Coastway Bancorp, Inc. - FORM 10-Q

Attached files

file	filename
EX-32 - EX-32 - Coastway Bancorp, Inc.	a17-8928_1ex32.htm
EX-31.2 - EX-31.2 - Coastway Bancorp, Inc.	a17-8928_1ex31d2.htm
EX-31.1 - EX-31.1 - Coastway Bancorp, Inc.	a17-8928_1ex31d1.htm

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

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

For the quarterly period ended March 31, 2017

Commission File Number: 001-36263

Coastway Bancorp, Inc.

(Exact name of registrant as specified in its charter)

Maryland		46-4149994
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

One Coastway Blvd, Warwick, Rhode Island		02886
(Address of principal executive offices)		(Zip code)

(401) 330-1600

(Registrant’s telephone number, including area code)

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

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

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

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

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

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

As of May 1, 2017 there were 4,392,441 shares of the issuer’s common stock outstanding- par value $0.01 per share

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COASTWAY BANCORP, INC. and SUBSIDIARY

Index

		Page Number

	PART I - FINANCIAL INFORMATION
Item 1	Financial Statements
	Consolidated Balance Sheets — March 31, 2017 and December 31, 2016 (unaudited)	1
	Consolidated Statements of Net Income and Comprehensive Income -Three months ended March 31, 2017 and 2016 (unaudited)	2
	Consolidated Statement of Changes in Stockholders’ Equity - Three months ended March 31, 2017 (unaudited)	3
	Consolidated Statements of Cash Flows - Three months ended March 31, 2017 and 2016 (unaudited)	4
	Notes to the Unaudited Consolidated Financial Statements	5
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4	Controls and Procedures	39

	PART II - OTHER INFORMATION

Item 1	Legal Proceedings	39
Item 1A	Risk Factors	39
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3	Defaults Upon Senior Securities	40
Item 4	Mine Safety Disclosures	40
Item 5	Other Information	40
Item 6	Exhibits	40
	Signature page	41

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PART I-FINANCIAL INFORMATION

Item 1 - Financial Statements

COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Balance Sheets

(Unaudited)

(Dollars in thousands except per share amounts)	March 31, 2017			December 31, 2016
Assets
Cash and cash equivalents:
Cash and due from banks	$	2,527		$	2,946
Interest-earning deposits	39,275			41,712
Total cash and cash equivalents	41,802			44,658
Federal Home Loan Bank stock, at cost	5,673			6,184
Loans, net of allowance for loan losses of $2,559 and $2,493, respectively	534,086			525,215
Loans held for sale	6,235			23,157
Premises and equipment, net	31,458			31,426
Accrued interest receivable	1,590			1,598
Foreclosed real estate	422			422
Bank-owned life insurance	4,490			4,452
Net deferred tax asset	1,039			925
Other assets	6,185			6,154
Total assets	$	632,980		$	644,191

Liabilities and Stockholders’ Equity
Deposits:
Interest-bearing	$	350,668		$	340,352
Non-interest-bearing	105,982			106,962
Total deposits	456,650			447,314
Borrowed funds	101,250			121,250
Accrued expenses and other liabilities	6,134			7,055
Total liabilities	564,034			575,619

Commitments and contingencies (Note 6)
Stockholders’ equity:
Preferred stock, $0.01 par value; 20,000,000 shares authorized, none issued or outstanding at March 31, 2017 and December 31, 2016	—			—
Common stock, $0.01 par value; 50,000,000 shares authorized; 4,396,941 and 4,403,096 issued and outstanding at March 31, 2017 and December 31, 2016, respectively	44			44
Additional paid-in capital	39,879			40,107
Retained earnings	32,748			32,186
Unearned compensation - Employee Stock Ownership Plan (ESOP)	(3,445		)	(3,485		)
Accumulated other comprehensive loss	(280		)	(280		)
Total stockholders’ equity	68,946			68,572
	$	632,980		$	644,191

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

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COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Statements of Net Income and Comprehensive Income

(Unaudited)

	Three months ended March 31,
(Dollars in thousands, except per share amounts)	2017		2016
Interest income:
Interest and fees on loans	$	5,462	$	4,950
Other interest income	151		73
Total interest income	5,613		5,023
Interest expense:
Interest on deposits	706		486
Interest on borrowed funds	226		144
Total interest expense	932		630
Net interest income	4,681		4,393
Provision for loan losses	60		109
Net interest income after provision for loan losses	4,621		4,284
Non-interest income:
Customer service fees	832		770
Net gain on sales of loans, and other mortgage banking income	818		884
Bank-owned life insurance income	38		32
Other income	59		46
Total non-interest income	1,747		1,732
Non-interest expenses:
Salary and employee benefits	2,959		2,711
Occupancy and equipment	872		816
Data processing	474		400
Professional fees	222		199
Deposit servicing	241		209
Foreclosed real estate	7		16
FDIC insurance assessment	78		97
Advertising	101		47
Other general and administrative	491		456
Total non-interest expenses	5,445		4,951
Income before income taxes	923		1,065
Income tax expense	361		426
Net income and comprehensive income	$	562	$	639

Weighted average common shares outstanding — basic	4,013,967		4,439,846
Weighted average common shares outstanding — diluted	4,031,347		4,440,276

Per share information:
Basic earnings per common share	$	0.14	$	0.14
Diluted earnings per common share	$	0.14	$	0.14

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

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COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Statement of Changes in Stockholders’ Equity

Three months ended March 31, 2017

(Unaudited)

	Common Stock				Additional Paid-in			Retained		Unearned Compensation-			Accumulated Other Comprehensive			Total Stockholders’
	Shares		Amount		Capital			Earnings		ESOP			Loss			Equity
	(Dollars in thousands)
Balance at December 31, 2016	4,403,096		$	44	$	40,107		$	32,186	$	(3,485	)	$	(280	)	$	68,572
Net income	—		—		—			562		—			—			562
Common stock repurchased	(14,700	)	—		(253		)	—		—			—			(253		)
Stock-based compensation, net of awards surrendered	8,545		—		(2		)	—		—			—			(2		)
ESOP shares committed to be allocated (3,959 shares)	—		—		27			—		40			—			67
Balance at March 31, 2017	4,396,941		$	44	$	39,879		$	32,748	$	(3,445	)	$	(280	)	$	68,946

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

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COASTWAY BANCORP, INC. and SUBSIDIARY

Consolidated Statements of Cash Flows

(Unaudited)

	Three months ended March 31,
(Dollars in thousands)	2017			2016
Cash flows from operating activities:
Net income	$	562		$	639
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	60			109
Loans originated for sale	(39,350		)	(33,905		)
Loans sold	57,149			40,978
Gain on sale of mortgage loans, net	(877		)	(798		)
Amortization of deferred loan costs	259			226
Loss on sale of real estate held for sale	—			11
Depreciation and amortization expense	356			320
Income from Bank-owned life insurance	(38		)	(32		)
Deferred income tax expense (benefit)	(114		)	507
ESOP expense	67			50
Stock-based compensation, net of awards surrendered	(2		)	18
Net change in:
Accrued interest receivable	8			(116		)
Other, net	(952		)	1,098
Net cash provided by operating activities	17,128			9,105
Cash flows from investing activities:
Purchase of and increases in certificates of deposit	—			(10		)
Purchase of FHLB stock	—			(317		)
Redemption of FHLB stock	511			100
Loan originations, net of principal payments	(3,992		)	(16,678		)
Purchase of loans from third party originators	(5,198		)	(7,737		)
Proceeds from the sale of real estate held for sale	—			3,294
Purchases of premises and equipment	(388		)	(391		)
Net cash used by investing activities	(9,067		)	(21,739		)
Cash flows from financing activities:
Net increase in deposits	9,336			2,459
Net change in short-term borrowed funds	(20,000		)	5,500
Repurchase of common stock	(253		)	(628		)
Net cash provided (used) by financing activities	(10,917		)	7,331

Net change in cash and cash equivalents	(2,856		)	(5,303		)
Cash and cash equivalents at beginning of period	44,658			18,322
Cash and cash equivalents at end of period	$	41,802		$	13,019
Supplemental cash flow information:
Interest paid on deposits	$	705		$	485
Interest paid on borrowed funds	208			140
Income taxes paid	25			475

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

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements

(1) Basis of Presentation and Consolidation

General information

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

Basis of Presentation

The consolidated financial statements include the accounts of the Corporation and its subsidiary. All significant intercompany transactions have been eliminated.

The unaudited consolidated financial statements of the Corporation presented herein have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and pursuant to the rules of the SEC for quarterly reports on Form 10-Q and Article 8 of Regulation S-X and do not include all of the information and note disclosures required by GAAP for a complete set of financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The results of operations for interim periods are not necessarily indicative of results for the full year or any other interim period. The accompanying unaudited financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2016, included in the Corporation’s annual report on Form 10-K.

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

Stock-Based Compensation

Compensation cost is recognized for stock options and restricted stock awards issued to employees based on the fair value of these awards at the grant date. A Black-Scholes model is utilized to estimate the fair value of stock options, while the market price of the Corporation’s stock at the grant date is utilized for restricted stock awards.

Compensation cost is recognized over the required service period, generally defined as the vesting period. For awards with graded vesting, compensation cost is recognized on a straight-line basis over the requisite service period for the entire award.

Recent Accounting Pronouncements

As an “emerging growth company” as defined in Title 1 of the Jumpstart Our Business Startups (JOBS) Act, the Corporation has elected to use the extended transition period to delay the adoption of new or reissued accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. As of March 31, 2017, there is no significant difference in the comparability of the financial statements as a result of this extended transition period.

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

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

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

In February 2016, the FASB issued ASU 2016-02, Leases, which will require organizations that lease assets — referred to as “lessees” — to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. Under the new guidance, a lessee will be required to recognize right to use assets and lease liabilities for leases with lease terms of more than 12 months. However, unlike current Generally Accepted Accounting Principles (GAAP) — which requires only capital leases to be recognized on the balance sheet — the new ASU will require both types of leases to be recognized on the balance sheet.

The accounting by organizations that own the assets leased by the lessee — also known as lessor accounting — will remain largely unchanged from current GAAP. However, the ASU contains some targeted improvements that are intended to align, where necessary, lessor accounting with the lessee accounting model. The ASU on leases will take effect for public companies for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other organizations, including emerging growth companies, the ASU on leases will take effect for fiscal years beginning after December 15, 2019, and for interim periods within fiscal years beginning after December 15, 2020. We are currently evaluating the impact of adoption of this standard, including identifying contracts that are, or contain, leases, as the lease identification guidance in the new standard is different than the current standard.

On March 30, 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-09, which is intended to improve the accounting for employee share-based payments. The ASU affects all organizations that issue share-based payment awards to their employees. The ASU, Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, simplifies several aspects of the accounting for share-based payment award transactions, including:

· The income tax consequences

· Classification of awards as either equity or liabilities, and

· Classification on the statement of cash flows.

For public companies, the amendments in this ASU are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For private companies and emerging growth companies, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any organization in any interim or annual period. This standard will be effective for the Corporation for the year ended December 31, 2018. The Corporation early adopted the standard as of January 1, 2017, and the impact of adoption was not material. The standard adds volatility in the effective tax rate.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments — Credit Losses, that will significantly change how banks measure and recognize credit impairment for many financial assets from an incurred loss methodology to a current expected credit loss model. The current expected credit loss model will require companies to immediately recognize an estimate of credit losses expected to occur over the remaining life of the financial assets that are in the scope of the standard. The FASB also made targeted amendments to the current impairment model for available-for-sale debt securities. The ASU is effective for public business entities that are SEC filers, for annual and interim periods in fiscal years beginning after December 15, 2019, and for other companies, including emerging growth companies, for interim and annual periods in fiscal years beginning after December 15, 2020. All entities may early adopt the standard for annual and interim periods in fiscal years after December 15, 2018. The standard will be effective for the Corporation on January 1, 2020. We are currently evaluating the impact of adoption of this standard, including different methodologies that may be employed to estimate credit losses, such as loss rate methods, component loss methods, and qualitative factors, as well as additional data gathering that will be needed to adopt the standard. The standard will add new disclosures related to factors that influenced management’s estimate, including current expected credit losses, the changes in those factors, and reasons for the changes as well as the method applied to revert to historical credit loss experience.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

(2) Loans

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

(Dollars in thousands)	March 31, 2017			December 31, 2016
Residential real estate mortgage loans:
1-4 family	$	255,929		$	243,385
Home equity loans and lines of credit	74,369			76,175
Total residential real estate mortgage loans	330,298			319,560

Commercial:
Commercial real estate	135,506			138,946
Commercial business	13,512			13,308
Commercial construction	12,299			10,946
SBA	39,968			39,948
Consumer	1,159			1,165
Total loans	532,742			523,873

Allowance for loan losses	(2,559		)	(2,493		)
Net deferred loan costs	3,903			3,835
Loans, net	$	534,086		$	525,215

Residential one- to four-family loans of $255.9 million at March 31, 2017 and $243.4 million at December 31, 2016 include purchased loans which were individually underwritten based on the Bank’s credit standards, totaling $70.1 million and $67.5 million at March 31, 2017 and December 31, 2016, respectively. During the three months ended March 31, 2017 and 2016, the Bank purchased $5.1 million and $7.6 million of loans at a cost of $5.2 million and $7.7 million, respectively. The loans purchased from third parties are located in New England, primarily Massachusetts.

Loan Segments

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

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

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

SBA — Loans in this segment include commercial loans underwritten using SBA guidelines for the SBA’s 7(a) program and include both guaranteed and unguaranteed portions of the same loans. Currently, under the SBA 7(a) program, loans may qualify for guarantees up to 85% of principal and accrued interest up to a maximum SBA guarantee of $3.75 million per borrower and related entities. The Bank does not treat the SBA guarantee as a substitute for a borrower meeting reasonable credit standards. SBA guarantees are generally sought on loans to borrowers that exhibit minimum capital levels, a short time in business, lower collateral coverage or maximum loan terms beyond the Bank’s normal underwriting criteria. For a number of SBA loans, the Bank has sold portions of certain loans and retains the unguaranteed portion while continuing to service the entire loan. The guaranteed portion of SBA loans in the Bank’s portfolio is not allocated a general reserve because the Bank has not experienced losses on such loans and management expects the guarantees will be effective, if necessary. Guaranteed portions of SBA loans totaled $25.8 million and $25.9 million at March 31, 2017 and December 31, 2016, respectively.

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

Allowance for Loan Losses

Allowance for Loan Loss Methodology

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

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

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segments. Management uses a ten year historical loss period to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; charge-off trends over the past three and five year periods; weighted average risk ratings; loan concentrations; management’s assessment of internal factors; and management’s assessment of external factors such as interest rates, real estate markets and local and national economic factors. There were no changes in the Bank’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended March 31, 2017 and the year ended December 31, 2016.

The Corporation evaluates the need for a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan and the need for a specific allowance include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, the Corporation considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage when evaluating the need for a specific allowance on loans determined to be impaired.

Credit Quality Indicators

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

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

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

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

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

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

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

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

The following table presents the credit risk profile by internally assigned risk rating category at the dates indicated:

	March 31, 2017
	Commercial		Commercial		Commercial
(Dollars in thousands)	Real Estate		Business		Construction		SBA		Total
Pass	$	130,168	$	13,512	$	12,299	$	38,379	$	194,358
Loans rated 6	856		—		—		448		1,304
Loans rated 7	4,482		—		—		1,141		5,623
Loans rated 8	—		—		—		—		—
	$	135,506	$	13,512	$	12,299	$	39,968	$	201,285

	December 31, 2016
	Commercial		Commercial		Commercial
(Dollars in thousands)	Real Estate		Business		Construction		SBA		Total
Pass	$	133,660	$	13,308	$	10,946	$	37,430	$	195,344
Loans rated 6	667		—		—		1,337		2,004
Loans rated 7	4,619		—		—		1,181		5,800
Loans rated 8	—		—		—		—		—
	$	138,946	$	13,308	$	10,946	$	39,948	$	203,148

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Past Due and Non-Accrual Loans

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

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

March 31, 2017

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Past Due > 90 Days and Still Accruing		Loans on Non-accrual
Residential real estate:
1-4 family	$	420	$	704	$	543	$	1,667	$	—	$	3,424
Home equity loans and lines of credit	177		80		110		367		—		720
Commercial real estate	108		—		—		108		—		108
Commercial business	—		—		—		—		—		—
Commercial construction	—		—		—		—		—		—
SBA	17		—		—		17		—		—
Consumer	—		—		—		—		—		—
Total gross loans	$	722	$	784	$	653	$	2,159	$	—	$	4,252

December 31, 2016

(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Past Due > 90 Days and Still Accruing		Loans on Non-accrual
Residential real estate:
1-4 family	$	625	$	587	$	738	$	1,950	$	—	$	3,662
Home equity loans and lines of credit	109		547		491		1,147		—		735
Commercial real estate	—		—		130		130		—		238
Commercial business	—		—		—		—		—		—
Commercial construction	—		—		—		—		—		—
SBA	—		148		18		166		—		18
Consumer	2		—		—		2		—		—
Total gross loans	$	736	$	1,282	$	1,377	$	3,395	$	—	$	4,653

The balance of loans on non-accrual at March 31, 2017 and December 31, 2016 exceeds loans past due, due to a combination of loans that are current, but that have been modified in a troubled debt restructuring and/or loans for which future payments are not reasonably assured.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Impaired Loans

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

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

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

March 31, 2017

(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related allowance
Residential real estate:
1-4 family	$	5,939	$	5,589	$	5,589	$	—	$	—
Home equity loans & lines of credit	1,756		1,736		1,519		217		31
Commercial real estate	4,350		4,350		4,350		—		—
SBA	1,447		1,447		1,447		—		—
Consumer	13		13		—		13		3
Total	$	13,505	$	13,135	$	12,905	$	230	$	34

December 31, 2016

(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans	Recorded investment with no allowance	Recorded investment with allowance	Related allowance
Residential real estate:
1-4 family	$	5,978	5,628	5,493	135	19
Home equity loans & lines of credit	1,369		1,349	1,131	218	31
Commercial real estate	4,487		4,487	4,487	—	—
SBA	1,511		1,493	1,493	—	—
Consumer	13		13	—	13	3
Total	$	13,358	12,970	12,604	366	53

Of the $1.4 million and $1.5 million of impaired SBA loans at March 31, 2017 and at December 31, 2016, respectively, guaranteed portions of such loans amounted to $1.2 million at both March 31, 2017 and December 31, 2016.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

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

	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Residential 1-4 family	$	5,607	$	53	$	4,384	$	36
Home equity loans & lines of credit	1,658		26		1,234		13
Commercial real estate	4,386		48		397		3
SBA	1,466		23		2,017		39
Consumer	13		—		14		—
Total	$	13,130	$	150	$	8,046	$	91

Troubled Debt Restructurings

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan, the Bank grants a concession on the terms, that would not otherwise be considered, as a result of financial difficulties of the borrower. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment or reduction of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. All loans that are modified are reviewed by the Bank to identify if a TDR has occurred. TDRs are included in the impaired loan category and as such, these loans are individually evaluated for impairment and a specific reserve is assigned for the amount of the estimated credit loss. Total TDR loans, included in impaired loans as of March 31, 2017 and December 31, 2016 were $11.1 million and $10.9 million, respectively. No additional funds are committed to be advanced in connection with TDR loans. TDR loans on accrual status amounted to $8.9 million and $8.3 million at March 31, 2017 and December 31, 2016, respectively.

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

	Three Months Ended March 31, 2017
(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Home equity	4	$	399	$	399
Total	4	$	399	$	399

The troubled debt restructurings described above had no impact to the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2017.

Troubled debt restructurings that subsequently defaulted within 12 months of restructuring are as follows during the period indicated:

	Three Months Ended March 31, 2017
(Dollars in thousands)	Number of TDRs that defaulted	Post-modification outstanding recorded investment
Residential 1-4 family	1	$	108
Home equity	1	$	74
Commercial real estate	2	$	4,108
Total	4	$	4,290

The troubled debt restructuring agreements described above resulted in no charge-offs during the three months ended March 31, 2017.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

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

	Three Months Ended March 31, 2016
(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Home equity	1	$	10	$	10
Total	1	$	10	$	10

The troubled debt restructurings described above had no impact to the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2016.

Troubled debt restructuring agreements that subsequently defaulted within 12 months of restructuring are as follows during the period indicated:

	Three Months Ended March 31, 2016
(Dollars in thousands)	Number of TDRs that defaulted	Post-modification outstanding recorded investment
Residential 1-4 family	3	$	669
Total	3	$	669

Troubled debt restructuring agreements described above resulted in a $20,000 charge-off during the three months ended March 31, 2016.

Allowance for loan loss activity

Changes in the allowance for loan losses by segment are presented below:

Three Months Ended March 31, 2017

(Dollars in thousands)	Residential 1-4 family		Home Equity			Commercial Real Estate		Commercial Business		Commercial Construction		SBA		Consumer			Total
Allowance at December 31, 2016	$	1,009	$	541		$	596	$	60	$	51	$	228	$	8		$	2,493
Provision (credit)	24		(9		)	33		4		10		—		(2		)	60
Loans charged-off	—		—			—		—		—		—		—			—
Recoveries	—		1			—		—		—		3		2			6
Allowance at March 31, 2017	$	1,033	$	533		$	629	$	64	$	61	$	231	$	8		$	2,559

Three Months Ended March 31, 2016

(Dollars in thousands)	Residential 1-4 family			Home Equity			Commercial Real Estate		Commercial Business		Commercial Construction		SBA		Consumer			Total
Allowance at December 31, 2015	$	863		$	525		$	503	$	39	$	21	$	234	$	9		$	2,194
Provision (credit)	63			1			24		12		10		3		(4		)	109
Loans charged-off	(20		)	(5		)	—		—		—		—		—			(25		)
Recoveries	—			1			—		—		—		1		3			5
Allowance at March 31, 2016	$	906		$	522		$	527	$	51	$	31	$	238	$	8		$	2,283

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

The allowance for loan losses and loan balances by impaired and non-impaired components are as follows at the dates indicated:

March 31, 2017

(Dollars in thousands)	Residential 1-4 family		Home Equity		Commercial Real Estate		Commercial Business		Commercial Construction		SBA		Consumer		Total
Allowance for impaired loans	$	—	$	31	$	—	$	—	$	—	$	—	$	3	$	34
Allowance for non-impaired loans	1,033		502		629		64		61		231		5		2,525
Total	$	1,033	$	533	$	629	$	64	$	61	$	231	$	8	$	2,559
Impaired loans	$	5,589	$	1,736	$	4,350	$	—	$	—	$	1,447	$	13	$	13,135
Non-impaired loans	250,340		72,633		131,156		13,512		12,299		38,521		1,146		519,607

Total loans	$	255,929	$	74,369	$	135,506	$	13,512	$	12,299	$	39,968	$	1,159	$	532,742

December 31, 2016

(Dollars in thousands)	Residential 1-4 family		Home Equity		Commercial Real Estate		Commercial Business		Commercial Construction		SBA		Consumer		Total
Allowance for impaired loans	$	19	$	31	$	—	$	—	$	—	$	—	$	3	$	53
Allowance for non-impaired loans	990		510		596		60		51		228		5		2,440
Total	$	1,009	$	541	$	596	$	60	$	51	$	228	$	8	$	2,493
Impaired loans	$	5,628	$	1,349	$	4,487	$	—	$	—	$	1,493	$	13	$	12,970
Non-impaired loans	237,757		74,826		134,459		13,308		10,946		38,455		1,152		510,903

Total loans	$	243,385	$	76,175	$	138,946	$	13,308	$	10,946	$	39,948	$	1,165	$	523,873

(3) Employee Benefits

Deferred Compensation Supplemental Executive Plan

The Bank maintains a non-qualified deferred compensation supplemental executive retirement plan (“DCSERP”) with a senior executive. The DCSERP allows the executive to invest all or a portion of the deferred compensation in Corporation Stock, provided that such stock will only be settled in Corporation Stock. The assets invested in bonds, which are held in a Rabbi Trust, related to this Plan totaled $1.2 million at March 31, 2017 and $1.1 million at December 31, 2016, and are included in other assets at fair value in the consolidated balance sheet. The liability for the benefit obligation reported in accrued expenses and other liabilities totaled $1.2 million at March 31, 2017 and $1.1 million at December 31, 2016. Additionally, the Rabbi Trust holds 8,900 shares of Corporation stock at March 31, 2017 and December 31, 2016 which is accounted for at its cost basis of $100,000, which is offset in stockholders’ equity by the benefit obligation of $100,000. Rabbi trust shares are considered outstanding shares for both basic and diluted EPS.

Supplemental Retirement Agreements

The Bank has entered into supplemental retirement agreements (“SERP”) with seven executive officers, which provide for payments upon attaining the retirement age specified in the agreements, generally ages 65-67. The present value of these future payments is accrued over the remaining service or vesting term. Supplemental retirement benefits generally accrue as they are vested; however a termination of employment subsequent to a change in control will result in the vesting of all benefits that would have accrued to the officer’s normal retirement date. During the three months ended March 31, 2017 and 2016, SERP expense totaled $241,000 and $192,000, respectively.

Defined Benefit Pension Plan

Pension expense totaled $8,000 and $5,000 for the three months ended March 31, 2017 and 2016, respectively. The Bank expects to contribute $8,000 during the plan year ending December 31, 2017.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Employee Stock Ownership Plan

The Corporation maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Corporation stock. This plan is a tax-qualified retirement plan for the benefit of all Corporation employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits.

The Corporation granted a loan to the ESOP for the purchase of shares of the Corporation’s common stock at the Conversion date. As of March 31, 2017, the ESOP holds 395,219 shares, or 9% of the common stock outstanding on that date. The loan obtained by the ESOP from the Corporation to purchase common stock is payable annually over 25 years at the prime rate, as published in The Wall Street Journal, which is currently 3.75% per annum at March 31, 2017. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Any cash dividends paid on allocated shares will, at the direction of the Corporation, be credited to the participant accounts and invested in the Investment Fund; be distributed to the participants in proportion with the participants’ stock fund account balance; be distributed to the participants within 90 days of the calendar year in which paid in proportion with the participants’ stock fund account balance; or be used to make payments on the outstanding debt of the ESOP. Cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP then due. If the amount of dividends exceeds the outstanding debt of the ESOP, then, in the sole discretion of the Corporation, cash dividends may be allocated to active participants on a non-discriminatory basis, or be deemed to be general earnings of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

Shares held by the ESOP include the following:

	March 31, 2017
Allocated	47,512
Distributions	(715	)
Committed to be allocated	3,959
Unallocated	344,463
	395,219

The fair value of unallocated shares was approximately $6.1 million at March 31, 2017.

Total expense recognized in connection with the ESOP for the three month period ended March 31, 2017 and 2016 was $67,000 and $50,000, respectively.

(4) Other Stock-Based Compensation

On May 21, 2015, the Coastway Bancorp, Inc. stockholders approved the 2015 Equity Incentive Plan (“EIP”). Types of awards permitted by the EIP include stock options, restricted stock awards, restricted stock units, and performance awards. The number of shares available for issuance under the EIP was 692,885 at December 31, 2015. Stock options under the EIP will generally expire ten years after the date of grant. Unless otherwise determined by the Compensation Committee, awards under the EIP (other than Performance Awards) shall be granted with a vesting rate not exceeding twenty percent per year, with the first installment vesting no earlier than one year after the date of grant. Upon an involuntary termination following a change in control, all stock options, restricted stock awards and units will become fully vested and performance awards will be deemed earned.

In February 2016, the Compensation Committee of the Board of Directors authorized the grant of 91,225 options at a strike price of $12.41 and 39,045 shares of restricted stock to directors and certain key senior executives. The options and the restricted stock both vest over a five year period. The $12.41 fair value of the restricted stock is based on the closing price of the Company’s common stock on the date of the grant. The holders of restricted stock participate fully in rewards of stock ownership of the Company, including voting, and dividend rights when vested. The grant-date fair value of stock options of $2.59 was estimated using the Black-Scholes Option-Pricing Model.

In February 2017, the Compensation Committee of the Board of Directors authorized the grant of 26,155 options at a strike price of $16.40 and 11,228 shares of restricted stock to directors and certain key senior executives. The options and the restricted stock both vest over a five year period. The $16.40 fair value of the restricted stock is based on the closing price of the Company’s common stock on the date of the grant. The holders of restricted stock participate fully in rewards of stock ownership of the Company, including voting, and dividend rights when vested. The grant-date fair value of stock options of $4.11 was estimated using the Black-Scholes Option-Pricing Model.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Other Stock-Based Compensation (continued)

Restricted stock expense for the three month period ended March 31, 2017 and 2016 was $28,000 and $12,000, respectively. At March 31, 2017 and 2016, there was $556,000 and $473,000, respectively, of unrecognized salary and employee benefits cost related to restricted stock. Executive officers forfeited 2,683 shares of restricted stock in February 2017 for tax withholding purposes with a fair value of $44,000.

Stock option expense for the three months ended March 31, 2017 and 2016 was $14,000 and $6,000, respectively. At March 31, 2017 and 2016, there was $288,000 and $231,000, respectively, of unrecognized salary and employee benefits cost related to stock options.

The following presents the assumptions that were used in determining the grant-date fair value of stock options:

	2017 Grant		2016 Grant
Volatility	15.04	%	13.52	%
Forfeiture rate	00.00		00.00
Dividend yield	00.00		00.00
Expected term	8 years		8 years
Risk free interest rate	2.25	%	1.56	%

(5) Earnings per Common Share

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations.

Earnings per common share have been computed as follows for the three months ended March 31, 2017 and 2016:

	2017			2016
(Dollars in thousands except per share amounts)
Net income applicable to common stock	$	562		$	639
Average number of common shares outstanding	4,360,405			4,802,121
Less: Average unallocated ESOP shares	(346,438		)	(362,275		)
Average number of common shares outstanding used to calculate basic earnings per share	4,013,967			4,439,846
Plus: dilutive impact of stock options	8,747			—
dilutive effect unvested restricted stock awards	8,633			430
Average number of common shares outstanding used to calculate basic and fully diluted earnings per common share	4,031,347			4,440,276
Earnings per share — basic	$	0.14		$	0.14
Earnings per share — diluted	$	0.14		$	0.14

Stock options to purchase 26,155 shares at $16.40 per share and 91,225 shares of common stock at $12.41 per share were not considered in computing diluted earnings per share for the three months ended March 31, 2017 and 2016, respectively because the option exercise price was greater than the average market price of the common stock.In November 2016, the Corporation authorized a program to repurchase, from time to time and as business conditions warrant, up to 223,331 shares of the Corporation’s common stock. During the three months ended March 31, 2017, the Corporation repurchased 14,700 shares under this third stock repurchase program, with 106,048 shares remaining to be repurchased under this program.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

(6) Off-Balance Sheet Activities and Mortgage Banking

In the normal course of business, there are outstanding commitments and contingencies which are not reflected in the accompanying consolidated 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:

	March 31,		December 31,
	2017		2016
	(In thousands)
Commitments to originate loans for portfolio	$	27,174	$	18,461
Commitments to originate loans to be sold	31,961		24,307
Commitments to purchase loans from third parties	1,899		4,236
Unfunded commitments under home equity lines of credit	56,467		53,342
Unfunded commitments under commercial lines of credit	15,892		14,730
Unfunded commitments under SBA lines of credit	4,732		4,106
Unfunded commitments under overdraft lines of credit	183		180
Unadvanced funds on construction loans	4,370		5,735

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.

Mortgage Banking

At March 31, 2017, the Bank had $32.0 million of interest rate lock commitments to borrowers and loans held for sale of $6.2 million with $31.8 million of forward commitments for the future delivery of residential mortgage loans. Included in the forward commitments total are open To Be Announced securities (“TBAs”) with a notional amount of $18.8 million, mandatory delivery contracts with a notional amount of $1.5 million, and best efforts contracts with a notional amount of $11.5 million. The Bank has $1.5 million of closed hedge instruments that are not settled at March 31, 2017.

At December 31, 2016, the Bank had $24.3 million of interest rate lock commitments to borrowers and loans held for sale of $23.2 million with $41.9 million of forward commitments for the future delivery of residential mortgage loans. Included in the forward commitments total are open TBAs with a notional amount of $15.2 million, mandatory delivery contracts with a notional amount of $7.4 million, and best efforts contracts with a notional amount of $19.3 million. The Bank had $8.5 million of closed hedge instruments that are not settled at December 31, 2016.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Off-Balance Sheet Activities and Derivatives (continued)

The following table presents the fair values of derivative instruments and forward loan sale commitments in the consolidated balance sheets:

	Assets			Liabilities
	Balance			Balance
	Sheet	Fair		Sheet	Fair
	Location	Value		Location	Value
		(In thousands)
March 31, 2017

Derivative loan commitments
Commitments hedged with best efforts	Other assets	$	130	N/A	$	—
Commitments hedged with TBA	Other assets	478		N/A	—
Total derivative commitments		608		N/A	—

Forward loan sale commitments
Best efforts contracts hedging:
Commitments	N/A	—		Other liabilities	1
Loans held for sale	Other assets	28		N/A	—
Total best efforts contracts		28			1
Mandatory delivery contracts	N/A	—		Other liabilities	—
TBA securities	N/A	—		Other liabilities	121
Total forward loans sale commitments		28			122
Total derivative loan and forward loan sale commitments		$	636		$	122

December 31, 2016

Derivative loan commitments:
Commitments hedged with best efforts	Other assets	$	255	N/A	$	—
Commitments hedged with TBA	Other assets	311		N/A	—
Total derivative commitments		566		N/A	—

Forward loan sale commitments
Best efforts contracts hedging:
Commitments	N/A	—		Other liabilities	125
Loans held for sale	Other assets	77		N/A	—
Total best efforts contracts		77			125
Mandatory delivery contracts	N/A	—		Other liabilities	37
TBA securities	N/A	—		Other liabilities	57
Total forward loan sale commitments		77			219
Total derivative loan and forward loan sale commitments		$	643		$	219

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Off-Balance Sheet Activities and Derivatives (continued)

The following table presents information pertaining to the gains and losses on Bank’s derivative loan commitments not designated as hedging instruments and forward loan sale commitments:

		Three Months Ended March 31,
	Location of Gain/(Loss)	2017			2016
		(In thousands)
Derivative loan commitments	Net gain on sales of loans and other mortgage banking income	$	42		$	550

Best efforts contracts	Net gain (loss) on sales of loans and other mortgage banking income	75			(238		)

Mandatory delivery contracts	Net gain (loss) on sales of loans and other mortgage banking income	37			(8		)

TBA securities	Net gain (loss) on sales of loans and other mortgage banking income	(64		)	(61		)
		$	90		$	243

(7) Fair Value Measurements

The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. The fair value of an asset or liability is the price which a seller would receive in an orderly transaction between market participants (an exit price). Assets and liabilities are placed in a fair value hierarchy based on fair value measurements using three levels of inputs: (Level 1) quoted market prices in active markets for identical assets or liabilities; (Level 2) significant other observable inputs, including quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs such as interest rates and yield curves, volatilities, prepayment speeds, credit risks and default rates which provide a reasonable basis for fair value determination or inputs derived principally from observed market data; (Level 3) significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability. Unobservable inputs must reflect reasonable assumptions that market participants would use in pricing the asset or liability, which are developed on the basis of the best information available under the circumstances.

The Bank has elected the fair value option pursuant to Accounting Standards Codification (“ASC”) 825, “Financial Instruments” for certain closed mortgage loans intended for sale. ASC 825 allows for the irrevocable option to elect fair value accounting for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis that may otherwise not be required to be measured at fair value under other accounting standards. The Bank elected the fair value option for certain residential real estate mortgage loans held for sale pursuant to forward sale commitments in order to better match changes in fair values for the loans with changes in the fair value of the forward loan sale contracts used to economically hedge them. The aggregate fair value of loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $6.2 million, $6.1 million and $164,000 at March 31, 2017. The aggregate fair value of loans held for sale, the contractual balance of loans held for sale and the gain on loans held for sale totaled $23.2 million, $22.7 million and $443,000 at December 31, 2016. The change in fair value of loans held for sale reported as a component of net gains on sale of loans and other mortgage banking income was $(121,000) and $(158,000) for the three months ended March 31, 2017 and 2016, respectively.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Fair Value Measurements (continued)

The following tables summarize significant assets and liabilities carried at fair value and placement in the fair value hierarchy at the dates specified:

	March 31, 2017
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Loans held for sale	$	—	$	6,235	$	—
Derivative loan commitments hedged with best efforts	—		—		130
Derivative loan commitments hedged with TBAs	—		—		478
Best efforts contracts hedging loans held for sale	—		—		28
Liabilities measured on a recurring basis:
Forward loan sale commitments:
Best efforts contracts	—		—		1
TBA securities	—		121		—

	December 31, 2016
(Dollars in thousands)	(Level 1)		(Level 2)		(Level 3)
Assets measured on a recurring basis:
Loans held for sale	$	—	$	23,157	$	—
Derivative loan commitments hedged with best efforts	—		—		255
Derivative loan commitments hedged with TBAs	—		—		311
Best efforts contracts hedging loans held for sale	—		—		77
Mandatory delivery contracts	—		37		—
Liabilities measured on a recurring basis:
Forward loan sale commitments:
Best efforts contracts — hedging commitments	—		—		125
TBA securities	—		57		—
Assets measured on a non-recurring basis:
Impaired loans (collateral dependent)	—		—		558
Foreclosed real estate	—		—		422

The Bank did not have cause to transfer any assets between the fair value measurement levels during the three months ended March 31, 2017 or the year ended December 31, 2016.

Impaired loan balances in the table above represent those collateral dependent impaired loans where management has estimated the credit loss by comparing the loan’s carrying value against the expected realizable fair value of the collateral (appraised value or internal analysis less estimated cost to sell, adjusted as necessary for changes in relevant valuation factors subsequent to the measurement date). Certain inputs used in these assessments, and possible subsequent adjustments, are not always observable, and therefore, collateral dependent impaired loans are categorized as Level 3 within the fair value hierarchy. A specific allowance or partial charge-off is recorded to the collateral dependent impaired loan for the amount of management’s estimated credit loss. There were no impaired loans recorded at fair value at March 31, 2017. The carrying value of impaired loans recorded at fair value was $558,000 net of no charge-offs and $23,000 in specific reserves at December 31, 2016.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Fair Value Measurements (continued)

Real estate acquired by the Bank through foreclosure proceedings or the acceptance of a deed in lieu of foreclosure is classified as foreclosed real estate. When property is acquired, it is generally recorded at the estimated fair value of the property acquired, less estimated costs to sell. The estimated fair value is based on market appraisals and the Bank’s internal analysis. Certain inputs used in appraisals or the Bank’s internal analysis, are not always observable, and therefore, foreclosed real estate may be categorized as Level 3 within the fair value hierarchy. There was no foreclosed real estate carried at fair value at March 31, 2017. There were no losses on foreclosed real estate held at period end for the three months ended March 31, 2017 and 2016.

Derivatives fair value methodology

Fair value changes in mortgage banking derivatives (interest rate lock commitments and commitments to sell fixed-rate residential mortgages) subsequent to inception are estimated using anticipated market prices based on pricing indications provided from syndicate banks and consideration of pull-through and fallout rates. The fair value of the mortgage banking derivatives are considered to be Level 3 assets.

The table below presents for the three months ended March 31, 2017 and 2016, the change in Level 3 assets and liabilities that are measured on a recurring basis:

	Derivative Loan Commitments and Forward Loan Sale Commitments
(Dollars in thousands)	2017			2016
Balance at beginning of period	$	518		$	42
Gains on new commitments during the period	601			375
Gains (losses) arising during the period	7			(15		)
Reclassifications of realized (gains) losses on settled commitments	(490		)	(48		)
Balance at end of period	$	635		$	354

The following tables present additional quantitative information about assets and liabilities measured at fair value on a recurring and non-recurring basis for which the Bank utilized Level 3 inputs (significant unobservable inputs for situations in which there is little, if any, market activity for the asset or liability) to determine fair value:

March 31, 2017

(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Assets measured on a recurring basis:
Derivative loan commitments	$	608	Investor pricing	Pull-through rate	68.2% – 100%
Best efforts contracts — hedging loans held for sale	28		Investor pricing	Pull-through rate	82.5% – 100%
Liabilities measured on a recurring basis:
Best efforts contracts — hedging commitments:	1		Investor pricing	Pull-through rate	82.5% – 100%

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Fair Value Measurements (continued)

December 31, 2016

(Dollars in thousands)	Fair Value		Valuation Technique	Unobservable Input	Unobservable Input Value or Range
Assets measured on a recurring basis:
Derivative commitments	$	566	Investor pricing	Pull-through rate	75.1% – 100%
Best efforts contracts — hedging loans held for sale	77		Investor pricing	Pull-through rate	82.5% – 100%
Liabilities measured on a recurring basis:
Forward loan sale commitments:	125		Investor pricing	Pull-through rate	82.5% – 100%
Best efforts contracts — hedging commitments
Assets measured on a non-recurring basis:
Impaired loans (collateral dependent)	558		Discounted appraisals	Collateral discounts	5 – 30%
Foreclosed real estate	422		Discounted appraisals	Collateral discounts	5 – 30%

Estimated Fair Values of Assets and Liabilities

In addition to disclosures regarding the measurement of assets and liabilities carried at fair value on the balance sheet, the Corporation is also required to disclose fair value information about financial instruments for which it is practicable to estimate that value, whether or not recognized on the balance sheet. In cases where quoted fair values are not available, fair values are based upon estimates using various valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. The following methods and assumptions were used by the Corporation in estimating fair values of its financial instruments.

The following methods and assumptions were used by the Corporation in estimating fair value disclosures:

Cash and cash equivalents — The carrying amounts of cash and cash equivalents approximate fair values based on the short-term nature of the assets.

Federal Home Loan Bank stock — It is not practical to determine the fair value of Federal Home Loan Bank stock due to restrictions placed on its transferability.

Loans, net — For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Loans held for sale — Fair values of loans held for sale are based on prevailing market rates for loans with similar characteristics.

Accrued interest receivable — The carrying amounts of accrued interest receivable approximates fair value.

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.

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Fair Value Measurements (continued)

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.

Accrued interest payable — The carrying amounts of accrued interest payable approximate fair value.

The estimates of fair value of financial instruments were based on information available at March 31, 2017 and December 31, 2016 and are not indicative of the fair market value of those instruments as of the date of this report. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Corporation’s entire holdings of a particular financial instrument. The fair value of the Corporation’s time deposit liabilities do not take into consideration the value of the Corporation’s long-term relationships with depositors, which may have significant value.

Because no active market exists for a portion of the Corporation’s financial instruments, fair value estimates were based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates were based on existing financial instruments without an attempt to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments, including premises and equipment and foreclosed real estate.

The carrying values, estimated fair values and placement in the fair value hierarchy of the Corporation’s financial instruments for which fair value is only disclosed but not recognized on the balance sheet at the dates indicated are summarized as follows:

	March 31, 2017 (unaudited)				Fair value measurement
	Carrying
(Dollars in thousands)	Amount		Fair Value		Level 1 inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:
Cash and cash equivalents	$	41,802	$	41,802	$	41,802	$	—	$	—
Loans, net	534,086		534,666		—		—		534,666
Loans held for sale	6,235		6,235		—		6,235		—
FHLB stock	5,673		N/A		N/A		N/A		N/A
Accrued interest receivable	1,590		1,590		—		—		1,590
Financial liabilities:
Non-certificate accounts	291,097		291,097		291,097		—		—
Certificate accounts	165,553		166,111		—		166,111		—
Borrowed funds	101,250		101,064		—		101,064		—
Accounts interest payable	59		59		—		59		—

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COASTWAY BANCORP, INC. AND SUBSIDIARY

Notes to the Unaudited Consolidated Financial Statements (continued)

Fair Value Measurements (continued)

	December 31, 2016				Fair value measurement
(Dollars in thousands)	Carrying Amount		Fair Value		Level 1 inputs		Level 2 Inputs		Level 3 Inputs
Financial assets:
Cash and cash equivalents	$	44,658	$	44,658	$	44,658	$	—	$	—
Loans, net	525,215		525,822		—		—		525,822
Loans held for sale	23,157		23,157		—		23,157		—
FHLB stock	6,184		N/A		N/A		N/A		N/A
Accrued interest receivable	1,598		1,598		—		—		1,598
Financial liabilities:
Non-certificate accounts	284,430		284,430		284,430		—		—
Certificate accounts	162,884		163,145		—		163,145		—
Borrowed funds	121,250		121,053		—		121,053		—
Accrued interest payable	40		40		—		40		—

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Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis should be read in conjunction with the Corporation’s (also referred to herein as, “Company’s” “us,” “we” or “our”) consolidated financial statements and notes thereto contained in this report and the Corporation’s 2016 audited consolidated financial statements.

Special Note Regarding Forward-Looking Statements

This report contains certain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements concerning plans, objectives, future events or performance and assumptions and other statements that are other than statements of historical fact. Forward-looking statements may be identified by reference to a future period or periods or by use of forward-looking terminology such as “anticipates,” “believes,” “expects,” “intends,” “may,” “plans,” “pursue,” “views” and similar terms or expressions. Various statements contained in Item 2 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” including, but not limited to, statements related to management’s views on the banking environment and the economy, competition and market expansion opportunities, the interest rate environment, credit risk and the level of future non-performing assets and charge-offs, potential asset and deposit growth, future non-interest expenditures and non-interest income growth, and borrowing capacity are forward-looking statements. The Corporation wishes to caution readers that such forward-looking statements reflect numerous assumptions and involve a number of risks and uncertainties that may adversely affect the Corporation’s future results. The following important factors, among others, could cause the Corporation’s results for subsequent periods to differ materially from those expressed in any forward-looking statement made herein: (i) changes in interest rates could negatively impact net interest income; (ii) changes in the business cycle and downturns in the local, regional or national economies, including deterioration in the local real estate market, could negatively impact credit and/or asset quality and result in credit losses and increases in the Corporation’s allowance for loan losses and/or valuations of foreclosed properties; (iii) changes in consumer spending could negatively impact the Corporation’s credit quality and financial results; (iv) increasing competition from larger regional and out-of-state banking organizations as well as non-bank providers of various financial services could adversely affect the Corporation’s competitive position within its market area and reduce demand for the Corporation’s products and services; (v) deterioration of securities markets could adversely affect the value or credit quality of the Corporation’s assets and the availability of funding sources necessary to meet the Corporation’s liquidity needs; (vi) changes in technology could adversely impact the Corporation’s operations and increase technology-related expenditures; (vii) increases in employee compensation and benefit expenses and other non-interest expenses could adversely affect the Corporation’s financial results; (viii) changes in laws and regulations that apply to the Corporation’s business and operations, including without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Jumpstart Our Business Startups Act (the “JOBS Act”) and the additional regulations that will be forthcoming as a result thereof, could adversely affect the Corporation’s business environment, operations and financial results; (ix) changes in accounting standards, policies and practices, as may be adopted or established by the regulatory agencies, the Financial Accounting Standards Board (the “FASB”) or the Public Company Accounting Oversight Board (“PCAOB”) could negatively impact the Corporation’s financial results; (x) our ability to enter new markets successfully and capitalize on growth opportunities; (xi) future regulatory compliance costs, including any increase caused by new regulations imposed by the Consumer Finance Protection Bureau; and (xii) some or all of the risks and uncertainties described in “Risk Factors” of the Corporation’s annual report on Form 10-K could be realized, which could have a material adverse effect on the Corporation’s business, financial condition and results of operation. Therefore, the Corporation cautions readers not to place undue reliance on any such forward-looking information and statements.

Accounting Policies/Critical Accounting Estimates

As discussed in the 2016 audited consolidated financial statements included in the Corporation’s annual report on Form 10-K, the most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, and the valuation of loans held for sale, mortgage banking derivatives and commitments to sell fixed—rate residential mortgages. The Corporation has not changed its significant accounting and reporting policies from those disclosed in its 2016 audited consolidated financial statements.

Overview

Coastway Bancorp, Inc. is a Maryland corporation and owns 100% of the common stock of Coastway Community Bank. On January 14, 2014, we completed our initial public offering (“IPO”) of common stock in connection with the mutual-to-stock conversion of Coastway Bancorp, MHC, selling 4,827,125 shares of common stock at $10.00 per share (contributing $300,000 in cash and 122,054 shares of common stock to Coastway Cares Charitable Foundation II) and raising $48.3 million of gross proceeds.

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The Corporation’s earnings are largely dependent on net interest income which is the difference between interest earned on loans, investments and cash and cash equivalents, and the cost of funding (primarily deposits and borrowed funds). The re-pricing frequency of the Corporation’s assets and liabilities are not identical, and therefore subject the Corporation to the risk of adverse changes in interest rates. Historically, our interest-earning assets had re-priced more quickly than our interest-bearing liabilities, which make us vulnerable to decreases in interest rates. Due to the growth in the fixed-rate one- to four-family residential loan portfolio, coupled with the increase in short-term borrowed funds, our interest-bearing liabilities may re-price more quickly than our interest-earning assets in the first one to two years in an increasing interest rate environment, and then revert back to interest-earning assets re-pricing more quickly than our interest-bearing liabilities thereafter. The Corporation’s earnings are also dependent on the net gains on sales of loans, and other mortgage banking income, which is volatile. When interest rates rise, the demand for mortgage loans tends to fall and may reduce the number of loans we can originate for sale. Weak or deteriorating economic conditions also tend to reduce loan demand. The Corporation’s operating expenses are high as a percentage of net interest income and non-interest income, due to prior branch growth and increase in personnel as we positioned the Bank for future growth.

Net income was $562,000 for the three months ended March 31, 2017 as compared to net income of $639,000 for the three months ended March 31, 2016. The decrease in earnings for the three months ended March 31, 2017 as compared to the same period in 2016 was impacted by an increase of $494,000 in non-interest expense. The $494,000 increase in non-interest expense was primarily due to an increase of $248,000 in salary and employee benefits, a $56,000 increase in occupancy and equipment costs, a $74,000 increase in data processing costs and a $54,000 increase in advertising costs. The $248,000 increase in salary and employee benefits expense for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to an increase of 10 full time equivalent employees (FTEs), a $50,000 increase in SERP expense, general merit increases, and $38,000 in stock-based compensation related to awards made under our 2015 Equity Incentive Plan and our ESOP. Occupancy and equipment expense increased $56,000 primarily due to increased snow removal and landscaping costs. Data processing costs increased $74,000 due to increased software expenses as well as cost of service increases. The increase in non-interest expense was partially offset by a $288,000 increase in net interest income, primarily due to growth in loan interest income of $512,000, partially offset by an increase in deposit interest expense of $220,000 due to growth in certificates of deposit. During the three months ended March 31, 2017 as compared to the three months ended March 31, 2016, we recorded a decrease in the provision for loan losses of $49,000, and had an increase in total non-interest income of $15,000, and a decrease in income tax expense of $65,000. The $15,000 increase in non-interest income was primarily due to an increase of $62,000 in customer service fees, a $6,000 increase in bank owned life insurance income, and an increase of $13,000 in other income, partially offset by a decrease of $66,000 in net gains on sales of loans, and other mortgage banking income for the three months ended March 31, 2017 as compared to the same period in 2016. The decrease in income tax expense was primarily due to decreased pre-tax income.

Comparison of Financial Condition at March 31, 2017 and December 31, 2016

Assets. Our total assets decreased $11.2 million, or 1.7%, to $633.0 million at March 31, 2017 from $644.2 million at December 31, 2016 primarily due to a decline of $16.9 million in loans held for sale as loan sales outpaced loans originated for sale. Total loans (excluding loans held for sale) increased $8.9 million, or 1.7%, to $532.7 million at March 31, 2017 from $523.9 million at December 31, 2016. The increase in total loans was primarily due to an increase in residential one- to four-family loans of $12.5 million, or 5.2%, to $255.9 million at March 31, 2017 from $243.4 million at December 31, 2016. Residential one-to four-family loans increased due to purchases of $5.1 million of loans at a purchase price of $5.2 million from third parties as well as organic loan growth. Commercial real estate loans decreased $3.4 million, or 2.4% to $135.5 million at March 31, 2017 as compared to $138.9 million at December 31, 2016. Commercial construction loans increased $1.4 million, or 12.3% to $12.3 million at March 31, 2017. Cash and cash equivalents declined $2.9 million during the three months ended March 31, 2017 due to an inflow of deposits on December 31, 2016 based on the holiday weekend.

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Loans. A summary of the balances of loans are as follows:

	March 31, 2017					December 31, 2016
(Dollars in thousands)	Amount			Percent		Amount			Percent
Residential real estate:
1-4 family	$	255,929		48.04	%	$	243,385		46.46	%
Home equity loans and lines of credit	74,369			13.96		76,175			14.54
Commercial real estate	135,506			25.43		138,946			26.52
Commercial business	13,512			2.54		13,308			2.54
Commercial construction	12,299			2.31		10,946			2.09
SBA loans	39,968			7.50		39,948			7.63
Consumer	1,159			0.22		1,165			0.22

Total loans	532,742			100.00		523,873			100.00
Net deferred loan costs	3,903					3,835
Allowance for loan losses	(2,559		)			(2,493		)
Total loans, net	$	534,086				$	525,215

Deposits. Our primary source of funds is retail deposits held by individuals and businesses within our market area. Deposits increased $9.3 million, or 2.1%, to $456.7 million at March 31, 2017 from $447.3 million at December 31, 2016. The increase in deposits was a result of an increase of $3.8 million or 3.6%, in savings and interest bearing deposit accounts, an increase of $3.7 million, or 5.3% in money market accounts, and an increase of $2.7 million, or 1.6% in certificates of deposit accounts. The increase in certificates of deposit was primarily in the five-year maturity category. Non-interest bearing demand deposits decreased $1.0 million, or 0.9% from $107.0 million at December 31, 2016 to $106.0 million at March 31, 2017.

The following table sets forth the deposit balances by certain categories at the dates indicated and the percentage of each category to total deposits.

	March 31, 2017				December 31, 2016
(Dollars in thousands)	Amount		Percent		Amount		Percent
Non-interest bearing demand deposits	$	105,982	23.21	%	$	106,962	23.91	%
Money market accounts	74,175		16.24		70,462		15.75
Savings and interest bearing demand deposit accounts	109,503		23.98		105,675		23.63
Club accounts	1,437		0.32		1,331		0.30
Total transaction accounts	291,097		63.75		284,430		63.59
Certificates of deposit	165,553		36.25		162,884		36.41
Total deposits	$	456,650	100.00	%	$	447,314	100.00	%

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Borrowed Funds. We utilize borrowings from the Federal Home Loan Bank of Boston (“FHLBB”) as an alternate funding source. Borrowed funds at March 31, 2017 totaled $101.3 million as compared to $121.3 million at December 31, 2016, a decrease of $20.0 million, or 16.5%. Borrowed funds at March 31, 2017 were comprised of $99.5 million of short-term advances at a weighted average rate of 1.00% as compared to short-term advances of $119.5 million at December 31, 2016 at a weighted average rate of 0.74%. The decrease in overnight advances during the three months ended March 31, 2017 was due to the reduction in loans held for sale. Long-term FHLBB advances totaled $1.8 million at March 31, 2017 and December 31, 2016, were borrowed at no cost under the FHLBB’s Jobs for New England Program, and mature in 2021.

Total Stockholders’ Equity. Total stockholders’ equity increased to $68.9 million at March 31, 2017 from $68.6 million at December 31, 2016. The increase in stockholders’ equity was due to net income of $562,000, and $67,000 of ESOP shares committed to be allocated, partially offset by stock repurchases of $253,000.

Nonperforming Assets

Loans on which the accrual of interest has been discontinued are designated as non-performing loans. Accrual of interest on loans is generally discontinued when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is performing. When a loan is placed on non-accrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans is applied against principal or interest or is recognized in income on a cash basis, until qualifying for return to accrual. Generally, loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms for a reasonable period of time, typically a minimum of six months, and future payments are reasonably assured.

Loans are classified as troubled debt restructured loans when certain modifications are made to the loan terms and concessions are granted to the borrowers due to financial difficulty experienced by those borrowers. The modifications of the terms of such loans were one of the following: a reduction of the stated interest rate of the loan for some period of time, an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk, or an extension of time to make payments with the delinquent payment added to the principal of the loan. Loans on nonaccrual status at the date of modification are initially classified as non-accruing troubled debt restructurings. Troubled debt restructured loans may be returned to accrual status after a period of satisfactory and reasonable future payment performance under the terms of the restructuring. Satisfactory payment performance is generally six months of current payments.

Non-performing loans decreased to $4.3 million, or 0.80% of total loans at March 31, 2017, from $4.7 million, or 0.89% of total loans, at December 31, 2016 primarily due to a $238,000 decrease in non-performing one- to four-family residential loans. A restructured residential one- to four-family loan with a balance of $213,000 was moved to performing status during the three months ended March 31, 2017 due to satisfactory payment performance, as well as a payoff of a $130,000 commercial real estate loan. Foreclosed real estate consists of property acquired through formal foreclosure or the acceptance of a deed in lieu of foreclosure, and is recorded at fair value less costs to sell. Foreclosed real estate was $422,000 at both March 31, 2017 and December 31, 2016.

Non-performing assets are comprised of non-performing loans, and foreclosed real estate. The designation of a loan or other asset as non-performing does not necessarily indicate that loan principal and interest will ultimately be uncollectible. However, management recognizes the greater risk characteristics of these assets and therefore considers the potential risk of loss on assets included in this category in evaluating the adequacy of the allowance for loan losses. Despite prudent loan underwriting, adverse changes within the Bank’s market area, or deterioration in local, regional or national economic conditions, could negatively impact the Bank’s level of non-performing loans and assets in the future.

Non-performing assets decreased $401,000 during the three months ended March 31, 2017 from $5.1 million at December 31, 2016 to $4.7 million at March 31, 2017 due to the decrease in non-performing loans discussed above.

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The table below sets forth the amounts and categories of our nonperforming assets at the dates indicated. For the dates presented, there were no loans delinquent 90 days or more and still accruing.

(Dollars in thousands)	March 31, 2017			December 31, 2016
Nonaccrual loans:
Residential real estate mortgage loans:
1-4 family	$	1,759		$	1,629
Home equity loans and lines of credit	315			316
Commercial real estate loans	—			130
Commercial business loans	—			—
SBA loans	—			18
Commercial construction loans	—			—
Consumer loans	—			—
Total nonaccrual loans	2,074			2,093
Non-accruing troubled debt restructured loans:
Residential real estate mortgage loans:
1-4 family	1,665			2,033
Home equity loans and lines of credit	405			419
Commercial real estate loans	108			108
Commercial business loans	—			—
SBA loans	—			—
Commercial construction loans	—			—
Consumer loans	—			—
Total non-accruing troubled debt restructured loans	2,178			2,560
Total nonperforming loans	4,252			4,653
Foreclosed real estate:
Residential real estate mortgage loans:
1-4 family	—			—
Home equity loans and lines of credit	—			—
Commercial loans	—			—
Commercial business loans	—			—
SBA loans	422			422
Commercial construction loans	—			—
Consumer loans	—			—
Total foreclosed real estate	422			422
Total nonperforming assets	$	4,674		$	5,075

Total accruing troubled debt restructured loans	$	8,884		$	8,316
Delinquent loans 60 — 89 days past due	$	784		$	1,282
Ratios:
Loans 60-89 days past due to total loans	0.15		%	0.24		%
Non-performing loans to total loans	0.80		%	0.89		%
Non-performing assets to total assets	0.74		%	0.79		%

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For the three months ended March 31, 2017 and 2016, and for the year ended December 31, 2016, gross interest income which would have been recorded had the non-performing loans been current in accordance with their original terms amounted to $52,000, $75,000 and $203,000, respectively. The amount that was included in interest income on such loans totaled $46,000, $43,000 and $135,000 for the three months ended March 31, 2017 and 2016, and the year ended December 31, 2016, respectively.

Asset Quality

Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard”, “doubtful”, or “loss”. An asset is “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses present to make collection or liquidation in full on the basis of currently existing facts, conditions, and values, “highly questionable and improbable”. Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.

In accordance with our loan policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of emerging financial weaknesses even though the loan is currently performing as agreed, or if the loan possesses weaknesses although currently performing. If a loan deteriorates in asset quality the classification is changed to “special mention”, “substandard” “doubtful” or “loss” depending on the circumstances and the evaluation. Based on this review, we had classified or held as special mention the following loans as of the date indicated:

(Dollars in thousands)	March 31, 2017		December 31, 2016
Special mention	$	1,304	$	2,004
Substandard	5,623		5,800
Doubtful	—		—
Loss	—		—
Total classified and special mention loans	$	6,927	$	7,804

The level of classified and special mention loans decreased by $877,000 to $6.9 million at March 31, 2017 from $7.8 million at December 31, 2016 principally due to four loans upgraded to pass rated loans which were previously classified as “special mention”, as well as two substandard loans totaling $148,000 which were paid off, partially offset by one loan of $265,000 downgraded to “special mention”.

Allowance for Loan Losses

The allowance for loan losses is the amount necessary to reflect probable incurred losses in the portfolio. The Corporation evaluates the adequacy of the allowance for loan losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.

The Corporation’s methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the portfolio. Although the Corporation determines the amount of each element of the allowance separately, the entire allowance is available for the entire portfolio.

The Corporation identifies loans that may need to be charged off by reviewing delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value could result in a charge-off of the loan or the portion of the loan that was impaired.

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Among other factors, the Corporation considers current general economic conditions, including current housing price depreciation, in determining the appropriateness of the allowance for loan losses for the Corporation’s residential real estate portfolio. The Corporation uses evidence obtained from its own loan portfolio, including loss history, as well as published housing data in its local markets from third party sources believed to be reliable as a basis for assumptions about the impact of housing depreciation.

Substantially all of the Corporation’s loans are secured by collateral. Loans 90 days past due or on non-accrual as well as TDRs are evaluated for impairment and specific allowances are established. Typically for a non-performing impaired real estate loan, the value of the underlying collateral is estimated using an independent appraisal, adjusted for property specific conditions and other factors, and related specific reserves are adjusted on a quarterly basis. If a non-performing impaired real estate loan is in the process of foreclosure, and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, a new appraisal may be ordered. Any shortfall would result in immediately charging off the portion of the loan that was impaired.

The general component of the allowance for loan losses is established for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, has not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category (segments) and assigning allowance percentages based on a ten year historical loss period to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; charge-off trends over the past three year period; weighted average risk ratings; loan concentrations; 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. Although the allowance for loan losses is allocated to various portfolio categories, it is general in nature and available for the loan portfolio in its entirety. The allowance may be adjusted for significant factors that in management’s judgment, affect the collectability of the portfolio as of the evaluation date. The applied loss factors are reevaluated quarterly to ensure their relevance in the current and overall economic environment and in relation to trends in the loan portfolio.

Despite prudent loan underwriting, adverse changes within the Corporation’s market area, or further deterioration in the local, regional or national economic conditions including a decline in real estate market values in Rhode Island, an increase in interest rates, as well as bank regulatory examination and/or independent loan review results could negatively impact the Corporation’s level of allowance for loan losses and non-performing assets in the future.

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The following table summarizes the activity in the allowance for loan losses for the periods indicated:

	Three months ended March 31,
(Dollars in thousands)	2017			2016
Balance at beginning of period	$	2,493		$	2,194

Provision for loan losses	60			109

Charge-offs:
Residential 1-4 family	—			(20		)
Home equity loans and lines of credit	—			(5		)
Commercial real estate loans	—			—
Commercial business loans	—			—
SBA	—			—
Commercial construction	—			—
Consumer	—			—
Total charge-offs	—			(25		)
Recoveries on charged-off loans
Residential 1-4 family	—			—
Home equity loans and lines of credit	1			1
Commercial real estate loans	—			—
Commercial business loans	—			—
SBA	3			1
Commercial construction	—			—
Consumer	2			3
Total recoveries	6			5

Net (charge-offs) recoveries	6			(20		)
Balance at end of period	2,559			$	2,283
Annualized net loans charge-offs to average loans outstanding	0.00		%	0.02		%
Allowance for loan losses to non-performing loans at end of period	60.18		%	42.84		%
Allowance for loan losses to total loans at end of period	0.48		%	0.47		%

The allowance reflects management’s estimate of loan loss reserves necessary to support the level of credit risk inherent in the portfolio during the periods. Refer to the Corporation’s annual report on Form 10-K for additional information regarding the Corporation’s credit risk management process and allowance for loan losses.

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Comparison of Operating Results for the Three Months Ended March 31, 2017 and March 31, 2016.

General. Net income was $562,000 for the three months ended March 31, 2017 as compared to net income of $639,000 for the three months ended March 31, 2016. The decrease in earnings for the three months ended March 31, 2017 as compared to the same period in 2016 was impacted by an increase of $494,000 in non-interest expense. The $494,000 increase in non-interest expense was primarily due to an increase of $248,000 in salary and employee benefits, a $56,000 increase in occupancy and equipment costs, a $74,000 increase in data processing costs and a $54,000 increase in advertising costs. The $248,000 increase in salary and employee benefits expense for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to an increase of 10 FTEs, a $50,000 increase in SERP expense, general merit increases, and $38,000 in stock-based compensation related to awards made under our 2015 Equity Incentive Plan and our ESOP. Occupancy and equipment expense increased $56,000 primarily due to increased snow removal and landscaping costs. Data processing costs increased $74,000 due to increased software expenses as well as cost of service increases. The increase in non-interest expense was partially offset by a $288,000 increase in net interest income, primarily due to growth in loan interest income of $512,000, partially offset by an increase in deposit interest expense of $220,000 due to growth in certificates of deposit. During the three months ended March 31, 2017 as compared to the three months ended March 31, 2016, we recorded a decrease in the provision for loan losses of $49,000, and had an increase in total non-interest income of $15,000, and a decrease in income tax expense of $65,000. The $15,000 increase in non-interest income was primarily due to an increase of $62,000 in customer service fees, a $6,000 increase in bank owned life insurance income, and an increase of $13,000 in other income, partially offset by a decrease of $66,000 in net gains on sales of loans, and other mortgage banking income for the three months ended March 31, 2017 as compared to the same period in 2016. The decrease in income tax expense was primarily due to decreased pre-tax income.

Interest Income. Interest income increased $590,000, or 11.7%, to $5.6 million for the three months ended March 31, 2017 from $5.0 million for the three months ended March 31, 2016. The increase reflected an increase in the average balance of interest earning assets of $72.5 million to $592.7 million for the three months ended March 31, 2017 as compared to $520.2 million for the three months ended March 31, 2016, partially offset by a decrease in the average yield on interest-earning assets to 3.81% for the three months ended March 31, 2017 as compared to 3.88% for the three months ended March 31, 2016. The majority of our interest income was derived from interest and fees on loans. Our average yield on interest-earning assets declined by seven basis points to 3.81% primarily due to the $28.1 million increase in the average balance of cash and cash equivalents as we increased our on-balance sheet liquidity.

Interest and fees on loans increased $512,000, or 10.3%, to $5.5 million for the three months ended March 31, 2017 from $5.0 million for the three months ended March 31, 2016. Interest and fees on loans increased due to an increase in the average balance of loans and loans held for sale of $50.0 million to $544.7 million for the three months ended March 31, 2017 as compared to $494.8 million for the three months ended March 31, 2016. The increase in our average balance of loans was principally due to the growth in our residential one-to four- family real estate loan portfolio. Our average yield on loans increased to 4.07% for the three months ended March 31, 2017 from 4.02% for the three months ended March 31, 2016 primarily due to an increase in market interest rates.

Interest Expense. Interest expense increased $302,000, or 47.9%, to $932,000 for the three months ended March 31, 2017 from $630,000 for the three months ended March 31, 2016 primarily due to a $216,000 increase in interest expense on certificates of deposit. Interest expense on certificates of deposit increased $216,000 due primarily to an increase of $53.6 million in the average balance of certificates of deposit. During the fourth quarter of 2016, we obtained $44.4 million of certificates of deposit through a nationwide on-line service (“national market”), with the remainder of the increase due to organic growth. The average rate paid to certificate of deposit holders increased eight basis points to 1.50% for the three months ended March 31, 2017 from 1.42% for the three months ended March 31, 2016 due to an increase in the average balance of longer duration certificates.

Interest expense on borrowed funds increased $82,000 to $226,000 for the three months ended March 31, 2017 from $144,000 for the three months ended March 31, 2016 due to a 31 basis points increase in the average cost of funds as short-term interest rates increased in December 2016 and again in March 2017. The average balance of borrowed funds decreased $3.0 million to $114.9 million for the three months ended March 31, 2017 from $117.9 million for the three months ended March 31, 2016, as we decreased short-term borrowings as a result of the loan sale volume outpacing new loans originated for sale.

Net Interest Income. Net interest income increased $288,000, or 6.6%, to $4.7 million for the three months ended March 31, 2017 from $4.4 million for the three months ended March 31, 2016. This increase was due to a $12.0 million increase in net interest-earning assets to $137.2 million for the three months ended March 31, 2017, partially offset by a decrease in our interest rate spread of 26 basis points to 2.98% for the three months ended March 31, 2017 as compared to 3.24% for the prior year period. The net interest margin decreased 20 basis points to 3.20% for the three months ended March 31, 2017 from 3.40% for the three months ended March 31, 2016.

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Rate / Volume Analysis

The following table presents the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities for the periods indicated. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

	Three months ended March 31,
	2017 vs. 2016
	Net		Increase (decrease) due to
(Dollars in thousands)	Change		Volume			Rate
Interest-earning assets:
Loans and loans held for sale	$	512	$	501		$	11
Cash and cash equivalents	44		51			(7		)
Federal Home Loan Bank of Boston stock and other investments	34		(29		)	63
Total interest-earning assets	590		523			67
Interest-bearing liabilities:
Money Market accounts	2		2			—
Savings accounts	2		2			—
Club accounts	—		—			—
Certificates of deposit	216		199			17
Borrowed funds	82		(4		)	86
Total interest-bearing liabilities	302		199			103
Net interest income	$	288	$	324		$	(36	)

The following table sets forth average balance sheets, average yields and costs, and certain other information for the three months ended March 31, 2017 and 2016. No tax-equivalent yield adjustments were made, as we had no non-taxable interest-earning assets during the periods presented. All average balances are daily average balances. Nonaccrual loans were included in the computation of average balances, but have been reflected in the table 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.

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AVERAGE BALANCES, INTEREST AND AVERAGE YIELDS

	Three months ended March 31, 2017						Three months ended March 31, 2016
(Dollars in thousands)	Average Balance		Interest		Average Yield(4)		Average Balance		Interest		Average Yield(4)
Assets:

Loans and loans held for sale	$	544,728	$	5,462	4.07	%	$	494,778	$	4,950	4.02	%
Cash and cash equivalents	41,972		74		0.72	%	13,829		30		0.87	%
Federal Home Loan Bank of Boston stock and other investments	5,974		77		5.23	%	11,586		43		1.49	%
Total interest-earning assets	592,674		5,613		3.81	%	520,193		5,023		3.88	%
Non-interest-earning assets	40,909						41,849
Total assets	$	633,583					$	562,042

Liabilities and Equity:

Money market accounts	$	71,885	75		0.42	%	$	69,581	73		0.42	%
Savings accounts	103,216		25		0.10	%	95,538		23		0.10	%
Club accounts	1,354		—		0.00	%	1,358		—		0.00	%
Certificates of deposit	164,162		606		1.50	%	110,555		390		1.42	%
Total interest-bearing deposits	340,617		706		0.84	%	277,032		486		0.71	%
Borrowed funds	114,889		226		0.80	%	117,944		144		0.49	%
Total interest bearing liabilities	455,506		932		0.83	%	394,976		630		0.64	%
Non-interest bearing deposits	102,717						90,213
Other liabilities	6,813						6,163
Total liabilities	565,036						491,352
Stockholders’ equity	68,547						70,690
Total liabilities and stockholders’ equity	$	633,583					$	562,042

Net interest income			$	4,681					$	4,393
Net interest rate spread(1)					2.98	%					3.24	%
Net interest-earning assets(2)	$	137,168					$	125,217

Net interest margin(3)					3.20	%					3.40	%
Average interest-earning assets to interest-bearing liabilities					130.11	%					131.70	%

(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.

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Provision for loan losses. A provision for loan losses of $60,000 was recorded to the allowance for loan losses during the three months ended March 31, 2017, a decrease of $49,000 as compared to a provision of $109,000 for the three months ended March 31, 2016. During the three months ended March 31, 2017, a provision of $24,000 was recorded to the residential one-to four- family loan portfolio due to loan growth and a provision of $33,000 was recorded to the commercial real estate loan portfolio primarily in consideration of the additional credit risk associated with increased interest rates. We recorded net recoveries of $6,000 for the three months ended March 31, 2017. Our provisions are based on our assessment of loss history, current asset quality and economic trends.

During the three months ended March 31, 2016, a provision of $63,000 was recorded relating to the residential one-to-four-family loan portfolio and a provision of $24,000 was recorded relating to the commercial real estate portfolio primarily due to loan growth. We recorded net charge-offs of $20,000 during the three months ended March 31, 2016.

Non-Interest income. Non-interest income increased $15,000, or 0.9%, to $1.7 million for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The $15,000 increase in non-interest income was primarily due to an increase of $62,000 in customer service fees, a $6,000 increase in bank owned life insurance income, and an increase of $13,000 in other income, partially offset by a decrease of $66,000 in net gains on sales of loans, and other mortgage banking income for the three months ended March 31, 2017 as compared to the same period in 2016. Gains on sales of mortgage loans increased $79,000 from $798,000 for the three months ended March 31, 2016 to $877,000 for the three months ended March 31, 2017 due to increased loan sale volume. Mortgage loans sold during the three months ended March 31, 2017 totaled $57.1 million as compared to $41.0 million during the three months ended March 31, 2016. A gain in the fair value of our mortgage derivatives and change in the fair value of loans held for sale of $70,000 were recorded during the three months ended March 31, 2016 as compared to a loss of $79,000 during the three months ended March 31, 2017.

Non-Interest expense. Non-interest expense increased $494,000, or 10.0%, to $5.4 million for the three months ended March 31, 2017 from $5.0 million for the three months ended March 31, 2016. The $494,000 increase in non-interest expense was primarily due to an increase of $248,000 in salary and employee benefits, a $56,000 increase in occupancy and equipment costs, a $74,000 increase in data processing costs and a $54,000 increase in advertising costs. The $248,000 increase in salary and employee benefits expense for the three months ended March 31, 2017 as compared to the three months ended March 31, 2016 was primarily due to an increase of 10 FTEs, a $50,000 increase in SERP expense, general merit increases, and $38,000 in stock-based compensation related to awards made under our 2015 Equity Incentive Plan and our ESOP. The increase in FTEs was primarily due to additional employees to handle increased loan volume. Occupancy and equipment expense increased $56,000 primarily due to increased snow removal and landscaping costs. Data processing costs increased $74,000 due to increased software expenses as well as cost of service increases. Advertising costs increased $54,000 based on a combination of timing of expenditures as well as enhancements to our on-line marketing presence.

Income tax expense. Income tax expense of $361,000 was recorded for the three months ended March 31, 2017, a decrease of $65,000, or 15.3%, as compared to $426,000 of income tax expense for the three months ended March 31, 2016. The decrease in income tax expense was primarily due to a decrease in pre-tax income of $142,000 during the three months ended March 31, 2017 as compared to the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 and 2016 were 39.1% and 40.0%, respectively. The reduction in the effective tax rate was due to the income tax benefit recorded related to the vesting of restricted stock during the three months ended March 31, 2017.

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Liquidity

Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loans repayments, advances from the Federal Home Loan Bank of Boston, principal repayments and loans sales. While maturities and scheduled amortization of loans are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Committee, under the direction of the Chief Financial Officer, is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of March 31, 2017.

The Corporation regularly monitors and adjusts its investments in liquid assets based upon an assessment of:

(i) Expected loan demand including commitments to purchase loans;

(ii) Expected deposit flows and borrowing maturities;

(iii) Yields available on interest-earning deposits; and

(iv) The objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits and are also used to pay off short-term borrowings.

The Corporation’s most liquid assets are cash and cash equivalents. The level of these assets is dependent on operating, financing, lending and investing activities during any given period. At March 31, 2017, cash and cash equivalents totaled $41.8 million.

The Corporation’s cash flows are derived from operating activities, investing activities and financing activities as reported in the Consolidated Statements of Cash Flows included in the Consolidated Financial Statements.

At March 31, 2017, the Bank had $59.1 million in commitments to originate loans, $32.0 million of which will be sold. In addition to commitments to originate loans, the Bank had $77.3 million in unused lines of credit to borrowers. Commitments to purchase loans from third parties totaled $1.9 million at March 31, 2017. Certificates of deposit due within one year of March 31, 2017 totaled $56.2 million, or 12.3%, 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 $21.3 million as of March 31, 2017. Depending on market conditions, the Bank may be required to pay higher rates on such deposits or other borrowed funds than it currently pays on the certificates of deposit due on or before March 31, 2017. Management believes, however, based on historical experience and current market interest rates, that the Bank will retain upon maturity, a large portion of certificates of deposit with maturities of one year or less as of March 31, 2017.

The Corporation’s primary investing activity is originating loans. During the three months ended March 31, 2017 and for the year ended December 31, 2016, loan originations, net of principal repayments totaled $4.0 million, and $42.6 million, respectively. During the three months ended March 31, 2017 and year ended December 31, 2016, purchases of loans from third party originators totaled $5.2 million and $17.8 million, respectively.

Financing activities consist primarily of activity in deposit accounts, borrowed funds from the Federal Home Loan Bank of Boston (FHLB) advances and stock repurchases. We experienced a net increase in deposits of $9.3 million and $73.8 million for the three months ended March 31, 2017 and for the year ended December 31, 2016, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors. The net decrease in short term borrowed funds was $20 million during the three months ended March 31, 2017 as compared to an increase of $4.0 million for the year ended December 31, 2016 and $1.8 million in long-term advances for the year ended December 31, 2016. The Corporation repurchased $253,000 of its common stock as part of a previously announced 5% stock repurchase program during the three months ended March 31, 2017.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston that provide an additional source of funds. Borrowed funds were $101.3 million and $121.3 million at March 31, 2017 and December 31, 2016, respectively. At March 31, 2017, we had the ability to borrow up to an additional $119.9 million from the Federal Home Loan Bank of Boston. We also have the ability to borrow with the Federal Reserve discount window. At March 31, 2017, the Bank had the capacity to borrow up to $18.8 million from the Federal Reserve discount window, but had no outstanding borrowings as of that date.

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Capital Resources

The Corporation believes its current capital is adequate to support ongoing operations. In July 2013, the Bank’s primary federal regulator, the FDIC, published final rules (the “Basel III Capital Rules”) that implement, in part, agreements reached by the Basel Committee on Banking Supervision (“Basel Committee”) in “Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems” (“Basel III”) and imposed new capital requirements on the Bank, effective January 1, 2015. When fully phased in, the Basel III Capital Rules will additionally require institutions to retain a capital conservation buffer, composed of CET1, of 2.5% above these required minimum capital ratio levels. Banking organizations that fail to maintain the minimum 2.5% capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. Restrictions would begin phasing in where the banking organization’s capital conservation buffer was below 2.5% at the beginning of a quarter, and distributions and discretionary bonus payments would be completely prohibited if no capital conservation buffer exists. When the capital conservation buffer is fully phased in on January 1, 2019, the Bank will effectively have the following minimum capital to risk-weighted assets ratios: a) 7.0% based upon CET1; b) 8.5% based upon tier 1 capital; and c) 10.5% based upon total regulatory capital. The implementation of the capital conservation buffer began on January 1, 2016 at 0.625% and increases by 0.625% each subsequent January 1, until it reaches 2.5% on January 1, 2019. For 2017, the capital conservation buffer is 1.25%. As of March 31, 2017, the Bank qualifies as “well capitalized” under applicable regulations of the Rhode Island Department of Business Regulation and the FDIC. To be categorized as “well capitalized” under Basel III, framework, the Bank must maintain minimum Total Capital, Tier 1 and Common Equity Tier 1 Capital ratios of 10%, 8% and 6.5% respectively, and, maintain a leverage capital ratio (Tier 1 capital to average assets) of at least 5%.

The Bank’s actual capital amounts and ratios are presented as of March 31, 2017 in the table below.

	Actual				Minimum Capital for Capital Adequacy Purposes				Minimum Capital for Adequacy with Capital Buffer				Minimum Capital To Be Well Capitalized
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to risk weighed assets)	$	59,838	13.66	%	$	35,041	8.00	%	$	40,516	9.25	%	$	43,801	10.00	%
Tier 1 Capital (to risk weighed assets)	$	57,279	13.08	%	$	26,281	6.00	%	$	31,756	7.25	%	$	35,041	8.00	%
Common Equity Tier 1 (to risk weighed assets)	$	57,279	13.08	%	$	19,710	4.50	%	$	25,186	5.75	%	$	28,471	6.50	%
Tier 1 Leverage Capital (to average assets)	$	57,279	9.05	%	$	25,326	4.00	%	N/A		N/A		$	31,657	5.00	%

On April 9, 2015, the Board of Governors of the Federal Reserve System issued the Final Rule to implement Public Law 113-250 enacted on December 18, 2014 that updates the Small Bank Holding Company Policy Statement (“Policy Statement”), which became effective in May 2015. Pursuant to the Policy Statement, capital rules and reporting requirements will not apply to the small bank holding companies (defined as less than $1.0 billion in assets) which meet the following criteria: (1) not engaged in significant non-bank activities; (2) no significant off-balance sheet activities conducted through a non-bank subsidiary, and (3) no material amount of SEC registered debt or equity securities outstanding (other than trust preferred). The Bank is subject to the capital rules and reporting requirements though the Holding Company is exempt.

Item 3 - Quantitative and Qualitative Disclosures About Market Risk

Not required for smaller reporting companies.

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Item 4 - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, the Corporation carried out an evaluation as defined in Rule 13a-15(e) under the Exchange Act of 1934, under the supervision and with the participation of the Corporation’s principal executive officer and principal financial officer, of the effectiveness of the design and operation of the Corporation’s disclosure controls and procedures. Based on this evaluation, the Corporation’s principal executive officer and principal financial officer concluded that the Corporation’s disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There has been no change in the Corporation’s internal control over financial reporting that has occurred during the Corporation’s most recent fiscal quarter (i.e., the three months ended March 31, 2017) that has materially affected, or is reasonably likely to materially affect, such internal controls.

PART II - OTHER INFORMATION

Item 1 - Legal Proceedings

At March 31, 2017 there were no material legal proceedings to which the Corporation is a party or of which any of its property is subject. From time to time, the Corporation is a party to various legal proceedings incident to its business.

Item 1A - Risk Factors

Not required for smaller reporting companies.

Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds

a) Unregistered Sales of Equity Securities. None

b) Use of Proceeds. None

c) Repurchase of Equity Securities

The following table provides certain information with regard to shares repurchased by the Company in the first quarter of 2017.

Period	(a) Total Number of Shares Purchased	(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
January 1 — January 31, 2017	—	$	—	—	120,748
February 1 — February 28, 2017	6,800	$	16.98	6,800	113,948
March 1 — March 31, 2017	7,900	$	17.42	7,900	106,048
Total	14,700	$	17.22	14,700	106,048

(1) The Corporation’s Board of Directors authorized its third stock repurchase program on November 22, 2016 to acquire up to 247,459 shares, or 5.0% of the Corporation’s then outstanding common stock. Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Corporation.

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Item 3 - Defaults upon Senior Securities

Not Applicable

Item 4 - Mine Safety Disclosures

Not Applicable

Item 5 - Other Information

Not Applicable

Item 6 - Exhibits

EXHIBIT INDEX

Exhibit No.		Description

31.1*		Certification of Principal Executive Officer under Securities Exchange Act Rule 13a-14(a)

31.2*		Certification of Principal Financial Officer under Securities Exchange Act Rule 13a-14(a)

32*		Certification of Principal Executive Officer and Principal Financial Officer under 18 U.S.C. § 1350 Furnished Pursuant to Securities Exchange Act Rule 13a-14(b)

101*		The following materials from Coastway Bancorp, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 were formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016, (ii) Consolidated Statements of Net Income for the three months ended March 31, 2017 and 2016, (iii) Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016, (iv) Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2017 and (v) Notes to Unaudited Consolidated Financial Statements.

*Filed herewith

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	COASTWAY BANCORP, INC.

Dated: May 4, 2017


	By:	/s/	William A. White
			President and Chief Executive Officer
			(Principal Executive Officer)

		/s/	Jeanette Fritz
			Executive Vice President and
			Chief Financial Officer
			(Principal Financial Officer)

Coastway Bancorp, Inc. - FORM 10-Q - May 4, 2017

Attached files

Coastway Bancorp, Inc. Reports