Waterstone Financial, Inc. - FORM 10-Q

Attached files

file	filename
EX-32.2 - Waterstone Financial, Inc.	exhibit322.htm
EX-32.1 - Waterstone Financial, Inc.	exhibit321.htm
EX-31.2 - Waterstone Financial, Inc.	exhibit312.htm
EX-31.1 - Waterstone Financial, Inc.	exhibit311.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q

T Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2016

☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number 001-36271

WATERSTONE FINANCIAL, INC.

(Exact name of registrant as specified in its charter)

Maryland	90-1026709
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

11200 W. Plank Court Wauwatosa, Wisconsin	53226
(Address of principal executive offices)	(Zip Code)

(414) 761-1000

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes T No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes T No ☐

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

Large accelerated filer ☐	Accelerated filer T	Non-accelerated filer ☐	Smaller reporting company ☐
	(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No T

The number of shares outstanding of the issuer's common stock, $0.01 par value per share, was 29,164,384 at July 28, 2016.

WATERSTONE FINANCIAL, INC.

10-Q INDEX

	Page No.

PART I. FINANCIAL INFORMATION	3

Item l. Financial Statements	3
Consolidated Statements of Financial Condition as of June 30, 2016 (unaudited) and December 31, 2015	3
Consolidated Statements of Income for the three and six months ended June 30, 2016 and 2015 (unaudited)	4
Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2016 and 2015 (unaudited)	5
Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2016 and 2015 (unaudited)	6
Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	8 - 37

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	38 - 61
Item 3. Quantitative and Qualitative Disclosures about Market Risk	62 - 63
Item 4. Controls and Procedures	63

PART II. OTHER INFORMATION	64

Item 1. Legal Proceedings	64
Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information	64 64 65 65 65
Item 6. Exhibits	65
Signatures	65

- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	June 30, 2016			December 31, 2015
Assets	(Dollars In Thousands, except share and per share data)
Cash	$	40,887		$	57,419
Federal funds sold		31,301			20,297
Interest-earning deposits in other financial institutions and other short term investments		10,268			22,755
Cash and cash equivalents		82,456			100,471
Securities available for sale (at fair value)		253,726			269,658
Loans held for sale (at fair value)		208,807			166,516
Loans receivable		1,130,036			1,114,934
Less: Allowance for loan losses		15,705			16,185
Loans receivable, net		1,114,331			1,098,749

Office properties and equipment, net		24,518			25,328
Federal Home Loan Bank stock (at cost)		14,850			19,500
Cash surrender value of life insurance		60,454			49,562
Real estate owned, net		8,637			9,190
Prepaid expenses and other assets		31,487			23,755
Total assets	$	1,799,266		$	1,762,729

Liabilities and Shareholders' Equity
Liabilities:
Demand deposits	$	106,059		$	102,673
Money market and savings deposits		154,550			140,631
Time deposits		682,100			650,057
Total deposits		942,709			893,361

Borrowings		414,745			441,203
Advance payments by borrowers for taxes		16,011			3,661
Other liabilities		25,220			32,574
Total liabilities		1,398,685			1,370,799

Shareholders' equity:
Preferred stock (par value $.01 per share)
Authorized - 50,000,000 shares in 2016 and in 2015, no shares issued		-			-
Common stock (par value $.01 per share)
Authorized - 100,000,000 shares in 2016 and in 2015
Issued - 29,163,190 in 2016 and 29,407,455 in 2015
Outstanding - 29,163,190 in 2016 and 29,407,455 in 2015		292			294
Additional paid-in capital		318,187			317,022
Retained earnings		176,163			168,089
Unearned ESOP shares		(20,771	)		(21,365	)
Accumulated other comprehensive income, net of taxes		3,257			582
Cost of shares repurchased (5,908,150 shares at June 30, 2016 and 5,624,415 shares at December 31, 2015)		(76,547	)		(72,692	)
Total shareholders' equity		400,581			391,930
Total liabilities and shareholders' equity	$	1,799,266		$	1,762,729

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended June 30,				Six months ended June 30,
	2016		2015		2016		2015
	(In Thousands, except per share amounts)

Interest income:
Loans	$	14,073	$	14,065	$	27,857	$	27,378
Mortgage-related securities		790		820		1,628		1,659
Debt securities, federal funds sold and short-term investments		885		857		1,859		1,723
Total interest income		15,748		15,742		31,344		30,760
Interest expense:
Deposits		1,835		1,358		3,554		2,711
Borrowings		3,748		4,324		7,642		8,553
Total interest expense		5,583		5,682		11,196		11,264
Net interest income		10,165		10,060		20,148		19,496
Provision for loan losses		-		805		205		1,140
Net interest income after provision for loan losses		10,165		9,255		19,943		18,356
Noninterest income:
Service charges on loans and deposits		616		443		953		849
Increase in cash surrender value of life insurance		471		352		712		559
Mortgage banking income		34,980		29,577		55,594		50,616
Gain on sale of available for sale securities		-		-		-		44
Other		284		668		537		1,005
Total noninterest income		36,351		31,040		57,796		53,073
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		25,709		23,272		43,395		41,350
Occupancy, office furniture, and equipment		2,419		2,269		4,755		4,712
Advertising		655		712		1,313		1,365
Data processing		638		630		1,281		1,205
Communications		372		351		714		721
Professional fees		489		632		1,012		1,129
Real estate owned		163		686		307		1,229
FDIC insurance premiums		155		271		360		607
Other		3,631		3,124		6,316		6,057
Total noninterest expenses		34,231		31,947		59,453		58,375
Income before income taxes		12,285		8,348		18,286		13,054
Income tax expense		4,518		3,064		6,658		4,754
Net income	$	7,767	$	5,284	$	11,628	$	8,300
Income per share:
Basic	$	0.29	$	0.17	$	0.43	$	0.26
Diluted	$	0.29	$	0.17	$	0.43	$	0.26
Weighted average shares outstanding:
Basic		26,919		29,841		26,942		31,098
Diluted		27,204		30,191		27,243		31,413

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

	Three months ended June 30,					Six months ended June 30,
	2016		2015			2016		2015
	(In Thousands)
Net income	$	7,767	$	5,284		$	11,628	$	8,300

Other comprehensive income (loss), net of tax:
Net unrealized holding gain (loss) on available for sale securities:
Net unrealized holding gain (loss) arising during the period, net of tax (expense) benefit of ($528), $1,557, ($1,728), $714, respectively		815		(2,410	)		2,675		(1,106	)

Reclassification adjustment for net gain included in net income during the period, net of tax expense of $0, $0, $0, $17, respectively		-		-			-		(27	)

Total other comprehensive income (loss)		815		(2,410	)		2,675		(1,133	)
Comprehensive income	$	8,582	$	2,874		$	14,303	$	7,167

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited)

	Common Stock						Additional Paid-In Capital		Retained Earnings			Unearned ESOP Shares			Accumulated Other Comprehensive Income			Cost of Shares Repurchased			Total Shareholders' Equity
	Shares			Amount
Balances at December 31, 2014		34,420		$	$344		$	313,894	$	157,304		$	(22,552	)	$	1,247		$	-		$	450,237

Comprehensive income:
Net income		-			-			-		8,300			-			-			-			8,300
Other comprehensive loss		-			-			-		-			-			(1,133	)		-			(1,133	)
Total comprehensive income																						7,167

ESOP shares committed to be released to Plan participants		-			-			88		-			594			-			-			682
Cash dividend, $0.10 per share		-			-			-		(3,029	)		-			-			-			(3,029	)
Stock compensation activity, net of tax		594			6			89		-			-			-			-			95
Stock compensation expense		-			-			1,851		-			-			-			-			1,851
Purchase of common stock returned to authorized but unissued		(4,307	)		(43	)		-		-			-			-			(55,522	)		(55,565	)
Balances at June 30, 2015		30,707		$	$307		$	315,922	$	162,575		$	(21,958	)	$	114		$	(55,522	)	$	401,438


Balances at December 31, 2015		29,407		$	$294		$	317,022	$	168,089		$	(21,365	)	$	582		$	(72,692	)	$	391,930

Comprehensive income:
Net income		-			-			-		11,628			-			-			-			11,628
Other comprehensive income		-			-			-		-			-			2,675			-			2,675
Total comprehensive income																						14,303

ESOP shares committed to be released to Plan participants		-			-			145		-			594			-			-			739
Cash dividend, $0.13 per share		-			-			-		(3,554	)		-			-			-			(3,554	)
Stock based compensation activity		40			-			78		-			-			-			-			78
Stock compensation expense		-			-			942		-			-			-			-			942
Purchase of common stock returned to authorized but unissued		(284	)		(2	)		-		-			-			-			(3,855	)		(3,857	)
Balances at June 30, 2016		29,163		$	$292		$	318,187	$	176,163		$	(20,771	)	$	3,257		$	(76,547	)	$	400,581

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six months ended June 30,
	2016			2015
	(In Thousands)

Operating activities:
Net income	$	11,628		$	8,300
Adjustments to reconcile net income to net cash used in operating activities:
Provision for loan losses		205			1,140
Provision for depreciation		1,447			1,571
Stock based compensation		942			1,851
Net amortization of premium/discount on debt and mortgage related securities		510			685
Amortization of unearned ESOP shares		739			682
Amortization and impairment of mortgage servicing rights		389			385
Gain on sale of loans held for sale		(54,929	)		(48,472	)
Loans originated for sale		(1,046,354	)		(995,131	)
Proceeds on sales of loans originated for sale		1,058,992			960,756
(Increase) decrease in accrued interest receivable		(21	)		39
Increase in cash surrender value of life insurance		(712	)		(559	)
Decrease in accrued interest on deposits and borrowings		(211	)		(41	)
Increase in other liabilities		4,149			4,490
(Increase) decrease in accrued tax receivable		(367	)		2,402
Gain on sale of available for sale securities		-			(44	)
Net loss related to real estate owned		3			379
Gain on sale of mortgage servicing rights		-			(262	)
Other		(9,447	)		(4,225	)
Net cash used in operating activities		(33,037	)		(66,054	)

Investing activities:
Net increase in loans receivable		(18,910	)		(10,151	)
Purchases of:
Debt securities		-			(10,000	)
Mortgage related securities		(5,236	)		(15,933	)
Premises and equipment, net		(689	)		(931	)
Bank owned life insurance		(10,180	)		(180	)
FHLB stock		(2,250	)		(2,000	)
Proceeds from:
Principal repayments on mortgage-related securities		19,115			20,652
Maturities of debt securities		5,945			5,690
Sales of debt securities		-			1,034
Sales of FHLB stock		6,900			-
Sales of real estate owned		3,712			13,475
Net cash (used in) provided by investing activities		(1,593	)		1,656

Financing activities:
Net increase (decrease) in deposits		49,348			(13,646	)
Net change in short term borrowings		(6,458	)		10,000
Repayment of long term debt		(70,000	)		-
Proceeds from long term debt		50,000			-
Net change in advance payments by borrowers for taxes		175			1,924
Cash dividends on common stock		(2,671	)		(3,113	)
Purchase of common stock returned to authorized but unissued		(3,857	)		(55,565	)
Proceeds from stock option exercises		78			89
Net cash provided by (used in) financing activities		16,615			(60,311	)
Decrease in cash and cash equivalents		(18,015	)		(124,709	)
Cash and cash equivalents at beginning of period		100,471			172,820
Cash and cash equivalents at end of period	$	82,456		$	48,111

Supplemental information:
Cash paid or credited during the period for:
Income tax payments	$	6,545		$	2,303
Interest payments		11,407			11,305
Noncash activities:
Loans receivable transferred to real estate owned		3,123			9,066
Dividends declared but not paid in other liabilities		2,304			1,536

See Accompanying Notes to Unaudited Consolidated Financial Statements.

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Note 1 — Basis of Presentation

The unaudited interim consolidated financial statements include the accounts of Waterstone Financial, Inc. (the "Company") and the Company's subsidiaries.

WaterStone Bank (the "Bank") is a community bank that has served the banking needs of its customers since 1921. WaterStone Bank also has an active mortgage banking subsidiary, Waterstone Mortgage Corporation.

WaterStone Bank conducts its community banking business from 11 banking offices located in Milwaukee, Washington and Waukesha Counties, Wisconsin, as well as a loan production office in Minneapolis, Minnesota. WaterStone Bank's principal lending activity is originating one- to four-family and multi-family residential real estate loans for retention in its portfolio. WaterStone Bank also offers home equity loans and lines of credit, construction and land loans, commercial real estate and commercial business loans, and consumer loans. WaterStone Bank funds its loan production primarily with retail deposits and Federal Home Loan Bank advances. Our deposit offerings include: certificates of deposit, money market savings accounts, transaction deposit accounts, non-interest bearing demand accounts and individual retirement accounts. Our investment securities portfolio is comprised principally of mortgage-backed securities, government-sponsored enterprise bonds and municipal obligations.

WaterStone Bank's mortgage banking operations are conducted through its wholly-owned subsidiary, Waterstone Mortgage Corporation. Waterstone Mortgage Corporation originates single-family residential real estate loans for sale into the secondary market. Waterstone Mortgage Corporation utilizes lines of credit provided by WaterStone Bank as a primary source of funds, and also utilizes a line of credit with another financial institution as needed.

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 GAAP 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, 2015 Annual Report on Form 10-K. Operating results for the six months ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016 or for any other period.

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 and real estate owned. Actual results could differ from those estimates.

Certain prior period amounts have been reclassified to conform to current period presentation. These reclassifications did not result in any changes to previously reported net income or shareholders' equity.

Impact of Recent Accounting Pronouncements

ASU 2016-13 "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2016-13") requires an entity to utilize a new impairment model known as the current expected credit loss ("CECL") model to estimate its lifetime "expected credit loss" and record an allowance that, when deducted from the amortized cost basis of the financial asset, presents the net amount expected to be collected on the financial asset. The CECL model is expected to result in more timely recognition of credit losses. ASU 2016-13 also requires new disclosures for financial assets measured at amortized cost, loans and available-for-sale debt securities. ASU 2016-13 is effective for public companies for annual periods beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are in the process of evaluating the impact adoption of ASU 2016-13 will have on our consolidated financial statements and disclosures.

ASU 2016-02 "Lease (Topic 842)" ("ASU 2016-02") requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 is effective for public companies for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. We are in the process of evaluating the impact adoption of ASU 2016-13 will have on our consolidated financial statements and disclosures.

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Note 2— Securities Available for Sale

The amortized cost and fair values of the Company's investment in securities available for sale follow:

	June 30, 2016
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In Thousands)
Mortgage-backed securities	$	84,445	$	2,388	$	(3	)	$	86,830
Collateralized mortgage obligations:
Government sponsored enterprise issued		67,855		1,112		-			68,967
Mortgage-related securities		152,300		3,500		(3	)		155,797

Government sponsored enterprise bonds		3,750		28		-			3,778
Municipal securities		72,371		3,155		(6	)		75,520
Other debt securities		17,400		128		(628	)		16,900
Debt securities		93,521		3,311		(634	)		96,198
Certificates of deposit		1,715		16		-			1,731
	$	247,536	$	6,827	$	(637	)	$	253,726

	December 31, 2015
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In Thousands)
Mortgage-backed securities	$	95,911	$	1,004	$	(248	)	$	96,667
Collateralized mortgage obligations:
Government sponsored enterprise issued		70,605		123		(300	)		70,428
Mortgage-related securities		166,516		1,127		(548	)		167,095

Government sponsored enterprise bonds		3,750		-		(4	)		3,746
Municipal securities		77,509		1,730		(80	)		79,159
Other debt securities		17,401		209		(647	)		16,963
Debt securities		98,660		1,939		(731	)		99,868
Certificates of deposit		2,695		4		(4	)		2,695
	$	267,871	$	3,070	$	(1,283	)	$	269,658

The Company's mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At June 30, 2016, $93.0 million of the Company's mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company. As of June 30, 2016, $2.2 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2015, $94.1 million of the Company's government sponsored enterprise bonds and $2.5 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities, respectively.

- 9 -

The amortized cost and fair values of investment securities by contractual maturity at June 30, 2016 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized Cost		Fair Value
	(In Thousands)
Debt and other securities
Due within one year	$	10,945	$	11,026
Due after one year through five years		19,526		19,799
Due after five years through ten years		42,011		44,103
Due after ten years		22,754		23,001
Mortgage-related securities		152,300		155,797
	$	247,536	$	253,726

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:

	June 30, 2016
	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(In Thousands)
Mortgage-backed securities	$	-	$	-		$	2,177	$	(3	)	$	2,177	$	(3	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		-		-			-		-			-		-
Municipal securities		6,603		(6	)		-		-			6,603		(6	)
Other debt securities		-		-			9,372		(628	)		9,372		(628	)
Certificates of deposit		-		-			-		-			-		-
	$	6,603	$	(6	)	$	11,549	$	(631	)	$	18,152	$	(637	)

	December 31, 2015
	Less than 12 months					12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(In Thousands)
Mortgage-backed securities	$	18,488	$	(163	)	$	5,577	$	(85	)	$	24,065	$	(248	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		48,281		(300	)		-		-			48,281		(300	)
Government sponsored enterprise bonds		3,246		(4	)		-		-			3,246		(4	)
Municipal securities		9,409		(18	)		5,555		(62	)		14,964		(80	)
Other debt securities		14,363		(647	)		-		-			14,363		(647	)
Certificates of deposit		976		(4	)		-		-			976		(4	)
	$	94,763	$	(1,136	)	$	11,132	$	(147	)	$	105,895	$	(1,283	)

- 10 -

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 market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the 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, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral.

As of June 30, 2016, the Company held two municipal securities that had previously been deemed to be other-than-temporarily impaired. Both securities were issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the securities to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of these securities resulted in $100,000 in credit losses charged to earnings with respect to these two municipal securities. During the year ended December 31, 2014, there were sales in the market of municipal issuer bonds at a discounted price that resulted in the Company recording additional credit losses. An additional $17,000 credit loss was charged to earnings during the year ended December 31, 2014 for these municipal bonds. As of June 30, 2016, these securities had a combined amortized cost of $198,000 and total life-to-date impairment of $117,000.

As of June 30, 2016, the Company had two mortgage-backed securities and one other debt security which had been in an unrealized loss position for twelve months or longer. These securities were determined not to be other-than-temporarily impaired as of June 30, 2016. The Company has determined that the decline in fair value of these securities is primarily attributable to an increase in market interest rates compared to the stated rates on these securities and is not attributable to credit deterioration. 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.

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.

There were no sales of securities during the six months ended June 30, 2016. During the six months ended June 30, 2015, proceeds from the sale of securities totaled $1.0 million and resulted in gains totaling $44,000. The $44,000 included in gain on sale of available for sale securities in the consolidated statements of income during the six months ended June 30, 2015 was reclassified from accumulated other comprehensive income.

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Note 3 - Loans Receivable

Loans receivable at June 30, 2016 and December 31, 2015 are summarized as follows:

	June 30, 2016		December 31, 2015
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	383,029	$	381,992
Multi-family		544,753		547,250
Home equity		23,173		24,326
Construction and land		16,842		19,148
Commercial real estate		134,537		118,820
Consumer		342		361
Commercial loans		27,360		23,037
	$	1,130,036	$	1,114,934

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. 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. While the Company's credit risks are geographically concentrated in the Milwaukee metropolitan area, there are no concentrations with individual or groups of related borrowers.

Qualifying loans receivable totaling $885.2 million and $872.8 million at June 30, 2016 and December 31, 2015, respectively, are pledged as collateral against $330.0 million in outstanding Federal Home Loan Bank of Chicago (FHLBC) advances under a blanket security agreement.

As of June 30, 2016 and December 31, 2015, there were no loans 90 or more days past due and still accruing interest.

An analysis of past due loans receivable as of June 30, 2016 and December 31, 2015 follows:

	As of June 30, 2016
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	1,064	$	99	$	5,441	$	6,604	$	376,425	$	383,029
Multi-family			379		-		700		1,079		543,674		544,753
Home equity			30		-		58		88		23,085		23,173
Construction and land			-		-		66		66		16,776		16,842
Commercial real estate			-		-		209		209		134,328		134,537
Consumer			-		-		-		-		342		342
Commercial loans			-		2		26		28		27,332		27,360
Total		$	1,473	$	101	$	6,500	$	8,074	$	1,121,962	$	1,130,036

	As of December 31, 2015
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans
	(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	851	$	1,133	$	6,503	$	8,487	$	373,505	$	381,992
Multi-family			—		207		1,858		2,065		545,185		547,250
Home equity			255		96		110		461		23,865		24,326
Construction and land			-		-		238		238		18,910		19,148
Commercial real estate			57		-		223		280		118,540		118,820
Consumer			-		-		-		-		361		361
Commercial loans			-		-		-		-		23,037		23,037
Total		$	1,163	$	1,436	$	8,932	$	11,531	$	1,103,403	$	1,114,934

⁽¹⁾	Includes $447,000 and $315,000 at June 30, 2016 and December 31, 2015, respectively, which are on non-accrual status.

⁽²⁾	Includes $32,000 and $467,000 at June 30, 2016 and December 31, 2015, respectively, which are on non-accrual status.

⁽³⁾	Includes $4.4 million and $7.9 million at June 30, 2016 and December 31, 2015, respectively, which are on non-accrual status.

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A summary of the activity for the six months ended June 30, 2016 and 2015 in the allowance for loan losses follows:

	One- to Four- Family			Multi-Family			Home Equity			Construction and Land			Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Six months ended June 30, 2016
Balance at beginning of period	$	7,763		$	5,000		$	433		$	904		$	1,680	$	9	$	396	$	16,185
Provision (credit) for loan losses		(103	)		(5	)		(2	)		(13	)		52		1		275		205
Charge-offs		(464	)		(445	)		(62	)		(3	)		-		-		-		(974	)
Recoveries		178			59			19			33			-		-		-		289
Balance at end of period	$	7,374		$	4,609		$	388		$	921		$	1,732	$	10	$	671	$	15,705

Six months ended June 30, 2015
Balance at beginning of period	$	9,877		$	5,358		$	422		$	687		$	1,951		$	8		$	403	$	18,706
Provision (credit) for loan losses		1,402			(147	)		(54	)		47			(115	)		(2	)		9		1,140
Charge-offs		(1,220	)		(1,304	)		(48	)		(47	)		(45	)		-			-		(2,664	)
Recoveries		289			753			95			33			5			3			-		1,178
Balance at end of period	$	10,348		$	4,660		$	415		$	720		$	1,796		$	9		$	412	$	18,360

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of June 30, 2016 follows:

	One- to Four- Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	605	$	-	$	75	$	-	$	88	$	-	$	2	$	770
Allowance related to loans collectively evaluated for impairment		6,769		4,609		313		921		1,644		10		669		14,935
Balance at end of period	$	7,374	$	4,609	$	388	$	921	$	1,732	$	10	$	671	$	15,705

Loans individually evaluated for impairment	$	12,124	$	4,287	$	319	$	504	$	1,631	$	-	$	48	$	18,913
Loans collectively evaluated for impairment		370,905		540,466		22,854		16,338		132,906		342		27,312		1,111,123
Total gross loans	$	383,029	$	544,753	$	23,173	$	16,842	$	134,537	$	342	$	27,360	$	1,130,036

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A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2015 follows:

	One- to Four-Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
Allowance related to loans individually evaluated for impairment	$	1,114	$	242	$	108	$	3	$	106	$	-	$	3	$	1,576
Allowance related to loans collectively evaluated for impairment		6,649		4,758		325		901		1,574		9		393		14,609
Balance at end of period	$	7,763	$	5,000	$	433	$	904	$	1,680	$	9	$	396	$	16,185

Loans individually evaluated for impairment	$	18,385	$	5,100	$	472	$	1,795	$	1,766	$	-	$	27	$	27,545
Loans collectively evaluated for impairment		363,607		542,150		23,854		17,353		117,054		361		23,010		1,087,389
Total gross loans	$	381,992	$	547,250	$	24,326	$	19,148	$	118,820	$	361	$	23,037	$	1,114,934

The following table presents information relating to the Company's internal risk ratings of its loans receivable as of June 30, 2016 and December 31, 2015:

	One to Four- Family		Multi-Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)
At June 30, 2016
Substandard	$	14,271	$	1,757	$	406	$	66	$	1,631	$	-	$	47	$	18,178
Watch		9,800		2,931		113		874		1,465		-		3,070		18,253
Pass		358,958		540,065		22,654		15,902		131,441		342		24,243		1,093,605
	$	383,029	$	544,753	$	23,173	$	16,842	$	134,537	$	342	$	27,360	$	1,130,036

At December 31, 2015
Substandard	$	19,148	$	2,553	$	684	$	1,794	$	1,766	$	-	$	55	$	26,000
Watch		11,352		3,634		128		-		1,161		-		402		16,677
Pass		351,492		541,063		23,514		17,354		115,893		361		22,580		1,072,257
	$	381,992	$	547,250	$	24,326	$	19,148	$	118,820	$	361	$	23,037	$	1,114,934

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Factors that are important to managing overall credit quality include sound loan underwriting and administration, systematic monitoring of existing loans and commitments, effective loan review on an ongoing basis, early identification of potential problems, an allowance for loan losses, and sound non-accrual and charge-off policies. Our underwriting policies require an officers' loan committee review and approval of all loans in excess of $500,000. In addition, we utilize an independent loan review function for all loans. Our ability to manage credit risk depends in large part on our ability to properly identify and manage problem loans. To do so, we maintain a loan review system under which our credit management personnel review non-owner occupied one- to four-family, multi-family, construction and land, commercial real estate and commercial loans that individually, or as part of an overall borrower relationship exceed $1.0 million in potential exposure. Loans meeting these criteria are reviewed on an annual basis, or more frequently, if the loan renewal is less than one year. With respect to this review process, management has determined that pass loans include loans that exhibit acceptable financial statements, cash flow and leverage. Watch loans have potential weaknesses that deserve management's attention, and if left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the credit. Substandard loans are considered inadequately protected by the current net worth and paying capacity of the obligor or the collateral pledged. These loans generally have a well-defined weakness that may jeopardize liquidation of the debt and are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Finally, a loan is considered to be impaired when it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreement. Management has determined that all non-accrual loans and loans modified under troubled debt restructurings meet the definition of an impaired loan.

The Company's procedures dictate that an updated valuation must be obtained with respect to underlying collateral at the time a loan is deemed impaired. Updated valuations may also be obtained upon transfer from loans receivable to real estate owned based upon the age of the prior appraisal, changes in market conditions or known changes to the physical condition of the property.

Estimated fair values are reduced to account for sales commissions, broker fees, unpaid property taxes and additional selling expenses to arrive at an estimated net realizable value. The adjustment factor is based upon the Company's actual experience with respect to sales of real estate owned over the prior two years. In situations in which we are placing reliance on an appraisal that is more than one year old, an additional adjustment factor is applied to account for downward market pressure since the date of appraisal. The additional adjustment factor is based upon relevant sales data available for our general operating market as well as company-specific historical net realizable values as compared to the most recent appraisal prior to disposition.

With respect to multi-family income-producing real estate, appraisals are reviewed and estimated collateral values are adjusted by updating significant appraisal assumptions to reflect current real estate market conditions. Significant assumptions reviewed and updated include the capitalization rate, rental income and operating expenses. These adjusted assumptions are based upon recent appraisals received on similar properties as well as on actual experience related to real estate owned and currently under Company management.

The following tables present data on impaired loans at June 30, 2016 and December 31, 2015.

As of or for the Six Months Ended June 30, 2016

Recorded

Investment

Unpaid

Principal

Reserve

Cumulative

Charge-Offs

Average

Waterstone Financial, Inc. - FORM 10-Q - July 29, 2016

Attached files