Attached files
file | filename |
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EX-31.2 - RICHARD C LARSON CERTIFICATION - WATERSTONE FINANCIAL INC | exhibit312.htm |
EX-32.1 - DOUGLAS GORDON SOX CERTIFICATION - WATERSTONE FINANCIAL INC | exhibit321.htm |
EX-32.2 - RICHARD C LARSON SOX CERTIFICATION - WATERSTONE FINANCIAL INC | exhibit322.htm |
EX-31.1 - DOUGLAS GORDON CERTIFICATION - WATERSTONE FINANCIAL INC | exhitbit311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
R
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Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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For the quarterly period ended September 30, 2010
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||
OR
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||
*
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Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Commission File Number 000-51507
WATERSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Federal
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20-3598485
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(State or other jurisdiction of
incorporation or organization)
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(IRS Employer Identification No.)
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11200 W. Plank Ct.
Wauwatosa, WI 53226
(414) 761-1000
(Address, including Zip Code, and telephone number,
including area code, of registrant’s principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes
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R
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No
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*
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
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*
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Accelerated filer
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R
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Non-accelerated filer
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*
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Smaller Reporting Company
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*
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
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*
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No
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R
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The number of shares outstanding of the issuer’s common stock, $0.01 par value per share, was 31,250,097 at October 31, 2010.
10-Q INDEX
Page No.
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3
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4
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5
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6-7
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Notes to Consolidated Financial Statements (unaudited)
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8-23
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24-42
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43
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43
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44
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44
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44
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44
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44
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(Unaudited)
|
||||||||
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
Assets
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(In Thousands, except share data)
|
|||||||
Cash
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$ | 86,267 | 57,234 | |||||
Federal funds sold
|
12,496 | 9,631 | ||||||
Short term investments
|
11,500 | 4,255 | ||||||
Cash and cash equivalents
|
110,263 | 71,120 | ||||||
Securities available for sale (at fair value)
|
206,901 | 205,415 | ||||||
Securities held to maturity (at amortized cost),
|
||||||||
fair value of $2,570 in 2010 and $1,930 in 2009
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2,648 | 2,648 | ||||||
Loans held for sale (at fair value)
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106,966 | 45,052 | ||||||
Loans receivable
|
1,351,948 | 1,420,010 | ||||||
Less: Allowance for loan losses
|
32,460 | 28,494 | ||||||
Loans receivable, net
|
1,319,488 | 1,391,516 | ||||||
Office properties and equipment, net
|
28,386 | 29,144 | ||||||
Federal Home Loan Bank stock (at cost)
|
21,653 | 21,653 | ||||||
Cash surrender value of life insurance
|
35,225 | 33,941 | ||||||
Real estate owned
|
53,092 | 50,929 | ||||||
Prepaid expenses and other assets
|
11,660 | 16,848 | ||||||
Total assets
|
$ | 1,896,282 | 1,868,266 | |||||
Liabilities and Shareholders’ Equity
|
||||||||
Liabilities:
|
||||||||
Demand deposits
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$ | 63,468 | 61,420 | |||||
Money market and savings deposits
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99,076 | 92,028 | ||||||
Time deposits
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1,009,715 | 1,011,442 | ||||||
Total deposits
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1,172,259 | 1,164,890 | ||||||
Short term borrowings
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72,902 | 73,900 | ||||||
Long term borrowings
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434,000 | 434,000 | ||||||
Advance payments by borrowers for taxes
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23,025 | 630 | ||||||
Other liabilities
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20,348 | 26,254 | ||||||
Total liabilities
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1,722,534 | 1,699,674 | ||||||
Shareholders’ equity:
|
||||||||
Preferred stock (par value $.01 per share)
|
||||||||
Authorized 20,000,000 shares, no shares issued
|
— | — | ||||||
Common stock (par value $.01 per share)
|
||||||||
Authorized - 200,000,000 shares in 2010 and 2009
|
||||||||
Issued - 33,974,450 shares in 2010 and in 2009
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||||||||
Outstanding - 31,250,097 shares in 2010 and in 2009
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340 | 340 | ||||||
Additional paid-in capital
|
109,677 | 108,883 | ||||||
Accumulated other comprehensive income (loss), net of taxes
|
3,160 | (2,001 | ) | |||||
Retained earnings
|
109,461 | 110,900 | ||||||
Unearned ESOP shares
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(3,629 | ) | (4,269 | ) | ||||
Treasury shares (2,724,353 shares), at cost
|
(45,261 | ) | (45,261 | ) | ||||
Total shareholders’ equity
|
173,748 | 168,592 | ||||||
Total liabilities and shareholders’ equity
|
$ | 1,896,282 | 1,868,266 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine months ended
September 30,
|
Three months ended
September 30,
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|||||||||||||||
2010
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2009
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2010
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2009
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(In thousands, except per share data)
|
||||||||||||||||
Interest income:
|
||||||||||||||||
Loans
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$ | 60,763 | 66,348 | 20,198 | 21,974 | |||||||||||
Mortgage-related securities
|
4,198 | 5,485 | 1,336 | 1,721 | ||||||||||||
Debt securities, cash and cash equivalents
|
2,578 | 2,640 | 931 | 973 | ||||||||||||
Total interest income
|
67,539 | 74,473 | 22,465 | 24,668 | ||||||||||||
Interest expense:
|
||||||||||||||||
Deposits
|
16,282 | 27,429 | 5,069 | 8,337 | ||||||||||||
Borrowings
|
14,319 | 15,065 | 4,866 | 5,087 | ||||||||||||
Total interest expense
|
30,601 | 42,494 | 9,935 | 13,424 | ||||||||||||
Net interest income
|
36,938 | 31,979 | 12,530 | 11,244 | ||||||||||||
Provision for loan losses
|
18,737 | 19,055 | 6,249 | 8,853 | ||||||||||||
Net interest income after provision for loan losses
|
18,201 | 12,924 | 6,281 | 2,391 | ||||||||||||
Noninterest income:
|
||||||||||||||||
Service charges on loans and deposits
|
810 | 883 | 269 | 312 | ||||||||||||
Increase in cash surrender value of life insurance
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978 | 1,037 | 511 | 529 | ||||||||||||
Mortgage banking income
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18,977 | 6,801 | 10,391 | 2,912 | ||||||||||||
Total other-than-temporary impairment losses
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- | (8,205 | ) | - | - | |||||||||||
Portion of loss recognized in other comprehensive income (before taxes)
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- | 7,093 | - | - | ||||||||||||
Net impairment losses recognized in earnings
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- | (1,112 | ) | - | - | |||||||||||
Other
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845 | 639 | 308 | 202 | ||||||||||||
Total noninterest income
|
21,610 | 8,248 | 11,479 | 3,955 | ||||||||||||
Noninterest expenses:
|
||||||||||||||||
Compensation, payroll taxes, and other employee benefits
|
21,917 | 13,311 | 10,752 | 4,921 | ||||||||||||
Occupancy, office furniture and equipment
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4,233 | 3,596 | 1,514 | 1,227 | ||||||||||||
Advertising
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825 | 620 | 295 | 170 | ||||||||||||
Data processing
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1,037 | 1,049 | 336 | 341 | ||||||||||||
Communications
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671 | 508 | 219 | 159 | ||||||||||||
Professional fees
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1,201 | 910 | 464 | 218 | ||||||||||||
Real estate owned
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4,271 | 2,760 | 2,101 | 1,551 | ||||||||||||
Other
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7,073 | 4,246 | 2,572 | 1,331 | ||||||||||||
Total noninterest expenses
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41,228 | 27,000 | 18,253 | 9,918 | ||||||||||||
Loss before income taxes
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(1,417 | ) | (5,828 | ) | (493 | ) | (3,572 | ) | ||||||||
Income taxes (benefit)
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22 | (5 | ) | - | - | |||||||||||
Net loss
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$ | (1,439 | ) | (5,823 | ) | (493 | ) | (3,572 | ) | |||||||
Loss per share:
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Basic
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$ | (0.05 | ) | (0.19 | ) | (0.02 | ) | (0.12 | ) | |||||||
Diluted
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$ | (0.05 | ) | (0.19 | ) | (0.02 | ) | (0.12 | ) | |||||||
Weighted average shares outstanding:
|
||||||||||||||||
Basic
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30,793,831 | 30,670,671 | 30,813,404 | 30,689,552 | ||||||||||||
Diluted
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30,793,831 | 30,670,671 | 30,813,404 | 30,689,552 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
Accumulated
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||||||||||||||||||||||||||||||||
Additional
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Other
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Unearned
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Total
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|||||||||||||||||||||||||||||
Common Stock
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Paid-In
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Comprehensive
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Retained
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ESOP
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Treasury
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Shareholders'
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||||||||||||||||||||||||||
Shares
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Amount
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Capital
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Loss
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Earnings
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Shares
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Shares
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Equity
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|||||||||||||||||||||||||
(In Thousands)
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Balances at December 31, 2008
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31,250 | $ | 340 | 107,839 | (6,449 | ) | 119,921 | (5,123 | ) | (45,261 | ) | 171,267 | ||||||||||||||||||||
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Cumulative effect adjustment related
to a change in accounting
principle related to available for
sale securities, net of taxes of $448
|
(669 | ) | 1,117 | 448 | ||||||||||||||||||||||||||||
Comprehensive income:
|
||||||||||||||||||||||||||||||||
Net loss
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— | — | — | — | (5,823 | ) | — | — | (5,823 | ) | ||||||||||||||||||||||
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
Net unrealized holding gain on
available for sale securities arising
during the period, net of taxes
of $2,499
|
— | — | — | 4,996 | — | — | — | 4,996 | ||||||||||||||||||||||||
Reclassification of adjustment
for net losses on available for
sale securities realized during
the period, net of taxes of $446
|
— | — | — | 666 | — | — | — | 666 | ||||||||||||||||||||||||
Total comprehensive income
|
(161 | ) | ||||||||||||||||||||||||||||||
ESOP shares committed to be
released to Plan participants
|
— | — | (446 | ) | — | — | 640 | — | 194 | |||||||||||||||||||||||
Stock based compensation
|
— | — | 1,257 | — | — | — | — | 1,257 | ||||||||||||||||||||||||
Balances at September 30, 2009
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31,250 | $ | 340 | 108,650 | (1,456 | ) | 115,215 | (4,483 | ) | (45,261 | ) | 173,005 | ||||||||||||||||||||
Balances at December 31, 2009
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31,250 | $ | 340 | 108,883 | (2,001 | ) | 110,900 | (4,269 | ) | (45,261 | ) | 168,592 | ||||||||||||||||||||
Comprehensive income:
|
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Net income
|
— | — | — | — | (1,439 | ) | — | — | (1,439 | ) | ||||||||||||||||||||||
Other comprehensive income:
|
||||||||||||||||||||||||||||||||
Net unrealized holding gain on
available for sale securities
arising during the period, net
of taxes of $2,520
|
— | — | — | 5,166 | — | — | — | 5,166 | ||||||||||||||||||||||||
Reclassification of adjustment
for net gains on available for
sale securities realized during
the period, net of taxes of $4
|
— | — | — | (5 | ) | — | — | — | (5 | ) | ||||||||||||||||||||||
Total comprehensive income
|
3,722 | |||||||||||||||||||||||||||||||
ESOP shares committed to be
released to Plan participants
|
— | — | (447 | ) | — | — | 640 | — | 193 | |||||||||||||||||||||||
Stock based compensation
|
— | — | 1,241 | — | — | — | — | 1,241 | ||||||||||||||||||||||||
Balances at September 30, 2010
|
31,250 | $ | 340 | 109,677 | 3,160 | 109,461 | (3,629 | ) | (45,261 | ) | 173,748 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
|
||||||||
2010
|
2009
|
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(In Thousands)
|
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Operating activities:
|
||||||||
Net loss
|
$ | (1,439 | ) | (5,823 | ) | |||
Adjustments to reconcile net loss to net
|
||||||||
cash used in operating activities:
|
||||||||
Provision for loan losses
|
18,737 | 19,055 | ||||||
Depreciation
|
1,393 | 1,504 | ||||||
Deferred income taxes
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(565 | ) | (1,365 | ) | ||||
Stock based compensation
|
1,241 | 1,257 | ||||||
Net amortization of premium on debt and mortgage-related securities
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(82 | ) | (189 | ) | ||||
Amortization of unearned ESOP shares
|
193 | 194 | ||||||
Loss on impairment of securities
|
— | 1,112 | ||||||
Loss on sale of real estate owned and other assets
|
928 | 547 | ||||||
Gain on sale of loans held for sale
|
(18,977 | ) | (6,490 | ) | ||||
Loans originated for sale
|
(700,096 | ) | (529,415 | ) | ||||
Proceeds on sales of loans originated for sale
|
657,160 | 515,372 | ||||||
(Increase) decrease in accrued interest receivable
|
263 | (242 | ) | |||||
Increase in cash surrender value of bank owned life insurance
|
(978 | ) | (1,037 | ) | ||||
Decrease in accrued interest on deposits and borrowings
|
(862 | ) | (2,411 | ) | ||||
Decrease in other liabilities
|
(1,045 | ) | (13,367 | ) | ||||
Decrease in accrued tax receivable
|
3,137 | 623 | ||||||
Other
|
(430 | ) | (18 | ) | ||||
Net cash used in operating activities
|
(41,422 | ) | (20,693 | ) | ||||
Investing activities:
|
||||||||
Net decrease in loans receivable
|
29,261 | 44,703 | ||||||
Purchases of:
|
||||||||
Debt securities
|
(58,764 | ) | (41,499 | ) | ||||
Mortgage-related securities
|
(21,585 | ) | (13,011 | ) | ||||
Premises and equipment, net
|
(635 | ) | (3,590 | ) | ||||
Bank owned life insurance
|
(306 | ) | (306 | ) | ||||
Proceeds from:
|
||||||||
Principal repayments on mortgage-related securities
|
24,353 | 29,151 | ||||||
Sales of mortgage-related securities
|
2,056 | — | ||||||
Sales of debt securities
|
12,926 | — | ||||||
Maturities of debt securities
|
43,222 | 8,988 | ||||||
Calls on structured notes
|
— | 7,289 | ||||||
Sales of real estate owned and other assets
|
21,271 | 20,643 | ||||||
Net cash provided by investing activities
|
51,799 | 52,368 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine months ended September 30,
|
||||||||
2010
|
2009
|
|||||||
(In Thousands)
|
||||||||
Financing activities:
|
||||||||
Net increase (decrease) in deposits
|
7,369 | (7,772 | ) | |||||
Net change in short-term borrowings
|
(998 | ) | 25,000 | |||||
Net change in advance payments by borrowers for taxes
|
22,395 | 22,670 | ||||||
Net cash provided by financing activities
|
28,766 | 39,898 | ||||||
Increase in cash and cash equivalents
|
39,143 | 71,573 | ||||||
Cash and cash equivalents at beginning of period
|
71,120 | 23,849 | ||||||
Cash and cash equivalents at end of period
|
$ | 110,263 | 95,422 | |||||
Supplemental information:
|
||||||||
Cash paid, credited or (received) during the period for:
|
||||||||
Income tax payments (refunds)
|
(3,116 | ) | 1,247 | |||||
Interest payments
|
31,464 | 44,904 | ||||||
Noncash investing activities:
|
||||||||
Loans receivable transferred to real estate owned
|
24,030 | 37,835 | ||||||
Noncash financing activities:
|
||||||||
Long-term FHLB advances reclassified to short-term borrowings
|
— | 23,900 |
See Accompanying Notes to Unaudited Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation
The consolidated financial statements include the accounts of Waterstone Financial, Inc. (the “Company”) and the Company’s subsidiaries.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders’ equity, and cash flows of the Company for the periods presented.
The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company’s December 31, 2009 Annual Report on Form 10-K. Operating results for the nine months ended September 30, 2010, are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.
The preparation of the unaudited consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the allowance for loan losses, deferred income taxes, certain investment securities and real estate owned. Actual results could differ from those estimates.
Certain items in the prior period consolidated financial statements have been reclassified to conform to the September 30, 2010 presentation.
Note 3 — Securities
Securities Available for Sale
The amortized cost and fair values of the Company’s investment in securities available for sale follow:
September 30, 2010
|
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(In Thousands)
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
||||||||||||||
cost
|
gains
|
losses
|
Fair value
|
|||||||||||||
Mortgage-backed securities
|
$ | 43,468 | 2,005 | (17 | ) | 45,456 | ||||||||||
Collateralized mortgage obligations:
|
||||||||||||||||
Government agency issue
|
39,248 | 1,279 | (11 | ) | 40,516 | |||||||||||
Private label issue
|
32,251 | 269 | (1,237 | ) | 31,283 | |||||||||||
Mortgage-related securities
|
114,967 | 3,553 | (1,265 | ) | 117,255 | |||||||||||
Government sponsored entity bonds
|
54,758 | 560 | — | 55,318 | ||||||||||||
Municipal securities
|
27,921 | 1,288 | (349 | ) | 28,860 | |||||||||||
Other debt securities
|
5,250 | 218 | — | 5,468 | ||||||||||||
Debt securities
|
87,929 | 2,066 | (349 | ) | 89,646 | |||||||||||
$ | 202,896 | 5,619 | (1,614 | ) | 206,901 |
December 31, 2009
|
||||||||||||||||
(In Thousands)
|
||||||||||||||||
Gross
|
Gross
|
|||||||||||||||
Amortized
|
unrealized
|
unrealized
|
||||||||||||||
cost
|
gains
|
losses
|
Fair value
|
|||||||||||||
Mortgage-backed securities
|
$ | 39,785 | 1,728 | — | 41,513 | |||||||||||
Collateralized mortgage obligations:
|
||||||||||||||||
Government agency issue
|
43,372 | 1,614 | (26 | ) | 44,960 | |||||||||||
Private label issue
|
36,681 | — | (6,319 | ) | 30,362 | |||||||||||
Mortgage-related securities
|
119,838 | 3,342 | (6,345 | ) | 116,835 | |||||||||||
Government sponsored entity bonds
|
40,400 | 238 | (49 | ) | 40,589 | |||||||||||
Municipal securities
|
43,599 | 631 | (989 | ) | 43,241 | |||||||||||
Other debt securities
|
5,250 | — | (500 | ) | 4,750 | |||||||||||
Debt securities
|
89,249 | 869 | (1,538 | ) | 88,580 | |||||||||||
$ | 209,087 | 4,211 | (7,883 | ) | 205,415 |
At September 30, 2010, $40.9 million of the Company’s government sponsored entity bonds and $61.7 million of the Company’s mortgage-related securities were pledged as collateral to secure repurchase agreement obligations of the Company.
The amortized cost and fair values of investment securities by contractual maturity at September 30, 2010, are shown below. Actual maturities may differ from contractual maturities because issuers have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized
|
Fair
|
|||||||
Cost
|
Value
|
|||||||
(In Thousands)
|
||||||||
Debt securities
|
||||||||
Due within one year
|
$ | 3,251 | 3,310 | |||||
Due after one year through five years
|
56,881 | 57,885 | ||||||
Due after five years through ten years
|
10,484 | 11,099 | ||||||
Due after ten years
|
17,313 | 17,352 | ||||||
Mortgage-related securities
|
114,967 | 117,255 | ||||||
$ | 202,896 | 206,901 |
Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:
September 30, 2010
|
||||||||||||||||||||||||
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
value
|
loss
|
value
|
loss
|
value
|
loss
|
|||||||||||||||||||
(In Thousands)
|
||||||||||||||||||||||||
Mortgage-backed securities
|
$ | 8,687 | (17 | ) | — | — | 8,687 | (17 | ) | |||||||||||||||
Collateralized mortgage obligations:
|
||||||||||||||||||||||||
Government agency issue
|
4,119 | (11 | ) | — | — | 4,119 | (11 | ) | ||||||||||||||||
Private-label issue
|
— | — | 21,096 | (1,237 | ) | 21,096 | (1,237 | ) | ||||||||||||||||
Municipal securities
|
— | — | 4,126 | (349 | ) | 4,126 | (349 | ) | ||||||||||||||||
$ | 12,806 | (28 | ) | 25,222 | (1,586 | ) | 38,028 | (1,614 | ) | |||||||||||||||
December 31, 2009
|
||||||||||||||||||||||||
Less than 12 months
|
12 months or longer
|
Total
|
||||||||||||||||||||||
Fair
|
Unrealized
|
Fair
|
Unrealized
|
Fair
|
Unrealized
|
|||||||||||||||||||
value
|
loss
|
value
|
loss
|
value
|
loss
|
|||||||||||||||||||
Collateralized mortgage obligations:
|
||||||||||||||||||||||||
Government agency issue
|
$ | 1,507 | (26 | ) | — | — | 1,507 | (26 | ) | |||||||||||||||
Private-label issue
|
1,519 | (7 | ) | 28,843 | (6,312 | ) | 30,362 | (6,319 | ) | |||||||||||||||
Government sponsored entity bonds
|
7,351 | (49 | ) | — | — | 7,351 | (49 | ) | ||||||||||||||||
Municipal securities
|
12,802 | (114 | ) | 7,713 | (875 | ) | 20,515 | (989 | ) | |||||||||||||||
Other debt securities
|
— | — | 4,500 | (500 | ) | 4,500 | (500 | ) | ||||||||||||||||
$ | 23,179 | (196 | ) | 41,056 | (7,687 | ) | 62,728 | (7,883 | ) |
The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security’s decline in fair value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than amortized cost, financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition, with regard to its debt securities, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral. For certain debt securities in unrealized loss positions, the Company prepares a cash flow analysis to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.
As of September 30, 2010, the Company had eight securities which had been in an unrealized loss position for twelve months or longer, including: three private-label issue collateralized mortgage obligation securities and five municipal securities. Based upon the aforementioned factors, the Company identified two collateralized mortgage obligation securities at September 30, 2010 with a combined amortized cost of $21.3 million for which a cash flow analysis was performed to determine whether an other than temporary impairment charge was warranted. This evaluation indicated that the two collateralized mortgage obligations were other-than-temporarily impaired. Estimates of discounted cash flows based on expected yield at time of original purchase, prepayment assumptions based on actual and anticipated prepayment speed, actual and anticipated default rates and estimated level of severity given the loan to value ratios, credit scores, geographic locations, vintage and levels of subordination related to the security and its underlying collateral resulted in a projected credit loss on the collateralized mortgage obligations. One of these securities had been deemed other-than-temporarily impaired in 2008 resulting in a cumulative-effect adjustment of $1.1 million made to retained earnings as of January 1, 2009 to reflect the difference between the present value of cash flows expected to be collected and the amortized cost basis as of the beginning of the period to reflect a change in accounting principal. Additional estimated credit losses on the two collateralized mortgage obligations of $1.1 million were charged to earnings during the year ended December 31, 2009. These two securities had an amortized cost of $21.3 million and a fair value of $20.1 million as of September 30, 2010. As of September 30, 2010, unrealized losses on these collateralized mortgage obligations include other-than-temporary impairment recognized in other comprehensive income (before taxes) of $1.2 million.
The following table presents the change in other-than-temporary credit related impairment charges on collateralized mortgage obligations for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive loss.
(in thousands)
|
||||
Credit related impairments on securities as of December 31, 2008
|
$ | 1,872 | ||
Cumulative effect adjustment related to a change in accounting principle
|
(1,117 | ) | ||
Credit related impairments related to securities for which an other-than-temporary
|
||||
impairment was not previously recognized
|
977 | |||
Increase in credit related impairments related to securities for which an other-than-
|
||||
temporary impairment was previously recognized
|
135 | |||
Credit related impairments on securities as of December 31, 2009
|
1,867 | |||
Credit related impairments related to securities for which an other-than-temporary
|
||||
impairment was not previously recognized
|
- | |||
Increase in credit related impairments related to securities for which an other-than-
|
||||
temporary impairment was previously recognized
|
- | |||
Credit related impairments on securities as of September 30, 2010
|
$ | 1,867 |
Exclusive of the two aforementioned collateralized mortgage obligations, the Company has determined that the decline in fair value of the remaining securities is not attributable to credit deterioration, and based on the foregoing evaluation criteria and as the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, these securities are not considered other-than-temporarily impaired.
Continued deterioration of general economic market conditions could result in the recognition of future other-than-temporary impairment losses within the investment portfolio and such amounts could be material to our consolidated financial statements.
Securities Held to Maturity
As of September 30, 2010, the Company held one security that has been designated as held to maturity. The security has an amortized cost of $2.65 million and an estimated fair value of $2.57 million. The final maturity of this security is 2022, however, it is callable quarterly. Due to the magnitude of the difference between fair value and amortized cost, the Company has performed an assessment to determine whether this security is other-than-temporarily impaired. Based upon a number of factors, including significant and repeated investments on the part of the United States government, the Company has determined that the security is not other-than-temporarily impaired at September 30, 2010.
Note 4 — Loans Receivable
Loans receivable are summarized as follows:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(In Thousands)
|
||||||||
Mortgage loans:
|
||||||||
Residential real estate:
|
||||||||
One- to four-family
|
$ | 621,298 | 681,578 | |||||
Over four-family residential
|
546,738 | 536,731 | ||||||
Home equity
|
73,544 | 85,964 | ||||||
Commercial real estate
|
50,697 | 48,948 | ||||||
Construction and land
|
60,025 | 69,814 | ||||||
Consumer loans
|
209 | 619 | ||||||
Commercial business loans
|
43,254 | 48,094 | ||||||
Gross loans receivable
|
1,395,765 | 1,471,748 | ||||||
Less:
|
||||||||
Undisbursed loan proceeds
|
41,867 | 49,818 | ||||||
Unearned loan fees
|
1,950 | 1,920 | ||||||
Total loans receivable
|
$ | 1,351,948 | 1,420,010 |
The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. The Company does not have a concentration of loans in any specific industry. Credit risks tend to be geographically concentrated since a majority of the Company’s customer base lies in the Milwaukee metropolitan area. Furthermore, as of September 30, 2010, 87.7% of the Company’s loan portfolio consists of loans that are secured by real estate properties located primarily within the Milwaukee metropolitan area. Residential real estate collateralizing $128.7 million, or 9.2%, of gross loans receivable is located outside of the state of Wisconsin.
The unpaid principal balance of loans serviced for others was $4.6 million at September 30, 2010 and $4.7 million at December 31, 2009. These loans are not reflected in the consolidated financial statements.
A summary of the activity in the allowance for loan losses is as follows:
For the Nine Months Ended
|
||||
September 30,
|
||||
2010
|
2009
|
|||
(In Thousands)
|
||||
Balance at beginning of period
|
$28,494
|
25,167
|
||
Provision for loan losses
|
18,737
|
19,055
|
||
Charge-offs
|
(14,905)
|
(12,965)
|
||
Recoveries
|
134
|
241
|
||
Balance at end of period
|
$32,460
|
31,498
|
||
Allowance for loan losses to loans receivable
|
2.40%
|
2.15%
|
||
Net charge-offs to average loans outstanding (annualized)
|
1.37%
|
1.11%
|
||
Allowance for loan losses to non-accrual loans
|
32.39%
|
33.69%
|
||
Non-accrual loans to loans receivable
|
7.41%
|
6.38%
|
Non-accrual loans totaled $100.2 million at September 30, 2010 and $75.3 million at December 31, 2009.
Beginning in 2007 and continuing through the current quarter, the Company experienced significant deterioration in credit quality, primarily in its residential and construction and land portfolios. These two segments represent a significant portion of the overall loan portfolio. The downturn in the residential real estate market has reduced demand and market prices for vacant land, new construction and existing residential units. The overall economic downturn and the depressed real estate market have negatively impacted many residential real estate customers and have resulted in an increase in nonperforming assets.
The following table presents data on impaired loans at September 30, 2010 and December 31, 2009.
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(In Thousands)
|
||||||||
Impaired loans for which a specific allowance has been provided
|
$ | 87,647 | 90,787 | |||||
Impaired loans for which no specific allowance has been provided
|
62,558 | 61,123 | ||||||
Total loans determined to be impaired
|
$ | 150,205 | 151,910 | |||||
Specific allowance for loan losses related to all impaired loans
|
$ | 14,055 | 12,517 |
The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total $62.6 million of impaired loans for which no allowance has been provided, $25.3 million represent loans on which a total of $10.1 million in charge-offs have been recorded to reduce the outstanding loans balance to an amount that is commensurate with the estimated net realizable value of the underlying collateral. To the extent that further deterioration in collateral value continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans resulting in additional provisions to the allowance for loans losses or charge-offs.
At September 30, 2010 and December 31, 2009, total impaired loans include $31.8 million and $42.7 million, respectively of troubled debt restructurings that are performing in accordance with their restructured terms and are accounted for on an accrual basis. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months.
The Company serves the credit needs of its customers by offering a variety of loan programs. The loan portfolio is diversified by types of borrowers, collateral type, and market areas. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. At September 30, 2010 and December 31, 2009, no loans to one borrower or industry concentrations in excess of 10% existed in the Company’s loan portfolio.
Note 5 — Deposits
(In Thousands)
|
||||
Within one year
|
$ | 447,209 | ||
More than one to two years
|
543,964 | |||
More than two to three years
|
7,502 | |||
More than three to four years
|
3,397 | |||
More than four through five years
|
7,643 | |||
$ | 1,009,715 |
Note 6 — Borrowings
Borrowings consist of the following:
September 30, 2010
|
December 31, 2009
|
||||||||||||||||
Weighted
|
Weighted
|
||||||||||||||||
Average
|
Average
|
||||||||||||||||
Balance
|
Rate
|
Balance
|
Rate
|
||||||||||||||
(Dollars in Thousands)
|
|||||||||||||||||
Bank line of credit
|
$ | 47,902 | 5.00 | % | $ | - | - | ||||||||||
Federal Home Loan Bank, Chicago (FHLBC) advances maturing:
|
|||||||||||||||||
2010
|
25,000 | 4.72 | % | 73,900 | 3.61 | % | |||||||||||
2016
|
220,000 | 4.34 | % | 220,000 | 4.34 | % | |||||||||||
2017
|
65,000 | 3.19 | % | 65,000 | 3.19 | % | |||||||||||
2018
|
65,000 | 2.97 | % | 65,000 | 2.97 | % | |||||||||||
Repurchase agreements maturing
|
2017
|
84,000 | 3.96 | % | 84,000 | 3.96 | % | ||||||||||
$ | 506,902 | 4.01 | % | $ | 507,900 | 3.85 | % |
The bank line of credit is the outstanding portion of revolving lines with two unrelated banks. The $20.0 million and $35.0 million lines of credit are utilized by Waterstone Mortgage Corporation to finance loans originated for sale. Related interest rates are based upon the note rate associated with the loans being financed.
The $25.0 million advance due in 2010 matured in October.
The $220.0 million in advances due in 2016 consist of eight advances with rates ranging from 4.01% to 4.82% callable quarterly until maturity.
The $65.0 million in advances due in 2017 consist of three advances with rates ranging from 3.09% to 3.46% callable quarterly until maturity.
The $65.0 million in advances due in 2018 consist of three callable advances with rates ranging from 2.73% to 3.03% callable quarterly until maturity.
The $84.0 million in repurchase agreements have rates ranging from 2.89% to 4.31% callable quarterly until maturity.
The Company selects loans that meet underwriting criteria established by the FHLBC as collateral for outstanding advances. The Company’s FHLBC borrowings are limited to 60% of the carrying value of qualifying, unencumbered one- to four-family mortgage loans, 50% of the carrying value of home equity loans and 60% of the carrying value of over four-family loans. In addition, these advances are collateralized by FHLBC stock totaling $21.7 million at September 30, 2010 and December 31, 2009.
Note 7 – Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Bank’s capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). As of September 30, 2010, that the Bank meets all capital adequacy requirements to which it is subject. On December 18, 2009, WaterStone Bank entered into a consent order with its federal and state bank regulators whereby it has agreed to maintain a minimum Tier 1 capital ratio of 8.50% and a minimum total risk based capital ratio of 12.00%. At September 30, 2010, we were in compliance with these higher capital requirements. The consent order prohibits the Bank from paying dividends or repurchasing common stock without the written consent of the WDFI and FDIC. In addition, the consent order prohibits the Bank from accepting or renewing brokered deposits.
As of September 30, 2010 the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as quantitatively “well capitalized” under the regulatory framework for prompt corrective action. To be categorized as “well capitalized,” the Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios, as set forth in the table below. There are no conditions or events since that notification that management believes have changed the Bank’s category, however, the outstanding consent order limits transactions otherwise available to “well capitalized” banks.
As a state-chartered savings bank, the Bank is required to meet minimum capital levels established by the state of Wisconsin in addition to federal requirements. For the state of Wisconsin, regulatory capital consists of retained income, paid-in-capital, capital stock equity and other forms of capital considered to be qualifying capital by the Federal Deposit Insurance Corporation.
The actual capital amounts and ratios for WaterStone Bank as of September 30, 2010 are presented in the table below:
September 30, 2010
|
||||||||||||||||||||||||
To Be Well-Capitalized
|
||||||||||||||||||||||||
For Capital
|
Under Prompt Corrective
|
|||||||||||||||||||||||
Actual
|
Adequacy Purposes
|
Action Provisions
|
||||||||||||||||||||||
Amount
|
Ratio
|
Amount
|
Ratio
|
Amount
|
Ratio
|
|||||||||||||||||||
(Dollars in Thousands)
|
||||||||||||||||||||||||
WaterStone Bank
|
||||||||||||||||||||||||
Total capital (to risk-weighted assets)
|
$ | 181,166 | 13.20 | % | $ | 109,788 | 8.00 | % | $ | 137,235 | 10.00 | % | ||||||||||||
Tier I capital (to risk-weighted assets)
|
163,823 | 11.94 | % | 54,894 | 4.00 | % | 82,341 | 6.00 | % | |||||||||||||||
Tier I capital (to average assets)
|
163,823 | 8.80 | % | 74,483 | 4.00 | % | 93,104 | 5.00 | % | |||||||||||||||
State of Wisconsin capital required (to total assets)
|
163,823 | 8.67 | % | 113,321 | 6.00 | % | N/A | N/A | ||||||||||||||||
December 31, 2009
|
||||||||||||||||||||||||
WaterStone Bank
|
||||||||||||||||||||||||
Total capital (to risk-weighted assets)
|
$ | 181,344 | 13.74 | % | $ | 105,559 | 8.00 | % | $ | 131,949 | 10.00 | % | ||||||||||||
Tier I capital (to risk-weighted assets)
|
164,693 | 12.48 | % | 52,780 | 4.00 | % | 79,170 | 6.00 | % | |||||||||||||||
Tier I capital (to average assets)
|
164,693 | 8.71 | % | 75,674 | 4.00 | % | 94,592 | 5.00 | % | |||||||||||||||
State of Wisconsin capital required (to total assets)
|
164,693 | 8.86 | % | 111,484 | 6.00 | % | N/A | N/A |
Note 8 – Income Taxes
Despite a pre-tax loss, we recorded income tax expense of $22,000 through the third quarter of 2010. Because of the valuation allowance on our deferred tax assets we were not able to record an income tax benefit related to the pre-tax loss incurred. A current income tax benefit that would normally result from a pre-tax loss was offset by additional deferred tax expense due to an increase in the required valuation allowance. The income tax expense recorded through the third quarter of 2010 is related to certain states in which our mortgage banking subsidiary does business and will file a separate company state income tax return.
Under generally accepted accounting principles, a deferred tax asset valuation allowance is required to be recognized if it is “more likely than not” that the deferred tax asset will not be realized. The determination of the realizability of the deferred tax assets is highly subjective and dependent upon judgment concerning management’s evaluation of both positive and negative evidence, the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. We consider both positive and negative evidence regarding the ultimate realizability of our deferred tax assets. Examples of positive evidence may include the existence, if any, of taxes paid in available carry-back years and the likelihood that taxable income will be generated in future periods. Examples of negative evidence may include a cumulative loss in the current year and prior two years and negative general business and economic trends. We currently maintain a valuation allowance against substantially all of our net deferred tax assets because it is “more likely than not” that all of these net deferred tax assets will not be realized. This determination was based, largely, on the negative evidence of a cumulative loss in the most recent three-year period caused primarily by the loan loss provisions made during those periods. In addition, general uncertainty surrounding future economic and business conditions has increased the likelihood of volatility in our future earnings.
Note 9 – Financial Instruments with Off-Balance Sheet Risk
Off-balance sheet financial instruments or obligations whose contract amounts represent credit and/or interest rate risk are as follows:
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(In Thousands)
|
||||||||
Financial instruments whose contract amounts represent potential credit risk:
|
||||||||
Commitments to extend credit under amortizing loans (1)
|
$ | 7,078 | 13,607 | |||||
Unused portion of home equity lines of credit
|
26,553 | 28,376 | ||||||
Unused portion of construction loans
|
4,472 | 7,861 | ||||||
Unused portion of business lines of credit
|
10,842 | 13,581 | ||||||
Standby letters of credit
|
1,001 | 1,001 |
(1) Excludes commitments to originate loans held for sale which are derivative instruments.
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter-party. Collateral obtained generally consists of mortgages on the underlying real estate.
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.
The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of September 30, 2010 and December 31, 2009.
Residential mortgage loans sold to others are conventional residential first lien mortgages that are sold on a servicing released basis. The Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. There have been insignificant instances of repurchase under representations and warranties. The Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages and that historical experience shows negligible losses and insignificant repurchase activity, management believes that losses and repurchases under the limited recourse provisions will continue to be insignificant.
In connection with its mortgage banking activities, the Company enters into forward loan sale commitments. Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on interest rate lock commitments to originate loans and loans held for sale. Interest rate lock commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are considered derivative instruments, and the fair value of these commitments is recorded on the consolidated statements of financial condition with the changes in fair value recorded as a component of mortgage banking income. The net fair value of the mortgage derivatives at September 30, 2010, was a gain of $226,000, comprised of the net loss of $171,000 on forward commitments to sell $129.8 million of residential mortgage loans to various investors and the net gain of $397,000 on interest rate lock commitments to originate $55.5 million of residential mortgage loans held for sale to individual borrowers.
Note 10 – Earnings (loss) per share
Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period, excluding outstanding participating securities. Participating securities include unvested restricted shares. Unvested restricted shares are considered participating securities because holders of these securities have the right to receive dividends at the same rate as holders of the Company’s common stock. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares. Unvested restricted stock and stock options are considered outstanding for diluted earnings (loss) per share only. Unvested restricted stock and stock options totaling 103,400 and 312,000 shares for the nine and three month periods ended September 30, 2010 and 149,900 and 462,000 shares for the nine and three month periods ended September 30, 2009 are antidilutive and are excluded from the earnings (loss) per share calculation.
Presented below are the calculations for basic and diluted earnings (loss) per share:
Nine Months Ended
|
Three Months Ended
|
|||||||||||||||
September 30,
|
September 30,
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
(In Thousands, except per share data)
|
||||||||||||||||
Net income (loss)
|
$ | (1,439 | ) | (5,823 | ) | $ | (493 | ) | (3,572 | ) | ||||||
Net income (loss) available to unvested restricted shares
|
- | - | - | - | ||||||||||||
Net income (loss) available to common stockholders
|
$ | (1,439 | ) | (5,823 | ) | $ | (493 | ) | (3,572 | ) | ||||||
Weighted average shares outstanding
|
30,794 | 30,671 | 30,813 | 30,690 | ||||||||||||
Effect of dilutive potential common shares
|
- | - | - | - | ||||||||||||
Diluted weighted average shares outstanding
|
30,794 | 30,671 | 30,813 | 30,690 | ||||||||||||
Basic earnings (loss) per share
|
$ | (0.05 | ) | (0.19 | ) | $ | (0.02 | ) | (0.12 | ) | ||||||
Diluted earnings (loss) per share
|
$ | (0.05 | ) | (0.19 | ) | $ | (0.02 | ) | (0.12 | ) |
Note 11 – Fair Value Measurements
The FASB issued an accounting standard (subsequently codified into ASC Topic 820, “Fair Value Measurements and Disclosures”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing the asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.
Level 1 inputs - In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2 inputs - Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs - Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.
In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
Assets and Liabilities Recorded at Fair Value on a Recurring Basis
The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a recurring basis as of September 30, 2010 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
Fair Value Measurements Using
|
||||||||||||||||
September 30,
2010
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Available for sale securities
|
||||||||||||||||
Mortgage-backed securities
|
$ | 45,456 | - | 45,456 | - | |||||||||||
Collateralized mortgage obligations
|
71,799 | - | 51,718 | 20,081 | ||||||||||||
Government sponsored entity bonds
|
55,318 | - | 55,318 | - | ||||||||||||
Municipal securities
|
28,860 | - | 28,860 | - | ||||||||||||
Other debt securities
|
5,468 | 5,468 | - | - | ||||||||||||
Loans held for sale
|
106,966 | - | 106,966 | - | ||||||||||||
Mortgage banking derivative assets
|
397 | - | - | 397 | ||||||||||||
Mortgage banking derivative liabilities
|
161 | - | - | 161 | ||||||||||||
Fair Value Measurements Using
|
||||||||||||||||
December 31,
2009
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Available for sale securities
|
||||||||||||||||
Mortgage-backed securities
|
$ | 41,513 | - | 41,513 | - | |||||||||||
Collateralized mortgage obligations
|
75,322 | - | 59,523 | 15,799 | ||||||||||||
Government sponsored entity bonds
|
40,589 | - | 40,589 | - | ||||||||||||
Municipal securities
|
43,241 | - | 43,241 | - | ||||||||||||
Other debt securities
|
4,750 | 4,750 | - | - | ||||||||||||
Loans held for sale
|
45,052 | - | 45,052 | - | ||||||||||||
Mortgage banking derivative assets
|
252 | - | - | 252 | ||||||||||||
Mortgage banking derivative liabilities
|
135 | - | - | 135 |
The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:
Available for sale securities – The Company’s investment securities classified as available for sale include: mortgage-backed securities, collateralized mortgage obligations, government sponsored entity bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored entity bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The fair value of municipal securities is determined by a third party valuation source using observable market data utilizing a multi-dimensional relational pricing model. Standard inputs to this model include observable market data such as benchmark yields, reported trades, broker quotes, rating updates and issuer spreads. These model measurements are classified as Level 2 in the fair value hierarchy. The fair value of other debt securities, which includes a trust preferred security issued by a financial institution, is determined through quoted prices in active markets and is classified as Level 1 in the fair value hierarchy.
Loans held for sale – Effective January 1, 2009, the Company elected to carry loans held for sale at fair value under the fair value option model. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the secondary market, principally from observable prices for forward sale commitments. At September 30, 2010 and December 31, 2009, loans held-for-sale totaled $107.0 million and $45.1 million, respectively. Loans held-for-sale are considered to be Level 2 in the fair value hierarchy of valuation techniques.
Mortgage banking derivatives - Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company relies on a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment and then multiplying by quoted investor prices. The Company also relies on a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that the majority of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy.
The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2010 and 2009.
Nine Months Ended
|
Year Ended
|
|||||||
September 30,
|
December 31,
|
|||||||
2010
|
2009
|
|||||||
(In Thousands)
|
||||||||
Balance at beginning of period
|
$ | 15,799 | 4,242 | |||||
Transfer into level 3
|
- | 9,870 | ||||||
Change in unrealized holding losses arising during the period:
|
||||||||
Included in other comprehensive income
|
4,961 | 2,427 | ||||||
Other than temporary impairment included in net loss
|
- | (1,112 | ) | |||||
Principal repayments
|
(788 | ) | (750 | ) | ||||
Net accretion of discount/amortization of premium
|
109 | 5 | ||||||
Cummulative-effect adjustment
|
- | 1,117 | ||||||
Balance at end of period
|
$ | 20,081 | 15,799 |
Level 3 available-for-sale securities include two corporate collateralized mortgage obligations which are deemed non-investment grade. The market for these securities was not active as of September 30, 2010. As such, the Company valued these securities based on the present value of estimated future cash flows. Additional impairment may be incurred in future periods if estimated future cash flows are less than the cost basis of the securities. There were no transfers in or out of Level 1 or Level 2 measurements during the periods.
Assets and Liabilities Recorded at Fair Value on a Non-recurring Basis
The following table presents information about our assets recorded in our consolidated statement of financial position at their fair value on a non-recurring basis as of September 30, 2010 and December 31, 2009, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.
Fair Value Measurements Using
|
||||||||||||||||
September 30, 2010
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Loans (1)
|
$ | 72,688 | - | - | 72,688 | |||||||||||
Real estate owned
|
53,092 | - | - | 53,092 | ||||||||||||
Fair Value Measurements Using
|
||||||||||||||||
December 31, 2009
|
Level 1
|
Level 2
|
Level 3
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Loans (1)
|
$ | 78,271 | - | - | 78,271 | |||||||||||
Real estate owned
|
50,929 | - | - | 50,929 |
____________________________
(1) Represents collateral-dependent impaired loans, net, which are included in loans.
Loans – We do not record loans at fair value on a recurring basis. On a non-recurring basis, loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at net realizable value of the underlying collateral. Fair value is determined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of impaired loans, loans that have been deemed to be impaired are considered to be Level 3 in the fair value hierarchy of valuation techniques. At September 30, 2010, loans determined to be impaired with an outstanding balance of $86.7 million were carried net of specific reserves of $14.1 million for a fair value of $72.7 million. At December 31, 2009, loans determined to be impaired with an outstanding balance of $90.8 million were carried net of specific reserves of $12.5 million for a fair value of $78.3 million. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.
Real estate owned – On a non-recurring basis, real estate owned, is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals obtained at the time the Company takes title to the property and, if less than the carrying value of the loan, the carrying value of the loan is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. At September 30, 2010 and December 31, 2009, real estate owned totaled $53.1 million and $50.9 million, respectively.
Fair value information about financial instruments follows, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.
The carrying amounts and fair values of the Company’s financial instruments consist of the following at September 30, 2010 and December 31, 2009:
September 30, 2010
|
December 31, 2009
|
|||||||||||||||
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
amount
|
value
|
amount
|
value
|
|||||||||||||
(In Thousands)
|
||||||||||||||||
Financial Assets
|
||||||||||||||||
Cash and cash equivalents
|
$ | 110,263 | 110,263 | 71,120 | 71,120 | |||||||||||
Securities available-for-sale
|
206,901 | 206,901 | 205,415 | 205,415 | ||||||||||||
Securities held-to-maturity
|
2,648 | 2,570 | 2,648 | 1,930 | ||||||||||||
Loans held for sale
|
106,966 | 106,966 | 45,052 | 45,052 | ||||||||||||
Loans receivable
|
1,351,948 | 1,371,749 | 1,420,010 | 1,403,266 | ||||||||||||
FHLB stock
|
21,653 | 21,653 | 21,653 | 21,653 | ||||||||||||
Cash surrender value of life insurance
|
35,225 | 35,225 | 33,941 | 33,941 | ||||||||||||
Accrued interest receivable
|
4,262 | 4,262 | 4,525 | 4,525 | ||||||||||||
Mortgage banking derivative assets
|
397 | 397 | 252 | 252 | ||||||||||||
Financial Liabilities
|
||||||||||||||||
Deposits
|
1,172,259 | 1,179,977 | 1,164,890 | 1,167,834 | ||||||||||||
Advance payments by
|
||||||||||||||||
borrowers for taxes
|
23,025 | 23,025 | 630 | 630 | ||||||||||||
Borrowings
|
506,902 | 556,879 | 507,900 | 513,596 | ||||||||||||
Accrued interest payable
|
2,208 | 2,208 | 3,070 | 3,070 | ||||||||||||
Mortgage banking derivative liabilities
|
161 | 161 | 211 | 211 | ||||||||||||
Other Financial Instruments
|
||||||||||||||||
Stand-by letters of credit
|
3 | 3 | 5 | 5 |
The following methods and assumptions were used by the Company in determining its fair value disclosures for financial instruments.
Cash and Cash Equivalents
The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is a reasonable estimate of fair value.
Securities
The fair value of securities is determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. Prepayment models are used for mortgage related securities with prepayment features.
Loans Held for Sale
|
Fair value is estimated using the prices of the Company’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.
|
Loans Receivable
Loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at fair value. Fair value is determined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. With respect to loans that are not considered to be impaired, fair value is estimated by discounting the future contractual cash flows using discount rates that that reflect a current rate offered to borrowers of similar credit standing for the remaining term to maturity. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820-10 and generally produces a higher fair value.
FHLBC Stock
For FHLBC stock, the carrying amount is the amount at which shares can be redeemed with the FHLBC and is a reasonable estimate of fair value.
Cash Surrender Value of Life Insurance
The carrying amounts reported in the consolidated statements of financial condition for the cash surrender value of life insurance approximate those assets’ fair values.
Deposits and Advance Payments by Borrowers for Taxes
The fair values for interest-bearing and noninterest-bearing negotiable order of withdrawal accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. The advance payments by borrowers for taxes are equal to their carrying amounts at the reporting date.
Borrowings
Fair values for borrowings are estimated using a discounted cash flow calculation that applies current interest rates to estimated future cash flows of the borrowings.
Accrued Interest Payable and Accrued Interest Receivable
For accrued interest payable and accrued interest receivable, the carrying amount is a reasonable estimate of fair value.
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