Forward Looking Statements
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
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statements of our goals, intentions and expectations;
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•
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statements regarding our business plans, prospects, growth and operating strategies;
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•
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statements regarding the asset quality of our loan and investment portfolios; and
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estimates of our risks and future costs and benefits.
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These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements:
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•
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our ability to manage our operations under current economic conditions nationally and in our market area;
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adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);
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•
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significant increases in our loan losses and changes in management’s assumptions in determining the adequacy of the allowance for loan losses;
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•
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credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and in our allowance for loan losses and in our provision for loan losses;
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•
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competition among depository and other financial institutions;
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our success in increasing our commercial business, commercial real estate and multifamily lending while maintaining our asset quality;
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•
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we have in recent periods identified multi-family, commercial real estate and construction loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-completion of construction projects,
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our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens. If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected;
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our success in introducing new financial products;
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our ability to attract and maintain deposits;
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our ability to retain customer accounts, achieve increased operating efficiencies and enhance profitability following the closing of underperforming branch offices;
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changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;
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fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;
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changes in consumer spending, borrowing and savings habits;
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further declines in the yield on our assets resulting from the current low interest rate environment;
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risks related to a high concentration of loans secured by real estate located in our market area;
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•
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the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits;
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other actions, resolutions or agreements imposed by our regulators (including the Federal Reserve Bank or the Office of the Comptroller of the Currency) as a result of changes in our financial condition, including related to paying dividends, issuing debt, borrowing funds, repurchasing shares of our common stock and other similar actions.
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changes in the level of government support of housing finance;
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our ability to enter new markets successfully and capitalize on growth opportunities;
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changes in consumer spending, borrowing and savings habits;
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•
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changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), and regulatory fees and compliance costs;
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•
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changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
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changes in our compensation and benefit plans;
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our ability to retain key members of our senior management team and to address staffing needs to respond to demand or to implement our strategic plans;
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loan delinquencies and changes in the underlying cash flows of our borrowers;
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•
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our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;
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changes in the financial condition or future prospects of issuers of securities that we own;
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the ability of third-party service providers to perform their obligations to us;
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the availability, effectiveness and security of our information technology systems and our ability to secure confidential information through the use of our computer and other technology systems and networks;
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the impact of reputational risk created by any of the foregoing developments on such matters such as business generation and retention, funding and liquidity; and
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other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this annual report.
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Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Westbury Bancorp, Inc.
Westbury Bancorp, Inc. (the “Company”) was incorporated in the State of Maryland on August 10, 2012 and became the savings and loan holding company for Westbury Bank (the “Bank”) following the consummation of the mutual-to-stock conversion of WBSB Bancorp, MHC, the Bank’s former mutual holding company, which was completed on April 9, 2013. The sole business of the Company is its ownership of the Bank. At September 30, 2016, we had total consolidated assets of
$702.6 million
, net loans of
$533.8 million
, total deposits of
$592.0 million
and stockholders' equity of
$79.6 million
.
In 2012, we elected to change our fiscal year from December 31 to September 30. In order to provide comparative data in certain tables, we have included unaudited information for the year ended September 30, 2012 in addition to the audited information for the years ended September 30, 2016, 2015, 2014 and 2013 and the nine months ended September 30, 2012.
Westbury Bank
Westbury Bank is a federally-chartered savings bank headquartered in West Bend, Wisconsin. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and borrowings, in commercial and multifamily real estate loans, one- to four-family residential real estate loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. A significant majority of our deposits are transaction accounts, which we believe are less susceptible to large-scale withdrawals as a result of changes in interest rates than certificates of deposit, and which we believe have a lower cost of funds over various interest rate cycles. We also purchase investment securities consisting primarily of securities issued by the United States government and its agencies and government-sponsored enterprises, mortgage-backed securities and collateralized mortgage obligations issued by government-sponsored enterprises, municipal securities and corporate securities.
Market Area
We conduct business through our main office located in West Bend, Wisconsin, seven branch offices in West Bend, Brookfield, Germantown, Hartford, Jackson, Kewaskum and Slinger, Wisconsin, and loan production offices in Madison and Appleton, Wisconsin. We also operate one free-standing ATM in West Bend, Wisconsin at a
location other than at one of our branches. Our main office, six of our branches and our one free-standing ATM are located in Washington County, our Brookfield branch is located in Waukesha County, our Madison loan production office is located in Dane County, Wisconsin and our Appleton loan production office is located in Outagamie County, Wisconsin. West Bend, Wisconsin is located in southeastern Wisconsin on the Highway 45 corridor, approximately 40 miles northwest of downtown Milwaukee, Wisconsin, and approximately 75 miles northeast of Madison, Wisconsin.
Our primary market area consists of Washington and Waukesha Counties, Wisconsin. Although our current operations are not focused in Milwaukee County, we are affected by conditions in Milwaukee County because our loan portfolio includes loans that are secured by real estate or that have borrowers located in Milwaukee County. In addition, a number of our customers who reside in Washington or Waukesha Counties are employed in Milwaukee County, and the operations of our commercial customers depend in part on sales of products and services to individuals or other businesses located in Milwaukee County and the surrounding area. Our primary market area includes the west and northwest suburbs of Milwaukee, as well as small towns and rural communities.
Lending Activities
Our principal lending activity is originating commercial real estate loans, one- to four-family residential real estate loans, multifamily loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. We also have a small portfolio of education loans, although we no longer originate education loans. In recent years, we have increased and, subject to market conditions and our asset-liability management analysis, expect to continue to increase our focus on commercial real estate, multifamily and commercial business lending, in an effort to maintain diversity in our overall loan portfolio and increase the overall yield earned on our loans. We also sell, in the secondary market, a significant portion of the longer-term (20 to 30 year) fixed-rate residential mortgage loans that we originate, on both a servicing-retained and servicing-released, non-recourse basis, while retaining shorter-term (10 to 15 year) fixed-rate residential mortgage loans and adjustable rate residential mortgage loans, in order to manage the maturity and time to repricing of our loan portfolio. We also originate FHA and VA loans for sale on a servicing-released basis.
We have in recent periods identified multi-family, commercial real estate, construction, and commercial business loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-completion of construction projects, our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens. If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected.
Loan Portfolio Composition.
The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
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At September 30,
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2016
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2015
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2014
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Amount
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Percent
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Amount
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Percent
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|
Amount
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Percent
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(Dollars in thousands)
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Real estate loans:
|
|
|
|
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|
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Single family
(1)
|
$
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158,541
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|
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29.41
|
%
|
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$
|
153,141
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|
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30.73
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%
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$
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135,337
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|
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32.13
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%
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Multifamily
|
123,623
|
|
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22.93
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105,750
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21.22
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76,396
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18.14
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Commercial real estate - non-owner occupied
|
117,971
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21.88
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110,833
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22.24
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|
93,141
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|
22.11
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Commercial real estate - owner occupied
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63,108
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11.71
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52,124
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10.46
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41,980
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9.97
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Construction and land
|
16,230
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|
3.01
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18,831
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|
|
3.78
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|
|
16,362
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|
3.89
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Total real estate
|
479,473
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|
|
88.94
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|
|
440,679
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|
|
88.43
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363,216
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|
86.24
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Commercial business loans
|
40,836
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|
|
7.57
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|
38,200
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|
|
7.66
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|
37,675
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|
8.95
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Consumer loans:
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|
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|
|
|
|
|
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Home equity lines of credit
|
14,969
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|
|
2.78
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|
|
14,881
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|
|
2.99
|
|
|
14,275
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|
3.39
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Education
|
3,401
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|
|
0.63
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|
|
4,106
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|
|
0.82
|
|
|
4,694
|
|
1.11
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Automobile
|
241
|
|
|
0.04
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|
|
207
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|
|
0.04
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|
|
327
|
|
0.08
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Other consumer loans
|
221
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|
|
0.04
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|
|
316
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|
|
0.06
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|
|
994
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|
0.23
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Total consumer loans
|
18,832
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|
|
3.49
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|
|
19,510
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|
|
3.91
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|
|
20,290
|
|
4.81
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|
Total loans
|
$
|
539,141
|
|
|
100.00
|
%
|
|
$
|
498,389
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|
|
100.00
|
%
|
|
$
|
421,181
|
|
|
100.00
|
%
|
Net deferred loan costs
|
138
|
|
|
|
|
366
|
|
|
|
|
235
|
|
|
|
Allowance for loan losses
|
5,244
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|
|
|
|
4,598
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|
|
|
|
4,072
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Total loans, net
|
$
|
533,759
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|
|
|
|
$
|
493,425
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|
|
|
|
$
|
416,874
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2013
|
|
2012
|
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Amount
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Percent
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|
Amount
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|
Percent
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|
(Dollars in thousands)
|
Real estate loans:
|
|
|
|
|
|
|
|
Single family
(1)
|
$
|
132,496
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|
|
38.16
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%
|
|
$
|
153,090
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|
|
40.00
|
%
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Multifamily
|
47,178
|
|
13.59
|
|
|
38,491
|
|
10.06
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|
Commercial real estate - non-owner occupied
|
80,522
|
|
23.19
|
|
|
92,565
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|
24.20
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Commercial real estate - owner occupied
|
31,715
|
|
9.14
|
|
|
40,217
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|
10.51
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|
Construction and land
|
10,629
|
|
3.06
|
|
|
8,975
|
|
2.35
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|
Total real estate
|
302,540
|
|
87.14
|
|
|
333,338
|
|
87.12
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|
Commercial business loans
|
25,003
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|
7.20
|
|
|
22,938
|
|
6.00
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Consumer loans:
|
|
|
|
|
|
|
|
Home equity lines of credit
|
13,652
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|
3.94
|
|
|
19,356
|
|
5.06
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|
Education
|
5,189
|
|
1.49
|
|
|
5,709
|
|
1.49
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|
Automobile
|
405
|
|
0.12
|
|
|
1,004
|
|
0.26
|
|
Other consumer loans
|
393
|
|
0.11
|
|
|
251
|
|
0.07
|
|
Total consumer
|
19,639
|
|
5.66
|
|
|
26,320
|
|
6.88
|
|
Total loans
|
$
|
347,182
|
|
|
100.00
|
%
|
|
$
|
382,596
|
|
|
100.00
|
%
|
Net deferred loan costs
|
136
|
|
|
|
|
7
|
|
|
|
Allowance for loan losses
|
4,266
|
|
|
|
|
6,690
|
|
|
|
Total loans, net
|
$
|
342,780
|
|
|
|
|
$
|
375,899
|
|
|
|
|
|
(1)
|
Excludes single family mortgage loans held for sale of
$1.9 million
, $431,000, $326,000, $1.0 million and $3.0 million, respectively, at September 30, 2016, 2015, 2014, 2013, and 2012.
|
Loan Portfolio Maturities.
The following table sets forth the contractual maturities of our total loan portfolio at September 30, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
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|
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|
|
|
|
|
|
|
|
|
|
|
Single Family
|
Multifamily
|
Commercial
Real Estate - Non-owner Occupied
|
Commercial
Real Estate - Owner Occupied
|
Construction and Land
|
Commercial
|
|
(Dollars in thousands)
|
Due During the Year Ending September 30
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
851
|
|
|
$
|
13,315
|
|
|
$
|
12,483
|
|
|
$
|
7,275
|
|
|
$
|
1,178
|
|
|
$
|
22,229
|
|
2018
|
1,479
|
|
|
11,409
|
|
|
23,072
|
|
|
2,901
|
|
|
2,891
|
|
|
4,246
|
|
2019
|
2,079
|
|
|
19,377
|
|
|
21,115
|
|
|
8,751
|
|
|
2,653
|
|
|
1,763
|
|
2020 to 2021
|
3,956
|
|
|
55,555
|
|
|
43,503
|
|
|
29,398
|
|
|
2,694
|
|
|
9,092
|
|
2022 to 2026
|
35,677
|
|
|
22,266
|
|
|
15,618
|
|
|
14,349
|
|
|
964
|
|
|
3,506
|
|
2027 to 2031
|
30,906
|
|
|
173
|
|
|
900
|
|
|
203
|
|
|
688
|
|
|
—
|
|
2032 and beyond
|
83,593
|
|
|
1,528
|
|
|
1,280
|
|
|
231
|
|
|
5,162
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
158,541
|
|
|
$
|
123,623
|
|
|
$
|
117,971
|
|
|
$
|
63,108
|
|
|
$
|
16,230
|
|
|
$
|
40,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home Equity Lines of Credit
|
Education
|
Automobile
|
Other Consumer
|
Total
|
|
(Dollars in thousands)
|
Due During the Year Ending September 30
|
|
|
|
|
|
|
|
|
|
2017
|
$
|
9,628
|
|
|
$
|
40
|
|
|
$
|
14
|
|
|
$
|
100
|
|
|
$
|
67,113
|
|
2018
|
41
|
|
|
84
|
|
|
93
|
|
|
—
|
|
|
46,216
|
|
2019
|
—
|
|
|
108
|
|
|
80
|
|
|
10
|
|
|
55,936
|
|
2020 to 2021
|
65
|
|
|
274
|
|
|
54
|
|
|
12
|
|
|
144,603
|
|
2022 to 2026
|
38
|
|
|
1,599
|
|
|
—
|
|
|
—
|
|
|
94,017
|
|
2027 to 2031
|
52
|
|
|
972
|
|
|
—
|
|
|
—
|
|
|
33,894
|
|
2032 and beyond
|
5,145
|
|
|
324
|
|
|
—
|
|
|
99
|
|
|
97,362
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
14,969
|
|
|
$
|
3,401
|
|
|
$
|
241
|
|
|
$
|
221
|
|
|
$
|
539,141
|
|
The following table sets forth our fixed- and adjustable-rate loans at September 30, 2016 that are due after September 30, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due After September 30, 2017
|
|
Fixed
|
|
Adjustable
|
|
Total
|
|
(Dollars in thousands)
|
Real estate loans:
|
|
|
|
|
|
Single family
|
$
|
71,784
|
|
|
$
|
85,906
|
|
|
$
|
157,690
|
|
Multifamily
|
98,032
|
|
|
12,276
|
|
|
110,308
|
|
Commercial real estate - non-owner occupied
|
99,165
|
|
|
6,323
|
|
|
105,488
|
|
Commercial real estate - owner occupied
|
53,978
|
|
|
1,855
|
|
|
55,833
|
|
Construction and land
|
5,222
|
|
|
9,830
|
|
|
15,052
|
|
Total real estate loans
|
328,181
|
|
|
116,190
|
|
|
444,371
|
|
Commercial business loans
|
16,948
|
|
|
1,659
|
|
|
18,607
|
|
Consumer loans:
|
|
|
|
|
|
Home equity lines of credit
|
90
|
|
|
5,251
|
|
|
5,341
|
|
Education
|
3,361
|
|
|
—
|
|
|
3,361
|
|
Automobile
|
227
|
|
|
—
|
|
|
227
|
|
Other consumer loans
|
22
|
|
|
99
|
|
|
121
|
|
Total consumer loans
|
3,700
|
|
|
5,350
|
|
|
9,050
|
|
Total loans
|
$
|
348,829
|
|
|
$
|
123,199
|
|
|
$
|
472,028
|
|
Loan Approval Procedures and Authority
.
Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Westbury Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At September 30, 2016, our largest credit relationship totaled
$10.5 million
and was secured by owner-occupied real estate in our market area. At September 30, 2016, this loan was performing in accordance with its terms. Our second largest relationship at this date was a
$9.8 million
loan secured by corporate assets including corporate owned life insurance. At September 30, 2016, this loan was performing in accordance with its terms. Both loans comply with our loans to one borrower limits at September 30, 2016.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to gather information to allow us to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the property is determined to be in a flood zone area.
Individual officers and employees do not have approval authority with respect to residential real estate loans. We use the Desktop Underwriter™ system for residential real estate loans, and any loans that are not approved under this system, and loans in excess of the current Fannie Mae eligibility guidelines, may only be approved by our management loan committee, which consists of our Executive Vice President - Community Banking, our Vice President - Retail Loan Operations, our Vice President - Underwriting and our Assistant Vice President - Consumer Lending for loans up to $500,000. For loans exceeding $500,000, the Chief Financial Officer or Chief Credit Officer are included to increase the approval limit to $1,000,000. Residential real estate loans greater than $1,000,000 must be approved by the directors' loan committee.
Our President, our Executive Vice President - Commercial Lending, our Chief Credit Officer and our Chief Financial Officer each have approval authority of up to $500,000 for commercial business, commercial real estate and multifamily lending relationships and up to $3,000 for unsecured consumer loans. Our other lending personnel have approval authority of lesser amounts, up to a maximum of $250,000, depending on each person’s lending experience and the results of credit review of loans that they have approved over a period of time.
In addition, any two persons, one of whom reports directly to the other, may approve commercial business, commercial real estate and multifamily lending relationships up to the aggregate of their individual lending authorities. Our President, our Executive Vice President - Commercial Lending, our Chief Credit Officer and our Chief Financial Officer may, together, approve a commercial business, commercial real estate or multifamily lending relationship up to $1,000,000. Aggregate credit exposure to one borrower in excess of $1,000,000 must be approved by the directors’ loan committee, which consists of at least three independent directors. Our President, our Executive Vice President - Commercial Lending, our Chief Financial Officer and our Chief Credit Officer participate in directors’ loan committee meetings, but are not voting members of the committee. Approval of the directors’ loan committee requires the approval of all of the independent directors serving on the committee.
Commercial Real Estate and Multifamily Lending
.
Consistent with our strategy to diversify our loan portfolio and increase its yield, we are focused on increasing our origination of commercial real estate and multifamily loans, with a target loan size of between $2.0 million to $8.0 million. At September 30, 2016, we had
$304.7 million
in commercial real estate and multifamily loans, representing
56.5%
of our total loan portfolio compared to
$268.7 million
, or
53.9%
of our total loan portfolio at September 30, 2015.
Subject to future economic, market and regulatory conditions, we intend to engage in a disciplined increase in commercial real estate and multifamily lending in our market area.
Our fixed-rate commercial real estate and multifamily loans generally have initial terms of three to five years and amortization terms of 10-25 years for commercial real estate loans and 15-30 years for multifamily loans, with a balloon payment at the end of the initial term. Our adjustable rate commercial real estate and multifamily loans generally have initial terms of three to five years and a re-pricing option. The maximum loan-to-value ratio of our commercial real estate loans and multifamily loans is generally 75% and 80%, respectively, of the lower of cost or appraised value of the property securing the loan. Our commercial real estate loans are typically secured by retail, industrial, warehouse, service, medical or other commercial properties, and our multifamily loans are typically secured by apartment buildings.
Set forth below is information regarding our commercial real estate and multifamily loans, by industry, at September 30, 2016.
|
|
|
|
|
|
|
|
|
Industry Type
|
|
Number of Loans
|
|
Balance
|
|
|
|
|
(Dollars in thousands)
|
Non-owner occupied real estate:
|
|
|
|
|
Multifamily
|
|
84
|
|
|
$
|
123,623
|
|
Commercial real estate development and rental
|
|
94
|
|
|
117,971
|
|
Total Non-owner occupied real estate:
|
|
178
|
|
|
241,594
|
|
|
|
|
|
|
Owner-occupied real estate:
|
|
|
|
|
Real estate, rental and leasing
|
|
33
|
|
|
16,409
|
|
Education services
|
|
2
|
|
|
11,811
|
|
Manufacturing
|
|
12
|
|
|
9,282
|
|
Health care and social
|
|
10
|
|
|
8,559
|
|
Construction
|
|
7
|
|
|
6,611
|
|
Other services
|
|
16
|
|
|
2,670
|
|
Wholesale trade
|
|
5
|
|
|
2,075
|
|
Retail trade
|
|
7
|
|
|
1,651
|
|
Transportation and warehousing
|
|
2
|
|
|
1,413
|
|
Professional, scientific, and technical services
|
|
3
|
|
|
1,238
|
|
Accommodation and food
|
|
4
|
|
|
637
|
|
Arts, entertainment, and recreation
|
|
1
|
|
|
495
|
|
Finance and insurance
|
|
2
|
|
|
223
|
|
Remediation services
|
|
1
|
|
|
34
|
|
Total Owner-occupied real estate:
|
|
105
|
|
|
$
|
63,108
|
|
|
|
|
|
|
Total
|
|
283
|
|
|
$
|
304,702
|
|
At September 30, 2016, the average loan balance of our outstanding commercial real estate and multifamily loans was
$1.1 million
, and the largest of such loans was a
$10.5 million
loan secured by owner-occupied real estate in our market area. This loan was performing in accordance with its original terms at September 30, 2016.
We consider a number of factors in originating commercial real estate and multifamily loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service coverage ratio of at least 1.20x for commercial real estate loans and 1.15x for multifamily loans. All commercial real estate and multifamily loans are appraised by outside independent appraisers approved by the Board of Directors. We also have an independent third party review of each appraisal, and conduct an internal valuation of any commercial real estate or multifamily property. We generally extend credit based upon the lowest valuation of the three methods.
Personal guarantees are generally obtained from the principals of commercial real estate and multifamily loans, although this requirement may be waived depending upon the loan-to-value ratio and the debt service ratio associated with the loan. We require borrowers to carry property and casualty insurance, and flood insurance if the
property is determined to be in a flood zone area. In addition, all purchase-money and refinance borrowers are required to obtain title insurance.
Commercial and multifamily real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multifamily real estate than residential properties.
Single Family Residential Real Estate Lending
.
At September 30, 2016, we had
$158.5 million
of loans secured by single family (considered to be housing consisting of no more than four units) real estate, representing
29.4%
of our total loan portfolio. In addition, at September 30, 2016, we had
$1.9 million
of residential mortgages held for sale. We originate fixed-rate and adjustable-rate residential mortgage loans and home equity loans. At September 30, 2016,
45.5%
of our single family residential real estate loans due after 2017 were fixed-rate loans, and
54.5%
of such loans were adjustable-rate loans.
Our fixed-rate single family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae, which as of September 30, 2016 was generally $417,000 for single-family homes in our market area. Substantially all of our home equity loans are adjustable-rate loans, and are originated in accordance with the same standards as single family residential loans. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA and VA loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA and VA guidelines. Virtually all of our single family residential real estate loans are secured by properties located in our market area.
We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower. On a limited basis, loans with a loan-to-value ratio of up to 90% may be made without private mortgage insurance. In these cases, the borrower must have a credit score greater than 700 and a higher interest rate is charged commensurate with the higher risk. Loans with loan-to-value ratios up to 95% may be made when the borrower obtains private mortgage insurance.
Our fixed-rate single family residential real estate loans typically have terms of 10 to 30 years.
Our adjustable-rate single family residential real estate loans generally have fixed rates for initial terms of one, three, five or seven years, and adjust annually thereafter at a margin over an index. Our adjustable-rate single family residential real estate loans carry terms to maturity ranging from 10 to 30 years.
Although adjustable-rate mortgage loans may reduce, to an extent, our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on our adjustable-rate loans may not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We offer single family residential real estate loans, secured by non-owner occupied properties, exclusively for sale on a servicing-released, non-recourse basis. Generally, we require personal guarantees from the borrowers on these properties, and we will not make loans in excess of 80% loan to value on non-owner-occupied properties.
Home equity loans have greater risk than single family residential real estate loans secured by first mortgages. We face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect the value of property used as collateral. We do not extend home equity loans unless the combined loan-to-value ratio of the first mortgage and the home equity loan is 80% or less, except in cases where the borrower has a credit score greater than 700 where we may accept a loan-to-value ratio of 90% with a higher interest rate charged to the borrower commensurate with the higher risk.
We do not offer “interest only” mortgage loans on permanent single family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). Until April 2012, we offered an interest-only home equity loan product with a term of five years and a balloon payment, but have since discontinued this product. We have approximately
$321,000
of these loans as of September 30, 2016, with an additional
$286,000
in unused commitments for these loans. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on single family residential real estate loans (
i.e.
, loans to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments or bankruptcies, or loans to borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” loans (
i.e.
, loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).
We also sell, in the secondary market, a significant portion of the longer-term (20 to 30 year) fixed-rate residential mortgage loans that we originate, on both a servicing-retained and servicing-released, non-recourse basis, while retaining shorter-term (10 to 15 year) fixed-rate residential mortgage loans and adjustable rate residential mortgage loans, in order to manage the maturity and time to repricing of our loan portfolio. We also originate FHA and VA loans for sale on a servicing-released basis. During the years ended September 30, 2016 and September 30, 2015, we sold
$48.4 million
and
$29.2 million
of residential mortgage loans, respectively.
At September 30, 2016, we serviced a portfolio of
$126.1 million
of residential mortgage loans that we had originated and sold.
Commercial Business Lending
.
At September 30, 2016, we had
$40.8 million
of commercial business loans, representing
7.6%
of our total loan portfolio. Our commercial business loans are generally term loans with terms of one to five years, and are generally made to businesses with between $3.0 million and $20.0 million in revenues operating in our market area for purchasing equipment, property improvements, business expansion or working capital, with a target loan size of between $1.0 million to $2.0 million. Our commercial business loans are generally secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets, or, in very limited circumstances, may be unsecured. If a commercial business loan is secured by equipment, we fix the maturity of a term loan to correspond to 80% of the useful life of equipment purchased or seven years, whichever is less. We also offer regular lines of credit and revolving lines of credit with terms of up to 12 months to finance short-term working capital needs such as accounts payable and inventory. Our commercial lines of credit are generally priced on an adjustable-rate basis and may be secured or, in very limited circumstances, unsecured. We generally obtain personal guarantees with commercial business loans.
We also offer commercial business loans utilizing the Small Business Administration’s ("SBA") various programs. The loan guaranty provided under the SBA program reduces our credit risk. In addition, the guaranteed portion of the credit can be sold in the secondary market generating fee income opportunities. We face recourse liability on these loans if they do not meet all SBA requirements. We address this risk by utilizing a third-party SBA partner which specializes in underwriting, portfolio composition and servicing of SBA credit facilities. The Bank has Preferred Lender Status with the SBA. During the year ended September 30, 2016, we originated
no
SBA guaranteed commercial business loans.
We typically originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial business loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans. In addition, commercial business loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts on our part.
The table below sets forth information regarding our commercial business loans at September 30, 2016.
|
|
|
|
|
|
|
|
|
Industry Type
|
|
Number of Loans
|
|
Balance
|
|
|
|
|
(Dollars in thousands)
|
Manufacturing
|
|
54
|
|
|
$
|
28,689
|
|
Construction
|
|
24
|
|
|
4,656
|
|
Wholesale trade
|
|
10
|
|
|
2,480
|
|
Transportation and warehousing
|
|
7
|
|
|
2,331
|
|
Real estate, rental and leasing
|
|
4
|
|
|
1,141
|
|
Professional, scientific, and technical services
|
|
7
|
|
|
412
|
|
Remediation services
|
|
9
|
|
|
399
|
|
Health care and social
|
|
5
|
|
|
283
|
|
Retail trade
|
|
6
|
|
|
235
|
|
Other services
|
|
5
|
|
|
155
|
|
Arts, entertainment, and recreation
|
|
2
|
|
|
53
|
|
Accommodation and food
|
|
1
|
|
|
2
|
|
Total
|
|
134
|
|
|
$
|
40,836
|
|
At September 30, 2016, the average loan balance of our outstanding commercial business loans was
$305,000
, and the largest outstanding balance of such loans was a
$9.8 million
loan secured by corporate assets including corporate owned life insurance. This loan was performing in accordance with its original terms at September 30, 2016.
We believe that commercial business loans will provide growth opportunities for us, and we expect to continue to increase, subject to our underwriting standards and market conditions, this business line in the future. We have recently hired seasoned commercial business lenders, which has increased our outstanding commercial business and owner-occupied commercial real estate loan balances and our pipeline of commercial business and owner-occupied commercial real estate loan commitments.
Construction and Land Lending
. At September 30, 2016, we had
$16.2 million
, or
3.0%
of our total loan portfolio, in construction and land loans. Of these,
$6.0 million
were loans on vacant land held for development by individuals for their primary residences,
$7.3 million
were commercial construction and land development loans,
and
$2.9 million
were loans for the construction by individuals of their primary residences. All
$6.0 million
of loans on vacant land were fully amortizing loans, with the borrower obligated to pay principal and interest. At September 30, 2016, our largest construction and land loan was a
$2.7 million
loan secured by a multifamily property in our market area. This loan was performing in accordance with its original terms at September 30, 2016.
Our residential construction loans generally have initial terms of 12 months (subject to extension), during which the borrower pays interest only. Upon completion of construction, these loans convert to conventional amortizing mortgage loans. Our residential construction loans have rates and terms comparable to single family residential real estate loans that we originate. The maximum loan-to-value ratio of our residential construction loans is generally 80% of the lesser of the appraised value of the completed property or the contract price for the land plus the value of the improvements, and up to 90% for loans where the borrower obtains private mortgage
insurance. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans, except that all residential construction loans are appraised by independent appraisers approved by the Board of Directors.
Our commercial and multifamily construction loans generally have initial terms of 6-12 months, during which the borrower pays interest only. Upon completion of construction, these loans convert to permanent loans. Our commercial and multifamily construction loans have rates and terms comparable to commercial real estate and multifamily loans that we originate. The maximum loan-to-value of our commercial and multifamily construction loans is 75% and 80%, respectively, of the lesser of the appraised value of the completed property or the contract price for the land plus the value of the improvements, and ranges from 40% to 75% for commercial construction and 40% to 80% for multifamily construction depending on the collateral and the purpose of the improvements upon completion of construction. Commercial and multifamily construction loans are generally underwritten pursuant to the same guidelines used for originating permanent commercial real estate and multifamily loans.
To a lesser extent, we will make loans to developers for the construction and development of one- to four-family residential homes in our market area. Generally, no more than two such loans may be outstanding to one borrower at any time. These loans are originated pursuant to the same standards as, and generally have terms similar to, commercial and multifamily construction loans. We generally obtain personal guarantees for these loans.
All construction and land development loans are appraised by independent appraisers approved by the Board of Directors. All borrowers are required to obtain title insurance, property and casualty insurance, and, if the property is determined to be located in a flood zone area, flood insurance. The provider of title insurance on these loans inspects the properties for progress and authorizes all draws.
Construction financing generally involves greater credit risk than long-term financing on improved commercial real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.
The table below sets forth, by type of collateral property, the number and amount of our construction and land loans at September 30, 2016, all of which are secured by properties located in our market area.
|
|
|
|
|
|
|
|
|
Number of Loans
|
|
Balance
|
|
|
|
(Dollars in thousands)
|
Single family construction
|
17
|
|
|
$
|
2,895
|
|
Multifamily construction
|
4
|
|
|
4,879
|
|
Commercial construction
|
12
|
|
|
2,423
|
|
Land
|
63
|
|
|
6,033
|
|
Total
|
96
|
|
|
$
|
16,230
|
|
Consumer Lending.
At September 30, 2016, we had
$18.8 million
, or
3.5%
of our loan portfolio, in consumer loans, including
$15.0 million
in home equity lines of credit,
$3.4 million
in education loans and
$462,000
in other consumer loans.
Home Equity Lines of Credit
.
At September 30, 2016, we had
$15.0 million
, or
2.8%
of our loan portfolio, in home equity lines of credit. Our home equity lines of credit are secured by residential property, and generally have no set maturity. We do not extend home equity lines of credit unless the combined loan-to-value ratio of all senior mortgages and the line of credit is less than 80%. We offer fixed and variable rate home equity lines of credit, with variable rate home equity lines of credit bearing interest rates based upon the prime rate, subject to maximum rates. Unused commitments on home equity lines of credit were
$27.3 million
at September 30, 2016.
Home equity lines of credit have greater risk than single family residential real estate loans secured by other mortgages. We face the risk that the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity lines of credit, decreases in real estate values could adversely affect the value of property used as collateral.
At September 30, 2016, the average loan balance of our outstanding home equity lines of credit was
$24,900
. The largest outstanding balance of any such loan was
$3.0 million
. This loan was performing in accordance with its original terms at September 30, 2016. The borrower is a local commercial real estate loan customer; however, the residential property securing this loan is located out of our market area. Approximately 60% of our home equity lines of credit are secured by property where we also hold the first mortgage.
Other Consumer Loans
. Consumer loans other than home equity lines of credit have either a variable or fixed-rate of interest for a term of up to 72 months, depending on the type of collateral and the creditworthiness of the borrower. Our consumer loans may be secured by deposits, automobiles, boats, motorcycles or recreational vehicles, and loans of up to $3,000 may be unsecured.
Our education loans are all insured by Sallie Mae. We no longer originate education loans.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer loans generally have greater risk compared to longer-term loans secured by improved real estate, particularly unsecured loans and consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.
Originations, Purchases and Sales of Loans
We originate real estate and other loans through employee marketing and advertising efforts, our existing customer base, walk-in customers and referrals from customers and service providers, such as real estate brokers, builders and attorneys. All loans that we originate are underwritten pursuant to our policies and procedures.
We may sell a certain amount of the loans we originate into the secondary market and in recent years, based upon our interest rate risk analysis, we have sold a portion of the fixed-rate, single family residential real estate loans that we originated for sale to Fannie Mae on a servicing-retained basis. We are also approved to sell similar loans to the Federal Home Loan Bank of Chicago and Freddie Mac but have not sold to them in recent years. We also originate residential mortgage loans for sale on a servicing-released basis where the interest rates available are more advantageous to our customer than those available from Fannie Mae or the customer requires other terms that
we are not prepared to offer on a servicing-retained basis or in our loan portfolio. In addition, all FHA and VA loans and single family residential loans secured by non-owner-occupied properties are originated for sale in the secondary market on a servicing-released basis. Otherwise, we consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. For the year ended September 30, 2016, we sold
no
mortgage loans on a servicing-retained basis and
$48.4 million
of mortgage loans on a servicing-released basis and for the year ended September 30, 2015, we sold
$286,000
of mortgage loans on a servicing-retained basis and
$28.9 million
of mortgage loans on a servicing-released basis. At September 30, 2016, we serviced
$126.1 million
of fixed-rate, single family residential real estate loans that we originated and sold in the secondary market.
From time to time, we may purchase commercial loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. We use loan participations sold to manage our loan concentrations and to enable us to make loans to customers with credit needs that exceed our legal lending limit. We held
$9.5 million
of commercial loan participations purchased in our loan portfolio and serviced
$37.2 million
of commercial loan participations sold at September 30, 2016.
Delinquencies and Non-Performing Assets
Delinquency Procedures.
When a borrower fails to make a required monthly payment on a residential real estate loan, we attempt to contact the borrower to determine the reason for nonpayment and to discuss future payments. Our policies provide that a late notice be sent when a loan is 15 days past due. Once the loan is considered in default, generally at 30 days past due, a letter is sent to the borrower explaining that the entire balance of the loan is due and payable, and additional efforts are made to contact the borrower. A demand letter is mailed at 60 days past due giving the borrower 30 days to bring the account current. If the borrower does not respond, we generally initiate foreclosure proceedings when the loan is 120 days past due. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. In certain instances, we may modify the loan or grant a limited exemption from loan payments to allow the borrower to reorganize his or her financial affairs. We attempt to work with our borrowers to establish a repayment schedule that will cure the delinquency in a timely manner based on a full financial review.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized up to the estimated fair value less estimated costs to sell.
Delinquent consumer loans are handled in a similar fashion. Our procedures for repossession and sale of consumer collateral are subject to various requirements under applicable laws, including applicable consumer protection laws. In addition, we may determine that foreclosure and sale of such collateral would not be cost-effective for us.
Delinquent commercial business, commercial real estate, construction and multifamily loans are initially handled by the loan officer responsible for the origination of the loan. Our collections department works with the loan officer to ensure that the necessary steps are taken to collect on delinquent loans, including the mailing of delinquency notices. A collection officer takes over any delinquent loan once the loan is 30 days past due, and that collection officer handles any additional collection procedures, including letters from our attorneys. If we cannot reach an acceptable workout of a delinquent commercial business, commercial real estate, construction or multifamily loan between 30 and 60 days of the due date of the first missed payment, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.
Delinquent Loans
. The following table sets forth our loan delinquencies by type and amount at the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars in thousands)
|
At September 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
5
|
|
|
$
|
239
|
|
|
3
|
|
|
$
|
426
|
|
|
2
|
|
|
$
|
73
|
|
|
10
|
|
|
$
|
738
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate
|
5
|
|
|
239
|
|
|
3
|
|
|
426
|
|
|
2
|
|
|
73
|
|
|
10
|
|
|
738
|
|
Commercial business loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
27
|
|
|
1
|
|
|
27
|
|
Education
|
3
|
|
|
11
|
|
|
4
|
|
|
39
|
|
|
7
|
|
|
149
|
|
|
14
|
|
|
199
|
|
Automobile
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
3
|
|
|
11
|
|
|
4
|
|
|
39
|
|
|
8
|
|
|
176
|
|
|
15
|
|
|
226
|
|
Total
|
8
|
|
|
$
|
250
|
|
|
7
|
|
|
$
|
465
|
|
|
10
|
|
|
$
|
249
|
|
|
25
|
|
|
$
|
964
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
10
|
|
|
$
|
473
|
|
|
1
|
|
|
$
|
83
|
|
|
5
|
|
|
$
|
340
|
|
|
16
|
|
|
$
|
896
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Construction and land
|
1
|
|
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
4
|
|
Total real estate
|
11
|
|
|
477
|
|
|
1
|
|
|
83
|
|
|
5
|
|
|
340
|
|
|
17
|
|
|
900
|
|
Commercial business loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
190
|
|
|
3
|
|
|
190
|
|
Education
|
5
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
245
|
|
|
15
|
|
|
324
|
|
Automobile
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
5
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
13
|
|
|
435
|
|
|
18
|
|
|
514
|
|
Total
|
16
|
|
|
$
|
556
|
|
|
1
|
|
|
$
|
83
|
|
|
18
|
|
|
$
|
775
|
|
|
35
|
|
|
$
|
1,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
16
|
|
|
$
|
1,623
|
|
|
2
|
|
|
$
|
162
|
|
|
6
|
|
|
$
|
450
|
|
|
24
|
|
|
$
|
2,235
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
1
|
|
|
178
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
32
|
|
|
2
|
|
|
210
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
1
|
|
|
163
|
|
|
1
|
|
|
164
|
|
|
2
|
|
|
327
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate
|
17
|
|
|
1,801
|
|
|
3
|
|
|
325
|
|
|
8
|
|
|
646
|
|
|
28
|
|
|
2,772
|
|
Commercial business loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
22
|
|
|
2
|
|
|
22
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
3
|
|
|
228
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
129
|
|
|
6
|
|
|
357
|
|
Education
|
4
|
|
|
28
|
|
|
6
|
|
|
44
|
|
|
10
|
|
|
120
|
|
|
20
|
|
|
192
|
|
Automobile
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
2
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
7
|
|
|
256
|
|
|
6
|
|
|
44
|
|
|
14
|
|
|
251
|
|
|
27
|
|
|
551
|
|
Total
|
24
|
|
|
$
|
2,057
|
|
|
9
|
|
|
$
|
369
|
|
|
24
|
|
|
$
|
919
|
|
|
57
|
|
|
$
|
3,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
4
|
|
|
$
|
406
|
|
|
11
|
|
|
$
|
1,571
|
|
|
20
|
|
|
$
|
2,888
|
|
|
35
|
|
|
$
|
4,865
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
3
|
|
|
5,305
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
5,305
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
1
|
|
|
180
|
|
|
2
|
|
|
1,069
|
|
|
3
|
|
|
1,249
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
192
|
|
|
1
|
|
|
192
|
|
Total real estate
|
4
|
|
|
406
|
|
|
15
|
|
|
7,056
|
|
|
23
|
|
|
4,149
|
|
|
42
|
|
|
11,611
|
|
Commercial business loans
|
2
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
27
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
5
|
|
|
116
|
|
|
4
|
|
|
90
|
|
|
7
|
|
|
266
|
|
|
16
|
|
|
472
|
|
Education
|
6
|
|
|
64
|
|
|
3
|
|
|
26
|
|
|
14
|
|
|
108
|
|
|
23
|
|
|
198
|
|
Automobile
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
3
|
|
|
4
|
|
|
4
|
|
|
5
|
|
Other consumer loans
|
1
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
Total consumer loans
|
12
|
|
|
182
|
|
|
8
|
|
|
117
|
|
|
24
|
|
|
378
|
|
|
44
|
|
|
677
|
|
Total
|
18
|
|
|
$
|
615
|
|
|
23
|
|
|
$
|
7,173
|
|
|
47
|
|
|
$
|
4,527
|
|
|
88
|
|
|
$
|
12,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans Delinquent For
|
|
Total
|
|
30-59 Days
|
|
60-89 Days
|
|
90 Days and Over
|
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
Number
|
|
Amount
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
22
|
|
|
$
|
1,747
|
|
|
11
|
|
|
$
|
1,112
|
|
|
30
|
|
|
$
|
3,034
|
|
|
63
|
|
|
$
|
5,893
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
1
|
|
|
169
|
|
5
|
|
|
2,376
|
|
6
|
|
|
2,545
|
Construction and land
|
1
|
|
|
53
|
|
—
|
|
|
—
|
|
|
1
|
|
|
108
|
|
2
|
|
|
161
|
Total real estate
|
23
|
|
|
1,800
|
|
12
|
|
|
1,281
|
|
36
|
|
|
5,518
|
|
71
|
|
|
8,599
|
Commercial business loans
|
4
|
|
|
153
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
153
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
7
|
|
|
453
|
|
3
|
|
|
248
|
|
11
|
|
|
288
|
|
21
|
|
|
989
|
Education
|
7
|
|
|
61
|
|
8
|
|
|
85
|
|
10
|
|
|
114
|
|
25
|
|
|
260
|
Automobile
|
3
|
|
|
5
|
|
2
|
|
|
5
|
|
2
|
|
|
3
|
|
7
|
|
|
13
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
6
|
|
2
|
|
|
6
|
Total consumer loans
|
17
|
|
|
519
|
|
13
|
|
|
338
|
|
25
|
|
|
411
|
|
55
|
|
|
1,268
|
Total
|
44
|
|
|
$
|
2,472
|
|
|
25
|
|
|
$
|
1,619
|
|
|
61
|
|
|
$
|
5,929
|
|
|
130
|
|
|
$
|
10,020
|
|
The general decrease in delinquent loans at September 30, 2016 was attributable to our ongoing efforts to improve credit quality and relatively stable economic conditions over the past year.
Classified Assets
. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When management classifies problem assets as either substandard or doubtful, after reviewing the assets for impairment, it may establish specific allowances in an amount deemed prudent by management to cover probable losses. When an insured institution classifies problem assets as “loss,” it is required to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports and in accordance with our classification of assets 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 financial weaknesses even though the loan is currently performing as agreed, or delinquency status. Management reviews the status of each impaired loan on our watch list on a quarterly basis with the directors’ loan committee and then with the full Board of Directors. If a loan deteriorates in asset quality, the classification is changed to “special
mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”
On the basis of this review of our assets, we had classified or held as special mention the following assets as of the date indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
(Dollars in thousands)
|
Classified Loans:
|
|
|
|
|
|
|
|
|
|
Loss
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Doubtful
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Substandard – performing:
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Single family
|
1,418
|
|
|
1,390
|
|
|
1,239
|
|
|
623
|
|
|
1,485
|
|
Multi-family
|
—
|
|
|
—
|
|
|
160
|
|
|
173
|
|
546
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
342
|
|
|
186
|
|
1,921
|
|
Commercial real estate - owner occupied
|
—
|
|
|
307
|
|
|
1,135
|
|
|
552
|
|
6,689
|
|
Construction and land
|
2
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
448
|
|
Total real estate loans
|
1,420
|
|
|
1,697
|
|
|
2,881
|
|
|
1,534
|
|
11,089
|
|
Commercial business loans
|
—
|
|
|
1,639
|
|
|
82
|
|
|
5
|
|
953
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
68
|
|
|
55
|
|
|
58
|
|
|
61
|
|
407
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
68
|
|
|
55
|
|
|
58
|
|
|
61
|
|
407
|
|
Total substandard – performing
|
1,488
|
|
|
3,391
|
|
|
3,021
|
|
|
1,600
|
|
12,449
|
|
|
|
|
|
|
|
|
|
|
|
Substandard – Nonperforming:
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Single family
|
337
|
|
|
195
|
|
|
596
|
|
|
3,903
|
|
4,268
|
|
Multi-family
|
—
|
|
|
—
|
|
|
—
|
|
|
2,638
|
|
2,789
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
186
|
|
|
35
|
|
0
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
164
|
|
|
1,249
|
|
2,376
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
191
|
|
108
|
|
Total real estate loans
|
337
|
|
|
195
|
|
|
946
|
|
|
8,016
|
|
9,541
|
|
Commercial business loans
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
27
|
|
|
190
|
|
|
129
|
|
|
285
|
|
310
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
2
|
|
|
3
|
|
45
|
|
Total consumer loans
|
27
|
|
|
190
|
|
|
131
|
|
|
288
|
|
355
|
|
Total substandard – nonperforming
|
364
|
|
|
385
|
|
|
1,099
|
|
|
8,304
|
|
9,896
|
|
|
|
|
|
|
|
|
|
|
|
Total classified loans
(1)
|
1,852
|
|
|
3,776
|
|
|
4,120
|
|
|
9,904
|
|
22,345
|
|
|
|
|
|
|
|
|
|
|
|
Securities
(2)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
230
|
|
Foreclosed real estate
|
99
|
|
|
283
|
|
|
2,355
|
|
|
1,690
|
|
2,728
|
|
|
|
|
|
|
|
|
|
|
|
Total classified assets
|
$
|
1,951
|
|
|
$
|
4,059
|
|
|
$
|
6,475
|
|
|
$
|
11,594
|
|
|
$
|
25,303
|
|
|
|
|
|
|
|
|
|
|
|
Special mention:
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Single family
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
118
|
|
|
$
|
121
|
|
|
$
|
806
|
|
Multi-family
|
—
|
|
|
—
|
|
|
445
|
|
|
—
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
396
|
|
|
410
|
|
|
424
|
|
|
1,221
|
|
1,187
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
434
|
|
|
1,328
|
|
608
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
177
|
|
Total real estate loans
|
396
|
|
|
410
|
|
|
1,421
|
|
|
2,670
|
|
2,778
|
|
Commercial business loans
|
214
|
|
|
—
|
|
|
—
|
|
|
928
|
|
780
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total special mention
|
610
|
|
|
410
|
|
|
1,421
|
|
|
3,598
|
|
3,558
|
|
|
|
|
|
|
|
|
|
|
|
Total classified assets and special mention loans
|
$
|
2,561
|
|
|
$
|
4,469
|
|
|
$
|
7,896
|
|
|
$
|
15,192
|
|
|
$
|
28,861
|
|
|
|
(1)
|
Includes
$364,000
, $385,000, $727,000, $2.2 million and $3.7 million respectively, at September 30, 2016, September 30, 2015, September 30, 2014, September 30, 2013, and September 30, 2012 of homogeneous single family real estate mortgage loans, home equity lines of credit and other consumer loans that were not, at those dates, subject to detailed internal evaluation or formally risk-rated by the Bank, but that were, at such dates, 90 or more days past due and not covered by private mortgage insurance, and, in accordance with internal policy, are included herein as substandard because the loans are non-performing.
|
|
|
(2)
|
Represents municipal bonds classified as substandard as a result of downgraded ratings issued by the ratings agencies.
|
The decrease in classified assets from September 30, 2015 to September 30, 2016 was primarily due to our ongoing efforts to improve credit quality and resolve problem credits in our loan portfolio in a timely, cost-effective manner. The decrease in substandard performing loans was the result of the payoff of a commercial and industrial loan relationship totaling
$1.6 million
. The decrease in foreclosed real estate was the result of loans transferred to foreclosed properties of
$170,000
, offset by sales of
$356,000
of properties and valuation adjustments of
$26,000
for the year ended September 30, 2016.
Non-Performing Assets.
Non-performing assets decreased to
$661,000
, or
0.09%
of total assets, at September 30, 2016 from
$1.1 million
, or
0.17%
of total assets, at September 30, 2015. General economic conditions, including the profitability of commercial enterprises, declines in real estate values and excess inventory in housing markets, were the primary cause of elevated levels of delinquencies and foreclosures in our real estate loan portfolio through 2013. Improvement in economic and market conditions and our enhanced efforts focused on loan collection and problem loan resolution have led to improvements in the levels of delinquencies and foreclosed assets. At September 30, 2016,
$25,000
, or
4.4%
, of total nonaccrual loans were current on their loan payments.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Troubled debt restructurings are loans that have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans, with modifications to loan terms including a lower interest rate, a reduction in principal, or a longer term to maturity. We generally do not forgive principal or interest on loans. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for longer amortization schedules (up to 40 years), or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.Troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the revised contractual terms for six months and the ultimate collectability of the total contractual principal and interest is deemed probable. At September 30, 2016, we had
six
loans totaling
$3.0 million
that were classified as troubled debt restructurings. Of these,
none
were included in our non-accrual loans at such date as they have been performing for at least six consecutive months under the modified loan terms and the ultimate collectability of the total contractual principal and interest has been deemed probable.
The following table sets forth information regarding our non-performing assets and troubled debt restructurings at the dates indicated. The information reflects net charge-offs but not specific reserves. Troubled debt restructurings include where the borrower is experiencing financial difficulty and loans for which either a portion of interest or principal has been forgiven or an extension of term granted, or for loans modified at interest rates less than current market rates.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
|
|
|
(Dollars in thousands)
|
Nonaccrual loans:
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
Single family
|
$
|
338
|
|
|
$
|
340
|
|
|
$
|
791
|
|
|
$
|
4,207
|
|
|
$
|
4,610
|
|
Multi family
|
—
|
|
|
—
|
|
|
—
|
|
|
2,638
|
|
|
2,789
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
186
|
|
|
34
|
|
|
—
|
|
Commercial real estate - owner occupied
|
—
|
|
|
—
|
|
|
164
|
|
|
1,249
|
|
|
2,376
|
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
192
|
|
|
108
|
|
Total real estate
|
338
|
|
|
340
|
|
|
1,141
|
|
|
8,320
|
|
|
9,883
|
|
Commercial business loans
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
—
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
36
|
|
|
203
|
|
|
145
|
|
|
285
|
|
|
310
|
|
Education
|
188
|
|
|
260
|
|
|
120
|
|
|
134
|
|
|
199
|
|
Automobile
|
—
|
|
|
—
|
|
|
2
|
|
|
4
|
|
|
3
|
|
Other consumer loans
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
42
|
|
Total consumer loans
|
224
|
|
|
463
|
|
|
267
|
|
|
423
|
|
|
554
|
|
Total nonaccrual loans
(1)
|
562
|
|
|
803
|
|
|
1,430
|
|
|
8,743
|
|
|
10,437
|
|
|
|
|
|
|
|
|
|
|
|
Loans greater than 90 days delinquent and still accruing:
|
|
|
|
|
|
|
|
|
|
Total delinquent loans accruing
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Total non-performing loans
|
562
|
|
|
803
|
|
|
1,430
|
|
|
8,743
|
|
|
10,437
|
|
|
|
|
|
|
|
|
|
|
Foreclosed assets:
|
|
|
|
|
|
|
|
|
|
Single family
|
99
|
|
|
89
|
|
|
653
|
|
|
427
|
|
|
591
|
Multi-family
|
—
|
|
|
—
|
|
|
458
|
|
|
551
|
|
|
410
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
629
|
Commercial real estate - owner occupied
|
—
|
|
|
194
|
|
|
1,149
|
|
|
448
|
|
|
55
|
Construction and land
|
—
|
|
|
—
|
|
|
95
|
|
|
264
|
|
|
1,043
|
Total foreclosed assets
|
99
|
|
|
283
|
|
|
2,355
|
|
|
1,690
|
|
|
2,728
|
|
|
|
|
|
|
|
|
|
|
Total nonperforming assets
|
$
|
661
|
|
|
$
|
1,086
|
|
|
$
|
3,785
|
|
|
$
|
10,433
|
|
|
$
|
13,165
|
|
|
|
|
|
|
|
|
|
|
|
Performing troubled debt restructurings
|
$
|
3,021
|
|
|
$
|
3,134
|
|
|
$
|
3,507
|
|
|
$
|
3,166
|
|
|
$
|
6,302
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
Nonperforming loans to total loans
|
0.10
|
%
|
|
0.16
|
%
|
|
0.34
|
%
|
|
2.52
|
%
|
|
2.73
|
%
|
Nonperforming assets to total assets
|
0.09
|
%
|
|
0.17
|
%
|
|
0.67
|
%
|
|
1.92
|
%
|
|
2.50
|
%
|
Nonperforming assets and troubled debt restructurings to total assets
|
0.52
|
%
|
|
0.66
|
%
|
|
1.28
|
%
|
|
2.50
|
%
|
|
3.70
|
%
|
|
|
(1)
|
Includes
$0
, $0, $195,000, $5.4 million and $1.3 million, respectively, of troubled debt restructurings that were on non-accrual status at September 30, 2016, 2015, 2014, 2013 and 2012.
|
Interest income that would have been recorded for the years ended September 30, 2016 and 2015 had non-accruing loans been current according to their original terms amounted to
$31,000
and
$31,000
, respectively. Interest of approximately
$14,000
and
$8,000
related to these loans was included in interest income for the years ended September 30, 2016 and 2015, respectively.
Non-performing single family residential real estate loans totaled
$338,000
at September 30, 2016 and consisted of
six
loans, of which the largest totaled
$131,000
. There were no non-performing commercial real estate loans at September 30, 2016. Other non-performing loans totaled
$224,000
at September 30, 2016.
Foreclosed real estate totaled
$99,000
at September 30, 2016, and consisted solely of single family residential properties.
At September 30, 2016, our largest non-performing loan relationship was a
home equity line of credit
loan totaling
$131,000
secured by a
personal residence
.
Other Loans of Concern.
There were no other loans at September 30, 2016 that are not already disclosed where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses
. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value would result in our charging off the loan or the portion of the loan that was determined to be a loss.
Among other factors, we consider current general economic conditions in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of the current housing market.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using the original independent appraisal, adjusted for current economic conditions and other factors, and related general or specific reserves are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal. Any shortfall would result in immediately charging off the portion of the loan that was determined to be a loss.
Specific Allowances for Identified Problem Loans
.
We establish a specific allowance when a loan is determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the amount of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.
General Valuation Allowance on the Remainder of the Loan Portfolio
. We establish a general allowance for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current economic environment.
Allowance for Loan Losses
.
The following table sets forth activity in our allowance for loan losses for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
For the Nine Months Ended September 30, 2012
|
|
2016
|
|
2015
|
|
2014
|
|
2013
|
|
2012
|
|
|
Audited
|
|
Audited
|
|
Audited
|
|
Audited
|
|
Unaudited
|
|
Audited
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
$
|
4,598
|
|
|
$
|
4,072
|
|
|
$
|
4,266
|
|
|
$
|
6,690
|
|
|
$
|
7,212
|
|
|
$
|
7,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charge-offs:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
(176
|
)
|
|
(257
|
)
|
|
(870
|
)
|
|
(1,922
|
)
|
|
(1,161
|
)
|
|
(803)
|
Multi-family
|
—
|
|
|
(99
|
)
|
|
—
|
|
|
—
|
|
|
(1,521
|
)
|
|
(435)
|
Commercial real estate - non-owner occupied
|
—
|
|
|
(63
|
)
|
|
(8
|
)
|
|
(534
|
)
|
|
(496
|
)
|
|
(179)
|
Commercial real estate - owner occupied
|
—
|
|
|
(52
|
)
|
|
(246
|
)
|
|
(1,069
|
)
|
|
(1,947
|
)
|
|
(1,220)
|
Construction and land
|
—
|
|
|
—
|
|
|
—
|
|
|
(198
|
)
|
|
(482
|
)
|
|
(482
|
)
|
Total real estate
|
(176
|
)
|
|
(471
|
)
|
|
(1,124
|
)
|
|
(3,723
|
)
|
|
(5,607
|
)
|
|
(3,119)
|
Commercial business loans
|
—
|
|
|
(14
|
)
|
|
(159
|
)
|
|
(125
|
)
|
|
(1,144
|
)
|
|
(398)
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
(10
|
)
|
|
(24
|
)
|
|
(5
|
)
|
|
(118
|
)
|
|
(281
|
)
|
|
(153)
|
Education
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Automobile
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
|
(7
|
)
|
|
(9
|
)
|
|
(9
|
)
|
Other consumer loans
|
—
|
|
|
—
|
|
|
(47
|
)
|
|
(2
|
)
|
|
(19
|
)
|
|
(1)
|
Total consumer loans
|
(10
|
)
|
|
(26
|
)
|
|
(53
|
)
|
|
(127
|
)
|
|
(309
|
)
|
|
(163)
|
Total charge-offs
|
(186
|
)
|
|
(511
|
)
|
|
(1,336
|
)
|
|
(3,975
|
)
|
|
(7,060
|
)
|
|
(3,680)
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoveries:
|
|
|
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
13
|
|
|
18
|
|
|
161
|
|
|
81
|
|
|
19
|
|
|
3
|
Multi-family
|
—
|
|
|
—
|
|
|
4
|
|
|
1
|
|
|
40
|
|
|
—
|
|
Commercial real estate - non-owner occupied
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
78
|
|
|
78
|
Commercial real estate - owner occupied
|
2
|
|
|
36
|
|
|
20
|
|
|
20
|
|
|
83
|
|
|
13
|
Construction and land
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total real estate
|
15
|
|
|
54
|
|
|
210
|
|
|
102
|
|
|
220
|
|
|
94
|
Commercial business loans
|
32
|
|
|
22
|
|
|
43
|
|
|
56
|
|
|
55
|
|
|
50
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
87
|
|
|
87
|
|
Education
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Automobile
|
—
|
|
|
5
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
1
|
|
Other consumer loans
|
10
|
|
|
6
|
|
|
338
|
|
|
—
|
|
|
3
|
|
|
3
|
|
Total consumer loans
|
10
|
|
|
11
|
|
|
339
|
|
|
13
|
|
|
91
|
|
|
91
|
Total recoveries
|
57
|
|
|
87
|
|
|
592
|
|
|
171
|
|
|
366
|
|
|
235
|
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs
|
(129
|
)
|
|
(424
|
)
|
|
(744
|
)
|
|
(3,804
|
)
|
|
(6,694
|
)
|
|
(3,445)
|
Provision for loan losses
|
775
|
|
|
950
|
|
|
550
|
|
|
1,380
|
|
|
6,172
|
|
|
3,019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
$
|
5,244
|
|
|
$
|
4,598
|
|
|
$
|
4,072
|
|
|
$
|
4,266
|
|
|
$
|
6,690
|
|
|
$
|
6,690
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
Net charge-offs to average loans outstanding
|
0.03
|
%
|
|
0.09
|
%
|
|
0.20
|
%
|
|
1.05
|
%
|
|
1.71
|
%
|
|
1.16
|
%
|
Allowance for loan losses to nonperforming loans at end of period
|
933.10
|
%
|
|
572.60
|
%
|
|
284.76
|
%
|
|
48.80
|
%
|
|
64.10
|
%
|
|
64.10
|
%
|
Allowance for loan losses to total loans at end of period
|
0.97
|
%
|
|
0.92
|
%
|
|
0.97
|
%
|
|
1.23
|
%
|
|
1.75
|
%
|
|
1.75
|
%
|
Allocation of Allowance for Loan Losses.
The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
|
At September 30, 2015
|
|
Allowance for Loan Losses
|
|
As a Percentage of
Total Allowance
|
|
Loan Balances by Category
|
|
Percent of Loans in Each Category to Total Loans
|
|
Allowance for Loan Losses
|
|
As a Percentage of
Total Allowance
|
|
Loan Balances by Category
|
|
Percent of Loans in Each Category to Total Loans
|
|
(Dollars in thousands)
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
$
|
980
|
|
|
18.69
|
%
|
|
$
|
158,541
|
|
|
29.41
|
%
|
|
$
|
1,073
|
|
|
23.34
|
%
|
|
$
|
153,141
|
|
|
30.73
|
%
|
Multi-family
|
1,015
|
|
|
19.36
|
|
|
123,623
|
|
|
22.93
|
|
|
1,013
|
|
|
22.03
|
|
|
105,750
|
|
|
21.22
|
|
Commercial real estate - non-owner occupied
|
1,519
|
|
|
28.97
|
|
|
117,971
|
|
|
21.88
|
|
|
1,091
|
|
|
23.73
|
|
|
110,833
|
|
|
22.24
|
|
Commercial real estate - owner occupied
|
813
|
|
|
15.50
|
|
|
63,108
|
|
|
11.71
|
|
|
513
|
|
|
11.15
|
|
|
52,124
|
|
|
10.46
|
|
Construction and land
|
344
|
|
|
6.56
|
|
|
16,230
|
|
|
3.01
|
|
|
330
|
|
|
7.18
|
|
|
18,831
|
|
|
3.78
|
|
Total real estate
|
4,671
|
|
|
|
|
479,473
|
|
|
|
|
4,020
|
|
|
|
|
440,679
|
|
|
|
Commercial business loans
|
500
|
|
|
9.53
|
|
|
40,836
|
|
|
7.57
|
|
|
498
|
|
|
10.83
|
|
|
38,200
|
|
|
7.66
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
70
|
|
|
1.33
|
|
|
14,969
|
|
|
2.78
|
|
|
74
|
|
|
1.61
|
|
|
14,881
|
|
|
2.99
|
|
Other consumer loans
|
3
|
|
|
0.06
|
|
|
3,863
|
|
|
0.71
|
|
|
6
|
|
|
0.13
|
|
|
4,629
|
|
|
0.92
|
|
Total consumer loans
|
73
|
|
|
|
|
18,832
|
|
|
|
|
80
|
|
|
|
|
19,510
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (excluding net deferred loan fees and costs)
|
$
|
5,244
|
|
|
100.00
|
%
|
|
$
|
539,141
|
|
|
100.00
|
%
|
|
$
|
4,598
|
|
|
100.00
|
%
|
|
$
|
498,389
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2014
|
|
At September 30, 2013
|
|
Allowance for Loan Losses
|
|
As a Percentage of
Total Allowance
|
|
Loan Balances by Category
|
|
Percent of Loans in Each Category to Total Loans
|
|
Allowance for Loan Losses
|
|
As a Percentage of
Total Allowance
|
|
Loan Balances by Category
|
|
Percent of Loans in Each Category to Total Loans
|
|
(Dollars in thousands)
|
Real estate loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single family
|
$
|
1,072
|
|
|
26.33
|
%
|
|
$
|
135,337
|
|
|
32.13
|
%
|
|
$
|
1,873
|
|
|
43.90
|
%
|
|
$
|
132,496
|
|
|
38.16
|
%
|
Multi-family
|
757
|
|
|
18.59
|
|
|
76,396
|
|
|
18.14
|
|
|
165
|
|
|
3.87
|
|
|
47,178
|
|
|
13.59
|
|
Commercial real estate - non-owner occupied
|
679
|
|
|
16.68
|
|
|
93,141
|
|
|
22.11
|
|
|
1,217
|
|
|
28.53
|
|
|
80,522
|
|
|
23.19
|
|
Commercial real estate - owner occupied
|
733
|
|
|
18.00
|
|
|
41,980
|
|
|
9.97
|
|
|
284
|
|
|
6.66
|
|
|
31,715
|
|
|
9.14
|
|
Construction and land
|
301
|
|
|
7.39
|
|
|
16,362
|
|
|
3.89
|
|
|
374
|
|
|
8.77
|
|
|
10,629
|
|
|
3.06
|
|
Total real estate
|
3,542
|
|
|
|
|
363,216
|
|
|
|
|
3,913
|
|
|
|
|
302,540
|
|
|
|
Commercial business loans
|
454
|
|
|
11.15
|
|
|
37,675
|
|
|
8.95
|
|
|
211
|
|
|
4.95
|
|
|
25,003
|
|
|
7.20
|
|
Consumer loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity lines of credit
|
75
|
|
|
1.84
|
|
|
14,275
|
|
|
3.39
|
|
|
136
|
|
|
3.19
|
|
|
13,652
|
|
|
3.94
|
|
Other consumer loans
|
1
|
|
|
0.02
|
|
|
6,015
|
|
|
1.42
|
|
|
6
|
|
|
0.14
|
|
|
5,987
|
|
|
1.72
|
|
Total consumer loans
|
76
|
|
|
|
|
20,290
|
|
|
|
|
142
|
|
|
|
|
19,639
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans (excluding net deferred loan fees and costs)
|
$
|
4,072
|
|
|
100.00
|
%
|
|
$
|
421,181
|
|
|
100.00
|
%
|
|
$
|
4,266
|
|
|
100.00
|
%
|
|
$
|
347,182
|
|
|
100.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2012
|
|
Allowance for Loan Losses
|
|
As a Percentage of
Total Allowance
|
|
Loan Balances by Category
|
|
Percent of Loans in Each Category to Total Loans
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Real estate loans:
|
|
|
|
|
|
|
|
Single family
|
$
|
1,390
|
|
|
20.78
|
%
|
|
$
|
153,090
|
|
|
40.00
|
%
|
Multi-family
|
712
|
|
10.64
|
|
|
38,491
|
|
10.06
|
|
Commercial real estate - non-owner occupied
|
2,121
|
|
31.70
|
|
|
92,565
|
|
24.20
|
|
Commercial real estate - owner occupied
|
1,128
|
|
16.87
|
|
|
40,217
|
|
10.51
|
|
Construction and land
|
293
|
|
4.38
|
|
|
8,975
|
|
2.35
|
|
Total real estate
|
5,644
|
|
|
|
333,338
|
|
|
Commercial business loans
|
810
|
|
12.11
|
|
|
22,938
|
|
6.00
|
|
Consumer loans:
|
|
|
|
|
|
|
|
Home equity lines of credit
|
233
|
|
3.48
|
|
|
19,356
|
|
5.06
|
|
Other consumer loans
|
3
|
|
0.04
|
|
|
6,964
|
|
1.82
|
|
Total consumer loans
|
236
|
|
|
|
26,320
|
|
|
|
|
|
|
|
|
|
|
Total loans (excluding net deferred loan fees and costs)
|
$
|
6,690
|
|
|
100.00
|
%
|
|
$
|
382,596
|
|
|
100.00
|
%
|
At September 30, 2016, our allowance for loan losses represented
0.97%
of total loans and
933.10%
of non-performing loans whereas at September 30, 2015, our allowance for loan losses represented
0.92%
of total loans and
572.60%
of non-performing loans. The decrease in non-performing loans to
$562,000
at September 30, 2016 from
$803,000
at September 30, 2015, without a significant amount of charge-offs to the allowance for loan losses, resulted in the improvement in the ratio of allowance for loan losses to non-performing loans. We recorded
$129,000
and
$424,000
in net charge-offs during the years ended September 30, 2016 and September 30, 2015, respectively.
Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used by our management in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the OCC, our primary regulator, will periodically review our allowance for loan losses. The OCC may require that we increase our allowance based on its judgments of information available to it at the time of its examination. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Activities
General
. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate interest rate and market risk, and to generate a reasonable rate of return on funds within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.
Our board of directors is responsible for adopting our investment policy. The investment policy is reviewed annually by management and any changes to the policy are recommended, and subject, to the approval of the board of directors. Authority to make investments under the approved investment policy guidelines is delegated to our Chief Financial Officer and our President and Chief Executive Officer. All investment transactions are reviewed at regularly scheduled monthly meetings of the board of directors.
Our current investment policy permits, with certain limitations, investments in United States Treasury securities with maturities up to 10 years; securities issued by the United States Government and its agencies or government sponsored enterprises with maturities up to 10 years; step-up coupon securities issued by government sponsored enterprises with maturities up to 15 years; pass-through mortgage-backed securities (MBS) issued by Fannie Mae, Ginnie Mae or Freddie Mac with an average life up to seven years secured by either single family or multifamily loans; collateralized mortgage obligations (CMO) with an average life up to seven years that are secured by MBS issued by Fannie Mae, Ginnie Mae or Freddie Mac; municipal tax, revenue, and bond anticipation notes issued by Wisconsin municipalities and general obligation municipal notes and bonds with maturities up to 20 years; AAA (insured) essential service municipal revenue notes and bonds issued by non-Wisconsin municipalities with maturities up to 20 years; corporate notes and bonds issued by U.S. corporations with maturities up to ten years; reverse repurchase agreements with maturities up to one year; certificates of deposit issued in the U.S. by U.S. banks with maturities up to seven years; bank notes and banker’s acceptances with maturities up to one year; Fed funds sold to U.S. banks; and equity investments in the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Chicago or acquired in foreclosure, settlement or workout of debts previously contracted.
Prior to any investment, certain instruments must be subject to a price sensitivity test using either our internal interest rate simulation model or a model available from a reputable third party other than the broker or dealer selling the instrument. These instruments are fixed rate instruments (other than mortgage-related instruments) with maturities greater than 10 years; mortgage-related securities with maturities greater than two years; floating rate instruments with caps or floors; floating rate instruments with coupon rates tied to or inversely related to an index; and securities that are continuously callable or have more than one call date. None of these instruments may be acquired if the change in price exceeds, generally, an increase of 10% to 25% resulting from changes in interest rates of -100 bp to -300 bp, or a decrease of -5% to -20% resulting from changes in interest rates of +100 bp to +300 bp.
Our investment policy does not permit investment in stripped mortgage-backed securities; CMOs secured by mortgage assets not backed by the credit support of a U.S. government agency; floating rate derivatives; CMO residual or “Z tranche” bonds; long-term zero coupon bonds; complex securities and derivatives as defined in federal banking regulations; and other high-risk securities that do not pass the interest rate sensitivity tests set forth in our investment policy. Our current policy does not permit hedging activities, such as futures, options or swap transactions; coupon stripping; gains trading; short sales; securities lending; “when issued” securities trading; “pair-offs”; corporate or extended settlements other than in the normal course of business; repositioning repurchase agreements; purchasing securities on margin; or trading with the intent to capture changes in price over 60 days or less.
Our investment policy also requires that certain investment instruments be rated, and that our investment portfolio be appropriately diversified. At September 30, 2016, none of the collateral underlying our securities portfolio was considered subprime or Alt-A, and we did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae.
U.S. Government and Agency Obligations.
At September 30, 2016, we had U.S. government and agency securities with a carrying value of
$25,000
, which constituted
0.03%
of our securities portfolio. While these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
Residential Mortgage-Backed Securities
. At September 30, 2016, we had residential mortgage-backed securities with a carrying value of
$40.8 million
, which constituted
42.4%
of our securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Westbury Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our residential mortgage-backed securities are
either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Collateralized Mortgage Obligations (CMO).
At September 30, 2016, we had CMOs with a carrying value of
$2.7 million
, which constituted
2.8%
of our securities portfolio. CMOs issued by United States Government agencies and government-sponsored enterprises are also more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, CMOs may be used to collateralize our borrowings. Investments in CMOs involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such investments, thereby affecting the net yield on our securities. However, they are generally less susceptible to prepayment risk than mortgage-backed securities as they are structured to provide a more predictable payment stream to the holder of the CMO. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. All of our CMOs are either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Commercial Mortgage-Backed Securities.
At September 30, 2016, we had commercial mortgage-backed securities with a carrying value of
$11.5 million
, which constituted
12.0%
of our securities portfolio. Commercial mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of multifamily mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Westbury Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our commercial mortgage-backed securities are either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Municipal Securities.
At September 30, 2016, we had taxable municipal securities available for sale with a carrying value of
$13.1 million
, tax exempt municipal securities available for sale with a carrying value of
$25.7 million
, and tax exempt municipal securities held to maturity with a carrying value of
$2.3 million
which constituted
13.6%
,
26.7%
, and
2.4%
of our securities portfolio, respectively. Most of our current municipal securities are issued by Wisconsin municipalities and have maturities not in excess of 12 years. These securities generally provide slightly higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as such other investments, so we typically maintain investments in municipal securities, to the extent appropriate, for generating returns in our investment portfolio.
Corporate Securities.
At September 30, 2016, we did not hold any corporate securities. The corporate securities we have historically owned are issued by well-known national companies and have maturities not in excess of ten years. These securities generally provide higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as such other investments, so we typically maintain investments in corporate securities, from time to time, to the extent appropriate, for generating returns in our investment portfolio.
Federal Home Loan Bank Stock
. We held common stock of the Federal Home Loan Bank of Chicago totaling
$1.3 million
at September 30, 2016. The Federal Home Loan Bank common stock is carried at cost and is classified as restricted equity securities. We may be required to purchase additional Federal Home Loan Bank stock if we increase borrowings in the future.
Securities Portfolio Composition
. The following table sets forth the amortized cost and fair value of our securities portfolio at the dates indicated. Securities available for sale are carried at fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
Amortized Cost
|
|
Fair Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprise securities:
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
$
|
24
|
|
|
$
|
25
|
|
|
$
|
24
|
|
|
$
|
25
|
|
|
$
|
5,250
|
|
|
$
|
5,179
|
|
U.S. Government agency residential mortgage-backed securities
|
40,289
|
|
|
40,750
|
|
|
39,380
|
|
|
39,692
|
|
|
37,144
|
|
|
37,196
|
|
U.S. Government agency collateralized mortgage obligations
|
2,674
|
|
|
2,680
|
|
|
1,963
|
|
|
1,941
|
|
|
3,458
|
|
|
3,432
|
|
U.S. Government agency commercial mortgage-backed securities
|
11,376
|
|
|
11,526
|
|
|
13,993
|
|
|
14,099
|
|
|
10,835
|
|
|
10,752
|
|
Corporate Bonds
|
—
|
|
|
—
|
|
|
2,852
|
|
|
2,862
|
|
|
—
|
|
|
—
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
12,756
|
|
|
13,109
|
|
|
19,285
|
|
|
19,466
|
|
|
30,512
|
|
|
30,572
|
|
Tax-exempt
|
25,730
|
|
25,682
|
|
2,209
|
|
2,201
|
|
3,223
|
|
|
3,215
|
|
Total available for sale securities
|
92,849
|
|
|
93,772
|
|
|
79,706
|
|
|
80,286
|
|
|
90,422
|
|
|
90,346
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities -Tax-exempt
|
2,293
|
|
|
2,392
|
|
|
2,459
|
|
|
2,490
|
|
|
—
|
|
|
—
|
|
Total Investment Securities
|
$
|
95,142
|
|
|
$
|
96,164
|
|
|
$
|
82,165
|
|
|
$
|
82,776
|
|
|
$
|
90,422
|
|
|
$
|
90,346
|
|
At September 30, 2016, we had no investments in a single entity (other than United States government or agency sponsored securities) that had an aggregate book value in excess of 10% of our total stockholders' equity.
Securities Portfolio Maturities and Yields
. The following table sets forth the stated maturities and weighted average yields of our securities at September 30, 2016. Securities available for sale are carried at fair value. Mortgage-backed securities, including collateralized mortgage obligations, are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan repayments. In addition, under the structure of some of our CMOs, the short- and intermediate-term tranche interests have repayment priority over the longer term tranche interests of the same underlying mortgage pool. Some of our U.S. Government and agency securities are callable at the option of the issuer. Yields on our tax-exempt securities are presented on a tax-equivalent basis. Certain securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules have not been reflected in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year or Less
|
|
More than One Year through Five Years
|
|
More than Five Years through Ten Years
|
|
More than Ten Years
|
|
Total Securities
|
|
Amortized Cost
|
|
Weighted Average Yield
|
|
Amortized Cost
|
|
Weighted Average Yield
|
|
Amortized Cost
|
|
Weighted Average Yield
|
|
Amortized Cost
|
|
Weighted Average Yield
|
|
Amortized Cost
|
|
Weighted Average Yield
|
|
Fair Value
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Government sponsored enterprise securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debentures
|
$
|
—
|
|
|
—
|
%
|
|
$
|
24
|
|
|
2.00
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
—
|
|
|
—
|
%
|
|
$
|
24
|
|
|
2.00
|
%
|
|
$
|
25
|
|
U.S. Government agency residential mortgage-backed securities
|
43
|
|
|
3.56
|
|
|
2,019
|
|
|
3.13
|
|
|
7,359
|
|
|
2.37
|
|
|
30,868
|
|
|
1.70
|
|
|
40,289
|
|
|
1.90
|
|
|
40,750
|
|
U.S. Government agency collateralized mortgage obligations
|
30
|
|
|
2.22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,644
|
|
|
2.04
|
|
|
2,674
|
|
|
2.04
|
|
|
2,680
|
|
U.S. Government agency commercial mortgage-backed securities
|
—
|
|
|
—
|
|
|
1,402
|
|
|
2.17
|
|
|
5,152
|
|
|
1.87
|
|
|
4,822
|
|
|
1.66
|
|
|
11,376
|
|
|
1.82
|
|
|
11,526
|
|
Corporate Bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Municipal securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable
|
—
|
|
|
—
|
|
|
5,380
|
|
|
2.39
|
|
|
7,376
|
|
|
2.85
|
|
|
—
|
|
|
—
|
|
|
12,756
|
|
|
2.65
|
|
|
13,109
|
|
Tax-exempt
|
85
|
|
1.01
|
|
|
4,724
|
|
|
1.23
|
|
|
14,712
|
|
|
1.74
|
|
|
6,209
|
|
|
2.62
|
|
|
25,730
|
|
|
1.86
|
|
|
25,682
|
|
Total securities available-for-sale:
|
158
|
|
|
1.93
|
|
|
13,549
|
|
|
2.07
|
|
|
34,599
|
|
|
2.13
|
|
|
44,543
|
|
|
1.85
|
|
|
92,849
|
|
|
1.99
|
|
|
93,772
|
|
Securities held to maturity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal securities - tax-exempt
|
168
|
|
|
1.20
|
|
|
703
|
|
|
1.86
|
|
|
982
|
|
|
2.94
|
|
|
440
|
|
|
3.50
|
|
|
2,293
|
|
|
2.59
|
|
|
2,392
|
|
Total
|
$
|
326
|
|
|
1.55
|
%
|
|
$
|
14,252
|
|
|
2.06
|
%
|
|
$
|
35,581
|
|
|
2.15
|
%
|
|
$
|
44,983
|
|
|
1.87
|
%
|
|
$
|
95,142
|
|
|
2.00
|
%
|
|
$
|
96,164
|
|
Sources of Funds
General.
Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Chicago advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities and sales, loan prepayments, retained earnings and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. To a lesser extent, we may utilize repurchase agreements or Fed funds sold as funding sources.
Deposits.
Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including non-interest-bearing and interest-bearing checking accounts, passbook and statement savings accounts, variable rate money market accounts, and certificates of deposit.
A significant majority
of our deposits are transaction accounts, which we believe are less susceptible than certificates of deposit to large-scale withdrawals as a result of changes in interest rates. At September 30, 2016, our core deposits, which are deposits other than time deposits and certificates of deposit, were
$445.5 million
, representing
75.2%
of total deposits. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have not in the past held, and currently do not hold, brokered deposits. We do generate certificates of deposit using Qwickrate
TM
and National CD Rateline
TM
, both of which are Internet-based deposit rate listing services, as alternative funding sources. These outlets also serve to support our contingency funding plan. At September 30, 2016, certificates of deposit generated via these alternative funding sources totaled
$53.9 million
, or
9.1%
of our total deposit balances.
In recent years, we have relied for deposit generation on promotional programs and advertising efforts, our reputation in the community for superior customer service, the variety of deposit accounts that we offer, our competitive rates, customer referrals, and cross-marketing efforts with loan customers. We may use promotional rates to meet asset/liability and market segment goals. We intend to continue to focus on increasing our core deposits by providing incentives on new transaction accounts, enhanced on-line and mobile services, remote deposit capture services, and by leveraging commercial lending relationships to increase transaction accounts.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates as consumers become more conscious of interest rates.
The following table sets forth the distribution of total deposits by account type, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For Years Ended September 30,
|
|
2016
|
|
2015
|
|
Average Balance
|
|
Percent
|
|
Weighted Average Rate
|
|
Average Balance
|
|
Percent
|
|
Weighted Average Rate
|
|
(Dollars in thousands)
|
Checking accounts:
|
|
|
|
|
|
|
|
|
|
|
|
Noninterest-bearing
|
$
|
110,600
|
|
|
19.70
|
%
|
|
n/a
|
|
|
$
|
82,524
|
|
|
16.36
|
%
|
|
n/a
|
|
Interest bearing
|
142,252
|
|
|
25.34
|
%
|
|
0.28
|
%
|
|
144,203
|
|
|
28.59
|
%
|
|
0.27
|
%
|
Passbook and statement savings accounts
|
130,363
|
|
|
23.22
|
%
|
|
0.14
|
%
|
|
124,962
|
|
|
24.78
|
%
|
|
0.15
|
%
|
Variable rate money market accounts
|
47,267
|
|
|
8.42
|
%
|
|
0.43
|
%
|
|
43,367
|
|
|
8.60
|
%
|
|
0.33
|
%
|
Certificates of deposit
|
130,955
|
|
|
23.32
|
%
|
|
1.21
|
%
|
|
109,269
|
|
|
21.67
|
%
|
|
1.10
|
%
|
Total deposits
|
$
|
561,437
|
|
|
100.00
|
%
|
|
0.42
|
%
|
|
$
|
504,325
|
|
|
100.00
|
%
|
|
0.38
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
For Year Ended September 30,
|
|
2014
|
|
Average Balance
|
|
Percent
|
|
Weighted Average Rate
|
|
(Dollars in thousands)
|
Checking accounts:
|
|
|
|
|
|
Noninterest-bearing
|
$
|
77,646
|
|
|
17.27
|
%
|
|
n/a
|
|
Interest bearing
|
138,600
|
|
|
30.84
|
%
|
|
0.32
|
%
|
Passbook and statement savings accounts
|
121,141
|
|
|
26.95
|
%
|
|
0.14
|
%
|
Variable rate money market accounts
|
21,448
|
|
|
4.77
|
%
|
|
0.20
|
%
|
Certificates of deposit
|
90,638
|
|
|
20.17
|
%
|
|
1.07
|
%
|
Total deposits
|
$
|
449,473
|
|
|
100.00
|
%
|
|
0.36
|
%
|
The following table sets forth our deposit activities for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
Beginning balance
|
$
|
531,020
|
|
|
$
|
454,928
|
|
|
$
|
440,978
|
|
Net deposits before interest credited
|
58,589
|
|
|
74,170
|
|
|
12,321
|
|
Interest credited
|
2,368
|
|
|
1,922
|
|
|
1,629
|
|
Net increase in deposits
|
60,957
|
|
|
76,092
|
|
|
13,950
|
|
Ending balance
|
$
|
591,977
|
|
|
$
|
531,020
|
|
|
$
|
454,928
|
|
The following table sets forth all of our certificates of deposit classified by interest rate as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
(Dollars in thousands)
|
Interest Rate:
|
|
|
|
|
|
Less than 1.00%
|
$
|
52,769
|
|
|
$
|
46,433
|
|
|
$
|
47,109
|
|
1.00% - 2.00%
|
88,571
|
|
|
68,030
|
|
|
40,077
|
|
2.00% - 2.99%
|
5,131
|
|
|
7,733
|
|
|
8,128
|
|
3.00% - 3.99%
|
51
|
|
|
63
|
|
|
1,057
|
|
4.00% and higher
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
146,522
|
|
|
$
|
122,259
|
|
|
$
|
96,371
|
|
The following table sets forth the amount and maturities of all of our certificates of deposit by interest rate at September 30, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At September 30, 2016
|
|
Less Than One Year
|
|
Over One Year to Two Years
|
|
Over Two Years to Three Years
|
|
Over Three Years
|
|
Total
|
|
Percentage of Total Certificate Accounts
|
|
(Dollars in thousands)
|
Interest Rate:
|
|
|
|
|
|
|
|
|
|
|
|
Less than 1.00%
|
$
|
40,633
|
|
|
$
|
12,136
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
52,769
|
|
|
36.01
|
%
|
1.00% - 1.99%
|
26,932
|
|
|
23,284
|
|
|
22,784
|
|
|
15,571
|
|
|
88,571
|
|
|
60.45
|
%
|
2.00% - 2.99%
|
—
|
|
|
—
|
|
|
595
|
|
|
4,536
|
|
|
5,131
|
|
|
3.50
|
%
|
3.00% - 3.99%
|
37
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
51
|
|
|
0.03
|
%
|
Total
|
$
|
67,602
|
|
|
$
|
35,434
|
|
|
$
|
23,379
|
|
|
$
|
20,107
|
|
|
$
|
146,522
|
|
|
100.00
|
%
|
As of September 30, 2016 and 2015, the aggregate amount of all of our certificates of deposit in amounts greater than or equal to $100,000 were
$89.6 million
and $64.2 million, respectively. The following table sets forth the maturity of these certificates as of September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2016
|
2015
|
|
(Dollars in thousands)
|
Three months or less
|
$
|
4,083
|
|
$
|
1,510
|
|
Over three months through six months
|
14,008
|
|
8,921
|
|
Over six months through one year
|
20,449
|
|
9,598
|
|
Over one year
|
51,048
|
|
44,126
|
|
|
|
|
Total
|
$
|
89,588
|
|
$
|
64,155
|
|
As of September 30, 2016 and 2015, the aggregate amount of all of our certificates of deposit in amounts greater than or equal to $250,000 were
$26.2 million
and $8.8 million, respectively. The following table sets forth the maturity of these certificates as of September 30, 2016 and 2015.
|
|
|
|
|
|
|
|
|
At September 30,
|
|
2016
|
2015
|
|
(Dollars in thousands)
|
Three months or less
|
$
|
751
|
|
$
|
—
|
|
Over three months through six months
|
2,682
|
|
1,500
|
|
Over six months through one year
|
8,421
|
|
1,328
|
|
Over one year
|
14,300
|
|
5,947
|
|
|
|
|
Total
|
$
|
26,154
|
|
$
|
8,775
|
|
Borrowings.
We may obtain advances from the Federal Home Loan Bank of Chicago upon the security of our capital stock in the Federal Home Loan Bank of Chicago and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. At September 30, 2016, we had
$20.0 million
of outstanding advances from the Federal Home Loan Bank of Chicago. At September 30, 2016, based on available collateral and our ownership of FHLB stock, and based upon our internal policy, we had access to additional Federal Home Loan Bank advances of up to
$179.7 million
, and an additional
$10.0 million
in overnight advances with our correspondent bank. The following table sets forth the maturity of long-term advances from the Federal Home Loan Bank of Chicago as of September 30, 2016.
|
|
|
|
|
|
|
|
At September 30, 2016
|
|
Amount
|
Weighted Ave Rate
|
|
(Dollars in thousands)
|
|
Due in one year or less
|
$
|
—
|
|
—
|
%
|
Due after one year through five years
|
10,000
|
|
1.13
|
|
Due after five years through ten years
|
10,000
|
|
0.92
|
|
Due after ten years
|
—
|
|
—
|
|
|
|
|
Total
|
$
|
20,000
|
|
1.02
|
%
|
The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the years indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At or For the Year Ended September 30,
|
|
2016
|
|
2015
|
|
2014
|
|
(Dollars in thousands)
|
Balance outstanding at end of year:
|
|
|
|
|
|
FHLB short-term advances
|
$
|
—
|
|
|
$
|
18,000
|
|
|
$
|
17,000
|
|
FHLB long-term advances
|
20,000
|
|
|
—
|
|
|
—
|
|
Maximum amount outstanding at any month-end:
|
|
|
|
|
|
FHLB short-term advances
|
$
|
37,000
|
|
|
$
|
56,000
|
|
|
$
|
17,500
|
|
FHLB long-term advances
|
20,000
|
|
|
—
|
|
|
—
|
|
Weighted average interest rate at end of year:
|
|
|
|
|
|
FHLB short-term advances
|
—
|
%
|
|
0.13
|
%
|
|
0.13
|
%
|
FHLB long-term advances
|
1.02
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Average amount outstanding during the year:
|
|
|
|
|
|
FHLB short-term advances
|
$
|
17,562
|
|
|
$
|
26,856
|
|
|
$
|
5,807
|
|
FHLB long-term advances
|
15,601
|
|
|
—
|
|
|
—
|
|
Weighted average interest rate during the year:
|
|
|
|
|
|
FHLB short-term advances
|
0.28
|
%
|
|
0.14
|
%
|
|
0.14
|
%
|
FHLB long-term advances
|
1.19
|
|
|
—
|
|
|
—
|
|
Personnel
As of September 30, 2016, we had
133
full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
Subsidiaries
Westbury Bancorp, Inc. wholly owns Westbury Bank. Westbury Bank has one subsidiary as of September 30, 2016. That subsidiary, WBSB Real Estate LLC, is a Wisconsin limited liability company that was formed to own certain of Westbury Bank’s foreclosed properties from time to time.
Another subsidiary was dissolved during fiscal 2016. That subsidiary, CRH, Inc., was a Wisconsin corporation that had been formed to own and operate commercial real estate for investment purposes.
SUPERVISION AND REGULATION
General
As a federal savings association, Westbury Bank is subject to examination and regulation by the OCC, and is also subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). The federal system of regulation and supervision establishes a comprehensive framework of activities in which Westbury Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Westbury Bank also is regulated to a lesser extent by the Federal Reserve Board, which governs the reserves to be maintained against deposits and other matters. Westbury Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau. Westbury Bank also is a member of and owns stock in the Federal Home Loan Bank of Chicago, which is one of the twelve regional banks in the Federal Home Loan Bank System. The OCC examines Westbury Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Westbury Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts, the form and content of Westbury Bank’s loan documents and certain consumer protection matters.
As a savings and loan holding company, Westbury Bancorp, Inc. is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Westbury Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Set forth below are certain material regulatory requirements that are applicable to Westbury Bank and its holding company, Westbury Bancorp, Inc. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Westbury Bank or Westbury Bancorp, Inc. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Westbury Bancorp, Inc., Westbury Bank and their operations.
Dodd-Frank Act
The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Westbury Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.
The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.
The Dodd-Frank Act also required the Consumer Financial Protection Bureau to issue regulations requiring lenders to make a reasonable good faith determination as to a prospective borrower’s ability to repay a residential mortgage loan. The final “Ability to Repay” rules, which were effective January 4, 2013, established a “qualified mortgage” safe harbor for loans whose terms and features are deemed to make the loan less risky. In addition, on October 3, 2015, the new TILA-RESPA Integrated Disclosure (TRID) rules for mortgage closings took effect for new loan applications. These new loan forms may have the effect of lengthening the time it takes to approve mortgage loans in the short term following implementation of the rule.
Some provisions of the Dodd-Frank Act involved delayed effective dates and/or require implementing regulations or have not been issued in final form. Their full impact on our operations cannot yet fully be assessed. However, the Dodd-Frank Act has resulted in increased compliance and operating expense for Westbury Bank and the Company.
Federal Banking Regulation
Business Activities.
A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Westbury Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts. Westbury Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for Westbury Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements.
The federal banking agencies have adopted new regulations that implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital requirements adopted by the OCC. These new requirements created a new required ratio for common equity Tier 1 ("CETI") capital, increased the leverage and Tier 1 capital ratios, changed the risk weight of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends or pay discretionary bonuses. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small savings and loan holding companies with assets under $1 billion.
Under the new capital regulations, the minimum capital ratios are: (1) CETI capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets: (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable regulatory adjustments and deductions.
There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not use any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CETI will be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.
The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (increased from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (increased from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (increased from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk weights (0% to 600%) for equity exposures.
In addition to the minimum CETI, Tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CETI capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends or paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.
The OCC's prompt corrective action standards changed effective January 1, 2015. Under the new standards, in order to be considered well-capitalized, the Bank must have a CETI ratio of 6.5% (new), a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a leverage ratio of 5.0% (unchanged). The Bank meets all these new requirements, including the full capital conservation buffer.
At September 30, 2016, the Bank’s capital exceeded all applicable requirements and is considered "well-capitalized".
Loans-to-One Borrower.
Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2016, Westbury Bank had no borrowers for which it was not in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test.
As a federal savings association, Westbury Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Westbury Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
Alternatively, Westbury Bank may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended.
A federal savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to enforcement action for a violation of law. At September 30, 2016, Westbury Bank maintained
70.01%
of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test. Westbury Bank has satisfied the QTL test in each of the last 12 months.
Capital Distributions.
Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application for approval of a capital distribution if:
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the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;
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the savings association would not be at least adequately capitalized following the distribution;
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the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
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the savings association is not eligible for expedited treatment of its filings.
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Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Westbury Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
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the federal savings association would be undercapitalized following the distribution;
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the proposed capital distribution raises safety and soundness concerns; or
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the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
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In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form. In addition, beginning in 2016, the Bank’s ability to pay dividends will be limited if the Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of the Company to pay dividends to its stockholders.
Community Reinvestment Act and Fair Lending Laws.
All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Westbury Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties.
A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Westbury Bank. The Company is an affiliate of Westbury Bank because of its control of the Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and
collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings associations to maintain detailed records of all transactions with affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
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be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
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not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Westbury Bank’s capital.
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In addition, extensions of credit in excess of certain limits must be approved by the Bank’s loan committee or board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement.
The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in a wrongful action that is likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness.
Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations
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The OCC is required by law to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.
Current OCC prompt corrective action regulations state that to be adequately capitalized, Westbury Bank must have a leverage ratio of at least 4.0%, a CETI capital ratio of at least 4.5%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 8.0%. To be well-capitalized, Westbury Bank must have a leverage ratio of at least 5.0%, a CETI capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least
8.0%, and a total risk-based capital ratio of at least 10.0%. A savings association that has total risk-based capital of less than 8.0%, a Tier 1 risk-based capital ratio that generally is less than 6.0%, a CETI ratio that is less than 4.5% or a leverage ratio that is less than 4.0% is considered to be undercapitalized. A savings association that has total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 4.0%, a CETI capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”
Generally, the OCC is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters.
Institutions that are undercapitalized become subject to certain mandatory measures such as restrictions on capital distributions and asset growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At September 30, 2016, the Bank met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts.
The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Westbury Bank. Deposit accounts in Westbury Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2016, the annualized FICO assessment was equal to 0.56 basis points of total assets less tangible capital.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long range fund of 2.0%.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Prohibitions Against Tying Arrangements
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Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Reserve System.
Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $103.6 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $14.5 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. As of September 30, 2016, Westbury Bank was in compliance with these requirements.
Federal Home Loan Bank System.
Westbury Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Chicago, Westbury Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of September 30, 2016, Westbury Bank was in compliance with this requirement.
Based on redemption provisions of the Federal Home Loan Bank of Chicago, the stock has no quoted market value and is carried at cost. Westbury Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank of Chicago stock. As of September 30, 2016, no impairment has been recognized.
Westbury Bank’s ability to borrow from the Federal Home Loan Bank of Chicago provides an additional source of liquidity and Westbury Bank has from time to time used advances from the Federal Home Loan Bank to fund its operations.
Other Regulations
Interest and other charges collected or contracted for by Westbury Bank are subject to state usury laws and federal laws concerning interest rates. Westbury Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
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Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;
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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
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Truth in Savings Act; and
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rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
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In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Westbury Bank is evaluating recent regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.
The operations of Westbury Bank also are subject to the:
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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
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Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
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Check Clearing for the 21
st
Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
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The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
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The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
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Holding Company Regulation
General
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The Company is a savings and loan holding company within the meaning of HOLA. As such, the Company is registered with the Federal Reserve Board and subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Permissible Activities.
Under present law, the business activities of the Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a
financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations.
Federal law prohibits a savings and loan holding company, including the Company, from directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
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the approval of interstate supervisory acquisitions by savings and loan holding companies; and
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the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
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The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital.
Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. Such regulations became effective January 1, 2015. However, legislation was enacted in December 2014 which required the Federal Reserve Board to amend its "Small Bank Holding Company" exemption from consolidated holding company capital requirements to generally extend the applicability to bank and savings and loan holding companies of up to $1 billion in assets. Regulations doing so were effective May 15, 2015. Consequently, savings and loan holding companies of under $1 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.
Source of Strength.
The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of managerial and financial strength to their subsidiary savings associations by providing capital, liquidity and other support in times of financial stress.
Dividends.
The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings association becomes undercapitalized. The policy statement also states that a savings and loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These
regulatory policies may affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition.
Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, the Company will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been
changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
TAXATION
Federal Taxation
General.
The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company and the Bank.
Method of Accounting
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For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30 for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax.
The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At September 30, 2016, the Company had
$669,000
of minimum tax credit carryforwards which do not expire.
Corporate Dividends.
We may exclude from our income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.
State Taxation
The Company and the Bank are subject to Wisconsin’s corporate income tax, which is imposed at a flat rate of 7.9% on apportioned "adjusted gross income." "Adjusted gross income," for purposes of the Wisconsin corporate income tax, begins with taxable income as defined by Section 62 of the Code, and thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several modifications pursuant to Wisconsin tax regulation.
Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Company and the Bank’s state income tax returns have not been audited in five years.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K is available on our website www.westburybankwi.com. Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.
The presentation of Risk Factors is not required for smaller reporting companies such as Westbury Bancorp, Inc.
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ITEM 1B.
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Unresolved Staff Comments
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None.