings that result therefrom will be reinvested among the other funds of the 401(k) plan in accordance with your then existing investment election (in proportion to your investment direction allocation percentages).
Performance of the Company Stock Fund will be dependent upon a number of factors, including the financial condition and profitability of the Company and the Bank and market conditions for the common stock generally.
As of the date of this prospectus supplement, none of the shares of Company common stock have been issued or are outstanding and there is no established market for Company common stock. Accordingly, there is no record of the historical performance of the Company Stock Fund. Investments in the Company Stock Fund involve special risks that parallel the risks of investing in the common stock of Company.
For a discussion of material risks you should consider, see the “Risk Factors” section of the accompanying Prospectus and the section of the Prospectus Supplement entitled “Notice of Your Rights Concerning Employer Securities” (see below).
15
Table of Contents
An investment in any of the funds listed above is not a deposit of a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. As with any mutual fund or stock investment, there is always a risk that you may lose money on your investment in any of the funds listed above.
Administration of the Plan
The Trustee and Custodian
. The trustee of the Plan is Delaware Charter Guarantee & Trust Company d/b/a Principal Trust Company.
Plan Administrator
.
Pursuant to the terms of the Plan, the Plan is administered by the Bank. The address of the Plan Administrator is c/o Richard Petrarca, One Coastway Plaza, Cranston, Rhode Island 02910, telephone number (401) 330-1600. The Plan Administrator is responsible for the administration of the Plan, interpretation of the provisions of the Plan, prescribing procedures for filing applications for benefits, preparation and distribution of information explaining the Plan, maintenance of Plan records, books of account and all other data necessary for the proper administration of the Plan, preparation and filing of all returns and reports relating to the Plan which are required to be filed with the U.S. Department of Labor and the Internal Revenue Service, and for all disclosures required to be made to participants, beneficiaries and others under Sections 104 and 105 of ERISA.
Reports to Plan Participants
. The Plan Administrator will furnish you a statement at least quarterly showing the balance in your account as of the end of that period, the amount of contributions allocated to your account for that period, and any adjustments to your account to reflect earnings or losses (if any).
Amendment and Termination
It is the Bank’s intention to continue the Plan indefinitely. Nevertheless, the Bank may terminate the Plan at any time. If the Plan is terminated in whole or in part, then regardless of other provisions in the Plan, you will have a fully vested interest in your accounts. The Bank reserves the right to make any amendment or amendments to the Plan which do not cause any part of the trust to be used for, or diverted to, any purpose other than the exclusive benefit of participants or their beneficiaries; provided, however, that the Bank may make any amendment it determines necessary or desirable, with or without retroactive effect, to comply with ERISA.
Merger, Consolidation or Transfer
In the event of the merger or consolidation of the Plan with another plan, or the transfer of the trust assets to another plan, the Plan requires that you would receive a benefit immediately after the merger, consolidation or transfer which is equal to or greater than the benefit you would have been entitled to receive immediately before the merger, consolidation or transfer.
16
Table of Contents
Federal Income Tax Consequences
The following is a brief summary of the material federal income tax aspects of the Plan. You should not rely on this summary as a complete or definitive description of the material federal income tax consequences relating to the Plan. Statutory provisions change, as do their interpretations, and their application may vary in individual circumstances. Finally, the consequences under applicable state and local income tax laws may not be the same as under the federal income tax laws. Please consult your tax advisor with respect to any distribution from the Plan and transactions involving the Plan.
As a “tax-qualified retirement plan,” the Internal Revenue Code affords the Plan special tax treatment, including:
(1)
the sponsoring employer is allowed an immediate tax deduction for the amount contributed to the Plan each year;
(2)
participants pay no current income tax on amounts contributed by the employer on their behalf;
(3)
earnings of the Plan are tax-deferred, thereby permitting the tax-free accumulation of income and gains on investments.
The Bank will administer the Plan to comply with the requirements of the Internal Revenue Code as of the applicable effective date of any change in the law.
Lump-Sum Distribution
. A distribution from the Plan to a participant or the beneficiary of a participant will qualify as a lump-sum distribution if it is made within one taxable year, on account of the participant’s death, disability or separation from service, or after the participant attains age 59 ½, and consists of the balance credited to the participant under the Plan and all other profit sharing plans, if any, maintained by the Bank. The portion of any lump-sum distribution required to be included in your taxable income for federal income tax purposes consists of the entire amount of the lump-sum distribution.
Company Common Stock Included in Lump-Sum Distribution
. If a lump-sum distribution includes Company common stock, the distribution generally will be taxed in the manner described above, except that the total taxable amount may be reduced by the amount of any net unrealized appreciation with respect to Company common stock; that is, the excess of the value of Company common stock at the time of the distribution over its cost or other basis of the securities to the trust. The tax basis of Company common stock, for purposes of computing gain or loss on its subsequent sale, equals the value of Company common stock at the time of distribution, less the amount of net unrealized appreciation. Any gain on a subsequent sale or other taxable disposition of Company common stock, to the extent of the amount of net unrealized appreciation at the time of distribution, will constitute long-term capital gain, regardless of the holding period of Company common stock. Any gain on a subsequent sale or other taxable disposition of Company common stock, in excess of the amount of net unrealized appreciation at the time of distribution, will be considered long-term capital gain. The recipient
17
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of a distribution may elect to include the amount of any net unrealized appreciation in the total taxable amount of the distribution, to the extent allowed by regulations to be issued by the Internal Revenue Service.
Distributions: Rollovers and Direct Transfers to Another Qualified Plan or to an IRA
. You may roll over virtually all distributions from the Plan to another qualified plan or to an individual retirement account in accordance with the terms of the other plan or account.
Notice of Your Rights Concerning Employer Securities.
Federal law provides specific rights concerning investments in employer securities. Because you may in the future have investments in the Company Stock Fund under the Plan, you should take the time to read the following information carefully.
Your Rights Concerning Employer Securities
. The Plan must allow you to elect to move any portion of your account that is invested in the Company Stock Fund from that investment into other investment alternatives under the Plan. You may contact the Plan Administrator shown above for specific information regarding this right, including how to make this election. In deciding whether to exercise this right, you will want to give careful consideration to the information below that describes the importance of diversification. All of the investment options under the Plan are available to you if you decide to diversify out of the Company Stock Fund.
The Importance of Diversifying Your Retirement Savings
. To help achieve long-term retirement security, you should give careful consideration to the benefits of a well-balanced and diversified investment portfolio. Spreading your assets among different types of investments can help you achieve a favorable rate of return, while minimizing your overall risk of losing money. This is because market or other economic conditions that cause one category of assets, or one particular security, to perform very well often cause another asset category, or another particular security, to perform poorly. If you invest more than 20% of your retirement savings in any one company or industry, your savings may not be properly diversified. Although diversification is not a guarantee against loss, it is an effective strategy to help you manage investment risk.
In deciding how to invest your retirement savings, you should take into account all of your assets, including any retirement savings outside of the Plan. No single approach is right for everyone because, among other factors, individuals have different financial goals, different time horizons for meeting their goals, and different tolerance for risk. Therefore, you should carefully consider the rights described here and how these rights affect the amount of money that you invest in employer common stock through the Plan.
It is also important to periodically review your investment portfolio, your investment objectives, and the investment options under the Plan to help ensure that your retirement savings will meet your retirement goals.
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Table of Contents
Additional Employee Retirement Income Security Act (“ERISA”) Considerations
As noted above, the Plan is subject to certain provisions of ERISA, including special provisions relating to control over the Plan’s assets by participants and beneficiaries. The Plan’s feature that allows you to direct the investment of your account balances is intended to satisfy the requirements of section 404(c) of ERISA relating to control over plan assets by a participant or beneficiary. The effect of this is two-fold. First, you will not be deemed a “fiduciary” because of your exercise of investment discretion. Second, no person who otherwise is a fiduciary, such as the Bank, the Plan administrator, or the Plan’s trustee is liable under the fiduciary responsibility provision of ERISA for any loss which results from your exercise of control over the assets in your Plan account.
Because you will be entitled to invest all or a portion of your account balance in the Plan in Company common stock, the regulations under section 404(c) of the ERISA require that the Plan establish procedures that ensure the confidentiality of your decision to purchase, hold, or sell employer securities, except to the extent that disclosure of such information is necessary to comply with federal or state laws not preempted by ERISA. These regulations also require that your exercise of voting and similar rights with respect to the common stock be conducted in a way that ensures the confidentiality of your exercise of these rights.
Securities and Exchange Commission Reporting and Short-Swing Profit Liability
Section 16 of the Securities Exchange Act of 1934 imposes reporting and liability requirements on officers, directors, and persons beneficially owning more than 10% of public companies such as Company. Section 16(a) of the Securities Exchange Act of 1934 requires the filing of reports of beneficial ownership. Within 10 days of becoming an officer, director or person beneficially owning more than 10% of the shares of Company, a Form 3 reporting initial beneficial ownership must be filed with the Securities and Exchange Commission. Changes in beneficial ownership, such as purchases, sales and gifts generally must be reported periodically, either on a Form 4 within 2 business days after the change occurs, or annually on a Form 5 within 45 days after the close of Company’s fiscal year. Discretionary transactions in and beneficial ownership of the common stock through the Company Stock Fund of the Plan by officers, directors and persons beneficially owning more than 10% of the common stock of Company generally must be reported to the Securities and Exchange Commission by such individuals.
In addition to the reporting requirements described above, Section 16(b) of the Securities Exchange Act of 1934 provides for the recovery by the Company of profits realized by an officer, director or any person beneficially owning more than 10% of the Company’s common stock resulting from non-exempt purchases and sales of Company common stock within any six-month period.
The Securities and Exchange Commission has adopted rules that provide exemptions from the profit recovery provisions of Section 16(b) for all transactions in employer securities within an employee benefit plan, provided certain requirements are met. These requirements
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generally involve restrictions upon the timing of elections to acquire or dispose of employer securities for the accounts of Section 16(b) persons.
Except for distributions of common stock due to death, disability, retirement, termination of employment or under a qualified domestic relations order, persons affected by Section 16(b) are required to hold shares of common stock distributed from the Plan for six months following such distribution and are prohibited from directing additional purchases of common stock within the Company Stock Fund for six months after receiving such a distribution.
Financial Information Regarding Plan Assets
Financial information representing the net assets available for Plan benefits and the change in net assets available for Plan benefits at December 31, 2012, is available upon written request to the Plan Administrator at the address shown above.
Legal Opinion
The validity of the issuance of the common stock has been passed upon by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., which firm is acting as special counsel to Coastway Community Bank in connection with Company’s stock offering.
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PROSPECTUS
Coastway Bancorp, Inc.
(Proposed Holding Company for Coastway Community Bank)
Up to 4,197,500 Shares of Common Stock
Coastway Bancorp, Inc., a Maryland corporation, is offering shares of common stock for sale in connection with the conversion of Coastway Bancorp, MHC from the mutual to the stock form of organization. All shares of common stock are being offered for sale at a price of $10.00 per share. We expect that our common stock will be listed on the Nasdaq Capital Market under the symbol “CWAY” upon conclusion of the stock offering. There is currently no public market for the shares of our common stock. We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012.
We are offering up to 4,197,500 shares of common stock for sale on a best efforts basis. We may sell up to 4,827,125 shares of common stock based on demand for the shares or changes in market conditions without resoliciting subscribers. We must sell a minimum of 3,102,500 shares in order to complete the offering.
We are offering the shares of common stock in a “subscription offering” to eligible depositors. Shares of common stock not purchased in the subscription offering are being concurrently offered for sale to the general public in a “community offering.” We also may offer for sale shares of common stock not purchased in the subscription offering or community offering through a “syndicated community offering” to be managed by Sandler O’Neill & Partners, L.P. In addition to the shares that we will sell in the offering, we will also contribute cash and stock to a charitable foundation that we are establishing, such contribution to consist of $300,000 in cash and a number of shares of our common stock that together will total 3.15% of the gross proceeds of the offering (67,729 shares or $677,290 in stock at the minimum of the range and 102,221 shares or $1,022,210 in stock at the maximum of the range, or up to 122,054 shares or $1,220,540 in stock at the adjusted maximum of the range).
The minimum number of shares of common stock you may order is 25 shares. The maximum number of shares of common stock that you may order on an individual basis or through a single account in the subscription offering is 20,000 shares, and the maximum number of shares of common stock that an individual with an associate or group of persons acting in concert in all categories of the offering can order is 40,000 shares. The offering is expected to expire at 4:00 p.m., Eastern Time, on [expiration date]. We may extend this expiration date without notice to you until [extension date #1], or such later date as the Federal Reserve Board may approve, to the extent such approval is required, which may not be beyond [extension date #2]. Once submitted, orders are irrevocable. However, if the offering is extended beyond [extension date #1], or the number of shares of common stock to be sold is increased to more than 4,827,125 shares or decreased to fewer than 3,102,500 shares, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. Funds received during the offering will be held in a segregated account at Coastway Community Bank, and will earn interest at [interest rate]% per annum, which is our current statement savings rate.
Sandler O’Neill & Partners, L.P. will assist us in selling our shares of common stock on a best efforts basis. Sandler O’Neill & Partners, L.P. is not required to purchase any shares of the common stock that are being offered for sale. Purchasers will not pay a commission to purchase shares of common stock in the offering. Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in the common stock, but is under no obligation to do so.
This investment involves a degree of risk, including the possible loss of your investment.
Please read “Risk Factors” beginning on page 15.
OFFERING SUMMARY
Price: $10.00 per Share
|
|
|
Minimum
|
|
Midpoint
|
|
Maximum
|
|
Adjusted Maximum
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
3,102,500
|
|
3,650,000
|
|
4,197,500
|
|
4,827,125
|
|
|
Gross offering proceeds
|
|
$
|
31,025,000
|
|
$
|
36,500,000
|
|
$
|
41,975,000
|
|
$
|
48,271,250
|
|
|
Estimated offering expenses (excluding selling agent fees)
|
|
$
|
1,120,000
|
|
$
|
1,120,000
|
|
$
|
1,120,000
|
|
$
|
1,120,000
|
|
|
Estimated selling agent fees(1) (2)
|
|
$
|
276,138
|
|
$
|
326,370
|
|
$
|
376,602
|
|
$
|
434,369
|
|
|
Estimated net proceeds
|
|
$
|
29,628,862
|
|
$
|
35,053,630
|
|
$
|
40,478,398
|
|
$
|
46,716,881
|
|
|
Estimated net proceeds per share
|
|
$
|
9.55
|
|
$
|
9.60
|
|
$
|
9.64
|
|
$
|
9.68
|
|
(1)
See “The Conversion and Plan of Reorganization—Marketing and Distribution; Compensation” for a discussion of Sandler O’Neill & Partners, L.P.’s compensation for this offering.
(2)
Assumes all shares are sold in the subscription or community offerings, and excludes reimbursable expenses and conversion agent fees, which are included in estimated offering expenses. If all shares of common stock are sold in the syndicated community offering, excluding shares purchased by the employee stock ownership plan, shares contributed to the foundation and shares purchased by insiders of Coastway Bancorp, Inc., for which no selling agent commissions would be paid, the maximum selling agent commissions and expenses would be $1.6 million at the minimum, $1.9 million at the midpoint, $2.2 million at the maximum and $2.5 million at the maximum, as adjusted. See “The Conversion and Plan of Reorganization—Marketing and Distribution; Compensation” for a discussion of fees to be paid to Sandler O’Neill & Partners, L.P. and other FINRA member firms in the event that all shares are sold in a syndicated community offering.
These securities are not deposits or accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency.
Neither the Securities and Exchange Commission, the Board of Governors of the
Federal Reserve System, the Rhode Island Department of Business Regulation
, the Federal Deposit Insurance Corporation, nor any state securities regulator has approved
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or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
For assistance, please call the Stock Information Center, toll free, at [stock information number].
SANDLER O’NEILL + PARTNERS, L.P.
The date of this prospectus is [prospectus date].
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SUMMARY
The following summary highlights material information in this prospectus. It may not contain all the information that is important to you. For additional information, you should read this entire prospectus carefully, including the Financial Statements and the notes to the Financial Statements.
In this prospectus, the terms “we, “our,” and “us” refer to Coastway Bancorp, Inc., Coastway Community Bank, Coastway Bancorp, MHC and Coastway Bancorp, LLC, unless the context indicates another meaning.
Coastway Community Bank
Coastway Community Bank is a Rhode Island chartered savings bank headquartered in Cranston, 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. Coastway Bancorp, MHC owns 100% of the membership interests of Coastway Bancorp, LLC, a Rhode Island limited liability corporation, which in turn owns 100% of the outstanding shares of common stock of Coastway Community Bank.
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 also offer online and mobile banking services. At June 30, 2013, we had total assets of $375.7 million, total deposits of $330.0 million and total equity of $27.6 million. See “Business of Coastway Community Bank.” Our website address is www.coastway.com. Information on our website is not incorporated into this prospectus and should not be considered part of this prospectus.
Coastway Bancorp, Inc.
Coastway Bancorp, Inc. is a newly formed Maryland corporation that will own all of the outstanding shares of common stock of Coastway Community Bank upon completion of the conversion and the offering. Coastway Bancorp, Inc. has not engaged in any business to date. Our executive offices are located at One Coastway Plaza, Cranston, Rhode Island 02910. Our telephone number at this address is (401) 330-1600.
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior, relationship-based customer service. This 93-year
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history in the community, combined with management’s extensive experience and adherence to what we believe are conservative underwriting standards through numerous business cycles, has enabled us to maintain a well capitalized regulatory classification despite the economic downturn.
Increase Commercial Real Estate and Commercial Business Lending
. In order to increase the yield on and reduce the term to repricing of our loan portfolio, following our conversion from a credit union to a bank, we began to increase our commercial real estate and commercial business loan portfolios while maintaining what we believe are conservative underwriting standards. We focus our commercial lending to small businesses located in our market area, targeting owner occupied businesses such as professional service providers. Our commercial real estate and commercial business loan portfolios have grown from $25.1 million and $2.9 million, respectively, at December 31, 2008 to $83.5 million and $8.3 million, respectively, at June 30, 2013. At June 30, 2013, there were no non-performing commercial real estate loans and one non-performing commercial business loan that totaled $149,000, which was subsequently paid off in July 2013. The additional capital raised in this offering will further increase our commercial lending capacity by enabling us to originate more loans as well as loans with larger balances that we will retain in our portfolio.
Continue to Originate and Sell Certain Residential Real Estate Loans.
Residential mortgage lending has historically comprised a significant portion of our operations. We recognize that the origination of one- to four-family residential real estate loans is essential to maintaining customer relations and our status as a community-oriented bank. During the six months ended June 30, 2013, we originated $88.1 million in one- to four-family residential real estate loans held for sale and sold $81.5 million of such loans for gains on sale of $1.6 million, and during the year ended December 31, 2012, we originated $171.2 million in one- to four-family residential real estate loans held for sale and sold $172.2 million of such loans for gains on sale of $3.3 million. We intend to continue to sell in the secondary market the majority of the long-term conforming fixed-rate one- to four-family residential real estate loans that we originate to increase non-interest income and manage the overall duration of our loan portfolio. To the extent available, we intend to continue to develop an appropriately sized portfolio of jumbo and shorter term adjustable-rate one- to four-family residential real estate loans to increase interest income and assist in the management of our interest rate risk. At June 30, 2013, we had $41.2 million in jumbo loans which represented 47.5% of our one- to four-family residential real estate loan portfolio.
Maintain Disciplined Underwriting
. We emphasize a disciplined credit culture based on intimate market knowledge, close ties to our customers, sound underwriting standards and experienced loan officers. We are committed to actively monitoring and managing all segments of our loan portfolio in an effort to proactively identify and mitigate credit risks within our loan portfolio. At June 30, 2013, non-performing assets totaled $8.3 million, which represented 2.20% of total assets. Non-performing SBA loans totaled $1.0 million at June 30, 2013, of which $865,000 was guaranteed by the SBA.
Increase our Share of Lower-Cost Deposits
.
We remain committed to generating lower-cost stable core deposits. We attract and retain transaction accounts by offering competitive products and rates and excellent customer service. Our efforts to attract and retain transaction accounts have resulted in an increase in the total number of accounts and balances. Our core deposits (consisting of demand deposit accounts, savings accounts, money market accounts and club accounts) increased $50.6 million to $206.7 million at June 30, 2013 from $156.1 million at December 31, 2010. At June 30, 2013, core deposits comprised 62.6% of our total deposits.
Focus on Relationship Banking.
We believe that our competitive strengths are personalized superior customer service, extensive knowledge of our local markets, high visibility community activities and technology-driven financial products such as internet banking. We believe that we can leverage these strengths to attract and retain customers who are seeking personalized, best-in-class customer service that are not being served by the large money center and regional banks in our market area. We also believe
2
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that we can capitalize on commercial deposit and personal banking relationships derived from an increase in commercial real estate and commercial business lending.
These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions and other factors. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Strategy” for a further discussion of our business strategy.
Reasons for the Conversion
We believe the stock form of organization will provide us with additional resources to expand the products and services we offer our customers. Management believes that the additional capital raised in the offering will enable us to take advantage of business opportunities that may not otherwise be available to us, while being committed to remaining an independent community bank. Our primary reasons for converting and raising additional capital through the offering are to:
·
increase our capital to enhance our financial strength and to support existing and future lending and deposit growth;
·
enhance our lending capacity by increasing our regulatory lending limits;
·
attract and retain qualified personnel by enabling us to establish stock-based benefit plans for management and employees that will give them an opportunity to share in our long-term success;
·
provide customers and members of our community with the opportunity to acquire an ownership interest in Coastway Community Bank; and
·
have greater flexibility to structure and finance opportunities for expansion, including acquisitions of other financial institutions, although we have no current arrangements or agreements with respect to any such transactions.
As of June 30, 2013, Coastway Community Bank was considered “well capitalized” for regulatory purposes and was not subject to a directive or a recommendation from the Rhode Island Department of Business Regulation or the Federal Deposit Insurance Corporation to raise capital. The proceeds from the stock offering will further improve our capital position.
Terms of the Conversion and the Offering
We are offering between 3,102,500 and 4,197,500 shares of common stock to eligible depositors of Coastway Community Bank, to our tax qualified employee benefit plans and, to the extent shares remain available, to members of our local community and the general public. The number of shares of common stock to be sold may be increased to up to 4,827,125 as a result of demand for the shares or changes in the market for financial institution stocks. Unless the number of shares of common stock to be offered is increased to more than 4,827,125 or decreased to less than 3,102,500, or the offering is extended beyond [extension date #1], subscribers will not have the opportunity to change or cancel their stock orders.
The purchase price of each share of common stock to be issued in the offering (other than shares we are contributing to our charitable foundation) is $10.00. Investors will not be charged a commission to purchase shares of common stock in the offering.
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Table of Contents
Persons Who May Order Shares of Common Stock in the Offering
We are offering the shares of common stock in a subscription offering in the following descending order of priority:
·
First, to depositors of Coastway Community Bank with aggregate account balances of at least $50 as of the close of business on July 30, 2012.
·
Second, to Coastway Community Bank’s tax-qualified employee benefit plans (including the employee stock ownership plan we are establishing in connection with the conversion and our 401(k) plan), which will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock issued in the offering (including shares contributed to our charitable foundation). We expect our employee stock ownership plan to purchase 8% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation).
·
Third, to depositors of Coastway Community Bank with aggregate account balances of at least $50 as of the close of business on [SERD].
·
Fourth, to depositors of Coastway Community Bank as of [voting record date].
Shares of common stock not purchased in the subscription offering are being concurrently offered for sale to the general public in a community offering, with a preference given to natural persons (including trusts of natural persons) residing in the State of Rhode Island.
How We Determined the Offering Range
The amount of common stock that we are offering is based on an independent appraisal of the estimated market value of Coastway Bancorp, Inc. assuming the conversion and the offering are completed. RP Financial, LC., our independent appraiser, has estimated that, as of August 9, 2013, this market value (including the cash and shares to be contributed to the charitable foundation) ranged from $31.7 million to $43.0 million, with a midpoint of $37.3 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale will range from 3,102,500 shares to 4,197,500 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.
RP Financial, LC. also considered that we intend to contribute cash and stock to a charitable foundation that we are establishing, such contribution to consist of $300,000 in cash and a number of shares of our common stock that together will total 3.15% of the gross proceeds of the offering (67,729 shares or $677,290 in stock at the minimum of the range and 102,221 shares or $1,022,210 in stock at the maximum of the range, up to 122,054 shares or $1,220,540 in stock at the adjusted maximum of the range). The intended contribution of cash and shares of common stock to the charitable foundation has the effect of reducing our estimated pro forma valuation. See “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation.”
The appraisal is based in part on an analysis of a peer group of ten publicly traded savings institutions that RP Financial, LC. considered comparable to us. The peer group consists of the following ten companies, all of which are traded on the Nasdaq stock market.
4
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|
Company Name and Ticker Symbol
|
|
Headquarters
|
|
Total Assets
|
|
|
|
|
|
|
(in millions)
|
|
|
SI Financial Group, Inc. (SIFI)
|
|
Willimantic, CT
|
|
$
|
949
|
(1)
|
|
BSB Bancorp, Inc. (BLMT)
|
|
Belmont, MA
|
|
$
|
909
|
(1)
|
|
TF Financial Corp. (THRD)
|
|
Newtown, PA
|
|
$
|
715
|
(1)
|
|
Hampden Bancorp, Inc. (HBNK)
|
|
Springfield, MA
|
|
$
|
668
|
(2)
|
|
Colonial Financial Services, Inc. (COBK)
|
|
Bridgeton, NJ
|
|
$
|
633
|
(2)
|
|
Chicopee Bancorp, Inc. (CBNK)
|
|
Chicopee, MA
|
|
$
|
597
|
(1)
|
|
Peoples Federal Bancshares, Inc. (PEOP)
|
|
Brighton, MA
|
|
$
|
578
|
(2)
|
|
Alliance Bancorp, Inc. (ALLB)
|
|
Broomall, PA
|
|
$
|
457
|
(2)
|
|
Wellesley Bancorp, Inc. (WEBK)
|
|
Wellesley, MA
|
|
$
|
397
|
(1)
|
|
Georgetown Bancorp, Inc. (GTWN)
|
|
Georgetown, MA
|
|
$
|
211
|
(2)
|
(1)
As of June 30, 2013
(2)
As of March 31, 2013.
RP Financial, LC. has informed us that it sought to provide meaningful comparative data to limit the need to perform subjective valuation adjustments with respect to institutions that did not share common characteristics with Coastway Community Bank. As a result, a comparable institution’s dissimilar asset size may be outweighed by similarities with respect to other characteristics that RP Financial, LC. considers more indicative of an institution’s value than asset size.
The peer group selection process was limited to publicly traded thrifts in accordance with regulatory conversion guidelines, which limit the number of potential comparable companies for inclusion in the peer group to 110 full stock publicly traded companies. As noted in the appraisal report, the selection process for the peer group involved applying two geographic screens of the universe of all public thrifts that were eligible for inclusion in the peer group.
·
New England Thrift Institutions
. Given the limited number of publicly-traded full stock savings institutions based in Rhode Island, RP Financial, LC. looked to a broader market comprised of thrift institutions with assets less than $1.0 billion based in the New England region of the United States. Seven companies met the criteria for the screen and all were included in the peer group.
·
Eastern Pennsylvania and New Jersey Thrift Institutions
. RP Financial, LC. next looked at publicly-traded full stock savings institutions based in eastern Pennsylvania and New Jersey with assets less than $1.0 billion. Three companies met the criteria for the screen and all were included in the group.
In selecting the peer group, RP Financial, LC. considered only those companies that have been in full stock form for over one year, are not subject to acquisition, and are not experiencing unusual financial or other trends.
The following table presents a summary of selected pro forma pricing ratios for Coastway Bancorp, Inc. and the peer group companies identified by RP Financial, LC. Ratios are based on earnings for the twelve months ended June 30, 2013 (or the last twelve months for which data is available) and stock price information as of August 9, 2013. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 28.6% on a price-to-book value basis, a discount of 30.4% on a price-to-tangible book value basis and a premium of 131.8% on a price-to-earnings basis.
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|
|
|
Price-to-earnings
multiple
|
|
Price-to-book
value ratio
|
|
Price-to-tangible
book value ratio
|
|
|
Coastway Bancorp, Inc. (pro forma)
|
|
|
|
|
|
|
|
|
Maximum, as adjusted
|
|
78.69
|
x
|
72.05
|
%
|
72.05
|
%
|
|
Maximum
|
|
63.99
|
x
|
68.12
|
%
|
68.12
|
%
|
|
Midpoint
|
|
52.66
|
x
|
64.06
|
%
|
64.06
|
%
|
|
Minimum
|
|
42.46
|
x
|
59.24
|
%
|
59.24
|
%
|
|
|
|
|
|
|
|
|
|
|
Valuation of peer group companies using stock prices as of
August 9, 2013
|
|
|
|
|
|
|
|
|
Averages
|
|
24.96
|
x
|
96.59
|
%
|
97.37
|
%
|
|
Medians
|
|
27.61
|
x
|
95.34
|
%
|
97.91
|
%
|
Compared to the average pricing ratios of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 29.5% on a price-to-book basis, a discount of 30.0% on a price-to-tangible book basis and a premium of 156.4% on a price-to-earnings basis. This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group on a book value and tangible book value basis and more expensive on a price-to-earnings basis.
The independent appraisal does not indicate per share market value. Do not assume or expect that the valuation of Coastway Bancorp, Inc. as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price. Furthermore, the pricing ratios presented above were utilized by RP Financial, LC. to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.
For a more complete discussion of the amount of common stock we are offering for sale and the independent appraisal, see “The Conversion and Plan of Reorganization—Determination of Share Price and Number of Shares to be Issued.”
Limits on How Much Common Stock You May Purchase
The minimum number of shares of common stock that may be purchased is 25. Generally, no individual, or individuals exercising subscription rights through a single qualifying account held jointly, may purchase more than 20,000 shares ($200,000) of common stock. Additionally, if any of the following persons purchase shares of common stock, their purchases, in all categories of the offering, will be combined with your purchases and may not exceed 40,000 shares ($400,000):
·
your spouse or relatives of you or your spouse living in your house;
·
most companies, trusts or other entities in which you are a trustee, have a substantial beneficial interest or hold a senior management position; or
·
other persons who may be your associates or persons acting in concert with you.
See the detailed descriptions of “acting in concert” and “associate” in “The Conversion and Plan of Reorganization—Limitations on Common Stock Purchases.”
Subject to the approval of the Federal Reserve Board and the Rhode Island Department of Business Regulation, we may increase or decrease the purchase limitations at any time. Please see “The Conversion and Plan of Reorganization—Limitations on Common Stock Purchases.”
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How You May Purchase Shares of Common Stock in the Subscription Offering and the Community Offering
In order to purchase shares of common stock in the subscription offering and community offering, you must submit a completed order form, together with full payment payable to Coastway Bancorp, Inc. or authorization to withdraw funds from one or more of your Coastway Community Bank deposit accounts. We will not be required to accept incomplete order forms, unsigned order forms, or orders submitted on photocopied or facsimiled order forms. We must receive all order forms prior to 4:00 p.m., Eastern Time, on [expiration date]. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal instructions. A postmark prior to [expiration date] will not entitle you to purchase shares of common stock unless we receive the envelope by [expiration date]. You may submit your order form and payment by overnight delivery to the indicated address on the order form, by bringing your order form to our Stock Information Center or by mail using the return envelope provided.
Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by:
(1)
personal check, bank check or money order, payable to Coastway Bancorp, Inc.; or
(2)
authorization of withdrawal from Coastway Community Bank deposit accounts designated on the order form.
Regulations prohibit Coastway Community Bank from knowingly lending funds or extending credit to any persons to purchase shares of common stock in the offering, including checks drawn on a Coastway Community Bank lines of credit. You may not use cash, wires or third-party checks (a check written by someone other than you) payable to you and endorsed over to Coastway Bancorp, Inc. If you request that we place a hold on your checking account for the subscription amount, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by [extension date #1], in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time. You may not authorize direct withdrawal from a Coastway Community Bank retirement account. See “—Using Retirement Account Funds to Purchase Shares of Common Stock.”
Please see “The Conversion and Plan of Reorganization—Procedure for Purchasing Shares—Payment for Shares” for a complete description of how to purchase shares in the stock offering.
Using Retirement Account Funds to Purchase Shares of Common Stock
You may be able to subscribe for shares of common stock using funds in your individual retirement account, or “IRA.” If you wish to use funds that are currently in your IRA or other retirement account held at Coastway Community Bank, the funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account with a broker who is willing and able to facilitate your purchase in the offering. It may take several weeks to transfer your Coastway Community Bank IRA to an independent trustee, so please allow yourself sufficient time to take this action.
Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.
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Please see “The Conversion and Plan of Reorganization—Procedure for Purchasing Shares—Payment for Shares” and “—Using Retirement Account Funds” for a complete description of how to use IRA funds to purchase shares in the stock offering.
How We Intend to Use the Proceeds From the Offering
Assuming we sell 4,827,125 shares of common stock in the stock offering (the adjusted maximum of the offering range), and we have net proceeds of $46.7 million, we intend to distribute the net proceeds as follows:
·
$23.4 million (50.0% of the net proceeds) will be invested in Coastway Community Bank;
·
$4.0 million (8.5% of the net proceeds) will be loaned to our employee stock ownership plan to fund its purchase of our shares of common stock;
·
$300,000 (0.6% of the net proceeds) will be contributed to our charitable foundation; and
·
$19.1 million (40.9% of the net proceeds) will be retained by Coastway Bancorp, Inc.
We may use the funds we receive for investments, to pay cash dividends, to repurchase shares of common stock and for other general corporate purposes, subject to regulatory approval as applicable. Coastway Community Bank may use the proceeds it receives from Coastway Bancorp, Inc. to support increased lending and to increase its capital position. The net proceeds retained by Coastway Bancorp, Inc. and Coastway Community Bank also may be used for future business expansion through acquisitions of banks, thrifts and other financial services companies. We have no current arrangements or agreements with respect to any such acquisitions. Initially, a substantial portion of the net proceeds will be invested in short-term investments consistent with our investment policy.
We do not anticipate the number of shares we sell in the stock offering will result in significant changes in the respective use of proceeds by Coastway Community Bank and Coastway Bancorp, Inc. Please see the section of this prospectus entitled “How We Intend to Use the Proceeds From the Offering” for more information on the proposed use of the proceeds from the offering, including a table showing the distribution of net proceeds at different points in the offering range.
Our Issuance of Cash and Shares of Our Common Stock to Coastway Cares Charitable Foundation II
To further our commitment to our local community, we intend to establish a charitable foundation as part of the conversion and stock offering. Assuming we receive approval from our depositors to fund the charitable foundation with shares of our common stock and cash, such contribution will consist of $300,000 in cash and a number of shares of our common stock that together will total 3.15% of the gross proceeds of the offering (67,729 shares or $677,290 in stock at the minimum of the range and 102,221 shares or $1,022,210 in stock at the maximum of the range, or up to 122,054 shares or $1,220,540 in stock at the adjusted maximum of the range). As a result of the issuance of shares of common stock and the contribution of cash to the charitable foundation, at the midpoint of the valuation range we will record an after-tax expense of approximately $700,000 during the quarter in which the stock offering is completed.
The charitable foundation will be dedicated exclusively to supporting charitable causes and community development activities in the communities in which we operate. The charitable foundation will be required to distribute annually in grants or donations a minimum of 5% of the average fair market
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value of its net investment assets, and is expected to make contributions totaling approximately $57,000 in its first year of operation.
Issuing shares of common stock and contributing cash to the charitable foundation will:
·
dilute the voting interests of purchasers of shares of our common stock in the stock offering; and
·
result in an expense, and a reduction in earnings, during the quarter in which the contribution is made, equal to the full amount of the contribution to the charitable foundation, offset in part by a corresponding tax benefit.
The establishment and funding of the charitable foundation has been approved by the Boards of Directors of Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank and Coastway Bancorp, Inc. and is subject to approval by depositors of Coastway Community Bank. If the depositors do not approve the funding of the charitable foundation with shares of our common stock and cash, we may, in our discretion, complete the conversion and stock offering without the inclusion of the charitable foundation and without resoliciting subscribers. We may also determine, in our discretion, not to complete the conversion and stock offering if the depositors do not approve the charitable foundation.
The amount of common stock that we would offer for sale would be greater if the offering were to be completed without the formation and funding of the Coastway Cares Charitable Foundation II. For a further discussion of the financial impact of the charitable foundation, including its effect on those who purchase shares in the offering, see “Risk Factors—Risks Related to this Stock Offering—The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in the year we complete the stock offering,” “Comparison of Valuation and Pro Forma Information With and Without the Charitable Foundation” and “Coastway Cares Charitable Foundation II.”
You May Not Sell or Transfer Your Subscription Rights
Applicable regulations prohibit you from transferring your subscription rights. If you order shares of common stock in the subscription offering, you will be required to state that you are purchasing the shares of common stock for yourself and that you have no agreement or understanding to sell or transfer your subscription rights. We intend to take legal action, including reporting persons to federal or state regulatory agencies, against anyone who we believe has sold or given away his or her subscription rights. We will not accept your order if we have reason to believe that you have sold or transferred your subscription rights.
Deadline for Orders of Common Stock
If you wish to purchase shares of common stock in the offering, we must receive a properly completed original stock order form, together with full payment for the shares of common stock, no later than 4:00 p.m., Eastern Time, on [expiration date]. You may submit your order form and payment by overnight delivery to the indicated address on the order form, by bringing your stock order form to our Stock Information Center, or by mail using the return envelope provided.
Steps We May Take If We Do Not Receive Orders for the Minimum Number of Shares
If we do not receive orders for at least 3,102,500 shares of common stock (not counting shares to be contributed to our charitable foundation), we may take additional steps to complete the offering. Specifically, we may:
·
increase the purchase limitations; and/or
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·
seek the approval, to the extent required, of the Federal Reserve Board and the Rhode Island Department of Business Regulation, to extend the offering beyond [extension date #1], so long as we resolicit persons that have previously subscribed in the offering.
If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit. If we extend the offering beyond [extension date #1], we will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock.
Possible Change in the Offering Range
RP Financial, LC. will update its appraisal before we complete the offering. If, as a result of demand for the shares, changes in market conditions or changes to our financial condition, operating results or other aspects of our business, RP Financial, LC. determines that our pro forma market value has increased, we may sell up to 4,827,125 shares in the offering without further notice to you. If our pro forma market value at that time is either below $31.7 million or above $49.5 million, then, after consulting with the Federal Reserve Board and the Rhode Island Department of Business Regulation, we may:
·
terminate the stock offering and promptly return all funds;
·
set a new offering range and give all subscribers the opportunity to confirm, modify or rescind their purchase orders for shares of Coastway Bancorp, Inc.’s common stock; or
·
take such other actions as may be permitted, to the extent such permission is required, by the Federal Reserve Board, the Rhode Island Department of Business Regulation and the Securities and Exchange Commission.
Possible Termination of the Offering
We may terminate the offering at any time prior to the special meeting of depositors of Coastway Community Bank that is being called to vote upon the conversion and to approve the establishment and funding of the charitable foundation, and at any time after depositor approval with the approval, to the extent such approval is required, of the Federal Reserve Board and the Rhode Island Department of Business Regulation.
We must sell a minimum of 3,102,500 shares to complete the offering. If we terminate the offering because we fail to sell the minimum number of shares (not counting shares that we will contribute to the charitable foundation) or for any other reason, we will promptly return your funds with interest at our statement savings rate, currently [interest rate]% per annum, and we will cancel deposit account withdrawal authorizations.
Purchases by Executive Officers and Directors
We expect our directors and executive officers, together with their associates, to subscribe for 87,500 shares of common stock in the offering, or 2.8% of the shares to be sold at the minimum of the offering range (excluding shares issued to our charitable foundation). Our directors and executive officers will pay the same $10.00 per share price for the common stock as all other subscribers in the offering. Purchases of the common stock by our directors and executive officers are for investment purposes for these individuals and not with a view towards resale, and pursuant to applicable conversion
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regulations, our directors and executive officers, generally, will not be permitted to sell any shares of the common stock that they purchase in the offering for a period of at least one year from the closing of the conversion and offering. See “Subscriptions by Directors and Executive Officers.”
Benefits to Management and Potential Dilution to Stockholders Following the Conversion
We expect our tax-qualified employee stock ownership plan to purchase 8% of the total number of shares of common stock that we issue in the conversion (including shares contributed to our charitable foundation), or 343,977 shares of common stock, assuming we sell the maximum of the shares proposed to be sold.
We also intend to implement one or more stock-based benefit plans. Stockholder approval of these plans will be required, and the stock-based benefit plans cannot be implemented until at least six months after the completion of the conversion pursuant to applicable regulations. We have not yet determined whether we will present these plans for stockholder approval within 12 months following the completion of the conversion or more than 12 months after the completion of the conversion. If presented more than 12 months after the completion of the conversion, these plans would require the approval of our stockholders by a majority of votes cast; otherwise, they would require the approval of our stockholders by a majority of votes eligible to be cast. Further, there are a number of restrictions that would apply to these plans if adopted within one year of the conversion, including limits on awards to non-employee directors and officers and vesting. See “Management of Coastway Bancorp, Inc.—Future Stock Benefit Plans.” For example, if adopted within 12 months following the completion of the conversion, the stock-based benefit plans will reserve a number of shares of common stock equal to not more than 4% of the shares issued in the conversion (including shares contributed to our charitable foundation) for restricted stock awards to key employees and directors, at no cost to the recipients, and will also reserve a number of stock options equal to not more than 10% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation ) for key employees and directors.
If 4% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation) are awarded under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of up to approximately 3.85% in their ownership interest in Coastway Bancorp, Inc. If 10% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation) are issued upon the exercise of options granted under a stock-based benefit plan and come from authorized but unissued shares of common stock, stockholders would experience dilution of approximately 9.09% in their ownership interest in Coastway Bancorp, Inc.
In connection with the conversion, we expect to establish an executive change in control severance plan with certain of our executive officers. See “Management of Coastway Bancorp, Inc.—Executive Officer Compensation” and “Risk Factors—Risks Related to This Stock Offering—We have entered into an employment agreement with our President and Chief Executive Officer and intend to enter into an executive change in control severance plan with certain of our executive officers, which may increase our compensation costs upon the occurrence of certain events or increase the costs of acquiring us” for a further discussion of these agreements, including their terms and potential costs, as well as a description of other benefits arrangements.
The following table summarizes the number of shares of common stock and aggregate dollar value of grants (valuing each share granted at the offering price of $10.00) that will be available under our employee stock ownership plan and one or more stock-based benefit plans if such plans are adopted within one year following the completion of the conversion and the offering. The table shows the dilution to stockholders if all these shares are issued from authorized but unissued shares, instead of shares purchased in the open market. The table also sets forth the number of shares of common stock to be
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acquired by the employee stock ownership plan for allocation to all employees. A portion of the stock award and stock option grants shown in the table below may be made to non-management employees.
|
|
|
Number of Shares to be Granted or
Purchased(3)
|
|
Dilution
Resulting
|
|
Value of Grants (1)
|
|
|
|
|
At
Minimum
of Offering
Range
|
|
At
Adjusted
Maximum
of Offering
Range
|
|
As a
Percentage
of Common
Stock to be
Issued (2)
|
|
From
Issuance of
Shares for
Stock Benefit
Plans
|
|
At
Minimum
Offering
Range
|
|
At
Adjusted
Maximum
Offering
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock ownership plan
|
|
253,618
|
|
395,934
|
|
8.00
|
%
|
—
|
|
$
|
2,536
|
|
$
|
3,959
|
|
|
Stock awards
|
|
126,809
|
|
197,967
|
|
4.00
|
|
3.85
|
%
|
1,268
|
|
1,980
|
|
|
Stock options
|
|
317,023
|
|
494,918
|
|
10.00
|
|
9.09
|
%
|
1,233
|
|
1,925
|
|
|
Total
|
|
697,450
|
|
1,088,819
|
|
22.00
|
%
|
12.28
|
%
|
$
|
5,037
|
|
$
|
7,864
|
|
(1)
The actual value of restricted stock awards will be determined based on their fair value as of the date grants are made. For purposes of this table, fair value is assumed to be the same as the offering price of $10.00 per share. The fair value of stock options has been estimated at $3.89 per option using the Black-Scholes option pricing model with the following assumptions: a grant-date share price and option exercise price of $10.00; dividend yield of 0%; an expected option life of 10 years; a risk-free interest rate of 2.52%; and a volatility rate of 24.17% based on an index of publicly traded thrift institutions. The actual expense of stock options granted under a stock-based benefit plan will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted, which may or may not be the Black-Scholes model.
(2)
The stock-based benefit plans may award a greater number of options and shares, respectively, if the plans are adopted more than 12 months after the completion of the conversion.
(3)
For plans adopted within 12 months of the completion of the conversion, applicable regulations permit stock awards to encompass up to 4.0% and the ESOP and stock awards to encompass in the aggregate up to 12.0% of the shares issued, provided Coastway Community Bank has tangible capital of 10.0% or more following the conversion.
The actual value of restricted stock awards will be determined based on their fair value (the closing market price of shares of common stock of Coastway Bancorp, Inc.) as of the date grants are made. The following table presents the total value of all shares to be available for awards of restricted stock under the stock-based benefit plan, assuming the shares for the plan are purchased or issued in a range of market prices from $8.00 per share to $14.00 per share at the time of the grant.
|
Share Price
|
|
126,809
Shares
Awarded at Minimum
of Offering Range
|
|
149,399
Shares
Awarded at Midpoint of
Offering Range
|
|
171,989
Shares
Awarded at Maximum
of Offering Range
|
|
197,967
Shares
Awarded at Maximum
of Offering Range, As
Adjusted
|
|
|
(In thousands, except share price information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.00
|
|
$
|
1,014
|
|
$
|
1,195
|
|
$
|
1,376
|
|
$
|
1,584
|
|
|
10.00
|
|
1,268
|
|
1,494
|
|
1,720
|
|
1,980
|
|
|
12.00
|
|
1,522
|
|
1,793
|
|
2,064
|
|
2,376
|
|
|
14.00
|
|
1,775
|
|
2,092
|
|
2,408
|
|
2,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The grant-date fair value of the stock options granted under the stock-based benefit plans will be based, in part, on the closing price of shares of common stock of Coastway Bancorp, Inc. on the date the options are granted. The fair value will also depend on the various assumptions utilized in the option-pricing model ultimately adopted. The following table presents the total estimated value of the stock options to be available for grant under the stock-based benefit plans, assuming the range of market prices for the shares are $8.00 per share to $14.00 per share at the time of the grant.
|
Exercise Price
|
|
Grant-Date Fair
Value Per Option
|
|
317,023
Options at
Minimum of Range
|
|
373,498
Options at
Midpoint of Range
|
|
429,972
Options at
Maximum of Range
|
|
494,918
Options at
Maximum of
Range, As Adjusted
|
|
|
(In thousands, except share price information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.00
|
|
$
|
3.11
|
|
$
|
986
|
|
$
|
1,162
|
|
$
|
1,337
|
|
$
|
1,539
|
|
|
10.00
|
|
3.89
|
|
1,233
|
|
1,453
|
|
1,673
|
|
1,925
|
|
|
12.00
|
|
4.67
|
|
1,480
|
|
1,744
|
|
2,008
|
|
2,311
|
|
|
14.00
|
|
5.45
|
|
1,728
|
|
2,036
|
|
2,343
|
|
2,697
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Market for Common Stock
We anticipate that the common stock sold in the offering will be listed on the Nasdaq Capital Market under the symbol “CWAY” following the completion of the stock offering. See “Market for the Common Stock.”
Our Policy Regarding Dividends
Our Board of Directors will have the authority to declare dividends on our common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the amount, if any, and timing of any dividend payments. See “Our Policy Regarding Dividends.”
Conditions to Completion of the Conversion and the Offering
We cannot complete the conversion and the offering unless:
·
the plan of conversion and reorganization is approved by a majority of votes eligible to be cast by depositors of Coastway Community Bank. A special meeting of depositors to consider and vote upon the plan of conversion and reorganization and to vote upon the establishment and funding of the charitable foundation has been set for , 2013;
·
we have received orders to purchase at least the minimum number of shares of common stock offered; and
·
we receive all required final approvals of the Federal Reserve Board and the Rhode Island Department of Business Regulation to complete the conversion and the offering.
Material Income Tax Consequences
The conversion qualifies as a tax-free reorganization. Neither Coastway Bancorp, Inc., Coastway Bancorp, LLC, Coastway Community Bank, Coastway Bancorp, MHC nor persons eligible to subscribe in the subscription offering will recognize any gain or loss as a result of the conversion. See “The Conversion and Plan of Reorganization—Material Income Tax Consequences” for a complete discussion of the income tax consequences of the transaction.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was signed into law on April 5, 2012, has 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.
As an “emerging growth company,” we have elected to use the extended 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 June 30, 2013, 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.
Additionally, we are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an
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Table of Contents
“emerging growth company” we choose to rely on such exemptions, 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 Wall Street Reform and Consumer Protection Act (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. However, we will also not be subject to the auditor attestation requirement or additional executive compensation disclosures so long as we remain a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates).
We could remain an “emerging growth company” for up to five years, 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.
How You Can Obtain Additional Information
Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our stock information center at [stock information number] to speak to a representative of Sandler O’Neill & Partners, L.P. Representatives are available by telephone Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time. You may also meet in person with a representative by visiting our Stock Information Center located at our headquarters at One Coastway Plaza, Cranston, Rhode Island. The Stock Information Center is open weekdays during the offering, except for bank holidays, on Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time.
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE EXPIRATION DATE OF [EXPIRATION DATE] IN ACCORDANCE WITH FEDERAL LAW, NO PROSPECTUS WILL BE MAILED OR HAND-DELIVERED ANY LATER THAN FIVE DAYS OR TWO DAYS, RESPECTIVELY, PRIOR TO [EXPIRATION DATE].
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RISK FACTORS
You should consider carefully the following risk factors in evaluating an investment in our shares of common stock.
Risks Related to Our Business
Our commercial real estate and commercial business 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 June 30, 2013, $91.8 million, or 29.7%, 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:
·
commercial real estate loans — repayment is generally dependent on income being generated in amounts sufficient to cover operating expenses and debt service.
·
commercial business loans — repayment is generally dependent upon the successful operation of the borrower’s business.
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 June 30, 2013, $265.9 million, or 86.1% of our total loan portfolio, consisted of loans secured by real estate in the state of Rhode Island. 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 a further 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. During the last several years, economic conditions and real estate values within our market area have declined significantly. The unemployment rate in the State of Rhode Island was 9.2% in May 2013 as compared to the national unemployment rate of 7.6% in May 2013.
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Table of Contents
A further deterioration, continued stagnation or even minimal improvement in economic conditions generally and 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 continue to 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 further;
·
demand for our deposits and services may decline; and
·
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 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 June 30, 2013, $41.2 million, or 47.5%, 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 $417,000 for single-family
16
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homes in our market area), or jumbo loans. At June 30, 2013, we had three loans totaling $1.6 million of non-performing jumbo loans.
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 June 30, 2013, we had $3.6 million in stated income loans, or 4.1% of our one- to four-family residential real estate loan portfolio, of which $1.2 million were non-performing loans. Approximately one-third of the $3.6 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. 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 residential 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 June 30, 2013, $84.4 million, or 27.4%, of our loan portfolio consisted of home equity loans and lines of credit, of which $47.7 million are in a junior lien position. Recent economic conditions have resulted in declines in real estate values in our market areas. These declines in real estate values could cause some of our home equity loans and lines of credit to be inadequately collateralized, which would 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.
Our operating expenses are high as a percentage of our net interest income and non-interest income, making it more difficult to maintain profitability.
Since 2012, we have opened two new branch offices and increased our full time equivalent employees from 125 at June 30, 2012 to 144 at June 30, 2013. This recent increase in our branch network and full time equivalent employees was part of a strategy to increase our platform to allow for future loan and deposit growth, and improve customer service. We also incurred professional fees in 2011 and 2012 related to the formation of our mutual holding company. In the second quarter of 2013, we incurred an impairment charge of $482,000 on real estate held for sale. These actions have increased our non-interest expense or reduced our non-interest income. In connection with the offering, we intend to make a contribution to our new foundation and put in place an employee stock ownership plan which will have the effect of reducing our net income. In addition in future periods, we intend to institute one or more stock-based benefit plans which will increase our non-interest expense and relocate to a new corporate headquarters which may increase our occupancy expense.
Our non-interest expense, which consists primarily of the costs associated with operating our business, represents a high percentage of the income we generate. The cost of generating our income is measured by our efficiency ratio, or our non-interest expense divided by the sum of our net interest income and our non-interest income. For the six months ended June 30, 2013 and for the years ended December 31, 2012 and 2011, our efficiency ratio was 91.91%, 82.56% and 83.12%, respectively. Generally, this means we spent approximately $0.92, $0.83 and $0.83 during those periods to generate $1.00 of income. If we are unable to lower our efficiency ratio by executing our strategy to increase our interest income, our profitability may be adversely affected.
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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 securities, 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.
Historically, our interest-earning assets repriced more quickly than our interest-bearing liabilities, which made us vulnerable to decreases in interest rates. For the years ended December 31, 2012 and 2011, our net interest margin was 3.51% and 3.87%, respectively. Our asset/liability management committee utilizes a computer simulation model to provide an analysis of estimated changes in net interest income 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. 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, reprice or are refinanced, which may cause a decline in our net interest margin.
Historically low interest rates may adversely affect our net interest income and profitability.
In recent years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated have been at lower levels than available prior to 2008. This has been a significant factor in the decrease in our net interest income to $10.6 million for the year ended December 31, 2012 from $11.0 million for the year ended December 31, 2011. As a general matter, our interest-earning assets reprice or mature slightly more quickly than our interest-bearing liabilities, which has resulted in decreases in net interest income as interest rates decreased. Our ability to lower our interest expense is limited at these interest rate levels while the average yield on our interest-earning assets may continue to decrease as long as the low interest rate environment continues. The Federal Reserve Board has indicated its intention to maintain low interest rates for at least another year and possibly longer. Accordingly, our net interest income may continue to decrease, which will have an adverse effect on our profitability.
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 originate, and intend to continue originating, loans 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
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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.
If our foreclosed real estate or real estate held for sale is not properly valued, our earnings could be reduced.
We obtain updated valuations in the form of appraisals and broker price opinions when a loan has been foreclosed and the property taken in as foreclosed real estate and at certain other times during the holding period of the asset. We also obtained appraisals and broker price opinions on our real estate held for sale. Our net book value, or NBV, of the loan at the time of foreclosure and thereafter is compared to the updated fair value of the foreclosed property less estimated selling costs (fair value). A charge-off is recorded for any excess in the asset’s NBV over its fair value less estimated selling costs. If our valuation process is incorrect, or if property values decline, the fair value of our foreclosed real estate and/or real estate held for sale may not be sufficient to recover our carrying value in such assets, resulting in the need for additional write-downs. An impairment loss is recorded on real estate held for sale to the extent that the fair value less estimated cost to sell is less than the NBV. In addition, bank regulators periodically review our foreclosed real estate and may require us to recognize further write-downs. Any increase in our charge-offs, write-downs and/or impairment losses 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. For additional information see “Business of Coastway Community Bank—Competition.”
We depend on our management team to implement our business strategy and execute successful operations 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 six executives averaging over 11 years of service with Coastway Community Bank and more than a combined 202 years of financial institution experience. Members of our senior management team, or lending specialists who possess expertise in our markets and key business relationships, could be
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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. See “Management of Coastway Bancorp, Inc.”
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, created an independent Consumer Financial Protection Bureau that has assumed the consumer protection responsibilities of the various federal banking agencies, and established more stringent capital standards for banks and bank holding companies. The legislation will also result in new regulations affecting the lending, funding, trading and investment activities of banks and bank holding companies. 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 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 will 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 and the Federal Reserve Board approved a new rule that will substantially amend 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 will be 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 will be: (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% above the new regulatory minimum capital ratios, and will result in the following minimum ratios: (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 would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to 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.
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The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses.
As a result of the completion of this offering, we will become a public reporting company. We expect that the obligations of being a public company, including the substantial public reporting obligations, will require significant expenditures and place additional demands on our management team. We have made, and will continue to make, changes to our internal controls and procedures for financial reporting and accounting systems to meet our reporting obligations as a stand-alone public company. However, the measures we take may not be sufficient to satisfy our obligations as a public company. Section 404 of the Sarbanes-Oxley Act requires annual management assessments of the effectiveness of our internal control over financial reporting, starting with the second annual report that we would expect to file with the SEC. Any failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and stock price. In addition, we may need to hire additional compliance, accounting and financial staff with appropriate public company experience and technical knowledge, and we may not be able to do so in a timely fashion. As a result, we may need to rely on outside consultants to provide these services for us until qualified personnel are hired. These obligations will increase our operating expenses and could divert our management’s attention from our operations.
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, 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.
Future legislative or regulatory actions could impair our rights against borrowers.
There have been proposals made by members of Congress and others that would reduce the amount distressed borrowers are otherwise contractually obligated to pay under their mortgage loans and limit an institution’s ability to foreclose on mortgage collateral. If proposals such as these, or other proposals limiting our rights as a creditor, are implemented, we could experience increased credit losses or increased expense in pursuing our remedies as a creditor.
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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 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 materially 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.
Risks Related to this Stock Offering
The future price of our common stock may be less than the purchase price in the stock offering.
If you purchase shares of common stock in the stock offering, you may not be able to sell them at or above the purchase price in the stock offering. The purchase price in the offering is based upon an independent third-party appraisal of the pro forma market value of Coastway Community Bank, pursuant to federal and state banking regulations and subject to review and approval by the Federal Reserve Board and the Rhode Island Department of Business Regulation. The appraisal is not intended, and should not be construed, as a recommendation of any kind as to the advisability of purchasing shares of common stock. Our aggregate pro forma market value as reflected in the final independent appraisal may exceed the market price of our shares of common stock after the completion of the offering, which may result in our stock trading below the initial offering price of $10.00 per share.
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After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace, and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded.
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.
We have never issued capital stock and there is no established market for our common stock. We expect that our common stock will be listed on the Nasdaq Capital Market under the symbol “CWAY,” subject to completion of the offering and compliance with certain conditions. Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in our common stock following the offering, but it is under no obligation to do so or to continue to do so once it begins. 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 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. If you purchase shares of common stock, you may not be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering 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 after the stock offering and may have an adverse impact on the price at which the common stock can be sold.
The capital we raise in the stock offering will reduce our return on equity, which could negatively affect the trading price of our shares of common stock.
Net income divided by average equity, known as “return on equity,” is a ratio many investors use to compare the performance of a financial institution to its peers. For the six months ended June 30, 2013, we had an annualized return on equity of 2.21%. Following the stock offering, we expect our consolidated equity to increase from $27.6 million at June 30, 2013 to between $53.5 million at the minimum of the offering range and $68.7 million at the adjusted maximum of the offering range. Based upon our actual earnings for the six months ended June 30, 2013, the impact of the conversion and net proceeds to our earnings, and these pro forma equity levels, our pro forma annualized return on equity would be 0.71% and 0.38% at the minimum and adjusted maximum of the offering range, respectively. We expect our return on equity to remain low until we are able to leverage the additional capital we receive from the stock offering. Although we anticipate increasing net interest income using proceeds of the stock offering, our return on equity will be reduced by the capital raised in the stock offering, higher expenses from the costs of being a public company and added expenses associated with our employee stock ownership plan and the stock-based benefit plans we intend to adopt. Until we can increase our net interest income and non-interest income, our return on equity may reduce the value of our shares of common stock. See “Pro Forma Data” for an illustration of the financial impact of the offering.
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The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in the year we complete the stock offering.
We intend to establish and fund a charitable foundation in connection with the conversion and stock offering. We intend to contribute cash and stock which will consist of $300,000 in cash and a number of shares of our common stock that together will total 3.15% of the gross proceeds of the offering (67,729 shares or $677,290 in stock at the minimum of the range and 102,221 shares or $1,022,210 in stock at the maximum of the range, up to 122,054 shares or $1,220,540 in stock at the adjusted maximum of the range). The amount of our contribution will be dependent upon the amount of the gross proceeds raised in the stock offering.
The contribution will have an adverse effect on our net income for the quarter and year in which we make the issuance and contribution to the charitable foundation. The after-tax expense of the contribution will reduce net income in the year in which we complete the stock offering by approximately $700,000 at the midpoint of the offering range. Persons purchasing shares in the stock offering will have their ownership and voting interests in Coastway Bancorp, Inc. diluted by 2.14% at the minimum of the offering range and 2.47% at the adjusted maximum of the offering range due to the issuance of shares of common stock to the charitable foundation.
Our contribution to the charitable foundation may not be tax deductible, which could reduce our profits.
We believe that the contribution to the charitable foundation will be deductible for federal income tax purposes. However, the Internal Revenue Service may disagree with our determination and not grant tax-exempt status to the charitable foundation. If the contribution is not deductible, we would not receive any tax benefit from the contribution. It is expected that the value of the contribution of cash and shares will be $1.1 million at the midpoint of the offering range, which would result in after-tax expense of approximately $700,000 during the year ended December 31, 2013. In the event that the Internal Revenue Service does not grant tax-exempt status to the charitable foundation or the contribution to the charitable foundation is otherwise not tax deductible, we would recognize as after-tax expense the full value (i.e., $1.1 million) of the entire contribution.
In addition, even if the contribution is tax deductible, we may not have sufficient profits to be able to use the deduction fully. Pursuant to the Internal Revenue Code, an entity is permitted to deduct up to 10% of its taxable income (income before income taxes) in any one year for charitable contributions. Any contribution in excess of the 10% limit may be deducted for federal and state income tax purposes over each of the five years following the year in which the charitable contribution is made. Accordingly, a charitable contribution could, if necessary, be deducted over a six-year period. Our pre-tax income over this period may not be sufficient to fully use this deduction. With certain exceptions, Rhode Island tax law follows the federal income tax laws and taxable income is computed in the same manner as taxable income is computed for federal income tax purposes.
Our stock-based benefit plans will increase our costs, which will reduce our income.
We anticipate that our employee stock ownership plan will purchase 8% of the total shares of common stock issued in the conversion (including shares contributed to the charitable foundation) with funds borrowed from Coastway Bancorp, Inc. We will record annual employee stock ownership plan expense in an amount equal to the fair value of shares of common stock committed to be released to employees. If shares of common stock appreciate in value over time, compensation expense relating to the employee stock ownership plan will increase.
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We also intend to adopt a stock-based benefit plan after the stock offering that would award participants restricted shares of our common stock (at no cost to them) and/or options to purchase shares of our common stock. The number of shares of restricted stock or stock options reserved for issuance under any initial stock-based benefit plan may not exceed 4% and 10% (including shares issued to the charitable foundation), respectively, of our total outstanding shares, if these plans are adopted within 12 months after the completion of the conversion. We may grant shares of common stock and stock options in excess of these amounts provided the stock-based benefit plan is adopted more than one year following the stock offering. The estimated grant-date fair value of the options utilizing a Black-Scholes option pricing analysis is $3.89 per option granted based on a price of $10.00 per share. Assuming this value is amortized over a five-year vesting period, the corresponding annual pre-tax expense associated with the stock options would be $385,000 at the adjusted maximum. In addition, assuming that all shares of restricted stock are awarded at a price of $10.00 per share, and that the awards vest over a five-year period, the corresponding annual pre-tax expense associated with restricted stock awarded under the stock-based benefit plan would be $396,000 at the adjusted maximum. However, if we grant shares of common stock or options in excess of these amounts, such grants would increase our costs further.
The shares of restricted stock granted under the stock-based benefit plan will be expensed by us over their vesting period at the fair market value of the shares on the date they are awarded. If the shares of restricted stock to be granted under the plan are repurchased in the open market (rather than issued directly from authorized but unissued shares by Coastway Bancorp, Inc.) and cost the same as the purchase price in the stock offering, the reduction to stockholders’ equity due to the plan would be between $1.3 million at the minimum of the offering range and $2.0 million at the adjusted maximum of the offering range. To the extent we repurchase shares of common stock in the open market to fund the grants of shares under the plan, and the price of such shares exceeds the offering price of $10.00 per share, the reduction to stockholders’ equity would exceed the range described above. Conversely, to the extent the price of such shares is below the offering price of $10.00 per share, the reduction to stockholders’ equity would be less than the range described above.
The implementation of stock-based benefit plans may dilute your ownership interest.
We intend to adopt one or more stock-based benefit plans, which will allow participants to be awarded shares of common stock (at no cost to them) and/or options to purchase shares of our common stock, following the stock offering. If these stock-based benefit plans are funded from the issuance of authorized but unissued shares of common stock, stockholders would experience a reduction in ownership interest totaling 12.28%.
Although the implementation of the stock-based benefit plan will be subject to stockholder approval, historically, the overwhelming majority of stock-based benefit plans adopted by savings institutions and their holding companies following mutual-to-stock conversions have been approved by stockholders.
We have not determined whether we will adopt stock-based benefit plans more than one year following the stock offering. Stock-based benefit plans adopted more than one year following the stock offering may exceed regulatory restrictions on the size of stock-based benefit plans adopted within one year, which would increase our costs and the dilution to stockholders.
If we adopt stock-based benefit plans within one year following the completion of the stock offering, then we may grant shares of common stock or stock options under our stock-based benefit plans for up to 4% and 10%, respectively, of our total outstanding shares including shares held by the charitable foundation. The amount of stock awards and stock options available for grant under the stock-based benefit plans may exceed these amounts, provided the stock-based benefit plans are adopted more than
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one year following the stock offering. Although the implementation of the stock-based benefit plan will be subject to stockholder approval, the determination as to the timing of the implementation of such a plan will be at the discretion of our Board of Directors. Stock-based benefit plans that provide for awards in excess of these amounts would increase our costs beyond the amounts estimated in “—Our stock-based benefit plans will increase our costs, which will reduce our income.” Stock-based benefit plans that provide for awards in excess of these amounts could also result in dilution to stockholders in excess of that described in “—The implementation of stock-based benefit plans will dilute your ownership interest.”
We have entered into an employment agreement with our President and Chief Executive Officer and intend to enter into an executive change in control severance plan with certain of our executive officers, which may increase our compensation costs upon the occurrence of certain events or increase the costs of acquiring us.
Following the conversion, we intend to enter into an executive change in control severance plan with certain of our executives. We have entered into an employment agreement with our President and Chief Executive Officer. In the event of termination of employment other than for cause, or in the event of certain types of termination following a change in control, as set forth in the employment and change in control severance plan, and assuming the agreements were in effect, the agreements will provide for cash severance benefits that would cost approximately $2.3 million in the aggregate based on salary information for the year ended December 31, 2012. These amounts may be reduced, if necessary, to an amount that would not qualify the payments to be deemed an “excess parachute payment” under Section 280G of the Internal Revenue Code of 1986, as amended. For additional information see “Management of Coastway Bancorp, Inc.—Executive Officer Compensation.”
We have broad discretion in how we use the proceeds of the stock offering. Our failure to effectively deploy the net proceeds of the offering may have an adverse effect on our financial performance and the value of our common stock.
We intend to invest between $14.8 million and $20.2 million of the net proceeds of the offering (or $23.4 million at the adjusted maximum of the offering range) in Coastway Community Bank. We may use the remaining net proceeds to invest in short-term investments, repurchase shares of common stock, pay dividends, finance the acquisition of financial institutions, or for other general corporate purposes. We also expect to use a portion of the net proceeds we retain to fund a loan for the purchase of shares of common stock in the offering by the employee stock ownership plan. Coastway Community Bank may use the net proceeds it receives to fund new loans, invest in short-term investments, expand its banking franchise by acquiring other financial institutions or other financial services companies, or for other general corporate purposes. However, with the exception of the loan to the employee stock ownership plan and contributions to our charitable foundation, we have not allocated specific amounts of the net proceeds for any of these purposes, and we will have significant flexibility in determining the amount of the net proceeds we apply to different uses and the timing of such applications. Also, certain of these uses, such as acquiring other financial institutions, may require regulatory approval. We have not established a timetable for investing the net proceeds, and we cannot predict how long we will require to reinvest the net proceeds. Our failure to utilize these finds effectively would reduce our profitability and may adversely affect the value of our common stock. For additional information see “How We Intend To Use The Proceeds From The Offering.”
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Certain provisions of our articles of incorporation and bylaws, and state and federal law could discourage hostile acquisitions of control of Coastway Bancorp, Inc., which could negatively affect our stock value.
Certain provisions in our articles of incorporation and bylaws may discourage attempts to acquire Coastway Bancorp, Inc., pursue a proxy contest for control of Coastway Bancorp, Inc., assume control of Coastway Bancorp, Inc. by a holder of a large block of common stock, and remove Coastway Bancorp, Inc.’s management, all of which stockholders might think are in their best interests. These provisions include:
·
restrictive requirements regarding eligibility for service on the board of directors, including, residency requirements, a prohibition on service by persons who are or have been the subject of certain legal or regulatory proceedings, a prohibition on service by persons who are party to agreements that may affect their voting discretion, a prohibition on service by persons who have lost more than one campaign for election, and a prohibition on service by nominees or representatives (as defined in applicable Federal Reserve Board regulations) of another person who would not be eligible for service or of an entity the partners or controlling persons of which would not be eligible for service;
·
the election of directors to staggered terms of three years;
·
provisions requiring advance notice of stockholder proposals and director nominations;
·
a limitation on the right to vote more than 10% of the outstanding shares of common stock;
·
a prohibition on cumulative voting;
·
a requirement that the calling of a special meeting by stockholders requires the request of a majority of all votes entitled to be cast at the special meeting;
·
a requirement that directors may only be removed for cause and by a majority of the votes entitled to be cast;
·
the board of directors’ ability to cause Coastway Bancorp, Inc. to issue preferred stock; and
·
the requirement of the vote of 80% of the votes entitled to be case in order to amend certain provisions of the articles of incorporation.
For further information, see “Restrictions on Acquisition of Coastway Bancorp, Inc.—Coastway Bancorp, Inc.’s Articles of Incorporation and Bylaws.”
Federal regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of Coastway Community Bank or Coastway Bancorp, Inc. without the prior approval of the Federal Reserve Board. In addition, the business corporation law of Maryland, the state where Coastway Bancorp, Inc. is incorporated, provides for certain restrictions on acquisition of Coastway Bancorp, Inc. See “Restrictions on Acquisitions of Coastway Bancorp, Inc.—Maryland Corporate Law,” “—Coastway Community Bank’s Charter” and “—Change in Control Regulations.”
27
Table of Contents
A significant percentage of our common stock will be held or controlled by our directors and executive officers and benefit plans.
Our board of directors and executive officers intend to purchase in the aggregate approximately 2.8% and 2.1% of our common stock (excluding shares issued to our charitable foundation) at the minimum and maximum of the offering range, respectively. These purchases, together with the purchase by the employee stock ownership plan of 8.0% of the aggregate shares sold in the offering, as well as the potential acquisition of common stock through the proposed equity incentive plan will result in ownership by insiders of Coastway Bancorp, Inc. and Coastway Community Bank of approximately 24.1% of the total shares issued in the offering at the maximum and approximately 24.8% of the total shares issued in the offering at the minimum of the offering range. The ownership by executive officers, directors and our stock plans could result in actions being taken that are not in accordance with other stockholders’ wishes, and could prevent any action requiring a supermajority vote under our articles of incorporation and bylaws (including the amendment of certain protective provisions of our articles and bylaws discussed immediately above).
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 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, 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.
We have elected to delay the adoption of new and revised accounting pronouncements, which means that our financial statements may not be comparable to those of other public companies.
As an “emerging growth company,” we have elected to use the extended 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.
28
Table of Contents
You may not revoke your decision to purchase common stock in the subscription or community offerings after you send us your order.
Funds submitted or automatic withdrawals authorized in connection with a purchase of shares of common stock in the subscription and community offerings will be held by us until the completion or termination of the conversion and offering, including any extension of the expiration date and consummation of a syndicated offering. Because completion of the conversion and offering will be subject to regulatory approvals and an update of the independent appraisal prepared by RP Financial, LC., among other factors, there may be one or more delays in the completion of the conversion and offering. Orders submitted in the subscription and community offerings are irrevocable, and purchasers will have no access to their funds unless the offering is terminated, or extended beyond , or the number of shares to be sold in the offering is increased to more than 4,827,125 shares or decreased to fewer than 3,102,500 shares.
29
Table of Contents
SELECTED FINANCIAL AND OTHER DATA
The following tables set forth selected historical financial and other data of Coastway Community Bank and Coastway Bancorp, MHC and subsidiaries for the periods and at the dates indicated. The information at and for the years ended December 31, 2012 and 2011 is derived in part from, and should be read together with, the audited consolidated financial statements and notes thereto of Coastway Bancorp, MHC and subsidiaries beginning at page F-1 of this prospectus. The information at and for the year ended December 31, 2010 is derived in part from audited consolidated financial statements that are not included in this prospectus. The information for Coastway Bancorp, MHC and subsidiaries at and for the six months ended June 30, 2013 and for Coastway Community Bank at and for the six months ended June 30, 2012 is unaudited and reflects all normal recurring adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The following information is only a summary, and should be read in conjunction with our consolidated financial statements and notes beginning on page F-1 of this prospectus.
|
|
|
At June 30,
|
|
At December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(In thousands)
|
|
|
Selected Financial Condition Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
375,746
|
|
$
|
354,622
|
|
$
|
322,967
|
|
$
|
309,265
|
|
|
Cash and cash equivalents
|
|
9,863
|
|
7,020
|
|
5,366
|
|
5,241
|
|
|
Loans, net
|
|
309,156
|
|
296,999
|
|
269,578
|
|
257,045
|
|
|
Loans held for sale
|
|
19,082
|
|
13,642
|
|
14,528
|
|
19,250
|
|
|
Federal Home Loan Bank stock
|
|
2,694
|
|
3,036
|
|
3,408
|
|
3,408
|
|
|
Deposits
|
|
329,992
|
|
307,793
|
|
282,956
|
|
261,851
|
|
|
Borrowed funds
|
|
14,000
|
|
16,343
|
|
10,769
|
|
19,789
|
|
|
Total retained earnings
|
|
27,595
|
|
27,296
|
|
26,123
|
|
25,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six Months Ended
June 30,
|
|
At December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(In thousands)
|
|
|
Selected Operating Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
6,873
|
|
$
|
6,617
|
|
$
|
13,207
|
|
$
|
13,717
|
|
$
|
14,116
|
|
|
Interest expense
|
|
1,331
|
|
1,320
|
|
2,650
|
|
2,704
|
|
3,403
|
|
|
Net interest income
|
|
5,542
|
|
5,297
|
|
10,557
|
|
11,013
|
|
10,713
|
|
|
Provision for loan losses
|
|
209
|
|
584
|
|
1,109
|
|
1,157
|
|
1,244
|
|
|
Net interest income after provision for loan losses
|
|
5,333
|
|
4,713
|
|
9,448
|
|
9,856
|
|
9,469
|
|
|
Non-interest income
|
|
3,004
|
|
3,130
|
|
7,175
|
|
6,020
|
|
4,965
|
|
|
Non-interest expense
|
|
7,855
|
|
7,043
|
|
14,640
|
|
14,158
|
|
13,386
|
|
|
Income before income taxes
|
|
482
|
|
800
|
|
1,983
|
|
1,718
|
|
1,048
|
|
|
Income tax provision
|
|
183
|
|
319
|
|
835
|
|
706
|
|
471
|
|
|
Net income
|
|
$
|
299
|
|
$
|
481
|
|
$
|
1,148
|
|
$
|
1,012
|
|
$
|
577
|
|
30
Table of Contents
|
|
|
At or For the Six Months
Ended June 30,(5)
|
|
At or For the Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Ratios and Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets (ratio of net income to average total assets)
|
|
0.17
|
%
|
0.30
|
%
|
0.34
|
%
|
0.32
|
%
|
0.19
|
%
|
|
Return on equity (ratio of net income to average equity)
|
|
2.21
|
%
|
3.73
|
%
|
4.36
|
%
|
3.92
|
%
|
2.32
|
%
|
|
Interest rate spread (1)
|
|
3.24
|
%
|
3.42
|
%
|
3.32
|
%
|
3.68
|
%
|
3.52
|
%
|
|
Net interest margin (2)
|
|
3.42
|
%
|
3.61
|
%
|
3.51
|
%
|
3.87
|
%
|
3.75
|
%
|
|
Efficiency ratio (3)
|
|
91.91
|
%
|
83.58
|
%
|
82.56
|
%
|
83.12
|
%
|
85.38
|
%
|
|
Non-interest expense to average total assets
|
|
4.39
|
%
|
4.34
|
%
|
4.39
|
%
|
4.55
|
%
|
4.33
|
%
|
|
Average interest-earning assets to average interest-bearing liabilities
|
|
121.49
|
%
|
120.75
|
%
|
121.36
|
%
|
120.17
|
%
|
119.61
|
%
|
|
Average equity to average total assets
|
|
7.57
|
%
|
7.95
|
%
|
7.89
|
%
|
8.28
|
%
|
8.04
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Quality Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming assets to total assets
|
|
2.20
|
%
|
2.37
|
%
|
2.89
|
%
|
2.64
|
%
|
3.39
|
%
|
|
Nonperforming loans to total loans
|
|
2.14
|
%
|
1.95
|
%
|
2.58
|
%
|
2.47
|
%
|
3.90
|
%
|
|
Allowance for loan losses to nonperforming loans
|
|
24.15
|
%
|
23.19
|
%
|
20.48
|
%
|
21.38
|
%
|
16.30
|
%
|
|
Allowance for loan losses to total loans
|
|
0.52
|
%
|
0.45
|
%
|
0.53
|
%
|
0.53
|
%
|
0.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity to total assets at end of period
|
|
7.3
|
%
|
8.0
|
%
|
7.7
|
%
|
8.1
|
%
|
8.2
|
%
|
|
Total capital to risk-weighted assets (4)
|
|
10.4
|
%
|
11.0
|
%
|
10.7
|
%
|
11.4
|
%
|
12.1
|
%
|
|
Tier 1 capital to risk-weighted assets (4)
|
|
9.8
|
%
|
10.5
|
%
|
10.1
|
%
|
10.8
|
%
|
11.4
|
%
|
|
Tier 1 capital to adjusted assets (4)
|
|
7.8
|
%
|
8.2
|
%
|
8.1
|
%
|
8.3
|
%
|
8.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of full service offices
|
|
9
|
|
7
|
|
8
|
|
7
|
|
7
|
|
|
Full time equivalent employees
|
|
144
|
|
125
|
|
141
|
|
123
|
|
125
|
|
(1)
Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.
(2)
Represents net interest income as a percent of average interest-earning assets for the period.
(3)
Represents non-interest expense divided by the sum of net interest income and non-interest income. Our efficiency ratio for the six months ended June 30, 2013 included the impact of the impairment loss of $482,000 related to the write-down of two real estate properties that were classified as held for sale at June 30, 2013.
(4)
Represents capital ratios of Coastway Community Bank.
(5)
Ratios are annualized where appropriate.
31
Table of Contents
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
·
statements of our goals, intentions and expectations;
·
statements regarding our business plans, prospects, growth and operating strategies;
·
statements regarding the quality of our loan and investment portfolios; and
·
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not undertake any obligation to update any forward-looking statements after the date of this prospectus.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:
·
general economic conditions, either nationally or in our market area, that are worse than expected;
·
our success in continuing to grow our commercial real estate, residential, SBA and commercial business loan portfolios;
·
increased competition among depository and other financial institutions;
·
inflation and changes in the interest rate environment that reduce our margins and yields, reduce the fair value of financial instruments or increase our funding costs;
·
changes in laws or government regulations or policies that adversely affect financial institutions, including changes in regulatory fees and capital requirements;
·
our ability to manage operations in the current economic conditions;
·
our ability to capitalize on growth opportunities;
·
our ability to successfully integrate any acquired entities;
·
changes in consumer spending, borrowing and savings habits;
·
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
·
changes in our organization, compensation and benefit plans;
32
Table of Contents
·
changes in the level of government support for housing finance;
·
significant increases in delinquencies and our loan losses; and
·
changes in our financial condition or results of operations that reduce capital.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. Please see “Risk Factors” beginning on page 15.
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
Although we cannot determine what the actual net proceeds from the sale of the shares of common stock in the offering will be until the offering is completed, we anticipate that the net proceeds will be between $29.6 million and $40.5 million, or $46.7 million if the offering range is increased to the adjusted maximum. Please see “Pro Forma Data” for additional information.
We intend to distribute the net proceeds from the stock offering as follows:
|
|
|
Based Upon the Sale at $10.00 Per Share of
|
|
|
|
|
3,102,500 Shares
|
|
3,650,000 Shares
|
|
4,197,500 Shares
|
|
4,827,125 Shares (1)
|
|
|
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
Percent
|
|
|
|
|
|
|
of Net
|
|
|
|
of Net
|
|
|
|
of Net
|
|
|
|
of Net
|
|
|
|
|
Amount
|
|
Proceeds
|
|
Amount
|
|
Proceeds
|
|
Amount
|
|
Proceeds
|
|
Amount
|
|
Proceeds
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock offering proceeds
|
|
$
|
31,025
|
|
|
|
$
|
36,500
|
|
|
|
$
|
41,975
|
|
|
|
$
|
48,271
|
|
|
|
|
Less offering expenses
|
|
(1,396
|
)
|
|
|
(1,446
|
)
|
|
|
(1,497
|
)
|
|
|
(1,554
|
)
|
|
|
|
Net offering proceeds
|
|
$
|
29,629
|
|
100.0
|
%
|
$
|
35,054
|
|
100.0
|
%
|
$
|
40,478
|
|
100.0
|
%
|
$
|
46,717
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Use of net proceeds:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
To Coastway Community Bank
|
|
$
|
14,815
|
|
50.0
|
%
|
$
|
17,527
|
|
50.0
|
%
|
$
|
20,239
|
|
50.0
|
%
|
$
|
23,359
|
|
50.0
|
%
|
|
To fund loan to employee stock ownership plan
|
|
2,536
|
|
8.6
|
%
|
2,988
|
|
8.5
|
%
|
3,440
|
|
8.5
|
%
|
3,959
|
|
8.5
|
%
|
|
Proceeds contributed to foundation
|
|
300
|
|
1.0
|
%
|
300
|
|
0.9
|
%
|
300
|
|
0.7
|
%
|
300
|
|
0.6
|
%
|
|
Retained by Coastway Bancorp, Inc.
|
|
$
|
11,978
|
|
40.4
|
%
|
$
|
14,239
|
|
40.6
|
%
|
$
|
16,499
|
|
40.8
|
%
|
$
|
19,100
|
|
40.9
|
%
|
(1)
As adjusted to give effect to an increase in the number of shares, which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
Payments for shares of common stock made through withdrawals from existing deposit accounts will not result in the receipt of new funds for investment but will result in a reduction of Coastway Community Bank’s deposits. The net proceeds may vary because the total expenses relating to the offering may be more or less than our estimates. For example, our expenses would increase if a syndicated community offering were used to sell shares of common stock not purchased in the subscription and community offerings.
Coastway Bancorp, Inc. intends to fund a loan to the employee stock ownership plan to purchase shares of common stock in the stock offering and contribute cash and shares of common stock to our charitable foundation. Coastway Bancorp, Inc. may also use the proceeds it retains from the stock offering:
·
to invest in short-term investments consistent with our investment policy;
33
Table of Contents
·
to pay cash dividends to stockholders;
·
to repurchase shares of our common stock; and
·
for other general corporate purposes.
With the exception of the funding of the loan to the employee stock ownership plan and the contribution to our charitable foundation, Coastway Bancorp, Inc. has not quantified its plans for use of the offering proceeds for each of the foregoing purposes. Initially, we intend to invest a substantial portion of the net proceeds in short-term investments prior to deploying the proceeds into new loans.
Under currently applicable regulations, we may not repurchase shares of our common stock during the first year following the conversion, except to fund equity benefit plans other than stock options or except when extraordinary circumstances exist and with prior regulatory approval.
Coastway Community Bank will receive a capital contribution equal to at least 50% of the net proceeds of the offering. Coastway Community Bank may use the net proceeds it receives from the Offering:
·
to invest in commercial real estate, residential, commercial business and SBA loans;
·
to invest in short-term investments consistent with our investment policy;
·
to expand its banking franchise by acquiring other financial institutions or other financial services companies, although no such acquisition transactions are contemplated at this time; and
·
for other general corporate purposes.
Coastway Community Bank has not quantified its plans for use of the offering proceeds for any of the foregoing purposes.
OUR POLICY REGARDING DIVIDENDS
Following completion of the stock offering, our Board of Directors will have the authority to declare dividends on our shares of common stock, subject to statutory and regulatory requirements. However, no decision has been made with respect to the payment of dividends. In determining whether to pay a cash dividend and the amount of such cash dividend, the Board of Directors is expected to take into account a number of factors, including capital requirements, our consolidated financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future. Special cash dividends, stock dividends or returns of capital, to the extent permitted by applicable law, regulations and policy, may be paid in addition to, or in lieu of, regular cash dividends. We will file a consolidated tax return with Coastway Community Bank. Accordingly, it is anticipated that any cash distributions made by us to our stockholders would be treated as cash dividends and not as a non-taxable return of capital for federal and state tax purposes. Additionally, pursuant to bank conversion regulations, during the three-year period following the stock offering, we will not take any action to declare an extraordinary dividend to stockholders that would be treated by recipients as a tax-free return of capital for federal income tax purposes.
The dividends we can declare and pay will depend, in part, upon receipt of dividends from Coastway Community Bank, because initially we will have no source of income other than dividends from Coastway Community Bank, earnings from the investment of proceeds from the sale of shares of common stock, and interest payments received in connection with the loan to the employee stock ownership plan. Applicable
34
Table of Contents
regulations impose significant limitations on “capital distributions” by depository institutions. See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.”
MARKET FOR THE COMMON STOCK
Coastway Bancorp, Inc. is a newly formed company and has never issued capital stock, except for 100 shares issued to Coastway Bancorp, LLC in connection with its formation. Coastway Bancorp, MHC, as a mutual institution, has never issued capital stock. Coastway Bancorp, Inc. anticipates that its common stock will be traded on the Nasdaq Capital Market under the symbol “CWAY.” Sandler O’Neill & Partners, L.P. has advised us that it intends to make a market in our common stock following the conversion and stock offering, but it is under no obligation to do so.
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, our directors and executive officers and the charitable foundation, 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. Furthermore, we cannot assure you that, if you purchase shares of common stock, you will be able to sell them at or above $10.00 per share. Purchasers of common stock in this stock offering 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 after the stock offering and may have an adverse impact on the price at which the common stock can be sold.
35
Table of Contents
HISTORICAL AND PRO FORMA REGULATORY CAPITAL COMPLIANCE
At June 30, 2013, Coastway Community Bank exceeded all of the applicable regulatory capital requirements. The table below sets forth the historical equity capital and regulatory capital of Coastway Community Bank at June 30, 2013, and the pro forma equity capital and regulatory capital of Coastway Community Bank, after giving effect to the sale of shares of common stock at a $10.00 per share purchase price. The table assumes the receipt by Coastway Community Bank of 50% of the net offering proceeds. See “How We Intend to Use the Proceeds from the Offering.”
|
|
|
Coastway
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Community Bank
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
Pro Forma at
June 30, 2013
, Based Upon the Sale in the Offering of
|
|
|
|
|
at
June 30, 2013
|
|
3,102,500 Shares
|
|
3,650,000 Shares
|
|
4,197,500 Shares
|
|
4,827,125 Shares(1)
|
|
|
|
|
Amount
|
|
Percent of
Assets(2)
|
|
Amount
|
|
Percent of
Assets(2)
|
|
Amount
|
|
Percent of
Assets(2)
|
|
Amount
|
|
Percent of
Assets(2)
|
|
Amount
|
|
Percent of
Assets(2)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
|
$
|
27,595
|
|
7.34
|
%
|
$
|
38,305
|
|
9.82
|
%
|
$
|
40,340
|
|
10.27
|
%
|
$
|
42,374
|
|
10.71
|
%
|
$
|
44,715
|
|
11.21
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 leverage capital(3)
|
|
$
|
28,072
|
|
7.75
|
%
|
$
|
38,782
|
|
10.29
|
%
|
$
|
40,817
|
|
10.76
|
%
|
$
|
42,851
|
|
11.21
|
%
|
$
|
45,192
|
|
11.73
|
%
|
|
Requirement
|
|
18,111
|
|
5.00
|
|
18,837
|
|
5.00
|
|
18,973
|
|
5.00
|
|
19,108
|
|
5.00
|
|
19,264
|
|
5.00
|
|
|
Excess
|
|
$
|
9,961
|
|
2.75
|
%
|
$
|
19,945
|
|
5.29
|
%
|
$
|
21,844
|
|
5.76
|
%
|
$
|
23,743
|
|
6.21
|
%
|
$
|
25,928
|
|
6.73
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tier 1 risk-based capital
|
|
$
|
28,072
|
|
9.81
|
%
|
$
|
38,782
|
|
13.22
|
%
|
$
|
40,817
|
|
13.85
|
%
|
$
|
42,851
|
|
14.47
|
%
|
$
|
45,192
|
|
15.18
|
%
|
|
Requirement
|
|
17,169
|
|
6.00
|
|
17,605
|
|
6.00
|
|
17,686
|
|
6.00
|
|
17,768
|
|
6.00
|
|
17,861
|
|
6.00
|
|
|
Excess
|
|
$
|
10,903
|
|
3.81
|
%
|
$
|
21,177
|
|
7.22
|
%
|
$
|
23,131
|
|
7.85
|
%
|
$
|
25,083
|
|
8.47
|
%
|
$
|
27,331
|
|
9.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total risk-based capital(3)
|
|
$
|
29,669
|
|
10.37
|
%
|
$
|
40,379
|
|
13.76
|
%
|
$
|
42,414
|
|
14.39
|
%
|
$
|
44,448
|
|
15.01
|
%
|
$
|
46,789
|
|
15.72
|
%
|
|
Requirement
|
|
28,616
|
|
10.00
|
|
29,342
|
|
10.00
|
|
29,477
|
|
10.00
|
|
29,613
|
|
10.00
|
|
29,769
|
|
10.00
|
|
|
Excess
|
|
$
|
1,053
|
|
0.37
|
%
|
$
|
11,037
|
|
3.76
|
%
|
$
|
12,937
|
|
4.39
|
%
|
$
|
14,835
|
|
5.01
|
%
|
$
|
17,020
|
|
5.72
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds infused into Coastway Community Bank
|
|
|
|
|
|
$
|
14,815
|
|
|
|
$
|
17,527
|
|
|
|
$
|
20,239
|
|
|
|
$
|
23,359
|
|
|
|
|
Less: Common stock acquired by employee stock ownership plan
|
|
|
|
|
|
(2,536
|
)
|
|
|
(2,988
|
)
|
|
|
(3,440
|
)
|
|
|
(3,959
|
)
|
|
|
|
Less: Common stock acquired by stock-based benefit plan
|
|
|
|
|
|
(1,268
|
)
|
|
|
(1,494
|
)
|
|
|
(1,720
|
)
|
|
|
(1,980
|
)
|
|
|
|
Less: Cash contribution to Foundation
|
|
|
|
|
|
(300
|
)
|
|
|
(300
|
)
|
|
|
(300
|
)
|
|
|
(300
|
)
|
|
|
|
Pro forma increase in Tier 1 and total risk-based capital
|
|
|
|
|
|
$
|
10,710
|
|
|
|
$
|
12,745
|
|
|
|
$
|
14,780
|
|
|
|
$
|
17,120
|
|
|
|
(1)
As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)
Leverage capital levels are shown as a percentage of total adjusted assets. Risk-based capital levels are shown as a percentage of risk-weighted assets.
(3)
Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 50% risk weighting.
36
Table of Contents
CAPITALIZATION
The following table presents the historical consolidated capitalization of Coastway Bancorp, MHC at June 30, 2013 and the pro forma consolidated capitalization of Coastway Bancorp, Inc., after giving effect to the conversion and the offering, based upon the assumptions set forth in the “Pro Forma Data” section.
|
|
|
Coastway
Bancorp, MHC
|
|
Coastway Bancorp, Inc. Pro Forma,
Based Upon the Sale in the Offering at $10.00 per Share of
|
|
|
|
|
Historical at
June 30, 2013
|
|
3,102,500
Shares
|
|
3,650,000
Shares
|
|
4,197,500
Shares
|
|
4,827,125
Shares (1)
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits (2)
|
|
$
|
329,992
|
|
$
|
329,992
|
|
$
|
329,992
|
|
$
|
329,992
|
|
$
|
329,992
|
|
|
Borrowings
|
|
14,000
|
|
14,000
|
|
14,000
|
|
14,000
|
|
14,000
|
|
|
Total deposits and borrowed funds
|
|
$
|
343,992
|
|
$
|
343,992
|
|
$
|
343,992
|
|
$
|
343,992
|
|
$
|
343,992
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock $0.01 par value, 50,000,000 shares authorized; none issued or outstanding
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
Common stock $0.01 par value, 100,000,000 shares authorized; assuming shares outstanding as shown (3)
|
|
—
|
|
32
|
|
37
|
|
43
|
|
49
|
|
|
Additional paid-in capital (4)
|
|
—
|
|
30,275
|
|
35,866
|
|
41,457
|
|
47,888
|
|
|
Retained earnings (5)
|
|
28,111
|
|
28,111
|
|
28,111
|
|
28,111
|
|
28,111
|
|
|
Accumulated other comprehensive income
|
|
(516
|
)
|
(516
|
)
|
(516
|
)
|
(516
|
)
|
(516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock to be acquired by employee stock ownership plan (6)
|
|
—
|
|
(2,536
|
)
|
(2,988
|
)
|
(3,440
|
)
|
(3,959
|
)
|
|
Common stock to be acquired by stock-based benefit plans (7)
|
|
—
|
|
(1,268
|
)
|
(1,494
|
)
|
(1,720
|
)
|
(1,980
|
)
|
|
After-tax expense of contribution to charitable foundation
|
|
—
|
|
(591
|
)
|
(696
|
)
|
(800
|
)
|
(920
|
)
|
|
Total stockholders’ equity
|
|
$
|
27,595
|
|
$
|
53,507
|
|
$
|
58,320
|
|
$
|
63,135
|
|
$
|
68,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity as a percentage of total assets (2)
|
|
7.34
|
%
|
13.32
|
%
|
14.35
|
%
|
15.35
|
%
|
16.48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares offered for sale in offering
|
|
—
|
|
3,102,500
|
|
3,650,000
|
|
4,197,500
|
|
4,827,125
|
|
|
Shares issued to foundation
|
|
—
|
|
67,729
|
|
84,975
|
|
102,221
|
|
122,054
|
|
|
Total shares outstanding
|
|
—
|
|
3,170,229
|
|
3,734,975
|
|
4,299,721
|
|
4,949,179
|
|
(1)
As adjusted to give effect to an increase in the number of shares of common stock that could occur due to a 15% increase in the offering range to reflect demand for shares or changes in market conditions following the commencement of the subscription and community offerings.
(2)
Does not reflect withdrawals from deposit accounts for the purchase of shares of common stock in the conversion and offering. These withdrawals would reduce pro forma deposits and assets by the amount of the withdrawals.
(3)
No effect has been given to the issuance of additional shares of Coastway Bancorp, Inc. common stock pursuant to one or more stock-based benefit plans. If these plans are implemented within 12 months following the completion of the stock offering, an amount up to 10% and 4% of the shares of Coastway Bancorp, Inc. common stock sold in the offering, including shares issued to our charitable foundation, will be reserved for issuance upon the exercise of stock options and for issuance as restricted stock awards, respectively. See “Management of Coastway Bancorp, Inc. —Future Stock Benefit Plans.”
(4)
The sum of the par value of the total shares outstanding and additional paid-in capital equals the net stock offering proceeds at the offering price of $10.00 per share.
(5)
The retained earnings of Coastway Community Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion and Plan of Reorganization—Liquidation Rights” and “Supervision and Regulation.”
(footnotes continue on following page)
37
Table of Contents
(continued from previous page)
(6)
Assumes that 8% of the shares issued in the conversion (including shares to be contributed to the charitable foundation) will be acquired by the employee stock ownership plan financed by a loan from Coastway Bancorp, Inc. The loan will be repaid principally from Coastway Community Bank’s contributions to the employee stock ownership plan. Since Coastway Bancorp, Inc. will finance the employee stock ownership plan debt, this debt will be eliminated through consolidation and no asset or liability will be reflected on Coastway Bancorp, Inc.’s consolidated financial statements. Under generally accepted accounting principles, the amount of common stock to be acquired by the employee stock ownership plan represents unearned compensation. Accordingly, the amount of shares of common stock acquired by the employee stock ownership plan is shown in this table as a reduction of total stockholders’ equity.
(7)
Assumes a number of shares of common stock equal to 4% of the shares of common stock to be issued in the conversion (including shares to be contributed to the charitable foundation) will be purchased for grant by one or more stock-based benefit plans in open market purchases. The dollar amount of common stock to be purchased is based on the $10.00 per share subscription price in the offering and represents unearned compensation, which is presented as a reduction of stockholders’ equity. This amount does not reflect possible increases or decreases in the value of common stock relative to the subscription price in the offering. As Coastway Bancorp, Inc. accrues compensation expense to reflect the vesting of shares pursuant to the stock-based benefit plans, the credit to equity will be offset by a charge to non-interest expense. Implementation of the stock stock-based benefit plans will require stockholder approval. Any funds to be used by the stock-based benefit plans to conduct open market purchases will be provided by Coastway Bancorp, Inc.
38
Table of Contents
PRO FORMA DATA
The following tables summarize historical data of Coastway Bancorp, MHC and pro forma data of Coastway Bancorp, Inc. at and for the year ended December 31, 2012 and at and for the six months ended June 30, 2013. This information is based on assumptions set forth below and in the table, and should not be used as a basis for projections of market value of the shares of common stock following the conversion and offering.
The net proceeds in the tables are based upon the following assumptions:
·
all shares of common stock will be sold in the subscription or community offerings;
·
our employee stock ownership plan will purchase 8% of the shares of common stock issued in the conversion (including shares contributed to the charitable foundation) with a loan from Coastway Bancorp, Inc. The loan will be repaid in substantially equal payments of principal and interest over a period of 25 years;
·
Sandler O’Neill & Partners, L.P. will receive a selling agent fee equal to 1.00% of the dollar amount of the shares of common stock sold in the stock offering. Shares purchased by our employee stock benefit plans or by our officers, directors and employees, and their immediate families and shares contributed to our charitable foundation will not be included in calculating the shares of common stock sold for this purpose; and
·
expenses of the stock offering, other than selling agent fees to be paid to Sandler O’Neill & Partners, L.P, will be approximately $1.1 million.
We calculated pro forma consolidated net income for the six months ended June 30, 2013 and the year ended December 31, 2012 as if the estimated net proceeds had been invested at assumed interest rates of 1.41% and 0.72%, respectively (0.85% and 0.44%, respectively on an after-tax basis). These rates represent the five-year United States Treasury Note rate as of June 30, 2013 and December 31, 2012, which, in light of current market interest rates, we consider to more accurately reflect the pro forma reinvestment rate than the arithmetic average of the weighted average yield earned on our interest-earning assets and the weighted average rate paid on our deposits as provided in applicable conversion regulations.
We calculated historical and pro forma per share amounts by dividing historical and pro forma amounts of consolidated net income and stockholders’ equity by the indicated number of shares of common stock. We adjusted these figures to give effect to the shares of common stock purchased by the
employee stock ownership plan
. We computed per share amounts for each period as if the shares of common stock were outstanding at the beginning of each period, but we did not adjust per share historical or pro forma stockholders’ equity to reflect the earnings on the estimated net proceeds.
The pro forma tables give effect to the implementation of stock-based benefit plans. Subject to the receipt of stockholder approval, we have assumed that the stock-based benefit plans will acquire for restricted stock awards a number of shares of common stock equal to 4% of our outstanding shares of common stock at the same price for which they were sold in the stock offering. We assume that shares of common stock are granted under the plans in awards that vest over a five-year period.
39
Table of Contents
We have also assumed that the stock-based benefit plans will grant options to acquire shares of common stock equal to 10% of our outstanding shares of common stock. In preparing the tables below, we assumed that stockholder approval was obtained, that the exercise price of the stock options and the market price of the stock at the date of grant were $10.00 per share and that the stock options had a term of ten years and vested over five years. We applied the Black-Scholes option pricing model to estimate a grant-date fair value of $3.89 for each option. In addition to the terms of the options described above, the Black-Scholes option pricing model assumed an estimated volatility rate of 24.17% for the shares of common stock, a dividend yield of 0%, an expected option life of 10 years and a risk-free interest rate of 2.52%.
We may grant options and award shares of common stock under one or more stock-based benefit plans in excess of 10% and 4%, respectively, of our total outstanding shares if the stock-based benefit plans are adopted more than one year following the stock offering. In addition, we may grant options and award shares that vest sooner than over a five-year period if the stock-based benefit plans are adopted more than one year following the stock offering.
As discussed under “How We Intend to Use the Proceeds from the Stock Offering,” we intend to contribute at least 50% of the net proceeds to Coastway Community Bank. We will retain the remainder of the net proceeds from the stock offering and use a portion of the proceeds we retain for the purpose of making a loan to the
employee stock ownership plan
and retain the rest of the proceeds for future use.
The pro forma table does not give effect to:
·
withdrawals from deposit accounts for the purpose of purchasing shares of common stock in the stock offering;
·
our results of operations after the stock offering; or
·
changes in the market price of the shares of common stock after the stock offering.
The following pro forma information may not represent the financial effects of the stock offering at the date on which the stock offering actually occurs and you should not use the table to indicate future results of operations. Pro forma stockholders’ equity represents the difference between the stated amount of our assets and liabilities, computed in accordance with GAAP. We did not increase or decrease stockholders’ equity to reflect the difference between the carrying value of loans and other assets and their market value. Pro forma stockholders’ equity is not intended to represent the fair market value of the shares of common stock and may be different than the amounts that would be available for distribution to stockholders if we liquidated. Pro forma stockholders’ equity does not give effect to the impact of intangible assets, the liquidation account we will establish in the conversion or tax bad debt reserves in the unlikely event we are liquidated.
40
Table of Contents
|
|
|
At or For the Year Ended December 31, 2012
Based Upon the Sale at $10.00 Per Share of
|
|
|
|
|
3,102,500
Shares
|
|
3,650,000
Shares
|
|
4,197,500
Shares
|
|
4,827,125 Shares
(1)
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds of Offering
|
|
$
|
31,025
|
|
$
|
36,500
|
|
$
|
41,975
|
|
$
|
48,271
|
|
|
Plus: market value of shares issued to charitable foundation
|
|
677
|
|
850
|
|
1,022
|
|
1,221
|
|
|
Pro forma market capitalization
|
|
$
|
31,702
|
|
$
|
37,350
|
|
$
|
42,997
|
|
$
|
49,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds of Offering
|
|
$
|
31,025
|
|
$
|
36,500
|
|
$
|
41,975
|
|
$
|
48,271
|
|
|
Less: expenses
|
|
(1,396
|
)
|
(1,446
|
)
|
(1,497
|
)
|
(1,554
|
)
|
|
Estimated net proceeds
|
|
29,629
|
|
35,054
|
|
40,478
|
|
46,717
|
|
|
Less: Common stock purchased by ESOP (2)
|
|
(2,536
|
)
|
(2,988
|
)
|
(3,440
|
)
|
(3,959
|
)
|
|
Less: Cash contribution to charitable foundation
|
|
(300
|
)
|
(300
|
)
|
(300
|
)
|
(300
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3)
|
|
(1,268
|
)
|
(1,494
|
)
|
(1,720
|
)
|
(1,980
|
)
|
|
Estimated net cash proceeds
|
|
$
|
25,525
|
|
$
|
30,272
|
|
$
|
35,018
|
|
$
|
40,478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
1,148
|
|
$
|
1,148
|
|
$
|
1,148
|
|
$
|
1,148
|
|
|
Pro forma income on net proceeds
|
|
111
|
|
132
|
|
153
|
|
176
|
|
|
Pro forma ESOP adjustment(2)
|
|
(61
|
)
|
(72
|
)
|
(83
|
)
|
(96
|
)
|
|
Pro forma stock award adjustment (3)
|
|
(153
|
)
|
(181
|
)
|
(208
|
)
|
(240
|
)
|
|
Pro forma stock option adjustment (4)
|
|
(222
|
)
|
(262
|
)
|
(301
|
)
|
(347
|
)
|
|
Pro forma net income
|
|
$
|
823
|
|
$
|
765
|
|
$
|
709
|
|
$
|
641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share net income:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
0.39
|
|
$
|
0.33
|
|
$
|
0.29
|
|
$
|
0.25
|
|
|
Pro forma income on net proceeds
|
|
0.04
|
|
0.04
|
|
0.04
|
|
0.04
|
|
|
Pro forma ESOP adjustment (2)
|
|
(0.02
|
)
|
(0.02
|
)
|
(0.02
|
)
|
(0.02
|
)
|
|
Pro forma stock award adjustment (3)
|
|
(0.05
|
)
|
(0.05
|
)
|
(0.05
|
)
|
(0.05
|
)
|
|
Pro forma stock option adjustment (4)
|
|
(0.08
|
)
|
(0.08
|
)
|
(0.08
|
)
|
(0.08
|
)
|
|
Pro forma net income per share (5)
|
|
$
|
0.28
|
|
$
|
0.22
|
|
$
|
0.18
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a multiple of pro forma net income per share
|
|
35.71
|
x
|
45.45
|
x
|
55.56
|
x
|
71.43
|
x
|
|
Number of shares outstanding for pro forma net income per share calculations (5)
|
|
2,926,755
|
|
3,448,129
|
|
3,969,503
|
|
4,569,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
27,296
|
|
$
|
27,296
|
|
$
|
27,296
|
|
$
|
27,296
|
|
|
Estimated net proceeds
|
|
29,629
|
|
35,054
|
|
40,478
|
|
46,717
|
|
|
Plus: market value of shares issued to charitable foundation
|
|
677
|
|
850
|
|
1,022
|
|
1,221
|
|
|
Plus: tax benefit of contribution to charitable foundation
|
|
386
|
|
454
|
|
522
|
|
601
|
|
|
Less: Common stock acquired by ESOP (2)
|
|
(2,536
|
)
|
(2,988
|
)
|
(3,440
|
)
|
(3,959
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
(1,268
|
)
|
(1,494
|
)
|
(1,720
|
)
|
(1,980
|
)
|
|
Less: expense of contribution to charitable foundation (6)
|
|
(977
|
)
|
(1,150
|
)
|
(1,322
|
)
|
(1,521
|
)
|
|
Pro forma stockholders’ equity
|
|
$
|
53,207
|
|
$
|
58,022
|
|
$
|
62,836
|
|
$
|
68,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity per share:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
8.61
|
|
$
|
7.31
|
|
$
|
6.35
|
|
$
|
5.52
|
|
|
Estimated net proceeds
|
|
9.35
|
|
9.39
|
|
9.41
|
|
9.44
|
|
|
Plus: market value of shares issued to charitable foundation
|
|
0.21
|
|
0.23
|
|
0.24
|
|
0.25
|
|
|
Plus: tax benefit of contribution to charitable foundation
|
|
0.12
|
|
0.12
|
|
0.12
|
|
0.12
|
|
|
Less: Common stock acquired by ESOP (2)
|
|
(0.80
|
)
|
(0.80
|
)
|
(0.80
|
)
|
(0.80
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
(0.40
|
)
|
(0.40
|
)
|
(0.40
|
)
|
(0.40
|
)
|
|
Less: expense of contribution to charitable foundation
|
|
(0.30
|
)
|
(0.31
|
)
|
(0.31
|
)
|
(0.31
|
)
|
|
Pro forma stockholders’ equity per share (7)
|
|
$
|
16.79
|
|
$
|
15.54
|
|
$
|
14.61
|
|
$
|
13.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as percentage of pro forma stockholders’ equity per share
|
|
59.56
|
%
|
64.35
|
%
|
68.45
|
%
|
72.36
|
%
|
|
Number of shares outstanding for pro forma book value per share calculations
|
|
3,170,229
|
|
3,734,975
|
|
4,299,721
|
|
4,949,179
|
|
(footnotes begin on page 44)
41
Table of Contents
|
|
|
At or For the Six Months Ended June 30, 2013
Based Upon the Sale at $10.00 Per Share of
|
|
|
|
|
3,102,500
Shares
|
|
3,650,000
Shares
|
|
4,197,500
Shares
|
|
4,827,125 Shares
(1)
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds of Offering
|
|
$
|
31,025
|
|
$
|
36,500
|
|
$
|
41,975
|
|
$
|
48,271
|
|
|
Plus: market value of shares issued to charitable foundation
|
|
677
|
|
850
|
|
1,022
|
|
1,221
|
|
|
Pro forma market capitalization
|
|
$
|
31,702
|
|
$
|
37,350
|
|
$
|
42,997
|
|
$
|
49,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Proceeds of Offering
|
|
$
|
31,025
|
|
$
|
36,500
|
|
$
|
41,975
|
|
$
|
48,271
|
|
|
Less: expenses
|
|
(1,396
|
)
|
(1,446
|
)
|
(1,497
|
)
|
(1,554
|
)
|
|
Estimated net proceeds
|
|
29,629
|
|
35,054
|
|
40,478
|
|
46,717
|
|
|
Less: Common stock purchased by ESOP (2)
|
|
(2,536
|
)
|
(2,988
|
)
|
(3,440
|
)
|
(3,959
|
)
|
|
Less: Cash contribution to charitable foundation
|
|
(300
|
)
|
(300
|
)
|
(300
|
)
|
(300
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3)
|
|
(1,268
|
)
|
(1,494
|
)
|
(1,720
|
)
|
(1,980
|
)
|
|
Estimated net cash proceeds
|
|
$
|
25,525
|
|
$
|
30,272
|
|
$
|
35,018
|
|
$
|
40,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Six months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
299
|
|
$
|
299
|
|
$
|
299
|
|
$
|
299
|
|
|
Pro forma income on net proceeds
|
|
109
|
|
129
|
|
150
|
|
173
|
|
|
Pro forma ESOP adjustment(2)
|
|
(31
|
)
|
(36
|
)
|
(42
|
)
|
(48
|
)
|
|
Pro forma stock award adjustment (3)
|
|
(77
|
)
|
(91
|
)
|
(104
|
)
|
(120
|
)
|
|
Pro forma stock option adjustment (4)
|
|
(111
|
)
|
(131
|
)
|
(151
|
)
|
(174
|
)
|
|
Pro forma net income
|
|
$
|
190
|
|
$
|
171
|
|
$
|
153
|
|
$
|
130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share net income:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
0.10
|
|
$
|
0.09
|
|
$
|
0.08
|
|
$
|
0.07
|
|
|
Pro forma income on net proceeds
|
|
0.04
|
|
0.04
|
|
0.04
|
|
0.04
|
|
|
Pro forma ESOP adjustment (2)
|
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
(0.01
|
)
|
|
Pro forma stock award adjustment (3)
|
|
(0.03
|
)
|
(0.03
|
)
|
(0.03
|
)
|
(0.03
|
)
|
|
Pro forma stock option adjustment (4)
|
|
(0.04
|
)
|
(0.04
|
)
|
(0.04
|
)
|
(0.04
|
)
|
|
Pro forma net income per share (5)
|
|
$
|
0.06
|
|
$
|
0.05
|
|
$
|
0.04
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a multiple of annualized pro forma net earnings per share
|
|
83.33
|
x
|
100.00
|
x
|
125.00
|
x
|
166.67
|
x
|
|
Number of shares outstanding for pro forma net income per share calculations (5)
|
|
2,919,147
|
|
3,439,165
|
|
3,959,183
|
|
4,557,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At June 30, 2013
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
27,595
|
|
$
|
27,595
|
|
$
|
27,595
|
|
$
|
27,595
|
|
|
Estimated net proceeds
|
|
29,629
|
|
35,054
|
|
40,478
|
|
46,717
|
|
|
Plus: market value of shares issued to charitable foundation
|
|
677
|
|
850
|
|
1,022
|
|
1,221
|
|
|
Plus: tax benefit of contribution to charitable foundation
|
|
386
|
|
454
|
|
522
|
|
601
|
|
|
Less: Common stock acquired by ESOP (2)
|
|
(2,536
|
)
|
(2,988
|
)
|
(3,440
|
)
|
(3,959
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
(1,268
|
)
|
(1,494
|
)
|
(1,720
|
)
|
(1,980
|
)
|
|
Less: expense of contribution to charitable foundation (6)
|
|
(977
|
)
|
(1,150
|
)
|
(1,322
|
)
|
(1,521
|
)
|
|
Pro forma stockholders’ equity
|
|
$
|
53,506
|
|
$
|
58,321
|
|
$
|
63,135
|
|
$
|
68,674
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity per share:
|
|
|
|
|
|
|
|
|
|
|
Historical
|
|
$
|
8.70
|
|
$
|
7.39
|
|
$
|
6.42
|
|
$
|
5.58
|
|
|
Estimated net proceeds
|
|
9.35
|
|
9.38
|
|
9.41
|
|
9.44
|
|
|
Plus: market value of shares issued to charitable foundation
|
|
0.21
|
|
0.23
|
|
0.24
|
|
0.25
|
|
|
Plus: tax benefit of contribution to charitable foundation
|
|
0.12
|
|
0.12
|
|
0.12
|
|
0.12
|
|
|
Less: Common stock acquired by ESOP (2)
|
|
(0.80
|
)
|
(0.80
|
)
|
(0.80
|
)
|
(0.80
|
)
|
|
Less: Common stock awarded under stock-based benefit plans (3) (4)
|
|
(0.40
|
)
|
(0.40
|
)
|
(0.40
|
)
|
(0.40
|
)
|
|
Less: expense of contribution to charitable foundation
|
|
(0.30
|
)
|
(0.31
|
)
|
(0.31
|
)
|
(0.31
|
)
|
|
Pro forma stockholders’ equity per share (7)
|
|
$
|
16.88
|
|
$
|
15.61
|
|
$
|
14.68
|
|
$
|
13.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as percentage of pro forma stockholders’ equity per share
|
|
59.24
|
%
|
64.06
|
%
|
68.12
|
%
|
72.05
|
%
|
|
Number of shares outstanding for pro forma book value per share calculations
|
|
3,170,229
|
|
3,734,975
|
|
4,299,721
|
|
4,949,179
|
|
(footnotes begin on following page)
42
Table of Contents
(
Footnotes from previous pages)
(1)
As adjusted to give effect to an increase in the number of shares which could occur due to a 15% increase in the offering range to reflect demand for the shares or changes in market conditions following the commencement of the offering.
(2)
Assumes that 8% of shares of common stock issued in the conversion (including shares to be contributed to the charitable foundation) will be purchased by the employee stock ownership plan. For purposes of this table, the funds used to acquire these shares are assumed to have been borrowed by the employee stock ownership plan from Coastway Bancorp, Inc. at a rate per annum equal to the Prime Rate. Coastway Community Bank intends to make annual contributions to the employee stock ownership plan in an amount at least equal to the required principal and interest payments on the debt. Coastway Community Bank’s total annual payments on the employee stock ownership plan debt are based upon 25 equal annual installments of principal and interest. Accounting Standard Codification 718-40-30 requires that an employer record compensation expense in an amount equal to the fair value of the shares committed to be released to employees. The pro forma adjustments assume that the employee stock ownership plan shares are allocated in equal annual installments based on the number of loan repayment installments assumed to be paid by Coastway Community Bank, the fair value of the common stock remains equal to the subscription price and the employee stock ownership plan expense reflects an effective combined federal and state tax rate of 39.5%. The unallocated employee stock ownership plan shares are reflected as a reduction of stockholders’ equity. No reinvestment is assumed on proceeds contributed to fund the employee stock ownership plan. The pro forma net income further assumes that the number of share set forth in the table below were committed to be released in the periods indicated.
|
|
|
Number of shares committed to be released at
|
|
|
|
|
Minimum of
Offering Range
|
|
Midpoint of
Offering Range
|
|
Maximum of
Offering Range
|
|
Maximum, as
adjusted, of
Offering Range
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the six months ended June 30, 2013
|
|
5,072
|
|
5,976
|
|
6,880
|
|
7,919
|
|
|
For the year ended December 31, 2012
|
|
10,145
|
|
11,952
|
|
13,759
|
|
15,837
|
|
In accordance with Accounting Standard Codification 718-40-30, only the employee stock ownership plan shares committed to be released during the period were considered outstanding for purposes of income per share calculations.
(3)
If approved by Coastway Bancorp, Inc.’s stockholders, one or more stock-based benefit plans may issue an aggregate number of shares of common stock equal to 4% of the shares to be issued in the conversion including shares contributed to the charitable foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion) for award as restricted stock to our officers, employees and directors. Stockholder approval of the stock-based benefit plans, and purchases by the plan may not occur earlier than six months after the completion of the conversion. The shares may be acquired directly from Coastway Bancorp, Inc. or through open market purchases. The funds to be used by the stock-based benefit plans to purchase the shares will be provided by Coastway Bancorp, Inc. The table assumes that (i) the stock-based benefit plans acquire the shares through open market purchases at $10.00 per share, (ii) 20% of the amount contributed to the stock-based benefit plans is amortized as an expense during the fiscal year and (iii) the stock-based benefit plans expense reflects an effective combined federal and state tax rate of 39.5%. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock (equal to 4% of the shares issued in the conversion, including shares contributed to the charitable foundation) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 3.85%.
(4)
If approved by Coastway Bancorp, Inc.’s stockholders, one or more stock-based benefit plans may grant options to acquire an aggregate number of shares of common stock equal to 10% of the shares to be issued in the conversion including shares contributed to the charitable foundation (or possibly a greater number of shares if the plan is implemented more than one year after completion of the conversion). Stockholder approval of the stock-based benefit plans may not occur earlier than six months after the completion of the conversion. In calculating the pro forma effect of the stock options to be granted under stock-based benefit plans, it is assumed that the exercise price of the stock options and the trading price of the common stock at the date of grant were $10.00 per share, the estimated grant-date fair value determined using the Black-Scholes option pricing model was $3.89 for each option, the aggregate grant-date fair value of the stock options was amortized to expense on a straight-line basis over a five-year vesting period of the options. The actual expense of the stock options to be granted under the stock-based benefit plans will be determined by the grant-date fair value of the options, which will depend on a number of factors, including the valuation assumptions used in the option pricing model ultimately adopted. Under the above assumptions, the adoption of the stock-based benefit plans will result in no additional shares under the treasury stock method for purposes of calculating earnings per share. There can be no assurance that the actual exercise price of the stock options will be equal to the $10.00 price per share. If a portion of the shares to satisfy the exercise of options under the stock-based benefit plans is obtained from the issuance of authorized but unissued shares, our net income per share and stockholders’ equity per share would decrease. Assuming stockholder approval of the stock-based benefit plans and that shares of common stock used to fund stock options (equal to 10% of the shares issued in the conversion, including shares contributed to the charitable foundation) are awarded through the use of authorized but unissued shares of common stock, stockholders would have their ownership and voting interests diluted by approximately 9.09%.
43
Table of Contents
(5)
Income per share computations are determined by taking the number of shares assumed to be sold in the offering and, in accordance with applicable accounting standards for employee stock ownership plans, subtracting the employee stock ownership plan shares that have not been committed for release during the period. See note 2, above.
(6)
Does not give effect to the nonrecurring expense that is expected to be recognized in the year ended December 31, 2013 as a result of the contribution of cash and shares of common stock to the charitable foundation. The estimated before tax expense, estimated after-tax expense and pro forma tax benefit associated with the contribution to the foundation is $1.1 million, $696,000 and $454,000, respectively, at the midpoint of the offering. The table below presents before and after tax expense of the Foundation contribution for the six months ended June 30, 2013 and the year ended December 31, 2012, along with pro forma net income (loss) and per share net income (loss) for the same periods. The pro forma data assume that we will realize 100.0% of the income tax benefit as a result of the contribution to the foundation based on a 39.5% income tax rate. The realization of the tax benefit is limited annually to 10.0% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.
|
|
|
Minimum of
Offering Range
|
|
Midpoint of
Offering Range
|
|
Maximum of
Offering Range
|
|
Maximum, as
adjusted, of
Offering Range
|
|
|
|
|
(in thousands, except per share data)
|
|
|
Before tax expense of contribution:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
$
|
977
|
|
$
|
1,150
|
|
$
|
1,322
|
|
$
|
1,521
|
|
|
Year ended December 31, 2012
|
|
977
|
|
1,150
|
|
1,322
|
|
1,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After tax expense of contribution:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
$
|
591
|
|
$
|
696
|
|
$
|
800
|
|
$
|
920
|
|
|
Year ended December 31, 2012
|
|
591
|
|
696
|
|
800
|
|
920
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss):
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
$
|
(401
|
)
|
$
|
(525
|
)
|
$
|
(647
|
)
|
$
|
(790
|
)
|
|
Year ended December 31, 2012
|
|
232
|
|
69
|
|
(91
|
)
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
$
|
(0.14
|
)
|
$
|
(0.15
|
)
|
$
|
(0.16
|
)
|
$
|
(0.17
|
)
|
|
Year ended December 31, 2012
|
|
0.08
|
|
0.02
|
|
(0.02
|
)
|
(0.06
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma tax benefit:
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2013
|
|
$
|
386
|
|
$
|
454
|
|
$
|
522
|
|
$
|
601
|
|
|
Year ended December 31, 2012
|
|
386
|
|
454
|
|
522
|
|
601
|
|
(7)
The retained earnings of Coastway Community Bank will be substantially restricted after the conversion. See “Our Policy Regarding Dividends,” “The Conversion and Plan of Reorganization—Liquidation Rights” and “Supervision and Regulation.” The number of shares used to calculate pro forma stockholders’ equity per share is equal to the total number of shares to be outstanding upon completion of the offering.
44
Table of Contents
COMPARISON OF VALUATION AND PRO FORMA INFORMATION
W
ITH AND WITHOUT THE CHARITABLE FOUNDATION
As reflected in the table below, if the charitable foundation is not established and funded as part of the stock offering, RP Financial, LC. estimates that our pro forma valuation would be greater and, as a result, a greater number of shares of common stock would be issued in the stock offering. At the minimum, midpoint, maximum and adjusted maximum of the valuation range, our pro forma valuation is $31.7 million, $37.4 million, $43.0 million and $49.5 million with the charitable foundation, as compared to $32.5 million, $38.3 million, $44.0 million and $50.6 million, respectively, without the charitable foundation. There is no assurance that in the event the charitable foundation were not formed, the appraisal prepared at that time would conclude that our pro forma market value would be the same as that estimated in the table below. Any appraisal prepared at that time would be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.
For comparative purposes only, set forth below are certain pricing ratios and financial data and ratios at and for the six months ended June 30, 2013 at the minimum, midpoint, maximum and adjusted maximum of the offering range, assuming the stock offering was completed at the beginning of the six-month period, with and without the charitable foundation.
|
|
|
Minimum of Offering Range
|
|
Midpoint of Offering Range
|
|
Maximum of Offering Range
|
|
Adjusted Maximum of
Offering Range
|
|
|
|
|
With
Foundation
|
|
Without
Foundation
|
|
With
Foundation
|
|
Without
Foundation
|
|
With
Foundation
|
|
Without
Foundation
|
|
With
Foundation
|
|
Without
Foundation
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated stock offering amount
|
|
$
|
31,025
|
|
$
|
32,513
|
|
$
|
36,500
|
|
$
|
38,250
|
|
$
|
41,975
|
|
$
|
43,988
|
|
$
|
48,271
|
|
$
|
50,586
|
|
|
Estimated full value
|
|
31,702
|
|
32,513
|
|
37,350
|
|
38,250
|
|
42,997
|
|
43,988
|
|
49,492
|
|
50,586
|
|
|
Total pro forma assets
|
|
401,657
|
|
402,947
|
|
406,472
|
|
407,943
|
|
411,287
|
|
412,939
|
|
416,826
|
|
418,685
|
|
|
Total pro forma liabilities
|
|
348,151
|
|
348,151
|
|
348,151
|
|
348,151
|
|
348,151
|
|
348,151
|
|
348,151
|
|
348,151
|
|
|
Pro forma stockholders’ equity
|
|
53,506
|
|
54,796
|
|
58,321
|
|
59,792
|
|
63,136
|
|
64,788
|
|
68,675
|
|
70,534
|
|
|
Pro forma net income
|
|
190
|
|
191
|
|
171
|
|
173
|
|
153
|
|
155
|
|
130
|
|
133
|
|
|
Pro forma stockholders’ equity per share
|
|
16.88
|
|
16.85
|
|
15.61
|
|
15.63
|
|
14.68
|
|
14.73
|
|
13.88
|
|
13.94
|
|
|
Pro forma net income per share
|
|
0.06
|
|
0.06
|
|
0.05
|
|
0.04
|
|
0.04
|
|
0.03
|
|
0.03
|
|
0.02
|
|
|
Pro forma pricing ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering price as a percentage of pro forma stockholders’ equity per share
|
|
59.24
|
%
|
59.31
|
%
|
64.06
|
%
|
64.02
|
%
|
68.12
|
%
|
67.89
|
%
|
72.05
|
%
|
71.68
|
%
|
|
Offering price to pro forma net income per share
|
|
83.33
|
x
|
83.33
|
x
|
100.00
|
x
|
125.00
|
x
|
125.00
|
x
|
166.67
|
x
|
166.67
|
x
|
250.00
|
x
|
|
Pro forma financial ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on assets (annualized)
|
|
0.09
|
%
|
0.09
|
%
|
0.08
|
%
|
0.08
|
%
|
0.07
|
%
|
0.07
|
%
|
0.06
|
%
|
0.06
|
%
|
|
Return on equity (annualized)
|
|
0.71
|
|
0.70
|
|
0.58
|
|
0.58
|
|
0.48
|
|
0.48
|
|
0.38
|
|
0.38
|
|
|
Equity to assets
|
|
13.32
|
|
13.60
|
|
14.35
|
|
14.66
|
|
15.35
|
|
15.69
|
|
16.48
|
|
16.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares issued
|
|
3,170,229
|
|
3,251,250
|
|
3,734,975
|
|
3,825,000
|
|
4,299,721
|
|
4,398,750
|
|
4,949,179
|
|
5,058,562
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45
Table of Contents
MANAGEMENT’S DISCUSSION AND
ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This section is intended to help potential investors understand the financial performance of Coastway Community Bank and Coastway Bancorp, MHC and its subsidiaries through a discussion of the factors affecting our financial condition at June 30, 2013, December 31, 2012 and December 31, 2011 and our results of operations for the six months ended June 30, 2013 and 2012 and for the years ended December 31, 2012 and 2011. This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this prospectus. Coastway Bancorp, Inc. had not engaged in any activities at June 30, 2013; therefore, the information reflected in this section reflects the financial performance of Coastway Bancorp, MHC and subsidiaries.
Overview
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, 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.
Our results of operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of customer service fees, gains on sales of loans, net and other income. Non-interest expense currently consists primarily of expenses related to salary and employee benefits, occupancy and equipment, data processing, deposit servicing, advertising, professional fees, federal deposit insurance assessments, foreclosed real estate and other general and administrative expenses.
Net income decreased $182,000, or 37.8%, to $299,000 for the six months ended June 30, 2013 from $481,000 for the six months ended June 30, 2012. Net income decreased primarily due to an increase in non-interest expenses of $812,000 and a decrease of $126,000 in non-interest income. The increase in non-interest expenses was primarily due to investments made in additional personnel and branch improvements related to two new branches that opened in late 2012 and early 2013, causing an increase in salary and employee benefits expense of $425,000 and an increase in occupancy and equipment expenses of $207,000. The decrease in non-interest income was primarily due to an impairment loss of $482,000 related to the write-down of two real estate properties that were classified as held for sale at June 30, 2013.
Net income increased $136,000, or 13.4%, to $1.1 million for the year ended December 31, 2012 from $1.0 million for the year ended December 31, 2011. Net income increased primarily due to an increase in non-interest income of $1.2 million as a result of an increase in the gain on sales of loans of $947,000, due primarily to increased sales of conforming one- to four-family residential real estate loans.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.
46
Table of Contents
Business Strategy
Our business strategy is to operate as a well-capitalized and profitable community bank dedicated to providing exceptional personal service to our individual and business customers. We believe that we have a competitive advantage in the markets we serve because of our knowledge of the local marketplace and our long-standing history of providing superior, relationship-based customer service. This 93-year history in the community, combined with management’s extensive experience and adherence to what we believe are conservative underwriting standards through numerous business cycles, has enabled us to maintain a well capitalized regulatory classification despite the economic downturn.
Increase Commercial Real Estate and Commercial Business Lending
. In order to increase the yield on and reduce the term to repricing of our loan portfolio, following our conversion from a credit union to a bank, we began to increase our commercial real estate and commercial business loan portfolios while maintaining what we believe are conservative underwriting standards. We focus our commercial lending to small businesses located in our market area, targeting owner occupied businesses such as professional service providers. Our commercial real estate and commercial business loan portfolios have grown from $25.1 million and $2.9 million, respectively, at December 31, 2008 to $83.5 million and $8.3 million, respectively, at June 30, 2013. At June 30, 2013, there were no non-performing commercial real estate loans and one non-performing commercial business loan that totaled $149,000, which was subsequently paid off in July 2013. The additional capital raised in this offering will further increase our commercial lending capacity by enabling us to originate more loans as well as loans with larger balances that we will retain in our portfolio.
Continue to Originate and Sell Certain Residential Real Estate Loans.
Residential mortgage lending has historically comprised a significant portion of our operations. We recognize that the origination of one- to four-family residential real estate loans is essential to maintaining customer relations and our status as a community-oriented bank. During the six months ended June 30, 2013, we originated $88.1 million in one- to four-family residential real estate loans held for sale and sold $81.5 million of such loans for gains on sale of $1.6 million, and during the year ended December 31, 2012, we originated $171.2 million in one- to four-family residential real estate loans held for sale and sold $172.2 million of such loans for gains on sale of $3.3 million. We intend to continue to sell in the secondary market the majority of the long-term conforming fixed-rate one- to four-family residential real estate loans that we originate to increase non-interest income and manage the overall duration of our loan portfolio. To the extent available, we intend to continue to develop an appropriately sized portfolio of jumbo and shorter term adjustable-rate one- to four-family residential real estate to increase interest income and assist in the management of our interest rate risk. At June 30, 2013, we had $41.2 million in jumbo loans which represented 47.5% of our one- to four-family residential real estate loan portfolio.
Maintain Disciplined Underwriting
. We emphasize a disciplined credit culture based on intimate market knowledge, close ties to our customers, sound underwriting standards and experienced loan officers. We are committed to actively monitoring and managing all segments of our loan portfolio in an effort to proactively identify and mitigate credit risks within our loan portfolio. At June 30, 2013, non-performing assets totaled $8.3 million, which represented 2.20% of total assets. Non-performing SBA loans totaled $1.0 million at June 30, 2013, of which $865,000 was guaranteed by the SBA.
Increase our Share of Lower-Cost Deposits
.
We remain committed to generating lower-cost stable core deposits. We attract and retain transaction accounts by offering competitive products and rates and excellent customer service. Our efforts to attract and retain transaction accounts have resulted in an increase in the total number of accounts and balances. Our core deposits (consisting of demand deposit accounts, savings accounts, money market accounts and club accounts) increased $50.6 million to $206.7
47
Table of Contents
million at June 30, 2013 from $156.1 million at December 31, 2010. At June 30, 2013, core deposits comprised 62.6% of our total deposits.
Focus on Relationship Banking.
We believe that our competitive strengths are personalized superior customer service, extensive knowledge of our local markets, high visibility community activities and technology-driven financial products such as internet banking. We believe that we can leverage these strengths to attract and retain customers who are seeking personalized, best-in-class customer service that are not being served by the large money center and regional banks in our market area. We also believe that we can capitalize on commercial deposit and personal banking relationships derived from an increase in commercial real estate and commercial business lending.
These strategies are intended to guide our investment of the net proceeds of the offering. We intend to continue to pursue our business strategy after the conversion and the offering, subject to changes necessitated by future market conditions, regulatory restrictions and other factors.
Anticipated Increase in Non-Interest Expense
Following the completion of the conversion and stock offering, we anticipate that our non-interest expense will increase as a result of increased compensation expenses associated with the implementation of our employee stock ownership plan and the implementation of a stock-based incentive plan, if that incentive plan is approved by our stockholders. For further information, see “Summary—Benefits to Management and Potential Dilution to Stockholders Following the Conversion,” “Risk Factors—Risks Related to this Stock Offering—Our stock-based benefit plans will increase our costs, which will reduce our income,” and “Management of Coastway Bancorp, Inc.—Benefit Plans and Agreements” and “—Future Stock Benefit Plans.”
Our non-interest expense will also increase as a result of our contribution of cash and shares of common stock to our charitable foundation, and as a result of our operation as a public company. For further information, please see “Summary—Our Issuance of Cash and Shares of Our Common Stock to Coastway Cares Charitable Foundation II,” “Risk Factors—Risks Related to Our Business—The cost of additional finance and accounting systems, procedures and controls in order to satisfy our new public company reporting requirements will increase our expenses” and “—Risks Related to this Stock Offering—The contribution to the charitable foundation will dilute your ownership interest and adversely affect net income in the year we complete the stock offering,” and “Coastway Cares Charitable Foundation II.”
Critical Accounting Policies
Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers. Our significant accounting policies are discussed in detail in Note 1 of the Notes to Consolidated Financial Statements included in this prospectus.
The recently enacted JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to
48
Table of Contents
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 June 30, 2013, 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.
Allowance for Loan Losses.
The allowance for loan losses is the amount estimated by management as necessary to cover probable losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, bank regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
Deferred Tax Assets.
We use the liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments may require us to make projections of future taxable income and/or to carryback to taxable income in prior years. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.
Comparison of Financial Condition at June 30, 2013 and December 31, 2012
Assets.
Our total assets increased $21.1 million, or 6.0%, to $375.7 million at June 30, 2013 from $354.6 million at December 31, 2012 due to an increase in total loans, loans held for sale and cash and cash equivalents. Total loans increased $12.0 million, or 4.1%, to $308.7 million at June 30, 2013 from $296.7 million at December 31, 2012. Loans held for sale increased $5.4 million and one- to four-family residential real estate loans increased $8.3 million. The increase was reflective of the low interest rate environment that existed for residential mortgage loans during the first half of 2013 and borrower demand to lock in interest rates prior to anticipated increases in interest rates, as well as the seasonal increase in home sales in the spring. Commercial construction loans also increased $2.7 million during the six months ended June 30, 2013 principally due to the origination of a loan to finance a multi-unit retail project which will also include our relocated Lincoln branch office. See “Properties.” Cash and cash equivalents increased by $2.8 million, or 40.5%, to $9.8 million at June 30, 2013 from $7.0 million at December 31, 2012 primarily due to the timing of funding of loan sales and originations.
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Deposits.
Our primary source of funds is retail deposit accounts held by individuals and businesses within our market area. Deposits increased $22.2 million, or 7.2%, to $330.0 million at June 30, 2013 from $307.8 million at December 31, 2012, primarily as a result of growth in non-interest-bearing demand deposit accounts of $6.2 million, or 10.7%, an increase in savings accounts and interest-bearing demand deposit accounts of $9.4 million, or 12.2%, an increase in money market accounts of $3.4 million, or 6.5%, and an increase in certificate of deposit accounts greater than $100,000 of $2.9 million, or 6.7%. Customers have generally continued to utilize more liquid deposit accounts in periods of lower interest rates. We have also continued to expand our services to our small business customers. However, we experienced an increase in certificates of deposit during the six months ended June 30, 2013 as some of our customers have elected to lock in rates in five year certificates of deposit which yield a higher interest rate.
Borrowed Funds.
We utilize borrowings from the Federal Home Loan Bank of Boston as an alternate funding source. Borrowed funds at June 30, 2013 totaled $14.0 million as compared to $16.3 million at December 31, 2012, a decrease of $2.3 million or 14.3%. Borrowed funds at June 30, 2013 were primarily comprised of $12.0 million of overnight advances at a weighted average rate of 0.31%, as compared to overnight advances of $13.0 million at December 31, 2012 at a weighted average of 0.31%. Overnight borrowings decreased $1.0 million during the six months ended June 30, 2013 due to the increase in cash and cash equivalents during the same time period. Long-term advances totaled $2.0 million at June 30, 2013 at a weighted average rate of 3.97% which mature during 2014 and 2015. Long-term advances at December 31, 2012 amounted to $3.3 million at a weighted average rate of 3.81%, with $1.3 million in long-term advances maturing in 2013 and the remainder maturing in 2014 and 2015. The decrease in long-term advances during 2013 of $1.3 million was due to maturities.
Total Retained Earnings.
Total retained earnings increased to $27.6 million at June 30, 2013 from $27.3 million at December 31, 2012. The increase in retained earnings was due to net income of $299,000 during the six months ended June 30, 2013.
Comparison of Financial Condition at December 31, 2012 and December 31, 2011
Assets.
Our total assets increased $31.7 million, or 9.8%, to $354.6 million at December 31, 2012 from $323.0 million at December 31, 2011. Total loans increased $26.9 million, or 10.0%, to $296.7 million at December 31, 2012 from $269.8 million at December 31, 2011. The growth in total loans was primarily due to increases in commercial real estate loans, which increased $14.7 million, or 21.9%, to $81.8 million at December 31, 2012 from $67.0 million at December 31, 2011 reflecting increased borrower demand. One- to four-family residential real estate loans also increased $5.3 million, or 7.2%, during 2012 reflecting the low interest rate environment. In addition, during the year ended December 31, 2012, commercial business loans increased $3.8 million, commercial construction loans increased $3.3 million and home equity loans and lines of credit increased $2.9 million, partially offset by a decline in SBA loans of $1.8 million and consumer loans of $1.3 million. Cash and cash equivalents increased by $1.7 million, or 30.8%, to $7.0 million at December 31, 2012 from $5.4 million at December 31, 2011 due to the timing of funding of loan sales and originations.
Deposits.
Deposits increased $24.8 million, or 8.8%, to $307.8 million at December 31, 2012 from $283.0 million at December 31, 2011 primarily due to an increase in non-interest-bearing demand deposit accounts of $7.7 million, or 15.4%, an increase of $6.7 million in savings accounts and interest-bearing demand deposit accounts, or 9.5%, an increase in money market accounts of $2.3 million, or 4.8% and an increase in certificate of deposit accounts greater than $100,000 of $7.4 million, or 20.9%. Customers have generally continued to utilize more liquid deposit accounts in periods of lower interest rates. We have also continued to expand our services to our small business customers. However, we experienced an increase in certificates of deposit during the year ended December 31, 2012 as some of
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our customers have elected to lock in rates in five year certificates of deposit which yield a higher interest rate.
Borrowed Funds.
We utilize borrowings from the Federal Home Loan Bank of Boston as an alternate funding source. Borrowed funds at December 31, 2012 totaled $16.3 million as compared to $10.8 million at December 31, 2011, an increase of $5.6 million, or 51.8%. Borrowed funds at December 31, 2012 were primarily comprised of $13.0 million of overnight advances at a weighted average rate of 0.31%, as compared to overnight advances of $6.0 million at December 31, 2012 with a weighted average rate of 0.35%. Overnight borrowings increased by $7.0 million during the year ended December 31, 2012 in order to fund loans held for sale. Long-term advances from the Federal Home Loan Bank of Boston totaled $3.3 million at December 31, 2012 at a weighted average rate of 3.81% as compared to $4.8 million at December 31, 2011 at a weighted average rate of 3.68%. The decrease in long-term advances during 2012 of $1.4 million was due to maturities.
Total Retained Earnings.
Total retained earnings increased to $27.3 million at December 31, 2012 as compared to $26.1 million at December 31, 2011. The increase in total retained earnings was due to net income of $1.1 million for the year ended December 31, 2012, partially offset by a $25,000 decrease in our accumulated other comprehensive loss.
Comparison of Operating Results for the Six Months Ended June 30, 2013 and June 30, 2012
General.
Net income decreased $182,000, or 37.8%, to $299,000 for the six months ended June 30, 2013 from $481,000 for the six months ended June 30, 2012. Net income decreased due to an increase in non-interest expenses of $812,000 and a decrease of $126,000 in non-interest income, which was offset by an increase of $245,000 in net interest income and a decrease of $375,000 in our provision for loan losses. The increase in non-interest expenses was primarily due to investments made in additional personnel and branch improvements related to two new branches that opened in late 2012 and early 2013 causing an increase in salary and employee benefits expense of $425,000 and an increase in occupancy and equipment expenses of $207,000. The decrease in non-interest income was primarily due to an impairment loss of $482,000 related to the write-down of two real estate properties that were classified as held for sale at June 30, 2013.
Interest Income.
Interest income increased $264,000, or 4.0%, to $6.9 million for the six months ended June 30, 2013 from $6.6 million for six months ended June 30, 2012. The increase reflected an increase in the average balance of interest-earning assets to $327.2 million for the six months ended June 30, 2013 from $295.5 million for the six months ended June 30, 2012, partially offset by a decrease in the average yield on interest-earning assets to 4.24% for the six months ended June 30, 2013 from 4.51% for the six months ended June 30, 2012. Substantially all of our interest income was derived from interest and fees on loans.
Interest income and fees on loans and loans held for sale increased $264,000, or 4.0%, to $6.9 million for the six months ended June 30, 2013 from $6.6 million for the six months ended June 30, 2012. Interest income and fees on loans and loans held for sale increased due to a $36.3 million, or 12.8%, increase in the average balance of loans to $320.5 million for the six months ended June 30, 2013 as compared to $284.2 million for the same period in the prior year, partially offset by a 36 basis point decline in the average yield on loans. The increase in our average loan balances was attributable to the growth in our residential one- to four-family loan portfolio, reflecting the low interest rate environment that existed for residential mortgage loans during the first half of 2013 and borrower demand to lock in interest rates prior to anticipated increases in interest rates as well as continued demand for commercial real estate loans. The average yield on loans decreased to 4.32% for the six months ended June 30, 2013 as compared to 4.68% for the six months ended June 30, 2012. The 36 basis point decline in average yield
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was primarily the result of the low interest rate environment as new loans have been added to the portfolio at lower interest rates.
Other interest income decreased $8,000 due to a decline in interest income earned on our cash and cash equivalents due to a lower average yield and lower average balances of cash and cash equivalents during the six months ended June 30, 2013 as compared to the prior year period.
Interest Expense.
Interest expense increased $11,000, or 0.8%, to $1.3 million for the six months ended June 30, 2013 due to an increase in the average balance of deposits.
Interest expense on deposits increased $21,000 during the six months ended June 30, 2013 as compared to the six months ended June 30, 2012 due to an increase in the average balance of deposits, offset by a decrease in the average cost of certificates of deposit. The average balance of deposits increased $16.5 million, or 6.9%, during the six months ended June 30, 2013 with average balances increasing across all deposit types. The average balance of certificates of deposit increased $8.9 million to $121.7 million for the six months ended June 30, 2013, primarily due to our continued competitive pricing in longer term (generally five year) certificates of deposit, in anticipation of a future increase in interest rates. The average cost of certificates of deposit decreased to 1.75% during the six months ended June 30, 2013 as compared to 1.87% during the six months ended June 30, 2012 due to the low interest rate environment.
Interest expense on borrowed funds decreased $10,000 to $68,000 for the six months ended June 30, 2013 due to a decrease in interest rates for newer borrowings, partially offset by an $8.1 million increase in the average balance of borrowed funds. The weighted average cost of borrowed funds was 1.03% for the six months ended June 30, 2013 as compared to 3.03% for the six months ended June 30, 2012. The average balance of borrowed funds increased to $13.3 million during the six months ended June 30, 2013 as compared to the prior year period as we increased the average balance of lower cost overnight borrowings which decreased the overall cost of borrowings.
Net Interest Income.
Net interest income increased $245,000, or 4.6%, to $5.5 million for the six months ended June 30, 2013 from $5.3 million for the six months ended June 30, 2012. This increase was due to a $7.1 million increase in net interest-earning assets to $57.9 million for the six months ended June 30, 2013. This growth in net interest-earning assets was offset by a decrease in our net interest margin of 19 basis points to 3.42% for the six months ended June 30, 2013 as compared to 3.61% for the prior year period.
Provision for Loan Losses.
A provision of $209,000 was recorded to the allowance for loan losses during the six month period ended June 30, 2013, a decrease of $375,000 compared to a provision of $584,000 during the six month period ended June 30, 2012.
During the six months ended June 30, 2013, we recorded a $184,000 provision for loan losses on home equity loans, out of the total $209,000 provision for the same period, based on our assessment of loss history, current asset quality and economic trends and charge-offs experienced in the portfolio. During the six months ended June 30, 2012, we recorded a provision of $584,000, of which $505,000 was in the home equity portfolio. Home equity net charge-offs for the six months ended June 30, 2013 totaled $209,000 as compared to $624,000 during the six months ended June 30, 2012. Included in the $624,000 in home equity charge-offs for the six month period ended June 30, 2012 was a $250,000 charge-off on one loan which had been in the 60-day delinquency category at December 31, 2011.
Refer to Note 3 of the Notes to the Consolidated Financial Statements for details on the provision for loan losses.
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Non-interest Income.
Non-interest income decreased $126,000, or 4.0%, to $3.0 million for the six months ended June 30, 2013 from $3.1 million for the six months ended June 30, 2012. We recorded an unrealized loss of $482,000 related to the write-down of two real estate properties that were classified as held for sale at June 30, 2013. One property located in Cranston, Rhode Island, known as Sharpe Drive, had been purchased for the purpose of becoming our new corporate headquarters. During the second quarter of 2013, we determined that the cost to improve the building exceeded initial estimates and we decided to sell the building. A second property located in Coventry, Rhode Island, known as New London Turnpike, is land that had been purchased for the purpose of building a future branch, but is no longer being contemplated as a future branch location. In 2012, we had a letter of intent to lease the land, at which point the land was classified as real estate held for investment. In May 2013, the letter of intent expired and we decided to sell the land and the land was reclassified as real estate held for sale. Real estate held for sale is carried at the lower of cost or fair value less cost to sell. Partially offsetting the decrease in non-interest income was an increase in gains on sales of loans, net which increased $326,000 due to an increase in loans sold. The increase in gain on the sales of loans was primarily due to an increase in the volume of one- to four-family residential real estate loans sold, which was $81.5 million for the six months ended June 30, 2013 as compared to $70.5 million for the six months ended June 30, 2012. The increase in the volume of the loans sold was reflective of the low interest rate environment and customer demand for fixed rate conforming one- to four-family residential real estate loans.
Non-interest Expense.
Non-interest expense increased $812,000, or 11.5%, to $7.9 million for the six months ended June 30, 2013 from $7.0 million for the six months ended June 30, 2012. Salaries and employee benefits increased $425,000 to $4.1 million for the six months ended June 30, 2013 as compared to $3.7 million for the six months ended June 30, 2012. The increase was related to general merit increases and an increase in full time equivalent employees from 125 employees at June 30, 2012 to 144 employees at June 30, 2013, primarily associated with the opening of two new branch offices. Occupancy and equipment increased $207,000 for the six months ended June 30, 2013 as compared to the prior year period due to the increase in depreciation expense of $82,000 and other costs associated with our branch growth. Foreclosed real estate expenses increased $228,000 during the six months ended June 30, 2013 principally related to an $180,000 write-down on a foreclosed real estate owned property for which we lowered our list price on the property. Other general and administrative expenses increased $147,000 as a result of a $32,000 increase in loan servicing expenses and an increase of $35,000 on ATM repairs. These increases were offset in part by a decrease in professional fees to $220,000 for the six months ended June 30, 2013 from $417,000 in the prior period as a result of higher costs incurred in the first half of 2012 related to the formation of the mutual holding company. Deposit services expense decreased $66,000 due to a decrease in debit card expenses in the six months ended June 30, 2013.
Income Tax Provision.
Income tax expense was $183,000 for the six months ended June 30, 2013 as compared to $319,000 for the six months ended June 30, 2012. The decline in income tax expense of $136,000 was due to the decrease in pre-tax income as well as a lower effective tax rate for 2013.
Comparison of Operating Results for the Years Ended December 31, 2012 and December 31, 2011
General.
Net income increased $136,000, or 13.4%, to $1.1 million for the year ended December 31, 2012 from $1.0 million for the year ended December 31, 2011. Net income increased due to increases in non-interest income of $1.2 million and a decrease in the provision for loan losses of $48,000, partially offset by a decrease in net interest income of $456,000 and an increase in non-interest expenses of $482,000. Non-interest income increased to $7.2 million for the year ended December 31, 2012 from $6.0 million for the year ended December 31, 2011 due to an increase in the gain on sales of loans of $947,000, due primarily to increased sales of conforming one- to four-family residential real estate loans.
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Interest Income.
Interest income decreased $510,000, or 3.7%, to $13.2 million for the year ended December 31, 2012 from $13.7 million for the year ended December 31, 2011 due to a decrease in interest income and fees on loans, which decreased to $13.2 million for the year ended December 31, 2012 from $13.7 million for the year ended December 31, 2011. The decrease of $525,000 in interest income and fees on loans was the result of a decrease in the average yield earned on loans from 4.93% during 2011 to 4.55% during 2012 due to the low interest rate and competitive environment for the origination of new loans. The average balance of loans increased $11.4 million, or 4.1%, to $289.4 million for the year ended December 31, 2012 from $278.0 million for the year ended December 31, 2011 due to the growth in new originations and refinancings of one- to four-family residential real estate as a result of the continuing low interest rate environment.
Other interest income increased $15,000 for the year ended December 31, 2012 due to a $4,000 increase in FHLB dividends and an $11,000 increase in interest earned on cash and cash equivalents due to a $5.0 million increase in the average balance of cash and cash equivalents during 2012.
Interest Expense.
Interest expense decreased $54,000 to $2.7 million for 2012. The decrease was principally due to a decrease in interest expense on borrowed funds.
Interest expense on borrowed funds decreased $70,000 during 2012 due to a $7.1 million decrease in the average balance on borrowed funds during 2012. The average balance of borrowed funds decreased due to an increase in liquidity on our balance sheet. The decrease in the average balance of borrowed funds was partially offset by an increase in the average cost on borrowed funds of 132 basis points to 3.15% for the year ended December 31, 2012 as compared to the prior year due to a limited use of lower cost overnight borrowings in 2012 as compared to 2011.
Interest expense on deposits increased $16,000 or 0.6% to $2.5 million during the year ended December 31, 2012 principally due to the growth in the average balance of interest bearing deposits of $18.1 million across all deposit categories. The average balance of our core deposits increased $12.5 million while the average balance of certificates of deposit increased $5.6 million. Partially offsetting the increase in interest expense on deposits was a decrease in the average cost of certificates of deposit during 2012. The cost of certificates of deposit was 1.83% during the year ended December 31, 2012 as compared to 1.95% for the year ended December 31, 2011 as a result of the low interest rate environment.
Net Interest Income.
Net interest income decreased $456,000 or 4.1% during 2012 to $10.6 million for the year ended December 31, 2012 as compared to $11.0 million for the year ended December 31, 2011. The decrease in net interest income was caused by the decline in the net interest rate spread which decreased 36 basis points to 3.32% for 2012 as compared to 3.68% for 2011 and a similar decrease in the net interest margin of 36 basis points to 3.51% for 2012 as compared to 3.87% for 2011. The decrease in net interest rate spread and net interest margin was due to a greater decrease in the average yield on interest-earning assets as compared to the decrease in the average cost of interest-bearing liabilities for 2012 as compared to 2011.
Provision for Loan Losses.
A provision of $1.1 million was recorded to the allowance for loan losses during the year ended December 31, 2012, a decrease of $48,000 compared to a provision of $1.2 million for the year ended December 31, 2011. The provision for loan losses was relatively consistent as was total delinquent loans over 30 days past due of $6.7 million at December 31, 2012 as compared to $6.4 million at December 31, 2011. Net charge-offs for 2012 totaled $964,000 as compared to $1.4 million for 2011. Net charge-offs of $699,000 in 2012 were in the home equity category, of which we recorded a $250,000 charge-off on one loan which had been in the 60-day delinquency category at December 31, 2011. During the year ended December 31, 2012, we provided for $872,000 of the $1.1
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million total provision in the home equity category, primarily as a result of increased historical loss experience.
During 2011, of the $1.2 million provision for loan losses, $657,000 was in the residential one- to four-family category and $431,000 was in the home equity category. The residential one- to four-family provision reflected an increase in recent historical loss experience. The 2011 residential one- to four-family loans net charge-offs of $820,000 included a charge-off of one loan of $479,000 in August 2011, of which $250,000 had been specifically reserved for at December 31, 2010. We adjusted the loan’s valuation in 2012 as the borrower had been unable to sell the property at the appraised value and in consideration of the continued decline in the real estate market. The $431,000 provision in the home equity category during the year ended December 31, 2011 considered historical loss experience as adjusted for our qualitative factors.
Refer to Note 3 of the Notes to the Consolidated Financial Statements for details on the provision for loan losses.
Non-interest Income.
Non-interest income increased $1.2 million to $7.2 million for the year ended December 31, 2012 due primarily to an increase in the gain on sales of loans, net of $947,000 as a result of an increase in the volume of loans sold due to the low interest rate environment. The increase in gain on the sales of loans was primarily due to an increase in the volume of one- to four-family residential real estate loans sold, which was $172.2 million for year ended December 31, 2012 as compared to $142.8 million for the year ended December 31, 2011. The increase in the volume of the loans sold was reflective of the low interest rate environment and customer demand for fixed rate conforming one- to four-family residential real estate loans. In addition, we had increases in customer service fees of $91,000 due to increased debit card fees. Other non-interest income increased $117,000 during 2012 due to an increase in rental income from a property classified as held for sale during the second quarter of 2013.
Non-interest Expense.
Non-interest expense increased $482,000 to $14.6 million for the year ended December 31, 2012 from $14.2 million for the year ended December 31, 2011. Non-interest expense increased due to an increase in occupancy and equipment expense of $131,000, primarily due to an increase in depreciation expense on our premises and equipment of $94,000 due to the opening of the East Greenwich branch during 2012 and a full year of depreciation on our Washington Street, Providence, branch which opened in 2011. In addition, our data processing expense increased $173,000 due to increased home banking and other data processing and software costs. Professional fees increased $330,000 due to legal and other fees incurred in relation to the formation of our mutual holding company. Deposit services expense also increased $57,000 due to increased debit card expenses.
Income Tax Provision.
Income tax provision increased $129,000 to $835,000 for the year ended December 31, 2012 as compared to $706,000 for the year ended December 31, 2011. The increase in the income tax provision was principally due to a higher level of pre-tax income.
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Average Balance Sheets
The following tables set forth average balance sheets, average yields and costs, and certain other information at June 30, 2013 and for the periods indicated. No tax-equivalent yield adjustments were made, as we had non-taxable interest-earning assets during the periods presented. All average balances are daily average balances, except 2010 which is a monthly average. Nonaccrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. The yields set forth below include the effect of deferred loan fees, discounts and premiums that are amortized or accreted to interest income or interest expense.
|
|
|
At June 30,
|
|
For the Six Months Ended June 30,
|
|
|
|
|
2013
|
|
2013
|
|
2012
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
|
Average
|
|
Outstanding
|
|
|
|
Average
|
|
|
|
|
Yield/Rate
|
|
Balance
|
|
Interest
|
|
Yield/Rate(4)
|
|
Balance
|
|
Interest
|
|
Yield/Rate(4)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale
|
|
4.48
|
%
|
$
|
320,547
|
|
$
|
6,864
|
|
4.32
|
%
|
$
|
284,207
|
|
$
|
6,600
|
|
4.68
|
%
|
|
Cash and cash equivalents
|
|
0.07
|
|
3,848
|
|
1
|
|
0.05
|
|
8,159
|
|
7
|
|
0.17
|
|
|
Federal Home Loan Bank of Boston stock
|
|
0.38
|
|
2,824
|
|
8
|
|
0.57
|
|
3,175
|
|
10
|
|
0.64
|
|
|
Total interest-earning assets
|
|
|
|
327,219
|
|
6,873
|
|
4.24
|
|
295,541
|
|
6,617
|
|
4.51
|
|
|
Non-interest-earning assets
|
|
|
|
33,323
|
|
|
|
|
|
31,669
|
|
|
|
|
|
|
Total assets
|
|
|
|
$
|
360,542
|
|
|
|
|
|
$
|
327,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
0.43
|
|
$
|
53,004
|
|
112
|
|
0.43
|
|
$
|
50,960
|
|
107
|
|
0.42
|
|
|
Savings accounts
|
|
0.25
|
|
79,975
|
|
93
|
|
0.23
|
|
74,448
|
|
86
|
|
0.23
|
|
|
Club accounts
|
|
0.25
|
|
1,412
|
|
2
|
|
0.29
|
|
1,345
|
|
2
|
|
0.30
|
|
|
Certificates of deposit
|
|
1.73
|
|
121,691
|
|
1,056
|
|
1.75
|
|
112,819
|
|
1,047
|
|
1.87
|
|
|
Total interest bearing deposits
|
|
|
|
256,082
|
|
1,263
|
|
0.99
|
|
239,572
|
|
1,242
|
|
1.04
|
|
|
Borrowed funds
|
|
0.84
|
|
13,255
|
|
68
|
|
1.03
|
|
5,192
|
|
78
|
|
3.03
|
|
|
Total interest-bearing liabilities
|
|
|
|
269,337
|
|
1,331
|
|
1.00
|
|
244,764
|
|
1,320
|
|
1.09
|
|
|
Non-interest-bearing deposits
|
|
|
|
60,323
|
|
|
|
|
|
51,857
|
|
|
|
|
|
|
Other liabilities
|
|
|
|
3,578
|
|
|
|
|
|
4,570
|
|
|
|
|
|
|
Total liabilities
|
|
|
|
333,238
|
|
|
|
|
|
301,191
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
27,304
|
|
|
|
|
|
26,019
|
|
|
|
|
|
|
Total liabilities and retained earnings
|
|
|
|
$
|
360,542
|
|
|
|
|
|
$
|
327,210
|
|
|
|
|
|
|
Net interest income
|
|
|
|
|
|
$
|
5,542
|
|
|
|
|
|
$
|
5,297
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
|
|
3.24
|
%
|
|
|
|
|
3.42
|
%
|
|
Net interest-earning assets(2)
|
|
|
|
$
|
57,882
|
|
|
|
|
|
$
|
50,777
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
|
|
3.42
|
%
|
|
|
|
|
3.61
|
%
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
|
|
121.49
|
%
|
|
|
|
|
120.75
|
%
|
|
|
|
|
(footnotes follow on next page)
56
Table of Contents
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
Average
Outstanding
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Outstanding
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
Average
Outstanding
Balance
|
|
Interest
|
|
Average
Yield/Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale
|
|
$
|
289,404
|
|
$
|
13,173
|
|
4.55
|
%
|
$
|
277,971
|
|
$
|
13,698
|
|
4.93
|
%
|
$
|
276,018
|
|
$
|
14,100
|
|
5.11
|
%
|
|
Cash and cash equivalents
|
|
8,301
|
|
15
|
|
0.18
|
|
3,273
|
|
4
|
|
0.12
|
|
6,402
|
|
16
|
|
0.25
|
|
|
Federal Home Loan Bank of Boston stock
|
|
3,105
|
|
19
|
|
0.61
|
|
3,408
|
|
15
|
|
0.44
|
|
3,408
|
|
—
|
|
—
|
|
|
Total interest-earning assets
|
|
300,810
|
|
13,207
|
|
4.39
|
|
284,652
|
|
13,717
|
|
4.82
|
|
285,828
|
|
14,116
|
|
4.94
|
|
|
Non-interest-earning assets
|
|
32,871
|
|
|
|
|
|
26,762
|
|
|
|
|
|
23,108
|
|
|
|
|
|
|
Total assets
|
|
$
|
333,681
|
|
|
|
|
|
$
|
311,414
|
|
|
|
|
|
$
|
308,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
$
|
52,248
|
|
222
|
|
0.42
|
|
$
|
48,290
|
|
202
|
|
0.42
|
|
$
|
56,715
|
|
395
|
|
0.70
|
|
|
Savings accounts
|
|
74,735
|
|
175
|
|
0.23
|
|
66,316
|
|
154
|
|
0.23
|
|
59,398
|
|
137
|
|
0.23
|
|
|
Club accounts
|
|
1,454
|
|
4
|
|
0.28
|
|
1,315
|
|
3
|
|
0.23
|
|
1,300
|
|
3
|
|
0.23
|
|
|
Certificates of deposit
|
|
114,836
|
|
2,104
|
|
1.83
|
|
109,218
|
|
2,130
|
|
1.95
|
|
111,290
|
|
2,588
|
|
2.33
|
|
|
Total interest bearing deposits
|
|
243,273
|
|
2,505
|
|
1.03
|
|
225,139
|
|
2,489
|
|
1.11
|
|
228,703
|
|
3,123
|
|
1.37
|
|
|
Borrowed funds
|
|
4,597
|
|
145
|
|
3.15
|
|
11,727
|
|
215
|
|
1.83
|
|
10,261
|
|
280
|
|
2.73
|
|
|
Total interest-bearing liabilities
|
|
247,870
|
|
2,650
|
|
1.07
|
|
236,866
|
|
2,704
|
|
1.14
|
|
238,964
|
|
3,403
|
|
1.42
|
|
|
Non-interest-bearing deposits
|
|
54,609
|
|
|
|
|
|
45,409
|
|
|
|
|
|
42,352
|
|
|
|
|
|
|
Other liabilities
|
|
4,887
|
|
|
|
|
|
3,350
|
|
|
|
|
|
2,785
|
|
|
|
|
|
|
Total liabilities
|
|
307,366
|
|
|
|
|
|
285,625
|
|
|
|
|
|
284,101
|
|
|
|
|
|
|
Retained earnings
|
|
26,315
|
|
|
|
|
|
25,789
|
|
|
|
|
|
24,835
|
|
|
|
|
|
|
Total liabilities and retained earnings
|
|
$
|
333,681
|
|
|
|
|
|
$
|
311,414
|
|
|
|
|
|
$
|
308,936
|
|
|
|
|
|
|
Net interest income
|
|
|
|
$
|
10,557
|
|
|
|
|
|
$
|
11,013
|
|
|
|
|
|
$
|
10,713
|
|
|
|
|
Net interest rate spread(1)
|
|
|
|
|
|
3.32
|
%
|
|
|
|
|
3.68
|
%
|
|
|
|
|
3.52
|
%
|
|
Net interest-earning assets(2)
|
|
$
|
52,940
|
|
|
|
|
|
$
|
47,786
|
|
|
|
|
|
$
|
48,864
|
|
|
|
|
|
|
Net interest margin(3)
|
|
|
|
|
|
3.51
|
%
|
|
|
|
|
3.87
|
%
|
|
|
|
|
3.75
|
%
|
|
Average interest-earning assets to interest-bearing liabilities
|
|
121.36
|
%
|
|
|
|
|
120.17
|
%
|
|
|
|
|
119.61
|
%
|
|
|
|
|
(1)
Net interest rate spread represents the difference between the weighted average yield on interest-earning assets and the weighted average rate of interest-bearing liabilities.
(2)
Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.
(3)
Net interest margin represents net interest income divided by average total interest-earning assets.
(4)
Annualized.
57
Table of Contents
Rate/Volume Analysis
The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities for the periods indicated. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
Years Ended December 31,
|
|
|
|
|
2013 vs. 2012
|
|
2012 vs. 2011
|
|
2011 vs. 2010
|
|
|
|
|
Increase (Decrease) Due to
|
|
Total Increase
|
|
Increase (Decrease) Due to
|
|
Total Increase
|
|
Increase (Decrease) Due to
|
|
Total Increase
|
|
|
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
Volume
|
|
Rate
|
|
(Decrease)
|
|
|
|
|
(Dollars in thousands)
|
|
|
Interest-earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and loans held for sale
|
|
$
|
803
|
|
$
|
(539
|
)
|
$
|
264
|
|
$
|
548
|
|
$
|
(1,073
|
)
|
$
|
(525
|
)
|
$
|
100
|
|
$
|
(502
|
)
|
$
|
(402
|
)
|
|
Cash and cash equivalents
|
|
(12
|
)
|
6
|
|
(6
|
)
|
8
|
|
3
|
|
11
|
|
(6
|
)
|
(6
|
)
|
(12
|
)
|
|
Federal Home Loan Bank of Boston stock
|
|
—
|
|
(2
|
)
|
(2
|
)
|
(1
|
)
|
5
|
|
4
|
|
—
|
|
15
|
|
15
|
|
|
Total interest-earning assets
|
|
791
|
|
(535
|
)
|
256
|
|
555
|
|
(1,065
|
)
|
(510
|
)
|
94
|
|
(493
|
)
|
(399
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market accounts
|
|
4
|
|
1
|
|
5
|
|
17
|
|
3
|
|
20
|
|
(52
|
)
|
(141
|
)
|
(193
|
)
|
|
Savings accounts
|
|
6
|
|
1
|
|
7
|
|
20
|
|
1
|
|
21
|
|
16
|
|
1
|
|
17
|
|
|
Club accounts
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
1
|
|
—
|
|
—
|
|
—
|
|
|
Certificates of deposit
|
|
79
|
|
(70
|
)
|
9
|
|
107
|
|
(133
|
)
|
(26
|
)
|
(47
|
)
|
(411
|
)
|
(458
|
)
|
|
Borrowed funds
|
|
65
|
|
(75
|
)
|
(10
|
)
|
(174
|
)
|
104
|
|
(70
|
)
|
36
|
|
(101
|
)
|
(65
|
)
|
|
Total interest-bearing liabilities
|
|
154
|
|
(143
|
)
|
11
|
|
(30
|
)
|
(24
|
)
|
(54
|
)
|
(47
|
)
|
(652
|
)
|
(699
|
)
|
|
Change in net interest income
|
|
$
|
637
|
|
$
|
(392
|
)
|
$
|
245
|
|
$
|
585
|
|
$
|
(1,041
|
)
|
$
|
(456
|
)
|
$
|
141
|
|
$
|
159
|
|
$
|
300
|
|
58
Table of Contents
Management of Market Risk
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings.
Over the past several years, management has implemented an asset/liability strategy to manage our interest rate risk. Among the techniques we use or have used to manage interest rate risk are:
·
originating commercial real estate, SBA and commercial business loans, all of which tend to have shorter terms and higher interest rates than one- to four-family residential real estate loans, and which generate customer relationships that can result in larger non-interest bearing accounts;
·
retaining jumbo one- to four-family residential real estate loans, which carry higher interest rates and may have shorter weighted average lives;
·
selling the majority of our long-term, conforming fixed-rate one- to four-family residential real estate loans that we originate and retaining the majority of the shorter-term adjustable-rate residential real estate loans that we originate;
·
lengthening the weighted average maturity of our liabilities through retail deposit pricing strategies and monitoring the cost of Federal Home Loan Bank advances relative to the cost of retail deposits; and
·
monitoring core deposit levels and pricing to allow us to remain competitive in obtaining funds and to respond to changes in customer demand and our liquidity needs.
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a quarterly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. In addition, we regularly perform a “gap analysis” of the discrepancy between the repricing of our assets and liabilities.
Economic Value of Equity.
In order to monitor and manage interest rate risk, we use the net present value of equity at risk (“NPV”) methodology. This methodology calculates the difference between the present value of expected cash flows from assets and liabilities. The comparative scenarios assume immediate parallel shift in the yield curve in increments of 100 basis point (bp) rate movements.
A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4% would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is run at least quarterly showing shocks from +300bp to -100bp, because a decline of greater than -100bp is currently highly unlikely. The Board of Directors and management review the methodology’s measurements on a quarterly basis.
The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Results of the modeling are used to provide a measure of the degree of volatility interest rate movements may have on our earnings. Modeling the sensitivity of earnings to interest rate risk is decidedly reliant on numerous assumptions embedded in the model. These
59
Table of Contents
assumptions include, but are not limited to, management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rate on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions. Assumptions are supported with annual back testing of the model to actual market rate shifts.
The table below sets forth, as of June 30, 2013, the estimated changes in the net present value of equity that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift for Coastway Community Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
|
Change in
|
|
Economic Value of Equity
|
|
EVE as a % of Economic Value of
|
|
|
Interest Rates
|
|
|
|
Amount of
|
|
|
|
Assets(3)
|
|
|
(Basis Points)(1)
|
|
Estimated EVE(2)
|
|
Change
|
|
Percent
|
|
EVE Ratio
|
|
Change(1)
|
|
|
|
|
(Dollars in thousands)
|
|
|
+400
|
|
$
|
41,635
|
|
$
|
7,804
|
|
23.1
|
%
|
11.81
|
|
2.83
|
|
|
+300
|
|
40,011
|
|
6,180
|
|
18.3
|
|
11.17
|
|
2.19
|
|
|
+200
|
|
38,198
|
|
4,367
|
|
12.9
|
|
10.49
|
|
1.61
|
|
|
+100
|
|
36,343
|
|
2,512
|
|
7.4
|
|
9.80
|
|
0.83
|
|
|
0
|
|
33,831
|
|
—
|
|
—
|
|
8.97
|
|
—
|
|
|
-100
|
|
27,388
|
|
(6,443
|
)
|
(19.0
|
)%
|
7.20
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Assumes instantaneous parallel changes in interest rates.
(2)
EVE or Economic Value of Equity at Risk measures Coastway Community Bank’s exposure to equity due to changes in a forecast interest rate environment.
(3)
EVE ratio represents Economic Value of Equity divided by the economic value of assets which should measure stability for future earnings.
The table above indicates that at June 30, 2013, in the event of a 100 basis point decrease in interest rates, we would experience a 19.0% decrease in economic value of equity. In the event of a 400 basis point increase in interest rates, we would experience a 23.1% increase in economic value of equity.
Certain shortcomings are inherent in the methodology used in the above interest rate risk measurement. Modeling changes in the economic portfolio value of equity require making certain assumptions that may or may not reflect the manner in which actual yields and costs respond to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in interest rates. In this regard, the table above assumes that the composition of our interest-sensitive assets and liabilities existing at the beginning of a period remains constant over the period being measured and assumes that particular changes in interest rates occur at different times and in different amounts in response to a designed change in the yield curve for U.S. Treasuries. Furthermore, although the table provides an indication of our interest rate risk exposure at a particular point in time, such measurements are not intended to and do not provide a precise forecast of the effect of changes in market interest rates on our net interest income. Finally, the above table does not take into account the changes in the credit risk of our assets that can occur in connection with changes in interest rates.
Depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that the increased net
60
Table of Contents
income which may result from an acceptable mismatch in the actual maturity or re-pricing of our assets and liabilities can, during periods of declining or stable interest rates, provide sufficient returns to justify an increased exposure to sudden and unexpected increases in interest rates. We believe that our level of interest rate risk is acceptable using this approach.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Boston, principal repayments and loan sales. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee, under the direction of our Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of June 30, 2013.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of:
(i) expected loan demand;
(ii) expected deposit flows and borrowing maturities;
(iii) yields available on interest-earning deposits; and
(iv) the objectives of our asset/liability management program.
Excess liquid assets are invested generally in interest-earning deposits and are also used to pay off short-term borrowings.
Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At June 30, 2013, cash and cash equivalents totaled $9.9 million.
Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.
At June 30, 2013, we had $22.9 million in commitments to originate loans, $16.8 million of which will be sold. In addition to commitments to originate loans, we had $61.4 million in unused lines of credit to borrowers. Certificates of deposit due within one year of June 30, 2013 totaled $46.1 million, or 14.0%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including utilizing additional Federal Home Loan Bank of Boston advances and selling the guaranteed portions of SBA loans of $25.0 million. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowed funds than we currently pay on the certificates of deposit due on or before June 30, 2014. We believe, however, based on historical experience and current market interest rates, that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of June 30, 2013.
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Our primary investing activity is originating loans. During the six months ended June 30, 2013 and for the years ended December 31, 2012 and 2011, we originated $143.8 million, $245.4 million and $214.5 million of loans, respectively.
Financing activities consist primarily of activity in deposit accounts and Federal Home Loan Bank of Boston advances. We experienced a net increase in deposits of $22.2 million, $24.8 million and $21.1 million for the six months ended June 30, 2013 and for the years ended December 31, 2012 and 2011, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.
Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston that provide an additional source of funds. Federal Home Loan Bank of Boston advances increased by $5.5 million at December 31, 2012 to $16.3 million, from $10.8 million at December 31, 2011. Federal Home Loan Bank of Boston advances were $14.0 million at June 30, 2013. At June 30, 2013, we had the ability to borrow up to an additional $50.8 million from the Federal Home Loan Bank of Boston. We also have the ability to borrow with the Federal Reserve discount window. At June 30, 2013, we had the capacity to borrow up to $14.2 million from the Federal Reserve discount window, but had no outstanding borrowings as of that date.
Coastway Community Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At June 30, 2013, Coastway Community Bank exceeded all regulatory capital requirements. Coastway Community Bank is considered “well capitalized” under regulatory guidelines. See “Supervision and Regulation—Federal Banking Regulation—Capital Requirements” and Note 12 of the Notes to the Consolidated Financial Statements.
The net proceeds from the stock offering will significantly increase our liquidity and capital resources. Over time, the initial level of liquidity will be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans.
Commitments, Contractual Obligations and Off-Balance Sheet Arrangements
Commitments.
As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, we enter into commitments to sell mortgage loans. For additional information, see Note 9 of the Notes to our Consolidated Financial Statements.
Contractual Obligations.
In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.
Off-Balance Sheet Arrangements.
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S.GAAP, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit as well as commitments to sell loans. For information about our loan
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Table of Contents
commitments and unused lines of credit, see Note 9 of the Notes to our Consolidated Financial Statements beginning on page F-1 of this prospectus.
In June 2013, we entered into a purchase and sale agreement for $8.8 million to purchase our new corporate headquarters which is currently under construction. We expect to close on the purchase in the second quarter of 2014, and relocate from our current headquarters.
We have not engaged in any other off-balance-sheet transactions in the normal course of our lending activities.
Recent Accounting Pronouncements
For a discussion of the impact of recent accounting pronouncements, see Note 1 of the Notes to our Consolidated Financial Statements beginning on page F-1 of this prospectus.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been prepared in accordance with generally accepted accounting principles in the United States of America which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary impact of inflation on our operations is reflected in increased operating costs. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates, generally, have a more significant impact on a financial institution’s performance than does inflation. Interest rates do not necessarily move in the same direction or to the same extent as the prices of goods and services.
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BUSINESS OF COASTWAY BANCORP, INC.
Coastway Bancorp, Inc. is incorporated in the State of Maryland. We have not engaged in any business to date. Upon completion of the conversion, we will own all of the issued and outstanding stock of Coastway Community Bank. We intend to contribute at least 50% of the net proceeds from the stock offering to Coastway Community Bank. Coastway Bancorp, Inc. will retain the remainder of the net proceeds from the stock offering and use a portion of the retained net proceeds to make a loan to the employee stock ownership plan and contribute a portion of the retained net proceeds to our charitable foundation. At a later date, we may use the net proceeds to pay dividends to stockholders and repurchase shares of common stock, subject to our capital needs and regulatory limitations. We will invest our initial capital as discussed in “How We Intend to Use the Proceeds from the Offering.”
After the conversion and the offering are complete, Coastway Bancorp, Inc., as the holding company of Coastway Community Bank, will be authorized to pursue other business activities permitted by applicable laws and regulations, which may include the acquisition of other banking and financial services companies. See “Supervision and Regulation—Holding Company Regulation” for a discussion of the activities that are permitted for bank holding companies.
Following the offering, our cash flow will depend on earnings from the investment of the net proceeds from the offering that we retain, and any dividends we receive from Coastway Community Bank. Coastway Community Bank is subject to regulatory limitations on the amount of dividends that it may pay. See “Supervision and Regulation—Federal Banking Regulation—Capital Distributions.” Initially, Coastway Bancorp, Inc. will neither own nor lease any property, but will instead pay a fee to Coastway Community Bank for the use of its premises, equipment and furniture. At the present time, we intend to employ only persons who are officers of Coastway Community Bank to serve as officers of Coastway Bancorp, Inc. We will, however, use the support staff of Coastway Community Bank from time to time. We will pay a fee to Coastway Community Bank for the time devoted to Coastway Bancorp, Inc. by employees of Coastway Community Bank; however, these persons will not be separately compensated by Coastway Bancorp, Inc. Coastway Bancorp, Inc. may hire additional employees, as appropriate, to the extent it expands its business in the future.
BUSINESS OF COASTWAY COMMUNITY BANK
General
Coastway Community Bank is a Rhode Island chartered savings bank headquartered in Cranston, 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. Coastway Bancorp, MHC owns 100% of the membership interests of Coastway Bancorp, LLC, a Rhode Island limited liability corporation, which in turn owns 100% of the outstanding shares of common stock of Coastway Community Bank.
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, 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-
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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 also offer online and mobile banking services. At June 30, 2013, we had total assets of $375.7 million, total deposits of $330.0 million and total equity of $27.6 million.
Our website address is www.coastway.com. Information on this website should not be considered a part of this prospectus.
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. 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 area 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. In the past, 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 remains elevated in Rhode Island with unemployment rates of 9.2% for the entire state, 10.1% for Providence County and 8.4% for Kent County as compared to the national rate of 7.6% as of May 2013. The median household income for 2012 in Rhode Island was $53,372, in Providence County it was $46,859 and in Kent County it was $58,424, as compared to the national median of $50,157. The percentage of households for 2012 with incomes of greater than $100,000 was 22.5% in Rhode Island as compared to 18.4% in Providence County and 20.3% for the United States.
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, 2012 (the latest date for which information is available), our market share was 0.46% and 2.14% of total deposits in Providence County and Kent County, Rhode Island respectively,
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making us the 9th largest out of 20 financial institutions in Providence County and the 8th largest out of 14 financial institutions in Kent County. We have been one of the top three SBA lenders in the State of Rhode Island in terms of dollars lent and number of loans originated for the last six years.
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. In recent years, we have increased and, subject to market conditions and our asset-liability analysis, expect to continue to increase our focus on commercial real estate and commercial business lending, in an effort to diversify our overall loan portfolio and increase the overall yield earned on our 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 maturity and time to repricing of our loan portfolio. Depending on market conditions, we may also sell the guaranteed portions of SBA loans that we originate.
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Table of Contents
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio, by type of loan at the dates indicated, excluding loans held for sale of $19.1 million, $13.6 million, $14.5 million, $19.3 million, $8.6 million and $2.5 million at June 30, 2013, December 31, 2012, 2011, 2010, 2009 and 2008, respectively.
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
At June 30, 2013
|
|
2012
|
|
2011
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
(Dollars in thousands)
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
86,970
|
|
28.17
|
%
|
$
|
78,633
|
|
26.50
|
%
|
$
|
73,335
|
|
27.19
|
%
|
|
Home equity loans and lines of credit
|
|
84,441
|
|
27.35
|
|
83,154
|
|
28.03
|
|
80,267
|
|
29.76
|
|
|
Commercial real estate loans
|
|
83,455
|
|
27.03
|
|
81,754
|
|
27.56
|
|
67,044
|
|
24.85
|
|
|
Commercial business loans
|
|
8,330
|
|
2.70
|
|
7,899
|
|
2.66
|
|
4,146
|
|
1.54
|
|
|
SBA loans
|
|
37,686
|
|
12.21
|
|
39,628
|
|
13.36
|
|
41,385
|
|
15.34
|
|
|
Commercial construction loans
|
|
5,958
|
|
1.93
|
|
3,302
|
|
1.11
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
1,889
|
|
0.61
|
|
2,320
|
|
0.78
|
|
3,573
|
|
1.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
308,729
|
|
100.00
|
%
|
296,690
|
|
100.00
|
%
|
269,750
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
2,024
|
|
|
|
1,878
|
|
|
|
1,252
|
|
|
|
|
Allowance for loan losses
|
|
(1,597
|
)
|
|
|
(1,569
|
)
|
|
|
(1,424
|
)
|
|
|
|
Total loans, net
|
|
$
|
309,156
|
|
|
|
$
|
296,999
|
|
|
|
$
|
269,578
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
|
|
|
(Dollars in thousands)
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
75,191
|
|
29.23
|
%
|
$
|
86,070
|
|
33.12
|
%
|
$
|
86,072
|
|
35.89
|
%
|
|
Home equity loans and lines of credit
|
|
81,047
|
|
31.50
|
|
81,221
|
|
31.25
|
|
69,459
|
|
28.96
|
|
|
Commercial real estate loans
|
|
47,498
|
|
18.46
|
|
35,693
|
|
13.74
|
|
25,128
|
|
10.48
|
|
|
Commercial business loans
|
|
2,877
|
|
1.12
|
|
2,831
|
|
1.09
|
|
2,894
|
|
1.21
|
|
|
SBA loans
|
|
44,329
|
|
17.23
|
|
41,703
|
|
16.05
|
|
36,530
|
|
15.23
|
|
|
Commercial construction loans
|
|
220
|
|
0.08
|
|
1,350
|
|
0.52
|
|
2,020
|
|
0.84
|
|
|
Consumer loans
|
|
6,114
|
|
2.38
|
|
10,999
|
|
4.23
|
|
17,732
|
|
7.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
257,276
|
|
100.00
|
%
|
259,867
|
|
100.00
|
%
|
239,835
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred loan costs
|
|
1,405
|
|
|
|
1,547
|
|
|
|
1,678
|
|
|
|
|
Allowance for loan losses
|
|
(1,636
|
)
|
|
|
(1,346
|
)
|
|
|
(963
|
)
|
|
|
|
Total loans, net
|
|
$
|
257,045
|
|
|
|
$
|
260,068
|
|
|
|
$
|
240,550
|
|
|
|
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Table of Contents
Loan Portfolio Maturities and Yields.
The following table summarizes the scheduled repayments of our loan portfolio at December 31, 2012. 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 and scheduled principal amortization.
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
329
|
|
5.14
|
%
|
$
|
2,918
|
|
5.01
|
%
|
$
|
3,666
|
|
4.60
|
%
|
$
|
2,203
|
|
4.05
|
%
|
|
2014
|
|
73
|
|
5.44
|
|
4,273
|
|
4.35
|
|
692
|
|
5.52
|
|
310
|
|
4.67
|
|
|
2015
|
|
38
|
|
4.50
|
|
3,322
|
|
4.14
|
|
3,594
|
|
5.86
|
|
469
|
|
5.45
|
|
|
2016 to 2017
|
|
60
|
|
4.01
|
|
7,255
|
|
4.38
|
|
5,709
|
|
5.22
|
|
1,044
|
|
4.98
|
|
|
2018 to 2022
|
|
3,073
|
|
5.23
|
|
63,013
|
|
3.75
|
|
42,733
|
|
4.86
|
|
3,747
|
|
4.05
|
|
|
2023 to 2027
|
|
2,859
|
|
4.84
|
|
2,373
|
|
6.29
|
|
8,561
|
|
5.12
|
|
126
|
|
5.10
|
|
|
2028 and beyond
|
|
72,201
|
|
4.60
|
|
—
|
|
—
|
|
16,799
|
|
5.35
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
78,633
|
|
4.63
|
%
|
$
|
83,154
|
|
3.97
|
%
|
$
|
81,754
|
|
5.35
|
%
|
$
|
7,899
|
|
4.30
|
%
|
|
|
|
SBA
|
|
Commercial
Construction
|
|
Consumer
|
|
|
Due During the Years
Ending December 31,
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
Amount
|
|
Weighted
Average
Rate
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
|
|
$
|
3,359
|
|
5.13
|
%
|
$
|
2,456
|
|
4.52
|
%
|
$
|
909
|
|
6.72
|
%
|
|
2014
|
|
1,183
|
|
5.57
|
|
846
|
|
3.85
|
|
325
|
|
8.16
|
|
|
2015
|
|
1,474
|
|
5.49
|
|
—
|
|
—
|
|
552
|
|
8.36
|
|
|
2016 to 2017
|
|
2,503
|
|
4.85
|
|
—
|
|
—
|
|
384
|
|
7.77
|
|
|
2018 to 2022
|
|
8,297
|
|
5.50
|
|
—
|
|
—
|
|
132
|
|
8.41
|
|
|
2023 to 2027
|
|
8,111
|
|
5.40
|
|
—
|
|
—
|
|
18
|
|
3.00
|
|
|
2028 and beyond
|
|
14,701
|
|
5.74
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
39,628
|
|
5.50
|
%
|
$
|
3,302
|
|
4.35
|
%
|
$
|
2,320
|
|
7.55
|
%
|
The following table sets forth our fixed- and adjustable-rate loans at December 31, 2012 that are due after December 31, 2013.
|
|
|
Due After December 31, 2013
|
|
|
|
|
Fixed
|
|
Adjustable
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
58,204
|
|
$
|
20,100
|
|
$
|
78,304
|
|
|
Home equity loans and lines of credit
|
|
19,545
|
|
60,691
|
|
80,236
|
|
|
Commercial real estate loans
|
|
11,272
|
|
66,816
|
|
78,088
|
|
|
Commercial business loans
|
|
4,252
|
|
1,444
|
|
5,696
|
|
|
SBA loans
|
|
1,053
|
|
35,216
|
|
36,269
|
|
|
Commercial construction loans
|
|
290
|
|
2,634
|
|
2,924
|
|
|
Consumer loans
|
|
1,411
|
|
—
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
96,027
|
|
$
|
186,901
|
|
$
|
282,928
|
|
68
Table of Contents
One- to Four-Family Residential Real Estate Lending
.
At June 30, 2013, we had $87.0 million of loans secured by one- to four-family residential real estate, representing 28.2% of our total loan portfolio. In addition, at June 30, 2013, we had $19.1 million of residential mortgages held for sale. 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 June 30, 2013, 77.8% of our one- to four-family residential real estate loans were fixed-rate loans, and 22.2% of such loans were adjustable-rate loans.
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, FHA or Rhode Island Housing guidelines when the loan balance meets such guidelines, and 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 June 30, 2013 was generally $417,000 for single-family homes in our market area. We typically sell servicing-released the majority of our fixed-rate conforming loans. During the six months ended June 30, 2013 and the years ended December 31, 2012 and December 31, 2011, we sold $88.1 million, $171.2 million and $137.6 million of one- to four-family residential real estate loans held for sale, 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 30 year terms and maximum loan-to-value ratios of 90%. At June 30, 2013, we had $41.2 million in jumbo loans, which represented 47.5% of our one- to four-family residential real estate loans. Our average loan size for jumbo loans was $600,000 at June 30, 2013. 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 residential real estate loans are secured by properties located in our market area.
We generally limit the loan-to-value 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 may be made with loan-to-value ratios up to 90%.
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 5.00% for the first adjustment period and 2% per adjustment period thereafter with a lifetime interest rate cap of generally 5.00% 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 permitted by our loan documents. Moreover, the interest rates on most of our adjustable-rate loans do not adjust for up to five 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.
69
Table of Contents
We offer on a limited basis one- to four-family residential real estate loans, secured by non-owner occupied properties. Generally, we require personal guarantees from the borrowers on these properties, and we will not make loans in excess of 85% loan to value on non-owner- occupied properties.
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 June 30, 2013, we had $3.6 million in stated income loans, or 4.1% of our one- to four-family residential real estate loan portfolio, of which $1.2 million were non-performing loans. We have no intention of originating stated income loans again in the future. Approximately one-third of the $3.6 million in stated income loans were made to borrowers who had existing commercial relationships and financial information on file with us.
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 $3.0 million. At June 30, 2013, we had $83.5 million in commercial real estate loans, representing 27.0% 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 FHLB 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 June 30, 2013, we had $23.6 million of non-owner occupied commercial real estate loans.
Coastway Community Bank is also qualified to make SBA loans. Loans are originated generally under the 7(a) and 504 programs. (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, secured by a first lien on the real property as collateral. At June 30, 2013, we had $21.8 million in SBA 504 loans or 26.1% of our commercial real estate loans.
At June 30, 2013, the average loan size of our outstanding commercial real estate loans was $364,000, and the largest of such loans was a $2.1 million loan secured by a multi-unit retail shopping
70
Table of Contents
plaza in Cranston, Rhode Island. This loan was performing in accordance with its original terms at June 30, 2013.
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 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. All commercial real estate loans equal to or greater than $250,000 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 June 30, 2013, we had $84.4 million, or 27.4% of our total loan portfolio in home equity loans and lines of credit. Home equity lines of credit totaled $61.8 million at June 30, 2013. At that date we also had $47.6 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 second mortgages have greater risk than one- to four-family residential mortgage loans secured by first mortgages. We face the risk that the collateral will be insufficient to compensate us for loan losses and costs of foreclosure. 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
71
Table of Contents
from those customers. Particularly with respect to our home equity loans and lines of credit, decreases in real estate values could adversely affect the value of property securing the loan.
SBA Loans.
We also offer commercial business and commercial real estate loans utilizing the SBA’s 7(a) Program. At June 30, 2013, we had $37.7 million of SBA loans, representing 12.2% of our total loan portfolio. Under this SBA program, we generally originate and fund loans that qualify for guarantees up to 85% of principal and accrued interest. 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. 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 six months ended June 30, 2013 and for the year ended December 31, 2012, we originated $3.5 million and $8.3 million, respectively of loans under the 7(a) program. In addition, the guaranteed portion of the credit can be sold in the secondary market, generating significant fee income opportunities. During the six months ended June 30, 2013 and for the year ended December 31, 2012, we sold $2.5 million and $7.1 million, respectively of loans under the 7(a) program, generating gains on sale of $245,000 and $574,000, respectively. Our largest SBA loan at June 30, 2013 had a balance of $1.3 million secured by printing equipment and has a 90% guarantee by the SBA for $1.2 million. The loan is performing in accordance with its terms at June 30, 2013.
Commercial Business Lending
.
At June 30, 2013, we had $8.3 million of commercial business loans, representing 2.7% 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 $3.0 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 June 30, 2013, the average loan size of our outstanding commercial business loans was $107,000, and the largest outstanding commercial loan balance was a $2.6 million loan secured by business assets of an educational facility. This loan was performing in accordance with its original terms at June 30, 2013.
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 June 30, 2013, we had $6.0 million, or 1.9% 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 have rates and
72
Table of Contents
terms comparable to commercial real estate loans that we originate. The maximum loan-to-value of our commercial construction loans is 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 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 June 30, 2013, the unadvanced portion of total construction loans totaled $5.6 million. At June 30, 2013, our largest construction loan had a balance of $1.8 million secured by a multi-unit retail project in Lincoln, Rhode Island, of which we will establish a future branch location, 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 June 30, 2013, our consumer loan portfolio totaled $1.9 million, or 0.6% of our total loan portfolio. At this date, $300,000 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. 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
73
Table of Contents
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 into the secondary market. We 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. For the six months ended June 30, 2013 and for the year ended December 31, 2012, we sold $81.5 million and $172.2 million of residential one- to four-family real estate loans, respectively. Total proceeds from SBA sales and participations were $4.3 million for the six months ended June 30, 2013 and $7.8 million for the year ended December 31, 2012.
From time to time, we may purchase loan participations secured by properties 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 June 30, 2013, we had one loan for $2.4 million in which we were not the lead lender and which is performing in accordance with its original terms. We also have participated out portions of a loan that exceeded our loans-to-one borrower legal lending limit and for risk diversification. We do not purchase whole loans.
74
Table of Contents
The following table shows our loan originations, purchases, sales and principal repayment activities during the periods indicated.
|
|
|
For the Six Months
Ended June 30,
|
|
For the Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans and loans held for sale at beginning of period
|
|
$
|
310,332
|
|
$
|
284,278
|
|
$
|
284,278
|
|
$
|
276,526
|
|
$
|
268,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans originated:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
103,390
|
|
75,393
|
|
186,866
|
|
153,696
|
|
153,811
|
|
|
Home equity loans and lines of credit
|
|
8,528
|
|
4,055
|
|
16,966
|
|
15,369
|
|
21,796
|
|
|
Commercial real estate loans
|
|
17,010
|
|
11,851
|
|
22,768
|
|
33,472
|
|
20,723
|
|
|
Commercial business loans
|
|
904
|
|
742
|
|
5,473
|
|
2,485
|
|
701
|
|
|
SBA loans
|
|
3,459
|
|
2,698
|
|
8,305
|
|
8,721
|
|
13,244
|
|
|
Commercial construction loans
|
|
10,250
|
|
2,240
|
|
4,455
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
242
|
|
320
|
|
603
|
|
742
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans originated
|
|
143,783
|
|
97,299
|
|
245,436
|
|
214,485
|
|
212,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans purchased:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
2,375
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans purchased
|
|
—
|
|
—
|
|
2,375
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans sold:
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
81,456
|
|
70,519
|
|
172,224
|
|
142,807
|
|
137,223
|
|
|
Home equity loans and lines of credit
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial real estate loans
|
|
1,840
|
|
—
|
|
—
|
|
4,188
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
2,500
|
|
1,836
|
|
7,092
|
|
7,862
|
|
3,301
|
|
|
Commercial construction loans
|
|
—
|
|
326
|
|
691
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans sold
|
|
85,796
|
|
72,681
|
|
180,007
|
|
154,857
|
|
140,524
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal repayments, charge-offs and transfers to foreclosed real estate
|
|
40,508
|
|
20,477
|
|
41,750
|
|
51,876
|
|
63,619
|
|
|
Net loan activity
|
|
17,479
|
|
4,141
|
|
26,054
|
|
7,752
|
|
8,068
|
|
|
Total loans and loans held for sale at end of period (excluding net deferred loan fees and costs)
|
|
$
|
327,811
|
|
$
|
288,419
|
|
$
|
310,332
|
|
$
|
284,278
|
|
$
|
276,526
|
|
Loan Approval Procedures and Authority
Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established 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.
75
Table of Contents
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, Chief 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 Business Lending Division Head 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 delinquent at 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 reorganize his or her financial affairs. 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. 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.
76
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 periods 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 June 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
3
|
|
$
|
830
|
|
1
|
|
$
|
150
|
|
3
|
|
$
|
1,332
|
|
7
|
|
$
|
2,312
|
|
|
Home equity loans and lines of credit
|
|
9
|
|
408
|
|
2
|
|
89
|
|
5
|
|
263
|
|
16
|
|
760
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
149
|
|
1
|
|
149
|
|
|
SBA loans
|
|
4
|
|
340
|
|
—
|
|
—
|
|
3
|
|
424
|
|
7
|
|
764
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
—
|
|
—
|
|
2
|
|
12
|
|
—
|
|
—
|
|
2
|
|
12
|
|
|
Total
|
|
16
|
|
$
|
1,578
|
|
5
|
|
$
|
251
|
|
12
|
|
$
|
2,168
|
|
33
|
|
$
|
3,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
11
|
|
$
|
1,721
|
|
3
|
|
$
|
717
|
|
7
|
|
$
|
2,652
|
|
21
|
|
$
|
5,090
|
|
|
Home equity loans and lines of credit
|
|
3
|
|
25
|
|
4
|
|
83
|
|
6
|
|
640
|
|
13
|
|
748
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
3
|
|
361
|
|
—
|
|
—
|
|
8
|
|
494
|
|
11
|
|
855
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
5
|
|
42
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5
|
|
42
|
|
|
Total
|
|
22
|
|
$
|
2,149
|
|
7
|
|
$
|
800
|
|
21
|
|
$
|
3,786
|
|
50
|
|
$
|
6,735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
7
|
|
$
|
2,208
|
|
1
|
|
$
|
247
|
|
4
|
|
$
|
659
|
|
12
|
|
$
|
3,114
|
|
|
Home equity loans and lines of credit
|
|
9
|
|
417
|
|
6
|
|
463
|
|
4
|
|
243
|
|
19
|
|
1,123
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
9
|
|
1,187
|
|
1
|
|
250
|
|
5
|
|
609
|
|
15
|
|
2,046
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
7
|
|
46
|
|
—
|
|
—
|
|
3
|
|
58
|
|
10
|
|
104
|
|
|
Total
|
|
32
|
|
$
|
3,858
|
|
8
|
|
$
|
960
|
|
16
|
|
$
|
1,569
|
|
56
|
|
$
|
6,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
1
|
|
$
|
990
|
|
6
|
|
$
|
2,901
|
|
10
|
|
$
|
4,032
|
|
17
|
|
$
|
7,923
|
|
|
Home equity loans and lines of credit
|
|
8
|
|
245
|
|
3
|
|
132
|
|
10
|
|
843
|
|
21
|
|
1,220
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
366
|
|
1
|
|
366
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
1
|
|
25
|
|
6
|
|
745
|
|
6
|
|
1,278
|
|
13
|
|
2,048
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
14
|
|
105
|
|
—
|
|
—
|
|
—
|
|
—
|
|
14
|
|
105
|
|
|
Total
|
|
24
|
|
$
|
1,365
|
|
15
|
|
$
|
3,778
|
|
27
|
|
$
|
6,519
|
|
66
|
|
$
|
11,662
|
|
77
Table of Contents
|
|
|
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, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
—
|
|
$
|
—
|
|
|
Home equity loans and lines of credit
|
|
7
|
|
335
|
|
4
|
|
410
|
|
8
|
|
613
|
|
19
|
|
1,358
|
|
|
Commercial real estate loans
|
|
2
|
|
530
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2
|
|
530
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
4
|
|
402
|
|
1
|
|
30
|
|
7
|
|
2,977
|
|
12
|
|
3,409
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
12
|
|
72
|
|
3
|
|
11
|
|
6
|
|
74
|
|
21
|
|
157
|
|
|
Total
|
|
25
|
|
$
|
1,339
|
|
8
|
|
$
|
451
|
|
21
|
|
$
|
3,664
|
|
54
|
|
$
|
5,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
10
|
|
$
|
2,399
|
|
9
|
|
$
|
1,887
|
|
4
|
|
$
|
1,310
|
|
23
|
|
$
|
5,596
|
|
|
Home equity loans and lines of credit
|
|
12
|
|
675
|
|
6
|
|
421
|
|
3
|
|
77
|
|
21
|
|
1,173
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
1
|
|
344
|
|
1
|
|
344
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
9
|
|
2,501
|
|
—
|
|
—
|
|
7
|
|
1,821
|
|
16
|
|
4,322
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
26
|
|
186
|
|
9
|
|
45
|
|
3
|
|
19
|
|
38
|
|
250
|
|
|
Total
|
|
57
|
|
$
|
5,761
|
|
24
|
|
$
|
2,353
|
|
18
|
|
$
|
3,571
|
|
99
|
|
$
|
11,685
|
|
78
Table of Contents
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 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 decreased to $6.6 million, or 2.14% of total loans, at June 30, 2013 from $7.7 million, or 2.58% of total loans, at December 31, 2012 due to a $730,000 decrease in non-performing one- to four-family residential real estate loans. Non-performing loans increased to $7.7 million, or 2.58% of total loans, at December 31, 2012 from $6.7 million, or 2.47% of total loans, at December 31, 2011 due to a $2.6 million increase in non-performing one- to four-family residential real estate loans. Declines in property values in our market area, unemployment and divorce were the primary cause of the increase in non-performing loans in our one- to four-family residential mortgage portfolio in 2012.
Non-performing one- to four-family residential real estate loans totaled $5.0 million at June 30, 2013 and consisted of 15 loans of which the largest was $612,000. Non-performing SBA loans totaled $1.0 million at June 30, 2013, of which $865,000 was guaranteed by the SBA. At June 30, 2013, non-performing commercial business loans consisted of one loan which totaled $149,000 and was paid off in July 2013.
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 June 30, 2013.
Loans on non-accrual status at the date of modification are initially classified as non-accrual troubled debt restructurings. At June 30, 2013, we had $3.4 million in non-accrual troubled debt restructurings. Our policy provides that troubled debt restructured loans are returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally no less than six consecutive months of timely payments. At June 30, 2013, we had $3.4 million in accruing troubled debt restructurings. As of June 30, 2013, three loans totaling $600,000 that were modified as troubled debt restructurings within the previous twelve months defaulted after their restructure.
79
Table of Contents
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 June 30,
|
|
At December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
(Dollars in thousands)
|
|
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
$
|
2,283
|
|
$
|
2,305
|
|
$
|
1,734
|
|
$
|
2,858
|
|
$
|
—
|
|
$
|
1,311
|
|
|
Home equity loans and lines of credit
|
|
406
|
|
779
|
|
555
|
|
862
|
|
613
|
|
77
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
344
|
|
|
Commercial business loans
|
|
149
|
|
—
|
|
—
|
|
366
|
|
—
|
|
—
|
|
|
SBA loans
|
|
334
|
|
569
|
|
1,149
|
|
1,527
|
|
2,595
|
|
1,884
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
—
|
|
—
|
|
58
|
|
—
|
|
74
|
|
20
|
|
|
Total nonaccrual loans
|
|
3,172
|
|
3,653
|
|
3,496
|
|
5,613
|
|
3,282
|
|
3,636
|
|
|
Non-accruing troubled debt restructured loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
2,760
|
|
3,468
|
|
2,077
|
|
3,212
|
|
—
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
25
|
|
25
|
|
180
|
|
303
|
|
—
|
|
—
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
655
|
|
502
|
|
906
|
|
910
|
|
638
|
|
—
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
—
|
|
13
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total non-accruing troubled debt restructured loans
|
|
3,440
|
|
4,008
|
|
3,163
|
|
4,425
|
|
638
|
|
—
|
|
|
Total nonperforming loans
|
|
6,612
|
|
7,661
|
|
6,659
|
|
10,038
|
|
3,920
|
|
3,636
|
|
|
Foreclosed real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
1,580
|
|
2,502
|
|
1,870
|
|
435
|
|
675
|
|
250
|
|
|
Home equity loans and lines of credit
|
|
90
|
|
92
|
|
—
|
|
—
|
|
—
|
|
485
|
|
|
Commercial loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
428
|
|
675
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Total foreclosed real estate
|
|
1,670
|
|
2,594
|
|
1,870
|
|
435
|
|
1,103
|
|
1,410
|
|
|
Total nonperforming assets
|
|
$
|
8,282
|
|
$
|
10,255
|
|
$
|
8,529
|
|
$
|
10,473
|
|
$
|
5,023
|
|
$
|
5,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total accruing troubled debt restructured loans
|
|
3,438
|
|
2,177
|
|
2,773
|
|
4,042
|
|
10,175
|
|
231
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
|
2.14
|
%
|
2.58
|
%
|
2.47
|
%
|
3.90
|
%
|
1.51
|
%
|
1.52
|
%
|
|
Nonperforming assets to total assets
|
|
2.20
|
%
|
2.89
|
%
|
2.64
|
%
|
3.39
|
%
|
1.68
|
%
|
1.67
|
%
|
For the six months ended June 30, 2013 and for the year ended December 31, 2012, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $147,000 and $316,000, respectively. The amount that was included in interest income on such loans totaled $100,000 and $233,000 for both the six months ended June 30, 2013 and the year ended December 31, 2012.
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Table of Contents
Foreclosed Real Estate
.
Other real estate owned consists of property acquired through formal foreclosure, in-substance foreclosure or by deed in lieu of foreclosure, and is recorded at the lower of recorded investment or fair value less estimated costs to sell. Write-downs from recorded investment to fair value, which are required at the time of foreclosure, are charged to the allowance for loan losses. After transfer, adjustments to the carrying value of the properties that result from subsequent declines in value are charged to operations in the period in which the declines occur. During the six months ended June 30, 2013, two loans totaling $270,000 secured by residential real estate were transferred into foreclosed real estate. For the year ended December 31, 2012, three one- to four-family residential lending relationships of $1.2 million were transferred into foreclosed real estate. We had $1.7 million in real estate owned at June 30, 2013.
Other Loans of Concern.
There were no other loans at June 30, 2013 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 accrued losses. General allowances represent loss allowances which have been established to cover probable accrued losses associated with lending activities, but which, unlike specific allowances, have not been allocated to 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.
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.” Management reviews the status of each impaired loan on our watch list on a quarterly basis.
On the basis of this review of our assets, we had classified or held as special mention the following assets as of the date indicated:
81
Table of Contents
|
|
|
At June 30,
|
|
At December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
Special mention
|
|
$
|
1,106
|
|
$
|
1,257
|
|
$
|
2,748
|
|
|
Substandard
|
|
4,085
|
|
5,255
|
|
5,535
|
|
|
Doubtful
|
|
—
|
|
—
|
|
193
|
|
|
Loss
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total classified and special mention assets
|
|
$
|
5,191
|
|
$
|
6,512
|
|
$
|
8,476
|
|
The decrease in classified assets from December 31, 2012 to June 30, 2013 was due to a $1.2 million decrease primarily in commercial real estate substandard loans due to improved financial results of the borrowers. At June 30, 2013, substandard loans included $3.7 million of SBA loans, of which $3.0 million 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 real estate portfolio. 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. We have increased our general allowance on home equity loans since 2011 to reflect increased historical loss experience. Our historical loss experience on one- to four-family residential real estate loans has improved since 2011 as the local economy and local real estate market has improved resulting in a decrease in our residential allowance since 2011.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a 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.
Specific Allowances for Identified Problem Loans
. We evaluate the need for a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value
82
Table of Contents
of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the 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 inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category (segments) and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors may include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, 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 real estate environment and in relation to trends in the loan portfolio.
83
Table of Contents
Allowance for Loan Losses
.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
|
At or For the Six Months
Ended June 30,
|
|
At or For the Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
2010
|
|
2009
|
|
2008
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
1,569
|
|
$
|
1,424
|
|
$
|
1,424
|
|
$
|
1,636
|
|
$
|
1,346
|
|
$
|
963
|
|
$
|
304
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
—
|
|
(110
|
)
|
(154
|
)
|
(829
|
)
|
(3
|
)
|
(412
|
)
|
—
|
|
|
Home equity loans and lines of credit
|
|
(215
|
)
|
(625
|
)
|
(707
|
)
|
(446
|
)
|
(440
|
)
|
(83
|
)
|
(77
|
)
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(174
|
)
|
(91
|
)
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
(32
|
)
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
(8
|
)
|
(43
|
)
|
(117
|
)
|
(112
|
)
|
(382
|
)
|
(134
|
)
|
(201
|
)
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
(15
|
)
|
(16
|
)
|
(58
|
)
|
(40
|
)
|
(22
|
)
|
(54
|
)
|
(137
|
)
|
|
Total charge-offs
|
|
(238
|
)
|
(794
|
)
|
(1,036
|
)
|
(1,459
|
)
|
(1,021
|
)
|
(774
|
)
|
(415
|
)
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One- to four-family
|
|
7
|
|
5
|
|
9
|
|
9
|
|
5
|
|
—
|
|
—
|
|
|
Home equity loans and lines of credit
|
|
6
|
|
1
|
|
8
|
|
7
|
|
4
|
|
3
|
|
—
|
|
|
Commercial real estate loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA loans
|
|
33
|
|
21
|
|
39
|
|
38
|
|
21
|
|
1
|
|
2
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Consumer loans
|
|
11
|
|
7
|
|
16
|
|
36
|
|
37
|
|
42
|
|
31
|
|
|
Total recoveries
|
|
57
|
|
34
|
|
72
|
|
90
|
|
67
|
|
46
|
|
33
|
|
|
Net (charge-offs) recoveries
|
|
(181
|
)
|
(760
|
)
|
(964
|
)
|
(1,369
|
)
|
(954
|
)
|
(728
|
)
|
(382
|
)
|
|
Provision for loan losses
|
|
209
|
|
584
|
|
1,109
|
|
1,157
|
|
1,244
|
|
1,111
|
|
1,041
|
|
|
Balance at end of period
|
|
$
|
1,597
|
|
$
|
1,248
|
|
$
|
1,569
|
|
$
|
1,424
|
|
$
|
1,636
|
|
$
|
1,346
|
|
$
|
963
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding
|
|
0.12
|
%
|
0.56
|
%
|
0.35
|
%
|
0.51
|
%
|
0.36
|
%
|
0.29
|
%
|
0.16
|
%
|
|
Allowance for loan losses to nonperforming loans at end of period
|
|
24.15
|
%
|
23.19
|
%
|
20.48
|
%
|
21.38
|
%
|
16.30
|
%
|
34.34
|
%
|
26.49
|
%
|
|
Allowance for loan losses to total loans at end of period
|
|
0.52
|
%
|
0.45
|
%
|
0.53
|
%
|
0.53
|
%
|
0.64
|
%
|
0.52
|
%
|
0.40
|
%
|
84
Table of Contents
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 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 June 30, 2013
|
|
At December 31, 2012
|
|
|
|
|
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
|
|
$
|
416
|
|
28.17
|
%
|
$
|
393
|
|
26.50
|
%
|
|
Home equity loans and lines of credit
|
|
649
|
|
27.35
|
|
674
|
|
28.03
|
|
|
Commercial real estate loans
|
|
283
|
|
27.03
|
|
261
|
|
27.56
|
|
|
Commercial business loans
|
|
28
|
|
2.70
|
|
25
|
|
2.66
|
|
|
SBA loans
|
|
185
|
|
12.21
|
|
185
|
|
13.36
|
|
|
Commercial construction loans
|
|
20
|
|
1.93
|
|
11
|
|
1.11
|
|
|
Consumer loans
|
|
16
|
|
0.61
|
|
20
|
|
0.78
|
|
|
Total allowance
|
|
$
|
1,597
|
|
100.0
|
%
|
$
|
1,569
|
|
100.0
|
%
|
|
|
|
At December 31,
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
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
|
|
$
|
531
|
|
27.19
|
%
|
$
|
694
|
|
29.23
|
%
|
|
Home equity loans and lines of credit
|
|
501
|
|
29.76
|
|
509
|
|
31.50
|
|
|
Commercial real estate loans
|
|
214
|
|
24.85
|
|
158
|
|
18.46
|
|
|
Commercial business loans
|
|
13
|
|
1.54
|
|
9
|
|
1.12
|
|
|
SBA loans
|
|
150
|
|
15.34
|
|
238
|
|
17.23
|
|
|
Commercial construction loans
|
|
—
|
|
—
|
|
1
|
|
0.09
|
|
|
Consumer loans
|
|
14
|
|
1.32
|
|
27
|
|
2.38
|
|
|
Total allowance
|
|
$
|
1,424
|
|
100.0
|
%
|
$
|
1,636
|
|
100.0
|
%
|
|
|
|
At December 31,
|
|
|
|
|
2009
|
|
2008
|
|
|
|
|
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
|
|
$
|
219
|
|
33.12
|
%
|
$
|
278
|
|
35.89
|
%
|
|
Home equity loans and lines of credit
|
|
338
|
|
31.25
|
|
122
|
|
28.96
|
|
|
Commercial real estate loans
|
|
130
|
|
13.74
|
|
168
|
|
10.48
|
|
|
Commercial business loans
|
|
7
|
|
1.09
|
|
9
|
|
1.21
|
|
|
SBA loans
|
|
597
|
|
16.05
|
|
268
|
|
15.23
|
|
|
Commercial construction loans
|
|
3
|
|
0.52
|
|
6
|
|
0.84
|
|
|
Consumer loans
|
|
52
|
|
4.23
|
|
112
|
|
7.39
|
|
|
Total allowance
|
|
$
|
1,346
|
|
100.0
|
%
|
$
|
963
|
|
100.0
|
%
|
85
Table of Contents
At June 30, 2013, our allowance for loan losses represented 0.52% of total loans and 24.15% of non-performing loans, at December 31, 2012, our allowance for loan losses represented 0.53% of total loans and 20.48% of non-performing loans, and at December 31, 2011, our allowance for loan losses represented 0.53% of total loans and 21.38% of non-performing loans. There were $181,000, $1.0 million and $1.4 million in net loan charge-offs during the six months ended June 30, 2013 and the years ended December 31, 2012 and 2011, 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 federal agency securities, and we will consider, investing in term federal funds, U.S. agencies, 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 June 30, 2013, December 31, 2012, 2011 and 2010, we had no investment securities other than our required investment in Federal Home Loan Bank of Boston stock.
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 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 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 June 30, 2013, our core deposits, which are deposits other than certificates of deposit, were $206.7 million, representing 62.6% of total deposits.
86
Table of Contents
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 Six Months Ended June 30, 2013
|
|
At or for the Year Ended December 31, 2012
|
|
|
|
|
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
|
|
$
|
60,323
|
|
$
|
63,775
|
|
19.33
|
%
|
—
|
%
|
$
|
54,609
|
|
$
|
57,608
|
|
18.72
|
%
|
—
|
%
|
|
Money market accounts
|
|
53,004
|
|
54,945
|
|
16.65
|
|
0.43
|
|
52,248
|
|
51,570
|
|
16.75
|
|
0.43
|
|
|
Savings accounts and interest-bearing checking
|
|
79,975
|
|
86,454
|
|
26.20
|
|
0.25
|
|
74,735
|
|
77,042
|
|
25.03
|
|
0.25
|
|
|
Club accounts
|
|
1,412
|
|
1,533
|
|
0.46
|
|
0.25
|
|
1,454
|
|
1,197
|
|
0.39
|
|
0.25
|
|
|
Total transaction accounts
|
|
194,715
|
|
206,707
|
|
62.64
|
|
0.22
|
|
183,046
|
|
187,417
|
|
60.89
|
|
0.22
|
|
|
Certificates of deposit
|
|
121,691
|
|
123,285
|
|
37.36
|
|
1.73
|
|
114,836
|
|
120,376
|
|
39.11
|
|
1.82
|
|
|
Total deposits
|
|
$
|
316,406
|
|
$
|
329,992
|
|
100.00
|
%
|
0.78
|
%
|
$
|
297,882
|
|
$
|
307,793
|
|
100.00
|
%
|
0.85
|
%
|
|
|
|
At or for the Year Ended December 31,
|
|
|
|
|
2011
|
|
2010
|
|
|
|
|
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
|
|
$
|
45,409
|
|
$
|
49,895
|
|
17.63
|
%
|
—
|
%
|
$
|
42,352
|
|
$
|
43,857
|
|
16.75
|
%
|
—
|
%
|
|
Money market accounts
|
|
48,290
|
|
49,232
|
|
17.40
|
|
0.43
|
|
56,715
|
|
51,062
|
|
19.50
|
|
0.42
|
|
|
Savings accounts and interest-bearing checking
|
|
66,316
|
|
70,356
|
|
24.86
|
|
0.25
|
|
59,398
|
|
60,151
|
|
22.97
|
|
0.50
|
|
|
Club accounts
|
|
1,315
|
|
1,124
|
|
0.40
|
|
0.25
|
|
1,300
|
|
1,013
|
|
0.39
|
|
0.50
|
|
|
Total transaction accounts
|
|
161,330
|
|
170,607
|
|
60.29
|
|
0.23
|
|
159,765
|
|
156,083
|
|
59.61
|
|
0.33
|
|
|
Certificates of deposit
|
|
109,218
|
|
112,349
|
|
39.71
|
|
1.98
|
|
111,290
|
|
105,768
|
|
40.39
|
|
2.06
|
|
|
Total deposits
|
|
$
|
270,548
|
|
$
|
282,956
|
|
100.00
|
%
|
0.92
|
%
|
$
|
271,055
|
|
$
|
261,851
|
|
100.00
|
%
|
1.03
|
%
|
87
Table of Contents
The following table sets forth the amount and maturities of certificates of deposit at June 30, 2013.
|
|
|
At June 30, 2013
|
|
|
|
|
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%
|
|
$
|
18,688
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
18,688
|
|
15.16
|
%
|
|
0.51% - 1.00%
|
|
17,602
|
|
9,139
|
|
2,220
|
|
11
|
|
28,972
|
|
23.50
|
|
|
1.01% - 2.00%
|
|
5,269
|
|
2,484
|
|
425
|
|
22,994
|
|
31,172
|
|
25.28
|
|
|
2.01% - 3.00%
|
|
1,425
|
|
5,909
|
|
19,038
|
|
6,603
|
|
32,975
|
|
26.75
|
|
|
3.01% - 4.00%
|
|
2,831
|
|
2,341
|
|
6,037
|
|
—
|
|
11,209
|
|
9.09
|
|
|
4.01% and over
|
|
269
|
|
—
|
|
—
|
|
—
|
|
269
|
|
0.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
46,084
|
|
$
|
19,873
|
|
$
|
27,720
|
|
$
|
29,608
|
|
$
|
123,285
|
|
100.00
|
%
|
As of June 30, 2013, the aggregate amount of our outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $45.9 million. The following table sets forth the maturity of these certificates as of June 30, 2013.
|
|
|
At June 30, 2013
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Three months or less
|
|
$
|
5,948
|
|
|
Over three months through six months
|
|
3,802
|
|
|
Over six months through one year
|
|
6,340
|
|
|
Over one year
|
|
29,790
|
|
|
|
|
|
|
|
Total
|
|
$
|
45,880
|
|
The following table sets forth the certificates of deposits in Coastway Community Bank classified by interest rate as of the dates indicated.
|
|
|
|
|
At December 31,
|
|
|
|
|
At June 30, 2013
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(In thousands)
|
|
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
Less than 0.50%
|
|
$
|
18,688
|
|
$
|
18,097
|
|
$
|
12,838
|
|
$
|
6,798
|
|
|
0.51% - 1.00%
|
|
28,972
|
|
27,093
|
|
25,798
|
|
27,147
|
|
|
1.01% - 2.00%
|
|
31,172
|
|
24,438
|
|
15,128
|
|
20,494
|
|
|
2.01% - 3.00%
|
|
32,975
|
|
38,036
|
|
42,371
|
|
29,747
|
|
|
3.01% - 4.00%
|
|
11,209
|
|
12,170
|
|
12,232
|
|
14,529
|
|
|
4.01% and over
|
|
269
|
|
542
|
|
3,982
|
|
7,053
|
|
|
Total
|
|
$
|
123,285
|
|
$
|
120,376
|
|
$
|
112,349
|
|
$
|
105,768
|
|
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 repricing than our deposits, they can change our interest rate risk profile. At June 30, 2013, we had $14.0 million advances from the Federal Home Loan Bank of Boston. At June 30, 2013, based on available collateral and our ownership of FHLB stock, we had access to additional Federal Home Loan Bank of Boston advances of up to $50.8 million.
88
Table of Contents
The following table sets forth information concerning balances and interest rates on our borrowings at the date and for the periods indicated.
|
|
|
At or For the Six Months Ended
June 30,
|
|
At or For the Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
2010
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FHLB Advances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
14,000
|
|
$
|
3,407
|
|
$
|
16,343
|
|
$
|
10,769
|
|
$
|
18,188
|
|
|
Average balance during period
|
|
13,256
|
|
5,192
|
|
4,597
|
|
11,371
|
|
8,863
|
|
|
Maximum outstanding at any month end
|
|
20,332
|
|
6,759
|
|
16,343
|
|
15,916
|
|
18,188
|
|
|
Weighted average interest rate at end of period
|
|
0.84
|
%
|
3.80
|
%
|
1.03
|
%
|
1.83
|
%
|
1.43
|
%
|
|
Average interest rate during period
|
|
1.02
|
%
|
3.01
|
%
|
3.15
|
%
|
1.89
|
%
|
2.76
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
Table of Contents
Properties
As of June 30, 2013, the net book value of our properties was $24.6 million. The net book value of our furniture, fixtures and equipment at June 30, 2013 was $2.0 million. The following is a list of our offices:
|
Location
|
|
Leased or Owned
|
|
Year Acquired
or Leased
|
|
Building
Square Footage
|
|
Net Book Value of
Real Property
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Corporate Headquarters:
(including land)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Coastway Plaza
Cranston, RI 02910
|
|
Owned
|
|
2003
|
|
22,671
|
|
$
|
3,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Full Service Branches:
(including land)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180 Washington Street
Providence, RI 02903
|
|
Owned
|
|
2011
|
|
7,000
|
|
4,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warwick
2089 Warwick Avenue
Warwick, RI 02889
|
|
Owned
|
|
1954
|
|
4,628
|
|
843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Women & Infants Hospital(1)
101 Dudley Street
Providence, RI 02905
|
|
Leased
|
|
1986
|
|
1,000
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lincoln(2)
210 Front Street
Lincoln, RI 02865
|
|
Leased
|
|
1998
|
|
2,800
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cranston East
1155 Reservoir Avenue
Cranston, RI 02920
|
|
Owned
|
|
2000
|
|
4,810
|
|
2,096
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cowesett
3830 Post Road
Warwick, RI 02886
|
|
Owned
|
|
2002
|
|
2,771
|
|
1,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Providence
2830 Pawtucket Avenue
East Providence, RI 02915
|
|
Owned
|
|
2005
|
|
3,476
|
|
1,990
|
|
|
|
|
|
|
|
|
|
|
|
|
|
East Greenwich
5750 Past Road
East Greenwich, RI 02818
|
|
Owned
|
|
2012
|
|
3,500
|
|
4,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cranston West
200 Comstock Parkway
Cranston, RI 02920
|
|
Owned
|
|
2013
|
|
3,800
|
|
2,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate held for sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33 Sharpe Drive
Cranston, RI 02920
|
|
Owned
|
|
2012
|
|
38,400
|
|
2,280
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Land in
2285 New London Turnpike
Coventry, RI 02816
|
|
Owned
|
|
|
|
—
|
|
1,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Future Corporate Headquarters:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MetroCenter
1 LoriAnne Drive
Warwick, RI 02886
|
|
Purchase & Sale
|
|
—
|
|
Under construction
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
The lease expires on June 30, 2016.
(2)
The lease expires December 31, 2013. This branch will be relocated to 618 George Washington Highway, Lincoln, RI 02845.
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Subsidiary and Other Activities
Upon completion of the conversion, Coastway Community Bank will become the wholly owned subsidiary of Coastway Bancorp, Inc. Coastway Community Bank has no subsidiaries.
Legal Proceedings
We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at June 30, 2013, we were not involved in any legal proceedings, the outcome of which would be material to our financial condition or results of operations.
Expense
and
Tax Allocation
Coastway Community Bank will enter into an agreement with Coastway Bancorp, Inc. to provide it with certain administrative support services for compensation not less than the fair market value of the services provided. In addition, Coastway Community Bank and Coastway Bancorp, Inc. will enter into an agreement to establish a method for allocating and for reimbursing the payment of their consolidated tax liability.
Personnel
As of June 30, 2013, we had 148 employees, of which 143 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 and upon completion of the conversion will be the wholly-owned subsidiary of Coastway Bancorp, Inc., a Maryland corporation, which will be a registered bank holding company. 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. will be regulated by the Board of Governors of the Federal Reserve System, or 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 funds, 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 Federal Reserve Board or 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
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Wall Street Reform and Consumer Protection Act (“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 eliminated the Office of Thrift Supervision and requires that federal savings associations be regulated by the Office of the Comptroller of the Currency (the primary federal regulator for national banks). The Dodd-Frank Act also authorized the Federal Reserve Board to supervise and regulate all savings and loan 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 also gave state attorneys general the ability to enforce applicable federal consumer protection laws.
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, and authorized non-interest bearing transaction accounts with unlimited deposit insurance through December 31, 2012. 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.
Many of the provisions of the Dodd-Frank Act are subject to delayed effective dates or require the implementing regulations and, therefore, their impact on our operations cannot be fully determined at this time. However, it is likely that the Dodd-Frank Act will increase the regulatory burden, compliance costs and interest expense for Coastway Community Bank and Coastway Bancorp, Inc.
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
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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 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.
Under the FDIC’s regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Coastway Community Bank, are required to comply with minimum leverage capital requirements. For an institution not anticipating or experiencing significant growth and deemed by the FDIC to be, in general, a strong banking organization rated composite 1 under Uniform Financial Institutions Ranking System, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common stockholder’s equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.
FDIC regulations also require state non-member banks to maintain certain ratios of regulatory capital to regulatory risk-weighted assets, or “risk-based capital ratios.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0.0% to 100.0%. State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, subordinated debentures and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital.
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In July, 2013, the FDIC and the other federal bank regulatory agencies issued a final rule to revise their risk-based and leverage capital requirements and their method for calculating risk-weighted assets, to make them consistent with the agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. The final rule applies to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for us on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.
At June 30, 2013, Coastway Community Bank met each of its capital requirements.
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.
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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.
The FDIC has adopted regulations to implement the prompt corrective action legislation. 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 6.0% or greater and a leverage ratio of 5.0% 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 4.0% or greater, and generally a leverage ratio of 4.0% 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 4.0%, or generally a leverage ratio of less than 4.0%. 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 3.0%, or a leverage 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.
The recently adopted final rule that will increase regulatory capital requirements will adjust the prompt corrective action categories accordingly.
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
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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 persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
·
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Coastway Community Bank’s capital.
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, retroactive to January 1, 2008.
Under the FDIC’s risk-based assessment system, insured institutions are 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.
In February 2011, the FDIC published a final rule under the Dodd-Frank Act to reform the deposit insurance assessment system. The rule redefined the assessment base used for calculating deposit insurance assessments effective April 1, 2011. Under the rule, assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. The rule revised the assessment rate schedule to establish assessments ranging from 2.5 to 45 basis points. Deposit assessments were prepaid in December 2009 for the fourth quarter of 2009 and for calendar years 2010 through 2012. Estimated assessments were based on certain assumptions specified by the FDIC, including a 5% annual growth rate. Prepaid assessments are to be applied against actual assessments until the prepaid assessments are exhausted. Unused prepayments were returned to the institutions on June 28, 2013. We recorded the prepayment of assessments as a prepaid expense, which is being amortized to expense over three years. Our prepayments amount was $1.5 million and we received a reimbursement of $262,000.
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
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Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended June 30, 2013, the annualized Financing Corporation assessment was equal to 64 basis points of total assets less tangible capital.
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 June 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%.
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.
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 2010, was “satisfactory.”
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: a 3% reserve ratio is assessed on net transaction accounts up to and including $58.8 million; a 10% reserve ratio is applied above $58.8 million. The first $10.7 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 June 30, 2013, Coastway Community Bank was in compliance with this requirement.
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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;
·
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;
·
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
·
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
·
Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
·
Truth in Savings Act; 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;
·
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
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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, will be 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 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. does not anticipate electing “financial holding company” status at this time.
Coastway Bancorp, Inc. will not be subject to the Federal Reserve Board’s consolidated capital adequacy guidelines for bank holding companies as it has less than $500 million in total assets.
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.
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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 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. will be subject to the regulation and supervision of the Rhode Island Department of Business Regulation. It will be subject to periodic examination by the department.
Federal Securities Laws
We have filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 for the registration of the shares of common stock to be issued pursuant to the stock offering. Upon completion of the stock offering, our common stock will be registered with the Securities and Exchange Commission under the Securities Exchange Act of 1934. We will be 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 common stock to be 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 will be 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
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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.
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 June 30, 2013, 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.
Additionally, we are in the process of evaluating the benefits of relying on the reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions 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. However, we will not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as we remain a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates).
We could remain an “emerging growth company” for up to five years, 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.
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 will be
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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 will be subject to further reporting and audit requirements beginning with the year ending December 31, 2012 under the requirements of the Sarbanes-Oxley Act. We will prepare policies, procedures and systems designed to ensure compliance with these regulations.
TAXATION
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.
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 may be used as credits against regular tax liabilities in future years. At June 30, 2013, Coastway Community Bank had no minimum tax credit carryforward.
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.
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.
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MANAGEMENT OF COASTWAY BANCORP, INC.
Shared Management Structure
The directors of Coastway Bancorp, Inc. are the same persons who are the directors of Coastway Community Bank. In addition, each executive officer of Coastway Bancorp, Inc. is also an executive officer of Coastway Community Bank. We expect that Coastway Bancorp, Inc. and Coastway Community Bank will continue to have common executive officers until there is a business reason to establish separate management structures.
Executive Officers of Coastway Bancorp, Inc. and Coastway Community Bank
The following table sets forth information regarding certain executive officers of Coastway Bancorp, Inc. and Coastway Community Bank and their ages as of June 30, 2013. Except as otherwise indicated, executive officers hold the same title at Coastway Bancorp, Inc. and Coastway Community Bank. The executive officers of Coastway Bancorp, Inc. and Coastway Community Bank are elected annually.
|
Name
|
|
Age
|
|
Position
|
|
William A. White
|
|
57
|
|
President and Chief Executive Officer
|
|
Richard H. Petrarca
|
|
59
|
|
Executive Vice President and Chief Operating Officer
|
|
Paul G. Wielgus(1)
|
|
61
|
|
Executive Vice President and Chief Credit Officer
|
|
Jeanette Fritz
|
|
47
|
|
Executive Vice President and Chief Financial Officer
|
|
Jana Planka(1)
|
|
53
|
|
Executive Vice President and Chief Retail Officer
|
|
Stephen J. Gibbons(1)
|
|
54
|
|
Executive Vice President, Chief Business Lending Officer
|
(1)
Not an officer of Coastway Bancorp, Inc.
Directors of Coastway Bancorp, Inc. and Coastway Community Bank
Coastway Bancorp, Inc. has 10 directors. Directors serve three-year staggered terms. Directors of Coastway Community Bank will be elected by Coastway Bancorp, Inc. as its sole stockholder.
The following table states our directors’ names, their ages as of June 30, 2013, the years that they began serving as directors of Coastway Community Bank and when their current term as directors of Coastway Bancorp, Inc. expires:
|
Name
|
|
Position(s) Held With
Coastway Bancorp, Inc.
|
|
Age
|
|
Director
Since(1)
|
|
Current Term
Expires
|
|
|
|
|
|
|
|
|
|
|
|
Mark E. Crevier
|
|
Chairman of the Board
|
|
62
|
|
1986
|
|
2014
|
|
Hon. Francis X. Flaherty
|
|
Director
|
|
66
|
|
2008
|
|
2014
|
|
Debra M. Paul
|
|
Director
|
|
50
|
|
2008
|
|
2014
|
|
William A. White
|
|
President, Chief Executive Officer and Director
|
|
57
|
|
1994
|
|
2015
|
|
Dennis M. Murphy
|
|
Director
|
|
64
|
|
2008
|
|
2015
|
|
James P. Fiore
|
|
Director
|
|
69
|
|
1996
|
|
2015
|
|
David P. DiSanto
|
|
Director
|
|
56
|
|
2013
|
|
2015
|
|
Peter A. Koch
|
|
Director
|
|
64
|
|
2005
|
|
2016
|
|
Lynda Dickinson
|
|
Director
|
|
64
|
|
2001
|
|
2016
|
|
Phillip Kydd
|
|
Vice Chairman of the Board
|
|
54
|
|
2002
|
|
2016
|
(1) Includes service with Coastway Credit Union and its predecessor.
Board Independence
The Board of Directors has determined that each of our directors, with the exception of President
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and Chief Executive Officer William A. White is “independent” as defined in the listing standards of the Nasdaq Stock Market. Mr. White is not independent because he is one of our executive officers.
In determining the independence of the other directors, the Board of Directors considered loans made to Directors Crevier, Koch, Dickinson and Kydd, and to CHILD, Inc., for which Director Dickinson is the Chief Executive Officer and to Centerville Associates, LLC, for which Director Flaherty has an ownership interest.
The Business Background of Our Directors and Executive Officers
The business experience for the past five years of each of our directors and executive officers is set forth below. With respect to directors, the biographies also contain information regarding the person’s experience, qualifications, attributes or skills that caused the Nominating Committee and the Board of Directors to determine that the person should serve as a director. Unless otherwise indicated, directors and executive officers have held their positions for the past five years.
Directors:
Mark E. Crevier
is a Certified Public Accountant and has served as chairman of the board of directors of Coastway Community Bank since 1998. He also serves on the Executive Committee. Mr. Crevier served as an executive with a number of hospital and health care organizations beginning in 1985. From 2005 to 2008 he served as president and chief executive officer of Kent County Hospital in Warwick, Rhode Island, retiring in 2008. He currently serves as an Executive-in-Residence at the University of Rhode Island. Mr. Crevier’s executive service experience and accounting expertise bring valuable insight to the board of directors.
Francis X. Flaherty
is an Associate Justice of the Rhode Island Supreme Court and has served in that position since 2003. Prior to his tenure on the court, Justice Flaherty served on the city council of the City of Warwick from 1978 until 1985. He served as the Mayor of Warwick from 1984 until 1991. Prior to his service on the court, he was engaged in the private practice of law in Providence and Warwick, Rhode Island. Justice Flaherty’s broad community service provides the board with a wide range of skills and experience to address the many issues facing a financial institution in today’s complex regulatory and economic environment.
Debra M. Paul
is the chief executive officer of Fellowship Health Resources, Inc. in Lincoln, Rhode Island which provides counseling and support services to people with emotional, mental and behavioral disorders. Prior to her appointment as chief executive officer in July 2013, she served as chief financial officer of the organization from January 2012 until June 2013. From 2006 until October 2011, she served as chief financial officer of Women and Infants Hospital, Providence, Rhode Island. Ms. Paul is also a Certified Public Accountant. Ms. Paul’s accounting expertise and executive and financial management experience brings a valuable resource to the board.
William A. White
has served as president and chief executive officer of Coastway Community Bank and its predecessor Warwick Credit Union since 1994. Mr. White is a present and past board member of a number of community service organizations in Rhode Island including the Providence Performing Arts Center and the Meeting Street School. Mr. White’s service on the board of directors provides the board with first hand information on the bank’s operations and his leadership in the growth of the bank and its conversion to a mutual savings bank in 2009 evidence strong leadership qualities that are an asset to the board.
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Dennis M. Murphy
is a former executive with Gateway Healthcare, Inc., Pawtucket, Rhode Island, where he was involved in sales and customer relations, from which he retired in 2012 after seven years of service. From 1997 to 2004 he served as the president and chief executive officer of the United Way of Rhode Island. He also served as an executive vice president with Fleet Bank from 1972 to 1996 where he managed the small business lending division among other duties. He has been a board member of the Gabelli School of Business at Roger Williams University since 2003. Mr. Murphy’s extensive experience in small business lending provides Coastway Community Bank with valuable expertise in an important business line for the bank.
James P. Fiore
is the founder and president of Thames Records Management, Inc., a digital scanning and software company located in Stonington, Connecticut. Mr. Fiore founded the company in 2008 after selling AMS Imaging, a scanning and software company that he founded and operated for 40 years. Mr. Fiore has served as corporate secretary of Coastway Community Bank since 2000. Mr. Fiore’s extensive experience in records management and technology provide the board of directors with valuable expertise on similar issues concerning the bank.
Peter A. Koch
is the chairman of the board of Candescent Eye Management, LLC, the owner of Koch Eye Associates, a full service eye care center with 12 offices throughout Rhode Island and Massachusetts. From 1984to 2012, he served as the chief executive officer of Koch Eye Associates. Mr. Koch is a present and past board member of a number of community service organizations in Rhode Island. Mr. Koch’s accounting background and management experience with a successful health care company bring a valuable financial and business background to the board of directors.
Lynda Dickinson
is the founder and chief executive officer of CHILD, Inc., a private non-profit comprehensive child development and family services agency serving children from low-income families from pre-birth to age five through four facilities located in Kent County, Rhode Island. She founded the organization in 1976. Ms. Dickinson is a present and past board member of a number of community service organizations in Rhode Island, including the New England Head Start Association. Ms. Dickinson’s financial and managerial skills bring valuable expertise to the board.
Phillip Kydd
serves as vice chairman of the board, a position he has held since 2010. Mr. Kydd has served as the Deputy Director of the Rhode Island Department of Transportation since 2010. He started his service with the Department of Transportation in 1986 and held the position of Assistant Director of Administration immediately before attaining his current position. Mr. Kydd has oversight of engineering, construction and professional service contracts in excess of $1 billion. Mr. Kydd is a present and past board member of a number of community service and educational organizations, including the Rhode Island Urban League and the New England Institute of Technology. Mr. Kydd’s executive service with the Department of Transportation provides the board with expertise in addressing budgetary planning, administration and contract negotiating.
David P. DiSanto
, a Certified Public Accountant, is a partner in the accounting firm of DiSanto, Priest & Co. and has over 30 years experience in public accounting. His accounting practice focuses on privately held businesses and high net worth individuals. Prior to establishing his firm in 2003, Mr. DiSanto was employed by KPMG Peat Marwick and served as a manager in the Private Business Group. Mr. DiSanto’s accounting expertise provides the board of directors with perspective on Coastway Community Bank’s financial and accounting practices as well as its relationship with internal and external auditors.
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Executive Officers Who Are Not Directors:
Richard H. Petrarca
is executive vice president and chief operating officer. Prior to his appointment in May 2013 he served as the chief financial officer, a position he held since 1993.
Paul G. Wielgus
has been executive vice president and chief credit officer since 2009. In this capacity he oversees the credit policy and loan review function of the bank and chairs the credit committee. He also serves as the bank’s Community Reinvestment Act officer. Prior to joining the bank in 2009 he served as senior vice president and senior credit officer at Bank Rhode Island beginning in 1998. Previously, he held senior credit positions with BankBoston and the Rhode Island Hospital Trust National Bank. He has over 30 years of credit related experience. He is a past and present board member of a number of community service organizations.
Jeanette Fritz
has served as executive vice president and chief financial officer since May 2013. Prior to joining the bank, she was an audit partner at KPMG LLP where she was employed from 1987 until 2012. Ms. Fritz primarily performed audits of community banks as well as other financial services organizations during her tenure at KPMG. Ms. Fritz is a certified public accountant.
Jana M. Planka
is executive vice president and chief retail officer since January 2010. She has held a number of managerial positions at Coastway Community Bank, including consumer and residential mortgage lending, sales and marketing and branch operations since joining the bank’s predecessor in 1994. Prior to joining Coastway Community Bank’s predecessor, Ms. Planka was employed at Fleet National Bank in the retail and community lending divisions. She is a present and past board member of a number of community service organizations in the Providence metropolitan area.
Stephen J. Gibbons
is executive vice president in charge of business lending, a position he has held since 2008. Prior to joining the bank, he served in various senior lending positions with Bank Rhode Island from 1996 to 2008. Mr. Gibbons has served with a number of community service organizations in the Cranston metropolitan area.
Corporate Governance Policies and Procedures
In addition to establishing committees of our board of directors, Coastway Bancorp, Inc. will adopt several policies to govern the activities of both Coastway Bancorp, Inc. and Coastway Community Bank including corporate governance policies and a code of business conduct and ethics. The corporate governance policies are expected to involve such matters as the following:
·
the composition, responsibilities and operation of our Board of Directors;
·
the establishment and operation of board committees, including audit, nominating and compensation committees;
·
convening executive sessions of independent directors; and
·
our Board of Directors’ interaction with management and third parties.
The code of business conduct and ethics, which is expected to apply to all employees and directors, will address conflicts of interest, the treatment of confidential information, general employee conduct and compliance with applicable laws, rules and regulations. In addition, the code of business conduct and ethics will be designed to deter wrongdoing and to promote honest and ethical conduct, the
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avoidance of conflicts of interest, full and accurate disclosure and compliance with all applicable laws, rules and regulations.
Executive Officer Compensation
Summary Compensation Table.
The table below summarizes for the year ended December 31, 2012 the total compensation paid to or earned by our President and Chief Executive Officer William White, and our two other most highly compensated executive officers. Each individual listed in the table below is referred to as a named executive officer.
Summary Compensation Table
|
Name and principal position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
All other
compensation
($)(1)
|
|
Total
($)
|
|
|
William A. White
President and Chief Executive Officer
|
|
2012
|
|
285,000
|
|
45,000
|
|
59,762
|
|
389,762
|
|
|
Stephen J. Gibbons
Executive Vice President, Chief Business Lending Officer
|
|
2012
|
|
206,876
|
|
20,085
|
|
34,729
|
|
261,690
|
|
|
Richard H. Petrarca
Executive Vice President and Chief Financial Officer (2)
|
|
2012
|
|
152,252
|
|
14,113
|
|
24,272
|
|
190,637
|
|
(1)
The amounts in this column reflect what Coastway Community Bank paid for, or reimbursed, the applicable named executive officer for the various benefits and perquisites received. A break-down of the various elements of compensation in this column is set forth in the following table:
|
Name
|
|
Auto
Expenses
($)
|
|
Country
Club Dues
($)
|
|
Life Insurance
Premiums
($)
|
|
Employer
Contributions to
401(k) Plan
($)
|
|
Total All Other
Compensation
($)
|
|
|
William A. White
|
|
15,000
|
|
10,767
|
|
1,020
|
|
32,723
|
|
252
|
|
|
Stephen J. Gibbons
|
|
—
|
|
7,100
|
|
1,020
|
|
26,249
|
|
360
|
|
|
Richard H. Petrarca
|
|
2,198
|
|
—
|
|
884
|
|
18,224
|
|
2,966
|
|
(2)
Mr. Petrarca was appointed Executive Vice President and Chief Operating Officer effective May, 2013.
Benefit Plans and Agreements
Employment Agreement.
Coastway Community Bank entered into an employment agreement with William A. White on January 1, 2011, which was amended on July 25, 2013. The amended employment agreement has a five-year term, will expire on December 31, 2018, unless renewed. In the absence of any written notice from either party not renewing the agreement, which notice must be delivered to the other party no later than December 1 each year, the agreement will automatically renew for an additional one year. Prior to each non-renewal notice period, the disinterested members of the board of directors will conduct a comprehensive performance evaluation and results thereof shall be included in the board’s minutes. The agreement provides for the payment of base salary which is subject to an annual salary increase equal to the greater of 3% or a percentage increase equal to the annual Consumer Price Index. Mr. White’s current base salary is $297,000. In addition to the base salary, the agreement provides Mr. White with a maximum potential target incentive equal to 20% of his base salary as in effect as of January 1 each year, based upon the successful completion of performance objectives established by the board of directors no later than 90 days after the beginning of any calendar year. Such incentive compensation is paid to the executive as a cash lump sum no later than 30 days after the end of the calendar year for which the target incentive pay was established. The agreement provides Mr. White
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with $1,250 per month to be applied toward the purchase or lease of an automobile of his choice, titled in his own name, and Coastway Community Bank reimburses Mr. White for maintenance costs of such automobile, but Mr. White is responsible for maintaining insurance coverage on such automobile at his own expense. The agreement also provides that Coastway Community Bank pays for membership dues and related fees and expenses for Mr. White’s membership in an appropriate club or clubs, subject to the approval of the board of directors. The agreement also provides for participation in other employee benefit plans, arrangements and perquisites applicable to senior officers. The agreement entitles Mr. White to reimbursement for business expenses, an annual medical examination paid by Coastway Community Bank, short term and long term disability insurance through the later of age 67 or the end of the term of the employment agreement, and participation in a supplemental executive retirement plan.
Certain events resulting in Mr. White’s termination or resignation entitle Mr. White to payments of severance benefits following termination of employment. In the event of Mr. White’s involuntary termination for reasons other than death, disability, or termination for cause, or in the event he resigns during the term of the agreement following (i) Coastway Community Bank’s failure to elect or reelect or to appoint or reappoint Mr. White as President and Chief Executive Officer, (ii) a material change in Mr. White’s position to become one of lesser responsibility, importance or scope, (iii) liquidation or dissolution of Coastway Community Bank (other than corporate reorganizations), (iv) a reduction in Mr. White’s base salary or benefits unless such reduction is employer-wide, (v) a relocation of executive’s principal place of employment by more than 50 miles from its location as of January 1, 2011, (vi) a material breach of the employment agreement by Coastway Community Bank, then for five years following such termination, Mr. White would be entitled to receive payment of his current base salary and continued benefits (but only one year of continued medical benefits). In the event of a change in control of Coastway Community Bank, the employment agreement will continue in full force and effect and shall become an obligation of the successor. If Mr. White’s employment is terminated for cause, he would have no right to receive compensation or other benefits for any period after termination. In the event Mr. White becomes disabled within the meaning of such term under Section 409A of the Internal Revenue Code, he will receive benefits under any disability plan maintained by Coastway Community Bank and other plans to which he is a party. In the event of executive’s death during the term of the employment agreement, his base salary and benefits shall be paid through the date of his death. Upon termination of Mr. White’s employment (excluding termination of employment due to cause or termination of employment for any reason following a change in control), for one year following such termination, he agrees not to compete with Coastway Community Bank in the State of Rhode Island and not to solicit employees or customers to terminate their relationships with Coastway Community Bank.
Executive Change in Control Severance Plan.
Following the conversion, Coastway Community Bank does not intend to enter into any new employment agreements. However, Coastway Community Bank intends to enter into an Executive Change in Control Severance Plan (“Severance Plan”), effective at, and contingent upon the closing of the conversion and stock offering. Participants in the Severance Plan will be selected by the President and Chief Executive Officer. The President and Chief Executive Officer is excluded from participating in the Severance Plan. If, within a two-year period following a change in control (as defined in Code Section 409A), a participant in the Severance Plan experiences either an involuntary termination of employment without cause or a voluntary resignation after being offered a position that is not a comparable position (as defined in the Severance Plan), the participant will be paid an individually determined amount, but in most cases equal to two times the participant’s current base salary plus two times the participant’s highest bonus paid in the two calendar years immediately prior to such termination. Such amount will be paid ratably, starting no later than 60 days after the termination date, but such payment is contingent upon the participant signing (and not revoking) a general release of all claims in a form provided by Coastway Community Bank. Upon termination of the participant’s employment in a manner that results in payments
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to the participant under the Severance Plan, for the period of time that severance payments are being made thereunder, the participant agrees not to solicit customers to terminate their relationships with Coastway Community Bank.
Supplemental Executive Retirement Plan for William A. White
. Coastway Community Bank entered into non-qualified supplemental executive retirement plan (“SERP”) with William A. White as of January 1, 2011, which was amended and restated as of January 1, 2013. In 2011, Coastway Community Bank transferred the value accrued under a prior SERP to the current SERP and is required to make annual contributions of $72,000 each January 1 thereafter until January 1, 2023, so long as Mr. White remains employed by Coastway Community Bank. Upon Mr. White’s separation from service on or after age 67, Coastway Community Bank shall pay Mr. White’s SERP benefit in 10 approximately equal annual installments staring on the first business day of January after his separation from service. If Mr. White dies before all installments have been paid, the balance shall be paid in a cash lump sum to his beneficiary. If Mr. White dies or becomes disabled before reaching age 67, he will become fully vested in his liability reserve account and it shall be paid to him or his beneficiary in a lump sum no later than the first day of the second month after such death or disability. If Mr. White separates from service before age 67 for reasons other than death, disability or cause, he shall be paid the vested portion of his liability reserve account in a lump sum no later than the first day of the second month after such separation from service. As of December 31, 2012, Mr. White was 60% vested in his SERP benefit. An additional 5% of his SERP benefit becomes vested as of each December 31 until it is 100% vested on December 31, 2020. If Mr. White’s employment is terminated for cause, he will forfeit all benefits under the SERP. In addition, SERP benefits may be paid to Mr. White in the event of an unforeseeable emergency, as defined in the SERP.
Supplemental Executive Retirement Plan
. Effective July 1, 2013, Coastway Community Bank adopted a non-qualified supplemental executive retirement plan (“SERP”) for certain senior executives, including Messrs. White, Gibbons and Petrarca. Each SERP participant will receive 60% (70% for Mr. White) of their final average compensation upon separation from service after attaining normal retirement age (i.e., age 66, 67 or 68, as specified in their benefits schedule), less offsets for the employer’s contribution to the Bank’s Code Section 401(k) plan and 50% of the contribution to Social Security. Mr. White’s benefit under this SERP is also offset by the benefit under his other SERP (described above). Benefits are also reduced if a participant has not completed 20 years of service. Benefits generally vest in 10% increments for each year of service completed after the effective date of the SERP. If a participant separates from service before normal retirement age, he or she shall be paid his or her vested accrued benefit in the form selected by the participant, unless such separation is due to cause, in which case all benefits are forfeited. Benefits are payable in the form selected by each participant, which may be a cash lump sum, monthly installments over 5 years, or monthly installments for life, with 15 years of guaranteed payments. If a proper election is not made, the default payment is a cash lump sum. If a participant dies or becomes disabled before benefits begin, the participant will become fully vested and the participant or participant’s beneficiaries shall be paid his or her vested accrued benefit as a cash lump sum no later than 30 days after the date of such death or disability. If the participant dies after payments have begun, all remaining payments shall be made to the participant’s beneficiary in a cash lump sum no later than 30 days after such death.
401(k) Plan
. Since 1994, Coastway Community Bank has maintained the Coastway Community Bank 401(k) Retirement Plan (“401(k) Plan”). Employees who have attained age 18 and completed six months of employment are eligible to participate in the 401(k) Plan. Under the 401(k) Plan a participant may elect to defer, on a pre-tax basis, up to 100% of his or her salary in any plan year, subject to limits imposed by the Internal Revenue Code. For 2013, the salary deferral contribution limit is $17,500, provided, however, that a participant over age 50 may contribute an additional $5,500, for a total contribution of $23,000. In addition to salary deferral contributions, Coastway Community Bank may make matching contributions up to 5% of each participant’s compensation and discretionary profit sharing contributions. Generally, unless the participant elects otherwise, the participant’s account balance will be distributed as a result of his or her termination of employment. Each participant has an individual account under the 401(k) Plan and may direct the investment of his or her account among a variety of
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investment options. In connection with the conversion, each participant will be allowed to invest his or her account balance in the common stock of Coastway Bancorp, Inc. through the Coastway Bancorp, Inc. Stock Fund.
Employee Stock Ownership Plan.
In connection with the conversion, Coastway Community Bank intends to adopt a tax-qualified retirement plan known as an employee stock ownership plan (“ESOP”) for eligible employees. Eligible employees will begin participation in the ESOP on the later of the effective date of the conversion or upon the first entry date commencing on or after the eligible employee’s completion of age 21 and 1,000 hours of service during a continuous 12-month period.
The ESOP trustee is expected to purchase, on behalf of the ESOP, 8.0% (including shares issued to the Coastway Bank Charitable Foundation) of the total number of shares of Coastway Bancorp, Inc. common stock issued in the conversion. We anticipate that the ESOP will fund its stock purchase with a loan from Coastway Bancorp, Inc. equal to the aggregate purchase price of the common stock. The loan will be repaid principally through Coastway Community Bank’s contribution to the ESOP and dividends payable on common stock held by the ESOP over the anticipated 25-year term of the loan. The interest rate for the ESOP loan is expected to be an adjustable rate equal to the prime rate, as published in
The Wall Street Journal
, on the closing date of the offering. Thereafter the interest rate will adjust annually and will be the prime rate on the first business day of the calendar year, retroactive to January 1 of such year. See “Pro Forma Data.”
The trustee will hold the shares purchased by the ESOP in an unallocated suspense account, and shares will be released from the suspense account on a pro-rata basis as the trustee repays the loan. The trustee will allocate the shares released among participants on the basis of each participant’s proportional share of compensation relative to all participants. Each participant will vest in his or her benefit at a rate of 20% per year, beginning after the participant’s completion of his or her second year of service, such that the participant will be fully vested upon completion of six years of credited service. However, each participant who was employed by Coastway Community Bank prior to the offering will receive credit for vesting purposes for years of service prior to the adoption of the ESOP. A participant also will become fully vested automatically in his or her benefit upon normal retirement, death or disability, or termination of the ESOP. Generally, a participant will receive a distribution from the ESOP upon separation from service.
The ESOP permits a participant to direct the trustee as to how to vote the shares of common stock allocated to his or her account. The trustee votes unallocated shares and allocated shares for which participants do not provide instructions on any matter in the same ratio as those shares for which participants provide instructions, subject to fulfillment of the trustee’s fiduciary responsibilities.
Under applicable accounting requirements, Coastway Community Bank will record a compensation expense for the ESOP at the fair market value of the shares as they are committed to be released from the unallocated suspense account to each participant’s account. The compensation expense resulting from the release of the common stock from the suspense account and allocation to plan participants will result in a corresponding reduction in Coastway Bancorp, Inc.’s earnings.
Frozen Defined Benefit Plan
. Coastway Community Bank maintains a tax-qualified defined benefit plan (“DB Plan”) that was created in 1955 and was frozen effective March 31, 1993. After that date, no further benefits were accrued and no new participants were eligible to join the DB Plan. Messrs. White, Gibbons and Petraraca do not participate in the DB Plan. Currently, there are approximately 36 participants entitled to benefits under the DB Plan. All benefits are fully vested. The benefit formula is based on a percentage of final average pay. Benefits are payable at normal retirement age (65) or at early retirement age (age 55 with 10 years of service) in the form of an annuity. The DB Plan has assets of
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approximately $1.6 million at December 31, 2012, and it is approximately 75% funded, which is within the allowable range under the Internal Revenue Code of 1986, as amended.
Director Compensation
The following table sets forth for the year ended December 31, 2012 certain information as to the total remuneration we paid to our non-employee directors. Information with respect to director compensation paid to directors who are also named executive officers is included above in “Executive Officer Compensation—Summary Compensation Table.”
|
Name
|
|
Fees earned or
paid in cash
($)
|
|
Total
($)
|
|
|
Mark E. Crevier
|
|
25,208
|
|
25,208
|
|
|
Hon. Francis X. Flaherty
|
|
9,908
|
|
9,908
|
|
|
Debra M. Paul
|
|
10,275
|
|
10,275
|
|
|
Dennis M. Murphy
|
|
11,708
|
|
11,708
|
|
|
James P. Fiore
|
|
20,542
|
|
20,542
|
|
|
Peter A. Koch
|
|
10,875
|
|
10,875
|
|
|
Lynda Dickinson
|
|
20,542
|
|
20,542
|
|
|
Phillip Kydd
|
|
20,542
|
|
20,542
|
|
Director Fees
Each non-employee director of Coastway Community Bank is paid a fee of $833 for each meeting attended. The chairman of the board receives $1,250 for each meeting attended. Additionally, each executive committee member is paid a fee of $833 for each executive committee meeting attended. Previously, the chairman of the board received a retainer of 1,375 per quarter, other members of the executive committee received a retainer of $875 per quarter and other board members were paid a quarterly retainer of $375, all of which was discontinued after the first quarter of 2012.
Following the conversion, each individual who serves as a director of Coastway Community Bank will serve as a director of Coastway Bancorp, Inc. We expect that directors of Coastway Community Bank will receive directors’ fees equivalent to the fees paid prior to the conversion. We anticipate paying $500 to each director for attending audit committee meetings, and no fees for attending nominating/corporate governance and compensation committee meetings. We currently do not plan to separately compensate the directors of Coastway Bancorp, Inc.
Future Stock Benefit Plans
Following the stock offering, we intend to adopt a new stock-based incentive plan that will provide for grants of stock options and restricted common stock awards. In accordance with applicable regulations, we anticipate that the plan will authorize a number of stock options and a number of shares of restricted stock, not to exceed 10% and 4%, respectively, of the shares issued in the conversion (including shares contributed to our charitable foundation). These limitations will not apply if the plan is implemented more than one year after the conversion.
The stock-based incentive plan will not be established sooner than six months after the stock offering and, if adopted within one year after the stock offering, would require the approval by stockholders owning a majority of the outstanding shares of common stock of Coastway Bancorp, Inc. If the stock-based incentive plan is established more than one year after the stock offering, it would require the approval of our stockholders by a majority of votes cast.
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The following additional restrictions would apply to our stock-based incentive plan only if the plan is adopted within one year after the stock offering:
·
non-employee directors in the aggregate may not receive more than 30% of the options and restricted stock awards authorized under the plan;
·
any non-employee director may not receive more than 5% of the options and restricted stock awards authorized under the plan;
·
any officer or employee may not receive more than 25% of the options and restricted stock awards authorized under the plan;
·
the options and restricted stock awards may not vest more rapidly than 20% per year, beginning on the first anniversary of stockholder approval of the plan; and
·
accelerated vesting is not permitted except for death, disability or upon a change in control of Coastway Community Bank or Coastway Bancorp, Inc.
These restrictions do not apply to plans adopted after one year following the completion of the stock offering.
We have not yet determined whether we will present the stock-based incentive plan for stockholder approval within one year following the completion of the conversion or whether we will present this plan for stockholder approval more than one year after the completion of the conversion. In the event the Board of Governors of the Federal Reserve System changes its regulations or policies regarding stock-based incentive plans, including any regulations or policies restricting the size of awards and vesting of benefits as described above, the restrictions described above may not be applicable.
We may obtain the shares needed for our stock-based benefit plans by issuing additional shares of common stock from authorized but unissued shares or through stock repurchases.
Transactions with Certain Related Persons
Loans and Extensions of Credit.
The Sarbanes-Oxley Act of 2002 generally prohibits publicly traded companies from making loans to their executive officers and directors, but it contains a specific exemption from such prohibition for loans made by federally insured financial institutions, such as Coastway Community Bank, to their executive officers and directors in compliance with federal banking regulations. Federal regulations permit executive officers and directors to receive the same terms that are widely available to other employees as long as the director or executive officer is not given preferential treatment compared to the other participating employees. Coastway Community Bank makes loans to its directors, executive officers and employees through an employee loan program pursuant to which such loans bear interest at a rate that is 1.0% lower than the market rate at the time of origination, but no lower than 4%. The program applies only to residential mortgages, consumer loans and home equity installment loans on a primary residence and is available to all employees of Coastway Community Bank.
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The following table sets forth loans made by Coastway Community Bank to its directors and executive officers where the largest amount of all indebtedness outstanding during the years ended December 31, 2012, 2011 and 2010, and all amounts of interest payable during each year, respectively, exceeded $120,000, and where the borrowers received reduced interest rates pursuant to the employee loan program described above. Except for the reduced interest rates, all loans to directors and executive officers were made in the ordinary course of business, were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to persons not related to Coastway Community Bank, and did not involve more than the normal risk of collectability or present other unfavorable features.
|
Name
|
|
Type of Loan
|
|
Largest
Aggregate
Balance from
January 1, 2010
to June 30, 2013
|
|
Interest Rate
on June 30,
2013
|
|
Principal
balance on
June 30, 2013
|
|
Amount of
Principal Paid
from January 1,
2010 to June 30,
2013
|
|
Amount of
Interest Paid
from January 1,
2010 to June 30,
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William A. White
|
|
Residential mortgage
|
|
$
|
1,083,485
|
|
4.0
|
%
|
$
|
481,626
|
(1)
|
$
|
577,133
|
|
$
|
131,645
|
|
|
Richard H. Petrarca
|
|
Residential mortgage
|
|
$
|
190,326
|
|
4.0
|
%
|
$
|
177,626
|
|
$
|
12,700
|
|
$
|
25,799
|
|
(1)
Unsecured.
Other than as described above and except for directors and executive officers whose loans were made on preferential terms but for which the principal balance has been less than $120,000 since January 1, 2010, all loans made by Coastway Community Bank to executive officers, directors, immediate family members of executive officers and directors, or organizations with which executive officers and directors are affiliated, were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable loans to persons not related to Coastway Community Bank, and did not involve more than the normal risk of collectability or present other unfavorable features. Coastway Community Bank is in compliance with federal regulations with respect to its loans and extensions of credit to executive officers and directors.
In addition, loans made to a director or executive officer must be approved in advance by a majority of the disinterested members of the Board of Directors. The aggregate amount of our loans to our executive officers and directors and their related entities was $1.2 million at June 30, 2013. As of June 30, 2013, these loans were performing according to their original terms.
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SUBSCRIPTIONS BY DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding intended common stock subscriptions by each of the directors and executive officers and their associates, and by all directors, officers and their associates as a group. However, there can be no assurance that any such person or group will purchase any specific number of shares of our common stock. In the event the individual maximum purchase limitation is increased, persons subscribing for the maximum amount may increase their purchase order. Directors and officers will purchase shares of common stock at the same $10.00 purchase price per share and on the same terms as other purchasers in the offering. This table excludes shares of common stock to be purchased by the employee stock ownership plan, as well as any stock awards or stock option grants that may be made no earlier than six months after the completion of the offering. The directors and officers have indicated their intention to subscribe in the offering for an aggregate of 87,500 shares of common stock, equal to 2.8% of the number of shares of common stock to be sold in the offering at the minimum of the offering range (excluding shares issued to our charitable foundation), assuming shares are available. Purchases by directors, officers and their associates will be included in determining whether the required minimum number of shares has been subscribed for in the offering. The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale. Subscriptions by management through our 401(k) Plan will be counted as part of the maximum number of shares such individuals may subscribe for in the offering.
|
Name and Title
|
|
Number of
Shares(1)
|
|
Aggregate
Purchase Price(1)
|
|
Percent at
Minimum of
Offering Range
|
|
|
|
|
|
|
|
|
|
|
|
Mark E. Crevier, Chairman of the Board
|
|
5,000
|
|
$
|
50,000
|
|
*
|
|
|
Hon. Francis X. Flaherty, Director
|
|
5,000
|
|
50,000
|
|
*
|
|
|
Debra M. Paul, Director
|
|
500
|
|
5,000
|
|
*
|
|
|
William A. White, President, Chief Executive Officer and Director
|
|
5,000
|
|
50,000
|
|
*
|
|
|
Dennis M. Murphy, Director
|
|
2,500
|
|
25,000
|
|
*
|
|
|
James P. Fiore, Director
|
|
10,000
|
|
100,000
|
|
*
|
|
|
Peter A. Koch, Director
|
|
20,000
|
|
200,000
|
|
*
|
|
|
Lynda Dickinson, Director
|
|
2,500
|
|
25,000
|
|
*
|
|
|
Phillip Kydd, Vice Chairman of the Board
|
|
5,000
|
|
50,000
|
|
*
|
|
|
David P. DiSanto, Director
|
|
10,000
|
|
100,000
|
|
*
|
|
|
Richard Petrarca, Executive Vice President and Chief Operating Officer
|
|
10,000
|
|
100,000
|
|
*
|
|
|
Paul G. Wielgus, Executive Vice President and Chief Credit Officer
|
|
3,000
|
|
30,000
|
|
*
|
|
|
Jeanette Fritz, Executive Vice President and Chief Financial Officer
|
|
3,000
|
|
30,000
|
|
*
|
|
|
Jana M. Planka, Executive Vice President and Chief Retail Officer
|
|
3,000
|
|
30,000
|
|
*
|
|
|
Stephen J. Gibbons, Executive Vice President and Chief Business Lender
|
|
3,000
|
|
30,000
|
|
*
|
|
|
All
directors and officers as a group (15 persons)
|
|
87,500
|
|
$
|
875,000
|
|
2.8
|
%
|
*
Less than 1%.
(1)
Includes purchases by the named individual’s spouse and other relatives of the named individual living in the same household. Other than as set forth above, the named individuals are not aware of any other purchases by a person who or entity that would be considered an associate of the named individuals under the plan of conversion and reorganization.
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THE CONVERSION AND PLAN OF REORGANIZATION
The Board of Directors of Coastway Bancorp, MHC has approved the plan of conversion and reorganization. The plan of conversion and reorganization must also be approved by Coastway Community Bank’s depositors. A special meeting of depositors has been called for this purpose. The Federal Reserve Board has conditionally approved the plan of conversion and reorganization; however, such approval does not constitute a recommendation or endorsement of the plan of conversion and reorganization by the Federal Reserve Board and the Rhode Island Department of Business Regulation.
General
The Board of Directors of Coastway Bancorp, MHC adopted the plan of conversion and reorganization on August 22, 2013. Pursuant to the plan of conversion and reorganization, Coastway Bancorp, MHC will convert from the mutual form of organization to the fully stock form and we will sell shares of common stock to the public in our offering. In the conversion, we have organized a new Maryland stock holding company named Coastway Bancorp, Inc. When the conversion is completed, all of the capital stock of Coastway Community Bank will be owned by Coastway Bancorp, Inc., and all of the common stock of Coastway Bancorp, Inc. will be owned by public stockholders.
We intend to retain between $12.0 million and $16.5 million of the net proceeds of the offering, or $19.1 million if the offering range is increased by 15%, and to contribute the balance of the net proceeds (excluding the contributions to the employee stock ownership plan and Foundation) to Coastway Community Bank. The conversion will be consummated only upon the issuance of at least 3,102,500 shares of our common stock offered pursuant to the plan of conversion and reorganization.
The plan of conversion and reorganization provides that we will offer shares of common stock for sale in the subscription offering to eligible account holders, our tax-qualified employee benefit plans, including our employee stock ownership plan that we are establishing in connection with the conversion and our 401(k) plan, supplemental eligible account holders and other depositors. If all shares are not subscribed for in the subscription offering, we intend to offer common stock for sale in a community offering to members of the general public, with a preference given to natural persons (including trusts of natural persons) residing in the State of Rhode Island.
We have the right to accept or reject, in whole or in part, any orders to purchase shares of the common stock received in the community offering. The community offering, if any, may begin at the same time as, during, or after the subscription offering, and must be completed within 45 days after the completion of the subscription offering unless otherwise extended by us with the approval, to the extent such approvals are required, of the Federal Reserve Board and the Rhode Island Department of Business Regulation. See “—Community Offering.”
We determined the number of shares of common stock to be offered in the offering based upon an independent valuation of the estimated consolidated pro forma market value of Coastway Bancorp, Inc. All shares of common stock to be sold in the offering will be sold at $10.00 per share. Investors will not be charged a commission to purchase shares of common stock in the offering. The independent valuation will be updated and the final number of the shares of common stock to be issued in the offering will be determined at the completion of the offering. See “—Determination of Share Price and Number of Shares to be Issued” for more information as to the determination of the estimated pro forma market value of the common stock.
The following is a brief summary of the conversion. We recommend reading the plan of conversion and reorganization in its entirety for more information. A copy of the plan of conversion and
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reorganization is available for inspection at each branch office of Coastway Community Bank and at the Federal Reserve Bank of Boston. See “Where You Can Find Additional Information.”
Reasons for the Conversion
Our primary reasons for converting and raising additional capital through the offering are to:
·
increase our capital to enhance our financial strength and to support existing and future lending and deposit growth;
·
enhance our lending capacity by increasing our regulatory lending limits;
·
attract and retain qualified personnel by enabling us to establish stock-based benefit plans for management and employees that will give them an opportunity to share in our long-term success;
·
provide customers and members of our community with the opportunity to acquire an ownership interest in Coastway Community Bank; and
·
have greater flexibility to structure and finance opportunities for expansion, including acquisitions of other financial institutions, although we have no current arrangements or agreements with respect to any such transactions.
In the stock holding company structure, we will have greater flexibility in structuring mergers and acquisitions. Our current mutual structure prevents us from offering shares of our common stock as consideration for a merger or acquisition. Potential sellers often want stock for at least part of the acquisition consideration. Our new stock holding company structure will enable us to offer stock or cash consideration, or a combination thereof, and will therefore enhance our ability to compete with other bidders when acquisition opportunities arise. We have no current arrangements or agreements to acquire other banks, thrifts, credit unions, financial services companies or branch offices, and there can be no assurance that we will be able to consummate any acquisitions.
We believe that the additional capital raised in the offering will enable us to take advantage of business opportunities that may not otherwise be available to us, while remaining an independent community-oriented institution.
As of June 30, 2013, Coastway Community Bank was considered “well capitalized” for regulatory purposes and the proceeds from the stock offering will further improve our capital position. We are not subject to any directive from any regulatory agency to raise capital.
Approvals Required
The affirmative vote of a majority of the total eligible votes of depositors of Coastway Community Bank at the special meeting of depositors is required to approve the plan of conversion and reorganization. The conversion also must be approved by the Federal Reserve Board and the Rhode Island Department of Business Regulation, which have given their conditional approval to the plan of conversion and reorganization.
A special meeting of depositors of Coastway Community Bank to consider and vote upon the plan of conversion and reorganization has been set for , 2013.
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Effects of Conversion on Depositors and Borrowers
Continuity
.
While the conversion is being accomplished, our normal business of accepting deposits and making loans will continue without interruption. We will continue to be a Rhode Island savings bank and will continue to be regulated by the FDIC and the Rhode Island Department of Business Regulation after the conversion. After the conversion, we will continue to offer existing services to depositors, borrowers and other customers. The directors serving Coastway Community Bank at the time of the conversion will be the directors of Coastway Community Bank and of Coastway Bancorp, Inc. after the conversion.
Effect on Deposit Accounts
.
Each depositor of Coastway Community Bank at the time of the conversion will automatically continue as a depositor after the conversion, and the deposit balance, interest rate and other terms of deposit accounts will not change as a result of the conversion. Each deposit account will continue to be insured by the FDIC to the same extent as before the conversion. Depositors will continue to hold their existing certificates, statement savings and other evidences of their accounts.
Effect on Loans
.
No loan outstanding from Coastway Community Bank will be affected by the conversion, and the amount, interest rate, maturity and security for each loan will remain as it was contractually fixed prior to the conversion.
Effect on Voting Rights of Depositors
.
At present, all of our depositors have voting rights in Coastway Bancorp, MHC as to all matters requiring membership action. Upon completion of the conversion, depositors will cease to be members of Coastway Bancorp, MHC (which will cease to exist) and will no longer have voting rights. Upon completion of the conversion, all voting rights in Coastway Community Bank will be vested in Coastway Bancorp, Inc. as the sole stockholder of Coastway Community Bank. The stockholders of Coastway Bancorp, Inc. will possess exclusive voting rights with respect to Coastway Bancorp, Inc. common stock.
Tax Effects
.
We will receive an opinion of counsel or tax advisor with regard to federal and state income tax consequences of the conversion to the effect that the conversion will not be taxable for federal or state income tax purposes to Coastway Community Bank or its depositors. See “—Material Income Tax Consequences.”
Effect on Liquidation Rights
.
Each depositor in Coastway Community Bank has both a deposit account in Coastway Community Bank and a pro rata ownership interest in the net worth of Coastway Bancorp, MHC based upon the deposit balance in his or her account. This ownership interest is tied to the depositor’s account and has no tangible market value separate from the deposit account. This interest may only be realized in the event of a complete liquidation of Coastway Bancorp, MHC and Coastway Community Bank. Any depositor who opens a deposit account obtains a pro rata ownership interest in Coastway Bancorp, MHC without any additional payment beyond the amount of the deposit. A depositor who reduces or closes his or her account receives a portion or all, respectively, of the balance in the deposit account but nothing for his or her ownership interest in the net worth of Coastway Bancorp, MHC, which is lost to the extent that the balance in the account is reduced or closed.
Consequently, depositors in a savings bank that is a subsidiary of a mutual holding company normally have no way of realizing the value of their ownership interest in the mutual holding company, which has realizable value only in the unlikely event that the savings bank is completely liquidated. If this occurs, the depositors of record at that time, as owners, would share pro rata in any residual surplus and reserves of the mutual holding company after other claims, including claims of depositors to the amounts of their deposits, are paid.
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Under the plan of conversion, depositors as of July 30, 2012 and [SERD] will receive an interest in liquidation accounts maintained by Coastway Bancorp, Inc. and Coastway Community Bank in an aggregate amount equal to Coastway Bancorp, MHC’s total equity as reflected in the latest statement of financial condition used in this prospectus. Coastway Bancorp, Inc. and Coastway Community Bank will hold the liquidation accounts for the benefit of depositors as of July 30, 2012 and [SERD] who continue to maintain deposits in Coastway Community Bank after the conversion. The liquidation accounts would be distributed to depositors as of July 30, 2012 and [SERD] who maintain their deposit accounts in Coastway Community Bank only in the event of a liquidation of (a) Coastway Bancorp, Inc. and Coastway Community Bank or (b) Coastway Community Bank. The liquidation account in Coastway Community Bank would be used only in the event that Coastway Bancorp, Inc. does not have sufficient assets to fund its obligations under its liquidation account. The total obligation of Coastway Bancorp, Inc. and Coastway Community Bank under their respective liquidation accounts will never exceed the dollar amount of Coastway Bancorp, Inc.’s liquidation account as adjusted from time to time pursuant to the plan of conversion and federal regulations. See “—Liquidation Rights.”
Determination of Share Price and Number of Shares to be Issued
The plan of conversion and reorganization and federal regulations require that the aggregate purchase price of the common stock sold in the offering be based on the appraised pro forma market value of the common stock, as determined by an independent valuation. We have retained RP Financial, LC. to prepare an independent valuation appraisal. For its services in preparing the initial valuation, RP Financial, LC. will receive a fee of $57,500, and will be reimbursed for its expenses. We have agreed to indemnify RP Financial, LC. and its employees and affiliates against specified losses, including any losses in connection with claims under the federal securities laws, arising out of its services as independent appraiser, except where such liability results from its negligence or bad faith.
RP Financial, LC. has estimated that, as of August 9, 2013, the estimated pro forma market value of Coastway Bancorp, Inc., assuming the establishment and funding of our new charitable foundation with a contribution to consist of $300,000 in cash and a number of shares of our common stock that together will total 3.15% of the gross proceeds of the offering (consisting of 67,729 shares or $677,290 in stock at the minimum of the range and 102,221 shares or $1,022,210 in stock at the maximum of the range, up to 122,054 shares or $1,220,540 in stock at the adjusted maximum of the range) ranged from $31.7 million to $42.8 million, with a midpoint of $37.1 million, subject to increase up to $49.5 million. Based on this valuation and a $10.00 per share price, the number of shares of common stock being offered for sale by us will range from 3,102,500 shares to 4,197,500 shares subject to an increase up to 4,827,125 shares. The $10.00 per share price was selected primarily because it is the price most commonly used in mutual-to-stock conversions of financial institutions.
Consistent with applicable appraisal guidelines, the appraisal applied three primary methodologies: the pro forma price-to-book value approach applied to both reported book value and tangible book value; the pro forma price-to-earnings approach applied to reported and core earnings; and the pro forma price-to-assets approach.
RP Financial, LC. also considered the following factors, among others:
·
our recent results and financial condition;
·
the economic and demographic conditions in our existing market area;
·
certain historical, financial and other information relating to us;
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·
a comparative evaluation of our operating and financial characteristics with those of other similarly situated publicly traded savings institutions;
·
the aggregate size of the offering of common stock;
·
the impact of the conversion and the offering on our equity and earnings potential;
·
our potential to pay cash dividends; and
·
the trading market for securities of comparable institutions and general conditions in the market for such securities.
The appraisal is based in part on an analysis of a peer group of ten publicly traded savings institutions that RP Financial, LC. considered comparable to us. The peer group consists of the following ten companies, all of which are traded on the Nasdaq stock market.
|
Company Name and Ticker Symbol
|
|
Headquarters
|
|
Total Assets
|
|
|
|
|
|
|
(in millions)
|
|
|
SI Financial Group, Inc. (SIFI)
|
|
Willimantic, CT
|
|
$
|
949
|
(1)
|
|
BSB Bancorp, Inc. (BLMT)
|
|
Belmont, MA
|
|
$
|
909
|
(1)
|
|
TF Financial Corp. (THRD)
|
|
Newtown, PA
|
|
$
|
715
|
(1)
|
|
Hampden Bancorp, Inc. (HBNK)
|
|
Springfield, MA
|
|
$
|
668
|
(2)
|
|
Colonial Financial Services, Inc. (COBK)
|
|
Bridgeton, NJ
|
|
$
|
633
|
(2)
|
|
Chicopee Bancorp, Inc. (CBNK)
|
|
Chicopee, MA
|
|
$
|
597
|
(1)
|
|
Peoples Federal Bancshares, Inc. (PEOP)
|
|
Brighton, MA
|
|
$
|
578
|
(2)
|
|
Alliance Bancorp, Inc. (ALLB)
|
|
Broomall, PA
|
|
$
|
457
|
(2)
|
|
Wellesley Bancorp, Inc. (WEBK)
|
|
Wellesley, MA
|
|
$
|
397
|
(1)
|
|
Georgetown Bancorp, Inc. (GTWN)
|
|
Georgetown, MA
|
|
$
|
211
|
(2)
|
(1)
As of June 30, 2013.
(2)
As of March 31, 2013.
RP Financial, LC. has informed us that it sought to provide meaningful comparative data to limit the need to perform subjective valuation adjustments with respect to institutions that did not share common characteristics with Coastway Community Bank. As a result, a comparable institution’s dissimilar asset size may be outweighed by similarities with respect to other characteristics that RP Financial, LC. considers more indicative of an institution’s value than asset size.
The peer group selection process was limited to publicly traded thrifts in accordance with regulatory conversion guidelines, which limit the number of potential comparable companies for inclusion in the peer group to 110 full stock publicly traded companies. As noted in the appraisal report, the selection process for the peer group involved applying two geographic screens of the universe of all public thrifts that were eligible for inclusion in the peer group.
·
New England Thrift Institutions
. Given the limited number of publicly-traded full stock savings institutions based in Rhode Island, RP Financial, LC. looked to a broader market comprised of thrift institutions with assets less than $1.0 billion based in the New England region of the United States. Seven companies met the criteria for the screen and all were included in the peer group.
·
Eastern Pennsylvania and New Jersey Thrift Institutions
. RP Financial, LC. next looked at publicly-traded full stock institutions based in eastern Pennsylvania and
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New Jersey with assets less than $1.0 billion. Three companies met the criteria for the screen and all were included in the group.
In selecting the peer group, RP Financial, LC. considered only those companies that have been in full stock form for over one year, are not subject to acquisition, and are not experiencing unusual financial or other trends.
The following table presents a summary of selected pro forma pricing ratios for Coastway Bancorp, Inc. and the peer group companies identified by RP Financial, LC. Ratios are based on earnings for the twelve months ended June 30, 2013 (or the last twelve months for which data is available) and stock price information as of August 9, 2013. Compared to the median pricing of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 28.6% on a price-to-book value basis, a discount of 30.4% on a price-to-tangible book value basis and a premium of 131.8% on a price-to-earnings basis.
|
|
|
Price-to-earnings
multiple
|
|
Price-to-book
value ratio
|
|
Price-to-tangible
book value ratio
|
|
|
Coastway Bancorp, Inc. (pro forma)
|
|
|
|
|
|
|
|
|
Maximum, as adjusted
|
|
78.69
|
x
|
72.05
|
%
|
72.05
|
%
|
|
Maximum
|
|
63.99
|
x
|
68.12
|
%
|
68.12
|
%
|
|
Midpoint
|
|
52.66
|
x
|
64.06
|
%
|
64.06
|
%
|
|
Minimum
|
|
42.46
|
x
|
59.24
|
%
|
59.24
|
%
|
|
|
|
|
|
|
|
|
|
|
Valuation of peer group companies using stock prices as of
August 9, 2013
|
|
|
|
|
|
|
|
|
Averages
|
|
24.96
|
x
|
96.59
|
%
|
97.37
|
%
|
|
Medians
|
|
27.61
|
x
|
95.34
|
%
|
97.91
|
%
|
Compared to the average pricing ratios of the peer group, our pro forma pricing ratios at the maximum of the offering range indicated a discount of 29.5% on a price-to-book basis, a discount of 30.0% on a price-to-tangible book basis and a premium of 156.4% on a price-to-earnings basis. This means that, at the maximum of the offering range, a share of our common stock would be more expensive on an earnings basis but would be less expensive than the peer group on a book value and tangible book value basis and more expensive on a price-to-earnings basis.
The independent valuation appraisal considered the pro forma effect of the offering. Consistent with federal appraisal guidelines, the appraisal applied three primary methodologies: (i) the pro forma price-to-book value approach applied to both reported book value and tangible book value; (ii) the pro forma price-to-earnings approach applied to reported and core earnings; and (iii) the pro forma price-to-assets approach. The market value ratios applied in the three methodologies were based on the current market valuations of the peer group companies. RP Financial, LC. placed the greatest emphasis on the price-to-earnings and price-to-book approaches in estimating pro forma market value. RP Financial, LC. did not consider a pro forma price-to-assets approach to be meaningful in preparing the appraisal, as this approach is more meaningful when a company has low equity or earnings. The price-to-assets approach is less meaningful for a company like us, as we have equity in excess of regulatory capital requirements and positive reported and core earnings.
In applying each of the valuation methods, RP Financial, LC. considered adjustments to the pro forma market value based on a comparison of Coastway Community Bank with the peer group. RP Financial, LC. made downward adjustments for earnings, market area, liquidity of the stock and stock market conditions. No adjustments were made for financial condition, asset growth, dividend policy, management or the effect of government regulations and regulatory reform. The downward valuation adjustment for earnings considered, among other things, Coastway Community Bank’s lower reported
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earnings levels historically, the dependence on mortgage banking activities as a revenue source, the burden on earnings from the investment in fixed assets and the general condition of the primary market area in which Coastway Community Bank operates. The downward valuation adjustment for primary market area considered various demographic and economic characteristics of the market area served, as well as regional and national economic trends as they may impact the local market area. The valuation adjustment for liquidity of the stock took into account the expected pro forma market capitalization and number of common shares to be outstanding in relation to the peer group. The valuation adjustment for stock market conditions took into consideration the prevailing stock market environment and valuation trends for the common stock of thrifts and their holding companies and the results and pro forma pricing ratios of recently completed thrift conversion transactions.
Our Board of Directors carefully reviewed the information provided to it by RP Financial, LC. through the appraisal process. We engaged RP Financial, LC. to help us understand the regulatory process as it applies to the appraisal and to advise the Board of Directors as to how much capital Coastway Bancorp, Inc. would be required to raise under the regulatory appraisal guidelines.
The independent appraisal does not indicate per share market value. Do not assume or expect that the valuation of Coastway Bancorp, Inc. as indicated above means that, after the conversion and the offering, the shares of common stock will trade at or above the $10.00 offering price. Furthermore, the pricing ratios presented above were utilized by RP Financial, LC. to estimate our market value and not to compare the relative value of shares of our common stock with the value of the capital stock of the peer group. The value of the capital stock of a particular company may be affected by a number of factors such as financial performance, asset size and market location.
The independent valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of our common stock. RP Financial, LC. did not independently verify our consolidated financial statements and other information which we provided to them, nor did RP Financial, LC. independently value our assets or liabilities. The independent valuation considers Coastway Community Bank as a going concern and should not be considered as an indication of the liquidation value of Coastway Community Bank. Moreover, because the valuation is necessarily based upon estimates and projections of a number of matters, all of which may change from time to time, no assurance can be given that persons purchasing our common stock in the offering will thereafter be able to sell their shares at prices at or above the $10.00 offering price per share.
Following commencement of the subscription offering, the maximum of the valuation range may be increased by up to 15%, or up to $49.5 million, without resoliciting subscribers, which would result in a corresponding increase of up to 15% in the maximum of the offering range to up to 4,827,125 shares, to reflect changes in the market and financial conditions or demand for the shares. We will not decrease the minimum of the valuation range and the minimum of the offering range without a resolicitation of subscribers. The subscription price of $10.00 per share will remain fixed. See “—Limitations on Common Stock Purchases” as to the method of distribution and allocation of additional shares that may be issued in the event of an increase in the offering range to fill unfilled orders in the offering.
If the update to the independent valuation at the conclusion of the offering results in an increase in the maximum of the offering range to more than $48.3 million and a corresponding increase in the offering range to more than 4,827,125 shares (excluding shares issued to our charitable foundation), or a decrease in the minimum of the valuation range to less than $31.0 million and a corresponding decrease in the offering range to fewer than 3,102,500 shares (excluding shares issued to our charitable foundation), then we may promptly return with interest at our current statement savings rate of interest all funds previously delivered to us to purchase shares of common stock and cancel deposit account withdrawal
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authorizations, and, after consulting with the Federal Reserve Board and the Rhode Island Department of Business Regulation, we may terminate the plan of conversion and reorganization. Alternatively, we may hold a new offering, establish a new offering range, extend the offering period and commence a resolicitation of subscribers or take other actions as permitted, to the extent that permission is required, by the Federal Reserve Board or the Rhode Island Department of Business Regulation in order to complete the conversion and the offering. In the event that a resolicitation is commenced, we will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a person does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. Any resolicitation following the conclusion of the subscription and community offerings would not exceed 45 days unless further extended with the approval, to the extent approval is required, of the Federal Reserve Board and the Rhode Island Department of Business Regulation, for periods of up to 90 days.
An increase in the number of shares to be issued in the offering would decrease both a subscriber’s ownership interest and our pro forma earnings and stockholders’ equity on a per share basis while increasing pro forma earnings and stockholders’ equity on an aggregate basis. A decrease in the number of shares to be issued in the offering would increase both a subscriber’s ownership interest and our pro forma earnings and stockholders’ equity on a per share basis, while decreasing pro forma earnings and stockholders’ equity on an aggregate basis. For a presentation of the effects of these changes, see “Pro Forma Data.”
Copies of the independent valuation appraisal report of RP Financial, LC. and the detailed memorandum setting forth the method and assumptions used in the appraisal report are available for inspection at our main office and as specified under “Where You Can Find Additional Information.”
Subscription Offering and Subscription Rights
In accordance with the plan of conversion and reorganization, rights to subscribe for shares of common stock in the subscription offering have been granted in the following descending order of priority. The filling of all subscriptions that we receive will depend on the availability of common stock after satisfaction of all subscriptions of all persons having prior rights in the subscription offering and to the maximum, minimum and overall purchase limitations set forth in the plan of conversion and reorganization and as described below under “—Limitations on Common Stock Purchases.”
Priority 1: Eligible Account Holders
.
Each depositor with aggregate deposit account balances of $50.00 or more (a “Qualifying Deposit”) as of the close of business on July 30, 2012 (an “Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase, subject to the overall purchase limitations, up to the greater of 20,000 shares of our common stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Eligible Account Holders, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will first be allocated so as to permit each Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all subscribing Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Eligible Account Holders, the excess shall be reallocated (one or more
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times as necessary) among those Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of shares of our common stock, each Eligible Account Holder must list on his or her stock order form all deposit accounts in which he or she had an ownership interest on July 30, 2012. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed. In the event of an oversubscription, the subscription rights of Eligible Account Holders who are also our directors or executive officers or their associates will be subordinated to the subscription rights of other Eligible Account Holders to the extent attributable to increased deposits during the year preceding July 30, 2012.
Priority 2: Tax-Qualified Plans
.
Our tax-qualified employee benefit plans, including our employee stock ownership plan and 401(k) plan, will receive, without payment therefor, nontransferable subscription rights to purchase in the aggregate up to 10% of the shares of common stock sold in the offering. Our employee stock ownership plan intends to purchase 8% of our outstanding shares (including shares to be contributed to our charitable foundation). In the event the number of shares offered in the offering is increased above the maximum of the valuation range, our tax-qualified employee plans will have a priority right to purchase any shares exceeding that amount up to 10% of the common stock issued in the offering and contributed to our charitable foundation. If market conditions warrant, in the judgment of its trustees, our employee stock ownership plan and 401(k) plan may instead elect to purchase shares in the open market following the completion of the conversion, subject to the approval of the Federal Reserve Board.
Priority 3: Supplemental Eligible Account Holders
.
To the extent that there are sufficient shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders and our tax-qualified employee benefit plans, each depositor with a Qualifying Deposit as of the close of business on [SERD] who is not an Eligible Account Holder (“Supplemental Eligible Account Holder”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of 20,000 shares of common stock, 0.10% of the total number of shares of common stock issued in the offering, or 15 times the number of subscription shares offered multiplied by a fraction of which the numerator is the aggregate Qualifying Deposit account balances of the Supplemental Eligible Account Holder and the denominator is the aggregate Qualifying Deposit account balances of all Supplemental Eligible Account Holders, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, shares will be allocated so as to permit each Supplemental Eligible Account Holder to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Supplemental Eligible Account Holder whose subscription remains unfilled in the proportion that the amount of his or her Qualifying Deposit bears to the total amount of Qualifying Deposits of all Supplemental Eligible Account Holders whose subscriptions remain unfilled. If an amount so allocated exceeds the amount subscribed for by any one or more Supplemental Eligible Account Holders, the excess shall be reallocated (one or more times as necessary) among those Supplemental Eligible Account Holders whose subscriptions are not fully satisfied until all available shares have been allocated.
To ensure proper allocation of common stock, each Supplemental Eligible Account Holder must list on the stock order form all deposit accounts in which he or she had an ownership interest at [SERD]. In the event of oversubscription, failure to list an account could result in fewer shares being allocated than if all accounts had been disclosed.
Priority 4: Other Depositors
.
To the extent that there are shares of common stock remaining after satisfaction of subscriptions by Eligible Account Holders, our tax-qualified employee benefit plans and Supplemental Eligible Account Holders, each depositor on the voting record date of [voting record date]
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who is not an Eligible Account Holder or Supplemental Eligible Account Holder (“Other Depositors”) will receive, without payment therefor, nontransferable subscription rights to purchase up to the greater of 20,000 shares of common stock or 0.10% of the total number of shares of common stock issued in the offering, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.” If there are not sufficient shares available to satisfy all subscriptions, available shares will be allocated so as to permit each Other Depositor to purchase a number of shares sufficient to make his or her total allocation equal to the lesser of 100 shares of common stock or the number of shares for which he or she subscribed. Thereafter, unallocated shares will be allocated to each Other Depositor whose subscription remains unfilled in the proportion that the amount of his or her subscription bears to the total amount of subscriptions of all Other Depositors whose subscriptions remain unfilled.
Expiration Date
. The Subscription Offering will expire at 4:00 p.m., Eastern Time, on [expiration date], unless extended by us for up to 45 days or such additional periods with the approval of the Federal Reserve Board, if necessary. Subscription rights will expire whether or not each eligible depositor can be located. We may decide to extend the expiration date of the subscription offering for any reason, whether or not subscriptions have been received for shares at the minimum, midpoint or maximum of the offering range. Subscription rights that have not been exercised prior to the expiration date will become void.
We will not execute orders until we have received orders to purchase at least the minimum number of shares of common stock. If we have not received orders to purchase at least 3,102,500 shares within 45 days after the expiration date and the Federal Reserve Board and the Rhode Island Department of Business Regulation has not consented, to the extent such consent is required, to an extension, all funds delivered to us to purchase shares of common stock in the offering will be returned promptly to the subscribers with interest at our current statement savings rate and all deposit account withdrawal authorizations will be canceled. If an extension beyond [extension date #1] is granted by the required regulatory agencies, we will resolicit subscribers, giving them an opportunity to change or cancel their orders. We will notify subscribers of the extension of time and of the rights of subscribers to place a new stock order for a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. Extensions may not go beyond [extension date #2], which is two years after the special meeting of our depositors to vote on the conversion.
Community Offering
To the extent that shares of common stock remain available for purchase after satisfaction of all subscriptions of the Eligible Account Holders, our tax-qualified employee benefit plans, Supplemental Eligible Account Holders and Other Depositors, we intend to offer shares pursuant to the plan of conversion and reorganization to members of the general public in a community offering. Shares would be offered with a preference to natural persons (including trusts of natural persons) residing in the State of Rhode Island.
Subscribers in the community offering may purchase up to 20,000 shares of common stock, subject to the overall purchase limitations. See “—Limitations on Common Stock Purchases.”
The opportunity to purchase shares of common stock in the community offering category is subject to our right, in our sole discretion, to accept or reject any such orders in whole or in part either at the time of receipt of an order or as soon as practicable following the expiration date of the offering.
If we do not have sufficient shares of common stock available to fill the orders of natural persons residing in the State of Rhode Island, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares, or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among
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natural persons residing in the State of Rhode Island, whose orders remain unsatisfied on an equal number of shares basis per order. If, after the allocation of shares to natural persons residing in such counties, we do not have sufficient shares of common stock available to fill the orders of other members of the general public, we will allocate the available shares among those persons in a manner that permits each of them, to the extent possible, to purchase the lesser of 100 shares, or the number of shares subscribed for by such person. Thereafter, unallocated shares will be allocated among members of the general public whose orders remain unsatisfied on an equal number of shares basis per order.
The term “residing” or “resident” as used in this prospectus means any person who occupies a dwelling within the State of Rhode Island, has a present intent to remain within the community for a period of time and manifests the genuineness of that intent by establishing an ongoing physical presence within the community, together with an indication that this presence within the community is something other than merely transitory in nature. We may utilize deposit or loan records or other evidence provided to us to decide whether a person is a resident. In all cases, however, the determination shall be in our sole discretion.
Expiration Date.
The community offering may begin at the same time as, during or after the subscription offering. It is currently expected to terminate at the same time as the subscription offering, although it must terminate no more than 45 days following the subscription offering. We may decide to extend the community offering for any reason and are not required to give purchasers notice of any such extension unless such period extends beyond [extension date #1]. If an extension beyond [extension date #1] is granted by the required regulatory agencies, we will resolicit persons whose orders we accept in the community offering, giving them an opportunity to change or cancel their orders. If a person does not respond, we will cancel his or her stock order and return purchase funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. These extensions may not go beyond [extension date #2], which is two years after the special meeting of our depositors to vote on the conversion.
Syndicated Community Offering
Our Board of Directors may decide to offer for sale shares of common stock not subscribed for or purchased in the subscription and community offerings in a syndicated community offering, subject to such terms, conditions and procedures as we may determine, in a manner that will achieve a widespread distribution of our shares of common stock. If a syndicated community offering is held, Sandler O’Neill & Partners, L.P. will serve as sole manager and will assist us in selling our common stock on a best efforts basis. In such capacity, Sandler O’Neill & Partners, L.P. may form a syndicate of other broker-dealers who are Financial Industry Regulatory Authority member firms. Neither Sandler O’Neill & Partners, L.P. nor any registered broker-dealer will have any obligation to take or purchase any shares of the common stock in the syndicated community offering.
In the syndicated community offering, any person may purchase up to 20,000 shares ($200,000) of common stock, subject to the overall purchase and ownership limitations. See “—Limitations on Common Stock Purchases.” We retain the right to accept or reject in whole or in part any orders in the syndicated community offering. Unless the Federal Reserve Board permits otherwise, accepted orders for Coastway Bancorp, Inc. common stock in the syndicated community offering will first be filled up to a maximum of two percent (2.0%) of the shares sold in the offering on a basis that will promote a widespread distribution of our common stock. Thereafter any remaining shares will be allocated on an equal number of shares per order basis until all shares have been allocated or orders have been filled, as the case may be. Unless the syndicated community offering begins during the subscription and/or community offering, the syndicated community offering will begin as soon as possible after the completion of the subscription and community offerings.
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Order forms will be used to purchase shares of common stock in the syndicated community offering. Investors in the syndicated community offering will follow the same general procedures applicable to purchasing shares in the community offering except that investors in the syndicated community offering may also wire payment for the subscription directly to Coastway Community Bank for deposit to the Coastway Bancorp, Inc. stock purchase escrow account. See “—Procedure for Purchasing Shares.”
The closing of the syndicated community offering is subject to conditions set forth in an agency agreement among Coastway Bancorp, Inc. and Coastway Community Bank on the one hand and Sandler O’Neill & Partners, L.P. on the other hand. If and when all the conditions for the closing are met, funds for common stock sold in the syndicated community offering, less fees and commissions payable, will be delivered promptly to us.
If for any reason we cannot effect a syndicated community offering of shares of common stock not purchased in the subscription and community offerings, or in the event that there are a significant number of shares remaining unsold after such offerings, we will try to make other arrangements for the sale of unsubscribed shares, if possible. The Federal Reserve Board must approve any such arrangements.
The opportunity to order shares of common stock in the syndicated community offering is subject to our right to reject orders, in whole or in part, either at the time of receipt of an order or as soon as practicable following the expiration date of the offering. If your order is rejected in part, you will not have the right to cancel the remainder of your order.
Limitations on Common Stock Purchases
The plan of conversion and reorganization includes the following limitations on the number of shares of common stock that may be purchased in the offering:
·
No person or entity may purchase more than 20,000 shares of common stock in the subscription offering, and no person or entity together with any associate or group of persons acting in concert may purchase more than 40,000 shares of common stock in all categories of the offering, except that our tax-qualified employee benefit plans, including the employee stock ownership plan that we are establishing in connection with the conversion and 401(k) plan, may purchase in the aggregate up to 10% of the shares of common stock issued in the offering and contributed to our charitable foundation (including shares issued in the event of an increase in the offering range of up to 15%);
·
The maximum number of shares of common stock that may be purchased in all categories of the offering by our executive officers and directors and their associates, in the aggregate, may not exceed 28.0% of the shares issued in the offering and contributed to our charitable foundation; and
·
The minimum purchase by each person purchasing shares in the offering is 25 shares, to the extent those shares are available.
Depending upon market or financial conditions, our Board of Directors, with any required approvals of the Federal Reserve Board, and without further approval of our depositors, may decrease or increase the purchase limitations. If a purchase limitation is increased, subscribers in the subscription offering who ordered the maximum amount will be, and, in our sole discretion, some other large subscribers may be, given the opportunity to increase their subscriptions up to the then-applicable limit. The effect of this type of resolicitation would be an increase in the number of shares of common stock owned by subscribers who choose to increase their subscriptions.
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In the event of an increase in the offering range of up to 15% of the total number of shares of common stock offered in the offering, shares will be allocated in the following order of priority in accordance with the plan of conversion and reorganization:
(1)
to fill our tax-qualified employee benefit plans’ subscriptions for up to 10% of the total number of shares of common stock issued in the offering and contributed to our charitable foundation;
(2)
in the event that there is an oversubscription at the Eligible Account Holder, Supplemental Eligible Account Holder or Other Depositor levels, to fill unfulfilled subscriptions of these subscribers according to their respective priorities; and
(3)
to fill unfulfilled subscriptions in the community offering, with preference given first to natural persons residing in the State of Rhode Island.
The term “associate” of a person means:
(1)
any corporation or organization, other than Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank, Coastway Bancorp, Inc. or a majority-owned subsidiary of these entities, of which the person is a senior officer, partner or beneficial owner of 10% or more of any class of equity securities;
(2)
any trust or other estate in which the person has a substantial beneficial interest or serves as a trustee or in a fiduciary capacity, excluding any employee stock benefit plan in which the person has a substantial beneficial interest or serves as trustee or in a fiduciary capacity; and
(3)
any relative, by blood or marriage, of the person, who either lives in the same home as the person or who is a director or officer of Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank or Coastway Bancorp, Inc.
The term “acting in concert” means:
(1)
knowing participation in a joint activity or interdependent conscious parallel action towards a common goal whether or not pursuant to an express agreement; or
(2)
a combination or pooling of voting or other interests in the securities of an issuer for a common purpose pursuant to any contract, understanding, relationship, agreement or other arrangement, whether written or otherwise.
A person or company that acts in concert with another person or company (“other party”) shall also be deemed to be acting in concert with any person or company who is also acting in concert with that other party, except that any tax-qualified employee stock benefit plan will not be deemed to be acting in concert with its trustee or a person who serves in a similar capacity solely for the purpose of determining whether common stock held by the trustee and common stock held by the employee stock benefit plan will be aggregated.
Our directors are not treated as associates of each other solely because of their membership on the Board of Directors. We have the right to determine whether prospective purchasers are associates or acting in concert. Shares of common stock purchased in the offering will be freely transferable except for shares purchased by our executive officers and directors and except as described below. Any purchases made by any associate of Coastway Community Bank or Coastway Bancorp, Inc. for the explicit purpose
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of meeting the minimum number of shares of common stock required to be sold in order to complete the offering shall be made for investment purposes only and not with a view toward redistribution. In addition, under the guidelines of the Financial Industry Regulatory Authority, members of the Financial Industry Regulatory Authority and their associates are subject to certain restrictions on transfer of securities purchased in accordance with subscription rights and to certain reporting requirements upon purchase of these securities. For a further discussion of limitations on purchases of shares of our common stock at the time of conversion and thereafter, see “—Restrictions on Purchase or Transfer of Our Shares After Conversion” and “Restrictions on Acquisition of Coastway Bancorp, Inc.”
Marketing and Distribution; Compensation
Subscription and Community Offerings.
To assist in the marketing of our shares of common stock in the subscription and community offerings, we have retained Sandler O’Neill & Partners, L.P., which is a broker-dealer registered with the Financial Industry Regulatory Authority. Sandler O’Neill & Partners, L.P. will assist us on a best efforts basis in the subscription and community offerings by:
(i)
consulting as to the financial and marketing implications of the plan of conversion and reorganization;
(ii)
reviewing with our board of directors the financial effect of the offering on us, based on the independent appraiser’s appraisal of the shares of common stock;
(iii)
reviewing all offering documents, including this prospectus, stock order forms and related offering materials;
(iv)
assisting in the design and implementation of a marketing strategy for the offering;
(v)
assisting management in scheduling and preparing for meetings with potential investors and other broker-dealers in connection with the offering; and
(vi)
providing such other general advice and assistance as may be reasonably necessary to promote the successful completion of the offerings.
For these services, Sandler O’Neill & Partners, L.P. will receive a fee of: (i) 1.0% of the dollar amount of all shares of common stock sold in the subscription and community offerings. No fee will be payable to Sandler O’Neill & Partners, L.P. with respect to shares purchased by officers, directors, employees or their immediate families and shares purchased by our tax-qualified and non-qualified employee benefit plans, and no sales fee will be payable with respect to the foundation shares.
Syndicated Offering.
In the event that shares of common stock are sold in a syndicated offering, we will pay fees of 5.25% of the aggregate amount of common stock sold in the syndicated offering to any other broker-dealers included in the syndicated offering.
Expenses.
Sandler O’Neill & Partners, L.P. will be reimbursed for allocable expenses in amount not to exceed $100,000 for expenses and attorney’s fees. We have paid Sandler O’Neill & Partners, L.P. an advance payment of $25,000 which will be credited against the expenses we incur during the offering.
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Records Management
We have also engaged Sandler O’Neill & Partners, L.P. as records management agent in connection with the conversion and the subscription and community offerings. In its role as records management agent, Sandler O’Neill & Partners, L.P., will assist us in the offering in the:
·
consolidation of deposit accounts and vote calculations;
·
design and preparation of proxy and stock order forms;
·
organization and supervision of the Stock Information Center;
·
proxy solicitation and other services for our special meeting of depositors; and
·
preparation and processing of other documents related to the stock offering.
Sandler O’Neill & Partners, L.P. will receive fees of $25,000 and expenses of up to $25,000 for these services.
Indemnity
Among other things, we will indemnify Sandler O’Neill & Partners, L.P. against liabilities and expenses, including legal fees, incurred in connection with certain claims or litigation arising out of or based upon untrue statements or omissions contained in the offering materials for the common stock, including liabilities under the Securities Act of 1933, as amended.
Solicitation of Offers by Officers and Directors
Some of our directors and executive officers may participate in the solicitation of offers to purchase common stock in the subscription and community offerings. These persons will be reimbursed for their reasonable out-of-pocket expenses incurred in connection with the solicitation. Other regular employees of Coastway Community Bank may assist in the offering, but only in ministerial capacities, and may provide clerical work in effecting a sales transaction. No offers or sales may be made by tellers or at the teller counters. Investment-related questions of prospective purchasers will be directed to executive officers or registered representatives of Sandler O’Neill & Partners, L.P. Our other employees have been instructed not to solicit offers to purchase shares of common stock or provide advice regarding the purchase of common stock. We will rely on Rule 3a4-1 under the Securities Exchange Act of 1934, as amended, and sales of common stock will be conducted within the requirements of Rule 3a4-1, so as to permit officers, directors and employees to participate in the sale of common stock. None of our officers, directors or employees will be compensated in connection with their participation in the offering.
The offering will comply with the requirements of Rule 10b-9 under the Securities Exchange Act of 1934.
Procedure for Purchasing Shares
Expiration Date
.
The offering will expire at 4:00 p.m., Eastern Time, on [expiration date], unless we extend it for up to 45 days. This extension may be approved by us, in our sole discretion, without further approval or additional notice to purchasers in the offering. Any extension of the subscription and/or community offering beyond [extension date #1] would require the Federal Reserve Board’s approval. If an extension beyond [extension date #1] is granted by the appropriate regulatory agencies,
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we will resolicit subscribers/persons who place orders, giving them an opportunity to change or cancel their orders. We will notify these subscribers of the extension of time and of the rights to place a new stock order for a specified period of time. If a subscriber does not respond, we will cancel his or her stock order and return his or her subscription funds, with interest, and cancel any authorization to withdraw funds from deposit accounts for the purchase of shares of common stock. If we have not received orders to purchase the minimum number of shares offered in the offering by the expiration date or any extension thereof, we may terminate the offering and promptly refund all funds received for shares of common stock. If the number of shares offered is reduced below the minimum of the offering range, or increased above the adjusted maximum of the offering range, subscribers may be resolicited with any required approvals of the Federal Reserve Board and the Rhode Island Department of Business Regulation.
To ensure that each purchaser receives a prospectus at least 48 hours before [expiration date], the expiration date of the offering, in accordance with Rule 15c2-8 of the Securities Exchange Act of 1934, as amended, no prospectus will be mailed any later than five days prior to the expiration date or hand delivered any later than two days prior to the expiration date. Execution of an order form will confirm receipt of delivery in accordance with Rule 15c2-8. Order forms will be distributed only with a prospectus. Subscription funds will be maintained in a segregated account at Coastway Community Bank and will earn interest at our current statement savings rate from the date of receipt.
We reserve the right in our sole discretion to terminate the offering at any time and for any reason, in which case we will cancel any deposit account withdrawal orders and promptly return all funds delivered to us, with interest at our current statement savings rate from the date of receipt.
We have the right to reject any order submitted in the offering by a person who we believe is making false representations or who we otherwise believe, either alone or acting in concert with others, is violating, evading, circumventing, or intends to violate, evade or circumvent the terms and conditions of the plan of conversion and reorganization.
Use of Order Forms
.
In order to purchase shares of common stock in the subscription offering and community offering, you must submit a completed order form and remit full payment. We will not be required to accept incomplete order forms, unsigned order forms, or orders submitted on photocopied or facsimiled order forms. We must receive all order forms prior to 4:00 p.m., Eastern Time, on [expiration date]. We are not required to accept order forms that are not received by that time, are executed defectively or are received without full payment or without appropriate withdrawal instructions. A postmark prior to [expiration date] will not entitle you to purchase shares of common stock unless we receive the envelope by [expiration date]. We are not required to notify subscribers of incomplete or improperly executed order forms. We have the right to permit the correction of incomplete or improperly executed order forms or waive immaterial irregularities. We do not represent, however, that we will do so and we have no affirmative duty to notify any prospective subscriber of any such defects. You may submit your order form and payment by overnight delivery to the indicated address on the order form, by bringing your order form to our Stock Information Center or by mail using the return envelope provided. Once tendered, an order form cannot be modified or revoked without our consent. We reserve the absolute right, in our sole discretion, to reject orders received in the community offering, in whole or in part, at the time of receipt or at any time prior to completion of the offering. If you are ordering shares, you must represent that you are purchasing shares for your own account and that you have no agreement or understanding with any person for the sale or transfer of the shares. Our interpretation of the terms and conditions of the plan of conversion and reorganization and of the acceptability of the order forms will be final, subject to any required approvals of the Federal Reserve Board and the Rhode Island Department of Business Regulation.
By signing the order form, you will be acknowledging that the common stock is not a deposit or savings account and is not federally insured or otherwise guaranteed by Coastway Community Bank or
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any governmental agency, and that you received a copy of this prospectus. However, signing the order form will not result in you waiving your rights under the Securities Act of 1933 or the Securities Exchange Act of 1934.
Payment for Shares
.
Payment for all shares of common stock will be required to accompany all completed order forms for the purchase to be valid. Payment for shares may be made by:
(1)
personal check, bank check or money order, payable to Coastway Bancorp, Inc.; or
(2)
authorization of withdrawal from Coastway Community Bank deposit accounts designated on the order form.
Appropriate means for designating withdrawals from deposit accounts at Coastway Community Bank are provided in the order forms. The funds designated must be available in the account(s) at the time the order form is received. A hold will be placed on these funds, making them unavailable to the depositor. Funds authorized for withdrawal will continue to earn interest within the account at the contract rate until the offering is completed, at which time the designated withdrawal will be made. Interest penalties for early withdrawal applicable to certificate accounts will not apply to withdrawals authorized for the purchase of shares of common stock; however, if a withdrawal results in a certificate account with a balance less than the applicable minimum balance requirement, the certificate will be canceled at the time of withdrawal without penalty and the remaining balance will be transferred to a savings account and earn interest at our current statement savings rate subsequent to the withdrawal. In the case of payments made by check or money order, these funds must be available in the account(s) and will be immediately cashed and placed in a segregated account at Coastway Community Bank and will earn interest at our current statement savings rate from the date payment is received until the offering is completed or terminated.
You may not use cash, wires or a check drawn on a Coastway Community Bank line of credit, and we will not accept third-party checks (a check written by someone other than you) payable to you and endorsed over to Coastway Bancorp, Inc. If you request that we place a hold on your checking account for the subscription amount, we reserve the right to interpret that as your authorization to treat those funds as if we had received a check for the designated amount, and we will immediately withdraw the amount from your checking account. Once we receive your executed order form, it may not be modified, amended or rescinded without our consent, unless the offering is not completed by the expiration date, in which event purchasers may be given the opportunity to increase, decrease or rescind their orders for a specified period of time.
We will have the right, in our sole discretion, to permit institutional investors to submit irrevocable orders together with the legally binding commitment for payment and to thereafter pay for the shares of common stock for which they subscribe in the community offering at any time prior to 48 hours before the completion of the offering. This payment may be made by wire transfer.
Our employee stock ownership plan will not be required to pay for any shares purchased in the offering until consummation of the offering, provided there is a loan commitment from an unrelated financial institution or Coastway Bancorp, Inc. to lend to the employee stock ownership plan the necessary amount to fund the purchase.
Regulations prohibit Coastway Community Bank from knowingly lending funds or extending credit to any persons to purchase shares of common stock in the offering.
Using Retirement Account Funds.
If you are interested in using your individual retirement account funds to purchase shares of common stock, you must do so through a self-directed individual
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retirement account such as a brokerage firm individual retirement account. By regulation, Coastway Community Bank’s individual retirement accounts are not self-directed, so they cannot be invested in shares of our common stock. Therefore, if you wish to use your funds that are currently in a Coastway Community Bank individual retirement account, you may not designate on the order form that you wish funds to be withdrawn from the account for the purchase of common stock. The funds you wish to use for the purchase of common stock will have to be transferred to a brokerage account. It may take several weeks to transfer your Coastway Community Bank individual retirement account to an independent trustee, so please allow yourself sufficient time to take this action. There will be no early withdrawal or Internal Revenue Service interest penalties for these transfers. Depositors interested in using funds in an individual retirement account or any other retirement account to purchase shares of common stock should contact our Stock Information Center as soon as possible, preferably at least two weeks prior to the end of the offering period, because processing such transactions takes additional time, and whether such funds can be used may depend on limitations imposed by the institutions where such funds are currently held. We cannot guarantee that you will be able to use such funds.
Delivery of Stock Certificates
.
Certificates representing shares of common stock issued in the offering and Coastway Community Bank checks representing any applicable refund and/or interest paid on subscriptions made by check or money order will be mailed to the persons entitled thereto at the certificate registration address noted on the order form, as soon as practicable following consummation of the offering and receipt of all necessary regulatory approvals. Any certificates returned as undeliverable will be held by the transfer agent until claimed by persons legally entitled thereto or otherwise disposed of in accordance with applicable law.
Until certificates for the shares of common stock are available and delivered to purchasers, purchasers may not be able to sell the shares of common stock that they ordered, even though the common stock will have begun trading.
Other Restrictions
.
Notwithstanding any other provision of the plan of conversion and reorganization, no person is entitled to purchase any shares of common stock to the extent the purchase would be illegal under any federal or state law or regulation, including state “blue sky” regulations, or would violate regulations or policies of the Financial Industry Regulatory Authority, particularly those regarding free riding and withholding. We may ask for an acceptable legal opinion from any purchaser as to the legality of his or her purchase and we may refuse to honor any purchase order if an opinion is not timely furnished. In addition, we are not required to offer shares of common stock to any person who resides in a foreign country.
Restrictions on Transfer of Subscription Rights and Shares
Applicable regulations prohibit any person with subscription rights, including the Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors, from transferring or entering into any agreement or understanding to transfer the legal or beneficial ownership of the subscription rights issued under the plan of conversion and reorganization or the shares of common stock to be issued upon their exercise. These rights may be exercised only by the person to whom they are granted and only for his or her account. Each person exercising subscription rights will be required to certify that he or she is purchasing shares solely for his or her own account and that he or she has no agreement or understanding regarding the sale or transfer of such shares. The regulations also prohibit any person from offering or making an announcement of an offer or intent to make an offer to purchase subscription rights or shares of common stock to be issued upon their exercise prior to completion of the offering.
We intend to pursue any and all legal and equitable remedies in the event we become aware of the transfer of subscription rights, and we will not honor orders that we believe involve the transfer of subscription rights.
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Stock Information Center
Our branch office personnel may not, by law, assist with investment-related questions about the offering. If you have any questions regarding the conversion or offering, please call our information hotline at [stock information number] to speak to a representative of Sandler O’Neill & Partners, L.P. Representatives are available by telephone Monday through Friday from 10:00 a.m. to 4:00 p.m., Eastern Time. You may also meet in person with a representative by visiting our Stock Information Center located at our headquarters at One Coastway Plaza, Cranston, Rhode Island. The Stock Information Center is open weekdays during the offering, except for bank holidays, from 10:00 a.m. to 4:00 p.m., Eastern Time.
Liquidation Rights
Liquidation prior to the conversion
.
In the unlikely event that Coastway Bancorp, MHC is liquidated prior to the conversion, all claims of creditors of Coastway Bancorp, MHC would be paid first. Thereafter, if there were any assets of Coastway Bancorp, MHC remaining, these assets would first be distributed to certain depositors of Coastway Community Bank under such depositors’ liquidation rights. The amount received by such depositors would be equal to their pro rata interest in the remaining value of Coastway Bancorp, MHC, after the claims of creditors, based on the relative size of their deposit accounts.
Liquidation following the conversion
.
The plan of conversion provides for the establishment, upon the completion of the conversion, of a liquidation account by
Coastway Bancorp, Inc.
for the benefit of Eligible Account Holders and Supplemental Eligible Account Holders in an amount equal to Coastway Bancorp, MHC’s total equity
as of the date of the latest statement of financial condition used in this prospectus.
The plan of conversion also provides for the establishment of a parallel bank liquidation account in Coastway Community Bank to support the Coastway Bancorp, Inc. liquidation account in the event Coastway Bancorp, Inc. does not have sufficient assets to fund its obligations under the Coastway Bancorp, Inc. liquidation account.
In the unlikely event that
Coastway Community Bank
were to liquidate after the conversion, all claims of creditors, including those of Coastway Community Bank depositors, would be paid first. However, except with respect to the liquidation account established by
Coastway Bancorp, Inc., a depositor’s claim would be solely for the principal amount of his or her deposit accounts plus accrued interest
. Depositors generally would not have an interest in the value of the assets of Coastway Community Bank or Coastway Bancorp, Inc. above that amount.
The liquidation account established by
Coastway Bancorp, Inc.
is designed to provide payments to qualifying depositors of their liquidation interest (exchanged for the liquidation rights such persons had in Coastway Bancorp, MHC) in the event of a liquidation of
Coastway Bancorp, Inc.
and Coastway Community Bank or a liquidation solely of Coastway Community Bank. Specifically, in the unlikely event that either (i) Coastway Community Bank or (ii)
Coastway Bancorp, Inc.
and
Coastway Community Bank
were to completely liquidate after the conversion, all claims of creditors, including those of Coastway Community Bank depositors, would be paid first, followed by a distribution to Eligible Account Holders and Supplemental Eligible Account Holders of their interests in the liquidation account maintained by
Coastway Bancorp, Inc.
In a complete liquidation of both entities, or of
Coastway Community Bank
only, when
Coastway Bancorp, Inc.
has insufficient assets to fund the distribution due to Eligible Account Holders and Supplemental Eligible Account Holders and
Coastway Community Bank
has positive net worth,
Coastway Community Bank
shall immediately make a distribution to fund
Coastway Bancorp, Inc.
’s remaining obligations under the Coastway Bancorp, Inc. liquidation account. In no event will any Eligible Account Holder or Supplemental Eligible Account Holder be entitled to a
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distribution that exceeds such holder’s interest in the liquidation account maintained by Coastway Bancorp, Inc. as adjusted from time to time pursuant to the plan of conversion and federal regulations. If
Coastway Bancorp, Inc.
is sold or liquidated apart from a sale or liquidation of
Coastway Community Bank
, then the Coastway Bancorp, Inc. liquidation account will cease to exist and Eligible Account Holders and Supplemental Eligible Account Holders will receive an equivalent interest in the Coastway Community Bank liquidation account, subject to the same rights and terms as the liquidation account maintained by Coastway Bancorp, Inc.
Pursuant to the plan of conversion, after two years from the date of conversion, Coastway Bancorp, Inc. shall, upon the written request of the Federal Reserve Board, transfer the liquidation account (and the depositors’ interests in such account) to
Coastway Community Bank
and the liquidation account shall thereupon subsumed into the liquidation account of
Coastway Community Bank.
Under the rules and regulations of the Federal Reserve Board, a post-conversion merger, consolidation, or similar combination or transaction with another depository institution or depository institution holding company in which
Coastway Bancorp, Inc.
or
Coastway Community Bank
is not the surviving institution would not be considered a liquidation. In such a transaction, the liquidation account would be assumed by the surviving institution.
Each Eligible Account Holder and Supplemental Eligible Account Holder would have an initial pro rata interest in the liquidation account for each deposit account, including savings accounts, transaction accounts such as negotiable order of withdrawal accounts, money market deposit accounts, and certificates of deposit, with a balance of $50.00 or more held in Coastway Community Bank on July 30, 2012 or [SERD] equal to the proportion that the balance of each Eligible Account Holder and Supplemental Account Holder deposit accounts on July 30, 2012 and [SERD], respectively, bears to the balance of all Eligible Account Holder and Supplemental Account Holder deposit accounts in Coastway Community Bank on such date.
If, however, on any December 31 annual liquidation account closing date commencing after the effective date of the conversion, the amount in any such deposit account is less than the amount in the deposit account on July 30, 2012 or [SERD], respectively, or any other annual liquidation account closing date, then the interest in the liquidation account relating to such deposit account would be reduced from time to time by the proportion of any such reduction, and such interest will cease to exist if such deposit account is closed. In addition, no interest in the liquidation account would ever be increased despite any subsequent increase in the related deposit account. Payment pursuant to liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders would be separate and apart from the payment of any insured deposit accounts to such depositor. Any assets remaining after the above liquidation rights of Eligible Account Holders and Supplemental Eligible Account Holders are satisfied would be available for distribution to stockholders.
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Material Income Tax Consequences
Consummation of the conversion is subject to the prior receipt of an opinion of counsel or tax advisor with respect to federal and state income taxation that the conversion will not be a taxable transaction to Coastway Bancorp, MHC, Coastway Bancorp, LLC (which will elect to be classified as a corporation for federal tax purposes as part of the conversion), Coastway Community Bank, Coastway Bancorp, Inc., Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors. Unlike private letter rulings, opinions of counsel or tax advisors are not binding on the Internal Revenue Service or any state taxing authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank or Coastway Bancorp, Inc. would prevail in a judicial proceeding.
Luse Gorman Pomerenk & Schick, P.C. has issued an opinion to Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank and Coastway Bancorp, Inc. that for federal income tax purposes:
1.
It is more likely than not that the conversion of Coastway Bancorp, MHC into Coastway Bancorp, Inc. will qualify as a tax-free organization within the meaning of Section 368(a)(1)(F) of the Code. In order to effect this conversion, the following interim steps will occur: (i) Coastway Bancorp LLC will elect to be classified as a corporation for federal tax purposes (and for federal tax purposes, will be deemed to be a newly-created association taxable as a corporation); (ii) Coastway Bancorp, MHC will merge with and into Coastway Bancorp, LLC, and (iii) thereafter, Coastway Bancorp, LLC will merge with and into Coastway Bancorp, Inc. It is more likely than not that the above series of transactions will be stepped together and treated as a merger of Coastway Bancorp, MHC into Coastway Bancorp, Inc. See Rev. Rul. 2003-48.
2.
The basis of the assets of Coastway Bancorp, MHC and the holding period of such assets to be received by Coastway Bancorp, Inc. will be the same as the basis and holding period of such assets in Coastway Bancorp, MHC immediately before the exchange.
3.
Eligible Account Holders and Supplemental Eligible Account Holders will not recognize any gain or loss upon the constructive exchange of their liquidation interests in Coastway Bancorp, MHC for interests in the liquidation account in Coastway Bancorp, Inc.
4.
It is more likely than not that the fair market value of the nontransferable subscription rights to purchase Coastway Bancorp, Inc. common stock is zero. Accordingly, no gain or loss will be recognized by Eligible Account Holders, Supplemental Eligible Account Holders or Other Depositors upon distribution to them of nontransferable subscription rights to purchase shares of Coastway Bancorp, Inc. common stock. Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors will not realize any taxable income as the result of the exercise by them of the nontransferable subscriptions rights.
5.
It is more likely than not that the fair market value of the benefit provided by the liquidation account of Coastway Community Bank supporting the payment of the Coastway Bancorp, Inc. liquidation account in the event Coastway Bancorp, Inc. lacks sufficient net assets is zero. Accordingly, it is more likely than not that no gain or loss will be recognized by Eligible Account Holders or Supplemental Eligible Account Holders upon the constructive distribution to them of such rights in the Coastway Community Bank liquidation account as of the effective date of the merger of Coastway Bancorp, LLC with and into Coastway Bancorp, Inc.
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6.
It is more likely than not that the basis of the shares of Coastway Bancorp, Inc. common stock purchased in the offering by the exercise of nontransferable subscription rights will be the purchase price. The holding period of the Coastway Bancorp, Inc. common stock purchased pursuant to the exercise of nontransferable subscription rights will commence on the date on which the right to acquire such stock was exercised.
7.
No gain or loss will be recognized by Coastway Bancorp, Inc. on the receipt of money in exchange for Coastway Bancorp, Inc. common stock sold in the offering.
We believe that the tax opinions summarized above address all material federal income tax consequences that are generally applicable to Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank, Coastway Bancorp, Inc. and persons receiving subscription rights. The tax opinion as to item 4 above is based on the position that subscription rights to be received by Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors do not have any economic value at the time of distribution or the time the subscription rights are exercised. In this regard, Luse Gorman Pomerenk & Schick, P.C. noted that the subscription rights will be granted at no cost to the recipients, are legally non-transferable and of short duration, and will provide the recipient with the right only to purchase shares of common stock at the same price to be paid by members of the general public in any community offering. The firm also noted that the Internal Revenue Service has not in the past concluded that subscription rights have value. Based on the foregoing, Luse Gorman Pomerenk & Schick, P.C. believes that it is more likely than not that the nontransferable subscription rights to purchase shares of common stock have no value. However, the issue of whether or not the nontransferable subscription rights have value is based on all the facts and circumstances. If the subscription rights granted to Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors are deemed to have an ascertainable value, receipt of these rights could result in taxable gain to those Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors who exercise the subscription rights in an amount equal to the ascertainable value, and we could recognize gain on a distribution. Eligible Account Holders, Supplemental Eligible Account Holders and Other Depositors are encouraged to consult with their own tax advisors as to the tax consequences in the event that subscription rights are deemed to have an ascertainable value.
We also have received a letter from RP Financial, LC., stating its belief that the subscription rights do not have any ascertainable fair market value and that the price at which the subscription rights are exercisable will not be more or less than the fair market value of the shares on the date of the exercise. This position is based on the fact that these rights are acquired by the recipients without cost, are
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nontransferable and of short duration, and afford the recipients the right only to purchase the common stock at the same price as will be paid by members of the general public in any community offering.
The tax opinion as to item 5 above is based on the position that the benefit provided by the Coastway Community Bank liquidation account supporting the payment of the liquidation account in the event Coastway Bancorp, Inc. lacks sufficient net assets has a fair market value of zero. We understand that: (i) no holder of an interest in a liquidation account has ever received a payment attributable to a liquidation account; (ii) the interests in the liquidation accounts are not transferable; (iii) the amounts due under the liquidation account with respect to each Eligible Account Holder and Supplemental Eligible Account Holder will be reduced as their deposits in Coastway Community Bank are reduced; and (iv) the Coastway Community Bank liquidation account payment obligation arises only if Coastway Bancorp, Inc. lacks sufficient assets to fund the liquidation account.
In addition, we have received a letter from RP Financial, LC. stating its belief that the benefit provided by the Coastway Community Bank liquidation account supporting the payment of the liquidation account in the event Coastway Bancorp, Inc. lacks sufficient net assets does not have any economic value at the time of the conversion. Based on the foregoing, Luse Gorman Pomerenk & Schick, P.C. believes it is more likely than not that such rights in the Coastway Community Bank liquidation account have no value. If such rights are subsequently found to have an economic value, income may be recognized by each Eligible Account Holder and Supplemental Eligible Account Holder in the amount of such fair market value as of the date of the conversion.
We do not plan to apply for a private letter ruling from the Internal Revenue Service concerning the transactions described herein. Unlike private letter rulings issued by the Internal Revenue Service, opinions of counsel are not binding on the Internal Revenue Service or any state tax authority, and such authorities may disagree with such opinions. In the event of such disagreement, there can be no assurance that the conclusions reached in an opinion of counsel would be sustained by a court if contested by the Internal Revenue Service.
The federal tax opinion has been filed with the Securities and Exchange Commission as an exhibit to Coastway Bancorp, Inc.’s registration statement. An opinion of Wolf & Company, P.C. regarding the Rhode Island state income tax consequences consistent with the federal tax opinion has also been filed as an exhibit to Coastway Bancorp, Inc.’s registration statement.
Restrictions on Purchase or Transfer of Our Shares after Conversion
The shares being acquired by the directors, executive officers and their associates are being acquired for investment purposes, and not with a view towards resale. All shares of common stock purchased in the offering by a director or an officer of Coastway Community Bank generally may not be sold for a period of one year following the closing of the conversion, except in the event of the death of the director or officer. Each certificate for restricted shares will bear a legend giving notice of this restriction on transfer, and instructions will be issued to the effect that any transfer within this time period of any certificate or record ownership of the shares other than as provided above is a violation of the restriction. Any shares of common stock issued at a later date as a stock dividend, stock split or otherwise with respect to the restricted stock will be similarly restricted. The directors and executive officers of Coastway Bancorp, Inc. also will be restricted by the insider trading rules promulgated pursuant to the Securities Exchange Act of 1934.
Purchases of shares of our common stock by any of our directors, officers and their associates, during the three-year period following the closing of the conversion may be made only through a broker or dealer registered with the Securities and Exchange Commission, except with the prior written approval of the Federal Reserve Board. This restriction does not apply, however, to negotiated transactions
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involving more than 1% of our outstanding common stock, to purchases of our common stock to fund stock options by one or more stock-based benefit plans or to any of our tax-qualified employee stock benefit plans or nontax-qualified employee stock benefit plans, including any stock-based benefit plans.
Applicable regulations and current agreements with our regulators prohibit Coastway Bancorp, Inc. from repurchasing its shares of common stock during the first year following conversion unless compelling business reasons exist for such repurchases. After one year, applicable regulations do not impose any repurchase restrictions; however, our agreements with our regulators may prohibit Coastway Bancorp, Inc. from repurchasing its shares of common stock for a significantly longer period of time.
COASTWAY CARES CHARITABLE FOUNDATION II
General
In furtherance of our commitment to our local community, our plan of conversion and reorganization provides that we will establish a new charitable foundation, Coastway Cares Charitable Foundation II as a non-stock, nonprofit Delaware corporation in connection with the stock offering. The new charitable foundation will be funded with shares of our common stock and cash, as further described below.
By further enhancing our visibility and reputation in our local community, we believe that the charitable foundation will enhance the long-term value of Coastway Community Bank’s community banking franchise. The stock offering presents us with a unique opportunity to provide a substantial and continuing benefit to our communities through the Coastway Cares Charitable Foundation II.
Purpose of the Charitable Foundation
In connection with the closing of the stock offering, we intend to contribute cash and stock to a charitable foundation that we are establishing, such contribution to consist of $300,000 in cash and a number of shares of our common stock that together will total 3.15% of the gross proceeds of the offering (67,729 shares or $677,290 in stock at the minimum of the range and 102,221 shares or $1,022,210 in stock at the maximum of the range, up to 122,054 shares or $1,220,540 in stock at the adjusted maximum of the range). Our expected aggregate contribution amount is not dependent upon the amount of stock that we sell in the stock offering. The purpose of the charitable foundation is to provide financial support to charitable organizations in the communities in which we operate and to enable our communities to share in our long-term growth. Coastway Cares Charitable Foundation II will be dedicated completely to community activities and the promotion of charitable causes, and may be able to support such activities in ways that are not presently available to us. Coastway Cares Charitable Foundation II will also support our ongoing obligations to the community under the Community Reinvestment Act. Coastway Community Bank received a “satisfactory” rating in its most recent Community Reinvestment Act examination by the FDIC.
Funding Coastway Cares Charitable Foundation II with shares of our common stock in addition to cash is also intended to allow our communities to share in our potential growth and success after the stock offering is completed because Coastway Cares Charitable Foundation II will benefit directly from any increases in the value of our shares of common stock. In addition, Coastway Cares Charitable Foundation II will maintain close ties with Coastway Community Bank, thereby forming a partnership within the communities in which Coastway Community Bank operates.
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Structure of the Charitable Foundation
Coastway Cares Charitable Foundation II will be incorporated under Delaware law as a non-stock, non-profit corporation. The certificate of incorporation of Coastway Cares Charitable Foundation II will provide that the corporation is organized exclusively for charitable purposes as set forth in Section 501(c)(3) of the Internal Revenue Code. Coastway Cares Charitable Foundation II’s certificate of incorporation will further provide that no part of the net earnings of the charitable foundation will inure to the benefit of, or be distributable to, its members, directors or officers or to private individuals.
The charitable foundation will be governed by a board of directors, initially consisting of Phillip Kydd, who is a director of Coastway Bancorp, Inc., Richard H. Petrarca, an executive officer of Coastway Bancorp, Inc. and one individual who is not affiliated with us. Applicable regulations require that we select one person to serve on the initial board of directors who is not one of our officers or directors and who has experience with local charitable organizations and grant making, and we have selected Marc Greenfield as a director to satisfy these requirements. For five years after the stock offering, one seat on the charitable foundation’s board of directors will be reserved for a person from our local community who has experience with local community charitable organizations and grant making and who is not one of our officers, directors or employees, and at least one seat on the charitable foundation’s board of directors will be reserved for one of Coastway Community Bank’s directors. On an annual basis, directors of the charitable foundation elect the board members to serve for one-year terms.
The business experience of Messrs. Kydd and Petrarca who will serve as board members of the charitable foundation is described in “Management of Coastway Bancorp, Inc.” Marc Greenfield, who will serve as our outside foundation director, is a resident of the City of Providence and a graduate of the University of Rhode Island and Suffolk Law School. He has been a practicing attorney for many years as a partner in the firm of Lynch and Greenfield, located in Providence, Rhode Island. Mr. Greenfield currently serves on the Zoning Board for the City of Providence. He is the Treasurer and a founding board member of the Learning Community Charter School in Central Falls, Rhode Island, a board member, coach and president of the Fox Point East Side Little League, board member of the Community Boating Center and has been active in other community affairs for many years.
The board of directors of Coastway Cares Charitable Foundation II will be responsible for establishing its grant and donation policies, consistent with the purposes for which it was established. As directors of a nonprofit corporation, directors of Coastway Cares Charitable Foundation II will at all times be bound by their fiduciary duty to advance the charitable foundation’s charitable goals, to protect its assets and to act in a manner consistent with the charitable purposes for which the charitable foundation is established. The directors of Coastway Cares Charitable Foundation II also will be responsible for directing the activities of the charitable foundation, including the management and voting of the shares of our common stock held by the charitable foundation. However, as required by applicable regulations, all shares of our common stock held by Coastway Cares Charitable Foundation II must be voted in the same ratio as all other shares of our common stock on all proposals considered by our stockholders.
Coastway Cares Charitable Foundation II’s initial place of business will be located at our corporate headquarters. The board of directors of Coastway Cares Charitable Foundation II will appoint such officers and employees as may be necessary to manage its operations. To the extent applicable, we will comply with the affiliates restrictions set forth in Sections 23A and 23B of the Federal Reserve Act and the regulations of the Federal Reserve Board and of the FDIC, as applicable, governing transactions between Coastway Community Bank and the charitable foundation.
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Capital for the charitable foundation will come from:
(1)
any dividends that may be paid on our shares of common stock in the future;
(2)
within the limits of applicable federal and state laws, loans collateralized by the shares of common stock; or
(3)
the proceeds of the sale of any of the shares of common stock in the open market from time to time.
As a private foundation under Section 501(c)(3) of the Internal Revenue Code, Coastway Cares Charitable Foundation II will be required to distribute annually in grants or donations a minimum of 5% of the average fair market value of its net investment assets.
Tax Considerations
We believe that an organization created for the above purposes should qualify as a Section 501(c)(3) exempt organization under the Internal Revenue Code and should be classified as a private foundation. Coastway Cares Charitable Foundation II will submit a timely request to the Internal Revenue Service to be recognized as an exempt organization. As long as Coastway Cares Charitable Foundation II files its application for tax-exempt status within 27 months of the last day of the month in which it was organized, and provided the Internal Revenue Service approves the application, its effective date as a Section 501(c)(3) organization will be the date of its organization. We have not received a tax opinion as to whether Coastway Cares Charitable Foundation II’s tax exempt status will be affected by the regulatory requirement that all shares of our common stock held by Coastway Cares Charitable Foundation II must be voted in the same ratio as all other outstanding shares of our common stock on all proposals considered by our stockholders.
Coastway Bancorp, Inc. and Coastway Community Bank are authorized by federal law to make charitable contributions. We believe that the stock offering presents a unique opportunity to establish and fund a charitable foundation given the substantial amount of additional capital being raised. In making such a determination, we considered the dilutive impact to our stockholders of the contribution of shares of common stock to Coastway Cares Charitable Foundation II.
We believe that our contribution of cash and shares of our common stock to Coastway Cares Charitable Foundation II should not constitute an act of self-dealing and that we should be entitled to a federal tax deduction in the amount of the fair market value of the cash and stock at the time of the contribution. We are permitted to deduct for charitable purposes only an amount equal to 10% of our annual taxable income in any one year. We are permitted under the Internal Revenue Code to carry the excess contribution over the five-year period following the contribution to Coastway Cares Charitable Foundation II. We estimate that at all levels of the offering range, the contribution should be deductible for federal tax purposes over the six-year period (
i.e.
, the year in which the contribution is made and the succeeding five-year period). However, we do not have any assurance that the Internal Revenue Service will grant tax-exempt status to the charitable foundation. In such event, our contribution to Coastway Cares Charitable Foundation II would be expensed without a tax benefit, resulting in a reduction in earnings in the year in which the Internal Revenue Service makes such a determination. Furthermore, even if the contribution is deductible, we may not have sufficient earnings to be able to use the deduction in full. Any such decision to continue to make additional contributions to Coastway Cares Charitable Foundation II in the future would be based on an assessment of, among other factors, our financial condition at that time, the interests of our stockholders and depositors, and the financial condition and operations of the foundation.
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As a private foundation, earnings and gains, if any, from the sale of common stock or other assets are exempt from federal and state income taxation. However, investment income, such as interest, dividends and capital gains, is generally taxed at a rate of 2%, although we expect to qualify for the lower 1% special rate. Coastway Cares Charitable Foundation II will be required to file an annual return with the Internal Revenue Service within four and one-half months after the close of its fiscal year. Coastway Cares Charitable Foundation II will be required to make its annual return available for public inspection. The annual return for a private foundation includes, among other things, an itemized list of all grants made or approved, showing the amount of each grant, the recipient, any relationship between a grant recipient and the foundation’s managers and a concise statement of the purpose of each grant.
Regulatory Requirements Imposed on the Coastway Cares Charitable Foundation II
Applicable regulations require that, before our board of directors adopted the plan of conversion and reorganization, the board of directors had to identify its members that will serve on the charitable foundation’s board, and these directors could not participate in our board’s discussions concerning contributions to the charitable foundation, and could not vote on the matter. Our board of directors complied with this regulation in adopting the plan of conversion and reorganization.
These regulations impose the following additional requirements on the establishment of the charitable foundation:
·
the Federal Reserve Board may examine the charitable foundation at the charitable foundation’s expense;
·
the charitable foundation must comply with all supervisory directives imposed by the Federal Reserve Board;
·
the charitable foundation must provide annually to the Federal Reserve Board a copy of the annual report that the charitable foundation submits to the Internal Revenue Service;
·
the charitable foundation must operate according to written policies adopted by its board of directors, including a conflict of interest policy;
·
the charitable foundation may not engage in self-dealing and must comply with all laws necessary to maintain its tax-exempt status under the Internal Revenue Code; and
·
the charitable foundation must vote its shares of our common stock in the same ratio as all of the other shares voted on each proposal considered by our stockholders.
Within six months of completing the stock offering, the Coastway Cares Charitable Foundation II must submit to the Federal Reserve Board a three-year operating plan, conflicts of interest policy, gift instrument, bylaws and certificate of incorporation.
RESTRICTIONS ON ACQUISITION OF COASTWAY BANCORP, INC.
Although the Board of Directors of Coastway Bancorp, Inc. is not aware of any effort that might be made to obtain control of Coastway Bancorp, Inc. after the conversion, the Board of Directors believes that it is appropriate to include certain provisions as part of Coastway Bancorp, Inc.’s articles of incorporation to protect the interests of Coastway Bancorp, Inc. and its stockholders from takeovers which our Board of Directors might conclude are not in the best interests of Coastway Community Bank, Coastway Bancorp, Inc. or Coastway Bancorp, Inc.’s stockholders.
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The following discussion is a general summary of the material provisions of Coastway Bancorp, Inc.’s articles of incorporation and bylaws, Coastway Community Bank’s charter and bylaws, Maryland corporate law and certain other regulatory provisions that may be deemed to have an “anti-takeover” effect. The following description of certain of these provisions is necessarily general and, with respect to provisions contained in Coastway Bancorp, Inc.’s articles of incorporation and bylaws and Coastway Community Bank’s charter and bylaws, reference should be made in each case to the document in question, each of which is part of Coastway Community Bank’s applications with the Federal Reserve Board and Coastway Bancorp, Inc.’s registration statement filed with the Securities and Exchange Commission. See “Where You Can Find Additional Information.”
Coastway Bancorp, Inc.’s Articles of Incorporation and Bylaws
Coastway Bancorp, Inc.’s articles of incorporation and bylaws contain a number of provisions relating to corporate governance and rights of stockholders that might discourage future takeover attempts. As a result, stockholders who might desire to participate in such transactions may not have an opportunity to do so. In addition, these provisions will also render the removal of the Board of Directors or management of Coastway Bancorp, Inc. more difficult.
Directors
.
The Board of Directors will be divided into three classes. The members of each class will be elected for a term of three years and only one class of directors will be elected annually. Thus, it would take at least two annual elections to replace a majority of our directors. The bylaws establish qualifications for board members, including:
·
a prohibition on service as a director by a person who is a director, officer or a 10% stockholder of a competitor of Coastway Community Bank;
·
a prohibition on service as a director by a person (i) who has been convicted of a crime involving dishonesty or breach of trust that is punishable by imprisonment for a term exceeding one year under state or federal law, (ii) who is currently charged in an information, indictment or other complaint with the commission of or participation in such a crime, or (iii) against whom a financial or securities regulatory agency has issued a cease and desist, consent or other formal order, other than a civil money penalty, which order is subject to public disclosure by such agency;
·
a prohibition on service as a director by a person who is party to any agreement or understanding that (i) provides such person with material benefits that are contingent upon Coastway Bancorp, Inc. entering into a merger or similar transaction in which Coastway Bancorp, Inc. is not the surviving entity, (ii) materially limits such person’s voting discretion with respect to Coastway Bancorp, Inc.’s strategic direction, or (iii) materially impairs such person’s ability to discharge his or her fiduciary duties with respect to the fundamental strategic direction of Coastway Bancorp, Inc.;
·
a requirement that any person proposed to serve as director (other than the initial directors) have maintained his or her principal residence within fifteen miles of an office of Coastway Bancorp, Inc. or Coastway Community Bank for a period of at least one year immediately before his or her purported election or appointment to the Board of Directors;
·
a prohibition on service as a director by a person who has lost more than one election for service as a director of Coastway Bancorp, Inc.; and
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·
a prohibition on service by nominees or representatives (as defined in applicable Federal Reserve Board regulations) of another person who would not be eligible for service or of an entity the partners or controlling persons of which would not be eligible for service.
Further, the bylaws impose notice and information requirements in connection with the nomination by stockholders of candidates for election to the Board of Directors or the proposal by stockholders of business to be acted upon at an annual meeting of stockholders. Such notice and information requirements are applicable to all stockholder business proposals and nominations, and are in addition to any requirements under the federal securities laws.
Evaluation of Offers.
The articles of incorporation of Coastway Bancorp, Inc. provide that its Board of Directors, when evaluating a transaction that would or may involve a change in control of Coastway Bancorp, Inc. (whether by purchases of its securities, merger, consolidation, share exchange, dissolution, liquidation, sale of all or substantially all of its assets, proxy solicitation or otherwise), may, in connection with the exercise of its business judgment in determining what is in the best interests of Coastway Bancorp, Inc. and its stockholders and in making any recommendation to the stockholders, give due consideration to all relevant factors, including, but not limited to:
·
the economic effect, both immediate and long-term, upon Coastway Bancorp, Inc.’s stockholders, including stockholders, if any, who do not participate in the transaction;
·
the social and economic effect on the present and future employees, creditors and customers of, and others dealing with, Coastway Bancorp, Inc. and its subsidiaries and on the communities in which Coastway Bancorp, Inc. and its subsidiaries operate or are located;
·
whether the proposal is acceptable based on the historical, current or projected future operating results or financial condition of Coastway Bancorp, Inc.;
·
whether a more favorable price could be obtained for Coastway Bancorp, Inc.’s stock or other securities in the future;
·
the reputation and business practices of the other entity to be involved in the transaction and its management and affiliates as they would affect the employees of Coastway Bancorp, Inc. and its subsidiaries;
·
the future value of the stock or any other securities of Coastway Bancorp, Inc. or the other entity to be involved in the proposed transaction;
·
any antitrust or other legal and regulatory issues that are raised by the proposal;
·
the business and historical, current or expected future financial condition or operating results of the other entity to be involved in the transaction, including, but not limited to, debt service and other existing financial obligations, financial obligations to be incurred in connection with the proposed transaction, and other likely financial obligations of the other entity to be involved in the proposed transaction; and
·
the ability of Coastway Bancorp, Inc. to fulfill its objectives as a bank holding company and on the ability of its subsidiary financial institution(s) to fulfill the objectives of a federally insured financial institution under applicable statutes and regulations.
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If the Board of Directors determines that any proposed transaction should be rejected, it may take any lawful action to defeat such transaction.
Restrictions on Call of Special Meetings
.
The bylaws provide that special meetings of stockholders can be called by only the Chairman or Vice Chairman of the Board of Directors or by resolution adopted by a majority of the total number of directors that Coastway Bancorp, Inc. would have if there were no vacancies on the Board of Directors (the “whole board”), or the Secretary upon the written request of stockholders entitled to cast at least a majority of all votes entitled to vote at the meeting.
Prohibition of Cumulative Voting
.
The articles of incorporation prohibit cumulative voting for the election of directors.
Limitation of Voting Rights
.
The articles of incorporation provide that in no event will any person who beneficially owns more than 10% of the then-outstanding shares of common stock, be entitled or permitted to vote any of the shares of common stock held in excess of the 10% limit. The 10% limit shall not apply if, before the stockholder acquires shares in excess of the 10% limit, the acquisition is approved by a majority of the directors who are not affiliated with the holder and who were members of the Board of Directors prior to the time of the acquisition (or who were chosen to fill any vacancy by a majority of the unaffiliated directors).
Restrictions on Removing Directors from Office
.
The articles of incorporation provide that directors may be removed only for cause, and only by the affirmative vote of the holders of a majority of the voting power of all of our then-outstanding capital stock entitled to vote generally in the election of directors (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”), voting together as a single class.
Stockholder Nominations and Proposals.
The bylaws provide that any stockholder desiring to make a nomination for the election of directors or a proposal for new business at an annual meeting of stockholders must submit written notice to Coastway Bancorp, Inc. at least 90 days prior and not earlier than 120 days prior to the anniversary date of the proxy statement relating to the previous year’s annual meeting. However, if less than 90 days’ prior public disclosure of the date of the meeting is given to stockholders and the date of the annual meeting is advanced by more than 30 days, or delayed by more than 30 days, from the anniversary date of the preceding year’s annual meeting then stockholders must submit written notice to Coastway Bancorp, Inc. no later than 10 days following the day on which public disclosure of the date of the meeting is first made in a press release, in a document filed with the Securities and Exchange Commission or on a website maintained by Coastway Bancorp, Inc.
Authorized but Unissued Shares
. After the conversion, Coastway Bancorp, Inc. will have authorized but unissued shares of common and preferred stock. See “Description of Capital Stock.” The articles of incorporation authorize 50,000,000 shares of serial preferred stock. Coastway Bancorp, Inc. is authorized to issue preferred stock from time to time in one or more series subject to applicable provisions of law, and the board of directors is authorized to fix the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends, qualifications and terms and conditions of redemption of such shares. The articles of incorporation provide that a majority of the whole board may, without action by the stockholders, amend the articles of incorporation to increase or decrease the aggregate number of shares of common stock that Coastway Bancorp, Inc. has the authority to issue. In addition, the articles of incorporation provide that only the holders of a majority of the shares of common stock may increase or decrease the amount of authorized shares of preferred stock, and without the vote of any holder of preferred stock unless otherwise required. In the event of a proposed merger, tender offer or other attempt to gain control of Coastway Bancorp, Inc. that the board of directors does not approve, it would be possible for the board of directors to authorize the issuance of a series of preferred
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stock with rights and preferences that would impede the completion of the transaction. An effect of the possible issuance of preferred stock therefore may be to deter a future attempt to gain control of Coastway Bancorp, Inc. The board of directors has no present plan or understanding to issue any preferred stock.
Amendments to Articles of Incorporation and Bylaws.
Except as provided under “—Authorized but Unissued Shares,” above, regarding the amendment of the articles of incorporation by the Board of Directors to increase or decrease the number of shares authorized for issuance, or as otherwise allowed by law, any amendment to the articles of incorporation must be approved by our Board of Directors and also by two-thirds of the votes entitled to be cast (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”); provided, however, that an amendment need only be approved by the vote of a majority of the votes entitled to be cast (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”) if the amendment is approved by at least two-thirds of the whole board. Approval by at least 80% of the votes entitled to be cast (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”) is generally required to amend the following provisions:
(i)
The limitation on voting rights of persons who directly or indirectly beneficially own more than 10% of the outstanding shares of common stock;
(ii)
The division of the board of directors into three staggered classes;
(iii)
The ability of the board of directors to fill vacancies on the board;
(iv)
The requirement that a majority of the voting power of stockholders must vote to remove directors, and can only remove directors for cause;
(v)
The ability of the board of directors to amend and repeal the bylaws and the required stockholder vote to amend or repeal the bylaws;
(vi)
The ability of the board of directors to evaluate a variety of factors in evaluating offers to purchase or otherwise acquire Coastway Bancorp, Inc.;
(vii)
The authority of the board of directors to provide for the issuance of preferred stock;
(viii)
The validity and effectiveness of any action lawfully authorized by the affirmative vote of the holders of a majority of the total number of outstanding shares of common stock;
(ix)
The number of stockholders constituting a quorum or required for stockholder consent;
(x) The provision regarding stockholder proposals and nominations;
(xi)
The indemnification of current and former directors and officers, as well as employees and other agents, by Coastway Bancorp, Inc.;
(xii)
The limitation of liability of officers and directors to Coastway Bancorp, Inc. for money damages; and
(xiii)
The provision regarding amendments to the articles of incorporation.
The articles of incorporation also provide that the bylaws may be amended by the affirmative vote of a majority of our directors or by the stockholders by the affirmative vote of at least 80% of the
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votes entitled to be cast in the election of directors (after giving effect to the limitation on voting rights discussed above in “—Limitation of Voting Rights”).
Maryland Corporate Law
Under Maryland law, “business combinations” between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, statutory share exchange or, in circumstances specified in the statute, certain transfers of assets, certain stock issuances and transfers, liquidation plans and reclassifications involving interested stockholders and their affiliates or issuance or reclassification of equity securities. Maryland law defines an interested stockholder as: (i) any person who beneficially owns 10% or more of the voting power of a corporation’s voting stock after the date on which the corporation had 100 or more beneficial owners of its stock; or (ii) an affiliate or associate of the corporation at any time after the date on which the corporation had 100 or more beneficial owners of its stock who, within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation. A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which the person otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least: (i) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (ii) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. These super-majority vote requirements do not apply if the corporation’s common stockholders receive a minimum price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares.
Conversion Regulations
Federal regulations prohibit any person from making an offer, announcing an intent to make an offer or participating in any other arrangement to purchase stock or acquire stock or subscription rights in a converting institution or its holding company from another person prior to completion of its conversion. Further, without the prior written approval of the Federal Reserve Board, no person may make an offer or announcement of an offer to purchase shares or actually acquire shares of a converted institution or its holding company for a period of three years from the date of the completion of the conversion if, upon the completion of such offer, announcement or acquisition, the person would become the beneficial owner of more than 10% of the outstanding stock of the institution or its holding company. The Federal Reserve Board has defined “person” to include any individual, group acting in concert, corporation, partnership, association, joint stock company, trust, unincorporated organization or similar company, a syndicate or any other group formed for the purpose of acquiring, holding or disposing of securities of an insured institution. However, offers made exclusively to a bank or its holding company, or to an underwriter or member of a selling group acting on the converting institution’s or its holding company’s behalf for resale to the general public, are excepted. The regulation also provides civil penalties for willful violation or assistance in any such violation of the regulation by any person connected with the management of the converting institution or its holding company or who controls more than 10% of the outstanding shares or voting rights of a converted institution or its holding company.
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Change in Control Regulations
Under the Change in Bank Control Act, no person may acquire control of a bank holding company unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition. In addition, Federal Reserve Board regulations provide that no company may acquire control of a bank holding company without the prior approval of the Federal Reserve Board.
Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the company’s directors, or a determination by the Federal Reserve Board that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a bank holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will be the case with Coastway Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934. Federal Reserve Board regulations provide that parties seeking to rebut control will be provided an opportunity to do so in writing.
DESCRIPTION OF CAPITAL STOCK
General
At the effective date, Coastway Bancorp, Inc. will be authorized to issue 100,000,000 shares of common stock, par value of $0.01 per share, and 50,000,000 shares of preferred stock, par value $0.01 per share. Coastway Bancorp, Inc. currently expects to issue in the offering up to 4,949,179 shares of common stock including shares issued to our charitable foundation. Coastway Bancorp, Inc. will not issue shares of preferred stock in the conversion. Each share of Coastway Bancorp, Inc. common stock will have the same relative rights as, and will be identical in all respects to, each other share of common stock. Upon payment of the subscription price for the common stock, in accordance with the plan of conversion and reorganization, all of the shares of common stock will be duly authorized, fully paid and non-assessable.
The shares of common stock of Coastway Bancorp, Inc. will represent nonwithdrawable capital, will not be an account of an insurable type, and will not be insured by the FDIC or any other government agency.
Common Stock
Dividends
.
Coastway Bancorp, Inc. can pay dividends on its common stock if, after giving effect to the distribution, it would be able to pay its indebtedness as the indebtedness comes due in the usual course of business and its total assets exceed the sum of its liabilities and the amount needed, if Coastway Bancorp, Inc. were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of any holders of capital stock who have a preference in the event of dissolution. The holders of common stock of Coastway Bancorp, Inc. will be entitled to receive and share equally in dividends as may be declared by our Board of Directors out of funds legally available therefor. If Coastway Bancorp, Inc. issues shares of preferred stock, the holders thereof may have a priority over the holders of the common stock with respect to dividends.
Voting Rights
.
Upon consummation of the conversion, the holders of common stock of Coastway Bancorp, Inc. will have exclusive voting rights in Coastway Bancorp, Inc. They will elect Coastway Bancorp, Inc.’s Board of Directors and act on other matters as are required to be presented to them under Maryland law or as are otherwise presented to them by the Board of Directors. Generally, each holder of common stock will be entitled to one vote per share and will not have any right to cumulate votes in the
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Table of Contents
election of directors. Any person who beneficially owns more than 10% of the then-outstanding shares of Coastway Bancorp, Inc.’s common stock, however, will not be entitled or permitted to vote any shares of common stock held in excess of the 10% limit. If Coastway Bancorp, Inc. issues shares of preferred stock, holders of the preferred stock may also possess voting rights. Amendments to the articles of incorporation require a two-thirds stockholder vote in certain circumstances, and certain matters require an 80% stockholder vote.
As a stock savings bank, corporate powers and control of Coastway Community Bank are vested in its Board of Directors, who elect the officers of Coastway Community Bank and who fill any vacancies on the Board of Directors. Voting rights of Coastway Community Bank are vested exclusively in the owners of the shares of capital stock of Coastway Community Bank, which will be Coastway Bancorp, Inc. Shares of Coastway Community Bank’s stock will be voted at the direction of Coastway Bancorp, Inc.’s Board of Directors. Consequently, the holders of the common stock of Coastway Bancorp, Inc. will not have direct control of Coastway Community Bank
Liquidation
.
In the event of any liquidation, dissolution or winding up of Coastway Community Bank, Coastway Bancorp, Inc., as the holder of 100% of Coastway Community Bank’s capital stock, would be entitled to receive all assets of Coastway Community Bank available for distribution, after payment or provision for payment of all debts and liabilities of Coastway Community Bank, including all deposit accounts and accrued interest thereon, and after distribution of the balance in the liquidation account to Eligible Account Holders and Supplemental Eligible Account Holders. In the event of liquidation, dissolution or winding up of Coastway Bancorp, Inc., the holders of its common stock would be entitled to receive, after payment or provision for payment of all its debts and liabilities, all of the assets of Coastway Bancorp, Inc. available for distribution, and Eligible Account Holders and Supplemental Eligible Account Holders will be treated as surrendering their rights to the Coastway Bancorp, Inc. liquidation account and receiving an equivalent interest in the Coastway Community Bank liquidation account. If preferred stock is issued, the holders thereof may have a priority over the holders of the common stock in the event of liquidation or dissolution.
Preemptive Rights
.
Holders of the common stock of Coastway Bancorp, Inc. will not be entitled to preemptive rights with respect to any shares that may be issued, unless such preemptive rights are approved by the Board of Directors. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Coastway Bancorp, Inc.’s authorized preferred stock will be issued as part of the offering or the conversion. Preferred stock may be issued with preferences and designations as our Board of Directors may from time to time determine. Our Board of Directors may, without stockholder approval, issue shares of preferred stock with voting, dividend, liquidation and conversion rights that could dilute the voting strength of the holders of the common stock and that could assist management in impeding an unfriendly takeover or attempted change in control.
TRANSFER AGENT
The transfer agent and registrar for Coastway Bancorp, Inc.’s common stock is , , .
EXPERTS
The consolidated financial statements of Coastway Bancorp, MHC at and for the years ended December 31, 2012 and 2011 have been included herein and in the registration statement in reliance upon the report of Wolf & Company, P.C., independent registered public accounting firm, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing.
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RP Financial, LC. has consented to the publication herein of the summary of its report to Coastway Bancorp, Inc. setting forth its opinion as to the estimated pro forma market value of the shares of common stock upon completion of the conversion and offering and its letter with respect to subscription rights.
LEGAL AND TAX MATTERS
Luse Gorman Pomerenk & Schick, P.C., Washington, D.C., counsel to Coastway Bancorp, Inc. and Coastway Community Bank, will issue to Coastway Bancorp, Inc. its opinions regarding the legality of the common stock and the federal income tax consequences of the conversion. Luse Gorman Pomerenk & Schick, P.C. has consented to the references in this prospectus to its opinions. Wolf & Company, P.C. will issue to Coastway Bancorp, Inc. its opinion regarding the Rhode Island income tax consequences of the conversion. Wolf & Company, P.C., has consented to the reference in this prospectus to its opinion. Certain legal matters will be passed upon for Sandler O’Neill & Partners, L.P. by Goodwin Procter LLP, Boston, Massachusetts.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
Coastway Bancorp, Inc. has filed with the Securities and Exchange Commission a registration statement under the Securities Act of 1933 with respect to the shares of common stock offered hereby. As permitted by the rules and regulations of the Securities and Exchange Commission, this prospectus does not contain all the information set forth in the registration statement. Such information, including the appraisal report which is an exhibit to the registration statement, can be examined without charge at the public reference facilities on official business days during the hours of 10:00 a.m. to 3:00 p.m. at the Securities and Exchange Commission located at 100 F Street, N.E., Washington, D.C. 20549, and copies of such material can be obtained from the Securities and Exchange Commission at prescribed rates. The Securities and Exchange Commission telephone number is 1-800-SEC-0330. In addition, the Securities and Exchange Commission maintains a web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Securities and Exchange Commission, including Coastway Bancorp, Inc. The statements contained in this prospectus as to the contents of any contract or other document filed as an exhibit to the registration statement are, of necessity, brief descriptions of the material terms of, and should be read in conjunction with, such contract or document.
Coastway Community Bank has filed with the Federal Reserve Bank of Boston an Application on Form AC with respect to the conversion. This prospectus omits certain information contained in the application. To obtain a copy of the application filed with the Board of Governors of the Federal Reserve System, you may contact Scott Chu, Supervisory Analyst, of the Federal Reserve Bank of Boston, at (617) 973-3088. Our plan of conversion and reorganization is available, upon request, at each of our branch offices.
In connection with the offering, Coastway Bancorp, Inc. will register its common stock under Section 12(b) of the Securities Exchange Act of 1934 and, upon such registration, Coastway Bancorp, Inc. and the holders of its common stock will become subject to the proxy solicitation rules, reporting requirements and restrictions on common stock purchases and sales by directors, officers and greater than 10% stockholders, the annual and periodic reporting and certain other requirements of the Securities Exchange Act of 1934, subject to subsequent deregistration of such shares under the Securities Exchange Act of 1934.
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Index to Consolidated Financial Statements of
Coastway Bancorp, MHC and Subsidiaries
|
Report of Independent Registered Public Accounting Firm
|
F-2
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|
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Consolidated Balance Sheets as of June 30, 2013 (unaudited), December 31, 2012 and 2011
|
F-3
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Consolidated Statements of Net Income for the Six Months Ended June 30, 2013 and 2012 (unaudited) and the Years Ended December 31, 2012 and 2011
|
F-4
|
|
|
|
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Consolidated Statements of Comprehensive Income for the Six Months Ended June 30, 2013 and 2012 (unaudited) and the Years Ended December 31, 2012 and 2011
|
F-5
|
|
|
|
|
Consolidated Statements of Changes in Retained Earnings for the Six Months Ended June 30, 2013 (unaudited) and the Years Ended December 31, 2012 and 2011
|
F-6
|
|
|
|
|
Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (unaudited) and the Years Ended December 31, 2012 and 2011
|
F-7-8
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|
|
|
|
Notes to the Consolidated Financial Statements
|
F-9-52
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F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Audit Committee of Coastway Bancorp, MHC and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Coastway Bancorp, MHC and Subsidiaries (formerly Coastway Community Bank) as of December 31, 2012 and 2011, and the related consolidated statements of net income, comprehensive income, changes in retained earnings and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Coastway Bancorp, MHC and Subsidiaries as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.
|
/s/ WOLF & COMPANY, P.C.
|
|
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|
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Boston, Massachusetts
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September 10, 2013
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F-2
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Consolidated Balance Sheets
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks
|
|
$
|
3,154
|
|
$
|
2,705
|
|
$
|
3,184
|
|
|
Interest-bearing deposits
|
|
6,709
|
|
4,315
|
|
2,182
|
|
|
Total cash and cash equivalents
|
|
9,863
|
|
7,020
|
|
5,366
|
|
|
|
|
|
|
|
|
|
|
|
Federal Home Loan Bank stock, at cost
|
|
2,694
|
|
3,036
|
|
3,408
|
|
|
Loans, net of allowance for loan losses of $1,597, $1,569 and $1,424, respectively
|
|
309,156
|
|
296,999
|
|
269,578
|
|
|
Loans held for sale
|
|
19,082
|
|
13,642
|
|
14,528
|
|
|
Premises and equipment, net
|
|
23,149
|
|
24,919
|
|
22,739
|
|
|
Accrued interest receivable
|
|
1,048
|
|
1,048
|
|
1,043
|
|
|
Real estate held for investment
|
|
—
|
|
1,354
|
|
—
|
|
|
Real estate held for sale
|
|
3,515
|
|
—
|
|
—
|
|
|
Foreclosed real estate
|
|
1,670
|
|
2,594
|
|
1,870
|
|
|
Prepaid FDIC insurance assessment
|
|
—
|
|
336
|
|
608
|
|
|
Net deferred tax asset
|
|
60
|
|
—
|
|
476
|
|
|
Other assets
|
|
5,509
|
|
3,674
|
|
3,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
375,746
|
|
$
|
354,622
|
|
$
|
322,967
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
Deposits:
|
|
|
|
|
|
|
|
|
Interest-bearing
|
|
$
|
266,217
|
|
$
|
250,185
|
|
$
|
233,061
|
|
|
Non-interest-bearing
|
|
63,775
|
|
57,608
|
|
49,895
|
|
|
Total deposits
|
|
329,992
|
|
307,793
|
|
282,956
|
|
|
Borrowed funds
|
|
14,000
|
|
16,343
|
|
10,769
|
|
|
Net deferred tax liability
|
|
—
|
|
68
|
|
—
|
|
|
Accrued expenses and other liabilities
|
|
4,159
|
|
3,122
|
|
3,119
|
|
|
Total liabilities
|
|
348,151
|
|
327,326
|
|
296,844
|
|
|
|
|
.
|
|
|
|
|
|
|
Commitments and contingencies (Notes 5 and 9)
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
28,111
|
|
27,812
|
|
26,664
|
|
|
Accumulated other comprehensive loss
|
|
(516
|
)
|
(516
|
)
|
(541
|
)
|
|
Total retained earnings
|
|
27,595
|
|
27,296
|
|
26,123
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
375,746
|
|
$
|
354,622
|
|
$
|
322,967
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Consolidated Statements of Net Income
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Interest income:
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans
|
|
$
|
6,864
|
|
$
|
6,600
|
|
$
|
13,173
|
|
$
|
13,698
|
|
|
Other interest income
|
|
9
|
|
17
|
|
34
|
|
19
|
|
|
Total interest income
|
|
6,873
|
|
6,617
|
|
13,207
|
|
13,717
|
|
|
Interest expense:
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits
|
|
1,263
|
|
1,242
|
|
2,505
|
|
2,489
|
|
|
Interest on borrowed funds
|
|
68
|
|
78
|
|
145
|
|
215
|
|
|
Total interest expense
|
|
1,331
|
|
1,320
|
|
2,650
|
|
2,704
|
|
|
Net interest income
|
|
5,542
|
|
5,297
|
|
10,557
|
|
11,013
|
|
|
Provision for loan losses
|
|
209
|
|
584
|
|
1,109
|
|
1,157
|
|
|
Net interest income, after provision for loan losses
|
|
5,333
|
|
4,713
|
|
9,448
|
|
9,856
|
|
|
Non-interest income:
|
|
|
|
|
|
|
|
|
|
|
Customer service fees
|
|
1,476
|
|
1,463
|
|
3,149
|
|
3,058
|
|
|
Gain on sales of loans, net
|
|
1,902
|
|
1,576
|
|
3,884
|
|
2,937
|
|
|
Impairment loss on real estate held for sale
|
|
(482
|
)
|
—
|
|
—
|
|
—
|
|
|
Other
|
|
108
|
|
91
|
|
142
|
|
25
|
|
|
Total non-interest income
|
|
3,004
|
|
3,130
|
|
7,175
|
|
6,020
|
|
|
Non-interest expenses:
|
|
|
|
|
|
|
|
|
|
|
Salary and employee benefits
|
|
4,090
|
|
3,665
|
|
7,488
|
|
7,566
|
|
|
Occupancy and equipment
|
|
1,123
|
|
916
|
|
1,977
|
|
1,846
|
|
|
Data processing
|
|
733
|
|
663
|
|
1,378
|
|
1,205
|
|
|
Deposit servicing
|
|
294
|
|
360
|
|
755
|
|
698
|
|
|
Advertising
|
|
143
|
|
156
|
|
578
|
|
631
|
|
|
Professional fees
|
|
220
|
|
417
|
|
699
|
|
369
|
|
|
Foreclosed real estate
|
|
285
|
|
57
|
|
274
|
|
292
|
|
|
FDIC insurance assessment
|
|
154
|
|
143
|
|
292
|
|
327
|
|
|
Other general and administrative
|
|
813
|
|
666
|
|
1,199
|
|
1,224
|
|
|
Total non-interest expenses
|
|
7,855
|
|
7,043
|
|
14,640
|
|
14,158
|
|
|
Income before income taxes
|
|
482
|
|
800
|
|
1,983
|
|
1,718
|
|
|
Income tax provision
|
|
183
|
|
319
|
|
835
|
|
706
|
|
|
Net income
|
|
$
|
299
|
|
$
|
481
|
|
$
|
1,148
|
|
$
|
1,012
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Consolidated Statements of Comprehensive Income
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
299
|
|
$
|
481
|
|
$
|
1,148
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
Defined benefit pension plan:
|
|
|
|
|
|
|
|
|
|
|
Losses arising during the period pertaining to defined benefit plans
|
|
—
|
|
—
|
|
(19
|
)
|
(350
|
)
|
|
Actuarial loss amortized through pension expense
|
|
—
|
|
—
|
|
62
|
|
31
|
|
|
Tax effect
|
|
—
|
|
—
|
|
(18
|
)
|
128
|
|
|
Net-of-tax amount
|
|
—
|
|
—
|
|
25
|
|
(191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
299
|
|
$
|
481
|
|
$
|
1,173
|
|
$
|
821
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Consolidated Statements of Changes in Retained Earnings
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
Retained
|
|
Comprehensive
|
|
|
|
|
|
|
Earnings
|
|
Loss
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2010
|
|
$
|
25,652
|
|
$
|
(350
|
)
|
$
|
25,302
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
1,012
|
|
(191
|
)
|
821
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
26,664
|
|
(541
|
)
|
26,123
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
1,148
|
|
25
|
|
1,173
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
27,812
|
|
(516
|
)
|
27,296
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (unaudited)
|
|
299
|
|
—
|
|
299
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2013 (unaudited)
|
|
$
|
28,111
|
|
$
|
(516
|
)
|
$
|
27,595
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Consolidated Statements of Cash Flows
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
299
|
|
$
|
481
|
|
$
|
1,148
|
|
$
|
1,012
|
|
|
Adjustments to reconcile net income to net cash provided (used) by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses
|
|
209
|
|
584
|
|
1,109
|
|
1,157
|
|
|
Loans originated for sale
|
|
(88,065
|
)
|
(68,291
|
)
|
(171,182
|
)
|
(137,575
|
)
|
|
Loans sold
|
|
81,456
|
|
70,519
|
|
172,224
|
|
142,807
|
|
|
Amortization of deferred loan costs
|
|
236
|
|
213
|
|
485
|
|
346
|
|
|
Provision for foreclosed real estate losses
|
|
209
|
|
—
|
|
95
|
|
70
|
|
|
Loss (gain) on sale of foreclosed real estate
|
|
10
|
|
(4
|
)
|
31
|
|
76
|
|
|
Gain on sale of premises and equipment
|
|
—
|
|
—
|
|
—
|
|
(1
|
)
|
|
Impairment loss on real estate held for sale
|
|
482
|
|
—
|
|
—
|
|
—
|
|
|
Depreciation and amortization expense
|
|
472
|
|
390
|
|
798
|
|
704
|
|
|
Deferred income tax provision (benefit)
|
|
(128
|
)
|
195
|
|
526
|
|
162
|
|
|
Net change in:
|
|
|
|
|
|
|
|
|
|
|
Accrued interest receivable
|
|
—
|
|
16
|
|
(5
|
)
|
(33
|
)
|
|
Prepaid FDIC insurance assessment
|
|
336
|
|
138
|
|
272
|
|
304
|
|
|
Other, net
|
|
371
|
|
(752
|
)
|
(433
|
)
|
1,170
|
|
|
Net cash provided (used) by operating activities
|
|
(4,113
|
)
|
3,489
|
|
5,068
|
|
10,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from redemption of FHLB stock
|
|
342
|
|
372
|
|
372
|
|
—
|
|
|
Loan (originations) principal payments, net
|
|
(17,213
|
)
|
(10,711
|
)
|
(38,033
|
)
|
(30,155
|
)
|
|
Proceeds from loan participations sold
|
|
4,341
|
|
2,162
|
|
7,783
|
|
12,050
|
|
|
Proceeds from sale of foreclosed real estate
|
|
975
|
|
114
|
|
385
|
|
887
|
|
|
Proceeds from sale of premises and equipment
|
|
—
|
|
—
|
|
—
|
|
12
|
|
|
Purchases of premises and equipment
|
|
(1,345
|
)
|
(1,455
|
)
|
(4,332
|
)
|
(6,554
|
)
|
|
Net cash used by investing activities
|
|
(12,900
|
)
|
(9,518
|
)
|
(33,825
|
)
|
(23,760
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
Net increase in deposits
|
|
22,199
|
|
17,549
|
|
24,837
|
|
21,105
|
|
|
Net change in short-term borrowed funds
|
|
(1,000
|
)
|
(6,000
|
)
|
7,000
|
|
(6,000
|
)
|
|
Repayments of long-term borrowed funds
|
|
(1,343
|
)
|
(1,362
|
)
|
(1,426
|
)
|
(1,419
|
)
|
|
Net cash provided by financing activities
|
|
19,856
|
|
10,187
|
|
30,411
|
|
13,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
The accompanying notes are an integral part of these consolidated financial statements.
F-7
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Consolidated Statements of Cash Flows (Concluded)
Years Ended December 31, 2012 and 2011
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Net increase in cash and cash equivalents
|
|
2,843
|
|
4,158
|
|
1,654
|
|
125
|
|
|
Cash and cash equivalents at beginning of period
|
|
7,020
|
|
5,366
|
|
5,366
|
|
5,241
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
9,863
|
|
$
|
9,524
|
|
$
|
7,020
|
|
$
|
5,366
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
Interest paid on deposits
|
|
$
|
1,261
|
|
$
|
1,241
|
|
$
|
2,505
|
|
$
|
2,491
|
|
|
Interest paid on borrowed funds
|
|
72
|
|
82
|
|
149
|
|
225
|
|
|
Income taxes paid
|
|
602
|
|
440
|
|
652
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental non-cash flow information
|
|
|
|
|
|
|
|
|
|
|
Loans transferred to foreclosed real estate
|
|
270
|
|
801
|
|
1,235
|
|
2,468
|
|
|
Decrease in secured borrowings
|
|
—
|
|
—
|
|
—
|
|
1,601
|
|
|
Real estate transferred from premises and equipment to real estate held for investment
|
|
—
|
|
—
|
|
1,354
|
|
—
|
|
|
Real estate transferred from real estate held for investment to real estate held for sale
|
|
1,354
|
|
—
|
|
—
|
|
—
|
|
|
Real estate transferred from premises to real estate held for sale
|
|
2,643
|
|
—
|
|
—
|
|
—
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements
Six Months Ended June 30, 2013 and 2012 (Unaudited) and
Years Ended December 31, 2012 and 2011
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
Coastway Bancorp, MHC (the “Company”) a state-chartered mutual holding company and its wholly-owned subsidiary, Coastway Bancorp LLC (“Bancorp”), were formed in February 1, 2013. The Bancorp owns 100% of Coastway Community Bank (the “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 residential mortgage and business loans. The consolidated financial statements include the accounts of the Company, the Bancorp, and the Bank. All significant intercompany balances and transactions have been eliminated in consolidation. See Note 14 — Conversion and Stock Offering.
Use of Estimates
In preparing consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, 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 and the valuation of deferred tax assets.
Reclassification
Certain amounts in the prior period consolidated financial statements have been reclassified to conform to the 2013 presentation.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, amounts due from banks and interest-bearing deposits. Interest-bearing deposits are carried at cost which approximates fair value and mature either daily or on demand.
Fair Value Hierarchy
The Bank groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets are traded and the reliability of the assumptions used to determine fair value.
F-9
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Fair Value Hierarchy (concluded)
Level 1 — Valuation is based on quoted prices in active markets for identical assets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets.
Level 2 — Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets.
Level 3 — Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets or liabilities include financial instruments whose value is determined using unobservable inputs to pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Transfers between levels, if any, are recognized at the end of a reporting period.
Federal Home Loan Bank Stock
The Bank, as a member of the Federal Home Loan Bank (“FHLB”) system, is required to maintain an investment in capital stock of the FHLB. Based on the redemption provisions of the FHLB, the stock has no quoted market value and is carried at cost. At its discretion, the FHLB may declare dividends on the stock. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock. As of June 30, 2013 (unaudited) and December 31, 2012 and 2011, no impairment has been recognized.
Loans
The Bank’s lending activities are conducted principally in Rhode Island. The Bank grants one-to-four family residential loans as well as commercial business, commercial real estate and consumer loans. Most loans granted by the Bank are collateralized by real estate. The ability and willingness of the one-to-four family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of economic activity within the borrowers’ geographic area and real estate values. The ability and willingness of commercial loan borrowers to repay their loan commitments is generally dependent on the state of the real estate economic sector in the borrowers’ geographic area and the general economy.
F-10
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Loans (concluded)
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
For loan disclosures and the allowance for loan losses estimate, the Bank’s loan portfolio includes residential real estate, home equity, commercial real estate, commercial business, commercial construction, Small Business Administration (“SBA”) and consumer segments.
The accrual of interest on loans is discontinued at the time the loan is 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off 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 nonaccrual or charged off, is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
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 to fair value of the collateral net of estimated selling costs by charge off.
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 further described below.
F-11
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (continued)
General component
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; weighted average risk weightings; 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 six months ended June 30, 2013 (unaudited) and the year ended December 31, 2012.
The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
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. 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 which 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.
F-12
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (continued)
General component (concluded)
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 loans. Under the SBA 7(a) Program, loans may qualify for guarantees up to 85% of principal and accrued interest. The Bank does not treat the SBA guarantee as a substitute for a borrower meeting reasonable credit standards. SBA guarantees are generally sought on loans that exhibit minimum capital levels, a short time in business, lower collateral coverage or maximum loan terms beyond the 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.
Consumer — This segment includes unsecured and vehicle loans and repayment is dependent on the credit quality of the individual borrower.
Specific component
The specific component relates to loans that are classified as impaired. Based on internal credit ratings, commercial and SBA loans are evaluated for impairment on a loan-by-loan basis. Impairment is measured by either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and performing residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.
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
F-13
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (concluded)
Specific component (concluded)
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 initially classified as impaired. Loans on nonaccrual status at the date of modification are initially classified as nonaccrual troubled debt restructurings. TDRs may be returned to actual status after a period of satisfactory payment performance per the terms of the restructuring, generally six months of payments.
Loans Held for Sale and Mortgage Banking Activities
Loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. One-to-four family residential loans are sold with servicing released. Gains and losses on loan sales are recorded in noninterest income as gains on sale of loans, net. Commitments to originate loans to be held for sale and forward loan sale commitments are recorded at fair value with changes in fair value included as a component of gains on sale of loans, net.
Premises and Equipment
Land is carried at cost. Buildings and equipment are carried at cost, less accumulated depreciation and amortization computed on the straight-line method over the estimated useful lives of the assets or the expected terms of the leases, if shorter. Expected terms include lease option periods to the extent that the exercise of such options is reasonably assured.
F-14
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Real Estate Held for Investment
In 2012, the Bank reclassified the carrying value of undeveloped land acquired for a branch location in the amount of $1,354,000 from premises and equipment to real estate held for investment. This asset did not meet held-for-sale criteria as management intended to lease the land and there was no immediate plan for sale. Upon transfer, the asset was evaluated for impairment and management determined that the asset was not impaired because future undiscounted cash flows of the expected rental payments and the salvage value of the land exceeded the carrying value at December 31, 2012.
Real Estate Held for Sale (Unaudited)
Real estate held for sale is carried at the lower of cost or fair value, less cost to sell. Real estate is classified as held for sale when management has committed to a plan to sell the asset; the asset is available for immediate sale in its present condition; an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition of a sale within one year; the asset is being actively marketed for sale; and actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.
On June 1, 2013, upon expiration of the letter of intent from the expected lessee, the Bank reclassified the $1.4 million carrying value of the undeveloped land classified as real estate held for investment at December 31, 2012 to real estate held for sale as management intends to sell the land and all of the above criteria have been met.
On June 1, 2013, the Bank reclassified land and building previously purchased for the potential relocation of the corporate headquarters with a carrying value of $2.6 million from premises and equipment to real estate held for sale as the Bank determined that the costs to improve the property for its intended use exceeded its initial expectations.
The Bank recorded a $482,000 impairment loss upon transfer of the aforementioned properties to real estate held for sale.
Foreclosed Real Estate
Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less cost to sell, at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less costs to sell. Revenue and expenses from operations, changes in the valuation allowance, gains or losses on sales and any direct write-downs are included in foreclosed real estate expenses. Foreclosed real estate consists of residential real estate properties.
F-15
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Transfers of Financial Assets
Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Bank, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Bank does not maintain effective control over the transferred assets.
During the normal course of business, the Bank may transfer a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer must be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.
Advertising Costs
Advertising costs are expensed as incurred.
Defined Benefit Plan
The compensation cost of an employee’s pension benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes.
The Bank accounts for its defined benefit pension plan using an actuarial model that allocates pension costs over the service period of employees in the plan. The Bank accounts for the over-funded or under-funded status of its defined benefit plan as an asset or liability in its balance sheet and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income/loss.
Income Taxes
Deferred income tax assets and liabilities are determined using the liability method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A
F-16
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes (concluded)
valuation allowance is established against deferred tax assets when, based upon the available evidence including historical and projected taxable income, it is more likely than not that some or all of the deferred tax assets will not be realized.
The Bank does not have any uncertain tax positions at June 30, 2013 (unaudited), December 31, 2012 or 2011 which require accrual or disclosure. The Bank records interest and penalties as part of income tax expense, if applicable.
Comprehensive Income/Loss
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the retained earnings section of the balance sheet, such items, along with net income, are components of comprehensive income/loss. The Bank measures the pension plan assets and pension obligations on an annual basis. As such, the pension obligation recognized in the June 30, 2013 consolidated financial statements (unaudited) is consistent with December 31, 2012. Accumulated other comprehensive loss represents the actuarial loss that will be amortized through pension expense, net of tax.
Segments and Significant Group Concentrations of Credit Risk
Management evaluates the Bank’s performance and allocates resources based on a single segment concept. Accordingly, there are no separately identified operating segments for which discrete financial information is available. The Bank does not derive revenues from or have assets located in foreign countries, nor does it derive revenue from any single customer that represents 10% or more of the Bank’s total revenues.
Recent Accounting Pronouncements
As an “emerging growth company,” as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Bank has elected to use the extended transition period to delay adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, the consolidated financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards. As of June 30, 2013, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.
F-17
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)
Recent Accounting Pronouncements (concluded)
In 2012, the Bank adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2011-04,
Fair Value Measurement (Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
. The ASU clarified and expanded the disclosures pertaining to unobservable inputs used in Level 3 fair value measurements. The adoption of this pronouncement did not have an effect on the Bank’s financial statements.
In 2012, the Bank adopted FASB ASU 2011-05,
Comprehensive Income (Topic 220), Presentation of Comprehensive Income.
This ASU amended the disclosure requirements for the presentation of comprehensive income, with no change in measurement. The amended guidance eliminates the option to present components of other comprehensive income (“OCI”) as part of the statement of changes in retained earnings. Under the amended guidance, all changes in comprehensive income are to be presented either in a single continuous statement of comprehensive income or in two separate but consecutive financial statements. See Statements of Comprehensive Income.
In February 2013, the FASB issued ASU 2013-02,
Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income
. This update requires entities to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. This ASU is effective prospectively for public entities for reporting periods beginning after December 15, 2012 and for nonpublic entities for reporting periods beginning after December 15, 2013. Under the extended transition period for an emerging growth company the Bank will adopt this ASU on January 1, 2014. Management does not expect this ASU to have a material effect on the presentation of comprehensive income in the Bank’s consolidated financial statements.
2.
RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS
The Bank is required to maintain average balances on hand or with the Federal Reserve Bank. At June 30, 2013 (unaudited) and December 31, 2012 and 2011, the reserve balance amounted to $1,857,000, $1,832,000 and $1,676,000, respectively.
F-18
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
3.
LOANS
A summary of the balances of loans follows:
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Residential real estate mortgage loans:
|
|
|
|
|
|
|
|
|
1-4 family
|
|
$
|
86,970
|
|
$
|
78,633
|
|
$
|
73,335
|
|
|
Home equity loans and lines of credit
|
|
84,441
|
|
83,154
|
|
80,267
|
|
|
Total residential real estate mortgage loans
|
|
171,411
|
|
161,787
|
|
153,602
|
|
|
|
|
|
|
|
|
|
|
|
Commercial:
|
|
|
|
|
|
|
|
|
Commercial real estate
|
|
83,455
|
|
81,754
|
|
67,044
|
|
|
Commercial business
|
|
8,330
|
|
7,899
|
|
4,146
|
|
|
Commercial construction
|
|
5,958
|
|
3,302
|
|
—
|
|
|
SBA
|
|
37,686
|
|
39,628
|
|
41,385
|
|
|
Total commercial loans
|
|
135,429
|
|
132,583
|
|
112,575
|
|
|
Consumer
|
|
1,889
|
|
2,320
|
|
3,573
|
|
|
Total loans
|
|
308,729
|
|
296,690
|
|
269,750
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
(1,597
|
)
|
(1,569
|
)
|
(1,424
|
)
|
|
Net deferred loan costs
|
|
2,024
|
|
1,878
|
|
1,252
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net
|
|
$
|
309,156
|
|
$
|
296,999
|
|
$
|
269,578
|
|
SBA loans carry a lower credit risk profile than standard commercial loans due to government guarantees inherent in SBA lending. Generally, loans with balances in excess of $150,000 have a 75% SBA guarantee, loans less than $150,000 have an 85% guarantee, and lines of credit have a 50% guarantee. Guaranteed portions of SBA loans total $27,284,000, $29,405,000 and $33,243,000 at June 30, 2013 (unaudited), December 31, 2012 and 2011, respectively.
F-19
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
Activity in the allowance for loan losses and allocation of the allowance to loan segments follows:
|
|
|
Six Months Ended June 30, 2013 (Unaudited)
|
|
|
|
|
Residential
|
|
Home
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
Equity
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Consumer
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
393
|
|
$
|
674
|
|
$
|
261
|
|
$
|
25
|
|
$
|
11
|
|
$
|
185
|
|
$
|
20
|
|
$
|
1,569
|
|
|
Provisions (credit) for loan losses
|
|
16
|
|
184
|
|
22
|
|
3
|
|
9
|
|
(25
|
)
|
—
|
|
209
|
|
|
Loans charged-off
|
|
—
|
|
(215
|
)
|
—
|
|
—
|
|
—
|
|
(8
|
)
|
(15
|
)
|
(238
|
)
|
|
Recoveries
|
|
7
|
|
6
|
|
—
|
|
—
|
|
—
|
|
33
|
|
11
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
416
|
|
$
|
649
|
|
$
|
283
|
|
$
|
28
|
|
$
|
20
|
|
$
|
185
|
|
$
|
16
|
|
$
|
1,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired loans
|
|
$
|
95
|
|
$
|
100
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
16
|
|
$
|
5
|
|
$
|
216
|
|
|
Allowance for non-impaired loans
|
|
321
|
|
549
|
|
283
|
|
28
|
|
20
|
|
169
|
|
11
|
|
1,381
|
|
|
Total allowance for loan losses
|
|
$
|
416
|
|
$
|
649
|
|
$
|
283
|
|
$
|
28
|
|
$
|
20
|
|
$
|
185
|
|
$
|
16
|
|
$
|
1,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
7,136
|
|
$
|
632
|
|
$
|
—
|
|
$
|
149
|
|
$
|
—
|
|
$
|
2,101
|
|
$
|
32
|
|
$
|
10,050
|
|
|
Non-impaired loans
|
|
79,834
|
|
83,809
|
|
83,455
|
|
8,181
|
|
5,958
|
|
35,585
|
|
1,857
|
|
298,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
86,970
|
|
$
|
84,441
|
|
$
|
83,455
|
|
$
|
8,330
|
|
$
|
5,958
|
|
$
|
37,686
|
|
$
|
1,889
|
|
$
|
308,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2012 (Unaudited)
|
|
|
|
|
Residential
|
|
Home
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
Equity
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Consumer
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
531
|
|
$
|
501
|
|
$
|
214
|
|
$
|
13
|
|
$
|
1
|
|
$
|
149
|
|
$
|
15
|
|
$
|
1,424
|
|
|
Provisions (credit) for loan losses
|
|
—
|
|
505
|
|
25
|
|
1
|
|
6
|
|
37
|
|
10
|
|
584
|
|
|
Loans charged-off
|
|
(110
|
)
|
(625
|
)
|
—
|
|
—
|
|
—
|
|
(43
|
)
|
(16
|
)
|
(794
|
)
|
|
Recoveries
|
|
5
|
|
1
|
|
—
|
|
—
|
|
—
|
|
21
|
|
7
|
|
34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
426
|
|
$
|
382
|
|
$
|
239
|
|
$
|
14
|
|
$
|
7
|
|
$
|
164
|
|
$
|
16
|
|
$
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
Residential
|
|
Home
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
Equity
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Consumer
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
531
|
|
$
|
501
|
|
$
|
214
|
|
$
|
13
|
|
$
|
1
|
|
$
|
149
|
|
$
|
15
|
|
$
|
1,424
|
|
|
Provisions (credit) for loan losses
|
|
7
|
|
872
|
|
47
|
|
12
|
|
10
|
|
114
|
|
47
|
|
1,109
|
|
|
Loans charged-off
|
|
(154
|
)
|
(707
|
)
|
—
|
|
—
|
|
—
|
|
(117
|
)
|
(58
|
)
|
(1,036
|
)
|
|
Recoveries
|
|
9
|
|
8
|
|
—
|
|
—
|
|
—
|
|
39
|
|
16
|
|
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
393
|
|
$
|
674
|
|
$
|
261
|
|
$
|
25
|
|
$
|
11
|
|
$
|
185
|
|
$
|
20
|
|
$
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for impaired loans
|
|
$
|
104
|
|
$
|
132
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
19
|
|
$
|
7
|
|
$
|
262
|
|
|
Allowance for non-impaired loans
|
|
289
|
|
542
|
|
261
|
|
25
|
|
11
|
|
166
|
|
13
|
|
1,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
393
|
|
$
|
674
|
|
$
|
261
|
|
$
|
25
|
|
$
|
11
|
|
$
|
185
|
|
$
|
20
|
|
$
|
1,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
6,727
|
|
$
|
1,006
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,074
|
|
$
|
30
|
|
$
|
9,837
|
|
|
Non-impaired loans
|
|
71,906
|
|
82,148
|
|
81,754
|
|
7,899
|
|
3,302
|
|
37,554
|
|
2,290
|
|
286,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
78,633
|
|
$
|
83,154
|
|
$
|
81,754
|
|
$
|
7,899
|
|
$
|
3,302
|
|
$
|
39,628
|
|
$
|
2,320
|
|
$
|
296,690
|
|
F-20
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
|
|
|
Year Ended December 31, 2011
|
|
|
|
|
Residential
|
|
Home
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
|
|
1-4 Family
|
|
Equity
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Consumer
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Allowance for loan losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
694
|
|
$
|
509
|
|
$
|
158
|
|
$
|
9
|
|
$
|
1
|
|
$
|
238
|
|
$
|
27
|
|
$
|
1,636
|
|
|
Provisions (credit) for loan losses
|
|
657
|
|
431
|
|
56
|
|
36
|
|
—
|
|
(14
|
)
|
(9
|
)
|
1,157
|
|
|
Loans charged-off
|
|
(829
|
)
|
(446
|
)
|
—
|
|
(32
|
)
|
—
|
|
(112
|
)
|
(40
|
)
|
(1,459
|
)
|
|
Recoveries
|
|
9
|
|
7
|
|
—
|
|
—
|
|
—
|
|
38
|
|
36
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
531
|
|
$
|
501
|
|
$
|
214
|
|
$
|
13
|
|
$
|
1
|
|
$
|
150
|
|
$
|
14
|
|
$
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
Allowance for impaired loans
|
|
$
|
106
|
|
$
|
183
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
8
|
|
$
|
—
|
|
$
|
297
|
|
|
Allowance for non-impaired loans
|
|
425
|
|
318
|
|
214
|
|
13
|
|
1
|
|
142
|
|
14
|
|
1,127
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total allowance for loan losses
|
|
$
|
531
|
|
$
|
501
|
|
$
|
214
|
|
$
|
13
|
|
$
|
1
|
|
$
|
150
|
|
$
|
14
|
|
$
|
1,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans
|
|
$
|
5,672
|
|
$
|
775
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,927
|
|
$
|
58
|
|
$
|
9,432
|
|
|
Non-impaired loans
|
|
67,663
|
|
79,492
|
|
67,044
|
|
4,146
|
|
—
|
|
38,458
|
|
3,515
|
|
260,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans
|
|
$
|
73,335
|
|
$
|
80,267
|
|
$
|
67,044
|
|
$
|
4,146
|
|
$
|
—
|
|
$
|
41,385
|
|
$
|
3,573
|
|
$
|
269,750
|
|
Of the $2,101,000, $2,074,000 and $2,927,000 of impaired SBA loans at June 30, 2013 (unaudited), December 31, 2012 and December 31, 2011, respectively, guaranteed portions amounted to $1,773,000 (unaudited), $1,750,000 and $2,627,000.
The following is a summary of past due and non-accrual loans at June 30, 2013 (unaudited) and December 31, 2012 and 2011:
|
|
|
|
|
|
|
90 Days
|
|
|
|
Past Due > 90
|
|
|
|
|
|
|
30-59 Days
|
|
60-90 Days
|
|
or more
|
|
Total
|
|
Days and Still
|
|
Loans on
|
|
|
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Accruing
|
|
Non-accrual
|
|
|
|
|
(In thousands)
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
830
|
|
$
|
150
|
|
$
|
1,332
|
|
$
|
2,312
|
|
$
|
—
|
|
$
|
5,043
|
|
|
Home equity loans and lines of credit
|
|
408
|
|
89
|
|
263
|
|
760
|
|
—
|
|
431
|
|
|
Commercial real estate
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business
|
|
—
|
|
—
|
|
149
|
|
149
|
|
—
|
|
149
|
|
|
Commercial construction
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA
|
|
340
|
|
—
|
|
424
|
|
764
|
|
—
|
|
989
|
|
|
Consumer
|
|
—
|
|
12
|
|
—
|
|
12
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,578
|
|
$
|
251
|
|
$
|
2,168
|
|
$
|
3,997
|
|
$
|
—
|
|
$
|
6,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
1,721
|
|
$
|
717
|
|
$
|
2,652
|
|
$
|
5,090
|
|
$
|
—
|
|
$
|
5,773
|
|
|
Home equity loans and lines of credit
|
|
25
|
|
83
|
|
640
|
|
748
|
|
—
|
|
804
|
|
|
Commercial real estate
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA
|
|
361
|
|
—
|
|
494
|
|
855
|
|
—
|
|
1,071
|
|
|
Consumer
|
|
42
|
|
—
|
|
—
|
|
42
|
|
—
|
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,149
|
|
$
|
800
|
|
$
|
3,786
|
|
$
|
6,735
|
|
$
|
—
|
|
$
|
7,661
|
|
F-21
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
|
|
|
|
|
|
|
90 Days
|
|
|
|
Past Due > 90
|
|
|
|
|
|
|
30-59 Days
|
|
60-90 Days
|
|
or more
|
|
Total
|
|
Days and Still
|
|
Loans on
|
|
|
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Past Due
|
|
Accruing
|
|
Non-accrual
|
|
|
|
|
(In thousands)
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
2,208
|
|
$
|
247
|
|
$
|
659
|
|
$
|
3,114
|
|
$
|
—
|
|
$
|
3,811
|
|
|
Home equity loans and lines of credit
|
|
417
|
|
463
|
|
243
|
|
1,123
|
|
—
|
|
735
|
|
|
Commercial real estate
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial business
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
Commercial construction
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
SBA
|
|
1,187
|
|
250
|
|
609
|
|
2,046
|
|
—
|
|
2,055
|
|
|
Consumer
|
|
46
|
|
—
|
|
58
|
|
104
|
|
—
|
|
58
|
|
|
Total
|
|
$
|
3,858
|
|
$
|
960
|
|
$
|
1,569
|
|
$
|
6,387
|
|
$
|
—
|
|
$
|
6,659
|
|
The following is information pertaining to impaired loans:
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
|
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
|
|
|
(In thousands)
|
|
|
Impaired loans without a valuation allowance:
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
3,405
|
|
$
|
3,479
|
|
$
|
—
|
|
|
Home equity loans and lines of credit
|
|
316
|
|
447
|
|
—
|
|
|
Commercial business
|
|
149
|
|
149
|
|
—
|
|
|
SBA
|
|
1,563
|
|
1,633
|
|
—
|
|
|
Consumer
|
|
14
|
|
14
|
|
—
|
|
|
Total
|
|
$
|
5,447
|
|
$
|
5,722
|
|
$
|
—
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
3,731
|
|
$
|
3,731
|
|
$
|
95
|
|
|
Home equity loans and lines of credit
|
|
316
|
|
316
|
|
100
|
|
|
SBA
|
|
538
|
|
538
|
|
16
|
|
|
Consumer
|
|
18
|
|
18
|
|
5
|
|
|
Total
|
|
$
|
4,603
|
|
$
|
4,603
|
|
$
|
216
|
|
F-22
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
|
|
|
December 31, 2012
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
|
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
|
|
|
(In thousands)
|
|
|
Impaired loans without a valuation allowance:
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
3,256
|
|
$
|
3,330
|
|
$
|
—
|
|
|
Home equity loans and lines of credit
|
|
322
|
|
490
|
|
—
|
|
|
SBA
|
|
1,624
|
|
1,750
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,202
|
|
$
|
5,570
|
|
$
|
—
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
3,471
|
|
$
|
3,471
|
|
$
|
104
|
|
|
Home equity loans and lines of credit
|
|
684
|
|
684
|
|
132
|
|
|
SBA
|
|
450
|
|
450
|
|
19
|
|
|
Consumer
|
|
30
|
|
30
|
|
7
|
|
|
Total
|
|
$
|
4,635
|
|
$
|
4,635
|
|
$
|
262
|
|
|
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
|
|
|
Recorded
|
|
Income
|
|
Recognized
|
|
|
|
|
Investment
|
|
Recognized
|
|
on Cash Basis
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
6,826
|
|
$
|
135
|
|
$
|
128
|
|
|
Home equity loans and lines of credit
|
|
765
|
|
20
|
|
20
|
|
|
Commercial business
|
|
23
|
|
—
|
|
31
|
|
|
SBA
|
|
2,079
|
|
32
|
|
1
|
|
|
Consumer
|
|
37
|
|
1
|
|
—
|
|
|
Total
|
|
$
|
9,730
|
|
$
|
188
|
|
$
|
180
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
|
|
|
Recorded
|
|
Income
|
|
Recognized
|
|
|
|
|
Investment
|
|
Recognized
|
|
on Cash Basis
|
|
|
|
|
(In thousands)
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
6,053
|
|
$
|
209
|
|
$
|
120
|
|
|
Home equity loans and lines of credit
|
|
848
|
|
25
|
|
18
|
|
|
SBA
|
|
2,139
|
|
104
|
|
45
|
|
|
Consumer
|
|
46
|
|
—
|
|
—
|
|
|
Total
|
|
$
|
9,086
|
|
$
|
338
|
|
$
|
183
|
|
F-23
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
|
|
|
December 31, 2011
|
|
|
|
|
|
|
Unpaid
|
|
|
|
|
|
|
Recorded
|
|
Principal
|
|
Related
|
|
|
|
|
Investment
|
|
Balance
|
|
Allowance
|
|
|
|
|
(In thousands)
|
|
|
Impaired loans without a valuation allowance:
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
2,486
|
|
$
|
2,543
|
|
$
|
—
|
|
|
Home equity loans and lines of credit
|
|
87
|
|
87
|
|
—
|
|
|
Commercial business
|
|
—
|
|
32
|
|
—
|
|
|
SBA
|
|
2,207
|
|
2,409
|
|
—
|
|
|
Consumer
|
|
58
|
|
78
|
|
—
|
|
|
Total
|
|
$
|
4,838
|
|
$
|
5,149
|
|
$
|
—
|
|
|
Impaired loans with a valuation allowance:
|
|
|
|
|
|
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
3,186
|
|
$
|
3,209
|
|
$
|
106
|
|
|
Home equity loans and lines of credit
|
|
688
|
|
742
|
|
183
|
|
|
SBA
|
|
720
|
|
720
|
|
8
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,594
|
|
$
|
4,671
|
|
$
|
297
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
|
Average
|
|
Interest
|
|
Income
|
|
|
|
|
Recorded
|
|
Income
|
|
Recognized
|
|
|
|
|
Investment
|
|
Recognized
|
|
on Cash Basis
|
|
|
|
|
(In thousands)
|
|
|
Residential real estate:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
$
|
7,059
|
|
$
|
108
|
|
$
|
78
|
|
|
Home equity loans and lines of credit
|
|
883
|
|
1
|
|
29
|
|
|
Commercial business
|
|
169
|
|
—
|
|
27
|
|
|
SBA
|
|
3,503
|
|
62
|
|
94
|
|
|
Consumer
|
|
30
|
|
—
|
|
9
|
|
|
Total
|
|
$
|
11,644
|
|
$
|
171
|
|
$
|
237
|
|
No additional funds are committed to be advanced in connection with impaired loans at June 30, 2013 (unaudited), December 31, 2012 and 2011.
F-24
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
The following is a summary of troubled debt restructurings for six months ended June 30, 2013 (unaudited) and the years ended December 31, 2012 and 2011:
|
|
|
|
|
Pre-Modification
|
|
Post-Modification
|
|
|
|
|
|
|
Outstanding
|
|
Outstanding
|
|
|
|
|
Number of
|
|
Recorded
|
|
Recorded
|
|
|
|
|
Contracts
|
|
Investment
|
|
Investment
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Six Months Ended June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
3
|
|
$
|
472
|
|
$
|
472
|
|
|
SBA
|
|
1
|
|
131
|
|
131
|
|
|
Consumer
|
|
2
|
|
15
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
12
|
|
$
|
3,409
|
|
$
|
3,409
|
|
|
Home equity and lines of credit
|
|
3
|
|
228
|
|
228
|
|
|
SBA
|
|
2
|
|
257
|
|
257
|
|
|
Consumer
|
|
2
|
|
31
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
|
|
Troubled debt restructurings:
|
|
|
|
|
|
|
|
|
Residential 1-4 family
|
|
15
|
|
$
|
3,539
|
|
$
|
3,482
|
|
|
Commercial
|
|
1
|
|
531
|
|
463
|
|
The terms for loan modifications are determined on a loan-by-loan basis. In connection with troubled debt restructurings, terms may be modified to fit the ability of the borrower to repay in line with their current financial status, which may include a temporary reduction in the interest rate to market rate or below, a change in the terms to grant principal or interest deferments, or movement of past due amounts to the back-end of the loan or refinancing. All deferred payments will be collected at the time of final repayment. For qualifying loans the Bank will permit multiple modifications to a loan if the borrower performs under the modified terms. During the six months ended June 30, 2013 (unaudited), the Bank modified six loans totaling $1,095,000 that were performing troubled debt restructured loans at the time of modification. During 2012, the Bank modified eight loans totaling $2,455,000 that were performing troubled debt restructured loans at the time of modification. These loans are included in the table of troubled debt restructurings and are reported as impaired loans at June 30, 2013 (unaudited) and December 31, 2012. Management performs a discounted cash flow calculation to
F-25
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
determine the amount of the impairment reserve required on each of the troubled debt restructurings and must exercise judgment to determine the amounts and timing of cash flows. Any reserve required is recorded through the provision for loan losses. TDRs are reported as nonaccrual loans unless the loan qualified for accruing status at the time of the restructure, or the loan has performed according to the new contractual terms for at least six months.
The following is a summary of troubled debt restructurings that defaulted in the first twelve months after restructure during the six months ended June 30, 2013 (unaudited) and the years ended December 31, 2012 and 2011:
|
|
|
Number of
|
|
Recorded
|
|
|
|
|
Contracts
|
|
Investment
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Six Months Ended June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
Residential 1-4 family
|
|
2
|
|
$
|
566
|
|
|
Home equity and lines of credit
|
|
1
|
|
25
|
|
|
SBA
|
|
—
|
|
—
|
|
|
Year Ended December 31, 2012
|
|
|
|
|
|
|
Residential 1-4 family
|
|
1
|
|
$
|
310
|
|
|
SBA
|
|
1
|
|
161
|
|
|
Year Ended December 31, 2011
|
|
|
|
|
|
|
Residential 1-4 family
|
|
2
|
|
$
|
446
|
|
Credit Quality Information
Commercial and SBA loans are risk rated based on key factors such as management ability, financial condition, debt repayment ability, collateral, industry conditions and loan structure. Risk ratings 1 through 5 are considered “pass” rated, risk rating 5.5 is considered “watch list”, risk rating 6 is considered “special mention”, while risk ratings 7, 8 and 9 are considered “classified” ratings.
Risk Rating 1 — Excellent: loans to borrowers of the strongest financial condition, or loans to borrowers that are secured by cash collateral or highly liquid marketable securities with ample margin. Quality is unquestioned with no known credit deficiencies or technical exceptions.
Risk Rating 2 — Very Strong: high quality loans to businesses with solid and consistent financial condition with no major problems, but with less stature than credits with a risk rating of 1. The probability of serious financial deterioration is slight.
F-26
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (continued)
Credit Quality Information
(continued)
Risk Rating 3 — Strong: above average quality loans to businesses with solid and consistent financial condition that conform to most acceptable credit standards. The probability of serious financial deterioration is below average, although some vulnerability to changing economic conditions may be evidenced.
Risk Rating 4 — Good: average quality loans to businesses with sound financial condition that conform to most acceptable credit standards. The probability of serious financial deterioration is average, with vulnerability to changing economic conditions evidenced.
Risk Rating 5 — Satisfactory: loans that possess above average risk, but exhibit current factors that indicate debt repayment ability. Borrowers in this category currently exhibit satisfactory operations, but may be highly susceptible to economic downturns or events that can result in a significant impact on the borrower’s ability to properly service debt.
Risk rating 5.5 — Watch List: loans in this category exhibit the characteristics associated with 5 risk-rated loans, but possess negative factors that warrant increased oversight yet do not warrant a negative risk rating. Factors may include short-term negative operating trends, temporary liquidity shortfalls, modest delinquency, missing or incomplete financial information, or negative balance sheet trends.
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.
F-27
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS (concluded)
Credit Quality Information
(concluded)
On an annual basis, or more often if needed, the Bank formally reviews the ratings on commercial and SBA loans. 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 process. Credit quality for residential real estate mortgage and consumer loans is determined by monitoring loan payment history and on-going communications with borrowers.
The following table presents the Bank’s commercial loans by risk rating.
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Loans rated 1 - 5
|
|
$
|
81,467
|
|
$
|
7,706
|
|
$
|
4,777
|
|
$
|
29,618
|
|
$
|
123,568
|
|
|
Loans rated 5.5
|
|
1,812
|
|
189
|
|
1,181
|
|
3,488
|
|
6,670
|
|
|
Loans rated 6
|
|
176
|
|
—
|
|
—
|
|
930
|
|
1,106
|
|
|
Loans rated 7
|
|
—
|
|
435
|
|
—
|
|
3,650
|
|
4,085
|
|
|
Loans rated 8
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
83,455
|
|
$
|
8,330
|
|
$
|
5,958
|
|
$
|
37,686
|
|
$
|
135,429
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Loans rated 1 - 5
|
|
$
|
80,138
|
|
$
|
7,234
|
|
$
|
3,302
|
|
$
|
29,401
|
|
$
|
120,075
|
|
|
Loans rated 5.5
|
|
1,616
|
|
176
|
|
—
|
|
4,204
|
|
5,996
|
|
|
Loans rated 6
|
|
—
|
|
—
|
|
—
|
|
1,257
|
|
1,257
|
|
|
Loans rated 7
|
|
—
|
|
489
|
|
—
|
|
4,766
|
|
5,255
|
|
|
Loans rated 8
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
|
|
|
$
|
81,754
|
|
$
|
7,899
|
|
$
|
3,302
|
|
$
|
39,628
|
|
$
|
132,583
|
|
|
|
|
December 31, 2011
|
|
|
|
|
Commercial
|
|
Commercial
|
|
Commercial
|
|
|
|
|
|
|
|
|
Real Estate
|
|
Business
|
|
Construction
|
|
SBA
|
|
Total
|
|
|
|
|
(In thousands)
|
|
|
Loans rated 1 - 5
|
|
$
|
66,479
|
|
$
|
3,266
|
|
$
|
—
|
|
$
|
32,830
|
|
$
|
102,575
|
|
|
Loans rated 5.5
|
|
418
|
|
—
|
|
—
|
|
1,106
|
|
1,524
|
|
|
Loans rated 6
|
|
147
|
|
248
|
|
—
|
|
2,353
|
|
2,748
|
|
|
Loans rated 7
|
|
—
|
|
632
|
|
—
|
|
4,903
|
|
5,535
|
|
|
Loans rated 8
|
|
—
|
|
—
|
|
—
|
|
193
|
|
193
|
|
|
|
|
$
|
67,044
|
|
$
|
4,146
|
|
$
|
—
|
|
$
|
41,385
|
|
$
|
112,575
|
|
F-28
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
4. LOAN SERVICING
The Bank has transferred a portion of its originated commercial and SBA loans to participating lenders. The amounts transferred have been accounted for as sales and are therefore not included in the Bank’s accompanying consolidated balance sheets. The Bank and participating lenders share ratably in cash flows and any gains or losses that may result from a borrower’s lack of compliance with contractual terms of the loan. The Bank continues to service the loans on behalf of the participating lenders and, as such, collects cash payments from the borrowers, remits payments (net of servicing fees) to participating lenders and disburses required escrow funds to relevant parties. At June 30, 2013 (unaudited), December 31, 2012 and 2011, the Bank was servicing commercial loans for participants aggregating $7,124,000, $5,376,000 and $6,054,000, respectively. At June 30, 2013 (unaudited), December 31, 2012 and 2011, the Bank was servicing SBA loans for participants aggregating $20,942,000, $19,448,000 and $14,685,000, respectively.
5. PREMISES AND EQUIPMENT
A summary of the cost and accumulated depreciation and amortization of premises and equipment follows:
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Land
|
|
$
|
7,604
|
|
$
|
8,729
|
|
$
|
10,084
|
|
|
Buildings and improvements
|
|
16,580
|
|
16,086
|
|
13,602
|
|
|
Furniture, fixtures and equipment
|
|
5,036
|
|
5,079
|
|
4,109
|
|
|
Leasehold improvements
|
|
387
|
|
387
|
|
387
|
|
|
Construction in process
|
|
354
|
|
1,552
|
|
711
|
|
|
|
|
29,961
|
|
31,833
|
|
28,893
|
|
|
Less accumulated depreciation and amortization
|
|
(6,812
|
)
|
(6,914
|
)
|
(6,154
|
)
|
|
|
|
$
|
23,149
|
|
$
|
24,919
|
|
$
|
22,739
|
|
Depreciation and amortization expense amounted to $472,000, $390,000, $798,000 and $704,000 for the six months ended June 30, 2013 and 2012 (unaudited) and for the years ended December 31, 2012 and 2011, respectively.
Construction in process at June 30, 2013 (unaudited), December 31, 2012 and 2011 represents costs incurred relating to the construction of branch locations. Construction commitments outstanding as of June 30, 2013 (unaudited) and December 31, 2012 amounted to $1,100,000 and $303,000, respectively.
F-29
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
PREMISES AND EQUIPMENT (concluded)
The Bank leases certain facilities and equipment under long-term noncancelable lease commitments. Pursuant to terms of the lease agreements in effect at June 30, 2013 (unaudited) and December 31, 2012 future minimum lease commitments are as follows:
|
|
|
June 30,
|
|
Years Ending
|
|
|
|
|
2013
|
|
December 31,
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
(In thousands)
|
|
|
2013
|
|
$
|
—
|
|
$
|
93
|
|
|
2014
|
|
177
|
|
11
|
|
|
2015
|
|
136
|
|
11
|
|
|
2016
|
|
130
|
|
6
|
|
|
2017
|
|
125
|
|
—
|
|
|
2018
|
|
125
|
|
—
|
|
|
|
|
$
|
693
|
|
$
|
121
|
|
One lease contains an option to extend for a two-year period. Another lease has four options to renew for 5 year periods each. The cost of such rentals is not included above. Rent expense amounted to $70,000, $49,000, $97,000 and $190,000 for the six months ended June 30, 2013 and 2012 (unaudited) and for the years ended December 31, 2012 and 2011, respectively.
6. DEPOSITS
A summary of deposit balances, by type, is as follows:
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Non-interest-bearing demand deposit accounts
|
|
$
|
63,775
|
|
$
|
57,608
|
|
$
|
49,895
|
|
|
Savings accounts and interest-bearing DDA
|
|
86,454
|
|
77,042
|
|
70,356
|
|
|
Money market accounts
|
|
54,945
|
|
51,570
|
|
49,232
|
|
|
Club accounts
|
|
1,533
|
|
1,197
|
|
1,124
|
|
|
Total non-certificate accounts
|
|
206,707
|
|
187,417
|
|
170,607
|
|
|
|
|
|
|
|
|
|
|
|
Term certificates $100,000 or greater
|
|
45,880
|
|
42,999
|
|
35,578
|
|
|
Term certificates less than $100,000
|
|
77,405
|
|
77,377
|
|
76,771
|
|
|
Total certificate accounts
|
|
123,285
|
|
120,376
|
|
112,349
|
|
|
Total deposits
|
|
$
|
329,992
|
|
$
|
307,793
|
|
$
|
282,956
|
|
F-30
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
DEPOSITS (concluded)
A summary of certificate accounts by maturity is as follows:
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
Maturing
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Periods
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Within 1 year
|
|
$
|
46,085
|
|
0.99
|
%
|
$
|
46,376
|
|
1.07
|
%
|
$
|
42,739
|
|
1.20
|
%
|
|
Within 2 years
|
|
19,873
|
|
1.81
|
|
15,185
|
|
1.60
|
|
20,371
|
|
1.73
|
|
|
Within 3 years
|
|
27,720
|
|
2.67
|
|
24,130
|
|
2.75
|
|
6,646
|
|
2.46
|
|
|
Within 4 years
|
|
13,738
|
|
2.13
|
|
20,158
|
|
2.58
|
|
22,044
|
|
2.94
|
|
|
Within 5 years
|
|
15,869
|
|
1.75
|
|
14,527
|
|
1.84
|
|
20,549
|
|
2.58
|
|
|
|
|
$
|
123,285
|
|
1.73
|
%
|
$
|
120,376
|
|
1.82
|
%
|
$
|
112,349
|
|
1.96
|
%
|
7. BORROWED FUNDS
FHLB advances with an original maturity of less than one year amounted to $12,000,000, $13,000,000 and $6,000,000 at June 30, 2013 (unaudited), December 31, 2012 and 2011, respectively, at a weighted average rate of 0.31%, 0.31% and 0.35%, respectively.
Long-term FHLB advances consist of the following fixed-rate advances:
|
|
|
June 30, 2013
|
|
December 31, 2012
|
|
December 31, 2011
|
|
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
Average
|
|
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
Non-amortizing advances maturing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012
|
|
$
|
—
|
|
—
|
%
|
$
|
—
|
|
—
|
%
|
$
|
1,300
|
|
3.41
|
%
|
|
2013
|
|
—
|
|
—
|
|
1,300
|
|
3.59
|
|
1,300
|
|
3.59
|
|
|
2014
|
|
700
|
|
3.84
|
|
700
|
|
3.84
|
|
700
|
|
3.84
|
|
|
2015
|
|
1,300
|
|
4.04
|
|
1,300
|
|
4.04
|
|
1,300
|
|
4.04
|
|
|
Amortizing advances (1)
|
|
—
|
|
—
|
|
43
|
|
3.07
|
|
169
|
|
3.07
|
|
|
Total FHLB advances
|
|
$
|
2,000
|
|
3.97
|
%
|
$
|
3,343
|
|
3.81
|
%
|
$
|
4,769
|
|
3.68
|
%
|
(1)
Amortizing advances require monthly principal and interest payments.
F-31
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
BORROWED FUNDS (concluded)
At June 30, 2013 (unaudited), December 31, 2012 and 2011, the Bank has a $6,000,000 available line of credit with the FHLB. There were no amounts outstanding on this line of credit at June 30, 2013 (unaudited), December 31, 2012 or 2011. All borrowings from the FHLB are secured by a blanket lien on qualified collateral, defined principally as 75% of the carrying value of first mortgage loans on owner-occupied residential property.
At June 30, 2013 (unaudited) and December 31, 2012, the Bank has an agreement with the Federal Reserve Bank of Boston for borrowings at the discount window for a maximum limit of $15 million. The terms of this agreement call for the pledging of certain loans as security for any and all obligations of the Bank under this agreement. At June 30, 2013 (unaudited) and December 31, 2012, there were no borrowings under this agreement.
8.
EMPLOYEE BENEFITS
Defined Benefit Plan
The Bank has a noncontributory, defined benefit pension plan (the “Plan”) that, prior to its curtailment, covered substantially all qualified full-time employees. In March 1993, the Bank’s Board of Directors approved an amendment to the Plan, which froze employee pension benefits at the benefit amounts earned by employees as of April 15, 1993. The benefits were based upon years of service and the employees’ compensation during the last five years of employment prior to the Plan’s curtailment.
Information pertaining to the activity in the Plan is as follows:
|
|
|
December 31,
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
(In thousands)
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
|
$
|
1,834
|
|
$
|
1,497
|
|
|
Interest cost
|
|
80
|
|
82
|
|
|
Actuarial loss
|
|
105
|
|
277
|
|
|
Benefits paid
|
|
(45
|
)
|
(22
|
)
|
|
Projected benefit obligation at end of year
|
|
1,974
|
|
1,834
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
1,332
|
|
1,255
|
|
|
Actual return on plan assets
|
|
182
|
|
15
|
|
|
Employer contribution
|
|
89
|
|
84
|
|
|
Benefits paid
|
|
(45
|
)
|
(22
|
)
|
|
Fair value of plan assets at end of year
|
|
1,558
|
|
1,332
|
|
|
Unfunded status and accrued pension benefit
|
|
$
|
416
|
|
$
|
502
|
|
|
Accumulated benefit obligation
|
|
$
|
1,974
|
|
$
|
1,834
|
|
F-32
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
EMPLOYEE BENEFITS (continued)
Defined Benefit Plan (continued)
At December 31, 2012 and 2011, the discount rate used to determine the benefit obligation was 4.05 % and 4.40%, respectively.
The components of net periodic pension cost are as follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
(In thousands)
|
|
|
Interest cost
|
|
$
|
80
|
|
$
|
82
|
|
|
Expected return on plan assets
|
|
(95
|
)
|
(89
|
)
|
|
Amortization of actuarial loss
|
|
62
|
|
31
|
|
|
|
|
$
|
47
|
|
$
|
24
|
|
Pension expense for the six months ended June 30, 2013 and 2012 (unaudited) totaled $24,000 for each period.
An actuarial loss of $62,000, included in accumulated other comprehensive loss at December 31, 2012, is expected to be recognized as a component of net periodic pension cost for the year ending December 31, 2013.
The assumptions used to determine net periodic pension cost are as follows:
|
|
|
Years Ended December 31,
|
|
|
|
|
2012
|
|
2011
|
|
|
Discount rate
|
|
4.40
|
%
|
5.54
|
%
|
|
Expected return on plan assets
|
|
7.00
|
%
|
7.00
|
%
|
In general, the Bank has selected their assumptions with respect to the expected long-term rate of return based on prevailing yields on high quality fixed income investments increased by a premium for equity return expectations.
F-33
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
EMPLOYEE BENEFITS (continued)
Defined Benefit Plan (concluded)
The plan assets are all measured at fair value in Level 1 because the values are based on quoted market prices in an active exchange market. The Bank’s fair values of major categories of pension plan assets are summarized below:
|
|
|
December 31,
|
|
|
|
|
2012
|
|
2011
|
|
|
|
|
(In thousands)
|
|
|
Equity securities:
|
|
|
|
|
|
|
Domestic mutual funds
|
|
$
|
598
|
|
$
|
577
|
|
|
Fixed income
|
|
604
|
|
512
|
|
|
International mutual funds
|
|
247
|
|
176
|
|
|
International exchange traded funds
|
|
94
|
|
41
|
|
|
Cash and cash equivalents
|
|
15
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,558
|
|
$
|
1,332
|
|
The Bank expects to contribute $71,000 to the plan during the year ended December 31, 2013.
Estimated future benefit payments, which reflect expected future service, as appropriate, are expected to be paid during the fiscal year ending:
|
|
|
Years Ending
|
|
|
|
|
December 31,
|
|
|
|
|
(In thousands)
|
|
|
2013
|
|
$
|
30
|
|
|
2014
|
|
30
|
|
|
2015
|
|
29
|
|
|
2016
|
|
42
|
|
|
2017
|
|
47
|
|
|
Thereafter
|
|
709
|
|
|
|
|
|
|
|
F-34
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
EMPLOYEE BENEFITS (continued)
Deferred Compensation Supplemental Executive Retirement Plan
The Bank entered into a non-qualified deferred compensation supplemental executive retirement plan (“SERP”) with a senior executive as of January 1, 2004, which was amended and restated as of January 1, 2011 and as of January 1, 2013. In 2011, the Bank contributed an initial amount of $62,000 and is required to make annual contributions of $72,000 each January 1 thereafter until January 1, 2023, so long as the executive remains employed by the Bank. Upon separation from service on or after age 67, the Bank shall pay the SERP benefit in 10 approximately equal annual installments staring on the first business day of January after separation from service. If the executive dies before all installments have been paid, the balance shall be paid in a cash lump sum to his beneficiary. If the executive separates from service before age 67 for reasons other than death, disability or cause, he shall be paid the vested portion of his SERP benefit in a lump sum no later than the first day of the second month after such separation from service. As of December 31, 2012, the executive was 60% vested in the SERP benefit. An additional 5% of his SERP benefit becomes vested as of each December 31 until it is 100% vested on December 31, 2020. If the executive employment is terminated for cause, he will forfeit all benefits under the SERP. To fund this plan, the Bank holds investment assets which are included in other assets at fair value with changes in fair value recorded through earnings. The plan participant has the right to provide the Board with investment directions for these investments. All earnings or losses on investments are the sole responsibility of the participant. The investments informally fund the SERP liability but remain assets of the Bank and are subject to the claims of general creditors of the Bank. The assets related to this Plan are $779,000, $653,000 and $509,000 at June 30, 2013 (unaudited), December 31, 2012 and 2011, respectively. The liability for the benefit obligation is reported in accrued expenses and other liabilities in the amount of $779,000, $653,000 and $509,000 at June 30, 2013 (unaudited), December 31, 2012 and 2011, respectively. Compensation expense related to this plan was $36,000 for each of the six months ended June 30, 2013 and 2012 (unaudited) and $72,000 for each of the years ended December 31, 2012 and 2011.
401(k) Plan
The Bank has a defined contribution 401(k) Salary Deferral Plan (the “Plan”) covering substantially all qualified employees. Under the provisions of the Plan, each qualified employee may contribute up to 15% of total compensation. The Bank matches 100% of up to 5% of the employee’s contribution. In addition, the Bank contributes for each qualified employee an amount equal to 5% of gross compensation as a discretionary contribution. The Bank’s contribution to the Plan was $484,000 and $455,000 for the six months ended June 30, 2013 and 2012 (unaudited) and $603,000 and $578,000 for the years ended December 31, 2012 and 2011, respectively.
F-35
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
EMPLOYEE BENEFITS (concluded)
Incentive Compensation
The Bank does not have a formal incentive plan but on an annual basis the Board of Directors reviews Bank performance and may authorize incentive compensation at their discretion. Incentive compensation expense for the six months ended June 30, 2013 and 2012 (unaudited) and for the years ended December 31, 2012 and 2011 amounted to $84,000, $81,000, $186,000 and $160,000, respectively.
9.
OFF-BALANCE SHEET ACTIVITIES AND DERIVATIVES
In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying financial statements.
Loan Commitments
The Bank is a party to conditional commitments to lend funds in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit which include commercial lines of credit and home equity lines that involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The Bank’s exposure to credit loss is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments as it does for on-balance-sheet instruments.
The following financial instruments were outstanding whose contract amounts represent credit risk:
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Commitments to grant loans
|
|
$
|
6,420
|
|
$
|
9,945
|
|
$
|
7,189
|
|
|
Commitments to originate loans to be sold
|
|
16,776
|
|
11,317
|
|
8,412
|
|
|
Unfunded commitments under home equity lines of credit
|
|
47,636
|
|
47,245
|
|
44,939
|
|
|
Unfunded commitments under commercial lines of credit
|
|
10,469
|
|
8,972
|
|
6,619
|
|
|
Unfunded commitments under SBA lines of credit
|
|
3,269
|
|
2,351
|
|
3,928
|
|
|
Unadvanced funds on construction loans
|
|
5,639
|
|
2,045
|
|
301
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
OFF-BALANCE SHEET ACTIVITIES AND DERIVATIVES (continued)
Loan Commitments (concluded)
The commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for lines-of-credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained if deemed necessary by the Bank upon extension of credit is based upon management’s credit evaluation of the counterparty. Collateral held generally consists of real estate.
Loans Sold with Recourse Obligations
The Bank sells certain loans on a servicing-released basis to investors pursuant to contracts which include limited recourse provisions whereby the Bank would be required to repurchase loans and/or refund premiums in the event a borrower defaults generally on any of the first four payments due. At June 30, 2013 (unaudited), December 31, 2012 and 2011, the premiums received on loans sold that were subject to refund provisions amounted to $1,475,000, $1,783,000 and $1,585,000, respectively. The contracts also include repurchase obligation provisions for fraud or misrepresentation. The Bank has not been required to repurchase any loans or refund any premiums under these agreements. No liability has been recorded in the financial statements related to these recourse obligations.
Interest Rate Risk Management — Derivative Instruments Not Designated As Hedging Instruments
Certain derivative instruments do not meet the requirements to be accounted for as hedging instruments. These undesignated derivative instruments are recognized on the balance sheet at fair value, with changes in fair value recorded in other noninterest income.
Derivative Loan Commitments
Mortgage loan commitments are considered derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Bank enters into commitments to fund residential mortgage loans at specified times in the future, with the intention that these loans will subsequently be sold in the secondary market.
F-37
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
OFF-BALANCE SHEET ACTIVITIES AND DERIVATIVES (continued)
Interest Rate Risk Management — Derivative Instruments Not Designated As Hedging Instruments (continued)
Derivative Loan Commitments (concluded)
Outstanding derivative loan commitments expose the Bank to the risk that the price of the loans arising from exercise of the loan commitment might decline from inception of the rate lock to funding of the loan due to increases in mortgage interest rates. If interest rates increase, the value of these loan commitments decreases. Conversely, if interest rates decrease, the value of these loan commitments increases.
Forward Loan Sale Commitments
To protect against the price risk inherent in derivative loan commitments, the Bank utilizes best efforts forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments.
With a best efforts contract, the Bank commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded (e.g., on the same day the lender commits to lend funds to a potential borrower). Forward commitments to sell loans totaled $36,498,000 (unaudited), $24,728,000 and $22,934,000 at June 30, 2013, December 31, 2012 and 2011, respectively.
The following table presents the fair values of derivative instruments in the balance sheet.
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
Balance
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
Sheet
|
|
Fair
|
|
|
|
|
Location
|
|
Value
|
|
Location
|
|
Value
|
|
|
|
|
(In thousands)
|
|
|
June 30, 2013 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
Derivative loan commitments
|
|
NA
|
|
$
|
—
|
|
Other liabilities
|
|
$
|
212
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward loan sale commitments
|
|
Other assets
|
|
1,582
|
|
NA
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
1,582
|
|
|
|
$
|
212
|
|
F-38
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
OFF-BALANCE SHEET ACTIVITIES AND DERIVATIVES (continued)
Interest Rate Risk Management - Derivative Instrument not Designated as Hedging Instruments (concluded)
|
|
|
Assets
|
|
Liabilities
|
|
|
|
|
Balance
|
|
|
|
Balance
|
|
|
|
|
|
|
Sheet
|
|
Fair
|
|
Sheet
|
|
Fair
|
|
|
|
|
Location
|
|
Value
|
|
Location
|
|
Value
|
|
|
|
|
(In thousands)
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Derivative loan commitments
|
|
Other assets
|
|
$
|
154
|
|
NA
|
|
$
|
—
|
|
|
Forward loan sale commitments
|
|
Other assets
|
|
47
|
|
NA
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
201
|
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
Derivative loan commitments
|
|
Other assets
|
|
$
|
101
|
|
NA
|
|
$
|
—
|
|
|
Forward loan sale commitments
|
|
Other assets
|
|
256
|
|
NA
|
|
—
|
|
|
Total derivatives not designated as hedging instruments
|
|
|
|
$
|
357
|
|
|
|
$
|
—
|
|
The following table presents information pertaining to the gains and losses on Bank’s derivative instruments not designated as hedging instruments:
|
Derivatives Not
|
|
|
|
|
|
|
|
|
|
|
|
|
Designated
|
|
|
|
|
|
|
|
|
|
|
|
|
As Hedging
|
|
Location of
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
Instruments
|
|
Gain/(Loss)
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Derivative loan commitments
|
|
Gain on sales of loans, net
|
|
$
|
(1,417
|
)
|
$
|
377
|
|
$
|
281
|
|
$
|
626
|
|
|
Forward loan sale commitments
|
|
Gain on sales of loans, net
|
|
1,534
|
|
(223
|
)
|
(209
|
)
|
(554
|
)
|
|
Total
|
|
|
|
$
|
117
|
|
$
|
154
|
|
$
|
72
|
|
$
|
72
|
|
F-39
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
OFF-BALANCE SHEET ACTIVITIES AND DERIVATIVES (concluded)
Executive Employment Agreement
The Bank has entered into an Executive Employment Agreement with its President which automatically renews annually unless otherwise determined by the Board of Directors, and provides for, among other things, an annual base salary, participation in any and all employee benefit plans, and guaranteed employment. The agreement provides for continued payment of base salary and continued benefits for five years following termination of employment without cause or a change of control event. However, such employment may be terminated for cause, as defined, without incurring any continuing obligation.
Premises and Equipment (Unaudited)
In June 2013, the Bank entered into a Purchase and Sale Agreement to purchase its new corporate headquarters for $8.8 million which is currently under construction. The purchase is expected to close in the second calendar quarter of 2014, at which point the Bank expects to relocate from and hold for sale its current headquarters, which has a carrying value of $3.4 million at June 30, 2013.
Legal Contingencies
Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Bank’s consolidated financial statements at December 31, 2012 and June 30, 2013 (unaudited).
10.
LOANS TO RELATED PARTIES
Information pertaining to loans to directors, executive officers and their associates is as follows:
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
1,766
|
|
$
|
2,270
|
|
$
|
2,270
|
|
$
|
2,360
|
|
|
Principal additions
|
|
100
|
|
6
|
|
166
|
|
19
|
|
|
Principal payments
|
|
(634
|
)
|
(217
|
)
|
(670
|
)
|
(109
|
)
|
|
Balance at end of period
|
|
$
|
1,232
|
|
$
|
2,059
|
|
$
|
1,766
|
|
$
|
2,270
|
|
F-40
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
LOANS TO RELATED PARTIES (concluded)
In the ordinary course of business, the Bank has granted loans to officers and directors at the same terms as those prevailing at the time of origination for comparable transactions with other customers, except for interest rates on loans originated in accordance with the Bank’s Employee Loan Discount Program which allows rates to be reduced by 1% with a floor rate of 4%.
On January 30, 2013, the Bank modified a related party loan to an officer that resulted in an unsecured residential loan in the amount of $482,000.
11.
INCOME TAXES
Allocation of income taxes between current and deferred portions is as follows:
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Current tax provision:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
263
|
|
$
|
106
|
|
$
|
208
|
|
$
|
372
|
|
|
State
|
|
48
|
|
18
|
|
101
|
|
172
|
|
|
|
|
311
|
|
124
|
|
309
|
|
544
|
|
|
Deferred tax provision (benefit):
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
(108
|
)
|
167
|
|
437
|
|
130
|
|
|
State
|
|
(20
|
)
|
28
|
|
89
|
|
32
|
|
|
|
|
(128
|
)
|
195
|
|
526
|
|
162
|
|
|
Total income tax provision
|
|
$
|
183
|
|
$
|
319
|
|
$
|
835
|
|
$
|
706
|
|
The reasons for the differences between the statutory federal income tax provision and the actual tax provision are summarized as follows:
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Statutory tax provision at 34%
|
|
$
|
164
|
|
$
|
272
|
|
$
|
674
|
|
$
|
584
|
|
|
Increase (decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
State taxes, net of federal tax benefit
|
|
28
|
|
48
|
|
118
|
|
102
|
|
|
Other, net
|
|
(9
|
)
|
(1
|
)
|
43
|
|
20
|
|
|
|
|
$
|
183
|
|
$
|
319
|
|
$
|
835
|
|
$
|
706
|
|
F-41
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
INCOME TAXES (concluded)
The tax effects of each item that give rise to deferred taxes are as follows:
|
|
|
June 30,
|
|
December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
638
|
|
$
|
628
|
|
$
|
568
|
|
|
Employee benefit plans
|
|
244
|
|
237
|
|
214
|
|
|
Non-accrual income
|
|
43
|
|
43
|
|
46
|
|
|
Defined benefit pension plan
|
|
248
|
|
248
|
|
266
|
|
|
Total deferred tax assets
|
|
1,173
|
|
1,156
|
|
1,094
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
(175
|
)
|
(368
|
)
|
(21
|
)
|
|
Net deferred loan costs
|
|
(877
|
)
|
(750
|
)
|
(500
|
)
|
|
Other, net
|
|
(61
|
)
|
(106
|
)
|
(97
|
)
|
|
Total deferred tax liabilities
|
|
(1,113
|
)
|
(1,224
|
)
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset (liability), net
|
|
$
|
60
|
|
$
|
(68
|
)
|
$
|
476
|
|
A summary of the change in deferred taxes is as follows:
|
|
|
Six Months Ended June 30,
|
|
Years Ended December 31,
|
|
|
|
|
2013
|
|
2012
|
|
2012
|
|
2011
|
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of period
|
|
$
|
(68
|
)
|
$
|
476
|
|
$
|
476
|
|
$
|
510
|
|
|
Deferred tax provision
|
|
128
|
|
(195
|
)
|
(526
|
)
|
(162
|
)
|
|
Unrealized gain/loss pertaining to defined benefit pension plan
|
|
—
|
|
—
|
|
(18
|
)
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
60
|
|
$
|
281
|
|
$
|
(68
|
)
|
$
|
476
|
|
The Bank’s income tax returns are subject to review and examination by federal and state taxing authorities. The Bank is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2009 through 2012. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2009 are open.
F-42
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
12.
MINIMUM REGULATORY CAPITAL REQUIREMENTS
The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company’s and the Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios of total and Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). Management believes, as of June 30, 2013 (unaudited), December 31, 2012 and 2011, that the Bank meets all capital adequacy requirements to which it is subject.
As of June 30, 2013 (unaudited) and December 31, 2012, the most recent notification from the Federal Deposit Insurance Corporation (“FDIC”) categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since the notification that management believes have changed the Bank’s category.
F-43
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
MINIMUM REGULATORY CAPITAL REQUIREMENTS (concluded)
The Company’s capital ratios are not materially different from the Bank’s capital ratios. The Bank’s actual and minimum required capital amounts at June 30, 2013 (unaudited), December 31, 2012 and 2011 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Minimum
|
|
|
|
|
|
|
|
|
|
|
|
|
To Be Well
|
|
|
|
|
|
|
|
|
Minimum
|
|
Capitalized Under
|
|
|
|
|
|
|
|
|
Capital
|
|
Prompt Corrective
|
|
|
|
|
Actual
|
|
Requirements
|
|
Action Provisions
|
|
|
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
Amount
|
|
Ratio
|
|
|
|
|
(Dollars in thousands)
|
|
|
June 30, 2013 (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
29,669
|
|
10.4
|
%
|
$
|
22,893
|
|
8.0
|
%
|
$
|
28,616
|
|
10.0
|
%
|
|
Tier 1 capital (to risk weighted assets)
|
|
28,072
|
|
9.8
|
|
11,446
|
|
4.0
|
|
17,169
|
|
6.0
|
|
|
Tier 1 capital (to average assets)
|
|
28,072
|
|
7.8
|
|
14,489
|
|
4.0
|
|
18,111
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
29,341
|
|
10.7
|
%
|
$
|
21,923
|
|
8.0
|
%
|
$
|
27,404
|
|
10.0
|
%
|
|
Tier 1 capital (to risk weighted assets)
|
|
27,772
|
|
10.1
|
|
10,962
|
|
4.0
|
|
16,442
|
|
6.0
|
|
|
Tier 1 capital (to average assets)
|
|
27,772
|
|
8.1
|
|
13,770
|
|
4.0
|
|
17,213
|
|
5.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital (to risk weighted assets)
|
|
$
|
28,057
|
|
11.4
|
%
|
$
|
19,745
|
|
8.0
|
%
|
$
|
24,682
|
|
10.0
|
%
|
|
Tier 1 capital (to risk weighted assets)
|
|
26,633
|
|
10.8
|
|
19,745
|
|
8.0
|
|
19,745
|
|
8.0
|
|
|
Tier 1 capital (to average assets)
|
|
26,633
|
|
8.3
|
|
25,570
|
|
8.0
|
|
25,570
|
|
8.0
|
|
Minimum capital requirement was 8.0% for Tier 1 capital ratios per order of the FDIC throughout the first three years of operation as a condition of the application to convert to a mutual savings bank. This restriction was removed during the year ended December 31, 2012.
F-44
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
13.
FAIR VALUES OF ASSETS AND LIABILITIES
Determination of Fair Value
The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Bank’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The following methods and assumptions were used by the Bank in estimating fair value disclosures:
Cash and cash equivalents
—
The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.
Federal Home Loan Bank stock
—
The carrying value of Federal Home Loan Bank stock is deemed to approximate fair value, based on the redemption provisions of the Federal Home Loan Bank.
Loans, net
— For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral valu
es, where applicable.
Loans held for sale
—
Fair values of loans held for sale are based on prevailing market rates for loans with similar characteristics.
Deposits
— The fair values of deposits with no stated maturity, such as demand deposits, savings, club and money market accounts, are equal to the amount payable on demand at the reporting date. Fair values for term certificates are estimated using a discounted cash flow calculation that applies market interest rates currently being offered for deposits of similar remaining maturities.
Borrowed funds
— The fair values of the Bank’s FHLB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
F-45
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
FAIR VALUES OF ASSETS AND LIABILITIES (continued)
Determination of Fair Value (concluded)
Accrued interest
— The carrying amounts of accrued interest approximate fair value.
Off-balance sheet credit-related instruments
— Fair values for off-balance-sheet, credit related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
At June 30, 2013 (unaudited), December 31, 2012 and 2011, there are no assets or liabilities measured at fair value on a recurring basis other than mortgage derivatives. See Note 9.
Fair value changes in mortgage banking derivatives (interest rate lock commitments and commitments to sell fixed-rate residential mortgages) subsequent to inception are estimated using anticipated market prices based on pricing indications provided from syndicate banks and consideration of pull-through and fallout rates. The fair value of the mortgage banking derivatives are considered to be Level 3 assets.
The following table shows significant unobservable inputs used in the recurring fair value measurements of Level 3 assets and liabilities:
|
|
|
|
|
Valuation
|
|
Unobservable
|
|
|
|
|
Measurements
|
|
Fair Value
|
|
Technique
|
|
Inputs
|
|
Range
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Derivative loan commitments
|
|
$
|
212
|
|
Investor pricing
|
|
Pull-through rate
|
|
83.5-100%
|
|
|
|
|
|
|
|
|
Pricing spreads
|
|
92.06-105.94%
|
|
|
Forward loan sale commitments
|
|
1,582
|
|
Investor pricing
|
|
Pricing spreads
|
|
92.06-105.94%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Derivative loan commitments
|
|
154
|
|
Investor pricing
|
|
Pull-through rate
|
|
83.5-100%
|
|
|
|
|
|
|
|
|
Pricing spreads
|
|
101.71-106.13%
|
|
|
Forward loan sale commitments
|
|
47
|
|
Investor pricing
|
|
Pricing spreads
|
|
101.61-106.17%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-46
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
FAIR VALUES OF ASSETS AND LIABILITIES (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis (concluded)
The table below presents, for the six months ended June 30, 2013 (unaudited) and the years ended December 31, 2012 and 2011, the changes in Level 3 assets and liabilities that are measured on a recurring basis. There were no transfers during the periods presented.
|
|
|
Derivative Loan
|
|
|
|
|
Commitments and
|
|
|
|
|
Forward Loan
|
|
|
|
|
Sale Commitments
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
Balance at January 1, 2011
|
|
$
|
868
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses) included in net income
|
|
72
|
|
|
Settlements and closed loans
|
|
(583
|
)
|
|
|
|
|
|
|
Balance at December 31, 2011
|
|
357
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses) included in net income
|
|
72
|
|
|
|
|
|
|
|
Settlements and closed loans
|
|
(228
|
)
|
|
|
|
|
|
|
Balance at December 31, 2012
|
|
201
|
|
|
|
|
|
|
|
Total realized and unrealized gains (losses) included in net income (unaudited)
|
|
117
|
|
|
Settlements and closed loans (unaudited)
|
|
1,052
|
|
|
|
|
|
|
|
Balance at June 30, 2013 (unaudited)
|
|
$
|
1,370
|
|
|
|
|
|
|
|
Total unrealized gains (losses) relating to instruments still held at June 30, 2013 (unaudited)
|
|
$
|
117
|
|
|
|
|
|
|
|
Total unrealized gains (losses) relating to instruments still held at December 31, 2012
|
|
$
|
72
|
|
|
|
|
|
|
|
Total unrealized gains (losses) relating to instruments still held at December 31, 2011
|
|
$
|
72
|
|
F-47
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
FAIR VALUES OF ASSETS AND LIABILITIES (continued)
Assets Measured at Fair Value on a Non-recurring Basis
The Bank may also be required, from time to time, to measure certain other assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of June 30, 2013 (unaudited), December 31, 2012 and 2011. The losses represent the amount of write-downs during the year on assets held at period end.
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
|
|
June 30, 2013
|
|
2013
|
|
2012
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Losses
|
|
Total Losses
|
|
|
|
|
(Unaudited) (In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,170
|
|
$
|
180
|
|
$
|
350
|
|
|
Real estate held for sale
|
|
|
|
|
|
3,515
|
|
482
|
|
—
|
|
|
Impaired loans
|
|
—
|
|
—
|
|
141
|
|
129
|
|
126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,826
|
|
$
|
791
|
|
$
|
476
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
December 31, 2012
|
|
2012
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Losses
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2,594
|
|
$
|
402
|
|
|
Impaired loans
|
|
—
|
|
—
|
|
2,254
|
|
320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,848
|
|
$
|
722
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
|
December 31, 2011
|
|
2011
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Losses
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1,870
|
|
$
|
90
|
|
|
Impaired loans
|
|
—
|
|
—
|
|
2,672
|
|
424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
$
|
—
|
|
$
|
4,542
|
|
$
|
514
|
|
F-48
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
FAIR VALUES OF ASSETS AND LIABILITIES (continued)
Assets Measured at Fair Value on a Non-recurring Basis (concluded)
Losses applicable to impaired loans are estimated using the appraised value of the underlying collateral, discounted as necessary due to management’s estimates of changes in market conditions. The loss is not recorded directly as an adjustment to current earnings or comprehensive income, but rather as a component in determining the overall adequacy of the allowance for loan losses. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.
Certain properties in foreclosed real estate and real estate held for sale were adjusted to fair value based on appraisals that utilize prices in observed transactions involving similar assets or estimated sales price less costs to sell. If necessary, these appraised values were adjusted by management to recognize unobservable inputs for specific characteristics of the properties. Losses during the year represent amounts charged off to the allowance for loan losses upon transfer and subsequent write-downs charged to earnings.
There are no liabilities measured at fair value on a non-recurring basis at June 30, 2013 (unaudited), December 31, 2012 or 2011.
The following table shows significant unobservable inputs used in the non-recurring fair value measurements of Level 3 assets:
|
|
|
|
|
Valuation
|
|
|
|
|
|
|
Measurements
|
|
Fair Value
|
|
Technique
|
|
Unobservable Inputs
|
|
Range
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
$
|
1,170
|
|
Discounted appraisals
|
|
Collateral discounts/selling costs
|
|
5-30%
|
|
|
Real estate held for sale
|
|
3,515
|
|
Discounted appraisals
|
|
Collateral discounts/selling costs
|
|
5-10%
|
|
|
Impaired loans
|
|
141
|
|
Discounted appraisals
|
|
Collateral discounts/selling costs
|
|
5-30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
|
|
|
|
|
|
Foreclosed real estate
|
|
2,594
|
|
Discounted appraisals
|
|
Collateral discounts/selling costs
|
|
5-30%
|
|
|
Impaired loans
|
|
2,254
|
|
Discounted appraisals
|
|
Collateral discounts/selling costs
|
|
5-30%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Summary of Fair Values of Financial Instruments
The estimated fair values, and related carrying amounts, of the Bank’s financial instruments are as follows. Certain financial instruments and all nonfinancial instruments are exempt from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Bank.
F-49
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
FAIR VALUES OF ASSETS AND LIABILITIES (continued)
Summary of Fair Values of Financial Instruments (continued)
The following tables present the carrying amount, estimated fair value and placement in the fair value hierarchy of the Bank’s financial instruments as of June 30, 2013 (unaudited), December 31, 2012 and 2011. The tables exclude financial instruments for which the carrying value approximates fair value and derivatives. Financial assets for which the fair value approximates carrying value include cash and cash equivalents, FHLBB stock and accrued interest receivable. Financial liabilities for which the fair value approximates carrying value include non-maturity deposits and accrued interest payable.
|
|
|
June 30, 2013 (Unaudited)
|
|
|
|
|
Carrying
|
|
Estimated
|
|
Fair Value Measurements
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
(In thousands)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance for loan losses
|
|
$
|
309,156
|
|
$
|
311,605
|
|
$
|
—
|
|
$
|
—
|
|
$
|
311,605
|
|
|
Loans held for sale
|
|
19,082
|
|
19,136
|
|
—
|
|
—
|
|
19,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
123,285
|
|
125,389
|
|
—
|
|
125,389
|
|
—
|
|
|
Borrowed funds
|
|
14,000
|
|
14,037
|
|
—
|
|
14,037
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012
|
|
|
|
|
Carrying
|
|
Estimated
|
|
Fair Value Measurements
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
(In thousands)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance for loan losses
|
|
$
|
296,999
|
|
$
|
305,797
|
|
$
|
—
|
|
$
|
—
|
|
$
|
305,797
|
|
|
Loan held for sale
|
|
13,642
|
|
13,870
|
|
—
|
|
—
|
|
13,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
120,376
|
|
122,483
|
|
—
|
|
122,483
|
|
—
|
|
|
Borrowed funds
|
|
16,343
|
|
16,452
|
|
—
|
|
16,452
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Continued)
FAIR VALUES OF ASSETS AND LIABILITIES (concluded)
Summary of Fair Values of Financial Instruments (concluded)
|
|
|
December 31, 2011
|
|
|
|
|
Carrying
|
|
Estimated
|
|
Fair Value Measurements
|
|
|
|
|
Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
|
(In thousands)
|
|
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, net of allowance for loan losses
|
|
$
|
269,578
|
|
$
|
274,142
|
|
$
|
—
|
|
$
|
—
|
|
$
|
274,152
|
|
|
Loan held for sale
|
|
14,528
|
|
14,767
|
|
—
|
|
—
|
|
14,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Certificates of deposit
|
|
112,349
|
|
114,797
|
|
—
|
|
114,797
|
|
—
|
|
|
Borrowed funds
|
|
10,769
|
|
10,920
|
|
—
|
|
10,920
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.
SUBSEQUENT EVENTS
Conversion and Stock Offering
On August 22, 2013, the Board of Directors adopted the Plan of Conversion (the “Plan”) whereby the Company will convert from the mutual holding company form of organization to a stock holding company form of organization whereby a new Maryland-chartered stock Corporation (the “Holding Company”), will offer Holding Company stock on a priority basis to qualifying depositors and tax qualified employee plans of the Bank with any remaining shares to be offered to the public in a community offering and possibly in a syndicated community offering (the “Conversion”).
As part of the Conversion, the Bank will establish a liquidation account in an amount equal to the net worth of the Bank as of the date of the latest consolidated balance sheet appearing in the final prospectus distributed in connection with the Conversion. The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who maintain their accounts at the Bank after the Conversion. The liquidation account will be reduced annually to the extent that such account holders have reduced their qualifying deposits as of each anniversary date.
Subsequent increases will not restore an account holder’s interest in the liquidation account. In the event of a complete liquidation, each eligible account holder will be entitled to receive balances for accounts then held.
Subsequent to the Conversion, the Holding Company may not declare or pay dividends on, and may not repurchase, any of its shares of common stock if the effect thereof would cause stockholders’ equity to be reduced below applicable regulatory capital maintenance requirements, or if such declaration, payment of repurchase would otherwise violate regulatory requirements.
F-51
Table of Contents
Coastway Bancorp, MHC and Subsidiaries
Notes to Consolidated Financial Statements (Concluded)
SUBSEQUENT EVENTS (concluded)
Conversion and Stock Offering (concluded)
Conversion costs are capitalized and reduce the proceeds from the shares sold in the Conversion. If the Conversion is not completed, all costs will be expensed. As of June 30, 2013 (unaudited), conversion costs amounting to $9,000 have been incurred and are included in other assets in the accompanying consolidated balance sheets.
In connection with the Conversion, the Holding Company intends to implement an employee stock ownership plan.
Also in connection with the Conversion, the Holding Company intends to contribute to Coastway Cares Charitable Foundation II an amount equal to $300,000 in cash and a number of shares of common stock which together will total 3.15% of the shares sold in the offering.
Change in Control Agreements
Following the Conversion, the Bank intends to enter into an Executive Change in Control Severance Plan (“Severance Plan”) effective at, and contingent upon the closing of the conversion and stock offering, with certain officers. The participants in the Severance Plan will be paid two times the participant’s base salary plus their highest bonus in the two calendar years immediately prior to termination.
Bank-owned Life Insurance
In July 2013, the Bank purchased $4 million of bank-owned life insurance policies which are recorded on the consolidated balance sheet at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, will be reflected in non-interest income on the consolidated statement of net income and are not subject to income taxes.
Supplemental Retirement Agreements
Effective July 1, 2013, the Bank entered into supplemental retirement agreements with six executive officers, which provide for payments upon attaining the retirement age specified in the agreements. The present value of these future payments is accrued over the remaining service term. Supplemental retirement benefits generally vest as they are accrued; however a termination of employment subsequent to a change in control will result in the vesting of all benefits that would have accrued to the officer’s normal retirement date.
F-52
Table of Contents
You should rely only on the information contained in this document or that to which we have referred you. No person has been authorized to give any information or to make any representation other than as contained in this prospectus and, if given or made, such other information or representation must not be relied upon as having been authorized by Coastway Bancorp, Inc. or Coastway Community Bank This prospectus does not constitute an offer to sell or a solicitation of an offer to buy any of the securities offered hereby to any person in any jurisdiction in which such offer or solicitation is not authorized or in which the person making such offer or solicitation is not qualified to do so, or to any person to whom it is unlawful to make such offer or solicitation in such jurisdiction. Neither the delivery of this prospectus nor any sale hereunder shall under any circumstances create any implication that there has been no change in the affairs of Coastway Bancorp, Inc. or Coastway Community Bank since any of the dates as of which information is furnished herein or since the date hereof.
COASTWAY BANCORP, INC.
(Proposed Holding Company for
Coastway Community Bank)
Up to 4,197,500 Shares of
Common Stock
Par value $0.01 per share
(Subject to Increase to up to 4,827,125 Shares)
PROSPECTUS
Sandler O’Neill + Partners, L.P.
[prospectus date]
Until , 2013, all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver the prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.
Table of Contents
PART II:
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13.
Other Expenses of Issuance and Distribution
|
|
|
|
|
Amount
|
|
|
*
|
|
Registrant’s Legal Fees and Expenses
|
|
$
|
450,000
|
|
|
*
|
|
Registrant’s Accounting Fees and Expenses
|
|
165,000
|
|
|
*
|
|
Marketing Agent Fees and Expenses (1)
|
|
534,369
|
|
|
*
|
|
Records Management Fees and Expenses
|
|
50,000
|
|
|
*
|
|
Appraisal Fees and Expenses
|
|
62,500
|
|
|
*
|
|
Printing, Postage, Mailing and EDGAR Fees
|
|
110,000
|
|
|
*
|
|
Filing Fees (Nasdaq, FINRA and SEC)
|
|
64,675
|
|
|
*
|
|
Transfer Agent Fees and Expenses
|
|
12,500
|
|
|
*
|
|
Business Plan Fees and Expenses
|
|
38,500
|
|
|
*
|
|
Proxy Solicitor Fees and Expenses
|
|
40,000
|
|
|
*
|
|
Other
|
|
26,825
|
|
|
*
|
|
Total
|
|
$
|
1,554,369
|
|
*
Estimated
(1)
Coastway Bancorp, Inc. has retained Sandler O’Neill & Partners, L.P. to assist in the sale of common stock on a best efforts basis. Fees are estimated at the adjusted maximum of the offering range, assuming that all shares are sold in the subscription and community offerings.
Item 14.
Indemnification of Directors and Officers
Articles 10 and 11 of the Articles of Incorporation of Coastway Bancorp, Inc. (the “Corporation”) set forth circumstances under which directors, officers, employees and agents of the Corporation may be insured or indemnified against liability which they incur in their capacities as such:
ARTICLE 10. Indemnification, etc. of Directors and Officers.
A. Indemnification.
The Corporation shall indemnify (1) its current and former directors and officers, whether serving the Corporation or at its request any other entity, to the fullest extent required or permitted by the MGCL now or hereafter in force, including the advancement of expenses under the procedures and to the fullest extent permitted by law, and (2) other employees and agents to such extent as shall be authorized by the Board of Directors and permitted by law; provided, however, that, except as provided in Section B of this Article 10 with respect to proceedings to enforce rights to indemnification, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.
B. Procedure.
If a claim under Section A of this Article 10 is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall also be entitled to be reimbursed the expense of prosecuting or defending such suit. It shall be a defense to any action for advancement of expenses that the Corporation has not received both (i) an undertaking as required by law to repay such advances in the event it shall ultimately be determined that the standard of conduct has not been met and (ii) a written affirmation by the indemnitee of his good faith belief that the standard of conduct necessary for indemnification by the Corporation has been met. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met the applicable standard for indemnification set forth in the MGCL. Neither the failure of the Corporation (including its Board of Directors,
II-1
Table of Contents
independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the MGCL, nor an actual determination by the Corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article 10 or otherwise shall be on the Corporation.
C. Non-Exclusivity.
The rights to indemnification and to the advancement of expenses conferred in this Article 10 shall not be exclusive of any other right that any Person may have or hereafter acquire under any statute, these Articles, the Corporation’s Bylaws, any agreement, any vote of stockholders or the Board of Directors, or otherwise.
D. Insurance.
The Corporation may maintain insurance, at its expense, to insure itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such Person against such expense, liability or loss under the MGCL.
E. Miscellaneous.
The Corporation shall not be liable for any payment under this Article 10 in connection with a claim made by any indemnitee to the extent such indemnitee has otherwise actually received payment under any insurance policy, agreement, or otherwise, of the amounts otherwise indemnifiable hereunder. The rights to indemnification and to the advancement of expenses conferred in Sections A and B of this Article 10 shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director or officer and shall inure to the benefit of the indemnitee’s heirs, executors and administrators.
F. Limitations Imposed by Federal Law
. Notwithstanding any other provision set forth in this Article 10, in no event shall any payments made by the Corporation pursuant to this Article 10 exceed the amount permissible under applicable federal law, including, without limitation, Section 18(k) of the Federal Deposit Insurance Act and the regulations promulgated thereunder. Any repeal or modification of this Article 10 shall not in any way diminish any rights to indemnification or advancement of expenses of such director or officer or the obligations of the Corporation arising hereunder with respect to events occurring, or claims made, while this Article 10 is in force.
ARTICLE 11. Limitation of Liability.
An officer or director of the Corporation, as such, shall not be liable to the Corporation or its stockholders for money damages, except (A) to the extent that it is proved that the Person actually received an improper benefit or profit in money, property or services, for the amount of the benefit or profit in money, property or services actually received; or (B) to the extent that a judgment or other final adjudication adverse to the Person is entered in a proceeding based on a finding in the proceeding that the Person’s action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in the proceeding; or (C) to the extent otherwise provided by the MGCL. If the MGCL is amended to further eliminate or limit the personal liability of officers and directors, then the liability of officers and directors of the Corporation shall be eliminated or limited to the fullest extent permitted by the MGCL, as so amended.
Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation shall not adversely affect any right or protection of a director or officer of the Corporation existing at the time of such repeal or modification.
Item 15.
Recent Sales of Unregistered Securities
Not Applicable.
II-2
Table of Contents
Item 16.
Exhibits and Financial Statement Schedules:
The exhibits and financial statement schedules filed as part of this registration statement are as follows:
(a)
List of Exhibits
1.1
Engagement Letters between Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank and Sandler O’Neill & Partners, L.P.
1.2
Form of Agency Agreement between Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank and Coastway Bancorp, Inc., and Sandler O’Neill & Partners, L.P. *
2
Plan of Conversion and Reorganization
3.1
Articles of Incorporation of Coastway Bancorp, Inc.
3.2
Bylaws of Coastway Bancorp, Inc.
4
Form of Common Stock Certificate of Coastway Bancorp, Inc.
5
Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered
8.1
Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.*
8.2
Form of State Tax Opinion of Wolf & Company, P.C.*
10.1
Employment Agreement between Coastway Community Bank and William A. White, and amendment
10.2
Form of Coastway Community Bank Change in Control Severance Plan
10.3
Supplemental Executive Retirement Plan for William A. White
10.4
Supplemental Executive Retirement Plan for Certain Executives
21
Subsidiaries of Registrant
23.1
Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions included as Exhibits 5 and 8.1)
23.2
Consent of RP Financial, LC.
23.3
Consent of Wolf & Company, P.C.
24
Power of Attorney (set forth on signature page)
99.1
Appraisal Agreement between Coastway Bancorp, Inc. and RP Financial, LC.
99.2
Letter of RP Financial, LC. with respect to Subscription Rights
99.3
Appraisal Report of RP Financial, LC.**
99.4
Marketing Materials*
99.5
Stock Order and Certification Form*
99.6
Letter of RP Financial, LC. with respect to Liquidation Accounts
*
To be filed by amendment.
**
Supporting financial schedules filed in paper format only pursuant to Rule 202 of Regulation S-T. Available for inspection during business hours at the principal offices of the SEC in Washington, D.C.
(b)
Financial Statement Schedules
No financial statement schedules are filed because the required information is not applicable or is included in the consolidated financial statements or related notes.
Item 17.
Undertakings
The undersigned Registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
II-3
Table of Contents
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
(4)
That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i)
Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424 (§230.424 of this chapter);
(ii)
Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii)
The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv)
Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
(5) That, for purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(6) That, for the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-4
Table of Contents
(7)
The undersigned registrant hereby undertakes to provide to the underwriter at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser.
(8)
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
II-5
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cranston, State of Rhode Island on September 10, 2013.
|
|
COASTWAY BANCORP, INC.
|
|
|
|
|
|
|
|
|
By:
|
/s/ William A. White
|
|
|
|
William A. White
|
|
|
|
President and Chief Executive Officer
|
|
|
|
(Duly Authorized Representative)
|
POWER OF ATTORNEY
We, the undersigned directors and officers of Coastway Bancorp, Inc. (the “Company”) hereby severally constitute and appoint William A. White as our true and lawful attorney and agent, to do any and all things in our names in the capacities indicated below which said William A. White may deem necessary or advisable to enable the Company to comply with the Securities Act of 1933, and any rules, regulations and requirements of the Securities and Exchange Commission, in connection with the registration statement on Form S-1 relating to the offering of the Company’s common stock, including specifically, but not limited to, power and authority to sign for us in our names in the capacities indicated below the registration statement and any and all amendments (including post-effective amendments) thereto; and we hereby approve, ratify and confirm all that said William A. White shall do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
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Signatures
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Title
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Date
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/s/
William A. White
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President, Chief Executive Officer and Director
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September 10, 2013
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William A. White
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(Principal Executive Officer)
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/s/ Jeanette Fritz
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Executive Vice President and Chief Financial Officer
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September 10, 2013
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Jeanette Fritz
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(Principal Accounting and Financial Officer)
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/s/ Mark E. Crevier
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Chairman of the Board
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September 10, 2013
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Mark E. Crevier
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/s/ Phillip Kydd
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Vice Chairman of the Board
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September 10, 2013
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Phillip Kydd
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/s/ Lynda Dickinson
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Director
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September 10, 2013
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Lynda Dickinson
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/s/ David P. DiSanto
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Director
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September 10, 2013
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David P. DiSanto
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/s/ Hon. Francis X. Flaherty
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Director
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September 10, 2013
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Hon. Francis X. Flaherty
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/s/ James P. Fiore
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Director
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September 10, 2013
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James P. Fiore
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/s/ Peter A. Koch
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Director
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September 10, 2013
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Peter A. Koch
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/s/ Dennis M. Murphy
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Director
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September 10, 2013
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Dennis M. Murphy
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/s/ Debra M. Paul
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Director
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September 10, 2013
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Debra M. Paul
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Table of Contents
As filed with the Securities and Exchange Commission on September 12, 2013
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
TO
REGISTRATION STATEMENT
ON
FORM S-1
Coastway Bancorp, Inc.
Cranston, Rhode Island
Table of Contents
EXHIBIT INDEX
1.1
Engagement Letters between Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank and Sandler O’Neill & Partners, L.P.
1.2
Form of Agency Agreement between Coastway Bancorp, MHC, Coastway Bancorp, LLC, Coastway Community Bank and Coastway Bancorp, Inc., and Sandler O’Neill & Partners, L.P. *
2
Plan of Conversion and Reorganization
3.1
Articles of Incorporation of Coastway Bancorp, Inc.
3.2
Bylaws of Coastway Bancorp, Inc.
4
Form of Common Stock Certificate of Coastway Bancorp, Inc.
5
Opinion of Luse Gorman Pomerenk & Schick, P.C. regarding legality of securities being registered
8.1
Form of Federal Tax Opinion of Luse Gorman Pomerenk & Schick, P.C.*
8.2
Form of State Tax Opinion of Wolf & Company, P.C.*
10.1
Employment Agreement between Coastway Community Bank and William A. White, and amendment
10.2
Form of Coastway Community Bank Change in Control Severance Plan
10.3
Supplemental Executive Retirement Plan for William A. White
10.4
Supplemental Executive Retirement Plan for Certain Executives
21
Subsidiaries of Registrant
23.1
Consent of Luse Gorman Pomerenk & Schick, P.C. (contained in Opinions included as Exhibits 5 and 8.1)
23.2
Consent of RP Financial, LC.
23.3
Consent of Wolf & Company, P.C.
24
Power of Attorney (set forth on signature page)
99.1
Appraisal Agreement between Coastway Bancorp, Inc. and RP Financial, LC.
99.2
Letter of RP Financial, LC. with respect to Subscription Rights
99.3
Appraisal Report of RP Financial, LC.**
99.4
Marketing Materials*
99.5
Stock Order and Certification Form*
99.6
Letter of RP Financial, LC. with respect to Liquidation Accounts
*
To be filed by amendment.
**
Supporting financial schedules filed in paper format only pursuant to Rule 202 of Regulation S-T. Available for inspection during business hours at the principal offices of the SEC in Washington, D.C.
Exhibit 99.3
PRO FORMA VALUATION REPORT
COASTWAY BANCORP, INC.
Cranston, Rhode Island
PROPOSED HOLDING COMPANY FOR:
COASTWAY COMMUNITY BANK
Cranston, Rhode Island
Dated As Of:
August 9, 2013
Prepared By:
RP
®
Financial, LC.
1100 North Glebe Road
Suite 600
Arlington, Virginia 22201
RP
®
FINANCIAL, LC.
Advisory | Planning | Valuation
August 9, 2013
Boards of Directors
Coastway Bancorp, MHC
Coastway Bancorp, LLC
Coastway Community Bank
One Coastway Plaza
Cranston, Rhode Island 02910
Members of the Boards of Directors:
At your request, we have completed and hereby provide an independent appraisal (“Appraisal”) of the estimated pro forma market value of the common stock which is to be issued in connection with the mutual-to-stock conversion transaction described below.
This Appraisal is furnished pursuant to the requirements of the Code of Federal Regulations 563b.7 and has been prepared in accordance with the “Guidelines for Appraisal Reports for the Valuation of Savings and Loan Associations Converting from Mutual to Stock Form of Organization” of the Office of Thrift Supervision (“OTS”) and reissued by the Office of the Comptroller of the Currency (“OCC”), and applicable regulatory interpretations thereof. Such Valuation Guidelines are relied upon by the Federal Reserve Board (“FRB”) in the absence of separate written valuation guidelines.
Description of Plan of Conversion and Reorganization
On August 22, 2013, the respective Boards of Directors of Coastway Bancorp, MHC adopted a plan of conversion and reorganization (the “Plan of Conversion”), whereby the MHC will convert to stock form. As a result of the conversion, Coastway Bancorp, LLC, which currently owns all of the issued and outstanding common stock of Coastway Community Bank (“Coastway” or the “Bank”), will be succeeded by a Maryland corporation with the name of Coastway Bancorp, Inc. (“Coastway Bancorp” or the “Company”). Following the conversion, the MHC will no longer exist. For purposes of this document, the existing consolidated entity will hereinafter be referred to as Coastway Bancorp or the Company.
It is
our understanding that Coastway Bancorp will offer its stock, representing the ownership interest held by the MHC, in a
subscription offering to Eligible Account holders, Tax-Qualified Plans, Supplemental Eligible Account Holders and Other Depositors, as such terms are defined for purposes of applicable federal regulatory requirements governing mutual-to-stock conversions. To the extent that shares remain available for purchase after satisfaction of all orders received in the subscription offering, the shares may be offered for sale
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Washington Headquarters
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Three Ballston Plaza
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Telephone: (703) 528-1700
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1100 North Glebe Road, Suite 600
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Fax No.: (703) 528-1788
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Arlington, VA 22201
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Toll-Free No.: (866) 723-0594
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www.rpfinancial.com
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E-Mail: mail@rpfinancial.com
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to the public at large in a community offering and a syndicated offering
. Upon completing the mutual-to-stock conversion and stock offering, the Company will be 100% owned by public shareholders.
RP
®
Financial, LC.
RP
®
Financial, LC. (“RP Financial”) is a financial consulting firm serving the financial services industry nationwide that, among other things, specializes in financial valuations and analyses of business enterprises and securities, including the pro forma valuation for savings institutions converting from mutual-to-stock form. The background and experience of RP Financial is detailed in Exhibit V-1. We believe that, except for the fee we will receive for our appraisal, we are independent of the Company, Coastway, the MHC and the other parties engaged by Coastway or the Company to assist in the stock conversion process.
Valuation Methodology
In preparing our Appraisal, we have reviewed the regulatory applications of the Company, Coastway and the MHC, including the prospectus as filed with the FRB and the Securities and Exchange Commission (“SEC”). We have conducted a financial analysis of the Company, Coastway and the MHC that has included a review of audited financial information for the years ended December 31, 2009 through December 31, 2012 and a review of various unaudited information and internal financial reports through June 30, 2013, and due diligence related discussions with the Company’s management; Wolf & Co., the Company’s independent auditor; Luse Gorman Pomerenk & Schick, P.C., the Company’s conversion counsel and Sandler O’Neill & Partners, L.P., the Company’s marketing advisor in connection with the subscription and community offerings. All assumptions and conclusions set forth in the Appraisal were reached independently from such discussions. In addition, where appropriate, we have considered information based on other available published sources that we believe are reliable. While we believe the information and data gathered from all these sources are reliable, we cannot guarantee the accuracy and completeness of such information.
We have investigated the competitive environment within which Coastway operates and have assessed Coastway’s relative strengths and weaknesses. We have kept abreast of the changing regulatory and legislative environment for financial institutions and analyzed the potential impact on Coastway and the industry as a whole. We have analyzed the potential effects of the stock conversion on Coastway’s operating characteristics and financial performance as they relate to the pro forma market value of Coastway Bancorp. We have taken into consideration the balance sheet of the LLC and the MHC. We have reviewed the economic and demographic characteristics of the Company’s primary market area. We have compared Coastway’s financial performance and condition with selected publicly-traded thrifts in accordance with the Valuation Guidelines, as well as all publicly-traded thrifts and thrift holding companies. We have reviewed the current conditions in the securities markets in general and the market for thrift stocks in particular, including the market for existing thrift issues, initial public offerings by thrifts and thrift holding companies, and second-step conversion offerings. We have excluded from such analyses thrifts subject to announced or rumored acquisition, and/or institutions that exhibit other unusual characteristics.
The Appraisal is based on Coastway’s representation that the information contained in the regulatory applications and additional information furnished to us by Coastway and its independent auditor, legal counsel and other authorized agents are truthful, accurate and
2
complete. We did not independently verify the financial statements and other information provided by Coastway, or its independent auditor, legal counsel and other authorized agents nor did we independently value the assets or liabilities of Coastway. The valuation considers Coastway only as a going concern and should not be considered as an indication of Coastway’s liquidation value.
Our appraised value is predicated on a continuation of the current operating environment for Coastway and for all thrifts and their holding companies. Changes in the local, state and national economy, the legislative and regulatory environment for financial institutions and mutual holding companies, the stock market, interest rates, and other external forces (such as natural disasters or significant world events) may occur from time to time, often with great unpredictability and may materially impact the value of thrift stocks as a whole or the value of Coastway Bancorp’s stock alone. It is our understanding that there are no current plans for selling control of Coastway. To the extent that such factors can be foreseen, they have been factored into our analysis.
The estimated pro forma market value is defined as the price at which Coastway Bancorp’s common stock, immediately upon completion of the second-step stock offering, would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts.
Valuation Conclusion
Based
on the foregoing, it is our opinion that, as of August 9, 2013, the estimated aggregate pro forma market value of the shares to be issued immediately following the conversion, including the shares to be issued to the Foundation equaled $37,349,750 at the midpoint, equal to 3,734,975 shares offered at a per share value of $10.00. Pursuant to conversion guidelines, the 15% valuation range indicates a minimum value of $31,702,290 and a maximum value of $42,997,210. Based on the $10.00 per share offering price determined by the Board, this valuation range equates to total shares outstanding of 3,170,229 at the minimum and 4,299,721 at the maximum. In the event the appraised value is subject to an increase, the aggregate pro forma market value may be increased up to a supermaximum value of $49,491,790 without a resolicitation. Based on the $10.00 per share offering price, the supermaximum value would result in total shares outstanding of 4,949,179.
Based on this valuation range, the conversion stock offering (excluding the shares issued to the Foundation) will be as follows: 3,102,500 shares at the minimum, 3,650,000 shares at the midpoint, 4,197,500 shares at the maximum and 4,827,125 shares at the supermaximum of the offering range. These figures translate to offering values as follows: $31,025,000 at the minimum, $36,500,000 at the midpoint, $41,975,000 at the maximum and $48,271,250 at the supermaximum of the offering range.
Limiting Factors and Considerations
The valuation is not intended, and must not be construed, as a recommendation of any kind as to the advisability of purchasing shares of the common stock. Moreover, because such valuation is determined in accordance with applicable OCC regulatory guidelines and is necessarily based upon estimates and projections of a number of matters, all of which are subject to change from time to time, no assurance can be given that persons who purchase shares of common stock in the conversion offering, or prior to that time, will thereafter be able to
3
buy or sell such shares at prices related to the foregoing valuation of the estimated pro forma market value thereof.
The appraisal reflects only a valuation range as of this date for the pro forma market value of Coastway Bancorp immediately upon issuance of the stock and does not take into account any trading activity with respect to the purchase and sale of common stock in the secondary market on the date of issuance of such securities or at anytime thereafter following completion of the conversion. RP Financial’s valuation was based on the financial condition, operations and shares outstanding of Coastway as of June 30, 2013, the date of the financial data included in the prospectus.
RP Financial is not a seller of securities within the meaning of any federal and state securities laws and any report prepared by RP Financial shall not be used as an offer or solicitation with respect to the purchase or sale of any securities. RP Financial maintains a policy which prohibits RP Financial, its principals or employees from purchasing stock of its client institutions.
This valuation will be updated as provided for in the conversion regulations and guidelines. These updates will consider, among other things, any developments or changes in the financial performance and condition of Coastway, management policies, and current conditions in the equity markets for thrift shares, both existing issues and new issues. These updates may also consider changes in other external factors which impact value including, but not limited to: various changes in the legislative and regulatory environment for financial institutions, the stock market and the market for thrift stocks, and interest rates. Should any such new developments or changes be material, in our opinion, to the valuation of the shares, appropriate adjustments to the estimated pro forma market value will be made. The reasons for any such adjustments will be explained in the update at the date of the release of the update. The valuation will also be updated at the completion of Coastway’s stock offering.
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Respectfully submitted,
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RP
®
FINANCIAL, LC.
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/s/ James J. Oren
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James J. Oren
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Director
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4
TABLE OF CONTENTS
COASTWAY BANCORP, INC.
COASTWAY COMMUNITY BANK
Cranston, Rhode Island
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DESCRIPTION
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PAGE
NUMBER
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CHAPTER ONE
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OVERVIEW AND FINANCIAL ANALYSIS
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Introduction
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I.1
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Plan of Conversion
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I.1
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Strategic Overview
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I.2
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Balance Sheet Trends
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I.3
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Income and Expense Trends
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I.8
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Interest Rate Risk Management
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I.12
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Lending Activities and Strategy
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I.13
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Loan Originations and Sales
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I.17
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Asset Quality
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I.18
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Funding Composition and Strategy
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I.18
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Subsidiaries
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I.19
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Legal Proceedings
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I.19
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CHAPTER TWO
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MARKET AREA ANALYSIS
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Introduction
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II.1
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National Economic Factors
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II.1
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Interest Rate Environment
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II.4
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Market Area Demographic and Economic Characteristics
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II.4
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Regional/Local Economic Factors
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II.5
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Summary of Local Economy
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II.8
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Major Market Area Employment Sectors
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II.9
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Unemployment Data
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II.10
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Market Area Deposit Characteristics/Competition
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II.11
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Competition
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II.13
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CHAPTER THREE
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PEER GROUP ANALYSIS
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Peer Group Selection
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III.1
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Financial Condition
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III.6
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Income and Expense Components
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III.9
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Loan Composition
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III.12
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Credit Risk
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III.14
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Interest Rate Risk
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III.14
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Summary
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III.17
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i
TABLE OF CONTENTS
COASTWAY BANCORP, INC.
COASTWAY COMMUNITY BANK
Cranston, Rhode Island
(continued)
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DESCRIPTION
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PAGE
NUMBER
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CHAPTER FOUR
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VALUATION ANALYSIS
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Introduction
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IV.1
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Appraisal Guidelines
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IV.1
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RP Financial Approach to the Valuation
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IV.1
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Valuation Analysis
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IV.2
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1. Financial Condition
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IV.2
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2. Profitability, Growth and Viability of Earnings
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IV.4
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3. Asset Growth
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IV.6
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4. Primary Market Area
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IV.7
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5. Dividends
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IV.8
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6. Liquidity of the Shares
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IV.9
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7. Marketing of the Issue
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IV.9
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A. The Public Market
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IV.10
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B. The New Issue Market
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IV.14
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C. The Acquisition Market
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IV.14
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8. Management
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IV.16
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9. Effect of Government Regulation and Regulatory Reform
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IV.16
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Summary of Adjustments
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IV.17
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Valuation Approaches
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IV.17
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1. Price-to-Earnings (“P/E”)
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IV.18
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2. Price-to-Book (“P/B”)
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IV.21
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3. Price-to-Assets (“P/A”)
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IV.21
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Comparison to Recent Offerings
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IV.21
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Valuation Conclusion
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IV.22
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ii
LIST OF TABLES
COASTWAY BANCORP, INC.
COASTWAY COMMUNITY BANK
Cranston, Rhode Island
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TABLE
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NUMBER
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DESCRIPTION
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PAGE
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1.1
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Historical Balance Sheets
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I.4
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1.2
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Historical Income Statements
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I.9
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2.1
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Summary Demographic Data
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II.7
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2.2
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Rhode Island Largest Employers
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II.9
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2.3
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Primary Market Area Employment Sectors
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II.10
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2.4
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Unemployment Trends
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II.11
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2.5
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Deposit Summary
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II.12
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2.6
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Market Area Deposit Competitors
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II.14
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3.1
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Peer Group of Publicly-Traded Thrifts
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III.3
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3.2
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Balance Sheet Composition and Growth Rates
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III.7
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3.3
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Income as a % of Average Assets and Yields, Costs, Spreads
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III.10
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3.4
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Loan Portfolio Composition and Related Information
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III.13
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3.5
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Credit Risk Measures and Related Information
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III.15
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3.6
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Interest Rate Risk Measures and Net Interest Income Volatility
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III.16
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4.1
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Recent Conversions Completed in Last Three Months
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IV.15
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4.2
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Valuation Adjustments
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IV.17
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4.3
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Derivation of Core Earnings
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IV.19
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4.3
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Public Market Pricing Versus Peer Group
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IV.20
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iii
I. OVERVIEW AND FINANCIAL ANALYSIS
Introduction
Coastway is a Rhode Island-chartered stock savings bank headquartered in Cranston, Rhode Island. In 2013, Coastway reorganized into the mutual holding company structure by forming Coastway Bancorp, MHC, a Rhode Island-chartered mutual holding company. Coastway Bancorp, MHC owns 100% of the membership interest of Coastway Bancorp, LLC, a Rhode Island stock limited liability corporation, which in turn owns 100% of the outstanding shares of common stock of Coastway Community Bank.
Operating primarily in Rhode Island, t
he Bank maintains nine banking offices located in Providence and Kent Counties, located in northern and central Rhode Island. The Bank’s lending market area consists of the State of Rhode Island and nearby contiguous areas of Connecticut and Massachusetts. A
map of the Bank’s branch offices provided in Exhibit I-1. Coastway is a member of the Federal Home Loan Bank (“FHLB”) system, and its deposits are insured up to the regulatory maximums by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). Coastway is subject to regulatory oversight and examination by the State of Rhode Island Department of Business Regulation and the FDIC (for deposit insurance purposes). At June 30, 2013, Coastway reported $375.7 million in assets, $330.0 million in deposits and total equity of $27.6 million, equal to 7.34% of total assets. Coastway’s audited financial statements are included by reference as Exhibit I-2.
Plan of Conversion
The Board of Directors of Coastway adopted a plan of conversion and reorganization on August 22, 2013. Pursuant to the plan of conversion and reorganization, Coastway Bancorp, MHC will convert from the mutual form of organization to the fully stock form. In the conversion, a new Maryland stock holding company named Coastway Bancorp, Inc. (“Coastway Bancorp” or the “Company”) will be organized and will sell shares of common stock to the public, and Coastway Bancorp, MHC and Coastway Bancorp, LLC will cease to exist. When the conversion is completed, all of the capital stock of Coastway Community Bank will be owned by Coastway Bancorp and all of the common stock of Coastway Bancorp will be owned by public shareholders. Following the completion of the offering, Coastway Bancorp will be a bank holding company, and its primary regulator will be the Federal Reserve.
I.1
The plan of conversion and reorganization provides that Coastway Bancorp will sell shares of its common stock in a
subscription offering
in descending order of priority to the Bank’s members and other stakeholders as follows: eligible account holders; tax-qualified employee benefit plans; supplemental eligible account holders; and other depositors. If all shares are not subscribed for in the subscription offering, the Bank intends to offer common stock for sale to certain members of the public through a community offering. Shares not purchased in the subscription and community offerings may be offered for sale to the general public in a syndicated community offering.
At this time, no other activities are contemplated for Coastway Bancorp other than the ownership of the Bank, a loan to the newly-formed employee stock ownership plan (“ESOP”) and reinvestment of the proceeds that are retained by the Company. In the future, Coastway Bancorp may acquire or organize other operating subsidiaries, diversify into other banking-related activities, pay dividends to shareholders and/or repurchase its stock, although there are no specific plans to undertake such activities at the present time.
Strategic Overview
Coastway has been serving the Rhode Island area since its founding in 1920 as the Telephone Workers Credit Union, a Rhode Island chartered credit union. Following a long history of serving the local market area and its members, as a credit union Coastway began expanding its market area served and merged with Ocean State Community Credit Union in 2000. Subsequent to this merger, as a credit union Coastway expanded its branch office network. On July 1, 2009, primarily in order to provide greater business lending authority, Coastway converted to a Rhode Island chartered mutual savings bank and changed its name to Coastway Community Bank.
While operating as a traditional credit union for most of its history, the Bank began to diversify its lending function by originating first and second position residential mortgage laons secured by 1-4 family properties in the local market area surrounding the office locations. A mortgage banking operation has been developed to sell most of the longer-term fixed rate conforming residential loans into the secondary market for interest rate risk and income purposes. In recent years, the Bank has further diversified the lending operations by originating commercial real estate, commercial business, small business program (“SBA”) and commercial construction loans. These loans also provide yield and interest rate risk benefits, while diversifying the revenue base. Balance sheet growth has been pursued through having a
I.2
competitive product line of deposit accounts, positioning the Bank as a local community bank, expanding and updating the branch office network and using borrowings for reinvestment in earning assets. The growth in funding and lending resulted in Coastway reaching an asset base of approximately $376 million as of June 30, 2013 and an equity base of approximately $28 million.
The Bank’s conservative lending operations, and the corresponding concentration in residential loan products has limited the level of delinquent loans during the most recent economic recession.
The additional equity obtained from the stock offering will increase the Bank’s liquidity, leverage and growth capacity and the overall financial strength. Coastway’s higher capital position resulting from the infusion of stock proceeds is anticipated to reduce interest rate risk through enhancing the interest-earning assets to interest-bearing liabilities (“IEA/IBL”) ratio. The increased equity is expected to reduce funding costs. The Bank will also be better positioned to pursue growth and revenue diversification. The projected use of proceeds is highlighted below.
·
The Company.
The Company is expected to retain an estimated 50% of the net conversion proceeds. At present, funds at the holding company level are expected to be initially invested primarily into short-term investment grade securities, along with providing the funds for the employee stock ownership plan purchases. Over time, the funds may be utilized for various corporate purposes, including possibly funding purchases of stock for the restricted stock plan.
·
The Bank.
A minimum of 50% of the net conversion proceeds will be infused into the Bank as cash/tier 1 capital. Cash proceeds (i.e., net proceeds less deposits withdrawn to fund stock purchases) infused into the Bank will become part of general funds, pending deployment into loans and investment securities.
Balance Sheet Trends
Table 1.1 presents the Bank’s historical balance sheet data for the most recent four fiscal years and as of June 30, 2013, all of which reflects data for Coastway as a mutual savings bank. Over this period, Coastway’s total assets have increased at a 6.8% annual rate, with loans receivable, representing the majority of the asset base, increasing at a 5.9% annual rate, a slightly lower rate than assets over the same time period.
Assets have increased steadily from fiscal 2009 through June 30, 2013 as a result of the Bank’s efforts to achieve balance sheet growth and to maintain a leveraged equity base. For the six months ended June 30, 2013, assets increased by $21.1 million, or 6.0%, with such
I.3
Table 1.1
Coastway Community Bank
Historical Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/31/2009-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/30/2013
|
|
|
|
|
As of December 31,
|
|
As of June 30,
|
|
Annual.
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
2013
|
|
Growth Rate
|
|
|
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Pct
|
|
|
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
(%)
|
|
|
Total Amount of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
$
|
298,028
|
|
100.00
|
%
|
$
|
309,265
|
|
100.00
|
%
|
$
|
322,967
|
|
100.00
|
%
|
$
|
354,622
|
|
100.00
|
%
|
$
|
375,746
|
|
100.00
|
%
|
6.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Equivalents
|
|
$
|
5,174
|
|
1.74
|
%
|
$
|
5,241
|
|
1.69
|
%
|
$
|
5,366
|
|
1.66
|
%
|
$
|
7,020
|
|
1.98
|
%
|
$
|
9,863
|
|
2.62
|
%
|
20.24
|
%
|
|
FHLB Stock
|
|
3,408
|
|
1.14
|
%
|
3,408
|
|
1.10
|
%
|
3,408
|
|
1.06
|
%
|
3,036
|
|
0.86
|
%
|
2,694
|
|
0.72
|
%
|
-6.50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Originated for Investment, Net
|
|
$
|
260,068
|
|
87.26
|
%
|
$
|
257,045
|
|
83.11
|
%
|
$
|
269,578
|
|
83.47
|
%
|
$
|
296,999
|
|
83.75
|
%
|
$
|
309,156
|
|
82.28
|
%
|
5.06
|
%
|
|
Loans Held for Sale
|
|
8,591
|
|
2.88
|
%
|
19,250
|
|
6.22
|
%
|
14,528
|
|
4.50
|
%
|
13,642
|
|
3.85
|
%
|
19,082
|
|
5.08
|
%
|
25.61
|
%
|
|
Loans Receivable (net)
|
|
$
|
268,659
|
|
90.15
|
%
|
$
|
276,295
|
|
89.34
|
%
|
$
|
284,106
|
|
87.97
|
%
|
$
|
310,641
|
|
87.60
|
%
|
$
|
328,238
|
|
87.36
|
%
|
5.89
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Assets
|
|
13,659
|
|
4.58
|
%
|
17,001
|
|
5.50
|
%
|
22,739
|
|
7.04
|
%
|
24,919
|
|
7.03
|
%
|
23,149
|
|
6.16
|
%
|
16.27
|
%
|
|
Real Estate Owned
|
|
1,103
|
|
0.37
|
%
|
435
|
|
0.14
|
%
|
1,870
|
|
0.58
|
%
|
2,594
|
|
0.73
|
%
|
1,670
|
|
0.44
|
%
|
12.58
|
%
|
|
Real Estate Inv./Held for Sale
|
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
1,354
|
|
0.38
|
%
|
3,515
|
|
0.94
|
%
|
NM
|
|
|
Non-Mortgage Servicing Rights
|
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
310
|
|
0.10
|
%
|
398
|
|
0.11
|
%
|
391
|
|
0.10
|
%
|
NM
|
|
|
Other Assets
|
|
6,025
|
|
2.02
|
%
|
6,885
|
|
2.23
|
%
|
5,168
|
|
1.60
|
%
|
4,660
|
|
1.31
|
%
|
6,226
|
|
1.66
|
%
|
0.94
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
|
|
$
|
261,992
|
|
87.91
|
%
|
$
|
261,851
|
|
84.67
|
%
|
$
|
282,956
|
|
87.61
|
%
|
$
|
307,793
|
|
86.79
|
%
|
$
|
329,992
|
|
87.82
|
%
|
6.82
|
%
|
|
FHLB Advances, Other Borrowed Funds
|
|
8,942
|
|
3.00
|
%
|
19,789
|
|
6.40
|
%
|
10,769
|
|
3.33
|
%
|
16,343
|
|
4.61
|
%
|
14,000
|
|
3.73
|
%
|
13.66
|
%
|
|
Other Liabilities
|
|
2,593
|
|
0.87
|
%
|
2,323
|
|
0.75
|
%
|
3,119
|
|
0.97
|
%
|
3,190
|
|
0.90
|
%
|
4,159
|
|
1.11
|
%
|
14.45
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
$
|
24,501
|
|
8.22
|
%
|
$
|
25,302
|
|
8.18
|
%
|
$
|
26,123
|
|
8.09
|
%
|
$
|
27,296
|
|
7.70
|
%
|
$
|
27,595
|
|
7.34
|
%
|
3.46
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AOCI Adjustment
|
|
$
|
(460
|
)
|
-0.15
|
%
|
$
|
(350
|
)
|
-0.11
|
%
|
$
|
(541
|
)
|
-0.17
|
%
|
$
|
(516
|
)
|
-0.15
|
%
|
$
|
(516
|
)
|
-0.14
|
%
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offices Open
|
|
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
9
|
|
|
|
—
|
|
(1) Ratios are as a percent of ending assets.
Source: Audited and unaudited financial statements and RP Financial calculations.
I.4
asset growth funneled primarily into loans held for investment, loans held for sale and cash and equivalents. Since December 31, 2009, asset growth has been funded with increasing levels of deposits and borrowings, with deposits providing a majority of the funding growth since that date. Equity also has increased since fiscal 2009 at an annual rate of 3.5%, reflecting net profits during this period, and reached $27.6 million at June 30, 2013, or 7.34% of assets. A summary of Coastway’s key operating ratios for the past five years is presented in Exhibit I-3.
A key long term business strategy of Coastway is to maintain a significant investment in whole loans receivable. As such, the Bank’s loan portfolio totaled $328.2 million, or 87.4% of assets at June 30, 2013, an increase from $268.7 million, or 90.2% of assets as of December 31, 2009. From fiscal 2009 through June 30, 2013, despite an increase in loan balance, Coastway’s loans/assets ratio decreased modestly, reflecting additional investment of available funds in cash equivalents, fixed assets and real estate owned. The combination of the decrease in loans receivable as a percent of assets offset by increased dependence on borrowed funds for funding resulted in the loan/deposit ratio decreasing from 102.54% at December 31, 2009 to 99.47% at June 30, 2013.
Coastway’s investment in loans reflects the Bank’s historical concentration in business lending, including Small Business Administration (“SBA”), commercial real estate, commercial business and commercial construction lending. Such loans increased from $66.6 million, or 27.8% of loans at December 31, 2009 to $135.4 million, or 43.9% of loans at June 30, 2013. The commercial lending activities represent a primary part of the Bank’s business strategy to maximize revenue (in terms of yield on portfolio loans and income from the sale of loans into the secondary market) and provide benefits in areas such as interest rate risk. Residential first and second position mortgage lending also is a long-term lending activity, and such loans comprise the majority of the remaining loan portfolio ($171.4 million, or 55.5% of total loans as of June 30, 2013). Coastway historically originated consumer loans to members and customers, primarily automobile loans (reflective of the credit union focus on consumer lending). However, this type of lending has been de-emphasized in recent years, and consumer loans totaled a minimal $1.9 million, or 0.6% of loans as of June 30, 2013.
The residential mortgage lending operations include a substantial mortgage banking program focused on reducing the level of originations of fixed-rate residential mortgage loans for portfolio and instead selling conforming fixed rate mortgage loans into the secondary market, primarily on a servicing released basis. The mortgage banking operations are evident in the balance of loans held for sale as shown in Table 1.1, totaling $19.1 million, or 5.1% of assets as
I.5
of June 30, 2013. This balance has increased steadily since 2009 in line with the increasing mortgage banking activities. The majority of the Bank’s 1-4 family residential first mortgage loan originations conform to standards set by secondary market governmental agencies and are sold to private sector institutions. For the six months ended June 30, 2013, the Bank sold $81.5 million of residential 1-4 family real estate loans.
As indicated above, the Bank’s loan portfolio comprises almost 90% of assets. The intent of the Bank’s cash and investment policy is to provide adequate liquidity and to generate a favorable return within the context of supporting Coastway’s cash operating needs and credit and interest rate risk objectives. Historically, the level of cash and equivalents has remained in the range of 1.0% to 2.0% of assets, which has been sufficient for daily operational needs. The ratio increased as of June 30, 2013 primarily due to the timing of funding of loan sales and originations.
As of June 30, 2013, the portfolio of cash and cash equivalents totaled $9.9 million, equal to 2.6% of assets.
Regarding an
investment securities portfolio, as of June 30, 2013 the Bank did not hold any investments such as U.S. government securities, municipal bonds and mortgage-backed securities (“MBS”), apart from its required investment of FHLB of Boston stock at $2.7 million, or 0.72% of assets. The Bank reviews for impairment based on the ultimate recoverability of the cost basis in the FHLB stock, and no impairment has been recognized as of June 30, 2013.
The level of cash and investments is anticipated to increase initially following conversion, pending gradual redeployment into higher yielding loans.
Coastway owns the headquarters office building and seven of the nine branch office locations. The headquarters office in Cranston is a 22,671 square foot building constructed in 2003, with a net book value of $3.4 million at June 30, 2013. This office, along with investment in the other branch offices (including land, buildings, and furniture, fixtures and equipment), totaled $23.1 million, or 6.2% of assets as of June 30, 2013. Since fiscal 2009, the Bank has pursued a strategy of expanding the branch office network, replacing or renovating existing offices, and purchasing land for potential additional offices. Thus, the investment in fixed assets has increased by 69.5% from $13.7 million as of December 31, 2009. Asset growth over the same time period has moderated the impact of this investment on the balance sheet and operating results. The book value of fixed assets represents a notable level of investment, which reduces the level of interest earning assets on the balance sheet and impacts the income statement through depreciation and operating expenses.
I.6
There are no current plans to add to the branch network following completion of a move to a new branch office in Lincoln, Rhode Island and the planned move to a new headquarters office (scheduled for the second quarter of 2014). In connection with the new headquarters office, as of June 30, 2013 the Bank held two real estate parcels for sale, one consisting of land purchased for development into a branch office and the other an existing office building originally targeted to be a new headquarters office (total book value of $3.5 million as of June 30, 2013). Coastway has decided to sell both parcels, and the existing headquarters office building, and has identified another office building to purchase as a new headquarters office. These purchase and sale transactions of real estate, all of which are in-process as of June 30, 2013, are not expected to materially change the total investment in fixed assets.
Reflecting the generally strong asset quality of the Bank, the balance of real estate owned (“REO”) was a modest $1.7 million or 0.4% of assets at June 30, 2013. Such REO reached a high of $2.6 million as of December 31, 2012, but has remained relatively modest in balance over the past four fiscal years.
Since December 31, 2009, Coastway’s funding needs have been provided by retail deposits, borrowed funds and retained earnings. Similar to the trend in assets, the balance of the Bank’s deposits has increased steadily since 2009, reaching a high of $330.0 million as of June 30, 2013. As a result of the growth in assets, the proportion of assets funded with deposits has remained essentially constant at 88% over the time period shown in Table 1.1. The growth in deposits has been achieved through increases in all account types, as the Bank offers a competitive community-based product line of retail deposits to individuals and businesses in its market area. The Bank maintains a concentration of deposits in core transaction and savings account deposits, which comprised 62.6% of deposits at June 30, 2013
, versus 59.6% of total deposits at fiscal year-end 2010.
Coastway has also historically utilized funding with borrowings to an increasing extent to support the asset size, fund liquidity and cash flow needs for the mortgage banking and portfolio lending operations, and to manage funding costs and interest rate risk. Borrowings reached a high of $19.8 million as of December 31, 2010, declined in 2011, but subsequently increased to $14.0 million, or 3.7% of assets, at June 30, 2013. The Bank’s utilization of borrowings has been generally limited to fixed rate, fixed maturity characteristics of overnight and mid- or longer-term advances.
The balance of equity increased between fiscal 2009 and June 30, 2013 as the Bank recorded profitable operations. Reflecting the combination of this increase in equity and the
I.7
increase in assets over that time period, the equity-to-assets ratio declined from 8.22% at year end 2009 to 7.34% at June 30, 2013. All of the Bank’s equity is tangible, and the Bank maintained surpluses relative to all of its regulatory capital requirements at June 30, 2013. The pro forma return on equity (“ROE”) is expected to initially decline given the increased equity position.
Income and Expense Trends
Table 1.2 presents the Bank’s income and expense trends over the past four years and for the 12 months ended June 30, 2013. Coastway has recorded consistently profitable operations over this time period,
ranging from a high of $1.1 million or 0.34% of average assets for fiscal 2012 to a low of $468,000, or 0.16% of average assets for fiscal 2009. For the 12 months ended June 30, 2013 the Bank reported net income of $966,000, or 0.35% of average assets. The income statement has been affected by various non-operating income or expense items over the past four and a half years, including such items as gains on the sale of loans (mortgage banking income),
real estate gains or losses and professional fees related to the formation of the MHC in 2013. Net interest income and operating expenses represent the primary components of the Bank’s income statement. Other revenues for the Bank largely are derived from the Bank’s mortgage banking income, as well as customer service fees and charges on the deposit base and lending operations.
The level of loan loss provisions due to the prevailing economic trends and the Bank’s asset quality has also affected the level of net income in the shown fiscal years.
The Bank’s net interest income to average assets ratio has reflected the impact of market interest rate trends and internal lending strategies over the time period shown in Table 1.2. Net interest income as a percent of average assets has declined from a high of 3.53% during fiscal 2010 to a low of 3.04% for the 12 months ended June 30, 2013. While the net interest income ratio is supported by the high proportion of loans on the balance sheet as a percent of assets, the prevailing low interest rate environment, and the competitive environment in the market area served have resulted in new portfolio loans carrying relatively lower yields. Interest income as a percent of average assets has declined from 4.65% for fiscal 2010 to 3.79% for the latest 12 month period (equal to a reduction of 0.86% of average assets). The Bank’s level of interest income is also supported by the relatively modest level of non-accruing loans, which would act to reduce the level of interest income recognized. In contrast, while funding costs have also declined in recent periods, the reduction in interest expense has
I.8
Table 1.2
Coastway Community Bank
Historical Income Statements
|
|
|
For the Fiscal Year Ended December 31,
|
|
12 Months Ended
|
|
|
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
June 30, 2013
|
|
|
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
Amount
|
|
Pct(1)
|
|
|
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Income
|
|
$
|
13,926
|
|
4.64
|
%
|
$
|
14,116
|
|
4.65
|
%
|
$
|
13,717
|
|
4.34
|
%
|
$
|
13,207
|
|
3.91
|
%
|
$
|
13,463
|
|
3.79
|
%
|
|
Interest Expense
|
|
(4,572
|
)
|
-1.52
|
%
|
(3,403
|
)
|
-1.12
|
%
|
(2,704
|
)
|
-0.86
|
%
|
(2,650
|
)
|
-0.78
|
%
|
(2,661
|
)
|
-0.75
|
%
|
|
Net Interest Income
|
|
$
|
9,354
|
|
3.12
|
%
|
$
|
10,713
|
|
3.53
|
%
|
$
|
11,013
|
|
3.48
|
%
|
$
|
10,557
|
|
3.13
|
%
|
$
|
10,802
|
|
3.04
|
%
|
|
Provision for Loan Losses
|
|
(1,111
|
)
|
-0.37
|
%
|
(1,244
|
)
|
-0.41
|
%
|
(1,157
|
)
|
-0.37
|
%
|
(1,109
|
)
|
-0.33
|
%
|
(734
|
)
|
-0.21
|
%
|
|
Net Interest Income after Provisions
|
|
$
|
8,243
|
|
2.75
|
%
|
$
|
9,469
|
|
3.12
|
%
|
$
|
9,856
|
|
3.12
|
%
|
$
|
9,448
|
|
2.80
|
%
|
$
|
10,068
|
|
2.83
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income
|
|
$
|
4,078
|
|
1.36
|
%
|
$
|
3,156
|
|
1.04
|
%
|
$
|
3,083
|
|
0.97
|
%
|
$
|
3,291
|
|
0.97
|
%
|
$
|
3,321
|
|
0.93
|
%
|
|
Operating Expense
|
|
(13,459
|
)
|
-4.49
|
%
|
(13,441
|
)
|
-4.43
|
%
|
(14,158
|
)
|
-4.48
|
%
|
(14,640
|
)
|
-4.34
|
%
|
(15,452
|
)
|
-4.35
|
%
|
|
Net Operating Income
|
|
$
|
(1,138
|
)
|
-0.38
|
%
|
$
|
(816
|
)
|
-0.27
|
%
|
$
|
(1,219
|
)
|
-0.39
|
%
|
$
|
(1,901
|
)
|
-0.56
|
%
|
$
|
(2,063
|
)
|
-0.58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Banking Income
|
|
$
|
698
|
|
0.23
|
%
|
$
|
1,684
|
|
0.55
|
%
|
$
|
2,937
|
|
0.93
|
%
|
$
|
3,884
|
|
1.15
|
%
|
$
|
4,210
|
|
1.18
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain on Sale of Premises/Equipment
|
|
$
|
392
|
|
0.13
|
%
|
$
|
0
|
|
0.00
|
%
|
$
|
0
|
|
0.00
|
%
|
$
|
0
|
|
0.00
|
%
|
$
|
0
|
|
0.00
|
%
|
|
Rec(Loss) on NCUA Share Ins./Mem. Cap.
|
|
2
|
|
0.00
|
%
|
180
|
|
0.06
|
%
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
|
Unrealized Loss on Real Estate HFS
|
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
0
|
|
0.00
|
%
|
(482
|
)
|
-0.14
|
%
|
|
Total Non-Operating Income/(Expense)
|
|
$
|
394
|
|
0.13
|
%
|
$
|
180
|
|
0.06
|
%
|
$
|
0
|
|
0.00
|
%
|
$
|
0
|
|
0.00
|
%
|
$
|
(482
|
)
|
-0.14
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Before Tax
|
|
$
|
(46
|
)
|
-0.02
|
%
|
$
|
1,048
|
|
0.35
|
%
|
$
|
1,718
|
|
0.54
|
%
|
$
|
1,983
|
|
0.59
|
%
|
$
|
1,665
|
|
0.47
|
%
|
|
Income Taxes
|
|
514
|
|
0.17
|
%
|
(471
|
)
|
-0.16
|
%
|
(706
|
)
|
-0.22
|
%
|
(835
|
)
|
-0.25
|
%
|
(699
|
)
|
-0.20
|
%
|
|
Net Income (Loss)
|
|
$
|
468
|
|
0.16
|
%
|
$
|
577
|
|
0.19
|
%
|
$
|
1,012
|
|
0.32
|
%
|
$
|
1,148
|
|
0.34
|
%
|
$
|
966
|
|
0.27
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Coverage Ratio
|
|
74.7
|
%
|
|
|
92.2
|
%
|
|
|
98.5
|
%
|
|
|
98.6
|
%
|
|
|
97.2
|
%
|
|
|
|
Efficiency Ratio
|
|
95.3
|
%
|
|
|
85.4
|
%
|
|
|
83.1
|
%
|
|
|
82.6
|
%
|
|
|
84.3
|
%
|
|
|
|
Effective Tax Rate (Benefit)
|
|
NM
|
|
|
|
44.9
|
%
|
|
|
41.1
|
%
|
|
|
42.1
|
%
|
|
|
42.0
|
%
|
|
|
|
Return on Avg. Equity
|
|
—
|
|
|
|
2.32
|
%
|
|
|
3.92
|
%
|
|
|
4.36
|
%
|
|
|
3.57
|
%
|
|
|
(1) Ratios are as a percent of average assets.
Source: Audited financial statements and RP Financial calculations.
I.9
equaled 0.37% of average assets since fiscal 2010.
The Bank’s interest rate spreads and yields and costs for the past three years are set forth in Exhibits I-3 and I-4.
Non-interest operating income (“other income”) has historically been a notable contributor to the Bank’s income statement, and averaged 1.09% of average assets for fiscal years 2009 through 2012. Such income declined in dollar amount from 2009 to 2011 but has modestly increased since then in relation to the growth in assets. The non-interest operating income ratio is dependent upon the level of banking activities, including core deposit accounts, with customer service fees constituting the primary source of non-interest income for the Bank. For the 12 months ended June 30, 2013 other income totaled $3.3 million, or 0.93% of average assets.
As a significant part of the revenue base, Coastway recognizes a material level of income from the gain on sale of loans as a part of the Bank’s mortgage banking operations. Gains on sale of loans have increased steadily since fiscal 2009 from $698,000, or 0.23% of average assets to $4.21 million or 1.18% of average assets for the 12 months ended June 30, 2013. The increase shown in Table 1.2 reflects increases in the volume of 1-4 family residential real estate loans sold, a result of efforts by the Bank to increase its presence in the marketplace, the low interest rate environment and customer demand for fixed rate conforming 1-4 family residential real estate loans in recent years. Historically, loans originated for sale were relatively evenly split between purchase transactions and refinance transactions, in recent periods the proportion of loans originated for purchase transactions has increased to 70% of originations.
Operating expenses represent the other major component of the Bank’s income statement, with such expenses showing only modest fluctuation over the time period shown in Table 1.2 as a percent of average assets. Total operating expenses (inclusive of the mortgage banking operations) equaled $15.5 million, or 4.35% of average assets during the 12 months ended June 30, 2013. The increase in operating expenses since 2009 reflects general inflation costs and the overall costs of operations, including the expansion of the various operating departments of the Bank. The Bank’s level of operating expenses is indicative of the higher staffing needs associated with the growth of its branch office network, resulting in increased salaries and employee benefits. The branch openings also led to increased depreciation expenses on the Bank’s premises and equipment. Additional increasing operating expenses include the mortgage banking operations, foreclosed real estate expenses, deposit services expenses, and other general and administrative expenses including professional fees and data
I.10
processing expenses.
Upward pressure will be placed on the Bank’s expense ratio following the stock offering, due to expenses associated with operating as a publicly-traded company, including expenses related to the stock benefit plans.
The trends in the net interest income and operating expense ratios since fiscal 2009 have caused the expense coverage ratio (net interest income plus mortgage banking income divided by operating expenses) to increase gradually from a low of 74.7% in fiscal 2009 to the range of 97% to 98% since fiscal 2011, indicating that net interest income was essentially sufficient to cover the Bank’s operating expenses. The mortgage banking income is included in this calculation since the expenses related to mortgage banking are included in the expense base. Also reflecting a favorable trend, Coastway’s efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of net interest income and other operating income) has decreased from 2009 to 84.3% for the 12 months ended June 30, 2013 from a high of 95.3% in fiscal 2009. The level of other income and mortgage banking income has assisted in maintaining the efficiency ratio. Going forward, the Bank believes the efficiency ratio should improve with continued efforts to control operating expenses and reinvestment of the offering proceeds.
As noted earlier, loan loss provisions have generally had a moderate impact on the income statement, reflecting the Bank’s generally favorable asset quality and the decreasing need for increased reserve coverage despite a challenging economic environment.
During the 12 months ended June 30, 2013, the Bank incurred loan loss provisions of $734,000, allowing for an increase in the
allowance for loan and lease losses (“ALLL”) balance to $1.6 million as of that date. Reflecting the Bank’s asset quality position, chargeoffs have been relatively modest and generally decreasing in recent periods from a high reached in fiscal 2011. As of June 30, 2013, ALLLs equaled 15.89% of non-performing loans, 13.63% of non-performing assets, and 0.52% of total loans receivable. Exhibit I-5 sets forth the Bank’s allowance for loan loss activity during the past five years.
Non-operating items have had a minimal impact on the Bank’s income statement in past four and a half years and have consisted primarily of gains/losses on the sale of fixed assets. During fiscal year 2009 and 2010 the Bank reported gains on sale of premises and equipment as well as one-time gains related to a reimbursement of National Credit Union Administration investments. During the 12 months ended June 30, 2013, Coastway recorded an unrealized loss of $482,000 related to the write-down of two real estate properties that were classified as held for sale.
I.11
The Bank’s income tax status has been impacted by the varying levels of pre-tax income recorded over the past four and a half years. For fiscal year 2009 Coastway recorded a tax benefit based on the then-current tax position of the Bank. For fiscal years 2010, 2011 and 2012 and the 12 months ended June 30, 2013, Coastway recorded tax expense based on recorded taxable income. The effective tax rates were within a narrow range and equaled 42.0% for the 12 months ended June 30, 2013. The Bank’s marginal effective statutory tax rate approximates 39.5%, and this is the rate utilized to calculate the net reinvestment benefit from the offering proceeds.
Interest Rate Risk Management
Coastway’s balance sheet is asset-sensitive in the shorter-term and, thus, the net interest margin will typically be favorably affected during periods of rising and higher interest rates, as well as in the interest rate environment that prevailed during 2013 in which interest rates began to rise after a prolonged period of depression since 2008. Coastway
measures its interest rate risk exposure by use of the
net present value of equity at risk (“NPV”) methodology, which provides an analysis of estimated changes in the Bank’s NPV under the assumed instantaneous changes in the U.S. treasury yield curve. Utilizing figures as of June 30, 2013, based on a 2.0% instantaneous and sustained increase in interest rates, the NPV model indicates that the Bank’s NPV would increase by 12.9% (see Exhibit I-6).
The Bank pursues a number of strategies to manage interest rate risk, particularly with respect to seeking to limit the repricing mismatch between interest rate sensitive assets and liabilities. The Bank manages interest rate risk from the asset side of the balance sheet through selling the majority of its long-term, conforming fixed-rate 1-4 family residential real estate loans that it originates, while retaining the majority of the shorter-term adjustable-rate residential real estate loans that it originates. At the same time, Coastway diversifies into other types of lending beyond 1-4 family permanent mortgage loans such as originating commercial real estate, SBA and commercial business loans, all of which have shorter terms and higher interest rates. As of June 30, 2013, of the Bank’s total loans due after December 31, 2013, ARM loans comprised 66.1% of those loans (see Exhibit I-7). On the liability side of the balance sheet, management of interest rate risk has been pursued through maintaining a concentration of deposits in lower cost and less interest rate sensitive transaction and savings accounts, and reducing dependence on certificates of deposits and wholesale funding. Coastway also strives to lengthen the weighted average maturity of its liabilities through retail deposit pricing strategies and longer-term wholesale funding sources. Core deposits, which consist of transaction and
I.12
savings accounts, comprised 62.6% of the Bank’s deposits at June 30, 2013.
The infusion of stock proceeds will serve to further limit the Bank’s interest rate risk exposure, as most of the net proceeds will be redeployed into interest-earning assets and the increase in the Bank’s capital will lessen the proportion of interest rate sensitive liabilities funding assets.
There are numerous limitations inherent in interest rate risk analyses such as the credit risk of Bank’s loans pursuant to changing interest rates. Additionally, such analyses do not measure the impact of changing spread relationships, as interest rates among various asset and liability accounts rarely move in tandem, as the shape of the yield curve for various types of assets and liabilities is constantly changing in response to investor perceptions and economic events and circumstances.
Lending Activities and Strategy
Coastway operates two principal lending activities: (1) the origination of 1-4 family residential first mortgage loans and second position loans and lines of credit; with the first position loans originated primarily for sale into the secondary market; and, (2) commercial real estate, SBA, commercial business and commercial construction loans as part of a commercial lending focus. In recent years, Coastway has increased its focus on commercial lending in an effort to diversify its overall loan portfolio and increase the overall yield earned on loans. Details of the Bank’s loan portfolio composition are shown in Exhibit I-8, while Exhibit I-9 provides details of the Bank’s loan portfolio by contractual maturity date.
Residential Real Estate Lending
Coastway primarily originates first position fixed-rate 1-4 family residential real estate loans, and depending on interest rate, local and regional real estate market conditions and borrower preferences, also offers adjustable rate 1-4 family residential real estate loans, secured by traditional 1-4 family residential real estate property. The Bank typically sells servicing released the majority of its fixed rate conforming loans to the secondary market. As of June 30, 2013, residential first mortgage portfolio loans equaled $87.0 million, or 28.2% of total loans, with adjustable rate loans totaling 22.2% of total residential first mortgage loans. The Bank also maintained a balance of loans held for sale of $19.1 million. As shown in Exhibit I-8, the balance of first position residential mortgage portfolio loans has remained essentially constant since December 31, 2008 at approximately $86 million. As described above, the residential loan origination function includes a substantial mortgage banking operation, whereby
I.13
conforming fixed rate first position loans are sold into the secondary market on a servicing released basis. The Bank recognizes fee income on the sale of the loans.
Coastway’s mortgage loans are generally underwritten according to Fannie Mae, Freddie Mac, FHA or Rhode Island Housing guidelines as conforming loans, with most of the
1-4 family mortgage loans secured by residences in the local markets surrounding the branch office locations. Loan-to-value ratios (“LTV”) of mortgage loans are generally limited to 80% of the lower of the sales price or appraised value, or 90% LTV if the loans carry private mortgage insurance.
Fixed
rate 1-4 family residential real estate loans typically have terms of 10 to 30 years and balances up to the maximum conforming loan limit as set by the federal government.
Loans are also originated above this lending limit or loans that do not conform for other reasons, in the form of jumbo loans that are retained in its portfolio. These loans typically have terms of 15 to 30 years and maximum LTVs of 90%. Adjustable-rate 1-4 family residential real estate loans offered by the Bank in general have terms-to-maturity ranging from 10 to 30 years and have fixed rates for initial terms of five years. These loans are usually held in portfolio. The Bank also offers ARM loans with terms of one through ten years and adjust annually thereafter at a margin tied to a premium above the LIBOR rate.
The ARM loans are subject to a 5% adjustment cap for the first adjustment period, and 2% per adjustment period cap thereafter with a lifetime interest rate cap of 5% above the initial interest rate of the loan.
On a limited basis, the Bank offers 1-4 family residential mortgages secured by non-owner occupied properties. From 2000 to 2006, the Bank originated “
stated income” loans, which are loans whereby the borrowers income source is not subject to verification through the application process. Such loans in portfolio totaled $3.6 million as of June 30, 2013.
Home Equity Loans and Lines of Credit
Another long term primary lending activity for Coastway consists of second position residential loans. Total home equity loans and lines of credit equaled $84.4 million, or 27.4% of the loan portfolio as of June 30, 2013, representing an increase in balance from $69.5 million, or 29.0% of loans as of December 31, 2008. These loans include home equity loans and lines of credit secured by the borrower’s primary or secondary residence, with the focus of such lending conducted in the geographic footprint served by the branches. Home equity loans and lines of credit have been pursued for interest rate risk and yield enhancement benefits. Home equity loans are primarily originated with fixed rates of interest with terms of up to 15 years, while
I.14
home equity lines of credit are originated with adjustable-rates based on the prime rate plus an applicable premium. These loans are generally underwritten with combined loan-to-value ratios up to 80%. Home equity loans and lines of credit are generally available in amounts of between $5,000 and $2.0 million.
Commercial Real Estate/Multi-Family Lending
As of June 30, 2013, commercial real estate/multi-family loans totaled $83.2 million, or 27.0% of the total loan portfolio, and the balances of these loans have been increasing in recent years due to the Bank’s focus to diversify its loan portfolio and increase yield. As of December 31, 2008, commercial real estate/multi-family loans totaled $25.1 million, or 10.5% of the total loan portfolio. These types of loans are attractive credits given the higher yields, larger balances, shorter duration and prospective relationship potential. 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 or adjustable rate. The maximum LTVs are generally 75% for commercial real estate loans and 80% for multi-family loans, of the lower of cost or appraised value of the property securing the loan. Debt service coverage ratios are generally required at 1.20x.
These loans are generally priced at a higher rate of interest, have larger balances and involve a greater risk profile than 1-4 residential mortgage loans. Often the payments on commercial real estate loans are dependent on successful operations and management of the property. When originating commercial real estate loans, the Bank evaluates the qualifications and financial condition of the borrower, as well as the value and condition of the property securing the loan. The Bank will also generally require and obtain personal guarantees from the principals. The average loan size of the commercial real estate loans is approximately $364,000, typically secured by medical, retail, industrial, warehouse, service or other commercial properties.
Commercial Construction Loans
Construction and land loans totaled $6.0 million, or 1.9% of loans outstanding, at June 30, 2013, representing a modest level of lending activity for the Bank. Such balances have increased from $2.0 million, or 0.8% of total loans as of December 31, 2008. Commercial construction loans generally have initial terms of up to 12 months, during which the borrow pays interest only. Upon completion of construction, these loans generally convert to permanent loans. Commercial construction loans have loans and terms comparable to permanent
I.15
commercial real estate loan originations, with maximum LTV is 80% of the lesser of the appraised value of the completed property or the contract price for the land plus the value of improvements.
Construction loans generally involve greater credit risk than improved owner-occupied real estate lending. Coastway reviews and inspects each property before disbursement of loan funds, and also requires detailed cost estimates to complete the construction project and an appraisal of the property.
SBA Loans
Another segment of the commercial lending activities of Coastway includes commercial business and commercial real estate loans utilizing the Small Business Administration’s 7(a) Program. At June 30, 2013, SBA loans totaled $37.7 million, or 12.2% of total loans, compared to $36.5 million, or 15.2% of loans as of December 31, 2008. Coastway is a preferred lending provider for the SBA and can determine SBA eligibility for a loan without prior SBA approval. The Bank generally originates loans which qualify for guarantees up to 85% of principal and accrued interest. The guaranteed portions of the loans are also frequently sold in the secondary market, allowing the Bank to recognize gains on sale. Coastway typically seeks SBA guarantees on loans that exhibit minimum capital levels, a short time in business, lower collateral coverage or maximum loan terms beyond the Bank’s normal underwriting criteria.
Commercial Business Lending
As part of the full-service business lending philosophy, Coastway originates commercial business loans on non-real estate commercial business assets including lines of credit and term loans. The Bank originates commercial business loans to small businesses located regionally in its market area, including loans to provide working capital or to acquire equipment, and secured by accounts receivable, inventory and business equipment. As of June 30, 2013, the Bank had $8.3 million of commercial business loans in portfolio, equal to 2.7% of total loans, an increase from $2.9 million, or 1.2% of loans as of December 31, 2008. The average loan size of the commercial business loan portfolio was $107,000 as of June 30, 2013.
Commercial business term loans generally have terms of three to seven years and are priced at a margin above the FHLB of Boston rate of a corresponding term. Commercial business lines of credit have terms of one to two years, and are priced at an adjustable rate tied to the prime rate. Commercial business loans have greater credit risk compared to 1-4 family
I.16
residential real estate loans, because the availability of funds for the repayment of commercial business loans are dependent on the success of the business and the general economic environment of the Bank’s market area. The Bank generally obtains personal guarantees with these loans.
Consumer Lending
To a minor extent, Coastway originates a variety of consumer loans to individuals who reside or work in the Bank’s market area, including loans secured by new and used automobiles, boats, recreational vehicles and certificates of deposits. As of June 30, 2013, consumer loans totaled $1.9 million, or 0.6% of total loans. The Bank offers such loans since they tend to have shorter maturities and higher interest rates than mortgage loans. These loans also help to expand and create stronger customer relationships and opportunities for cross-marketing. Consumer loans have greater risk compared to mortgage loans, due to their dependence on the borrower’s continuing financial stability.
Loan Originations and Sales
Exhibit I-10 provides a summary of the Bank’s lending activities over the past three and a half fiscal years, illustrating the mortgage banking and commercial lending activities of the Bank. Annual l
ending volume was in excess of $200 million from 2010 to 2012, and totaled $291.9 million for the 12 months ended June 30, 2013. Within the specific loan categories, 1-4 family residential first mortgage loan originations totaled $494.4 million for the most recent three fiscal years, or 74% of total originations over the three year period. For the most recent six months, 1-4 family residential loans totaled $103.4 million, or 72% of total originations.
Commercial loan originations (commercial real estate, SBA, commercial business, commercial construction) equaled $31.6 million, or 22.0% of total originations for the most recent six month period. Over the past three and a half years, a minimal $2.4 million of loans were purchased, consisting of commercial real estate loans in fiscal 2012.
Exhibit I-10 also presents details of the loan sales activity since fiscal 2010. As discussed earlier, loan sales, consisting of 1-4 family fixed rate loans, totaled $452.3 million for fiscal years 2010 to 2012, or 95.2% of total loan sales. Other loan sales during this time period consisted primarily of SBA loans, equal to $17.9 million, or 3.8% of total sales. For the six months ended June 30, 2013, loan sales totaled $86.1 million, of which $81.5 were residential loans and $2.5 million were SBA loans.
I.17
Asset Quality
Coastway’s lending operations include originations of construction/land, commercial real estate/multi-family, commercial business and consumer loans for portfolio, all of which carry a higher risk profile than traditional 1-4 family mortgage lending. Since fiscal 2009 the Bank has experienced a fluctuating level of non-performing assets (“NPAs”), consisting of non-accruing loans, REO, and accruing troubled debt restructured loans (“Accruing TDRs”). NPAs and Accruing TDRs have ranged from a low of $10.6 million as of December 31, 2011 to a high of $15.2 million at December 31, 2009, and declined to $11.7 million at June 30, 2013. Included in the June 30, 2013 figure is $3.4 million of Accruing TDRs. Non-accruing loans totaled $6.6 million as of June 30, 2013, and were comprised of 1-4 family first and second position loans (83%) and commercial loans (17%). All of the REO balance consisted of residential property. Exhibit I-11 presents a history of NPAs for the Bank since 2008.
To track the Bank’s asset quality and the adequacy of valuation allowances, Coastway has established detailed asset classification policies and procedures which are consistent with regulatory guidelines. Detailed asset classifications are reviewed quarterly by senior management and the Board. Pursuant to these procedures, when needed, the Bank establishes additional valuation allowances to cover anticipated losses in classified or non-classified assets. As of June 30, 2013, the Bank maintained general and specific reserves of $1.6 million, equal to 0.52% of total loans receivable and 24.15% of non-accruing loans.
Funding Composition and Strategy
Deposits have traditionally accounted for the major portion of the Bank’s IBL, although over the past four and a half years borrowed funds have remained a modest yet steady source of funding as the Bank has relied on borrowed funds to supplement cash flow needs and lengthen the maturities of liabilities. At June 30, 2013, deposits equaled $330.0 million, or 95.9% of total deposits and borrowings, a slight decrease from 96.7% at December 31, 2009. Exhibit I-12 sets forth the Bank’s deposit composition for the past three years and Exhibit I-13 provides the interest rate and maturity composition of the certificate of deposit (“CD”) portfolio at June 30, 2013. CDs constitute the largest but decreasing portion of the Bank’s deposit base, totaling 37.4% of deposits at June 30, 2013 versus 40.4% of deposits as of December 31, 2010. All types of core deposits, including NOW/demand, money market and savings accounts, increased as a percent of total deposits over the past two and a half fiscal years. Transaction
I.18
and savings account deposits equaled $206.7 million, or 62.6% of total deposits at June 30, 2013, versus $156.1 million, or 59.6% of total deposits, at December 31, 2010.
Coastway’s current CD composition reflects a concentration of short-term CDs (maturities of one year or less). As of June 30, 2013, the CD portfolio totaled $123.3 million, and 37.4% of the CDs were scheduled to mature in one year or less. As of June 30, 2013, jumbo CDs (balances exceeding $100,000) amounted to $45.9 million, or 37.2% of total CDs. There were no brokered CDs in portfolio as of June 30, 2013. As noted above, the balances of CDs in recent years has been affected by offering rates, which increases the attractiveness of those deposits relative to lower yielding transaction and savings account deposits.
Borrowings have served as an alternative funding source for the Bank to facilitate asset growth, management of funding costs, management of liquidity as a result of the mortgage banking operation and interest rate risk. Coastway maintained $14.0 million of FHLB advances at June 30, 2013 with a weighted average rate of 0.84%, which included either short-term overnight advances or advances that had fixed interest rates with maturity dates primarily through 2013.
Exhibit I-14 provides further detail of the Bank’s borrowings activities during the past three years.
Subsidiary Operations
The Bank currently does not operate any subsidiaries. Upon completion of the conversion, Coastway will become the wholly-owned subsidiary of the Company.
Legal Proceedings
The Bank is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, are believed by management to be immaterial to the financial condition of the Bank.
I.19
II. MARKET AREA ANALYSIS
Introduction
Coastway operates a community banking business through its corporate office and nine branch office locations in Providence County (six branches) and Kent County (three branches), Rhode Island. The Bank serves most of the state of Rhode Island, containing a total population of 1.1 million (almost 60% of the population is located in the headquarters’ county of Providence). The Bank’s market area also includes the broader Providence MSA, which includes the five counties in Rhode Island and one county in southern Massachusetts, encompassing a total population of 1.6 million. Certain information regarding the Bank’s office locations is presented in Exhibit II-1.
The Bank focuses on providing personal service while meeting the needs of its retail and business customer base, emphasizes personalized banking services to retail customers and offers a broad array of deposit services including demand deposits, regular savings accounts, money market deposits, certificates of deposit and individual retirement accounts. The Bank’s market area coverage, from its beginnings as a credit union and recent conversion to a savings institution, has expanded as the Bank’s branch office network has increased.
Future business and growth opportunities, in particular in the small business lending area, will be partially influenced by economic and demographic characteristics of the regional markets, particularly the future growth and stability of the regional economy, and the nature and intensity of the competitive environment for financial institutions. These factors outlined herein have been considered in the analysis of the Bank’s pro forma market value.
National Economic Factors
The business potential of a financial institution is partially dependent on the future operating environment and growth opportunities for the financial services industry and the economy as a whole. The national economy experienced a severe downturn during 2008 and 2009, as the fallout of the housing crisis caused the wider economy to falter, with most significant indicators of economic activity declining by substantial amounts. The overall economic recession was the worst since the great depression of the 1930s. Approximately 8 million jobs were lost during the recession, as consumers cut back on spending, causing a reduction in the need for many products and services. Total personal wealth declined notably
II.1
due to the housing crisis and the drop in real estate values. As measured by the nation’s gross domestic product (“GDP”), the recession officially ended in the fourth quarter of 2009, after the national GDP expanded for two consecutive quarters. The economic expansion has continued since that date, albeit at a relatively slow pace, with recent GDP growth of 2.2% for calendar year 2012, 1.1% for the first quarter of 2013 and 1.7% for the second quarter. Notably, a large portion of GDP growth during 2009 through 2012 was generated through federal stimulus programs, bringing into question the sustainability of the recovery without government support.
Reflecting a measure of recovery of the economy, the national annualized inflation rate averaged 2.29% for the three year period of 2010-2012. For the six months ended June 2013, the rate of inflation averaged an even lower rate of 1.57%. Indicating another level of improvement, the national unemployment rate equaled 7.6% as of June 2013, a moderate decline from 8.2% as of June 2012, but still high compared to recent historical levels. There remains uncertainty about the near term future, particularly in terms of the speed at which the economy will recover, the impact of the housing crisis on longer term economic growth, and the near-term future performance of the real estate industry, including both residential and commercial real estate prices, all of which have the potential to impact future economic growth. While the number of jobs has increased nationally over the past several years, most newly created jobs have been somewhat lower wage positions. The current and projected size of government spending and deficits also has the ability to impact the longer-term economic performance of the country.
The major stock exchange indices have increased substantially since the depths of the recession in 2008 and 2009. After recording a month-end low of 7062.93 in February 2009, the Dow Jones Industrial Average (“DJIA”) has more than doubled in value through mid-2013. Over the last 12 months, while there has been a measure of period-to-period volatility, the DJIA has continued to trend upward. As an indication of the changes in the nation’s stock markets over the last 12 months, as of June 28, 2013 the Dow Jones Industrial Average closed at 14,909.60, an increase of 15.8% from June 29, 2012, while the NASDAQ Composite Index stood at 3,403.25, an increase of 15.9% over the same time period. The Standard & Poor’s 500 Index totaled 1,606.28 as of June 28, 2013, an increase of 17.9% from June 29, 2012.
Regarding factors that most directly impact the banking and financial services industries, in the past year the number of housing foreclosures have begun to decline in many regional or urban areas of the country, as the backlog of foreclosed properties is processed. However,
II.2
there remains specific states, or areas that continue to experience elevated levels of foreclure activity, at times due to state foreclosure laws and processes, which have delayed such actions over the past several years. Similarly, median home values have recovered in many parts of the county, but continue to be below historical highs. Existing home sales have also shown improvement, along with the housing construction industry. While concerns about a “double-dip” housing recession have lessened in recent periods, Coastway will continue to employ strict, prudent underwriting for such loans being placed into its portfolio, and will work to aggressively resolve substandard credits.
Based on the consensus outlook of 54 economists surveyed by The Wall Street Journal in June 2013, economic growth is expected to improve from an annualized growth rate of 1.5% in 2012 to 3.0% in 2015. Most of the economists expect that the unemployment rate will remain steady at 7% into 2014; the pace of job growth will only serve to bring the unemployment rate down slowly. On average, the economists expect that the unemployment rate will be 6.4% by the end of 2014, with the economy adding around 2.2 million jobs from June 2013 to June 2014. On average, the economists did not expect the Federal Reserve to begin raising its target rate until 2014 at the earliest and the yield on the 10-year Treasury would increase to 3.61% by the end of 2015. Inflation pressures were forecasted to decrease and remain steady in the range of 2.0% to 2.3% through the end of 2015, and that the price of oil was expected to settle around $95 a barrel. The Federal Housing Finance Agency Index was projected to rise by 6.7% in 2013. Projections for housing starts were mostly unchanged.
The 2013 housing forecast from the Mortgage Bankers Association (the “MBA”) was for existing home sales to increase by approximately 4.9% from 2012 levels and new home sales were expected to increase by 11.5% in 2013 from their relatively depressed levels in 2012. The MBA forecast showed increases in the median sale price for new and existing homes in 2013. Total mortgage production is forecasted to be down in 2013 to $1.4 trillion compared to $1.8 trillion in 2012. The reduction in 2013 originations is largely due to a 13% reduction in refinancing volume, with refinancing volume forecasted to total $818 billion in 2013. Comparatively, house purchase mortgage originations are predicted to increase by 17.7% in 2013, with purchase lending forecasted to total $592 billion in 2013.
II.3
Interest Rate Environment
In terms of interest rates, through the first half of 2004, in a reaction to try to avoid a significant slowdown of the economy, the Federal Reserve lowered key market interest rates to historical lows not seen since the 1950s, with the federal funds rate equal to 1.00% and the discount rate equal to 2.00%. Beginning in June 2004, the Fed began slowly, but steadily increasing the federal funds and overnight interest rates in order to ward off any possibility of inflation. Through June 2006, the Fed had increased interest rates a total of 17 times, and as of June 2006, the Fed Funds rate was 5.25%, up from 1.00% in early 2004, while the Discount Rate stood at 6.25%, up from 2.00% in early 2004. The Fed then held these two interest rates steady until mid-2007, at which time the downturn in the economy was evident, and the Fed began reacting to the increasingly negative economic news. Beginning in August 2007 and through December 2008, the Fed decreased market interest rates a total of 12 times in an effort to stimulate the economy, both for personal and business spending.
As of January 2009, the Discount Rate had been lowered to 0.50%, and the Federal Funds rate target was 0.00% to 0.25%. These historically low rates were intended to enable a faster recovery of the housing industry, while at the same time lower business borrowing costs, and such rates remained in effect through early 2010. In February 2010, the Fed increased the discount rate to 0.75%, reflecting a slight change to monetary strategy. The effect of the interest rate decreases since mid-2008 has been most evident in short term rates, which decreased more than longer term rates, increasing the slope of the yield curve. This low interest rate environment has been maintained as part of a strategy to stimulate the economy by keeping both personal and business borrowing costs as low as possible. The strategy has achieved its goals, as borrowing costs for residential housing have been at historical lows, and the prime rate of interest remains at a low level. Longer-term interest rates (10-year treasury) increased somewhat in mid-2013 in response to the expectation that the Federal Reserve will cease its treasury buying efforts to keep longer term rates low.
As of June 28, 2013, one- and ten-year U.S. government bonds were yielding 0.15% and 2.52%, respectively, compared to 0.22% and 1.60%, as of June 28, 2012. This has had a mixed impact on the net interest margins of many financial institutions, as they rely on a spread between the yields on longer term assets and the costs of shorter term funding sources. However, institutions who originate substantial volumes of prime-based loans have given up some of this pickup in yield as the prime rate declined from 5.00% as of June 30, 2008 to 3.25%
II.4
as of December 31, 2008, and has remained at that level since that date. Historical interest rate information is presented in Exhibit II-2.
Regional/Local Economic Factors
Primary Market Area Overview
The primary market area for business operations is the state of Rhode Island, which is part of the Providence-New Bedford-Fall River, RI-MA MSA (the “Providence MSA”). To a much lesser extent, the Bank conducts business (primarily lending) in contiguous areas to the state of Rhode Island, however these activities are currently relatively minor. The market area served is in the heart of southern New England. Rhode Island is a relatively well-developed area settled in the early part of the country’s history that has a wide range of new and old housing and commercial building stock. Geographically, Rhode Island covers a small area, and thus the Bank’s current branch office network provides access to a material portion of the statewide population base. Such operations are essentially limited to the western side of Narragansett Bay, the region containing all of the Bank’s offices.
The region has long experienced a modestly growing economy, with a historical dependence on manufacturing and employment generated by military bases. In recent decades, health care, financial services, defense industry, tourism and gambling have become more important segments of the economy. In the most recent periods, Rhode Island has experienced to some degree the national issues related to home value declines, foreclosure rates, or other real estate related problems that are prevalent across most of the country. However, overall, the statewide economy remains relatively weak in comparison to other neighboring states and other regions of the country.
Coastway holds a small market share of deposits in the primary market area, given its asset size, number and size of competitors and the overall population base, and thus has potential for additional growth. Similar to other areas of the country, Coastway operates in a competitive environment and competes with a number of national, regional and locally-based financial institutions. In addition, the Bank faces competition from mortgage banking companies, consumer finance companies, investment houses, mutual funds, insurance companies and other financial intermediaries. Over the most recent years, the competitive factors have intensified with the growth of electronic delivery systems, particularly the Internet.
II.5
Demographic Trends
Table 2.1 presents information regarding the demographic and economic trends for the Bank’s market area from 2010 to 2012 and projected through 2017, highlighting the somewhat unfavorable market area trends for financial institutions in general and Coastway specifically. Additional data is presented in Exhibit II-3. Data for the nation, the State of Rhode Island and the Providence MSA are included for comparative purposes. The size and scope of the market area is evidenced by the demographic data, which shows that as of 2012 the total population of the state was 1.1 million, with 59% of the state population in Providence County. Most of the population base is concentrated along the northern end of Narragansett Bay, a natural water harbor. Between 2010 and 2012 the population growth rate of the state was slightly negative, significantly lower than the national rate, indicating a gradually declining population base. Over this time period, the Rhode Island and Michigan were the only states in the nation to record population declines. Similar to the state, Providence County also recorded a reduction in population from 2010 to 2012, while Kent County recorded a slight increase. However, over the next projected five years, the state, MSA and both market counties are expected to experience modest population decreases, compared to much larger projected population growth for the country, indicating a relatively challenging future operating environment for financial institutions.
Changes in the number of households in the market area have generally paralleled trends with respect to population, although at slightly more favorable rates of change. This reflects a national trend towards smaller average household sizes. These stable or slowly shrinking trends in households also will act to limit business opportunities for community financial institutions such as Coastway and result in increased levels of competition for available retail and commercial banking business.
Table 2.1 also provides certain median age distribution figures for the market area, the state of Rhode Island and the nation. The data reveals that the state and the market area counties all contained somewhat older population bases than the nation as a whole, indicative of the historical concentration in manufacturing employment The lack of population growth provides for a gradual aging of the population base as younger residents leave the area for employment opportunities elsewhere. Kent County in particular, reported the highest overall median age figures.
II.6
Table 2.1
Coastway Community Bank
Summary Demographic Data
|
|
|
Year
|
|
Growth Rate
|
|
|
|
|
2010
|
|
2012
|
|
2017
|
|
2010-2012
|
|
2012-2017
|
|
|
|
|
|
|
|
|
|
|
(%)
|
|
(%)
|
|
|
Population (000)
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
308,746
|
|
313,129
|
|
323,986
|
|
0.7
|
%
|
0.7
|
%
|
|
Rhode Island
|
|
1,053
|
|
1,050
|
|
1,038
|
|
-0.1
|
%
|
-0.2
|
%
|
|
Providence MSA
|
|
1,601
|
|
1,603
|
|
1,599
|
|
0.1
|
%
|
-0.1
|
%
|
|
Providence County
|
|
627
|
|
621
|
|
612
|
|
-0.5
|
%
|
-0.3
|
%
|
|
Kent County
|
|
166
|
|
166
|
|
165
|
|
0.1
|
%
|
-0.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Households (000)
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
116,716
|
|
118,209
|
|
122,665
|
|
0.6
|
%
|
0.7
|
%
|
|
Rhode Island
|
|
414
|
|
412
|
|
410
|
|
-0.2
|
%
|
-0.1
|
%
|
|
Providence MSA
|
|
627
|
|
627
|
|
628
|
|
0.0
|
%
|
0.0
|
%
|
|
Providence County
|
|
242
|
|
240
|
|
236
|
|
-0.5
|
%
|
-0.3
|
%
|
|
Kent County
|
|
69
|
|
68
|
|
68
|
|
-0.1
|
%
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Median Household Income ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
NA
|
|
50,157
|
|
56,895
|
|
NA
|
|
2.6
|
%
|
|
Rhode Island
|
|
NA
|
|
53,372
|
|
63,323
|
|
NA
|
|
3.5
|
%
|
|
Providence MSA
|
|
NA
|
|
53,554
|
|
62,557
|
|
NA
|
|
3.2
|
%
|
|
Providence County
|
|
NA
|
|
46,859
|
|
55,565
|
|
NA
|
|
3.5
|
%
|
|
Kent County
|
|
NA
|
|
58,424
|
|
70,263
|
|
NA
|
|
3.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Capita Income ($)
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
NA
|
|
26,409
|
|
29,882
|
|
NA
|
|
2.5
|
%
|
|
Rhode Island
|
|
NA
|
|
28,395
|
|
32,690
|
|
NA
|
|
2.9
|
%
|
|
Providence MSA
|
|
NA
|
|
28,231
|
|
32,100
|
|
NA
|
|
2.6
|
%
|
|
Providence County
|
|
NA
|
|
25,159
|
|
28,819
|
|
NA
|
|
2.8
|
%
|
|
Kent County
|
|
NA
|
|
30,344
|
|
34,749
|
|
NA
|
|
2.7
|
%
|
|
|
|
0-14 Yrs.
|
|
15-34 Yrs.
|
|
35-54 Yrs.
|
|
55-69 Yrs.
|
|
70+ Yrs.
|
|
|
2012 Age Distribution (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
19.6
|
|
27.4
|
|
27.1
|
|
16.6
|
|
9.2
|
|
|
Rhode Island
|
|
17.1
|
|
27.5
|
|
27.6
|
|
17.3
|
|
10.6
|
|
|
Providence MSA
|
|
17.4
|
|
26.8
|
|
28.1
|
|
17.3
|
|
10.5
|
|
|
Providence County
|
|
17.7
|
|
29.7
|
|
26.9
|
|
15.6
|
|
10.1
|
|
|
Kent County
|
|
16.5
|
|
23.1
|
|
29.9
|
|
19.1
|
|
11.5
|
|
|
|
|
Less Than
|
|
$25,000 to
|
|
$50,000 to
|
|
|
|
|
|
|
25,000
|
|
50,000
|
|
100,000
|
|
$100,000+
|
|
|
2012 HH Income Dist. (%)
|
|
|
|
|
|
|
|
|
|
|
USA
|
|
24.7
|
|
25.1
|
|
29.9
|
|
20.3
|
|
|
Rhode Island
|
|
24.1
|
|
22.4
|
|
31.0
|
|
22.5
|
|
|
Providence MSA
|
|
23.9
|
|
22.4
|
|
30.9
|
|
22.8
|
|
|
Providence County
|
|
28.5
|
|
23.8
|
|
29.2
|
|
18.4
|
|
|
Kent County
|
|
17.8
|
|
23.2
|
|
35.7
|
|
23.2
|
|
Source: SNL Financial
II.7
Table 2.1 also provides data concerning household and per capita income levels, which are important indicators of a market area’s health and attractiveness in terms of housing and economic activity. The 2012 median household incomes ranged from $46,859 in Providence County to $58,424 in Kent County, with the lower figure for Providence County indicative of the generally lower incomes prevalent in urbanized areas in comparison to the suburban Kent County. The state and MSA average for median household income was slightly higher than the national average, given the state’s position in the densely populated northeast corridor. Per capita incomes generally tracked the household income data, with Providence County recording the lowest per capita income of all comparative areas. Household income distribution patterns shown in Table 2.1 also provide support for earlier statements regarding the nature of the Bank’s market as approximately 48% of Providence County households had income levels in excess of $50,000 annually in 2012 while the ratio was 59% for the Kent County and 54% for the state average.
Summary of Local Economy
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 and location along the east coast resulted in establishment of military bases and other military-related industries and employment. Similar to many areas all across the county, in the past century manufacturing and other labor intensive industries have declined in Rhode Island and been replaced by a more service-oriented economy. Presently, Rhode Island’s economy includes large private companies in the health care, financial services, marine products, defense and manufacturing sectors. Notable firms headquartered in Rhode Island include CVS Pharmacy, Textron, Hasbro and Amica Insurance. Other companies that maintain large divisions in Rhode Island include Fidelity Investments, Metlife Insurance and General Dynamics. Rhode Island is also a center of higher education, with Brown University, the University of Rhode Island, Johnson & Wales and Bryant University. The U.S. Navy has had a significant presence in the Newport area, through the Naval Station Newport and the Naval Undersea Warfare Center. Government and non-profit community service agencies employ significant numbers of workers, and the tourism industry serves visitors from all over the world. The employment base is relatively diversified such that loss of employment in one sector would not have a material impact on the overall employment situation. Rhode Island’s largest employers, including the approximate number of employees, are provided in Table 2.2.
II.8
Table 2.2
Coastway Community Bank
Rhode Island Largest Employers
|
|
|
Employees
|
|
|
Company/Institution
|
|
(#)
|
|
|
|
|
|
|
|
Rhode Island State Government
|
|
14,904
|
|
|
Lifespan
|
|
11,869
|
|
|
US Government
|
|
11,581
|
|
|
Roman Catholic Diocese of Providence
|
|
6,200
|
|
|
Care New England
|
|
5,953
|
|
|
CVS Corp
|
|
5,800
|
|
|
Citizens Financial Group, Inc.
|
|
4,991
|
|
|
Brown University
|
|
4,800
|
|
|
Stop & Shop Supermarket Co., Inc.
|
|
3,632
|
|
|
Bank of America
|
|
3,500
|
|
|
Fidelity Investments
|
|
2,934
|
|
|
Rhode Island ARC
|
|
2,851
|
|
|
Metlife Insurance Co.
|
|
2,604
|
|
|
General Dynamics Corp.
|
|
2,243
|
|
|
University of Rhode Island
|
|
2,155
|
|
Source: Rhode Island Economic Development Corp., 2011
Major Market Area Employment Sectors
Employment data, presented in Table 2.3 below, indicates that similar to many larger, developed areas of the country, services are the most prominent sector for the state of Rhode Island and the two Providence MSA counties, comprising approximately 30% of total employment. Healthcare, at approximately 15% for the state and two counties, is the second largest employment sector. Another large component of the economy of the market area is government employment, reflecting the location of the state capitol and the military bases previously mentioned. Wholesale and retail trade, at approximately 12%, is the third largest employment sector. Manufacturing employment was relatively similar in both market area counties, and was less than 10% of total employment, reflecting the overall decline of this historically important and significant employment sector. Finance, insurance and real estate employment was highest in Kent County, indicative of the higher incomes and more recent population growth in that county when compared to the older, more developed Providence
II.9
County. This data indicates that the Bank’s market area has a relatively diversified economic base, such that a downturn in any one industry will likely not have a large impact on the regional economy. This diversification provides a level of stability that is a positive factor for financial institutions such as Coastway. Additional employment data by sector is included in Exhibit II-4.
Table 2.3
Coastway Community Bank
Primary Market Area Employment Sectors
(Percent of Labor Force)
|
|
|
Rhode
|
|
Providence
|
|
Kent
|
|
|
Employment Sector
|
|
Island
|
|
County
|
|
County
|
|
|
|
|
(% of Total Employment)
|
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
29.2
|
%
|
30.1
|
%
|
26.0
|
%
|
|
Healthcare
|
|
14.9
|
%
|
16.9
|
%
|
14.0
|
%
|
|
Government
|
|
12.3
|
%
|
10.9
|
%
|
9.2
|
%
|
|
Wholesale/Retail Trade
|
|
12.5
|
%
|
11.6
|
%
|
13.4
|
%
|
|
Finance/Insurance/Real Estate
|
|
10.3
|
%
|
10.2
|
%
|
12.2
|
%
|
|
Manufacturing
|
|
7.2
|
%
|
7.0
|
%
|
7.3
|
%
|
|
Construction
|
|
4.6
|
%
|
4.4
|
%
|
4.9
|
%
|
|
Information
|
|
2.0
|
%
|
2.3
|
%
|
1.8
|
%
|
|
Transportation/Utility
|
|
2.3
|
%
|
2.2
|
%
|
3.5
|
%
|
|
Agriculture
|
|
0.3
|
%
|
0.1
|
%
|
0.2
|
%
|
|
Other
|
|
4.6
|
%
|
4.3
|
%
|
7.5
|
%
|
|
|
|
100.0
|
%
|
100.0
|
%
|
100.0
|
%
|
Source: Bureau of Economic Analysis, 2011
Unemployment Data
Table 2.4 below provides recent unemployment data for the Bank’s market area, which provides an additional indication of the economic and demographic health of the primary market area. Indicative of the somewhat less favorable economic conditions in the state and modest growth opportunities, the unemployment rate in Rhode Island at 8.5% was well above the national average of 7.6% as of June 2013. The unemployment rates of both Providence and Kent counties were also above the national average. However, the data also indicates that similar to national and statewide trends, the unemployment rates in both market area counties
II.10
decreased over the most recent 12 month period. Kent County reported the lowest unemployment rate in the market area served, and an unemployment rate lower than the state average but higher than the national average. Providence County reported the highest unemployment rate, significantly above the state average. This data is an unfavorable statistic for financial institutions such as Coastway that depend on a strong local economy for attracting and maintaining customer deposits and loans. The higher unemployment rates are more significant due to the slow population growth, which indicates that job growth is relatively low.
Table 2.4
Coastway Community Bank
Unemployment Trends
|
|
|
June 2012
|
|
June 2013
|
|
|
Region
|
|
Unemployment
|
|
Unemployment
|
|
|
|
|
|
|
|
|
|
USA
|
|
8.2
|
%
|
7.6
|
%
|
|
Rhode Island
|
|
10.3
|
%
|
8.5
|
%
|
|
Providence County
|
|
11.5
|
%
|
9.5
|
%
|
|
Kent County
|
|
9.7
|
%
|
7.7
|
%
|
Source: U.S. Bureau of Labor Statistics.
Market Area Deposit Characteristics/Competition
Table 2.5 displays deposit market trends and deposit market share, respectively, for commercial banks and savings institutions for the State of Rhode Island and the Bank’s market area from June 30, 2010 to June 30, 2012 (Coastway converted from a credit union to a savings institution on July 1, 2009, and thus no directly comparable historical deposit data is available prior to that date). Deposit growth trends are important indicators of a market area’s current and future prospect’s for growth. As shown in Table 2.5, Rhode Island’s deposits increased at an annual rate of 6.2% over the two year time period, with commercial banks increasing deposits at a strong annual rate of 8.9%, while savings and loan associations experienced an annualized decline of 17.5%. As of June 30, 2012 commercial banks held a market share of 93.0% of total bank and thrift deposits in the state of Rhode Island.
II.11
Table 2.5
Coastway Community Bank
Deposit Summary
|
|
|
As of June 30,
|
|
|
|
|
|
|
2010
|
|
2012
|
|
Deposit
|
|
|
|
|
|
|
Market
|
|
No. of
|
|
|
|
Market
|
|
No. of
|
|
Growth Rate
|
|
|
|
|
Deposits
|
|
Share
|
|
Branches
|
|
Deposits
|
|
Share
|
|
Branches
|
|
2010-2012
|
|
|
|
|
|
|
|
|
(Dollars in Thousands)
|
|
|
|
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rhode Island
|
|
$
|
39,828,043
|
|
100.0
|
%
|
259
|
|
$
|
44,916,379
|
|
100.0
|
%
|
259
|
|
6.2
|
%
|
|
Commercial Banks
|
|
35,204,453
|
|
88.4
|
%
|
177
|
|
41,769,663
|
|
93.0
|
%
|
215
|
|
8.9
|
%
|
|
Savings Institutions
|
|
4,623,590
|
|
11.6
|
%
|
82
|
|
3,146,716
|
|
7.0
|
%
|
44
|
|
-17.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Providence County
|
|
$
|
27,442,922
|
|
100.0
|
%
|
141
|
|
$
|
32,501,164
|
|
100.0
|
%
|
143
|
|
8.8
|
%
|
|
Commercial Banks
|
|
25,543,872
|
|
93.1
|
%
|
103
|
|
31,520,467
|
|
97.0
|
%
|
129
|
|
11.1
|
%
|
|
Savings Institutions
|
|
1,899,050
|
|
6.9
|
%
|
38
|
|
980,697
|
|
3.0
|
%
|
14
|
|
-28.1
|
%
|
|
Coastway Community
|
|
134,888
|
|
0.5
|
%
|
7
|
|
149,436
|
|
0.5
|
%
|
7
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kent County
|
|
$
|
7,468,588
|
|
100.0
|
%
|
45
|
|
$
|
7,057,380
|
|
100.0
|
%
|
44
|
|
-2.8
|
%
|
|
Commercial Banks
|
|
6,265,432
|
|
83.9
|
%
|
29
|
|
6,135,117
|
|
86.9
|
%
|
34
|
|
-1.0
|
%
|
|
Savings Institutions
|
|
1,203,156
|
|
16.1
|
%
|
16
|
|
922,263
|
|
13.1
|
%
|
10
|
|
-12.4
|
%
|
|
Coastway Community
|
|
141,755
|
|
1.9
|
%
|
2
|
|
151,069
|
|
2.1
|
%
|
2
|
|
3.2
|
%
|
The table indicates that deposit growth in Providence County, the location of the Bank’s headquarters office and the majority of the deposit base, was 8.8% annually from June 30, 2010 to June 30, 2012, exceeding the growth rate of the state. Similar to the statewide trends, commercial banks recorded higher growth in deposits over the two year period, while savings institutions reported declines. Commercial banks also held a higher market share position of bank and thrift deposits in Providence County, 97.0%, as of June 30, 2012, compared to the statewide average. In Kent County, bank and thrift deposits experienced declines in both commercial banks and savings institutions. Savings institutions held a higher market share of deposits in Kent County, at 13.1%, than in Providence County.
As of June 30, 2012, Coastway maintained a relatively modest 0.5% deposit market share in Providence County and 2.1% in Kent County, representative of the overall large size of the deposit base and indicating that future deposit gains and market share gains are possible. Over the two year period shown, Coastway recorded growth in deposits in both counties, with the Bank’s growth in Kent County higher than the county-wide growth rate. It is important to note that Coastway’s growth capabilities were limited through July 1, 2012 due to a regulatory restriction and regulatory capital limit that was imposed for a three year period after completion of the charter conversion in 2009. Subsequent to the expiration of this limit on July 1, 2012, the
II.12
Bank has been able to noticeably increase deposits.
Competition
The competitive environment for financial institution products and services on a national, regional and local level can be expected to become even more competitive in the future. Consolidation in the banking and thrift industries provides economies of scale to the larger institutions, while the increased presence of investment options provides consumers with attractive investment alternatives to financial institutions. The Bank faces notable competition in both deposit gathering and lending activities, including direct competition with financial institutions that primarily have a local, regional or national presence. Securities firms and mutual funds also represent major sources of competition in raising deposits. In many cases, these competitors are also seeking to provide some or all of the community-oriented services as the Bank. With regard to lending competition, the Bank encounters the most significant competition from the same institutions providing deposit services. In addition, the Bank competes with mortgage companies, independent mortgage brokers, and credit unions.
From a competitive standpoint, the Bank
benefits from its status of a locally-owned financial institution, longstanding customer relationships, and continued efforts to offer competitive products and services. However, competitive pressures will also likely continue to build as the financial services industry continues to consolidate and as additional non-bank investment options for consumers become available. Table 2.6 lists the Bank’s largest competitors in the two counties currently served by its branches, based on deposit market share as noted. The proceeds from the proposed stock offering will enhance the Bank’s competitiveness by providing increased operating flexibility, including potential branching, focus on cross-selling and marketing and potential acquisition.
II.13
Table 2.6
Coastway Community Bank
Market Area Deposit Competitors
|
Location
|
|
Name
|
|
Market Share
|
|
Rank
|
|
|
Providence County, RI
|
|
Bank of America Corp. (NC)
|
|
65.71
|
%
|
|
|
|
|
|
RBS
|
|
22.20
|
%
|
|
|
|
|
|
Santander
|
|
4.21
|
%
|
|
|
|
|
|
Brookline Bancorp, Inc. (MA)
|
|
2.72
|
%
|
|
|
|
|
|
Lazares & Co. LLC
|
|
1.50
|
%
|
|
|
|
|
|
Washington Trust Bancorp, Inc.
|
|
0.95
|
%
|
|
|
|
|
|
Webster Financial Corp. (CT)
|
|
0.69
|
%
|
|
|
|
|
|
Coastway Community Bank
|
|
0.46
|
%
|
8 out of 17
|
|
|
|
|
|
|
|
|
|
|
|
Kent County, RI
|
|
RBS
|
|
33.59
|
%
|
|
|
|
|
|
Centreville Savings Bank
|
|
19.75
|
%
|
|
|
|
|
|
Bank of America
|
|
8.59
|
%
|
|
|
|
|
|
Santander
|
|
8.24
|
%
|
|
|
|
|
|
Brookline Bancorp, Inc. (MA)
|
|
7.50
|
%
|
|
|
|
|
|
Washington Trust Bancorp, Inc.
|
|
5.95
|
%
|
|
|
|
|
|
Coastway Community Bank
|
|
5.02
|
%
|
7 out of 14
|
|
Source: SNL Financial
II.14
III. PEER GROUP ANALYSIS
This chapter presents an analysis of Coastway’s operations versus a group of comparable savings institutions (the “Peer Group”) selected from the universe of all publicly-traded savings institutions in a manner consistent with the regulatory valuation guidelines. The basis of the pro forma market valuation of Coastway is derived from the pricing ratios of the Peer Group institutions, incorporating valuation adjustments for key differences in relation to the Peer Group. Since no Peer Group can be exactly comparable to Coastway, key areas examined for differences are: financial condition; profitability, growth and viability of earnings; asset growth; primary market area; dividends; liquidity of the shares; marketing of the issue; management; and effect of government regulations and regulatory reform.
Peer Group Selection
The Peer Group selection process is governed by the general parameters set forth in the regulatory valuation guidelines. Accordingly, the Peer Group is comprised of only those publicly-traded savings institutions whose common stock is either listed on a national exchange (NYSE or AMEX), or is NASDAQ listed, since their stock trading activity is regularly reported and generally more frequent than non-publicly traded and closely-held institutions. Institutions that are not listed on a national exchange or NASDAQ are inappropriate, since the trading activity for thinly-traded or closely-held stocks is typically highly irregular in terms of frequency and price and thus may not be a reliable indicator of market value. We have also excluded from the Peer Group those companies with unusual operating strategies, such as internet banking, those under acquisition or subject to rumored acquisition, mutual holding companies and recent conversions, since their pricing ratios are subject to unusual distortion and/or have limited trading history. A recent listing of the universe of all publicly-traded banks is included as Exhibit III-1.
Ideally, the Peer Group, which must have at least 10 members to comply with the regulatory valuation guidelines, should be comprised of locally- or regionally-based institutions with comparable resources, strategies and financial characteristics. There are approximately 110 fully converted savings institutions nationally and, thus, it is typically the case that the Peer Group will be comprised of institutions with relatively comparable characteristics. To the extent that differences exist between the converting institution and the Peer Group, valuation adjustments will be applied to account for the differences.
Since Coastway will be a fully public company upon completion of the offering, we considered only fully public companies to be
III.1
viable candidates for inclusion in the Peer Group.
From the universe of publicly-traded thrifts, we selected 10 institutions with characteristics similar to those of Coastway. In the selection process, we applied two “screens” to the universe of all public companies that were eligible for consideration:
·
Screen: New England institutions with assets less than $1 billion and have fully converted for at least one year.
Seven companies met the criteria for the screen and were included in the Peer Group.
·
Screen: New Jersey and Eastern Pennsylvania institutions with assets less than $1 billion and have fully converted for at least one year.
Three companies met the criteria for the screen and were included in the Peer Group.
Exhibit III-1 provides financial and public market pricing characteristics of all publicly-traded thrifts, while Exhibit III-2 provides financial and public market pricing characteristics of the Peer Group. Table 3.1 shows the general characteristics of each of the 10 Peer Group companies and Exhibit III-3 provides summary demographic and deposit market share data for the primary market areas served by each of the Peer Group companies. While there are expectedly some differences between the Peer Group companies and Coastway, we believe that the Peer Group companies, on average, provide a good basis for valuation subject to valuation adjustments. The following sections present a comparison of Coastway’s financial condition, income and expense trends, loan composition, credit risk and interest rate risk versus the Peer Group as of the most recent publicly available date.
A summary description of the key comparable characteristics of each of the Peer Group companies relative to Peer Group as a whole is detailed below.
·
Alliance Bancorp, Inc. of Broomall, PA (“ALLB”).
Alliance, with a branch office network of nine branches, maintains lower loans/assets but higher deposits/assets ratios as the Peer Group as a whole. It also maintained the highest balance of cash and equivalents among the Peer Group, significantly higher than the Peer Group average. Reporting the largest decrease in assets during the most recent 12 months, Alliance had the second highest tangible equity position of the Peer Group at the same time. Alliance reported a higher level of net income than the Peer Group average, as well as a lower operating expense ratio than the average. The loan portfolio was comprised of the lowest concentration of 1-4 family loans among the Peer Group, with a relatively high concentration in multi-family and commercial real estate loans.
·
BSB Bancorp, Inc. of Belmont, MA (“BLMT”)
. BSB, the second largest Peer Group member in assets, operates from four offices. It reported the third highest loans/assets ratio of the Peer Group members, and a comparable proportion of deposits as the funding base as the Peer Group average. BSB recorded the smallest positive net income among the Peer Group, with both net interest income and non-interest income
III.2
Table 3.1
Peer Group of Publicly-Traded Thrifts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 9, 2013
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Fiscal
|
|
Conv.
|
|
Stock
|
|
Market
|
|
|
Ticker
|
|
Financial Institution
|
|
Exchange
|
|
Primary Market
|
|
Assets (1)
|
|
Offices
|
|
Year
|
|
Date
|
|
Price
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($)
|
|
($Mil)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SIFI
|
|
SI Financial Group, Inc. of CT
|
|
NASDAQ
|
|
Willimantic, CT
|
|
$
|
949
|
|
21
|
|
31-Dec
|
|
01/11
|
|
$
|
11.13
|
|
$
|
113
|
|
|
BLMT
|
|
BSB Bancorp, Inc. of MA
|
|
NASDAQ
|
|
Belmont, MA
|
|
909
|
|
4
|
|
31-Dec
|
|
10/11
|
|
14.10
|
|
132
|
|
|
THRD
|
|
TF Fin. Corp. of Newtown PA
|
|
NASDAQ
|
|
Newtown, PA
|
|
715
|
|
14
|
|
31-Dec
|
|
07/94
|
|
27.70
|
|
79
|
|
|
HBNK
|
|
Hampden Bancorp, Inc. of MA
|
|
NASDAQ
|
|
Springfield, MA
|
|
668
|
|
9
|
|
30-Jun
|
|
01/07
|
|
15.75
|
|
89
|
|
|
COBK
|
|
Colonial Financial Serv. of NJ
|
|
NASDAQ
|
|
Bridgeton, NJ
|
|
633
|
|
9
|
|
31-Dec
|
|
07/10
|
|
14.00
|
|
54
|
|
|
CBNK
|
|
Chicopee Bancorp, Inc. of MA
|
|
NASDAQ
|
|
Chicopee, MA
|
|
597
|
|
8
|
|
31-Dec
|
|
07/06
|
|
17.56
|
|
95
|
|
|
PEOP
|
|
Peoples Fed Bancshrs Inc of MA
|
|
NASDAQ
|
|
Brighton, MA
|
|
578
|
|
6
|
|
30-Sep
|
|
07/10
|
|
18.35
|
|
119
|
|
|
ALLB
|
|
Alliance Bancorp, Inc. of PA
|
|
NASDAQ
|
|
Broomall, PA
|
|
457
|
|
9
|
|
31-Dec
|
|
01/11
|
|
14.95
|
|
77
|
|
|
WEBK
|
|
Wellesley Bancorp, Inc. of MA
|
|
NASDAQ
|
|
Wellesley, MA
|
|
397
|
|
2
|
|
31-Dec
|
|
01/12
|
|
17.20
|
|
43
|
|
|
GTWN
|
|
Georgetown Bancorp, Inc. of MA
|
|
NASDAQ
|
|
Georgetown, MA
|
|
211
|
|
3
|
|
31-Dec
|
|
07/12
|
|
14.87
|
|
28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Most recent quarter end available.
Source: SNL Financial, LC.
III.3
below the Peer Group average. BSB reported the highest concentration of commercial real estate loans and consumer loans as a percent of assets. BSB’s asset quality ratios were generally more favorable than the Peer Group average, although reserve coverage ratios were somewhat lower than peer averages.
·
Chicopee Bancorp, Inc. of Chicopee, MA (“CBNK”)
. CBNK operates from a network of eight offices in Massachusetts, and Chicopee reported a higher loans/assets and a similar funding structure as the Peer Group on average. The equity/assets ratio was above the Peer Group average. Profitability was higher than the Peer Group average, supported by a higher net interest income ratio. Operating expenses were also somewhat higher than the Peer Group. Loan diversification was greatest in commercial business loans, the highest ratio among Peer Group members. Investment in MBS was the lowest of all Peer Group members. Asset quality ratios were more favorable than the Peer Group averages, including higher reserve coverage ratios.
·
Colonial Financial Services of Bridgeton, NJ (“COBK”)
. COBK, operating from nine offices, reported the lowest loans/assets, the highest level of cash and investments/assets and the highest deposits/assets ratios of all Peer Group members. The equity/assets ratio was also the lowest among the Peer Group. Profitability was the lowest among the Peer Group, caused by the lowest net interest income ratio, the lowest yield-cost spread, and the highest loss due to real estate operations. COBK reported modest diversification away from residential assets and a higher investment in MBS in relation to the Peer Group average, resulting in a lower risk-weighted assets-to-assets ratio. Asset quality ratios were less favorable than the Peer Group, including the highest levels of non-performing assets and non-performing loans of all Peer Group members. Reserve coverage ratios were the lowest of the Peer Group.
·
Georgetown Bancorp, Inc. of Georgetown, MA (“GTWN”)
. Georgetown, the smallest Peer Group member, reported the highest loans/assets and the lowest deposits/assets ratios. Borrowed funds were the highest of the Peer Group. The equity/assets ratio was in line with the median of the Peer Group. Profitability was supported by the highest net interest income ratio in the Peer Group, offset in part by the highest operating expense ratio. Net non-operating gains also supported net income. Georgetown maintained the highest reliance on 1-4 family loans in the asset base among the Peer Group, and also with considerable loan diversification in other loan types. Asset quality ratios are generally more favorable than the Peer Group averages.
·
Hampden Bancorp, Inc. of Springfield, MA (“HBNK”)
. HBNK, with a branch office network of nine branches, maintained lower loans/assets and deposits/assets ratios as the Peer Group as a whole, offset by higher borrowings. Reporting a modest increase in assets and cash and investments during the most recent 12 months, HBNK’s tangible equity position remained below the Peer Group average. Above average profitability was mainly related to lower levels of provisions. HBNK reported the highest investment in MBS among the Peer Group, and relatively high loan portfolio concentrations in consumer loans. Problem asset ratios were less favorable than the Peer Group averages, including lower reserve coverage ratios.
·
Peoples Federal Bancshares Inc. of Brighton, MA (“PEOP”)
PEOP, operating out of six offices in Massachusetts, reported the highest equity/assets ratio of the Peer Group and an balance sheet structure that is similar to the Peer Group averages. Below average profitability was caused by lower levels of net interest income as well as non-interest income and higher operating expenses. Loans were concentrated in residential and commercial assets, as there was modest diversification into other loan types. Asset
III.4
quality ratios were the most favorable among the Peer Group, with the lowest levels of non-performing assets and the highest levels of loan loss reserves.
·
SI Financial Group, Inc. of Willimantic, CT (“SIFI”)
. The largest Peer Group member, SIFI operates from 21 office locations. SIFI reported slightly below average loan/assets and deposit/assets ratios, and was the only Peer Group member with subordinated debt. Assets declined slightly over the past 12 months. A small net loss was caused by lower net interest income and higher operating expenses than the Peer Group average. The lower net interest income was evident in the low yield-cost spread. SIFI maintained a more highly diversified loan portfolio with lower concentration in 1-4 family loans, and higher levels of commercial real estate and commercial business loans than average. Income diversification was evident in the highest loans serviced for others portfolio of all Peer Group members. Asset quality ratios were more favorable than the Peer Group average, although reserve coverage ratios were modestly lower.
·
TF Financial Cop. Of Newtown, PA (“THRD”)
. THRD, the third largest Peer Group member, operates 14 branch offices. It maintained a comparable balance sheet structure to the Peer Group average, but with a somewhat lower level of equity. Profitability was the highest among the Peer Group, induced by the highest levels of net interest income and non-interest income, along with lower operating expenses. Loans were concentrated in residential assets, as there was little diversification into other loan types. THRD also maintained a significant loans serviced for others portfolio. The asset quality ratios were generally in line with the Peer Group averages.
·
Wellesley Bancorp, Inc. of Wellesley, MA (“WEBK”)
. WEBK, the second smallest Peer Group member, operates the smallest branch network of only two branch offices. Operating with the second highest loans/assets ratio and a higher than average level of borrowings, WEBK experienced the largest growth in assets and loans over the past 12 months, accompanied also by the largest increase in borrowings. Above average profitability was a result of relatively higher net interest income and lower operating expense ratios, offset in part by lower non-interest income. WEBK maintains a much higher level of construction and land development loans than the Peer Group on average. Asset quality ratios were more favorable than the Peer Group average.
In aggregate, the Peer Group companies maintained a higher level of equity as the industry average (13.99% of assets versus 13.16% for all public companies), but recorded a lower level of profitability as a percent of average assets (0.37% ROAA versus 0.56% for all public companies), as well as a less favorable ROE (2.66% ROE versus 4.37% for all public companies). The Peer Group’s average P/B ratio was lower than the Peer Group average, while the average P/E multiple was above the respective average for all publicly-traded thrifts.
III.5
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|
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All Fully-Conv.
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Publicly-Traded
|
|
Peer Group
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|
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|
|
Financial Characteristics (Averages)
|
|
|
|
|
|
|
Assets ($Mil)
|
|
$
|
2,489
|
|
$
|
611
|
|
|
Market capitalization ($Mil)
|
|
$
|
341
|
|
$
|
83
|
|
|
Equity/assets (%)
|
|
13.16
|
%
|
13.99
|
%
|
|
Return on average assets (%)
|
|
0.56
|
%
|
0.37
|
%
|
|
Return on average equity (%)
|
|
4.37
|
%
|
2.66
|
%
|
|
|
|
|
|
|
|
|
Pricing Ratios (Averages)
(1)
|
|
|
|
|
|
|
Price/earnings (x)
|
|
18.71
|
x
|
24.96
|
x
|
|
Price/book (%)
|
|
103.20
|
%
|
96.60
|
%
|
|
Price/assets (%)
|
|
13.24
|
%
|
13.66
|
%
|
(1) Based on market prices as of August 9, 2013.
Ideally, the Peer Group companies would be comparable to Coastway in terms of all of the selection criteria, but the universe of publicly-traded thrifts does not provide for an appropriate number of such companies. However, in general, the companies selected for the Peer Group were fairly comparable to Coastway, as will be highlighted in the following comparative analysis.
Financial Condition
Table 3.2 shows comparative balance sheet measures for Coastway and the Peer Group, reflecting the expected similarities and some differences given the selection procedures outlined above. The Bank’s ratios reflect balances as of June 30, 2013, while the Peer Group’s ratios reflect balances as of the latest available data as of June 30, 2013 or March 31, 2013. Coastway’s equity-to-assets ratio of 7.34% was lower than the Peer Group’s average equity ratio of 13.98%. The Bank’s pro forma capital position will increase with the addition of stock proceeds, providing the Bank with an equity-to-assets ratio that will be more in line with the Peer Group’s ratio. Tangible equity-to-assets ratios for the Bank and the Peer Group equaled 7.34% and 13.88%, respectively. The increase in Coastway’s pro forma capital position will be favorable from a risk perspective and in terms of future earnings potential that could be realized through leverage and lower funding costs. At the same time, the Bank’s higher pro forma capitalization will initially depress return on equity. Both Coastway’s and the Peer Group’s capital ratios reflected capital surpluses with respect to the regulatory capital requirements, with the Bank’s ratios currently lower than the Peer Group’s ratios. On a pro forma basis, the Bank’s regulatory surpluses will become more significant.
III.6
Table 3.2
Balance Sheet Composition and Growth Rates
Comparable Institution Analysis
As of June 30, 2013
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|
Balance Sheet as a Percent of Assets
|
|
Balance Sheet Annual Growth Rates
|
|
Regulatory Capital
|
|
|
|
|
Cash &
|
|
MBS &
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|
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|
|
|
|
|
Borrowed
|
|
Subd.
|
|
Net
|
|
Goodwill
|
|
Tng Net
|
|
|
|
MBS, Cash &
|
|
|
|
|
|
Borrows.
|
|
Net
|
|
Tng Net
|
|
|
|
|
|
|
|
|
|
|
Equivalents
|
|
Invest
|
|
BOLI
|
|
Loans
|
|
Deposits
|
|
Funds
|
|
Debt
|
|
Worth
|
|
& Intang
|
|
Worth
|
|
Assets
|
|
Investments
|
|
Loans
|
|
Deposits
|
|
&Subdebt
|
|
Worth
|
|
Worth
|
|
Tangible
|
|
Core
|
|
Reg.Cap.
|
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
|
Coastway Community Bank of RI
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2013
|
|
2.62
|
|
0.72
|
|
0.00
|
|
87.36
|
|
87.82
|
|
3.73
|
|
0.00
|
|
7.34
|
|
0.00
|
|
7.34
|
|
10.61
|
|
27.00
|
|
10.10
|
|
10.80
|
|
19.12
|
|
3.72
|
|
3.72
|
|
7.69
|
|
9.71
|
|
10.19
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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|
All Public Companies
|
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|
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|
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|
Averages
|
|
6.50
|
|
21.20
|
|
1.80
|
|
66.00
|
|
74.90
|
|
10.10
|
|
0.40
|
|
13.50
|
|
0.80
|
|
12.70
|
|
3.57
|
|
-0.31
|
|
4.63
|
|
4.22
|
|
-4.40
|
|
3.15
|
|
2.51
|
|
12.93
|
|
12.75
|
|
22.48
|
|
|
Medians
|
|
5.20
|
|
17.70
|
|
1.90
|
|
67.30
|
|
75.90
|
|
8.40
|
|
0.00
|
|
12.80
|
|
0.00
|
|
11.60
|
|
0.25
|
|
-4.03
|
|
2.50
|
|
0.78
|
|
-5.27
|
|
0.90
|
|
1.06
|
|
11.84
|
|
11.75
|
|
20.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
7.04
|
|
15.89
|
|
2.12
|
|
72.28
|
|
76.88
|
|
8.01
|
|
0.09
|
|
13.98
|
|
0.10
|
|
13.88
|
|
5.39
|
|
-7.72
|
|
9.63
|
|
5.78
|
|
9.54
|
|
3.98
|
|
4.00
|
|
10.34
|
|
10.34
|
|
19.57
|
|
|
Medians
|
|
6.20
|
|
11.15
|
|
2.30
|
|
74.95
|
|
76.20
|
|
7.65
|
|
0.00
|
|
13.60
|
|
0.00
|
|
13.55
|
|
3.18
|
|
-6.79
|
|
4.33
|
|
3.51
|
|
2.84
|
|
-1.85
|
|
-1.89
|
|
10.34
|
|
10.34
|
|
19.57
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
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|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
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|
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|
|
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|
|
ALLB
|
Alliance Bancorp, Inc. of PA(1)
|
|
23.90
|
|
9.70
|
|
2.70
|
|
60.50
|
|
80.60
|
|
0.60
|
|
0.00
|
|
17.40
|
|
0.00
|
|
17.40
|
|
-5.48
|
|
-10.65
|
|
-0.11
|
|
-5.89
|
|
-6.27
|
|
-3.86
|
|
-3.86
|
|
NA
|
|
NA
|
|
NA
|
|
|
BLMT
|
BSB Bancorp, Inc. of MA
|
|
6.10
|
|
10.60
|
|
1.40
|
|
80.30
|
|
76.50
|
|
8.00
|
|
0.00
|
|
14.10
|
|
0.00
|
|
14.10
|
|
20.35
|
|
10.58
|
|
22.95
|
|
29.34
|
|
-4.48
|
|
-3.19
|
|
-3.19
|
|
NA
|
|
NA
|
|
NA
|
|
|
CBNK
|
Chicopee Bancorp, Inc. of MA
|
|
6.80
|
|
11.70
|
|
2.30
|
|
76.50
|
|
78.50
|
|
6.20
|
|
0.00
|
|
15.20
|
|
0.00
|
|
15.20
|
|
-1.31
|
|
-7.63
|
|
0.48
|
|
3.05
|
|
-39.92
|
|
2.77
|
|
2.77
|
|
NA
|
|
NA
|
|
NA
|
|
|
COBK
|
Colonial Financial Serv. of NJ(1)
|
|
1.00
|
|
46.30
|
|
2.30
|
|
47.00
|
|
87.60
|
|
1.30
|
|
0.00
|
|
10.70
|
|
0.00
|
|
10.70
|
|
-0.90
|
|
-4.28
|
|
1.08
|
|
-1.59
|
|
NM
|
|
-4.89
|
|
-4.89
|
|
9.93
|
|
9.93
|
|
20.36
|
|
|
GTWN
|
Georgetown Bancorp, Inc. of MA(1)
|
|
2.30
|
|
6.30
|
|
1.30
|
|
87.10
|
|
69.40
|
|
14.70
|
|
0.00
|
|
14.40
|
|
0.00
|
|
14.40
|
|
2.71
|
|
-55.01
|
|
17.56
|
|
-5.55
|
|
21.83
|
|
48.60
|
|
48.60
|
|
NA
|
|
NA
|
|
NA
|
|
|
HBNK
|
Hampden Bancorp, Inc. of MA(1)
|
|
6.90
|
|
22.30
|
|
2.50
|
|
65.90
|
|
71.60
|
|
14.30
|
|
0.00
|
|
13.00
|
|
0.00
|
|
13.00
|
|
9.24
|
|
11.76
|
|
8.90
|
|
9.79
|
|
18.36
|
|
-0.80
|
|
-0.80
|
|
NA
|
|
NA
|
|
NA
|
|
|
PEOP
|
Peoples Fed Bancshrs Inc of MA(1)
|
|
9.80
|
|
7.10
|
|
3.40
|
|
77.60
|
|
74.10
|
|
5.70
|
|
0.00
|
|
18.70
|
|
0.00
|
|
18.70
|
|
3.65
|
|
-6.11
|
|
6.55
|
|
3.96
|
|
37.50
|
|
-4.57
|
|
-4.57
|
|
NA
|
|
NA
|
|
NA
|
|
|
SIFI
|
SI Financial Group, Inc. of CT
|
|
4.10
|
|
20.90
|
|
1.00
|
|
70.70
|
|
74.70
|
|
9.80
|
|
0.90
|
|
13.10
|
|
0.40
|
|
12.70
|
|
-0.88
|
|
-7.47
|
|
1.75
|
|
-0.79
|
|
0.00
|
|
-2.90
|
|
-2.97
|
|
NA
|
|
NA
|
|
NA
|
|
|
THRD
|
TF Fin. Corp. of Newtown PA
|
|
6.30
|
|
14.40
|
|
2.70
|
|
73.40
|
|
79.90
|
|
7.30
|
|
0.00
|
|
11.70
|
|
0.60
|
|
11.10
|
|
4.29
|
|
14.32
|
|
2.10
|
|
4.46
|
|
2.84
|
|
4.18
|
|
4.42
|
|
10.74
|
|
10.74
|
|
18.77
|
|
|
WEBK
|
Wellesley Bancorp, Inc. of MA
|
|
3.20
|
|
9.60
|
|
1.60
|
|
83.80
|
|
75.90
|
|
12.20
|
|
0.00
|
|
11.50
|
|
0.00
|
|
11.50
|
|
22.21
|
|
-22.75
|
|
34.99
|
|
21.01
|
|
55.97
|
|
4.49
|
|
4.49
|
|
NA
|
|
NA
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Financial information as of March 31, 2013.
Source: SNL Financial, LC. and RP
®
Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2013 by RP
®
Financial, LC.
III.7
The interest-earning asset compositions for the Bank and the Peer Group were similar, with loans constituting the bulk of interest-earning assets for both. The Bank’s loans-to-assets ratio of 87.36% was much higher than the comparable Peer Group ratio of 72.28%. Comparatively, the Bank’s cash-to-assets ratio of 2.62% was much lower than the ratio for the Peer Group of 7.04%. Coastway reported investment securities of 0.72% (FHLB stock) and no investments in BOLI, compared to a combined ratio of 18.01% for the Peer Group. Overall, Coastway’s earning assets amounted to 90.70% of assets, which was noticeably lower than the comparable Peer Group ratio of 97.33%, primarily due to the higher level of fixed assets maintained by the Bank.
Coastway’s funding liabilities reflected a funding strategy that relied more on deposits than the Peer Group’s funding composition. The Bank’s deposits equaled 87.82% of assets, which was above the Peer Group’s ratio of 76.88%. Comparatively, the Bank maintained a lower level of borrowings than the Peer Group, as indicated by borrowings-to-assets ratios of 3.73% and 8.01% for Coastway and the Peer Group, respectively.
Total interest-bearing liabilities maintained by the Bank and the Peer Group, as a percent of assets, equaled 91.5% and 85.0%, respectively. Following the increase in equity provided by the net proceeds of the stock offering, the Bank’s ratio of interest-bearing liabilities as a percent of assets will likely be more in line with the Peer Group’s ratio. A key measure of balance sheet strength for a thrift institution is its IEA/IBL ratio. Presently, the Bank’s IEA/IBL ratio is lower than the Peer Group’s ratio, based on IEA/IBL ratios of 98.4% and 114.5%, respectively. The additional equity realized from stock proceeds will serve to strengthen Coastway’s IEA/IBL ratio in comparison to the Peer Group ratio, as the increase in equity provided by the infusion of stock proceeds will lower the level of interest-bearing liabilities funding assets and will be primarily deployed into interest-earning assets.
The growth rate section of Table 3.2 shows annual growth rates for key balance sheet items, with growth rates for Coastway based on annual growth rates for the 18 months ended June 30, 2013, while the Peer Group’s growth rates are based on 12 months ended March 31, 2013 or latest period available.
Coastway recorded annualized asset growth of 10.61% over that time period, higher than the Peer Group’s asset growth of 5.39%. The increase in the Bank’s assets was funneled into largely into cash and equivalents, which increased at a high level of 27.00% and loans receivable, which increased at an annual rate of 10.10%. The asset growth for the Peer Group was evident in the higher loan growth but a decrease in cash/investments. Funding of Coastway’s growth was obtained from an annual deposit
III.8
increase of 10.80%, while borrowings also increased by a rate of 19.12%. The Peer Group recorded smaller increases in both deposits and borrowings as a funding base.
Reflecting the recent levels of net income, the Bank’s equity increased at a 3.72% annual rate, versus a larger 3.98% increase in equity balances for the Peer Group. The increase in equity realized from stock proceeds will likely depress the Bank’s equity growth rate initially following the stock offering. Dividend payments and stock repurchases, pursuant to regulatory limitations and guidelines could also potentially slow the Bank’s equity growth rate in the longer term following the stock offering.
Income and Expense Components
Table 3.3 displays statements of operations for the Bank and the Peer Group, with the income ratios based on earnings for the 12 months ended June 30, 2013 for the Bank and last 12 months for the most recent quarter ended for the Peer Group. Coastway
reported net income of 0.27% of average assets for the 12 months ended June 30, 2013, lower than the average net income of 0.37% of average assets for the Peer Group. A higher level of net operating expenses accounted for the Bank’s less favorable reported results, despite of the Bank’s higher levels of gains on sale and non-interest income. Most of the key income statement ratios for Coastway were affected by the material level of mortgage banking operations conducted by the Bank, making such comparisons to the Peer Group somewhat less meaningful.
The Bank’s net interest income ratio was equal to the Peer Group’s ratio (3.04% of average assets), as both interest income and interest expense figures were very similar for both, indicating that the base bank-level earning assets and costing liabilities of Coastway provide similar economic benefit as the Peer Group. Coastway’s overall yield earned on interest-earning assets (4.25%) was somewhat higher than the 3.96% ratio for the Peer Group, while the Bank’s cost of funds also was higher (1.02% versus 0.85% for the Peer Group).
In another key area of core earnings strength, the Bank reported an elevated ratio of operating expenses, 4.35% of average assets versus the Peer Group (2.84% of average assets), primarily due to the Bank’s mortgage banking operations. Also as a result of the mortgage banking operations, Coastway maintained a comparatively lower number of employees relative to its asset size.
Assets per full time equivalent employee equaled $2.6 million for the Bank versus a comparable measure of $5.8 million for the Peer Group.
On a
III.9
Table 3.3
Income as Percent of Average Assets and Yields, Costs, Spreads
Comparable Institution Analysis
For the 12 Months Ended June 30, 2013
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Net Interest Income
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Other Income
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G&A/Other Exp.
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Non-Op. Items
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Yields, Costs, and Spreads
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Loss
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NII
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Total
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MEMO:
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MEMO:
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Net
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Provis.
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After
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Loan
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R.E.
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Other
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Other
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G&A
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Goodwill
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Net
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Extrao.
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Yield
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Cost
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Yld-Cost
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Assets/
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Effective
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Income
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Income
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Expense
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NII
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on IEA
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Provis.
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Fees
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Oper.
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Income
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Income
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Expense
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Amort.
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Gains
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Items
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On Assets
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Of Funds
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Spread
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FTE Emp.
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Tax Rate
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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(%)
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Coastway Community Bank of RI
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June 30, 2013
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0.27
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3.79
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0.75
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3.04
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0.21
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2.83
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0.00
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0.00
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0.93
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0.93
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4.35
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0.00
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1.04
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0.00
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4.25
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1.02
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3.23
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2,619
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41.98
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All Public Companies
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Averages
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0.57
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3.84
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0.80
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3.04
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0.28
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2.76
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0.05
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-0.06
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0.42
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0.40
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3.03
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0.02
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0.74
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0.00
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4.11
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0.95
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3.16
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5,731
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30.87
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Medians
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0.61
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3.84
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0.77
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3.05
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0.19
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2.85
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0.00
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-0.02
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0.63
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0.59
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2.75
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0.00
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0.12
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0.00
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4.07
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0.91
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3.15
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4,852
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31.68
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Comparable Group
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Averages
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0.37
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3.76
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0.72
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3.04
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0.23
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2.81
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0.02
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-0.05
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0.49
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0.47
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2.84
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0.00
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0.12
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0.00
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3.96
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0.85
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3.10
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5,842
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34.96
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Medians
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0.49
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3.75
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0.71
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2.99
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0.17
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2.90
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0.01
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0.00
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0.41
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0.41
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2.74
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0.00
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0.06
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0.00
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3.97
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0.83
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3.06
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4,765
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37.63
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Comparable Group
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ALLB
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Alliance Bancorp, Inc. of PA(1)
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0.52
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3.64
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0.64
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3.00
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0.20
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2.80
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0.00
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0.00
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0.34
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0.34
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2.48
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0.00
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-0.17
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0.00
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3.89
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0.79
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3.10
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4,765
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27.37
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BLMT
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BSB Bancorp, Inc. of MA
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0.17
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3.39
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0.61
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2.78
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0.22
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2.56
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0.07
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0.00
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0.17
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0.25
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2.79
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0.00
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0.24
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0.00
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3.50
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0.73
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2.77
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7,974
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37.57
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CBNK
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Chicopee Bancorp, Inc. of MA
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0.49
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3.98
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0.82
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3.16
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0.07
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3.09
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0.03
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-0.03
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0.63
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0.63
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3.01
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0.00
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-0.03
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0.00
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4.20
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0.97
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3.23
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4,700
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20.58
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COBK
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Colonial Financial Serv. of NJ(1)
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-0.24
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3.27
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0.80
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2.46
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0.84
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1.62
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0.00
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-0.32
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0.90
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0.58
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2.66
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0.00
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0.02
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0.00
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3.45
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0.90
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2.55
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5,809
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44.87
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GTWN
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Georgetown Bancorp, Inc. of MA(1)
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0.48
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4.23
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0.70
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3.53
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0.11
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3.43
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0.03
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0.02
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0.24
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0.29
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3.74
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0.00
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0.79
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0.00
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4.43
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0.82
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3.61
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4,064
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37.68
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HBNK
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Hampden Bancorp, Inc. of MA(1)
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0.51
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3.85
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0.88
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2.97
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0.05
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2.92
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0.00
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0.00
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0.48
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0.48
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2.73
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0.00
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0.17
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0.00
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4.05
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1.03
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3.02
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NM
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38.66
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PEOP
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Peoples Fed Bancshrs Inc of MA(1)
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|
0.26
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3.50
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0.54
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2.96
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0.09
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|
2.87
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|
0.01
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|
0.00
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|
0.29
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|
0.29
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|
2.51
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|
0.00
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|
0.05
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|
0.00
|
|
3.70
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|
0.68
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|
3.02
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|
7,711
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63.60
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SIFI
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SI Financial Group, Inc. of CT
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|
-0.01
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3.63
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|
0.94
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|
2.69
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|
0.23
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|
2.46
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|
0.05
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|
-0.03
|
|
0.80
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|
0.82
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|
3.24
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|
0.00
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|
0.07
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|
0.00
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|
3.79
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|
1.11
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|
2.68
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|
3,889
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|
13.61
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|
THRD
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TF Fin. Corp. of Newtown PA
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0.85
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|
4.00
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|
0.58
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3.42
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0.32
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|
3.10
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0.00
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|
-0.09
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|
0.84
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|
0.75
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|
2.74
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|
0.00
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|
-0.08
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|
0.00
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|
4.26
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|
0.67
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|
3.60
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|
4,440
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|
27.71
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WEBK
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Wellesley Bancorp, Inc. of MA
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0.65
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|
4.13
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0.72
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|
3.41
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|
0.14
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|
3.27
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|
0.00
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|
0.00
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|
0.22
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|
0.22
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|
2.53
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|
0.00
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|
0.09
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|
0.00
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|
4.28
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|
0.83
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|
3.46
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9,227
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37.93
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(1) As of March 31, 2013
Source: SNL Financial, LC. and RP
®
Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2013 by RP
®
Financial, LC.
III.10
post-offering basis, the Bank’s operating expenses can be expected to further increase with the addition of the ESOP and certain expenses that result from being a publicly-traded company, with such expenses already impacting the Peer Group’s operating expenses.
At the same time, Coastway’s capacity to leverage operating expenses will be enhanced following the increase in capital realized from the infusion of net stock proceeds.
When viewed together, net interest income (Inclusive of mortgage banking income) and operating expenses provide considerable insight into a bank’s earnings strength, since those sources of income and expenses are typically the most prominent components of earnings and are generally more predictable than losses and gains realized from the sale of assets or other non-recurring activities. In this regard, as measured by their expense coverage ratios (net interest income, including mortgage banking operations divided by operating expenses), the Bank’s earnings were modestly less favorable than the Peer Group’s, based on respective expense coverage ratios of 0.97x for Coastway and 1.07x for the Peer Group. A ratio less than 1.00x indicates that an institution depends on non-interest operating income to achieve profitable operations.
Sources of non-interest operating income provided a higher contribution to Coastway’s earnings compared to the Peer Group, indicating a favorable comparison to the Peer Group as such income provides diversification away from net interest income. Non-interest operating income equaled 0.93% and 0.47% of Coastway’s and the Peer Group’s average assets, respectively.
Taking non-interest operating income into account in comparing the Bank’s and the Peer Group’s earnings, Coastway’s efficiency ratio (operating expenses, net of amortization of intangibles, as a percent of the sum of non-interest operating income and net interest income, including mortgage banking income) of 84.5% was modestly less favorable than the Peer Group’s efficiency ratio of 77.8%.
Loan loss provisions had a similar impact on the Bank’s and Peer Group’s earnings, with loan loss provisions established by the Bank and the Peer Group equaling 0.21% and 0.23% of average assets, respectively. The impact of loan loss provisions on the Bank’s and the Peer Group’s earnings, particularly when taking into consideration the prevailing credit market environment for mortgage based lenders, were indicative of the relatively modest asset quality factors facing the Bank and the Peer Group.
For the 12 months ended June 30, 2013, the
Bank reported net non-operating income equal to 0.14% of average assets, while the Peer Group reported, on average, 0.12% of average assets of net non-operating gains. Non-operating items for
the Bank reflected the
III.11
writedown of property held for sale.
Typically, gains and losses generated from non-operating items are viewed as non-recurring in nature, particularly to the extent that such gains and losses result from the sale of investments or other assets that are not considered to be part of an institution’s core operations. Comparatively, to the extent that gains have been derived through selling fixed rate loans into the secondary market, such gains may be considered to be an ongoing activity for an institution and, therefore, warrant some consideration as a core earnings factor for an institution. However, loan sale gains are still viewed as a more volatile source of income than income generated through the net interest margin and non-interest operating income.
Extraordinary items were not a factor in either the Bank’s or the Peer Group’s earnings.
On average, the Peer Group reported an average effective tax rate of 35.0%, while Coastway reported an effective tax rate of 42.0%. As indicated in the prospectus, the Bank’s effective marginal tax rate is assumed to equal 39.5% when calculating the after tax return on conversion proceeds.
Loan Composition
Table 3.4 presents data related to the Bank’s and the Peer Group’s loan portfolio compositions (including any investment in MBS). The Bank’s loan portfolio composition reflected a higher concentration of 1-4 family permanent mortgage loans than maintained by the Peer Group (50.70% of assets versus 38.66 for the Peer Group). The Bank reported no investments in MBS, while the Peer Group reported an MBS investment at 7.64% of assets on average. Coastway
maintained a lower percent of loan serviced for others of assets and $391,000 of servicing intangibles, indicating a lower dependence on loan servicing income than the Peer Group.
Diversification into higher risk and higher yielding types of lending was slightly higher for the Coastway, as the Bank reported total loans other than 1-4 family and MBS of 36.54% of assets, versus 34.89% for the Peer Group, a result of the Bank’s higher overall loans/assets ratio in comparison to the Peer Group. Commercial real estate/multi-family loans
represented the most significant area of lending diversification for the Bank (32.24% of assets), followed by commercial business loans (2.21% of assets). The Peer Group’s lending diversification consisted primarily also of commercial real estate/multi-family loans (23.43% of assets), followed by commercial business loans (4.96% of assets). The relative concentration of assets in loans and diversification into higher risk types of loans by the Bank translated into a higher risk weighted assets-to-assets ratio for the Bank (76.33%) than the Peer Group (64.68%).
III.12
Table 3.4
Loan Portfolio Composition and Related Information
Comparable Institution Analysis
As of June 30, 2013
|
|
|
Portfolio Composition as a Percent of Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
1-4
|
|
Constr.
|
|
5+Unit
|
|
Commerc.
|
|
|
|
RWA/
|
|
Serviced
|
|
Servicing
|
|
|
Institution
|
|
MBS
|
|
Family
|
|
& Land
|
|
Comm RE
|
|
Business
|
|
Consumer
|
|
Assets
|
|
For Others
|
|
Assets
|
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
($000)
|
|
($000)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coastway Community Bank of RI
|
|
0.00
|
|
50.70
|
|
1.59
|
|
32.24
|
|
2.21
|
|
0.50
|
|
76.33
|
|
28,064
|
|
391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Public Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
12.50
|
|
32.82
|
|
2.99
|
|
23.90
|
|
4.22
|
|
1.72
|
|
62.80
|
|
1,410,071
|
|
13,093
|
|
|
Medians
|
|
10.82
|
|
31.02
|
|
2.23
|
|
22.51
|
|
3.11
|
|
0.33
|
|
62.50
|
|
30,750
|
|
258
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
7.64
|
|
38.66
|
|
4.52
|
|
23.43
|
|
4.96
|
|
1.98
|
|
64.68
|
|
69,518
|
|
443
|
|
|
Medians
|
|
5.67
|
|
32.79
|
|
2.92
|
|
22.91
|
|
3.81
|
|
0.73
|
|
65.35
|
|
63,860
|
|
250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLB
|
Alliance Bancorp, Inc. of PA(1)
|
|
1.29
|
|
27.11
|
|
4.35
|
|
28.30
|
|
2.17
|
|
1.06
|
|
54.23
|
|
0
|
|
0
|
|
|
BLMT
|
BSB Bancorp, Inc. of MA
|
|
5.98
|
|
36.50
|
|
2.22
|
|
31.64
|
|
0.35
|
|
10.31
|
|
74.09
|
|
62,690
|
|
354
|
|
|
CBNK
|
Chicopee Bancorp, Inc. of MA
|
|
0.16
|
|
28.30
|
|
7.12
|
|
27.72
|
|
14.04
|
|
0.39
|
|
81.13
|
|
95,740
|
|
425
|
|
|
COBK
|
Colonial Financial Serv. of NJ(1)
|
|
14.20
|
|
27.68
|
|
1.08
|
|
14.80
|
|
3.39
|
|
0.20
|
|
51.73
|
|
0
|
|
0
|
|
|
GTWN
|
Georgetown Bancorp, Inc. of MA(1)
|
|
8.82
|
|
59.27
|
|
6.97
|
|
20.53
|
|
4.50
|
|
0.19
|
|
70.03
|
|
113,530
|
|
1,114
|
|
|
HBNK
|
Hampden Bancorp, Inc. of MA(1)
|
|
21.07
|
|
28.31
|
|
2.67
|
|
24.18
|
|
6.37
|
|
5.12
|
|
67.70
|
|
65,030
|
|
0
|
|
|
PEOP
|
Peoples Fed Bancshrs Inc of MA(1)
|
|
4.59
|
|
50.81
|
|
3.16
|
|
21.64
|
|
1.68
|
|
1.07
|
|
62.15
|
|
29,390
|
|
145
|
|
|
SIFI
|
SI Financial Group, Inc. of CT
|
|
10.34
|
|
29.07
|
|
0.97
|
|
28.14
|
|
12.17
|
|
1.15
|
|
53.57
|
|
198,850
|
|
1,335
|
|
|
THRD
|
TF Fin. Corp. of Newtown PA
|
|
5.36
|
|
53.64
|
|
1.59
|
|
17.70
|
|
0.73
|
|
0.25
|
|
62.99
|
|
129,900
|
|
1,053
|
|
|
WEBK
|
Wellesley Bancorp, Inc. of MA
|
|
4.63
|
|
45.94
|
|
15.06
|
|
19.60
|
|
4.22
|
|
0.07
|
|
69.15
|
|
50
|
|
0
|
|
(1) As of March 31, 2013.
Source:
SNL Financial LC. and RP
®
Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2013 by RP
®
Financial, LC.
III.13
Credit Risk
Based on a comparison of credit quality measures, the Bank’s credit risk exposure was considered to be generally higher than that of the Peer Group. As shown in Table 3.5, the Bank’s foreclosed real estate/assets and non-performing assets/assets equaled 0.44% and 3.11%, respectively, versus comparable measures of 0.26% and 1.99% for the Peer Group. At the same time, the Bank recorded a higher non-performing loans (non-accruing loans plus performing TDRs)/loans ratio than the Peer Group, at 3.52% and 2.70% respectively. Coastway also maintained lower reserve coverage ratios, including
loss reserves as a percent of total NPAs, which equaled 13.63% for the Bank versus 67.54% for the Peer Group. Reflecting a more favorable ratio for the Peer Group, loss reserves maintained as percent of net loans receivable equaled 0.52% for the Bank versus 1.07% for the Peer Group. Net loan charge-offs were modest for both the Peer Group and the Bank, based on ratios of 0.16% and 0.06% of net loans receivable, respectively.
Interest Rate Risk
Table 3.6 reflects various key ratios highlighting the relative interest rate risk exposure of the Bank versus the Peer Group.
In terms of balance sheet composition, Coastway’s interest rate risk characteristics were considered to be less favorable than the Peer Group. The Bank’s equity-to-assets and IEA/IBL ratios were lower than the Peer Group, thereby implying a greater dependence on the yield-cost spread to sustain the net interest margin for the Bank. The Bank also reported a higher level of non-interest earning assets (due to the fixed asset investment for Coastway), which provides an indication of the earnings capabilities and interest rate risk of the balance sheet.
On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with more favorable balance sheet interest rate risk characteristics than currently maintained by the Peer Group, particularly with respect to the increases that will be realized in the Bank’s equity-to-assets and IEA/IBL ratios.
To analyze interest rate risk associated with the net interest margin, we reviewed quarterly changes in net interest income as a percent of average assets for Coastway and the Peer Group. The relative fluctuations in the Bank’s net interest income to average assets ratio were considered to be higher than the Peer Group and, thus, based on the interest rate environment that prevailed during the period analyzed in Table 3.6, Coastway was viewed as maintaining a higher degree of interest rate risk exposure in the net interest margin. The
III.14
Table 3.5
Credit Risk Measures and Related Information
Comparable Institution Analysis
As of June 30, 2013 or Most Recent Date Available
|
|
|
|
|
NPAs &
|
|
|
|
|
|
|
|
Rsrves/
|
|
|
|
|
|
|
|
|
REO/
|
|
90+Del/
|
|
NPLs/
|
|
Rsrves/
|
|
Rsrves/
|
|
NPAs &
|
|
Net Loan
|
|
NLCs/
|
|
|
Institution
|
|
Assets
|
|
Assets
|
|
Loans
|
|
Loans
|
|
NPLs
|
|
90+Del
|
|
Chargeoffs
|
|
Loans
|
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
($000)
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coastsway Community Bank of RI
|
|
0.44
|
|
3.11
|
|
3.52
|
|
0.52
|
|
15.89
|
|
13.63
|
|
480
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Public Companies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
0.37
|
|
2.80
|
|
3.57
|
|
1.43
|
|
60.38
|
|
48.37
|
|
1,015
|
|
0.33
|
|
|
Medians
|
|
0.12
|
|
1.90
|
|
2.48
|
|
1.30
|
|
49.82
|
|
41.77
|
|
368
|
|
0.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
0.26
|
|
1.99
|
|
2.70
|
|
1.07
|
|
75.39
|
|
67.54
|
|
168
|
|
0.06
|
|
|
Medians
|
|
0.09
|
|
1.64
|
|
1.69
|
|
0.94
|
|
56.08
|
|
49.76
|
|
123
|
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLB
|
Alliance Bancorp, Inc. of PA(1)
|
|
0.54
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
NA
|
|
530
|
|
0.00
|
|
|
BLMT
|
BSB Bancorp, Inc. of MA
|
|
0.00
|
|
1.67
|
|
1.86
|
|
0.93
|
|
50.82
|
|
48.35
|
|
22
|
|
0.01
|
|
|
CBNK
|
Chicopee Bancorp, Inc. of MA
|
|
0.10
|
|
0.76
|
|
0.85
|
|
0.94
|
|
109.60
|
|
97.61
|
|
117
|
|
0.10
|
|
|
COBK
|
Colonial Financial Serv. of NJ(1)
|
|
0.85
|
|
5.84
|
|
10.48
|
|
1.35
|
|
12.91
|
|
11.03
|
|
109
|
|
0.15
|
|
|
GTWN
|
Georgetown Bancorp, Inc. of MA(1)
|
|
0.01
|
|
1.61
|
|
1.69
|
|
NA
|
|
55.55
|
|
51.16
|
|
129
|
|
0.00
|
|
|
HBNK
|
Hampden Bancorp, Inc. of MA(1)
|
|
0.18
|
|
2.21
|
|
2.99
|
|
NA
|
|
39.56
|
|
35.65
|
|
220
|
|
0.00
|
|
|
PEOP
|
Peoples Fed Bancshrs Inc of MA(1)
|
|
0.00
|
|
0.35
|
|
0.44
|
|
0.88
|
|
203.00
|
|
203.00
|
|
33
|
|
0.03
|
|
|
SIFI
|
SI Financial Group, Inc. of CT
|
|
0.08
|
|
1.27
|
|
1.64
|
|
0.89
|
|
56.61
|
|
51.96
|
|
376
|
|
0.22
|
|
|
THRD
|
TF Fin. Corp. of Newtown PA
|
|
0.86
|
|
2.24
|
|
1.68
|
|
1.30
|
|
75.06
|
|
41.52
|
|
146
|
|
0.11
|
|
|
WEBK
|
Wellesley Bancorp, Inc. of MA
|
|
0.00
|
|
NA
|
|
NA
|
|
1.19
|
|
NA
|
|
NA
|
|
0
|
|
0.00
|
|
(1) As of March 31, 2013.
Source:
Audited and unaudited financial statements, corporate reports and offering circulars, and RP
®
Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2013 by RP
®
Financial, LC.
III.15
Table 3.6
Interest Rate Risk Measures and Net Interest Income Volatility
Comparable Institution Analysis
As of June 30, 2013 or Most Recent Date Available
|
|
|
Balance Sheet Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible
|
|
|
|
Non-Earn.
|
|
|
|
|
|
|
Equity/
|
|
IEA/
|
|
Assets/
|
|
Quarterly Change in Net Interest Income
|
|
|
Institution
|
|
Assets
|
|
IBL
|
|
Assets
|
|
6/30/2013
|
|
3/31/2013
|
|
12/31/2012
|
|
9/30/2012
|
|
6/30/2012
|
|
3/31/2012
|
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(change in net interest income is annualized in basis points)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coastway Community Bank of RI
|
|
7.2
|
|
98.4
|
|
10.0
|
|
-2
|
|
17
|
|
-33
|
|
-1
|
|
-4
|
|
-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Public Companies
|
|
12.5
|
|
108.2
|
|
6.1
|
|
0
|
|
-6
|
|
-3
|
|
-2
|
|
0
|
|
-4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
13.9
|
|
112.1
|
|
4.8
|
|
-6
|
|
-8
|
|
-1
|
|
4
|
|
-9
|
|
-2
|
|
|
Median
|
|
13.6
|
|
112.2
|
|
5.0
|
|
-5
|
|
-8
|
|
-5
|
|
5
|
|
-9
|
|
-3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLB
|
Alliance Bancorp, Inc. of PA(1)
|
|
17.4
|
|
116.0
|
|
5.8
|
|
NA
|
|
1
|
|
-5
|
|
18
|
|
-13
|
|
-3
|
|
|
BLMT
|
BSB Bancorp, Inc. of MA
|
|
14.1
|
|
114.8
|
|
3.0
|
|
-5
|
|
-6
|
|
-4
|
|
19
|
|
-36
|
|
8
|
|
|
CBNK
|
Chicopee Bancorp, Inc. of MA
|
|
15.2
|
|
112.2
|
|
5.1
|
|
-6
|
|
1
|
|
8
|
|
6
|
|
4
|
|
5
|
|
|
COBK
|
Colonial Financial Serv. of NJ(1)
|
|
10.7
|
|
106.0
|
|
5.7
|
|
NA
|
|
-17
|
|
-9
|
|
7
|
|
-14
|
|
-8
|
|
|
GTWN
|
Georgetown Bancorp, Inc. of MA(1)
|
|
14.4
|
|
113.8
|
|
4.3
|
|
NA
|
|
-2
|
|
26
|
|
-6
|
|
-9
|
|
NA
|
|
|
HBNK
|
Hampden Bancorp, Inc. of MA(1)
|
|
13.0
|
|
110.7
|
|
4.9
|
|
NA
|
|
-13
|
|
-13
|
|
-12
|
|
-12
|
|
-4
|
|
|
PEOP
|
Peoples Fed Bancshrs Inc of MA(1)
|
|
18.7
|
|
118.4
|
|
5.4
|
|
NA
|
|
-16
|
|
-6
|
|
2
|
|
-5
|
|
-4
|
|
|
SIFI
|
SI Financial Group, Inc. of CT
|
|
12.7
|
|
112.2
|
|
4.3
|
|
-5
|
|
-9
|
|
3
|
|
4
|
|
-8
|
|
-1
|
|
|
THRD
|
TF Fin. Corp. of Newtown PA
|
|
11.1
|
|
107.7
|
|
6.0
|
|
-5
|
|
-22
|
|
-11
|
|
11
|
|
14
|
|
-19
|
|
|
WEBK
|
Wellesley Bancorp, Inc. of MA
|
|
11.5
|
|
109.6
|
|
3.4
|
|
-10
|
|
8
|
|
0
|
|
-13
|
|
-8
|
|
9
|
|
NA=Change is greater than 100 basis points during the quarter.
(1) As of March 31, 2013.
Source:
SNL Financial LC. and RP
®
Financial, LC. calculations. The information provided in this table has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2013 by RP
®
Financial, LC.
III.16
stability of the Bank’s net interest margin should be enhanced by the infusion of stock proceeds, as the increase in capital will reduce the level of interest rate sensitive liabilities funding Coastway’s assets.
Summary
Based on the above analysis, RP Financial concluded that the Peer Group forms a reasonable basis for determining the pro forma market value of the Bank. Such general characteristics as asset size, capital position, interest-earning asset composition, funding composition, core earnings measures, loan composition, credit quality and exposure to interest rate risk all tend to support the reasonability of the Peer Group from a financial standpoint. Those areas where differences exist will be addressed in the form of valuation adjustments to the extent necessary.
III.17
IV. VALUATION ANALYSIS
Introduction
This chapter presents the valuation analysis and methodology, prepared pursuant to the regulatory valuation guidelines, and valuation adjustments and assumptions used to determine the estimated pro forma market value of the common stock to be issued in conjunction with the Bank’s conversion transaction.
Appraisal Guidelines
The regulatory written appraisal guidelines as reissued by the Office of the Comptroller of the Currency and which are relied upon by the Federal Reserve Board, as well as the Rhode Island Department of Business Regulation and the Federal Deposit Insurance Corporation specify the market value methodology for estimating the pro forma market value of an institution pursuant to a mutual-to-stock conversion. Pursuant to this methodology: (1) a peer group of comparable publicly-traded institutions is selected; (2) a financial and operational comparison of the subject company to the peer group is conducted to discern key differences; and (3) a valuation analysis in which the pro forma market value of the subject company is determined based on the market pricing of the peer group as of the date of valuation, incorporating valuation adjustments for key differences. In addition, the pricing characteristics of recent conversions, both at conversion and in the aftermarket, must be considered.
RP Financial Approach to the Valuation
The valuation analysis herein complies with such regulatory approval guidelines. Accordingly, the valuation incorporates a detailed analysis based on the Peer Group, discussed in Chapter III, which constitutes “fundamental analysis” techniques. Additionally, the valuation incorporates a “technical analysis” of recently completed stock conversions, including closing pricing and aftermarket trading of such offerings. It should be noted that these valuation analyses cannot possibly fully account for all the market forces which impact trading activity and pricing characteristics of a particular stock on a given day.
The pro forma market value determined herein is a preliminary value for the Company’s to-be-issued stock. Throughout the conversion process, RP Financial will: (1) review changes in Coastway’s operations and financial condition; (2) monitor Coastway’s operations and financial condition relative to the Peer Group to identify any fundamental changes; (3) monitor
IV.1
the external factors affecting value including, but not limited to, local and national economic conditions, interest rates, and the stock market environment, including the market for thrift stocks; and (4) monitor pending conversion offerings (including those in the offering phase), both regionally and nationally. If material changes should occur during the conversion process, RP Financial will evaluate if updated valuation reports should be prepared reflecting such changes and their related impact on value, if any. RP Financial will also prepare a final valuation update at the closing of the offering to determine if the prepared valuation analysis and resulting range of value continues to be appropriate.
The appraised value determined herein is based on the current market and operating environment for the Bank and for all thrifts. Subsequent changes in the local and national economy, the legislative and regulatory environment, the stock market, interest rates, and other external forces (such as natural disasters or major world events), which may occur from time to time (often with great unpredictability) may materially impact the market value of all thrift stocks, including Coastway’s value, or Coastway’s value alone. To the extent a change in factors impacting the Bank’s value can be reasonably anticipated and/or quantified, RP Financial has incorporated the estimated impact into the analysis.
Valuation Analysis
A fundamental analysis discussing similarities and differences relative to the Peer Group was presented in Chapter III. The following sections summarize the key differences between the Bank and the Peer Group and how those differences affect the pro forma valuation. Emphasis is placed on the specific strengths and weaknesses of the Bank relative to the Peer Group in such key areas as financial condition, profitability, growth and viability of earnings, asset growth, primary market area, dividends, liquidity of the shares, marketing of the issue, management, and the effect of government regulations and/or regulatory reform. We have also considered the market for thrift stocks, in particular new issues, to assess the impact on value of the Bank coming to market at this time.
1.
Financial Condition
The financial condition of an institution is an important determinant in pro forma market value because investors typically look to such factors as liquidity, equity, asset composition and quality, and funding sources in assessing investment attractiveness. The similarities and differences in the Bank’s and the Peer Groups’ financial strengths are noted as follows:
IV.2
·
Overall A/L Composition
. Loans funded by retail deposits were the primary components of both Coastway’s and the Peer Group’s balance sheets. The Bank’s interest-earning asset composition exhibited a notably higher concentration of loans compared to the Peer Group, a favorable comparative factor. In contrast, Coastway maintained a much larger investment in fixed assets than the Peer Group average, leading to a lower proportion of interest-earning assets/assets (“IEA”) than the Peer Group. Diversification into higher risk and higher yielding types of loans such as commercial, construction and consumer loans was similar for both the Bank and the Peer Group, indicating a higher proportion of residential property secured loans in portfolio for Coastway. In comparison to the Peer Group, the Bank’s interest-earning asset composition provided for a higher yield earned on interest-earning assets and a higher risk weighted assets-to-assets ratio. Despite the higher yield on interest-earning assets, the Bank’s interest income as a percent of assets was essentially equal to the Peer Group ratio due to the lower IEA/assets ratio.
Coastway’s funding composition indicated a higher proportion of deposits and a lower proportion of borrowings than the comparable Peer Group ratios, a more favorable funding based. Notwithstanding this funding structure, the Bank maintained a somewhat higher cost of funds than the Peer Group. The Bank’s lower level of interest-earning assets and higher level of interest-bearing liabilities compared to the Peer Group’s ratios, which resulted in a higher IEA/IBL ratio for the Peer Group compared to the Bank. After factoring in the impact of the net stock proceeds, the Bank’s IEA/IBL ratio will be more in line with the Peer Group’s ratio. On balance, RP Financial concluded that asset/liability composition was a neutral factor in our adjustment for financial condition.
·
Credit Quality.
The Bank’s ratio of REO was modestly higher than the Peer Group average, while total NPAs as a percent of total assets was also higher than the comparable Peer Group average.
Loss reserves as a percent loans were lower for Coastway, while reserve coverage ratios were higher than the Peer Group. Net loan charge-offs were higher for Coastway, while the Bank’s
risk weighted assets-to-assets ratio was higher than the Peer Group.
Coastway reported a similar level of loan diversification into higher risk loans (construction/land, commercial real estate, commercial business) than the Peer Group. The perceived credit risk in Coastway’s loan portfolio was deemed to be higher than the Peer Group based on asset quality ratios. Overall,
RP Financial concluded that credit quality was a moderately negative factor in our adjustment for financial condition.
·
Balance Sheet Liquidity
. A result of the higher loans/assets ratio mentioned above, Coastway maintained a noticeably lower level of cash and investment securities relative to the Peer Group (3.34% of assets versus 29.5% for the Peer Group). Coastway’s liquidity management process and sources of liquidity include the balance of loans held for sale on the balance sheet as a result of the mortgage banking operations. Such funds totaled $19.1 million as of June 30, 2013, or 5.1% of assets. The Bank’s mortgage banking operations place relatively greater liquidity demand on the Bank owning to the potentially significant fluctuations in the funding needs for this business line. The Peer Group operates with a more traditional level of liquidity in line with industry averages. Following the infusion of stock proceeds, the Bank’s cash and investments ratio will increase as the proceeds will be initially deployed into investments. The Bank’s potential borrowing capacity was considered to be more favorable than the Peer Group given the lower level of borrowings
IV.3
currently maintained by Coastway.
Overall, RP Financial concluded that balance sheet liquidity was a slightly negative factor in our adjustment for financial condition.
·
Funding Liabilities
. Coastway’s interest-bearing funding composition reflected a higher concentration of deposits and a lower concentration of borrowings relative to the comparable Peer Group ratios. Coastway’s funding costs were somewhat higher than the Peer Group average, indicating a modestly higher cost market area. The Bank does not maintain balances of wholesale deposits such as brokered or internet deposits. Total interest-bearing liabilities as a percent of assets were higher for the Bank compared to the Peer Group’s ratio, which was attributable to Coastway’s lower equity position. Following the stock offering, the increase in the Bank’s equity position should provide Coastway with a similar ratio of interest-bearing liabilities as a percent of assets. Overall, RP Financial concluded that funding liabilities were a neutral factor in our adjustment for financial condition.
·
Equity
.
The Peer Group currently operates with a higher equity-to-assets ratio than the Bank. Following the stock offering, Coastway’s pro forma equity position is expected to be slightly higher than the Peer Group’s equity-to-assets ratio. The increase in the Bank’s pro forma capital position will result in a somwehat higher leverage potential for the Bank and reduce the level of interest-bearing liabilities utilized to fund assets. At the same time, the Bank’s equity ratio will likely result in a lower ROE.
On balance, RP Financial concluded that equity strength was a slightly positive factor in our adjustment for financial condition.
On balance, Coastway’s pro forma financial condition was comparable to the Peer Group’s after considering the above factors and, thus, no valuation
adjustment was applied for the Bank’s financial condition.
2.
Profitability, Growth and Viability of Earnings
Earnings are a key factor in determining pro forma market value, as the level and risk characteristics of an institution’s earnings stream and the prospects and ability to generate future earnings heavily influence the multiple that the investment community will pay for earnings. The major factors considered in the valuation are described below.
·
Reported Earnings
. For the 12 months ended June 30, 2013, Coastway reported net income of $966,000 or 0.27% of average assets, versus average and median net income of 0.37% and 0.49% of average assets for the Peer Group. Net interest income was similar for both the Bank and the Peer Group at 3.04% of average assets. Coastway recorded higher levels of non-interest operating income, gains on the sale of loans, non-operating expense and operating expenses.
T
he Bank also reported higher funding costs than the Peer Group, along with a higher yield on earning assets. The Bank’s income statement was notably impacted by the mortgage banking operations, which provided substantial levels of gains on sale, but also resulted in a high operating expense ratio. The dependence on mortgage banking revenue represents a higher risk source that traditional net interest income and non-interest income sources.
Non-operating items had only a minimal impact on the Peer Group’s earnings (a gain of 0.12% of average assets), versus a net non-operating expense of 0.12% of average assets for Coastway.
IV.4
Reinvestment and leveraging of stock proceeds into interest-earning assets will serve to increase the Bank’s bottom line income, with the benefit of reinvesting proceeds expected to be somewhat offset by higher operating expenses associated with operating as a publicly-traded company. Loan loss provisions as a percent of average assets were similar for both. On balance, RP Financial concluded that the Bank’s reported earnings were somewhat less favorable than the Peer Group’s earnings, resulting in a moderate downward factor in our adjustment for profitability, growth and viability of earnings.
·
Core Earnings
. As noted above, Coastway’s income statement was minimally impacted by non-operating items, consisting of a 0.12% of average assets expense related to a write down on fixed assets held for sale. The mortgage banking revenue was considered to be part of core earnings given the mortgage banking is a core business line for the Bank and a long-term strategic focus. The Peer Group on average reported a minimal level of net non-operating income, on average. In comparison to the Peer Group, the Bank operates with a similar net interest income ratio, a higher yield/cost spread, a higher operating expense ratio and a higher level of non-interest operating income. Core net income for the 12 months ended June 30, 2013 approximated $1.25 million. The Bank’s ratios for net interest income and operating expenses (inclusive of mortgage banking revenue) translated into an expense coverage ratio that was lower than the Peer Group’s ratio (equal to 0.97x for the Bank and 1.07x for the Peer Group). Similarly, the Bank’s efficiency ratio of 84.47% was less favorable than the Peer Group’s efficiency ratio of 80.9%. Total loan loss provisions had a similar impact on the Bank’s income statement, and as noted above,
the current levels of NPAs and/or the reserve coverage ratios for the Bank will remain as a potential negative factor in future earnings as additional loan loss reserves may be incurred (in comparison to the Peer Group).
In addition, a substantial portion of the Bank’s revenue is generated through the mortgage banking operation. We believe that investors would tend to place a lower valuation multiple on this business line reflecting various risk factors, including the reliance on key individuals to support the business line, susceptibility to competition, the potential impact of changes to the prevailing interest rate environment and economic conditions in the Bank’s market area, regionally and nationally, and volatility in earnings being among the most significant factors. In addition, the income statement remains subject to additional loan loss provisions given the higher level of NPAs (and potential for loan chargeoffs) in comparison to the Peer Group. For these reasons, we believe the Bank’s core profitability is deemed to be moderately less favorable than the Peer Group, on average.
Based on the above discussion, RP Financial concluded that a moderate downward adjustment for core earnings was warranted
in our adjustment for profitability, growth and viability of earnings.
·
Interest Rate Risk
. Quarterly changes in the Bank’s and the Peer Group’s net interest income to average assets ratios indicated that a higher degree of volatility was associated with the Bank’s net interest income ratios. Other measures of interest rate risk, such as equity and IEA/IBL ratios were less favorable for Coastway compared to the Peer Group thereby indicating a higher dependence on the yield-cost spread to sustain net interest income. On a pro forma basis, the infusion of stock proceeds can be expected to provide the Bank with equity-to-assets and IEA/ILB ratios that will be more in line with the Peer Group ratios, as well as enhance the stability of the Bank’s net interest income ratio through the reinvestment of stock
IV.5
proceeds into interest-earning assets. On balance, RP Financial concluded that interest rate risk was a slightly negative factor in our adjustment for profitability, growth and viability of earnings.
·
Credit Risk
. Loan loss provisions were a similar factor in the Peer Group’s most recent 12 month earnings stream (0.23% of average assets versus 0.21% of average assets for Coastway). In terms of future exposure to credit quality related losses, Coastway maintained a notably higher concentration of assets in loans, while the level of lending diversification into higher risk types of loans was similar for both. The risk weighed assets-to-assets ratio was higher for the Bank. Credit quality measures on balance were less favorable for Coastway in terms of NPA ratios and reserve coverage ratios, and net chargeoffs were higher for the Bank. Taking these factors into consideration, RP Financial concluded that credit risk
was a moderately negative factor in our adjustment for profitability, growth and viability of earnings.
·
Earnings Growth Potential
. Coastway’s earnings growth potential can be separated into two distinct areas: the base banking operations and the mortgage banking operations. Regarding the base banking operations, Coastway maintained a somewhat higher interest rate spread and similar level of net interest income in comparison to the Peer Group which would tend to continue to lead to a similar net interest income ratio for the Bank going forward based on the current prevailing interest rate environment. The infusion of stock proceeds will provide Coastway with slightly greater growth potential through leverage than currently maintained by the Peer Group. As discussed previously, the mortgage banking operations are subject to a greater perceived level of fluctuation, given the impacts of market interest rates, the health of the housing sector in general, competitive factors and regulatory changes and oversight. Thus, earnings growth potential of the mortgage banking operations, while potentially significant, also is subject to a greater level of uncertainty which investors will recognize. Overall, earnings growth potential was considered to be a slightly negative factor in our adjustment for profitability, growth and viability of earnings.
·
Return on Equity
. For the most recent 12 month period, the Bank’s ROE on a core earnings basis is higher than the Peer Group’s ROE, based on the Bank’s lower current equity ratio. Following the increase in equity that will be realized from the infusion of net stock proceeds into the Bank, Coastway’s pro forma ROE on a core earnings basis is projected to be lower than the Peer Group’s ratio. Accordingly,
this was a moderately negative factor in the adjustment for profitability, growth and viability of earnings.
On balance, Coastway’s pro forma core earnings strength was considered to be less favorable than the Peer Group and, thus, a moderate downward valuation adjustment
was applied for profitability, growth and viability of earnings.
3.
Asset Growth
Coastway’s assets increased at an annual rate of 10.61% during the most recent 18 month period, while the Peer Group’s assets increased at a lower annual rate of 5.39% on average over the most recent 12 month period. The Bank’s asset growth reflected a constant
IV.6
trend of growth recorded over the past three and one-half fiscal years in an effort to leverage the equity base and increase interest income and overall profitability. Six of the 10 Peer Group companies reported increases in assets over the last 12 months, with loans receivable increasing, on average and cash and investments declining. For Coastway, both loans and cash and investments increased. On a pro forma basis, Coastway’s tangible equity-to-assets ratio is expected to modestly exceed the Peer Group’s tangible equity-to-assets ratio, indicating a moderate amount of additional leverage capacity for the Bank. On balance, we concluded that a slight upward valuation adjustment was warranted for asset growth.
4.
Primary Market Area
The general condition of an institution’s market area has an impact on value as future success is in part dependent upon opportunities for profitable activities in the local markets served.
Coastway serves most of the state of Rhode Island through nine office locations in two counties. The market area served is mainly urban and suburban in nature, with the city of Providence the primary population center. The total population of the two county market area is 787,000, while the greater Providence metropolitan area contains a population of approximately 1.6 million. Income levels are in general higher than national averages, reflecting the more developed market area in terms of population density typically found along the east coast of the United States. The market area region has long experienced a modestly growing economy, with a historical dependence on manufacturing and government-related employment. Similar to many areas of the country, the economy has shifted to a great extent to a service-based economy, including notable employment in health care, financial services, retailing, tourism and gambling.
In the most recent periods the Rhode Island economy has experienced to some degree the national issues related to home value declines, foreclosure rates, or other real estate related problems that are prevalent across most of the county. In addition, key economic factors such as the unemployment rate, demographic trends such as population growth and income levels, all have underperformed the region and nation since the end of the office “recession” in 2009. Rhode Island is one of two states that experienced a population decline since 2010, and also is projected to continue to lose population over the next five years. Available census data indicates that the residents of Rhode Island have an overall higher median age than the nation as a whole, a less attractive demographic parameter for the lending function. In addition, the unemployment rate in the state continues to be well above regional and national rates. The limited economic and demographic performance of the Bank’s market area has resulted in an
IV.7
even more competitive banking environment in which the Bank competes against other community banks as well as institutions with a regional or national presence.
Comparative economic and demographic data for the Peer Group and the Bank is presented in Exhibit III-3. The Peer Group companies also on balance operate in a mix of urban and suburban markets along the east-coast corridor, with seven of the Peer Group markets being in New England and the remaining three in the southern New Jersey/Eastern Pennsylvania market. Thus, the markets served by the Peer Group companies, on average, reflect similar market areas in terms of economic and demographic characteristics. The average headquarters county population base was similar for the Peer Group and the Bank. Projected population growth in the headquarters county for the Peer Group was materially more favorable than the projected decline in population for Providence County in Rhode Island. Per capita income levels were also notably higher for the Peer Group companies versus the Bank’s headquarters county figures. The average and median deposit market shares maintained by the Peer Group companies were higher than the Bank’s market share of deposits in Providence County. Finally, the unemployment rate was somewhat higher than the Peer Group average. Overall, the degree of competition faced by the Peer Group companies was viewed to be similar to that faced by Coastway, while the growth potential in the markets served by the Peer Group companies was viewed to be more favorable. On balance, we concluded that a moderate downward adjustment was appropriate for the Bank’s market area.
5.
Dividends
At this time the Bank has not established a dividend policy. Future declarations of dividends by the Board of Directors will depend upon a number of factors, including investment opportunities, growth objectives, financial condition, profitability, tax considerations, minimum capital requirements, regulatory limitations, stock market characteristics and general economic conditions.
Seven of the 10 Peer Group companies pay regular cash dividends, with implied dividend yields ranging from 1.08% to 1.52%. The average dividend yield on the stocks of the Peer Group institutions equaled 0.85% as of August 9, 2013. As of August 9, 2013, 67% of all publicly-traded thrifts had adopted cash dividend policies (see Exhibit IV-1), exhibiting an average yield of 36.34%. The dividend paying thrifts generally maintain higher than average profitability ratios, facilitating their ability to pay cash dividends.
IV.8
The Bank has not established a definitive dividend policy prior to converting. The Bank will have the capacity to pay a dividend comparable to the Peer Group’s average dividend yield based on pro forma capitalization. On balance, we concluded that no adjustment was warranted for this factor.
6.
Liquidity of the Shares
The Peer Group is by definition composed of companies that are traded in the public markets. All ten of the Peer Group members trade on the NASDAQ. Typically, the number of shares outstanding and market capitalization provides an indication of how much liquidity there will be in a particular stock. The market capitalization of the Peer Group companies ranged from $28.1 million to $132.4 million as of August 9, 2013, with average and median market values of $82.8 million and $83.7 million, respectively. The shares issued and outstanding to the public shareholders of the Peer Group members ranged from 1.9 million to 10.1 million, with average and median shares outstanding of 5.3 million and 5.3 million, respectively. The Bank’s stock offering is expected to have a pro forma market value and number of shares outstanding that will be below the average and median market values indicated for the Peer Group companies. Like the Peer Group companies, Coastway’s stock is expected to be quoted on the NASDAQ Global Market following the stock offering. Overall, we anticipate that the Bank’s public stock will have a less liquid trading market as the Peer Group companies on average given the fewer shares outstanding, lower market capitalization and lower float. Therefore, we have concluded that a slight downward adjustment was necessary for this factor.
7.
Marketing of the Issue
We believe that three separate markets exist for thrift stocks, including those coming to market such as Coastway (1) the after-market for public companies, in which trading activity is regular and investment decisions are made based upon financial condition, earnings, capital, ROE, dividends and future prospects; (2) the new issue market in which converting thrifts are evaluated on the basis of the same factors, but on a pro forma basis without the benefit of prior operations as a fully-converted publicly-held company and stock trading history; and (3) the acquisition market for thrift franchises in Rhode Island. All three of these markets were considered in the valuation of the Bank’s to-be-issued stock.
IV.9
A.
The Public Market
The value of publicly-traded thrift stocks is easily measurable, and is tracked by most investment houses and related organizations. Exhibit IV-1 provides pricing and financial data on all publicly-traded thrifts. In general, thrift stock values react to market stimuli such as interest rates, inflation, perceived industry health, projected rates of economic growth, regulatory issues and stock market conditions in general. Exhibit IV-2 displays historical stock market trends for various indices and includes historical stock price index values for thrifts and commercial banks. Exhibit IV-3 displays historical stock price indices for thrifts only.
In terms of assessing general stock market conditions, the performance of the overall stock market has been mixed in recent quarters. Completion of a tax deal between Congress and the White House sent stocks soaring at the start of 2013. A December employment report that showed hiring remained steady further added to stock market gains in the first week of 2013. Some favorable economic readings and solid fourth quarter earning posted by some “blue chip” stocks helped to sustain the positive trend in stocks into late-January, as the DJIA moved to its highest close since October 2007. The DJIA closed above 14000 at the start of February, after jobs and manufacturing data indicated that the economy’s slow and stable recovery remained on track. Profit taking pulled the DJIA below 14000 the next day of trading, which was followed by a narrow trading range for the broader stock market during the first full week of trading in February. Merger activity helped to propel the DJIA to a fresh five-year high in mid-February, which was followed by a one-day selloff heading into late-February. The selloff was prompted by inconclusive national election results in Italy and the increased likelihood of automatic U.S. government spending cuts kicking in. Stocks rebounded at the end of February and continued to rally through mid-March, as the DJIA closed higher for ten consecutive sessions including eight consecutive record highs. Some favorable reports on the economy and indications from the Federal Reserve that it would continue its bond buying program were factors that contributed to the rally. The rally ended when global markets stumbled on news of a problematic bailout of Cyprus’s financial services sector. Stocks were mixed heading into closing weeks of the first quarter, as investors reacted to the Federal Reserve’s reaffirmation of continued easy monetary policies and some blue chips reporting earnings that fell short of expectations. Growing investor confidence in the U.S. economic recovery helped stocks to close out the first quarter on an upswing.
Stocks pulled back at the start of the second quarter of 2013, as investors reacted to disappointing readings for manufacturing and service sector activity in March and the weaker-
IV.10
than-expected jobs report for March. The release of the Federal Reserve’s most recent policy meeting, which indicated that the Federal Reserve remained committed to easy monetary policy, fueled broader stock market gains heading into mid-April. Mixed first quarter earnings reports and growing concerns of a global economic slowdown provided for an up and down stock market during the second half of April, while a rally in technology stocks lifted the Standard & Poor’s 500 Index (“S&P 500”) to record highs at the end of April. The broader stock market rally continued during the first half of May, as the DJIA closed above 15000 for the first time and the S&P 500 closed at record highs for five consecutive sessions. Factors contributing to the rally were some strong earnings reports coming out of the technology sector, the April employment report showing stronger-than-expected job growth, expectations that stocks would continue to benefit from the Federal Reserve’s stimulus policies and a reading on consumer sentiment rose to its highest level in nearly six years. The broader stock market traded unevenly through the second half of May, as investors reacted to mixed signals from the Federal Reserve on how long its current monetary policy would continue. After closing at a record high on May 28
th
, the DJIA began to pull back at the close of May as some strong economic reports pushed interest rates higher and further fueled the debate on when the Federal Reserve would scale back on its bond buying program.
The up and down stock market continued during the first week of June, as investors reacted to the latest economic data and the potential impact it would have on the Federal Reserve’s stimulus program. After climbing for seven straight months, the longest winning streak since 2009, U.S. equities ran into stiff headwinds in early and mid-June, the last month of the second quarter. Federal Reserve Chairman Ben Bernanke unnerved markets when he commented that the Fed might scale back its monthly asset purchases later this year, possibly ending them in mid-2014. The program has helped keep interest rates low and sustain the momentum propelling stocks. In addition, first-quarter U.S. economic growth was revised downward from earlier estimates, which also offered resistance to advancing share prices. The stock markets responded by declining notably, with the DJIA declining by almost 5% from May 17, 2013 through June 24, 2013. However, the more sluggish pace of economic growth helped calm investors’ fears that the Fed might reduce its ongoing asset-purchase program or begin raising short-term rates more quickly than anticipated. Most areas of the economy measured were weaker than original estimates, with the exception of home construction and government activity. One notable improvement was consumer sentiment, which edged up in June, as U.S. consumers have been benefiting from low inflation, which remains within the Fed’s comfort
IV.11
range. For the remainder of June and through mid-July, stocks trended sharply upward, as economic indicators and comments made by Fed Chairman Bernanke continued to highlight that the economy remains on a path of moderate economic growth and that the Fed will not reduce its stimulus actions until it is clear such actions would not hurt the economic recovery. In mid-July the S&P 500 again touched new highs, also supported by corporate earnings that largely continued to beat consensus earnings estimates.
The rally in the broader stock market continued during the first half of July 2013, as the DJIA closed at multiple new highs in mid-July. Some favorable economic data and assurances from the Federal Reserve that it would continue its easy monetary policies were noteworthy factors that fueled the gains in the broader stock market. The broader stock market traded in a narrow range during the second half of July, as investors digested some mixed second quarter earnings reports and awaited fresh data on the economy. Economic data showing a pick-up in manufacturing activity and new unemployment claims hitting a five-year propelled the DJIA to a new record high at the beginning of August. Following sluggish job growth reflected in the July employment report and lowered sales forecast by some retailer, stocks retreated heading into mid-August.
On August 9, 2013, the DJIA closed at 15425.51, an increase of 17.2% from one year ago and an increase of 17.7% year-to-date, and the NASDAQ Composite Index closed at 3660.11, an increase of 21.3% from one year ago and an increase of 21.3% year-to-date. The S&P 500 closed at 1,691.42 on August 9, 2013, an increase of 20.6% from one year ago and an increase of 18.6% year-to-date.
The market for thrift stocks has also generally shown a positive trend in recent quarters. News that a deal that was reached to avoid the “fiscal cliff” contributed to thrift stock gains at the start of 2013. Thrift stocks traded in a narrow range through mid-January, as investors exercised caution ahead of the fourth quarter earnings season. The narrow trading range for the thrift sector continued through the end of January and the first week of February, amid mixed fourth quarter earnings reports in which a large portion of the thrift sector experienced net interest margin compression during the fourth quarter. Financial shares led the broader stock market higher in mid-February, as investors speculated that merger activity in the financial sector would pick-up in 2013. The growing threat of sequester cuts pushed thrift stocks lower in late-February, as lenders worried that already weak loan demand would be hurt by the across-the-board budget cuts. Thrifts stocks participated in the broader stock market rally that extended into mid-March, with favorable results of the Federal Reserve’s big bank
IV.12
stress tests and a better-than-expected employment report for February contributing to the upswing in thrift stocks. Heading into the second half of March, thrift stocks traded in a narrow range to close out the first quarter as the Federal Reserve announced that it was leaving its target interest rate unchanged and would continue its bond buying program.
Disappointing job growth reflected in the March employment report contributed to a decline in thrift stocks at the start of the second quarter of 2013. Thrift shares spiked higher on news that the Federal Reserve remained committed to its stimulus program and then declined in mid-April, as initial first quarter earnings reports posted by some of the large banks generally showed a continuation of net interest margin erosion. Thrift stocks strengthened in the second half of April, as financial stocks benefitted from favorable reports on the housing sector. The favorable employment report for April provided a boost to thrift stock in early-May, which was followed by a narrow trading into mid-May. Thrift stocks strengthened along with the broader stock heading into the second week of May.
Through mid-May, indications from the Federal Reserve that it remained committed to its bond purchase program contributed to an advance in banking industry stocks. Bank and thrift stocks remained relatively steady for the remainder of May and first half of June, notwithstanding a series of economic reports led investors to sell in broader markets after a series of macroeconomic reports and news showed that a middling economic recovery continued. Thrift stocks also traded within this narrow range through mid-June ahead of the release of the May employment report. In concert with the overall increase in the stock market in general that began in late-June, thrift stocks also began a relatively strong run-up due to several factors. Such factors included the release by federal banking agencies of additional clarity on Basil III, including no substantial negative surprises, and statements by the chairman of the Fed that interest rates would not be raised until it was certain that such actions would not hurt the economy. Furthermore, market analysts believed that, although interest rates had risen notably, over the long-term such increases in interest rates would be beneficial to financial institution earnings. In addition, the May jobs report, as issued on July 5, prompted another round of speculation on whether the Fed would reduce monetary policy stimulus sooner rather than later, which would imply higher interest rates and more positive results for financial institutions. Bank and thrift stocks trended notably higher through the middle of July, in concert with the overall rise in the stock market and as second quarter earnings reports indicated that larger banks continued to beat their earnings estimates for the second quarter. Financial shares led the broader stock market higher heading into the second half of July, as some large banks
IV.13
beat second quarter earnings estimates. Thrift stocks edged lower at the end of July, as investors took some profit following the extended run-up in thrift prices. Some favorable economic data boosted thrift shares at the beginning of August, which was followed by a downturn amid indications from the Federal Reserve that tapering of quantitative easing was becoming more likely. On August 9, 2013, the SNL Index for all publicly-traded thrifts closed at 664.57, an increase of 26.9% from one year ago and an increase of 17.5% year-to-date.
B.
The New Issue Market
In addition to thrift stock market conditions in general, the new issue market for converting thrifts is also an important consideration in determining the Bank’s pro forma market value. The new issue market is separate and distinct from the market for seasoned thrift stocks in that the pricing ratios for converting issues are computed on a pro forma basis, specifically: (1) the numerator and denominator are both impacted by the conversion offering amount, unlike existing stock issues in which price change affects only the numerator; and (2) the pro forma pricing ratio incorporates assumptions regarding source and use of proceeds, effective tax rates, stock plan purchases, etc. which impact pro forma financials, whereas pricing for existing issues are based on reported financials. The distinction between pricing of converting and existing issues is perhaps no clearer than in the case of the price/book (“P/B”) ratio in that the P/B ratio of a converting thrift will typically result in a discount to book value whereas in the current market for existing thrifts the P/B ratio may reflect a premium to book value. Therefore, it is appropriate to also consider the market for new issues, both at the time of the conversion and in the aftermarket.
As shown in Table 4.1, two standard conversions have been completed during the past three months. The standard conversion offerings are considered to be more relevant for Coastway’s pro forma pricing. The average closing pro forma price/tangible book ratio of the two recent standard conversion offerings equaled 59.7%. On average, the two standard conversion offerings reflected price appreciation of 3.3% after the first week of trading. As of August 9, 2013, the two recent standard conversion offerings reflected a 1.5% increase in price on average.
C.
The Acquisition Market
Also considered in the valuation was the potential impact on Coastway’s stock price of recently completed and pending acquisitions of other thrift institutions operating in
IV.14
Table 4.1
Pricing Characteristics and After-Market Trends
Recent Conversions Completed in Last Three Months
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Contribution to
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Insider Purchases
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Pre-Conversion Data
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Offering Information
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Char. Found.
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% Off Incl. Fdn.+Merger Shares
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Institutional Information
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Financial Info.
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Asset Quality
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Excluding Foundation
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% of
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Benefit Plans
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Initial
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Conversion
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Equity/
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NPAs/
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Res.
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Gross
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%
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% of
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Exp./
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Public Off.
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Recog.
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Stk
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Mgmt.&
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Div.
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Institution
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Date
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Ticker
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Assets
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Assets
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Assets
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Cov.
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Proc.
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Offer
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Mid.
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Proc.
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Form
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Excl. Fdn.
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ESOP
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Plans
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Option
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Dirs.
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Yield
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($Mil)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
($Mil.)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)(1)
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarry City S&LA - MO
|
|
7/26/13
|
|
QRRY-OTCBB
|
|
$
|
40
|
|
10.93
|
%
|
1.30
|
%
|
101
|
%
|
$
|
4.1
|
|
100
|
%
|
91
|
%
|
17.6
|
%
|
N.A.
|
|
N.A.
|
|
0.0
|
%
|
4.0
|
%
|
10.0
|
%
|
15.8
|
%
|
0.00
|
%
|
|
Sunnyside Bancorp, Inc. - NY
|
|
7/15/13
|
|
SNNY-OTCQB
|
|
$
|
91
|
|
6.72
|
%
|
0.00
|
%
|
NM
|
|
$
|
7.9
|
|
100
|
%
|
132
|
%
|
9.5
|
%
|
N.A.
|
|
N.A.
|
|
7.0
|
%
|
3.0
|
%
|
10.0
|
%
|
5.6
|
%
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages - Standard Conversions:
|
|
$
|
65
|
|
8.83
|
%
|
0.65
|
%
|
101
|
%
|
$
|
6.0
|
|
100
|
%
|
111
|
%
|
13.6
|
%
|
N.A.
|
|
N.A.
|
|
3.5
|
%
|
3.5
|
%
|
10.0
|
%
|
10.7
|
%
|
0.00
|
%
|
|
Medians - Standard Conversions:
|
|
$
|
65
|
|
8.83
|
%
|
0.65
|
%
|
101
|
%
|
$
|
6.0
|
|
100
|
%
|
111
|
%
|
13.6
|
%
|
N.A.
|
|
N.A.
|
|
3.5
|
%
|
3.5
|
%
|
10.0
|
%
|
10.7
|
%
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages - All Conversions:
|
|
$
|
65
|
|
8.83
|
%
|
0.65
|
%
|
101
|
%
|
$
|
6.0
|
|
100
|
%
|
111
|
%
|
13.6
|
%
|
N.A.
|
|
N.A.
|
|
3.5
|
%
|
3.5
|
%
|
10.0
|
%
|
10.7
|
%
|
0.00
|
%
|
|
Medians - All Conversions:
|
|
$
|
65
|
|
8.83
|
%
|
0.65
|
%
|
101
|
%
|
$
|
6.0
|
|
100
|
%
|
111
|
%
|
13.6
|
%
|
N.A.
|
|
N.A.
|
|
3.5
|
%
|
3.5
|
%
|
10.0
|
%
|
10.7
|
%
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Post-IPO Pricing Trends
|
|
|
|
|
Pro Forma Data
|
|
|
|
Closing Price:
|
|
|
Institutional Information
|
|
Pricing Ratios(2)(5)
|
|
Financial Charac.
|
|
|
|
First
|
|
|
|
After
|
|
|
|
After
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
|
|
|
Core
|
|
|
|
Core
|
|
|
|
Core
|
|
IPO
|
|
Trading
|
|
%
|
|
First
|
|
%
|
|
First
|
|
%
|
|
Thru
|
|
%
|
|
|
Institution
|
|
Date
|
|
Ticker
|
|
P/TB
|
|
P/E
|
|
P/A
|
|
ROA
|
|
TE/A
|
|
ROE
|
|
Price
|
|
Day
|
|
Chge
|
|
Week(3)
|
|
Chge
|
|
Month(4)
|
|
Chge
|
|
8/9/13
|
|
Chge
|
|
|
|
|
|
|
|
|
(%)
|
|
(x)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
($)
|
|
($)
|
|
(%)
|
|
($)
|
|
(%)
|
|
($)
|
|
(%)
|
|
($)
|
|
(%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standard Conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarry City S&LA - MO
|
|
7/26/13
|
|
QRRY-OTCBB
|
|
55.9
|
%
|
15.6
|
x
|
9.4
|
%
|
0.6
|
%
|
16.9
|
%
|
3.4
|
%
|
$
|
10.00
|
|
$
|
10.75
|
|
7.5
|
%
|
$
|
10.20
|
|
2.0
|
%
|
$
|
10.00
|
|
0.0
|
%
|
$
|
10.25
|
|
2.5
|
%
|
|
Sunnyside Bancorp, Inc. - NY
|
|
7/15/13
|
|
SNNY-OTCQB
|
|
63.6
|
%
|
-22.0
|
x
|
8.2
|
%
|
-0.4
|
%
|
12.9
|
%
|
-2.9
|
%
|
$
|
10.00
|
|
$
|
10.50
|
|
5.0
|
%
|
$
|
10.45
|
|
4.5
|
%
|
$
|
10.01
|
|
0.1
|
%
|
$
|
10.04
|
|
0.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages - Standard Conversions:
|
|
59.7
|
%
|
-3.2
|
x
|
8.8
|
%
|
0.1
|
%
|
14.9
|
%
|
0.3
|
%
|
$
|
10.00
|
|
$
|
10.63
|
|
6.3
|
%
|
$
|
10.33
|
|
3.2
|
%
|
$
|
10.01
|
|
0.0
|
%
|
$
|
10.15
|
|
1.5
|
%
|
|
Medians - Standard Conversions:
|
|
59.7
|
%
|
-3.2
|
x
|
8.8
|
%
|
0.1
|
%
|
14.9
|
%
|
0.3
|
%
|
$
|
10.00
|
|
$
|
10.63
|
|
6.3
|
%
|
$
|
10.33
|
|
3.2
|
%
|
$
|
10.01
|
|
0.0
|
%
|
$
|
10.15
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages - All Conversions:
|
|
59.7
|
%
|
-3.2
|
x
|
8.8
|
%
|
0.1
|
%
|
14.9
|
%
|
0.3
|
%
|
$
|
10.00
|
|
$
|
10.63
|
|
6.3
|
%
|
$
|
10.33
|
|
3.2
|
%
|
$
|
10.01
|
|
0.0
|
%
|
$
|
10.15
|
|
1.5
|
%
|
|
Medians - All Conversions:
|
|
59.7
|
%
|
-3.2
|
x
|
8.8
|
%
|
0.1
|
%
|
14.9
|
%
|
0.3
|
%
|
$
|
10.00
|
|
$
|
10.63
|
|
6.3
|
%
|
$
|
10.33
|
|
3.2
|
%
|
$
|
10.01
|
|
0.0
|
%
|
$
|
10.15
|
|
1.5
|
%
|
Note: * - Appraisal performed by RP Financial; BOLD = RP Fin. Did the business plan, “NT” - Not Traded; “NA” - Not Applicable, Not Available; C/S-Cash/Stock.
(1)
As a percent of MHC offering for MHC transactions.
(2)
Does not take into account the adoption of SOP 93-6.
(3)
Latest price if offering is less than one week old.
(4)
Latest price if offering is more than one week but less than one month old.
(5)
Mutual holding company pro forma data on full conversion basis.
(6)
Simultaneously completed acquisition of another financial institution.
(7)
Simultaneously converted to a commercial bank charter.
(8)
Former credit union.
August 9, 2013
IV.15
Rhode Island. As shown in Exhibit IV-4, there have been six Rhode Island thrift acquisitions completed from the beginning of 2002 through August 9, 2013, and there is currently one pending acquisition pending of a Rhode Island savings institution.
To the extent that acquisition speculation may impact the Bank’s offering, we have largely taken this into account in selecting companies for the Peer Group which operate in markets that have experienced a comparable level of acquisition activity as the Bank’s market and, thus, are subject to the same type of acquisition speculation that may influence Coastway’s stock. However, since converting thrifts are subject to a three-year regulatory moratorium from being acquired, acquisition speculation in Coastway’s stock would tend to be less compared to the stocks of the Peer Group companies.
In determining our valuation adjustment for marketing of the issue, we considered trends in both the overall thrift market, the new issue market including the new issue market for thrift conversions and the local acquisition market for thrift stocks. Taking these factors and trends into account, RP Financial concluded that a slight downward adjustment was appropriate in the valuation analysis for purposes of marketing of the issue.
8.
Management
The Bank’s management team appears to have experience and expertise in all of the key areas of the Bank’s operations. Exhibit IV-5 provides summary resumes of the Bank’s Board of Directors and senior management. The Board and senior management have been effective in implementing an operating strategy that can be well managed by the Bank’s present organizational structure. The Bank currently does not have any senior management positions that are vacant.
Similarly, the returns, equity positions and other operating measures of the Peer Group companies are indicative of well-managed financial institutions, which have Boards and management teams that have been effective in implementing competitive operating strategies. Therefore, on balance, we concluded no valuation adjustment relative to the Peer Group was appropriate for this factor.
9.
Effect of Government Regulation and Regulatory Reform
In summary, as a fully-converted regulated institution, Coastway will operate in substantially the same regulatory environment as the Peer Group members — all of whom are adequately capitalized institutions and are operating with no apparent restrictions. Exhibit IV-6
IV.16
reflects the Bank’s pro forma regulatory capital ratios. On balance, no adjustment has been applied for the effect of government regulation and regulatory reform.
Summary of Adjustments
Overall, based on the factors discussed above, we concluded that the Bank’s pro forma market value should reflect the following valuation adjustments relative to the Peer Group:
Table 4.2
Valuation Adjustments
Coastway Community Bank
|
Key Valuation Parameters:
|
|
Valuation Adjustment
|
|
Financial Condition
|
|
No Adjustment
|
|
Profitability, Growth and Viability of Earnings
|
|
Moderate Downward
|
|
Asset Growth
|
|
Slight Upward
|
|
Primary Market Area
|
|
Moderate Downward
|
|
Dividends
|
|
No Adjustment
|
|
Liquidity of the Shares
|
|
Slight Downward
|
|
Marketing of the Issue
|
|
Slight Downward
|
|
Management
|
|
No Adjustment
|
|
Effect of Govt. Regulations and Regulatory Reform
|
|
No Adjustment
|
Valuation Approaches
In applying the accepted valuation methodology originally promulgated by the OCC and adopted by the FRB, i.e., the pro forma market value approach, we considered the three key pricing ratios in valuing the Bank’s to-be-issued stock — price/earnings (“P/E”), price/book (“P/B”), and price/assets (“P/A”) approaches — all performed on a pro forma basis including the effects of the stock proceeds. In computing the pro forma impact of the conversion and the related pricing ratios, we have incorporated the valuation parameters disclosed in the Bank’s prospectus for the effective tax rate, stock benefit plan assumptions, establishment of the foundation, insider purchases and offering expenses (summarized in Exhibits IV-7 and IV-8).
In our estimate of value, we assessed the relationship of the pro forma pricing ratios relative to the Peer Group and recent conversion offerings.
RP Financial’s valuation placed an emphasis on the following:
·
P/E Approach
. The P/E approach is generally the best indicator of long-term value for a stock. Given the similarities between the Bank’s and the Peer Group’s earnings composition and overall financial condition, the P/E approach was carefully
IV.17
considered in this valuation. At the same time, recognizing that (1) the earnings multiples will be evaluated on a pro forma basis for the Bank; and (2) the Peer Group on average has had the opportunity to realize the benefit of reinvesting and leveraging the offering proceeds, we also gave weight to the other valuation approaches.
·
P/B Approach
. P/B ratios have generally served as a useful benchmark in the valuation of thrift stocks, particularly in the context of an initial public offering, as the earnings approach involves assumptions regarding the use of proceeds. RP Financial considered the P/B approach to be a valuable indicator of pro forma value, taking into account the pricing ratios under the P/E and P/A approaches. We have also modified the P/B approach to exclude the impact of intangible assets (i.e., price/tangible book value or “P/TB”), in that the investment community frequently makes this adjustment in its evaluation of this pricing approach.
·
P/A Approach
. P/A ratios are generally a less reliable indicator of market value, as investors typically assign less weight to assets and attribute greater weight to book value and earnings. Furthermore, this approach as set forth in the regulatory valuation guidelines does not take into account the amount of stock purchases funded by deposit withdrawals, thus understating the pro forma P/A ratio. At the same time, the P/A ratio is an indicator of franchise value, and, in the case of highly capitalized institutions, high P/A ratios may limit the investment community’s willingness to pay market multiples for earnings or book value when ROE is expected to be low.
The Bank will adopt “Employers’ Accounting for Employee Stock Ownership Plans” (“ASC 718-40”) which will cause earnings per share computations to be based on shares issued and outstanding excluding unreleased ESOP shares. For purposes of preparing the pro forma pricing analyses, we have reflected all shares issued in the offering, including all ESOP shares, to capture the full dilutive impact, particularly since the ESOP shares are economically dilutive, receive dividends and can be voted. However, we did consider the impact of the adoption of ASC 718-40 in the valuation.
Based on the application of the three valuation approaches, taking into consideration the valuation adjustments discussed above
,
RP Financial concluded that as of August 9, 2013, the pro forma market value of the Bank, inclusive of the shares to be issued to the Foundation, was equal to $37,349,750, or 3,734,975 shares issued at $10.00 per share. Based on the terms of the Foundation, the conversion offering is equal to $36,500,000 at the midpoint of the offering range, equal to 3,650,000 shares at $10.00 per share. The $10.00 per share price was determined by Coastway’s board of directors.
1.
Price-to-Earnings (“P/E”)
. The application of the P/E valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/E multiple to the pro
IV.18
forma earnings base. In attempting to apply this technique, we considered both reported earnings and a recurring earnings base, that is, earnings adjusted to exclude any one-time non-operating items, plus the estimated after-tax earnings benefit of the reinvestment of the net proceeds. The Bank reported net income of $966,000 for the 12 months ended June 30, 2013. Coastway’s income statement for the latest 12 months included a non-operating expense item consisting of a write down of fixed assets held for sale in the amount of $482,000. As shown below, on a tax affected basis, assuming an effective marginal tax rate of 39.5% for the earnings adjustment, the Bank’s core earnings were determined to equal $1,258,000 for the 12 months ended June 30, 2013. (Note: see Exhibit IV-9 for the adjustments applied to the Peer Group’s earnings in the calculation of core earnings).
Table 4.3
Coastway Community Bank
Derivation of Core Earnings, 12 Months Ended June 30, 2013
|
|
|
Amount
|
|
|
|
|
($000)
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
966
|
|
|
Less: Writedown of Fixed Assets Held for Sale
|
|
482
|
|
|
Addback: Tax Effect @39.5%
|
|
(190
|
)
|
|
|
|
|
|
|
Core earnings estimate
|
|
$
|
1,258
|
|
Based on the Bank’s reported and estimated core earnings and incorporating the impact of the pro forma assumptions discussed previously, the Bank’s pro forma reported and core P/E multiples at the $37.3 million midpoint value equaled 52.66 times and 37.32 times, respectively, which provided for premiums of 110.98% and 51.34% relative to the Peer Group’s average reported and core P/E multiples of 24.96 times and 24.66 times, respectively (see Table 4.4). In comparison to the Peer Group’s median reported and core earnings multiples which equaled 27.61 times and 25.78 times, respectively, the Bank’s pro forma reported and core P/E multiples at the midpoint value indicated premiums of 90.73% and 44.76%, respectively. At the top of the super range, the Bank’s reported and core P/E multiples equaled 78.69 times and 53.76 times, respectively. In comparison to the Peer Group’s average reported and core P/E multiples, the Bank’s P/E multiples at the top of the super range reflected premiums of 215.26% and 118.00%, respectively. In comparison to the Peer Group’s median reported and core P/E multiples, the Bank’s P/E multiples at the top of the super range reflected premiums of 185.01% and 108.53%, respectively.
IV.19
Table 4.4
Public Market Pricing Versus Peer Group
Coastway Community Bank of RI and the Comparables
As of August 9, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalization
|
|
Core
|
|
Book
|
|
|
|
|
|
|
|
|
|
|
|
Dividends(4)
|
|
Financial Characteristics(6)
|
|
|
|
|
Price/
|
|
Market
|
|
12 Month
|
|
Value/
|
|
Pricing Ratios(3)
|
|
Amount/
|
|
|
|
Payout
|
|
Total
|
|
Equity/
|
|
Tang. Eq./
|
|
NPAs/
|
|
Reported
|
|
Core
|
|
|
|
|
Share(1)
|
|
Value
|
|
EPS(2)
|
|
Share
|
|
P/E
|
|
P/B
|
|
P/A
|
|
P/TB
|
|
P/Core
|
|
Share
|
|
Yield
|
|
Ratio(5)
|
|
Assets
|
|
Assets
|
|
Assets
|
|
Assets
|
|
ROA
|
|
ROE
|
|
ROA
|
|
ROE
|
|
|
|
|
($)
|
|
($Mil)
|
|
($)
|
|
($)
|
|
(x)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(x)
|
|
($)
|
|
(%)
|
|
(%)
|
|
($Mil)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
(%)
|
|
|
Coastway Community Bank of RI
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supermaximum
|
|
10.00
|
|
49.49
|
|
0.19
|
|
13.88
|
|
78.69
|
|
72.05
|
|
11.87
|
|
72.05
|
|
53.76
|
|
0.00
|
|
0.00
|
|
0.00
|
|
417
|
|
16.48
|
|
16.48
|
|
2.81
|
|
0.15
|
|
0.92
|
|
0.22
|
|
1.34
|
|
|
Maximum
|
|
10.00
|
|
43.00
|
|
0.22
|
|
14.68
|
|
63.99
|
|
68.12
|
|
10.45
|
|
68.12
|
|
44.63
|
|
0.00
|
|
0.00
|
|
0.00
|
|
411
|
|
15.35
|
|
15.35
|
|
2.85
|
|
0.16
|
|
1.06
|
|
0.23
|
|
1.53
|
|
|
Midpoint
|
|
10.00
|
|
37.35
|
|
0.27
|
|
15.61
|
|
52.66
|
|
64.06
|
|
9.19
|
|
64.06
|
|
37.32
|
|
0.00
|
|
0.00
|
|
0.00
|
|
406
|
|
14.35
|
|
14.35
|
|
2.88
|
|
0.17
|
|
1.22
|
|
0.25
|
|
1.72
|
|
|
Minimum
|
|
10.00
|
|
31.70
|
|
0.33
|
|
16.88
|
|
42.46
|
|
59.24
|
|
7.89
|
|
59.24
|
|
30.53
|
|
0.00
|
|
0.00
|
|
0.00
|
|
402
|
|
13.32
|
|
13.32
|
|
2.92
|
|
0.19
|
|
1.40
|
|
0.26
|
|
1.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All Non-MHC Public Companies(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
15.96
|
|
341.01
|
|
0.20
|
|
15.47
|
|
18.71
|
|
103.20
|
|
13.24
|
|
111.52
|
|
22.08
|
|
0.24
|
|
1.55
|
|
26.73
|
|
2489
|
|
13.16
|
|
12.49
|
|
2.86
|
|
0.56
|
|
4.37
|
|
0.01
|
|
1.50
|
|
|
Median
|
|
14.87
|
|
97.19
|
|
0.36
|
|
14.72
|
|
17.34
|
|
95.24
|
|
12.63
|
|
99.25
|
|
21.58
|
|
0.20
|
|
1.34
|
|
6.13
|
|
778
|
|
12.58
|
|
11.43
|
|
2.02
|
|
0.57
|
|
4.28
|
|
0.37
|
|
2.79
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
16.56
|
|
82.78
|
|
0.44
|
|
17.20
|
|
24.96
|
|
96.60
|
|
13.66
|
|
97.37
|
|
24.66
|
|
0.15
|
|
0.85
|
|
29.85
|
|
611
|
|
13.99
|
|
13.91
|
|
1.99
|
|
0.37
|
|
2.66
|
|
0.29
|
|
2.08
|
|
|
Medians
|
|
15.35
|
|
83.70
|
|
0.33
|
|
16.44
|
|
27.61
|
|
95.34
|
|
13.28
|
|
97.92
|
|
25.78
|
|
0.16
|
|
1.08
|
|
33.62
|
|
615
|
|
13.60
|
|
13.55
|
|
1.64
|
|
0.48
|
|
3.15
|
|
0.32
|
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State of RI (7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NFSB
Newport Bancorp, Inc. of RI(7)
|
|
17.20
|
|
60.97
|
|
0.47
|
|
15.22
|
|
NM
|
|
113.01
|
|
14.16
|
|
113.01
|
|
36.60
|
|
0.00
|
|
0.00
|
|
0.00
|
|
431
|
|
12.53
|
|
12.53
|
|
1.13
|
|
0.29
|
|
2.48
|
|
0.36
|
|
3.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ALLB
Alliance Bancorp, Inc. of PA
|
|
14.95
|
|
76.78
|
|
0.58
|
|
15.52
|
|
31.15
|
|
96.33
|
|
16.79
|
|
96.33
|
|
25.78
|
|
0.20
|
|
1.34
|
|
41.67
|
|
457
|
|
17.43
|
|
17.43
|
|
NA
|
|
0.52
|
|
3.03
|
|
0.63
|
|
3.66
|
|
|
BLMT
BSB Bancorp, Inc. of MA
|
|
14.10
|
|
132.37
|
|
0.01
|
|
13.65
|
|
NM
|
|
103.30
|
|
14.56
|
|
103.30
|
|
NM
|
|
0.00
|
|
0.00
|
|
0.00
|
|
909
|
|
14.10
|
|
14.10
|
|
1.67
|
|
0.17
|
|
1.07
|
|
0.01
|
|
0.07
|
|
|
CBNK
Chicopee Bancorp, Inc. of MA
|
|
17.56
|
|
95.33
|
|
0.56
|
|
16.77
|
|
32.52
|
|
104.71
|
|
15.97
|
|
104.71
|
|
31.36
|
|
0.20
|
|
1.14
|
|
37.04
|
|
597
|
|
15.25
|
|
15.25
|
|
0.76
|
|
0.49
|
|
3.26
|
|
0.51
|
|
3.38
|
|
|
COBK
Colonial Financial Serv. of NJ
|
|
14.00
|
|
53.94
|
|
-0.41
|
|
17.66
|
|
NM
|
|
79.28
|
|
8.52
|
|
79.28
|
|
NM
|
|
0.00
|
|
0.00
|
|
NM
|
|
633
|
|
10.75
|
|
10.75
|
|
5.84
|
|
-0.24
|
|
-2.16
|
|
-0.25
|
|
-2.27
|
|
|
GTWN
Georgetown Bancorp, Inc. of MA
|
|
14.87
|
|
28.06
|
|
-0.05
|
|
16.15
|
|
28.06
|
|
92.07
|
|
13.28
|
|
92.07
|
|
NM
|
|
0.16
|
|
1.08
|
|
30.19
|
|
211
|
|
14.42
|
|
14.42
|
|
1.61
|
|
0.47
|
|
3.78
|
|
-0.04
|
|
-0.36
|
|
|
HBNK
Hampden Bancorp, Inc. of MA
|
|
15.75
|
|
88.67
|
|
0.46
|
|
15.41
|
|
27.16
|
|
102.21
|
|
13.28
|
|
102.21
|
|
34.24
|
|
0.24
|
|
1.52
|
|
41.38
|
|
668
|
|
13.00
|
|
13.00
|
|
2.21
|
|
0.51
|
|
3.75
|
|
0.41
|
|
2.98
|
|
|
PEOP
Peoples Fed Bancshrs Inc of MA
|
|
18.35
|
|
118.78
|
|
0.20
|
|
16.72
|
|
NM
|
|
109.75
|
|
20.54
|
|
109.75
|
|
NM
|
|
0.16
|
|
0.87
|
|
69.57
|
|
578
|
|
18.72
|
|
18.72
|
|
0.35
|
|
0.26
|
|
1.35
|
|
0.23
|
|
1.17
|
|
|
SIFI
SI Financial Group, Inc. of CT
|
|
11.13
|
|
112.54
|
|
-0.05
|
|
12.28
|
|
NM
|
|
90.64
|
|
11.86
|
|
93.22
|
|
NM
|
|
0.12
|
|
1.08
|
|
NM
|
|
949
|
|
13.09
|
|
12.77
|
|
1.27
|
|
-0.01
|
|
-0.08
|
|
-0.05
|
|
-0.40
|
|
|
THRD
TF Fin. Corp. of Newtown PA
|
|
27.70
|
|
78.72
|
|
2.24
|
|
29.36
|
|
13.13
|
|
94.35
|
|
11.01
|
|
99.50
|
|
12.37
|
|
0.40
|
|
1.44
|
|
18.96
|
|
715
|
|
11.67
|
|
11.14
|
|
2.24
|
|
0.85
|
|
7.28
|
|
0.90
|
|
7.73
|
|
|
WEBK
Wellesley Bancorp, Inc. of MA
|
|
17.20
|
|
42.62
|
|
0.88
|
|
18.43
|
|
17.73
|
|
93.33
|
|
10.74
|
|
93.33
|
|
19.55
|
|
0.00
|
|
0.00
|
|
0.00
|
|
397
|
|
11.51
|
|
11.51
|
|
NA
|
|
0.65
|
|
5.36
|
|
0.59
|
|
4.86
|
|
(1) Average of High/Low or Bid/Ask price per share.
(2) EPS (estimate core basis) is based on actual trailing 12 month data, adjusted to omit non-operating items on a tax-effected basis, and is shown on a pro forma basis where appropriate.
(3) P/E = Price to earnings; P/B = Price to book; P/A = Price to assets; P/TB = Price to tangible book value; and P/Core = Price to core earnings.
(4) Indicated 12 month dividend, based on last quarterly dividend declared.
(5) Indicated 12 month dividend as a percent of trailing 12 month estimated core earnings.
(6) ROA (return on assets) and ROE (return on equity) are indicated ratios based on trailing 12 month common earnings and average common equity and total assets balances.
(7) Excludes from averages and medians those companies the subject of actual or rumored acquisition activities or unusual operating characteristics.
Source: Corporate reports, offering circulars, and RP Financial, LC. calculations. The information provided in this report has been obtained from sources we believe are reliable, but we cannot guarantee the accuracy or completeness of such information.
Copyright (c) 2013 by RP
®
Financial, LC.
IV.20
2.
Price-to-Book (“P/B”)
. The application of the P/B valuation method requires calculating the Bank’s pro forma market value by applying a valuation P/B ratio, as derived from the Peer Group’s P/B ratio,
to the Bank’s pro forma book value. Based on the $37.3 million midpoint valuation, the Bank’s pro forma P/B and P/TB ratios both equaled 64.06% (see Table 4.4). In comparison to the average P/B and P/TB ratios for the Peer Group of 96.60% and 97.37%, the Bank’s ratios reflected a discount of 33.69% on a P/B basis and a discount of 34.21% on a P/TB basis. In comparison to the Peer Group’s median P/B and P/TB ratios of 95.34% and 97.92%, respectively, the Bank’s pro forma P/B and P/TB ratios at the midpoint value reflected discounts of 32.81% on a P/B basis and 34.58% on a P/TB basis. At the top of the super range, the Bank’s P/B and P/TB ratios both equaled 72.05%. In comparison to the Peer Group’s average P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflected discounts of 25.41% and 26.00%, respectively. In comparison to the Peer Group’s median P/B and P/TB ratios, the Bank’s P/B and P/TB ratios at the top of the super range reflect discounts of 24.43% and 26.42%, respectively. RP Financial considered the resulting premiums or discounts under the P/B approach to be reasonable, given the nature of the calculation of the P/B ratio.
3.
Price-to-Assets (“P/A”)
. The P/A valuation methodology determines market value by applying a valuation P/A ratio to the Bank’s pro forma asset base, conservatively assuming no deposit withdrawals are made to fund stock purchases. In all likelihood there will be deposit withdrawals, which results in understating the pro forma P/A ratio which is computed herein. At the $37.3 million midpoint of the valuation range, the Bank’s value equaled 9.19% of pro forma assets. Comparatively, the Peer Group companies exhibited an average P/A ratio of 13.66%, which implies a discount of 32.72% has been applied to the Bank’s pro forma P/A ratio.
In comparison to the Peer Group’s median P/A ratio of 13.28%, the Bank’s pro forma P/A ratio at the midpoint value reflects a premium of 30.80%.
Comparison to Recent Offerings
As indicated at the beginning of this chapter, RP Financial’s analysis of recent conversion offering pricing characteristics at closing and in the aftermarket has been limited to a “technical” analysis and, thus, the pricing characteristics of recent conversion offerings can not be a primary determinate of value. Particular focus was placed on the P/TB approach in this analysis, since the P/E multiples do not reflect the actual impact of reinvestment and the source of the stock proceeds (i.e., external funds vs. deposit withdrawals). As discussed previously,
IV.21
there have been two recently completed standard conversion offerings, Quarry City Savsings and Loan Association of MO and Sunnyside Bancorp, Inc. of NY. In comparison to the average closing pro forma P/TB ratio of these offerings, 59.7%, the Bank’s P/TB ratio of 64.06% at the midpoint value reflects an implied premium of 7.3%. At the top of the superrange, the Bank’s P/TB ratio of 72.05% reflects an implied premium of 20.7% relative to the average closing pro forma P/TB ratio.
Valuation Conclusion
Based
on the foregoing, it is our opinion that, as of August 9, 2013, the estimated aggregate pro forma market value of the shares to be issued immediately following the conversion, including the shares to be issued to the Foundation equaled $37,349,750 at the midpoint, equal to 3,734,975 shares offered at a per share value of $10.00. Pursuant to conversion guidelines, the 15% valuation range indicates a minimum value of $31,702,290 and a maximum value of $42,997,210. Based on the $10.00 per share offering price determined by the Board, this valuation range equates to total shares outstanding of 3,170,229 at the minimum and 4,299,721 at the maximum. In the event the appraised value is subject to an increase, the aggregate pro forma market value may be increased up to a supermaximum value of $49,491,790 without a resolicitation. Based on the $10.00 per share offering price, the supermaximum value would result in total shares outstanding of 4,949,179.
Based on this valuation range, the conversion stock offering (excluding the shares issued to the Foundation will be as follows: 3,102,500 shares at the minimum, 3,650,000 shares at the midpoint, 4,197,500 shares at the maximum and 4,827,125 shares at the supermaximum of the offering range. These figures translate to offering values as follows: $31,025,000 at the minimum, $36,500,000 at the midpoint, $41,975,000 at the maximum and $48,271,250 at the supermaximum of the offering range. The pro forma valuation calculations relative to the Peer Group are shown in Table 4.4 and are detailed in Exhibit IV-7 and Exhibit IV-8.
IV.22
