Attached files

file filename
EX-32 - EXHIBIT 32 - Westbury Bancorp, Inc.wbb-2016930x10kexx32.htm
EX-31.2 - EXHIBIT 31.2 - Westbury Bancorp, Inc.wbb-2016930x10kexx312.htm
EX-31.1 - EXHIBIT 31.1 - Westbury Bancorp, Inc.wbb-2016930x10kexx311.htm
EX-23 - EXHIBIT 23 - Westbury Bancorp, Inc.wbb-2016930x10kexx23.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2016.
OR
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________.

Commission file number: 001-35871

WESTBURY BANCORP, INC.
(Exact name of registrant as specified in its charter)
Maryland
 
46-1834307
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
200 South Main Street, West Bend, Wisconsin
 
53095
(Address of principal executive offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (262) 334-5563

Securities registered pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share                NASDAQ Stock Market, LLC
(Title of each class to be registered)
 
(Name of each exchange on which
each class is to be registered)

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ¨ NO x

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES ¨ NO x

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 x NO ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, 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 x NO ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨





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. (Check one)
Large accelerated filer
¨
 
Accelerated filer
¨
 
 
 
 
 
Non-accelerated filer
¨
 
Smaller reporting company
x
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act). YES ¨ NO x

As of December 2, 2016, there were 4,097,906 issued and outstanding shares of the Registrant’s Common Stock. The aggregate market value of the voting and non-voting common stock held by non-affiliates of the Registrant, computed by reference to the closing price of the common stock on the NASDAQ Capital Market on March 31, 2016 (the last day of the Registrant's most recently completed fiscal second quarter) was $65.5 million. Shares of common stock held by any executive officer or director of the Registrant have been excluded from this computation because such persons may be deemed affiliates. This determination of affiliate status is not a conclusive determination for other purposes.

DOCUMENTS INCORPORATED BY REFERENCE:

2017 Annual Meeting Proxy Statement (Part III)




TABLE OF CONTENTS

 
 
Page Number




PART I
ITEM 1.
Business
Forward Looking Statements
This annual report contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “assume,” “plan,” “seek,” “expect,” “will,” “may,” “should,” “indicate,” “would,” “believe,” “contemplate,” “continue,” “intend,” “target” and words of similar meaning. These forward-looking statements include, but are not limited to:
statements of our goals, intentions and expectations;
statements regarding our business plans, prospects, growth and operating strategies;
statements regarding the asset quality of our loan and investment portfolios; and
estimates of our risks and future costs and benefits.
These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this annual report.
The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in our forward-looking statements:
our ability to manage our operations under current economic conditions nationally and in our market area;
adverse changes in the financial industry, securities, credit and national and local real estate markets (including real estate values);
significant increases in our loan losses and changes in management’s assumptions in determining the adequacy of the allowance for loan losses;
credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs and in our allowance for loan losses and in our provision for loan losses;
competition among depository and other financial institutions;
our success in increasing our commercial business, commercial real estate and multifamily lending while maintaining our asset quality;
we have in recent periods identified multi-family, commercial real estate and construction loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-completion of construction projects,

1



our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens.  If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected;
our success in introducing new financial products;
our ability to attract and maintain deposits;
our ability to retain customer accounts, achieve increased operating efficiencies and enhance profitability following the closing of underperforming branch offices;
changes in interest rates generally, including changes in the relative differences between short term and long term interest rates and in deposit interest rates, that may affect our net interest margin and funding sources;
fluctuations in the demand for loans, which may be affected by the number of unsold homes, land and other properties in our market areas and by declines in the value of real estate in our market area;
changes in consumer spending, borrowing and savings habits;
further declines in the yield on our assets resulting from the current low interest rate environment;
risks related to a high concentration of loans secured by real estate located in our market area;
the results of examinations by our regulators, including the possibility that our regulators may, among other things, require us to increase our allowance for loan losses, write down assets, change our regulatory capital position, limit our ability to borrow funds or maintain or increase deposits;
other actions, resolutions or agreements imposed by our regulators (including the Federal Reserve Bank or the Office of the Comptroller of the Currency) as a result of changes in our financial condition, including related to paying dividends, issuing debt, borrowing funds, repurchasing shares of our common stock and other similar actions.
changes in the level of government support of housing finance;
our ability to enter new markets successfully and capitalize on growth opportunities;
changes in consumer spending, borrowing and savings habits;
changes in laws or government regulations or policies affecting financial institutions, including the Dodd-Frank Act and the JOBS Act, which could result in, among other things, increased deposit insurance premiums and assessments, capital requirements (particularly the new capital regulations), and regulatory fees and compliance costs;
changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;
changes in our compensation and benefit plans;
our ability to retain key members of our senior management team and to address staffing needs to respond to demand or to implement our strategic plans;

2



loan delinquencies and changes in the underlying cash flows of our borrowers;
our ability to control costs and expenses, particularly those associated with operating as a publicly traded company;
changes in the financial condition or future prospects of issuers of securities that we own;
the ability of third-party service providers to perform their obligations to us;
the availability, effectiveness and security of our information technology systems and our ability to secure confidential information through the use of our computer and other technology systems and networks;
the impact of reputational risk created by any of the foregoing developments on such matters such as business generation and retention, funding and liquidity; and
other economic, competitive, governmental, regulatory and operational factors affecting our operations, pricing, products and services described elsewhere in this annual report.
Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.
Westbury Bancorp, Inc.
Westbury Bancorp, Inc. (the “Company”) was incorporated in the State of Maryland on August 10, 2012 and became the savings and loan holding company for Westbury Bank (the “Bank”) following the consummation of the mutual-to-stock conversion of WBSB Bancorp, MHC, the Bank’s former mutual holding company, which was completed on April 9, 2013. The sole business of the Company is its ownership of the Bank. At September 30, 2016, we had total consolidated assets of $702.6 million, net loans of $533.8 million, total deposits of $592.0 million and stockholders' equity of $79.6 million.
In 2012, we elected to change our fiscal year from December 31 to September 30. In order to provide comparative data in certain tables, we have included unaudited information for the year ended September 30, 2012 in addition to the audited information for the years ended September 30, 2016, 2015, 2014 and 2013 and the nine months ended September 30, 2012.
Westbury Bank
Westbury Bank is a federally-chartered savings bank headquartered in West Bend, Wisconsin. Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and borrowings, in commercial and multifamily real estate loans, one- to four-family residential real estate loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. A significant majority of our deposits are transaction accounts, which we believe are less susceptible to large-scale withdrawals as a result of changes in interest rates than certificates of deposit, and which we believe have a lower cost of funds over various interest rate cycles. We also purchase investment securities consisting primarily of securities issued by the United States government and its agencies and government-sponsored enterprises, mortgage-backed securities and collateralized mortgage obligations issued by government-sponsored enterprises, municipal securities and corporate securities.
Market Area
We conduct business through our main office located in West Bend, Wisconsin, seven branch offices in West Bend, Brookfield, Germantown, Hartford, Jackson, Kewaskum and Slinger, Wisconsin, and loan production offices in Madison and Appleton, Wisconsin. We also operate one free-standing ATM in West Bend, Wisconsin at a

3



location other than at one of our branches. Our main office, six of our branches and our one free-standing ATM are located in Washington County, our Brookfield branch is located in Waukesha County, our Madison loan production office is located in Dane County, Wisconsin and our Appleton loan production office is located in Outagamie County, Wisconsin. West Bend, Wisconsin is located in southeastern Wisconsin on the Highway 45 corridor, approximately 40 miles northwest of downtown Milwaukee, Wisconsin, and approximately 75 miles northeast of Madison, Wisconsin.
Our primary market area consists of Washington and Waukesha Counties, Wisconsin. Although our current operations are not focused in Milwaukee County, we are affected by conditions in Milwaukee County because our loan portfolio includes loans that are secured by real estate or that have borrowers located in Milwaukee County. In addition, a number of our customers who reside in Washington or Waukesha Counties are employed in Milwaukee County, and the operations of our commercial customers depend in part on sales of products and services to individuals or other businesses located in Milwaukee County and the surrounding area. Our primary market area includes the west and northwest suburbs of Milwaukee, as well as small towns and rural communities.
Lending Activities
Our principal lending activity is originating commercial real estate loans, one- to four-family residential real estate loans, multifamily loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. We also have a small portfolio of education loans, although we no longer originate education loans. In recent years, we have increased and, subject to market conditions and our asset-liability management analysis, expect to continue to increase our focus on commercial real estate, multifamily and commercial business lending, in an effort to maintain diversity in our overall loan portfolio and increase the overall yield earned on our loans. We also sell, in the secondary market, a significant portion of the longer-term (20 to 30 year) fixed-rate residential mortgage loans that we originate, on both a servicing-retained and servicing-released, non-recourse basis, while retaining shorter-term (10 to 15 year) fixed-rate residential mortgage loans and adjustable rate residential mortgage loans, in order to manage the maturity and time to repricing of our loan portfolio. We also originate FHA and VA loans for sale on a servicing-released basis.
We have in recent periods identified multi-family, commercial real estate, construction, and commercial business loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-completion of construction projects, our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens.  If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected.


4



Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio by type of loan at the dates indicated.
 
At September 30,
 
2016
 
2015
 
2014
 
Amount
 
Percent
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
Single family(1)   
$
158,541

 
29.41
%
 
$
153,141

 
30.73
%
 
$
135,337

 
32.13
%
Multifamily
123,623

 
22.93

 
105,750

 
21.22

 
76,396
 
18.14

Commercial real estate - non-owner occupied
117,971

 
21.88

 
110,833

 
22.24

 
93,141
 
22.11

Commercial real estate - owner occupied
63,108

 
11.71

 
52,124

 
10.46

 
41,980
 
9.97

Construction and land
16,230

 
3.01

 
18,831

 
3.78

 
16,362
 
3.89

Total real estate
479,473

 
88.94

 
440,679

 
88.43

 
363,216
 
86.24

Commercial business loans
40,836

 
7.57

 
38,200

 
7.66

 
37,675
 
8.95

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
14,969

 
2.78

 
14,881

 
2.99

 
14,275
 
3.39

Education
3,401

 
0.63

 
4,106

 
0.82

 
4,694
 
1.11

Automobile
241

 
0.04

 
207

 
0.04

 
327
 
0.08

Other consumer loans
221

 
0.04

 
316

 
0.06

 
994
 
0.23

Total consumer loans
18,832

 
3.49

 
19,510

 
3.91

 
20,290
 
4.81

Total loans
$
539,141

 
100.00
%
 
$
498,389

 
100.00
%
 
$
421,181

 
100.00
%
Net deferred loan costs
138

 
 
 
366

 
 
 
235

 
 
Allowance for loan losses
5,244

 
 
 
4,598

 
 
 
4,072

 
 
Total loans, net
$
533,759

 
 
 
$
493,425

 
 
 
$
416,874

 
 
 
September 30,
 
2013
 
2012
 
Amount
 
Percent
 
Amount
 
Percent
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
Single family(1)   
$
132,496

 
38.16
%
 
$
153,090

 
40.00
%
Multifamily
47,178
 
13.59

 
38,491
 
10.06

Commercial real estate - non-owner occupied
80,522
 
23.19

 
92,565
 
24.20

Commercial real estate - owner occupied
31,715
 
9.14

 
40,217
 
10.51

Construction and land
10,629
 
3.06

 
8,975
 
2.35

Total real estate
302,540
 
87.14

 
333,338
 
87.12

Commercial business loans
25,003
 
7.20

 
22,938
 
6.00

Consumer loans:
 
 
 
 
 
 
 
Home equity lines of credit
13,652
 
3.94

 
19,356
 
5.06

Education
5,189
 
1.49

 
5,709
 
1.49

Automobile
405
 
0.12

 
1,004
 
0.26

Other consumer loans
393
 
0.11

 
251
 
0.07

Total consumer
19,639
 
5.66

 
26,320
 
6.88

Total loans
$
347,182

 
100.00
%
 
$
382,596

 
100.00
%
Net deferred loan costs
136

 
 
 
7

 
 
Allowance for loan losses
4,266

 
 
 
6,690

 
 
Total loans, net
$
342,780

 
 
 
$
375,899

 
 
                    
(1)
Excludes single family mortgage loans held for sale of $1.9 million, $431,000, $326,000, $1.0 million and $3.0 million, respectively, at September 30, 2016, 2015, 2014, 2013, and 2012.

5



Loan Portfolio Maturities. The following table sets forth the contractual maturities of our total loan portfolio at September 30, 2016. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less. The table presents contractual maturities and does not reflect repricing or the effect of prepayments. Actual maturities may differ.
 
Single Family
Multifamily
Commercial
Real Estate - Non-owner Occupied
Commercial
Real Estate - Owner Occupied
Construction and Land
Commercial
 
(Dollars in thousands)
Due During the Year Ending September 30
 
 
 
 
 
 
 
 
 
 
 
2017
$
851

 
$
13,315

 
$
12,483

 
$
7,275

 
$
1,178

 
$
22,229

2018
1,479

 
11,409

 
23,072

 
2,901

 
2,891

 
4,246

2019
2,079

 
19,377

 
21,115

 
8,751

 
2,653

 
1,763

2020 to 2021
3,956

 
55,555

 
43,503

 
29,398

 
2,694

 
9,092

2022 to 2026
35,677

 
22,266

 
15,618

 
14,349

 
964

 
3,506

2027 to 2031
30,906

 
173

 
900

 
203

 
688

 

2032 and beyond
83,593

 
1,528

 
1,280

 
231

 
5,162

 

 
 
 
 
 
 
 
 
 
 
 
 
Total
$
158,541

 
$
123,623

 
$
117,971

 
$
63,108

 
$
16,230

 
$
40,836



 
Home Equity Lines of Credit
Education
Automobile
Other Consumer
Total
 
(Dollars in thousands)
Due During the Year Ending September 30
 
 
 
 
 
 
 
 
 
2017
$
9,628

 
$
40

 
$
14

 
$
100

 
$
67,113

2018
41

 
84

 
93

 

 
46,216

2019

 
108

 
80

 
10

 
55,936

2020 to 2021
65

 
274

 
54

 
12

 
144,603

2022 to 2026
38

 
1,599

 

 

 
94,017

2027 to 2031
52

 
972

 

 

 
33,894

2032 and beyond
5,145

 
324

 

 
99

 
97,362

 
 
 
 
 
 
 
 
 
 
Total
$
14,969

 
$
3,401

 
$
241

 
$
221

 
$
539,141



6



The following table sets forth our fixed- and adjustable-rate loans at September 30, 2016 that are due after September 30, 2017.

 
Due After September 30, 2017
 
Fixed
 
Adjustable
 
Total
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
Single family
$
71,784

 
$
85,906

 
$
157,690

Multifamily
98,032

 
12,276

 
110,308

Commercial real estate - non-owner occupied
99,165

 
6,323

 
105,488

Commercial real estate - owner occupied
53,978

 
1,855

 
55,833

Construction and land
5,222

 
9,830

 
15,052

Total real estate loans
328,181

 
116,190

 
444,371

Commercial business loans
16,948

 
1,659

 
18,607

Consumer loans:
 
 
 
 
 
Home equity lines of credit
90

 
5,251

 
5,341

Education
3,361

 

 
3,361

Automobile
227

 

 
227

Other consumer loans
22

 
99

 
121

Total consumer loans
3,700

 
5,350

 
9,050

Total loans
$
348,829

 
$
123,199

 
$
472,028

Loan Approval Procedures and Authority. Pursuant to applicable law, the aggregate amount of loans that we are permitted to make to any one borrower or a group of related borrowers is generally limited to 15% of Westbury Bank’s unimpaired capital and surplus (25% if the amount in excess of 15% is secured by “readily marketable collateral” or 30% for certain residential development loans). At September 30, 2016, our largest credit relationship totaled $10.5 million and was secured by owner-occupied real estate in our market area. At September 30, 2016, this loan was performing in accordance with its terms. Our second largest relationship at this date was a $9.8 million loan secured by corporate assets including corporate owned life insurance. At September 30, 2016, this loan was performing in accordance with its terms. Both loans comply with our loans to one borrower limits at September 30, 2016.
Our lending is subject to written underwriting standards and origination procedures. Decisions on loan applications are made on the basis of detailed applications submitted by the prospective borrower and property valuations (consistent with our appraisal policy) prepared by outside independent licensed appraisers approved by our board of directors as well as internal evaluations, where permitted by regulations. The loan applications are designed primarily to gather information to allow us to determine the borrower’s ability to repay the requested loan, and the more significant items on the application are verified through use of credit reports, financial statements and tax returns.
Generally, we require title insurance on our mortgage loans as well as fire and extended coverage casualty insurance in amounts at least equal to the principal amount of the loan or the value of improvements on the property, depending on the type of loan. We also require flood insurance if the property is determined to be in a flood zone area.
Individual officers and employees do not have approval authority with respect to residential real estate loans. We use the Desktop Underwriter™ system for residential real estate loans, and any loans that are not approved under this system, and loans in excess of the current Fannie Mae eligibility guidelines, may only be approved by our management loan committee, which consists of our Executive Vice President - Community Banking, our Vice President - Retail Loan Operations, our Vice President - Underwriting and our Assistant Vice President - Consumer Lending for loans up to $500,000. For loans exceeding $500,000, the Chief Financial Officer or Chief Credit Officer are included to increase the approval limit to $1,000,000. Residential real estate loans greater than $1,000,000 must be approved by the directors' loan committee.

7



Our President, our Executive Vice President - Commercial Lending, our Chief Credit Officer and our Chief Financial Officer each have approval authority of up to $500,000 for commercial business, commercial real estate and multifamily lending relationships and up to $3,000 for unsecured consumer loans. Our other lending personnel have approval authority of lesser amounts, up to a maximum of $250,000, depending on each person’s lending experience and the results of credit review of loans that they have approved over a period of time.
In addition, any two persons, one of whom reports directly to the other, may approve commercial business, commercial real estate and multifamily lending relationships up to the aggregate of their individual lending authorities. Our President, our Executive Vice President - Commercial Lending, our Chief Credit Officer and our Chief Financial Officer may, together, approve a commercial business, commercial real estate or multifamily lending relationship up to $1,000,000. Aggregate credit exposure to one borrower in excess of $1,000,000 must be approved by the directors’ loan committee, which consists of at least three independent directors. Our President, our Executive Vice President - Commercial Lending, our Chief Financial Officer and our Chief Credit Officer participate in directors’ loan committee meetings, but are not voting members of the committee. Approval of the directors’ loan committee requires the approval of all of the independent directors serving on the committee.
Commercial Real Estate and Multifamily Lending. Consistent with our strategy to diversify our loan portfolio and increase its yield, we are focused on increasing our origination of commercial real estate and multifamily loans, with a target loan size of between $2.0 million to $8.0 million. At September 30, 2016, we had $304.7 million in commercial real estate and multifamily loans, representing 56.5% of our total loan portfolio compared to $268.7 million, or 53.9% of our total loan portfolio at September 30, 2015. Subject to future economic, market and regulatory conditions, we intend to engage in a disciplined increase in commercial real estate and multifamily lending in our market area.
Our fixed-rate commercial real estate and multifamily loans generally have initial terms of three to five years and amortization terms of 10-25 years for commercial real estate loans and 15-30 years for multifamily loans, with a balloon payment at the end of the initial term. Our adjustable rate commercial real estate and multifamily loans generally have initial terms of three to five years and a re-pricing option. The maximum loan-to-value ratio of our commercial real estate loans and multifamily loans is generally 75% and 80%, respectively, of the lower of cost or appraised value of the property securing the loan. Our commercial real estate loans are typically secured by retail, industrial, warehouse, service, medical or other commercial properties, and our multifamily loans are typically secured by apartment buildings.

8




Set forth below is information regarding our commercial real estate and multifamily loans, by industry, at September 30, 2016.
Industry Type

Number of Loans

Balance




(Dollars in thousands)
Non-owner occupied real estate:




Multifamily

84


$
123,623

Commercial real estate development and rental

94


117,971

Total Non-owner occupied real estate:
 
178

 
241,594

 
 
 
 
 
Owner-occupied real estate:




Real estate, rental and leasing
 
33

 
16,409

Education services
 
2

 
11,811

Manufacturing
 
12

 
9,282

Health care and social
 
10

 
8,559

Construction
 
7

 
6,611

Other services
 
16

 
2,670

Wholesale trade
 
5

 
2,075

Retail trade
 
7

 
1,651

Transportation and warehousing
 
2

 
1,413

Professional, scientific, and technical services
 
3

 
1,238

Accommodation and food
 
4

 
637

Arts, entertainment, and recreation
 
1

 
495

Finance and insurance
 
2

 
223

Remediation services
 
1

 
34

Total Owner-occupied real estate:
 
105

 
$
63,108

 
 
 
 
 
Total

283


$
304,702


At September 30, 2016, the average loan balance of our outstanding commercial real estate and multifamily loans was $1.1 million, and the largest of such loans was a $10.5 million loan secured by owner-occupied real estate in our market area. This loan was performing in accordance with its original terms at September 30, 2016.
We consider a number of factors in originating commercial real estate and multifamily loans. We evaluate the qualifications and financial condition of the borrower, including project-level and global cash flows, credit history, and management expertise, as well as the value and condition of the property securing the loan. When evaluating the qualifications of the borrower, we consider the financial resources of the borrower, the borrower’s experience in owning or managing similar property and the borrower’s payment history with us and other financial institutions. In evaluating the property securing the loan, the factors we consider include the net operating income of the mortgaged property before debt service and depreciation, the ratio of the loan amount to the appraised value of the mortgaged property and the debt service coverage ratio (the ratio of net operating income to debt service). We generally require a debt service coverage ratio of at least 1.20x for commercial real estate loans and 1.15x for multifamily loans. All commercial real estate and multifamily loans are appraised by outside independent appraisers approved by the Board of Directors. We also have an independent third party review of each appraisal, and conduct an internal valuation of any commercial real estate or multifamily property. We generally extend credit based upon the lowest valuation of the three methods.
Personal guarantees are generally obtained from the principals of commercial real estate and multifamily loans, although this requirement may be waived depending upon the loan-to-value ratio and the debt service ratio associated with the loan. We require borrowers to carry property and casualty insurance, and flood insurance if the

9



property is determined to be in a flood zone area. In addition, all purchase-money and refinance borrowers are required to obtain title insurance.
Commercial and multifamily real estate loans entail greater credit risks compared to one- to four-family residential real estate loans because they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income-producing properties typically depends on the successful operation of the property, as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral for the loan or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial and multifamily real estate than residential properties.
Single Family Residential Real Estate Lending. At September 30, 2016, we had $158.5 million of loans secured by single family (considered to be housing consisting of no more than four units) real estate, representing 29.4% of our total loan portfolio. In addition, at September 30, 2016, we had $1.9 million of residential mortgages held for sale. We originate fixed-rate and adjustable-rate residential mortgage loans and home equity loans. At September 30, 2016, 45.5% of our single family residential real estate loans due after 2017 were fixed-rate loans, and 54.5% of such loans were adjustable-rate loans.
Our fixed-rate single family residential real estate loans are generally underwritten according to Fannie Mae guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed- and adjustable-rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency for Fannie Mae, which as of September 30, 2016 was generally $417,000 for single-family homes in our market area. Substantially all of our home equity loans are adjustable-rate loans, and are originated in accordance with the same standards as single family residential loans. We also originate loans above the lending limit for conforming loans, which are referred to as “jumbo loans.” We also offer FHA and VA loans, all of which we originate for sale on a servicing-released, non-recourse basis in accordance with FHA and VA guidelines. Virtually all of our single family residential real estate loans are secured by properties located in our market area.
We generally limit the loan-to-value ratios of our mortgage loans to 80% of the sales price or appraised value, whichever is lower. On a limited basis, loans with a loan-to-value ratio of up to 90% may be made without private mortgage insurance. In these cases, the borrower must have a credit score greater than 700 and a higher interest rate is charged commensurate with the higher risk. Loans with loan-to-value ratios up to 95% may be made when the borrower obtains private mortgage insurance.
Our fixed-rate single family residential real estate loans typically have terms of 10 to 30 years. Our adjustable-rate single family residential real estate loans generally have fixed rates for initial terms of one, three, five or seven years, and adjust annually thereafter at a margin over an index. Our adjustable-rate single family residential real estate loans carry terms to maturity ranging from 10 to 30 years.
Although adjustable-rate mortgage loans may reduce, to an extent, our vulnerability to changes in market interest rates because they periodically re-price, as interest rates increase the required payments due from the borrower also increase (subject to rate caps), increasing the potential for default by the borrower. At the same time, the ability of the borrower to repay the loan and the marketability of the underlying collateral may be adversely affected by higher interest rates. Upward adjustments of the contractual interest rate are also limited by the maximum periodic and lifetime rate adjustments permitted by our loan documents. Moreover, the interest rates on our adjustable-rate loans may not adjust for up to seven years after origination. As a result, the effectiveness of adjustable-rate mortgage loans in compensating for changes in general interest rates may be limited during periods of rapidly rising interest rates.
We offer single family residential real estate loans, secured by non-owner occupied properties, exclusively for sale on a servicing-released, non-recourse basis. Generally, we require personal guarantees from the borrowers on these properties, and we will not make loans in excess of 80% loan to value on non-owner-occupied properties.

10



Home equity loans have greater risk than single family residential real estate loans secured by first mortgages. We face the risk that the value of the collateral may not be sufficient to compensate us for the amount of the unpaid loan and costs of foreclosure and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity loans, decreases in real estate values could adversely affect the value of property used as collateral. We do not extend home equity loans unless the combined loan-to-value ratio of the first mortgage and the home equity loan is 80% or less, except in cases where the borrower has a credit score greater than 700 where we may accept a loan-to-value ratio of 90% with a higher interest rate charged to the borrower commensurate with the higher risk.
We do not offer “interest only” mortgage loans on permanent single family residential real estate loans (where the borrower pays interest for an initial period, after which the loan converts to a fully amortizing loan). Until April 2012, we offered an interest-only home equity loan product with a term of five years and a balloon payment, but have since discontinued this product. We have approximately $321,000 of these loans as of September 30, 2016, with an additional $286,000 in unused commitments for these loans. We also do not offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on the loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” on single family residential real estate loans (i.e., loans to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments or bankruptcies, or loans to borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios), or “Alt-A” loans (i.e., loans that generally target borrowers with better credit scores who borrow with alternative documentation such as little or no verification of income).
We also sell, in the secondary market, a significant portion of the longer-term (20 to 30 year) fixed-rate residential mortgage loans that we originate, on both a servicing-retained and servicing-released, non-recourse basis, while retaining shorter-term (10 to 15 year) fixed-rate residential mortgage loans and adjustable rate residential mortgage loans, in order to manage the maturity and time to repricing of our loan portfolio. We also originate FHA and VA loans for sale on a servicing-released basis. During the years ended September 30, 2016 and September 30, 2015, we sold $48.4 million and $29.2 million of residential mortgage loans, respectively. At September 30, 2016, we serviced a portfolio of $126.1 million of residential mortgage loans that we had originated and sold.

Commercial Business Lending. At September 30, 2016, we had $40.8 million of commercial business loans, representing 7.6% of our total loan portfolio. Our commercial business loans are generally term loans with terms of one to five years, and are generally made to businesses with between $3.0 million and $20.0 million in revenues operating in our market area for purchasing equipment, property improvements, business expansion or working capital, with a target loan size of between $1.0 million to $2.0 million. Our commercial business loans are generally secured by equipment, furniture and fixtures, inventory, accounts receivable or other business assets, or, in very limited circumstances, may be unsecured. If a commercial business loan is secured by equipment, we fix the maturity of a term loan to correspond to 80% of the useful life of equipment purchased or seven years, whichever is less. We also offer regular lines of credit and revolving lines of credit with terms of up to 12 months to finance short-term working capital needs such as accounts payable and inventory. Our commercial lines of credit are generally priced on an adjustable-rate basis and may be secured or, in very limited circumstances, unsecured. We generally obtain personal guarantees with commercial business loans.
We also offer commercial business loans utilizing the Small Business Administration’s ("SBA") various programs.  The loan guaranty provided under the SBA program reduces our credit risk.  In addition, the guaranteed portion of the credit can be sold in the secondary market generating fee income opportunities.  We face recourse liability on these loans if they do not meet all SBA requirements. We address this risk by utilizing a third-party SBA partner which specializes in underwriting, portfolio composition and servicing of SBA credit facilities. The Bank has Preferred Lender Status with the SBA. During the year ended September 30, 2016, we originated no SBA guaranteed commercial business loans. 

11



We typically originate commercial business loans on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business, the experience and stability of the borrower’s management team, earnings projections and the underlying assumptions, and the value and marketability of any collateral securing the loan. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment in our market area. Therefore, commercial business loans that we originate have greater credit risk than one- to four-family residential real estate loans or, generally, consumer loans. In addition, commercial business loans often result in larger outstanding balances to single borrowers, or related groups of borrowers, and also generally require substantially greater evaluation and oversight efforts on our part.
The table below sets forth information regarding our commercial business loans at September 30, 2016.
Industry Type
 
Number of Loans
 
Balance
 
 
 
 
(Dollars in thousands)
Manufacturing
 
54

 
$
28,689

Construction
 
24

 
4,656

Wholesale trade
 
10

 
2,480

Transportation and warehousing
 
7

 
2,331

Real estate, rental and leasing
 
4

 
1,141

Professional, scientific, and technical services
 
7

 
412

Remediation services
 
9

 
399

Health care and social
 
5

 
283

Retail trade
 
6

 
235

Other services
 
5

 
155

Arts, entertainment, and recreation
 
2

 
53

Accommodation and food
 
1

 
2

Total
 
134

 
$
40,836


At September 30, 2016, the average loan balance of our outstanding commercial business loans was $305,000, and the largest outstanding balance of such loans was a $9.8 million loan secured by corporate assets including corporate owned life insurance. This loan was performing in accordance with its original terms at September 30, 2016.
We believe that commercial business loans will provide growth opportunities for us, and we expect to continue to increase, subject to our underwriting standards and market conditions, this business line in the future. We have recently hired seasoned commercial business lenders, which has increased our outstanding commercial business and owner-occupied commercial real estate loan balances and our pipeline of commercial business and owner-occupied commercial real estate loan commitments.
Construction and Land Lending. At September 30, 2016, we had $16.2 million, or 3.0% of our total loan portfolio, in construction and land loans. Of these, $6.0 million were loans on vacant land held for development by individuals for their primary residences, $7.3 million were commercial construction and land development loans, and $2.9 million were loans for the construction by individuals of their primary residences. All $6.0 million of loans on vacant land were fully amortizing loans, with the borrower obligated to pay principal and interest. At September 30, 2016, our largest construction and land loan was a $2.7 million loan secured by a multifamily property in our market area. This loan was performing in accordance with its original terms at September 30, 2016.
Our residential construction loans generally have initial terms of 12 months (subject to extension), during which the borrower pays interest only. Upon completion of construction, these loans convert to conventional amortizing mortgage loans. Our residential construction loans have rates and terms comparable to single family residential real estate loans that we originate. The maximum loan-to-value ratio of our residential construction loans is generally 80% of the lesser of the appraised value of the completed property or the contract price for the land plus the value of the improvements, and up to 90% for loans where the borrower obtains private mortgage

12



insurance. Residential construction loans are generally underwritten pursuant to the same guidelines used for originating permanent residential mortgage loans, except that all residential construction loans are appraised by independent appraisers approved by the Board of Directors.
Our commercial and multifamily construction loans generally have initial terms of 6-12 months, during which the borrower pays interest only. Upon completion of construction, these loans convert to permanent loans. Our commercial and multifamily construction loans have rates and terms comparable to commercial real estate and multifamily loans that we originate. The maximum loan-to-value of our commercial and multifamily construction loans is 75% and 80%, respectively, of the lesser of the appraised value of the completed property or the contract price for the land plus the value of the improvements, and ranges from 40% to 75% for commercial construction and 40% to 80% for multifamily construction depending on the collateral and the purpose of the improvements upon completion of construction. Commercial and multifamily construction loans are generally underwritten pursuant to the same guidelines used for originating permanent commercial real estate and multifamily loans.
To a lesser extent, we will make loans to developers for the construction and development of one- to four-family residential homes in our market area. Generally, no more than two such loans may be outstanding to one borrower at any time. These loans are originated pursuant to the same standards as, and generally have terms similar to, commercial and multifamily construction loans. We generally obtain personal guarantees for these loans.
All construction and land development loans are appraised by independent appraisers approved by the Board of Directors. All borrowers are required to obtain title insurance, property and casualty insurance, and, if the property is determined to be located in a flood zone area, flood insurance. The provider of title insurance on these loans inspects the properties for progress and authorizes all draws.
Construction financing generally involves greater credit risk than long-term financing on improved commercial real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

The table below sets forth, by type of collateral property, the number and amount of our construction and land loans at September 30, 2016, all of which are secured by properties located in our market area.
 
Number of Loans
 
Balance
 
 
 
(Dollars in thousands)
Single family construction
17

 
$
2,895

Multifamily construction
4

 
4,879

Commercial construction
12

 
2,423

Land
63

 
6,033

Total
96

 
$
16,230


Consumer Lending. At September 30, 2016, we had $18.8 million, or 3.5% of our loan portfolio, in consumer loans, including $15.0 million in home equity lines of credit, $3.4 million in education loans and $462,000 in other consumer loans.

13



Home Equity Lines of Credit. At September 30, 2016, we had $15.0 million, or 2.8% of our loan portfolio, in home equity lines of credit. Our home equity lines of credit are secured by residential property, and generally have no set maturity. We do not extend home equity lines of credit unless the combined loan-to-value ratio of all senior mortgages and the line of credit is less than 80%. We offer fixed and variable rate home equity lines of credit, with variable rate home equity lines of credit bearing interest rates based upon the prime rate, subject to maximum rates. Unused commitments on home equity lines of credit were $27.3 million at September 30, 2016.
Home equity lines of credit have greater risk than single family residential real estate loans secured by other mortgages. We face the risk that the collateral may not be sufficient to compensate us for the amount of the unpaid loan and we may be unsuccessful in recovering the remaining balance from those customers. Particularly with respect to our home equity lines of credit, decreases in real estate values could adversely affect the value of property used as collateral.
At September 30, 2016, the average loan balance of our outstanding home equity lines of credit was $24,900. The largest outstanding balance of any such loan was $3.0 million. This loan was performing in accordance with its original terms at September 30, 2016. The borrower is a local commercial real estate loan customer; however, the residential property securing this loan is located out of our market area. Approximately 60% of our home equity lines of credit are secured by property where we also hold the first mortgage.
Other Consumer Loans. Consumer loans other than home equity lines of credit have either a variable or fixed-rate of interest for a term of up to 72 months, depending on the type of collateral and the creditworthiness of the borrower. Our consumer loans may be secured by deposits, automobiles, boats, motorcycles or recreational vehicles, and loans of up to $3,000 may be unsecured.
Our education loans are all insured by Sallie Mae. We no longer originate education loans.
Consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.
Consumer loans generally have greater risk compared to longer-term loans secured by improved real estate, particularly unsecured loans and consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan collections are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy.


Originations, Purchases and Sales of Loans
We originate real estate and other loans through employee marketing and advertising efforts, our existing customer base, walk-in customers and referrals from customers and service providers, such as real estate brokers, builders and attorneys. All loans that we originate are underwritten pursuant to our policies and procedures.
We may sell a certain amount of the loans we originate into the secondary market and in recent years, based upon our interest rate risk analysis, we have sold a portion of the fixed-rate, single family residential real estate loans that we originated for sale to Fannie Mae on a servicing-retained basis. We are also approved to sell similar loans to the Federal Home Loan Bank of Chicago and Freddie Mac but have not sold to them in recent years. We also originate residential mortgage loans for sale on a servicing-released basis where the interest rates available are more advantageous to our customer than those available from Fannie Mae or the customer requires other terms that

14



we are not prepared to offer on a servicing-retained basis or in our loan portfolio. In addition, all FHA and VA loans and single family residential loans secured by non-owner-occupied properties are originated for sale in the secondary market on a servicing-released basis. Otherwise, we consider our balance sheet as well as market conditions on an ongoing basis in making decisions as to whether to hold the mortgage loans we originate for investment or to sell such loans to investors, choosing the strategy that is most advantageous to us from a profitability and risk management standpoint. For the year ended September 30, 2016, we sold no mortgage loans on a servicing-retained basis and $48.4 million of mortgage loans on a servicing-released basis and for the year ended September 30, 2015, we sold $286,000 of mortgage loans on a servicing-retained basis and $28.9 million of mortgage loans on a servicing-released basis. At September 30, 2016, we serviced $126.1 million of fixed-rate, single family residential real estate loans that we originated and sold in the secondary market.
From time to time, we may purchase commercial loan participations secured by properties within and outside of our primary lending market area in which we are not the lead lender. In these circumstances, we follow our customary loan underwriting and approval policies. We use loan participations sold to manage our loan concentrations and to enable us to make loans to customers with credit needs that exceed our legal lending limit. We held $9.5 million of commercial loan participations purchased in our loan portfolio and serviced $37.2 million of commercial loan participations sold at September 30, 2016.
Delinquencies and Non-Performing Assets
Delinquency Procedures. When a borrower fails to make a required monthly payment on a residential real estate loan, we attempt to contact the borrower to determine the reason for nonpayment and to discuss future payments. Our policies provide that a late notice be sent when a loan is 15 days past due. Once the loan is considered in default, generally at 30 days past due, a letter is sent to the borrower explaining that the entire balance of the loan is due and payable, and additional efforts are made to contact the borrower. A demand letter is mailed at 60 days past due giving the borrower 30 days to bring the account current. If the borrower does not respond, we generally initiate foreclosure proceedings when the loan is 120 days past due. If the loan is reinstated, foreclosure proceedings will be discontinued and the borrower will be permitted to continue to make payments. In certain instances, we may modify the loan or grant a limited exemption from loan payments to allow the borrower to reorganize his or her financial affairs. We attempt to work with our borrowers to establish a repayment schedule that will cure the delinquency in a timely manner based on a full financial review.
When we acquire real estate as a result of foreclosure or by deed in lieu of foreclosure, the real estate is classified as foreclosed real estate until it is sold. The real estate is recorded at estimated fair value at the date of acquisition less estimated costs to sell, and any write-down resulting from the acquisition is charged to the allowance for loan losses. Estimated fair value is based on a new appraisal which is obtained as soon as practicable, typically after the foreclosure process is completed. Subsequent decreases in the value of the property are charged to operations. After acquisition, all costs incurred in maintaining the property are expensed. Costs relating to the development and improvement of the property, however, are capitalized up to the estimated fair value less estimated costs to sell.
Delinquent consumer loans are handled in a similar fashion. Our procedures for repossession and sale of consumer collateral are subject to various requirements under applicable laws, including applicable consumer protection laws. In addition, we may determine that foreclosure and sale of such collateral would not be cost-effective for us.
Delinquent commercial business, commercial real estate, construction and multifamily loans are initially handled by the loan officer responsible for the origination of the loan. Our collections department works with the loan officer to ensure that the necessary steps are taken to collect on delinquent loans, including the mailing of delinquency notices. A collection officer takes over any delinquent loan once the loan is 30 days past due, and that collection officer handles any additional collection procedures, including letters from our attorneys. If we cannot reach an acceptable workout of a delinquent commercial business, commercial real estate, construction or multifamily loan between 30 and 60 days of the due date of the first missed payment, we generally initiate foreclosure or repossession proceedings on any collateral securing the loan.

15



Delinquent Loans. The following table sets forth our loan delinquencies by type and amount at the dates indicated.
 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
At September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
5

 
$
239

 
3

 
$
426

 
2

 
$
73

 
10

 
$
738

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

Construction and land

 

 

 

 

 

 

 

Total real estate
5

 
239

 
3

 
426

 
2

 
73

 
10

 
738

Commercial business loans

 

 

 

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 

 

 

 
1

 
27

 
1

 
27

Education
3

 
11

 
4

 
39

 
7

 
149

 
14

 
199

Automobile

 

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
3

 
11

 
4

 
39

 
8

 
176

 
15

 
226

Total
8

 
$
250

 
7

 
$
465

 
10

 
$
249

 
25

 
$
964

 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
10

 
$
473

 
1

 
$
83

 
5

 
$
340

 
16

 
$
896

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 

 

 

 

 

 

Construction and land
1

 
4

 

 

 

 

 
1

 
4

Total real estate
11

 
477

 
1

 
83

 
5

 
340

 
17

 
900

Commercial business loans

 

 

 

 

 

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 

 

 

 
3

 
190

 
3

 
190

Education
5

 
79

 

 

 
10

 
245

 
15

 
324

Automobile

 

 

 

 

 

 

 

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
5

 
79

 

 

 
13

 
435

 
18

 
514

Total
16

 
$
556

 
1

 
$
83

 
18

 
$
775

 
35

 
$
1,414


16



 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2014:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
16

 
$
1,623

 
2

 
$
162

 
6

 
$
450

 
24

 
$
2,235

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied
1

 
178

 

 

 
1

 
32

 
2

 
210

Commercial real estate - owner occupied

 

 
1

 
163

 
1

 
164

 
2

 
327

Construction and land

 

 

 

 

 

 

 

Total real estate
17

 
1,801

 
3

 
325

 
8

 
646

 
28

 
2,772

Commercial business loans

 

 

 

 
2

 
22

 
2

 
22

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
3

 
228

 

 

 
3

 
129

 
6

 
357

Education
4

 
28

 
6

 
44

 
10

 
120

 
20

 
192

Automobile

 

 

 

 
1

 
2

 
1

 
2

Other consumer loans

 

 

 

 

 

 

 

Total consumer loans
7

 
256

 
6

 
44

 
14

 
251

 
27

 
551

Total
24

 
$
2,057

 
9

 
$
369

 
24

 
$
919

 
57

 
$
3,345

 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2013:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
4

 
$
406

 
11

 
$
1,571

 
20

 
$
2,888

 
35

 
$
4,865

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 
3

 
5,305

 

 

 
3

 
5,305

Commercial real estate - owner occupied

 

 
1

 
180

 
2

 
1,069

 
3

 
1,249

Construction and land

 

 

 

 
1

 
192

 
1

 
192

Total real estate
4

 
406

 
15

 
7,056

 
23

 
4,149

 
42

 
11,611

Commercial business loans
2

 
27

 

 

 

 

 
2

 
27

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
5

 
116

 
4

 
90

 
7

 
266

 
16

 
472

Education
6

 
64

 
3

 
26

 
14

 
108

 
23

 
198

Automobile

 

 
1

 
1

 
3

 
4

 
4

 
5

Other consumer loans
1

 
2

 

 

 

 

 
1

 
2

Total consumer loans
12

 
182

 
8

 
117

 
24

 
378

 
44

 
677

Total
18

 
$
615

 
23

 
$
7,173

 
47

 
$
4,527

 
88

 
$
12,315


17



 
Loans Delinquent For
 
Total
 
30-59 Days
 
60-89 Days
 
90 Days and Over
 
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
Number
 
Amount
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2012:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
22

 
$
1,747

 
11

 
$
1,112

 
30

 
$
3,034

 
63

 
$
5,893

Multi-family

 

 

 

 

 

 

 

Commercial real estate - non-owner occupied

 

 

 

 

 

 

 

Commercial real estate - owner occupied

 

 
1

 
169
 
5

 
2,376
 
6

 
2,545
Construction and land
1

 
53
 

 

 
1

 
108
 
2

 
161
Total real estate
23

 
1,800
 
12

 
1,281
 
36

 
5,518
 
71

 
8,599
Commercial business loans
4

 
153
 

 

 

 

 
4

 
153
Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
7

 
453
 
3

 
248
 
11

 
288
 
21

 
989
Education
7

 
61
 
8

 
85
 
10

 
114
 
25

 
260
Automobile
3

 
5
 
2

 
5
 
2

 
3
 
7

 
13
Other consumer loans

 

 

 

 
2

 
6
 
2

 
6
Total consumer loans
17

 
519
 
13

 
338
 
25

 
411
 
55

 
1,268
Total
44

 
$
2,472

 
25

 
$
1,619

 
61

 
$
5,929

 
130

 
$
10,020


The general decrease in delinquent loans at September 30, 2016 was attributable to our ongoing efforts to improve credit quality and relatively stable economic conditions over the past year.

Classified Assets. Federal regulations provide for the classification of loans and other assets, such as debt and equity securities considered by the FDIC to be of lesser quality, as “substandard,” “doubtful” or “loss.” An asset is considered “substandard” if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. “Substandard” assets include those characterized by the “distinct possibility” that the insured institution will sustain “some loss” if the deficiencies are not corrected. Assets classified as “doubtful” have all of the weaknesses inherent in those classified “substandard,” with the added characteristic that the weaknesses present make “collection or liquidation in full,” on the basis of currently existing facts, conditions, and values, “highly questionable and improbable.” Assets classified as “loss” are those considered “uncollectible” and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but possess weaknesses are designated as “special mention” by our management.
When management classifies problem assets as either substandard or doubtful, after reviewing the assets for impairment, it may establish specific allowances in an amount deemed prudent by management to cover probable losses. When an insured institution classifies problem assets as “loss,” it is required to charge-off such amount. An institution’s determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the regulatory authorities, which may require the establishment of additional general or specific loss allowances.
In connection with the filing of our periodic reports and in accordance with our classification of assets policy, we regularly review the problem loans in our portfolio to determine whether any loans require classification in accordance with applicable regulations. Loans are listed on the “watch list” initially because of financial weaknesses even though the loan is currently performing as agreed, or delinquency status. Management reviews the status of each impaired loan on our watch list on a quarterly basis with the directors’ loan committee and then with the full Board of Directors. If a loan deteriorates in asset quality, the classification is changed to “special

18



mention,” “substandard,” “doubtful” or “loss” depending on the circumstances and the evaluation. Generally, loans 90 days or more past due are placed on nonaccrual status and classified “substandard.”
On the basis of this review of our assets, we had classified or held as special mention the following assets as of the date indicated:
 
At September 30,
 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
(Dollars in thousands)
Classified Loans:
 
 
 
 
 
 
 
 
 
Loss
$

 
$

 
$

 
$

 
$

Doubtful

 

 

 

 

Substandard – performing:
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
1,418

 
1,390

 
1,239

 
623

 
1,485

Multi-family

 

 
160

 
173
 
546

Commercial real estate - non-owner occupied

 

 
342

 
186
 
1,921

Commercial real estate - owner occupied

 
307

 
1,135

 
552
 
6,689

Construction and land
2

 

 
5

 

 
448

Total real estate loans
1,420

 
1,697

 
2,881

 
1,534
 
11,089

Commercial business loans

 
1,639

 
82

 
5
 
953

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit
68

 
55

 
58

 
61
 
407

Other consumer loans

 

 

 

 

Total consumer loans
68

 
55

 
58

 
61
 
407

Total substandard – performing
1,488

 
3,391

 
3,021

 
1,600
 
12,449

 
 
 
 
 
 
 
 
 
 
Substandard – Nonperforming:
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
337

 
195

 
596

 
3,903
 
4,268

Multi-family

 

 

 
2,638
 
2,789

Commercial real estate - non-owner occupied

 

 
186

 
35
 
0

Commercial real estate - owner occupied

 

 
164

 
1,249
 
2,376

Construction and land

 

 

 
191
 
108

Total real estate loans
337

 
195

 
946

 
8,016
 
9,541

Commercial business loans

 

 
22

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit
27

 
190

 
129

 
285
 
310

Other consumer loans

 

 
2

 
3
 
45

Total consumer loans
27

 
190

 
131

 
288
 
355

Total substandard – nonperforming
364

 
385

 
1,099

 
8,304
 
9,896

 
 
 
 
 
 
 
 
 
 
Total classified loans(1)   
1,852

 
3,776

 
4,120

 
9,904
 
22,345

 
 
 
 
 
 
 
 
 
 
Securities(2)   

 

 

 

 
230

Foreclosed real estate
99

 
283

 
2,355

 
1,690
 
2,728

 
 
 
 
 
 
 
 
 
 
Total classified assets
$
1,951

 
$
4,059

 
$
6,475

 
$
11,594

 
$
25,303

 
 
 
 
 
 
 
 
 
 
Special mention:
 
 
 
 
 
 
   
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
$

 
$

 
$
118

 
$
121

 
$
806

Multi-family

 

 
445

 

 

Commercial real estate - non-owner occupied
396

 
410

 
424

 
1,221
 
1,187

Commercial real estate - owner occupied

 

 
434

 
1,328
 
608

Construction and land

 

 

 

 
177

Total real estate loans
396

 
410

 
1,421

 
2,670
 
2,778

Commercial business loans
214

 

 

 
928
 
780

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit

 

 

 

 

Other consumer loans

 

 

 

 

Total consumer loans

 

 

 

 

Total special mention
610

 
410

 
1,421

 
3,598
 
3,558

 
 
 
 
 
 
 
 
 
 
Total classified assets and special mention loans
$
2,561

 
$
4,469

 
$
7,896

 
$
15,192

 
$
28,861

                

19



(1)
Includes $364,000, $385,000, $727,000, $2.2 million and $3.7 million respectively, at September 30, 2016, September 30, 2015, September 30, 2014, September 30, 2013, and September 30, 2012 of homogeneous single family real estate mortgage loans, home equity lines of credit and other consumer loans that were not, at those dates, subject to detailed internal evaluation or formally risk-rated by the Bank, but that were, at such dates, 90 or more days past due and not covered by private mortgage insurance, and, in accordance with internal policy, are included herein as substandard because the loans are non-performing.
(2)
Represents municipal bonds classified as substandard as a result of downgraded ratings issued by the ratings agencies.

The decrease in classified assets from September 30, 2015 to September 30, 2016 was primarily due to our ongoing efforts to improve credit quality and resolve problem credits in our loan portfolio in a timely, cost-effective manner. The decrease in substandard performing loans was the result of the payoff of a commercial and industrial loan relationship totaling $1.6 million. The decrease in foreclosed real estate was the result of loans transferred to foreclosed properties of $170,000, offset by sales of $356,000 of properties and valuation adjustments of $26,000 for the year ended September 30, 2016.
Non-Performing Assets. Non-performing assets decreased to $661,000, or 0.09% of total assets, at September 30, 2016 from $1.1 million, or 0.17% of total assets, at September 30, 2015. General economic conditions, including the profitability of commercial enterprises, declines in real estate values and excess inventory in housing markets, were the primary cause of elevated levels of delinquencies and foreclosures in our real estate loan portfolio through 2013. Improvement in economic and market conditions and our enhanced efforts focused on loan collection and problem loan resolution have led to improvements in the levels of delinquencies and foreclosed assets. At September 30, 2016, $25,000, or 4.4%, of total nonaccrual loans were current on their loan payments.
We generally cease accruing interest on our loans when contractual payments of principal or interest have become 90 days past due or management has serious doubts about further collectability of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income is reversed. Interest received on nonaccrual loans generally is applied against principal. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.
Troubled debt restructurings are loans that have renegotiated loan terms to assist borrowers who are unable to meet the original terms of their loans, with modifications to loan terms including a lower interest rate, a reduction in principal, or a longer term to maturity. We generally do not forgive principal or interest on loans. We may modify the terms of loans to lower interest rates (which may be at below market rates), to provide for longer amortization schedules (up to 40 years), or to provide for interest-only terms. These modifications are made only when there is a reasonable and attainable workout plan that has been agreed to by the borrower and that is in our best interests.Troubled debt restructurings are restored to accrual status when the obligation is brought current, has performed in accordance with the revised contractual terms for six months and the ultimate collectability of the total contractual principal and interest is deemed probable. At September 30, 2016, we had six loans totaling $3.0 million that were classified as troubled debt restructurings. Of these, none were included in our non-accrual loans at such date as they have been performing for at least six consecutive months under the modified loan terms and the ultimate collectability of the total contractual principal and interest has been deemed probable.


20



The following table sets forth information regarding our non-performing assets and troubled debt restructurings at the dates indicated. The information reflects net charge-offs but not specific reserves. Troubled debt restructurings include where the borrower is experiencing financial difficulty and loans for which either a portion of interest or principal has been forgiven or an extension of term granted, or for loans modified at interest rates less than current market rates.
 
At September 30,
 

 
2016
 
2015
 
2014
 
2013
 
2012
 
 
 
 
 
(Dollars in thousands)
Nonaccrual loans:
 
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
 
 
Single family
$
338

 
$
340

 
$
791

 
$
4,207

 
$
4,610

Multi family

 

 

 
2,638

 
2,789

Commercial real estate - non-owner occupied

 

 
186

 
34

 

Commercial real estate - owner occupied

 

 
164

 
1,249

 
2,376

Construction and land

 

 

 
192

 
108

Total real estate
338

 
340

 
1,141

 
8,320

 
9,883

Commercial business loans

 

 
22

 

 

Consumer loans:
 
 
 
 
 
 
 
 
 
Home equity lines of credit
36

 
203

 
145

 
285

 
310

Education
188

 
260

 
120

 
134

 
199

Automobile

 

 
2

 
4

 
3

Other consumer loans

 

 

 

 
42

Total consumer loans
224

 
463

 
267

 
423

 
554

Total nonaccrual loans(1)   
562

 
803

 
1,430

 
8,743

 
10,437

 
 
 
 
 
 
 
 
 
 
Loans greater than 90 days delinquent and still accruing:
 
 
 
 
 
 
 
 
 
Total delinquent loans accruing

 

 

 

 

 
 
 
 
 
 
 
 
 
 
Total non-performing loans
562

 
803

 
1,430

 
8,743

 
10,437
 
 
 
 
 
 
 
 
 
 
Foreclosed assets:
 
 
 
 
 
 
 
 
 
Single family
99

 
89

 
653

 
427

 
591
Multi-family

 

 
458

 
551

 
410
Commercial real estate - non-owner occupied

 

 

 

 
629
Commercial real estate - owner occupied

 
194

 
1,149

 
448

 
55
Construction and land

 

 
95

 
264

 
1,043
Total foreclosed assets
99

 
283

 
2,355

 
1,690

 
2,728
 
 
 
 
 
 
 
 
 
 
Total nonperforming assets
$
661

 
$
1,086

 
$
3,785

 
$
10,433

 
$
13,165

 
 
 
 
 
 
 
 
 
 
Performing troubled debt restructurings   
$
3,021

 
$
3,134

 
$
3,507

 
$
3,166

 
$
6,302

 
 
 
 
 
 
 
 
 
 
Ratios:
 
 
 
 
 
 
 
 
 
Nonperforming loans to total loans
0.10
%
 
0.16
%
 
0.34
%
 
2.52
%
 
2.73
%
Nonperforming assets to total assets
0.09
%
 
0.17
%
 
0.67
%
 
1.92
%
 
2.50
%
Nonperforming assets and troubled debt restructurings to total assets
0.52
%
 
0.66
%
 
1.28
%
 
2.50
%
 
3.70
%
                    
(1)
Includes $0, $0, $195,000, $5.4 million and $1.3 million, respectively, of troubled debt restructurings that were on non-accrual status at September 30, 2016, 2015, 2014, 2013 and 2012.

Interest income that would have been recorded for the years ended September 30, 2016 and 2015 had non-accruing loans been current according to their original terms amounted to $31,000 and $31,000, respectively. Interest of approximately $14,000 and $8,000 related to these loans was included in interest income for the years ended September 30, 2016 and 2015, respectively.

21



Non-performing single family residential real estate loans totaled $338,000 at September 30, 2016 and consisted of six loans, of which the largest totaled $131,000. There were no non-performing commercial real estate loans at September 30, 2016. Other non-performing loans totaled $224,000 at September 30, 2016.
Foreclosed real estate totaled $99,000 at September 30, 2016, and consisted solely of single family residential properties.
At September 30, 2016, our largest non-performing loan relationship was a home equity line of credit loan totaling $131,000 secured by a personal residence.
Other Loans of Concern. There were no other loans at September 30, 2016 that are not already disclosed where there is information about possible credit problems of borrowers that caused management to have serious doubts about the ability of the borrowers to comply with present loan repayment terms and that may result in disclosure of such loans in the future.
Allowance for Loan Losses
Analysis and Determination of the Allowance for Loan Losses. Our allowance for loan losses is the amount considered necessary to reflect probable incurred losses in our loan portfolio. We evaluate the need to establish allowances against losses on loans on a quarterly basis. When additional allowances are necessary, a provision for loan losses is charged to earnings.
Our methodology for assessing the appropriateness of the allowance for loan losses consists of two key elements: (1) specific allowances for identified impaired loans; and (2) a general valuation allowance on the remainder of the loan portfolio. Although we determine the amount of each element of the allowance separately, the entire allowance for loan losses is available for the entire portfolio.
We identify loans that may need to be charged off as a loss by reviewing all delinquent loans, classified loans, and other loans about which management may have concerns about collectability. For individually reviewed loans, the borrower’s inability to make payments under the terms of the loan as well as the shortfall in collateral value would result in our charging off the loan or the portion of the loan that was determined to be a loss.
Among other factors, we consider current general economic conditions in determining the appropriateness of the allowance for loan losses for our residential real estate portfolio. We use evidence obtained from our own loan portfolio as well as published housing data on our local markets from third party sources we believe to be reliable as a basis for assumptions about the impact of the current housing market.
Substantially all of our loans are secured by collateral. Loans 90 days past due and other classified loans are evaluated for impairment and general or specific allowances are established. Typically for a nonperforming real estate loan in the process of collection, the value of the underlying collateral is estimated using the original independent appraisal, adjusted for current economic conditions and other factors, and related general or specific reserves are adjusted on a quarterly basis. If a nonperforming real estate loan is in the process of foreclosure and/or there are serious doubts about further collectability of principal or interest, and there is uncertainty about the value of the underlying collateral, we will order a new independent appraisal. Any shortfall would result in immediately charging off the portion of the loan that was determined to be a loss.
Specific Allowances for Identified Problem Loans. We establish a specific allowance when a loan is determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of our collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, we consider the amount of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

22



General Valuation Allowance on the Remainder of the Loan Portfolio. We establish a general allowance for loans that are not classified as impaired to recognize the inherent losses associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. This general valuation allowance is determined by segregating the loans by loan category and assigning allowance percentages based on our historical loss experience, delinquency trends and management’s evaluation of the collectability of the loan portfolio. The allowance may be adjusted for significant factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date. These significant factors include changes in lending policies and procedures, changes in existing general economic and business conditions affecting our primary market area, credit quality trends, collateral value, loan volumes and concentrations, seasoning of the loan portfolio, recent loss experience in particular segments of the portfolio, duration of the current business cycle and bank regulatory examination results. The applied loss factors are re-evaluated quarterly to ensure their relevance in the current economic environment.

23



Allowance for Loan Losses. The following table sets forth activity in our allowance for loan losses for the periods indicated.

For the Years Ended September 30,

For the Nine Months Ended September 30, 2012

2016
 
2015
 
2014
 
2013

2012

 
Audited
 
Audited
 
Audited
 
Audited
 
Unaudited
 
Audited

(Dollars in thousands)

 
 
 
 

 
 




Balance at beginning of period
$
4,598

 
$
4,072

 
$
4,266

 
$
6,690

 
$
7,212


$
7,116


 
 
 
 
 
 
 
 
 

 
Charge-offs:
 
 
 
 
 
 
 
 
 

 
Real estate loans:
 
 
 
 
 
 
 
 
 

 
Single family
(176
)
 
(257
)
 
(870
)
 
(1,922
)
 
(1,161
)

(803)
Multi-family

 
(99
)
 

 

 
(1,521
)

(435)
Commercial real estate - non-owner occupied

 
(63
)
 
(8
)
 
(534
)
 
(496
)
 
(179)
Commercial real estate - owner occupied

 
(52
)
 
(246
)
 
(1,069
)
 
(1,947
)
 
(1,220)
Construction and land

 

 

 
(198
)
 
(482
)

(482
)
Total real estate
(176
)
 
(471
)
 
(1,124
)
 
(3,723
)
 
(5,607
)

(3,119)
Commercial business loans

 
(14
)
 
(159
)
 
(125
)
 
(1,144
)

(398)
Consumer loans:
 
 
 
 
 
 
 
 
 

 
Home equity lines of credit
(10
)
 
(24
)
 
(5
)
 
(118
)
 
(281
)

(153)
Education

 

 

 

 



Automobile

 
(2
)
 
(1
)
 
(7
)
 
(9
)

(9
)
Other consumer loans

 

 
(47
)
 
(2
)
 
(19
)

(1)
Total consumer loans
(10
)
 
(26
)
 
(53
)
 
(127
)
 
(309
)

(163)
Total charge-offs
(186
)
 
(511
)
 
(1,336
)
 
(3,975
)
 
(7,060
)

(3,680)

 
 
 
 
 
 
 
 
 

 
Recoveries:
 
 
 
 
 
 
 
 
 

 
Real estate loans:
 
 
 
 
 
 
 
 
 

 
Single family
13

 
18

 
161

 
81

 
19


3
Multi-family

 

 
4

 
1

 
40



Commercial real estate - non-owner occupied

 

 
15

 

 
78

 
78
Commercial real estate - owner occupied
2

 
36

 
20

 
20

 
83

 
13
Construction and land

 

 
10

 

 



Total real estate
15

 
54

 
210

 
102

 
220


94
Commercial business loans
32

 
22

 
43

 
56

 
55


50
Consumer loans:
 
 
 
 
 
 
 
 
 

 
Home equity lines of credit

 

 

 
11

 
87


87

Education

 

 

 

 



Automobile

 
5

 
1

 
2

 
1


1

Other consumer loans
10

 
6

 
338

 

 
3


3

Total consumer loans
10

 
11

 
339

 
13

 
91


91
Total recoveries
57

 
87

 
592

 
171

 
366


235

 
 
 
 
 
 
 
 
 

 
Net charge-offs
(129
)
 
(424
)
 
(744
)
 
(3,804
)
 
(6,694
)

(3,445)
Provision for loan losses
775

 
950

 
550

 
1,380

 
6,172


3,019


 
 
 
 
 
 
 
 
 

 
Balance at end of period
$
5,244

 
$
4,598

 
$
4,072

 
$
4,266

 
$
6,690


$
6,690


 
 
 
 
 
 
 
 
 

 
Ratios:
 
 
 
 
 
 
 
 
 

 
Net charge-offs to average loans outstanding
0.03
%
 
0.09
%
 
0.20
%
 
1.05
%
 
1.71
%

1.16
%
Allowance for loan losses to nonperforming loans at end of period
933.10
%
 
572.60
%
 
284.76
%
 
48.80
%
 
64.10
%

64.10
%
Allowance for loan losses to total loans at end of period
0.97
%
 
0.92
%
 
0.97
%
 
1.23
%
 
1.75
%

1.75
%


24



Allocation of Allowance for Loan Losses. The following tables set forth the allowance for loan losses allocated by loan category, the total loan balances by category, and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.

At September 30, 2016
 
At September 30, 2015

Allowance for Loan Losses
 
As a Percentage of
Total Allowance
 
Loan Balances by Category
 
Percent of Loans in Each Category to Total Loans
 
Allowance for Loan Losses

As a Percentage of
Total Allowance

Loan Balances by Category

Percent of Loans in Each Category to Total Loans

(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 







Single family
$
980

 
18.69
%
 
$
158,541

 
29.41
%
 
$
1,073

 
23.34
%
 
$
153,141

 
30.73
%
Multi-family
1,015

 
19.36

 
123,623

 
22.93

 
1,013

 
22.03

 
105,750

 
21.22

Commercial real estate - non-owner occupied
1,519

 
28.97

 
117,971

 
21.88

 
1,091

 
23.73

 
110,833

 
22.24

Commercial real estate - owner occupied
813

 
15.50

 
63,108

 
11.71

 
513

 
11.15

 
52,124

 
10.46

Construction and land
344

 
6.56

 
16,230

 
3.01

 
330

 
7.18

 
18,831

 
3.78

Total real estate
4,671

 
 
 
479,473

 
 
 
4,020

 
 
 
440,679

 
 
Commercial business loans
500

 
9.53

 
40,836

 
7.57

 
498

 
10.83

 
38,200

 
7.66

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
70

 
1.33

 
14,969

 
2.78

 
74

 
1.61

 
14,881

 
2.99

Other consumer loans
3

 
0.06

 
3,863

 
0.71

 
6

 
0.13

 
4,629

 
0.92

Total consumer loans
73

 
 
 
18,832

 
   
 
80

 
 
 
19,510

 
   

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans (excluding net deferred loan fees and costs)
$
5,244

 
100.00
%
 
$
539,141

 
100.00
%
 
$
4,598

 
100.00
%
 
$
498,389

 
100.00
%

 
At September 30, 2014
 
At September 30, 2013
 
Allowance for Loan Losses
 
As a Percentage of
Total Allowance
 
Loan Balances by Category
 
Percent of Loans in Each Category to Total Loans
 
Allowance for Loan Losses
 
As a Percentage of
Total Allowance
 
Loan Balances by Category
 
Percent of Loans in Each Category to Total Loans
 
(Dollars in thousands)
Real estate loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Single family
$
1,072

 
26.33
%
 
$
135,337

 
32.13
%
 
$
1,873

 
43.90
%
 
$
132,496

 
38.16
%
Multi-family
757

 
18.59

 
76,396

 
18.14

 
165

 
3.87

 
47,178

 
13.59

Commercial real estate - non-owner occupied
679

 
16.68

 
93,141

 
22.11

 
1,217

 
28.53

 
80,522

 
23.19

Commercial real estate - owner occupied
733

 
18.00

 
41,980

 
9.97

 
284

 
6.66

 
31,715

 
9.14

Construction and land
301

 
7.39

 
16,362

 
3.89

 
374

 
8.77

 
10,629

 
3.06

Total real estate
3,542

 
 
 
363,216

 
 
 
3,913

 
 
 
302,540

 
 
Commercial business loans
454

 
11.15

 
37,675

 
8.95

 
211

 
4.95

 
25,003

 
7.20

Consumer loans:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Home equity lines of credit
75

 
1.84

 
14,275

 
3.39

 
136

 
3.19

 
13,652

 
3.94

Other consumer loans
1

 
0.02

 
6,015

 
1.42

 
6

 
0.14

 
5,987

 
1.72

Total consumer loans
76

 
 
 
20,290

 
   
 
142

 
 
 
19,639

 
   
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total loans (excluding net deferred loan fees and costs)
$
4,072

 
100.00
%
 
$
421,181

 
100.00
%
 
$
4,266

 
100.00
%
 
$
347,182

 
100.00
%


25



 
At September 30, 2012
 
Allowance for Loan Losses
 
As a Percentage of
Total Allowance
 
Loan Balances by Category
 
Percent of Loans in Each Category to Total Loans
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
Real estate loans:
 
 
 
 
 
 
 
Single family
$
1,390

 
20.78
%
 
$
153,090

 
40.00
%
Multi-family
712
 
10.64

 
38,491
 
10.06

Commercial real estate - non-owner occupied
2,121
 
31.70

 
92,565
 
24.20

Commercial real estate - owner occupied
1,128
 
16.87

 
40,217
 
10.51

Construction and land
293
 
4.38

 
8,975
 
2.35

Total real estate
5,644
 
 
 
333,338
 
 
Commercial business loans
810
 
12.11

 
22,938
 
6.00

Consumer loans:
 
 
 
 
 
 
 
Home equity lines of credit
233
 
3.48

 
19,356
 
5.06

Other consumer loans
3
 
0.04

 
6,964
 
1.82

Total consumer loans
236
 
 
 
26,320
 
   
 
 
 
 
 
 
 
 
Total loans (excluding net deferred loan fees and costs)
$
6,690

 
100.00
%
 
$
382,596

 
100.00
%

At September 30, 2016, our allowance for loan losses represented 0.97% of total loans and 933.10% of non-performing loans whereas at September 30, 2015, our allowance for loan losses represented 0.92% of total loans and 572.60% of non-performing loans. The decrease in non-performing loans to $562,000 at September 30, 2016 from $803,000 at September 30, 2015, without a significant amount of charge-offs to the allowance for loan losses, resulted in the improvement in the ratio of allowance for loan losses to non-performing loans. We recorded $129,000 and $424,000 in net charge-offs during the years ended September 30, 2016 and September 30, 2015, respectively.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and results of operations could be adversely affected if circumstances differ substantially from the assumptions used by our management in making the determinations. Because future events affecting borrowers and collateral cannot be predicted with certainty, the existing allowance for loan losses may not be adequate and management may determine that increases in the allowance are necessary if the quality of any portion of our loan portfolio deteriorates as a result. Furthermore, as an integral part of its examination process, the OCC, our primary regulator, will periodically review our allowance for loan losses. The OCC may require that we increase our allowance based on its judgments of information available to it at the time of its examination. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.
Investment Activities
General. The goals of our investment policy are to provide and maintain liquidity to meet deposit withdrawal and loan funding needs, to help mitigate interest rate and market risk, and to generate a reasonable rate of return on funds within the context of our interest rate and credit risk objectives. Subject to loan demand and our interest rate risk analysis, we will increase the balance of our investment securities portfolio when we have excess liquidity.
Our board of directors is responsible for adopting our investment policy. The investment policy is reviewed annually by management and any changes to the policy are recommended, and subject, to the approval of the board of directors. Authority to make investments under the approved investment policy guidelines is delegated to our Chief Financial Officer and our President and Chief Executive Officer. All investment transactions are reviewed at regularly scheduled monthly meetings of the board of directors.

26



Our current investment policy permits, with certain limitations, investments in United States Treasury securities with maturities up to 10 years; securities issued by the United States Government and its agencies or government sponsored enterprises with maturities up to 10 years; step-up coupon securities issued by government sponsored enterprises with maturities up to 15 years; pass-through mortgage-backed securities (MBS) issued by Fannie Mae, Ginnie Mae or Freddie Mac with an average life up to seven years secured by either single family or multifamily loans; collateralized mortgage obligations (CMO) with an average life up to seven years that are secured by MBS issued by Fannie Mae, Ginnie Mae or Freddie Mac; municipal tax, revenue, and bond anticipation notes issued by Wisconsin municipalities and general obligation municipal notes and bonds with maturities up to 20 years; AAA (insured) essential service municipal revenue notes and bonds issued by non-Wisconsin municipalities with maturities up to 20 years; corporate notes and bonds issued by U.S. corporations with maturities up to ten years; reverse repurchase agreements with maturities up to one year; certificates of deposit issued in the U.S. by U.S. banks with maturities up to seven years; bank notes and banker’s acceptances with maturities up to one year; Fed funds sold to U.S. banks; and equity investments in the Federal Reserve Bank of Chicago and the Federal Home Loan Bank of Chicago or acquired in foreclosure, settlement or workout of debts previously contracted.
Prior to any investment, certain instruments must be subject to a price sensitivity test using either our internal interest rate simulation model or a model available from a reputable third party other than the broker or dealer selling the instrument. These instruments are fixed rate instruments (other than mortgage-related instruments) with maturities greater than 10 years; mortgage-related securities with maturities greater than two years; floating rate instruments with caps or floors; floating rate instruments with coupon rates tied to or inversely related to an index; and securities that are continuously callable or have more than one call date. None of these instruments may be acquired if the change in price exceeds, generally, an increase of 10% to 25% resulting from changes in interest rates of -100 bp to -300 bp, or a decrease of -5% to -20% resulting from changes in interest rates of +100 bp to +300 bp.
Our investment policy does not permit investment in stripped mortgage-backed securities; CMOs secured by mortgage assets not backed by the credit support of a U.S. government agency; floating rate derivatives; CMO residual or “Z tranche” bonds; long-term zero coupon bonds; complex securities and derivatives as defined in federal banking regulations; and other high-risk securities that do not pass the interest rate sensitivity tests set forth in our investment policy. Our current policy does not permit hedging activities, such as futures, options or swap transactions; coupon stripping; gains trading; short sales; securities lending; “when issued” securities trading; “pair-offs”; corporate or extended settlements other than in the normal course of business; repositioning repurchase agreements; purchasing securities on margin; or trading with the intent to capture changes in price over 60 days or less.
Our investment policy also requires that certain investment instruments be rated, and that our investment portfolio be appropriately diversified. At September 30, 2016, none of the collateral underlying our securities portfolio was considered subprime or Alt-A, and we did not hold any common or preferred stock issued by Freddie Mac or Fannie Mae.
U.S. Government and Agency Obligations. At September 30, 2016, we had U.S. government and agency securities with a carrying value of $25,000, which constituted 0.03% of our securities portfolio. While these securities generally provide lower yields than other investments in our securities investment portfolio, we maintain these investments, to the extent appropriate, for liquidity purposes, as collateral for borrowings and for prepayment protection.
Residential Mortgage-Backed Securities. At September 30, 2016, we had residential mortgage-backed securities with a carrying value of $40.8 million, which constituted 42.4% of our securities portfolio. Mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of one- to four-family mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Westbury Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our residential mortgage-backed securities are

27



either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Residential mortgage-backed securities issued by United States Government agencies and government-sponsored enterprises are more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, residential mortgage-backed securities may be used to collateralize our borrowings. Investments in residential mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.
Collateralized Mortgage Obligations (CMO). At September 30, 2016, we had CMOs with a carrying value of $2.7 million, which constituted 2.8% of our securities portfolio. CMOs issued by United States Government agencies and government-sponsored enterprises are also more liquid than individual mortgage loans because there is an active trading market for such securities. In addition, CMOs may be used to collateralize our borrowings. Investments in CMOs involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such investments, thereby affecting the net yield on our securities. However, they are generally less susceptible to prepayment risk than mortgage-backed securities as they are structured to provide a more predictable payment stream to the holder of the CMO. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments. All of our CMOs are either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Commercial Mortgage-Backed Securities. At September 30, 2016, we had commercial mortgage-backed securities with a carrying value of $11.5 million, which constituted 12.0% of our securities portfolio. Commercial mortgage-backed securities are securities issued in the secondary market that are collateralized by pools of multifamily mortgages. The issuers of such securities pool and resell the participation interests in the form of securities to investors such as Westbury Bank. The interest rate of the security is lower than the interest rates of the underlying loans to allow for payment of servicing and guaranty fees. All of our commercial mortgage-backed securities are either backed by Ginnie Mae, a United States Government agency, or government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
Municipal Securities. At September 30, 2016, we had taxable municipal securities available for sale with a carrying value of $13.1 million, tax exempt municipal securities available for sale with a carrying value of $25.7 million, and tax exempt municipal securities held to maturity with a carrying value of $2.3 million which constituted 13.6%, 26.7%, and 2.4% of our securities portfolio, respectively. Most of our current municipal securities are issued by Wisconsin municipalities and have maturities not in excess of 12 years. These securities generally provide slightly higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as such other investments, so we typically maintain investments in municipal securities, to the extent appropriate, for generating returns in our investment portfolio.
Corporate Securities. At September 30, 2016, we did not hold any corporate securities. The corporate securities we have historically owned are issued by well-known national companies and have maturities not in excess of ten years. These securities generally provide higher yields than U.S. government and agency securities and mortgage-backed securities, but are not as liquid as such other investments, so we typically maintain investments in corporate securities, from time to time, to the extent appropriate, for generating returns in our investment portfolio.
Federal Home Loan Bank Stock. We held common stock of the Federal Home Loan Bank of Chicago totaling $1.3 million at September 30, 2016. The Federal Home Loan Bank common stock is carried at cost and is classified as restricted equity securities. We may be required to purchase additional Federal Home Loan Bank stock if we increase borrowings in the future.

28




Securities Portfolio Composition. The following table sets forth the amortized cost and fair value of our securities portfolio at the dates indicated. Securities available for sale are carried at fair value.
 
At September 30,
 
2016
 
2015
 
2014
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
Government sponsored enterprise securities:
 
 
 
 
 
 
 
 
 
 
 
Debentures
$
24

 
$
25

 
$
24

 
$
25

 
$
5,250

 
$
5,179

U.S. Government agency residential mortgage-backed securities
40,289

 
40,750

 
39,380

 
39,692

 
37,144

 
37,196

U.S. Government agency collateralized mortgage obligations
2,674

 
2,680

 
1,963

 
1,941

 
3,458

 
3,432

U.S. Government agency commercial mortgage-backed securities
11,376

 
11,526

 
13,993

 
14,099

 
10,835

 
10,752

 Corporate Bonds

 

 
2,852

 
2,862

 

 

Municipal securities:
 
 
 
 
 
 
 
 
 
 
 
Taxable
12,756

 
13,109

 
19,285

 
19,466

 
30,512

 
30,572

Tax-exempt
25,730
 
25,682
 
2,209
 
2,201
 
3,223

 
3,215

Total available for sale securities
92,849

 
93,772

 
79,706

 
80,286

 
90,422

 
90,346

 Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 Municipal securities -Tax-exempt
2,293

 
2,392

 
2,459

 
2,490

 

 

Total Investment Securities
$
95,142

 
$
96,164

 
$
82,165

 
$
82,776

 
$
90,422

 
$
90,346


At September 30, 2016, we had no investments in a single entity (other than United States government or agency sponsored securities) that had an aggregate book value in excess of 10% of our total stockholders' equity.

29




Securities Portfolio Maturities and Yields. The following table sets forth the stated maturities and weighted average yields of our securities at September 30, 2016. Securities available for sale are carried at fair value. Mortgage-backed securities, including collateralized mortgage obligations, are anticipated to be repaid in advance of their contractual maturities as a result of projected mortgage loan repayments. In addition, under the structure of some of our CMOs, the short- and intermediate-term tranche interests have repayment priority over the longer term tranche interests of the same underlying mortgage pool. Some of our U.S. Government and agency securities are callable at the option of the issuer. Yields on our tax-exempt securities are presented on a tax-equivalent basis. Certain securities have interest rates that are adjustable and will reprice annually within the various maturity ranges. These repricing schedules have not been reflected in the table below.
 
One Year or Less
 
More than One Year through Five Years
 
More than Five Years through Ten Years
 
More than Ten Years
 
Total Securities
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Amortized Cost
 
Weighted Average Yield
 
Fair Value
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Securities available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Government sponsored enterprise securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Debentures
$

 
%
 
$
24

 
2.00
%
 
$

 
%
 
$

 
%
 
$
24

 
2.00
%
 
$
25

U.S. Government agency residential mortgage-backed securities
43

 
3.56

 
2,019

 
3.13

 
7,359

 
2.37

 
30,868

 
1.70

 
40,289

 
1.90

 
40,750

U.S. Government agency collateralized mortgage obligations
30

 
2.22

 

 

 

 

 
2,644

 
2.04

 
2,674

 
2.04

 
2,680

U.S. Government agency commercial mortgage-backed securities

 

 
1,402

 
2.17

 
5,152

 
1.87

 
4,822

 
1.66

 
11,376

 
1.82

 
11,526

 Corporate Bonds

 

 

 

 

 

 

 

 

 

 

Municipal securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Taxable

 

 
5,380

 
2.39

 
7,376

 
2.85

 

 

 
12,756

 
2.65

 
13,109

Tax-exempt
85
 
1.01

 
4,724

 
1.23

 
14,712

 
1.74

 
6,209

 
2.62

 
25,730

 
1.86

 
25,682

Total securities available-for-sale:
158

 
1.93

 
13,549

 
2.07

 
34,599

 
2.13

 
44,543

 
1.85

 
92,849

 
1.99

 
93,772

Securities held to maturity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Municipal securities - tax-exempt
168

 
1.20

 
703

 
1.86

 
982

 
2.94

 
440

 
3.50

 
2,293

 
2.59

 
2,392

Total
$
326

 
1.55
%
 
$
14,252

 
2.06
%
 
$
35,581

 
2.15
%
 
$
44,983

 
1.87
%
 
$
95,142

 
2.00
%
 
$
96,164


Sources of Funds

General. Deposits have traditionally been our primary source of funds for use in lending and investment activities. We also use borrowings, primarily Federal Home Loan Bank of Chicago advances, to supplement cash flow needs, lengthen the maturities of liabilities for interest rate risk purposes and to manage the cost of funds. In addition, we receive funds from scheduled loan payments, investment maturities and sales, loan prepayments, retained earnings and income on interest-earning assets. While scheduled loan payments and income on interest-earning assets are relatively stable sources of funds, deposit inflows and outflows can vary widely and are influenced by prevailing interest rates, market conditions and levels of competition. To a lesser extent, we may utilize repurchase agreements or Fed funds sold as funding sources.
Deposits. Our deposits are generated primarily from residents within our primary market area. We offer a selection of deposit accounts, including non-interest-bearing and interest-bearing checking accounts, passbook and statement savings accounts, variable rate money market accounts, and certificates of deposit. A significant majority

30



of our deposits are transaction accounts, which we believe are less susceptible than certificates of deposit to large-scale withdrawals as a result of changes in interest rates. At September 30, 2016, our core deposits, which are deposits other than time deposits and certificates of deposit, were $445.5 million, representing 75.2% of total deposits. Deposit account terms vary, with the principal differences being the minimum balance required, the amount of time the funds must remain on deposit and the interest rate. We have not in the past held, and currently do not hold, brokered deposits. We do generate certificates of deposit using QwickrateTM and National CD RatelineTM, both of which are Internet-based deposit rate listing services, as alternative funding sources. These outlets also serve to support our contingency funding plan. At September 30, 2016, certificates of deposit generated via these alternative funding sources totaled $53.9 million, or 9.1% of our total deposit balances.
In recent years, we have relied for deposit generation on promotional programs and advertising efforts, our reputation in the community for superior customer service, the variety of deposit accounts that we offer, our competitive rates, customer referrals, and cross-marketing efforts with loan customers. We may use promotional rates to meet asset/liability and market segment goals. We intend to continue to focus on increasing our core deposits by providing incentives on new transaction accounts, enhanced on-line and mobile services, remote deposit capture services, and by leveraging commercial lending relationships to increase transaction accounts.
Interest rates, maturity terms, service fees and withdrawal penalties are established on a periodic basis. Deposit rates and terms are based primarily on current operating strategies and market rates, liquidity requirements, rates paid by competitors and growth goals. The flow of deposits is influenced significantly by general economic conditions, changes in interest rates and competition. The variety of deposit accounts that we offer allows us to be competitive in generating deposits and to respond with flexibility to changes in our customers’ demands. Our ability to gather deposits is impacted by the competitive market in which we operate, which includes numerous financial institutions of varying sizes offering a wide range of products. We believe that deposits are a stable source of funds, but our ability to attract and maintain deposits at favorable rates will be affected by market conditions, including competition and prevailing interest rates as consumers become more conscious of interest rates.
The following table sets forth the distribution of total deposits by account type, for the periods indicated.
 
For Years Ended September 30,
 
2016
 
2015
 
Average Balance
 
Percent
 
Weighted Average Rate
 
Average Balance
 
Percent
 
Weighted Average Rate
 
(Dollars in thousands)
Checking accounts:
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing
$
110,600

 
19.70
%
 
n/a

 
$
82,524

 
16.36
%
 
n/a

Interest bearing
142,252

 
25.34
%
 
0.28
%
 
144,203

 
28.59
%
 
0.27
%
Passbook and statement savings accounts
130,363

 
23.22
%
 
0.14
%
 
124,962

 
24.78
%
 
0.15
%
Variable rate money market accounts
47,267

 
8.42
%
 
0.43
%
 
43,367

 
8.60
%
 
0.33
%
Certificates of deposit
130,955

 
23.32
%
 
1.21
%
 
109,269

 
21.67
%
 
1.10
%
Total deposits
$
561,437

 
100.00
%
 
0.42
%
 
$
504,325

 
100.00
%
 
0.38
%
 
For Year Ended September 30,
 
2014
 
Average Balance
 
Percent
 
Weighted Average Rate
 
(Dollars in thousands)
Checking accounts:
 
 
 
 
 
Noninterest-bearing
$
77,646

 
17.27
%
 
n/a

Interest bearing
138,600

 
30.84
%
 
0.32
%
Passbook and statement savings accounts
121,141

 
26.95
%
 
0.14
%
Variable rate money market accounts
21,448

 
4.77
%
 
0.20
%
Certificates of deposit
90,638

 
20.17
%
 
1.07
%
Total deposits
$
449,473

 
100.00
%
 
0.36
%


31



The following table sets forth our deposit activities for the periods indicated.
 
For the Years Ended September 30,
 
2016
 
2015
 
2014

(Dollars in thousands)
 
 
 
 
 
 
Beginning balance
$
531,020

 
$
454,928

 
$
440,978

Net deposits before interest credited
58,589

 
74,170

 
12,321

Interest credited
2,368

 
1,922

 
1,629

Net increase in deposits
60,957

 
76,092

 
13,950

Ending balance
$
591,977

 
$
531,020

 
$
454,928


The following table sets forth all of our certificates of deposit classified by interest rate as of the dates indicated.
 
At September 30,
 
2016
 
2015
 
2014
 
(Dollars in thousands)
Interest Rate:
 
 
 
 
 
Less than 1.00%
$
52,769

 
$
46,433

 
$
47,109

1.00% - 2.00%
88,571

 
68,030

 
40,077

2.00% - 2.99%
5,131

 
7,733

 
8,128

3.00% - 3.99%
51

 
63

 
1,057

4.00% and higher

 

 

Total
$
146,522

 
$
122,259

 
$
96,371


The following table sets forth the amount and maturities of all of our certificates of deposit by interest rate at September 30, 2016.
 
At September 30, 2016
 
Less Than One Year
 
Over One Year to Two Years
 
Over Two Years to Three Years
 
Over Three Years
 
Total
 
Percentage of Total Certificate Accounts
 
(Dollars in thousands)
Interest Rate:
 
 
 
 
 
 
 
 
 
 
 
Less than 1.00%
$
40,633

 
$
12,136

 
$

 
$

 
$
52,769

 
36.01
%
1.00% - 1.99%
26,932

 
23,284

 
22,784

 
15,571

 
88,571

 
60.45
%
2.00% - 2.99%

 

 
595

 
4,536

 
5,131

 
3.50
%
3.00% - 3.99%
37

 
14

 

 

 
51

 
0.03
%
Total
$
67,602

 
$
35,434

 
$
23,379

 
$
20,107

 
$
146,522

 
100.00
%


32



As of September 30, 2016 and 2015, the aggregate amount of all of our certificates of deposit in amounts greater than or equal to $100,000 were $89.6 million and $64.2 million, respectively. The following table sets forth the maturity of these certificates as of September 30, 2016 and 2015.
 
At September 30,
 
2016
2015
 
(Dollars in thousands)
Three months or less
$
4,083

$
1,510

Over three months through six months
14,008

8,921

Over six months through one year
20,449

9,598

Over one year
51,048

44,126

 
 
 
Total
$
89,588

$
64,155


As of September 30, 2016 and 2015, the aggregate amount of all of our certificates of deposit in amounts greater than or equal to $250,000 were $26.2 million and $8.8 million, respectively. The following table sets forth the maturity of these certificates as of September 30, 2016 and 2015.
 
At September 30,
 
2016
2015
 
(Dollars in thousands)
Three months or less
$
751

$

Over three months through six months
2,682

1,500

Over six months through one year
8,421

1,328

Over one year
14,300

5,947

 
 
 
Total
$
26,154

$
8,775


Borrowings. We may obtain advances from the Federal Home Loan Bank of Chicago upon the security of our capital stock in the Federal Home Loan Bank of Chicago and certain of our mortgage loans. Such advances may be made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. To the extent such borrowings have different terms to repricing than our deposits, they can change our interest rate risk profile. At September 30, 2016, we had $20.0 million of outstanding advances from the Federal Home Loan Bank of Chicago. At September 30, 2016, based on available collateral and our ownership of FHLB stock, and based upon our internal policy, we had access to additional Federal Home Loan Bank advances of up to $179.7 million, and an additional $10.0 million in overnight advances with our correspondent bank. The following table sets forth the maturity of long-term advances from the Federal Home Loan Bank of Chicago as of September 30, 2016.

 
At September 30, 2016
 
Amount
Weighted Ave Rate
 
(Dollars in thousands)
 
Due in one year or less
$

%
Due after one year through five years
10,000

1.13

Due after five years through ten years
10,000

0.92

Due after ten years


 
 
 
Total
$
20,000

1.02
%

33




The following table sets forth information concerning balances and interest rates on our borrowings at the dates and for the years indicated.

At or For the Year Ended September 30,

2016
 
2015
 
2014

(Dollars in thousands)
Balance outstanding at end of year:
 
 
 
 

FHLB short-term advances
$

 
$
18,000

 
$
17,000

FHLB long-term advances
20,000

 

 

Maximum amount outstanding at any month-end:
 
 
 
 
 
FHLB short-term advances
$
37,000

 
$
56,000

 
$
17,500

FHLB long-term advances
20,000

 

 

Weighted average interest rate at end of year:
 
 
 
 
 
FHLB short-term advances
%
 
0.13
%
 
0.13
%
FHLB long-term advances
1.02

 

 


 
 
 
 
 
Average amount outstanding during the year:
 
 
 
 
 
FHLB short-term advances
$
17,562

 
$
26,856

 
$
5,807

FHLB long-term advances
15,601

 

 

Weighted average interest rate during the year:
 
 
 
 
 
FHLB short-term advances
0.28
%
 
0.14
%
 
0.14
%
FHLB long-term advances
1.19

 

 

Personnel
As of September 30, 2016, we had 133 full-time equivalent employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.
Subsidiaries
Westbury Bancorp, Inc. wholly owns Westbury Bank. Westbury Bank has one subsidiary as of September 30, 2016. That subsidiary, WBSB Real Estate LLC, is a Wisconsin limited liability company that was formed to own certain of Westbury Bank’s foreclosed properties from time to time.
Another subsidiary was dissolved during fiscal 2016. That subsidiary, CRH, Inc., was a Wisconsin corporation that had been formed to own and operate commercial real estate for investment purposes.

34



SUPERVISION AND REGULATION
General
As a federal savings association, Westbury Bank is subject to examination and regulation by the OCC, and is also subject to examination by the Federal Deposit Insurance Corporation (“FDIC”). The federal system of regulation and supervision establishes a comprehensive framework of activities in which Westbury Bank may engage and is intended primarily for the protection of depositors and the FDIC’s Deposit Insurance Fund, and not for the protection of security holders. Under this system of federal regulation, financial institutions are periodically examined to ensure that they satisfy applicable standards with respect to their capital adequacy, assets, management, earnings, liquidity and sensitivity to market interest rates. Westbury Bank also is regulated to a lesser extent by the Federal Reserve Board, which governs the reserves to be maintained against deposits and other matters. Westbury Bank must comply with consumer protection regulations issued by the Consumer Financial Protection Bureau. Westbury Bank also is a member of and owns stock in the Federal Home Loan Bank of Chicago, which is one of the twelve regional banks in the Federal Home Loan Bank System. The OCC examines Westbury Bank and prepares reports for the consideration of its Board of Directors on any operating deficiencies. Westbury Bank’s relationship with its depositors and borrowers also is regulated to a great extent by federal law and, to a much lesser extent, state law, especially in matters concerning the ownership of deposit accounts, the form and content of Westbury Bank’s loan documents and certain consumer protection matters.
As a savings and loan holding company, Westbury Bancorp, Inc. is subject to examination and supervision by, and is required to file certain reports with, the Federal Reserve Board. Westbury Bancorp, Inc. is also subject to the rules and regulations of the Securities and Exchange Commission under the federal securities laws.
Set forth below are certain material regulatory requirements that are applicable to Westbury Bank and its holding company, Westbury Bancorp, Inc. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Westbury Bank or Westbury Bancorp, Inc. Any change in these laws or regulations, whether by Congress or the applicable regulatory agencies, could have a material adverse impact on Westbury Bancorp, Inc., Westbury Bank and their operations.
Dodd-Frank Act
The Dodd-Frank Act made significant changes to the regulatory structure for depository institutions and their holding companies. However, the Dodd-Frank Act’s changes go well beyond that and affect the lending, investments and other operations of all depository institutions. The Dodd-Frank Act required the Federal Reserve Board to set minimum capital levels for both bank holding companies and savings and loan holding companies that are as stringent as those required for the insured depository subsidiaries, and the components of Tier 1 capital for holding companies were restricted to capital instruments that were then currently considered to be Tier 1 capital for insured depository institutions. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect upon passage, and directed the federal banking regulators to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.
The Dodd-Frank Act created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Westbury Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets are still examined for compliance by their applicable bank regulators. The new legislation also weakened the federal preemption available for national banks and federal savings associations, and gave state attorneys general the ability to enforce applicable federal consumer protection laws.

35



The Dodd-Frank Act broadened the base for FDIC insurance assessments. Assessments are now based on the average consolidated total assets less tangible equity capital of a financial institution, rather than on total deposits. The legislation also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor. The Dodd-Frank Act increased stockholder influence over boards of directors by requiring companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directs the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded or not. Further, the legislation requires that originators of securitized loans retain a percentage of the risk for transferred loans, directs the Federal Reserve Board to regulate pricing of certain debit card interchange fees and contains a number of reforms related to mortgage origination.
The Dodd-Frank Act also required the Consumer Financial Protection Bureau to issue regulations requiring lenders to make a reasonable good faith determination as to a prospective borrower’s ability to repay a residential mortgage loan. The final “Ability to Repay” rules, which were effective January 4, 2013, established a “qualified mortgage” safe harbor for loans whose terms and features are deemed to make the loan less risky. In addition, on October 3, 2015, the new TILA-RESPA Integrated Disclosure (TRID) rules for mortgage closings took effect for new loan applications. These new loan forms may have the effect of lengthening the time it takes to approve mortgage loans in the short term following implementation of the rule.
Some provisions of the Dodd-Frank Act involved delayed effective dates and/or require implementing regulations or have not been issued in final form. Their full impact on our operations cannot yet fully be assessed. However, the Dodd-Frank Act has resulted in increased compliance and operating expense for Westbury Bank and the Company.

Federal Banking Regulation
Business Activities. A federal savings association derives its lending and investment powers from the Home Owners’ Loan Act, as amended, and applicable federal regulations. Under these laws and regulations, Westbury Bank may invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities and certain other assets, subject to applicable limits. The Dodd-Frank Act authorized, for the first time, the payment of interest on commercial checking accounts. Westbury Bank may also establish subsidiaries that may engage in certain activities not otherwise permissible for Westbury Bank, including real estate investment and securities and insurance brokerage.
Capital Requirements. The federal banking agencies have adopted new regulations that implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.
Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital requirements adopted by the OCC. These new requirements created a new required ratio for common equity Tier 1 ("CETI") capital, increased the leverage and Tier 1 capital ratios, changed the risk weight of certain assets for purposes of the risk-based capital ratios, created an additional capital conservation buffer over the required capital ratios and changed what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends or pay discretionary bonuses. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small savings and loan holding companies with assets under $1 billion.

Under the new capital regulations, the minimum capital ratios are: (1) CETI capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets: (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable regulatory adjustments and deductions.


36



There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not use any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CETI will be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (increased from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (increased from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (increased from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk weights (0% to 600%) for equity exposures.

In addition to the minimum CETI, Tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CETI capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends or paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement is being phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.

The OCC's prompt corrective action standards changed effective January 1, 2015. Under the new standards, in order to be considered well-capitalized, the Bank must have a CETI ratio of 6.5% (new), a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a leverage ratio of 5.0% (unchanged). The Bank meets all these new requirements, including the full capital conservation buffer.

At September 30, 2016, the Bank’s capital exceeded all applicable requirements and is considered "well-capitalized".
Loans-to-One Borrower. Generally, a federal savings association may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of unimpaired capital and surplus. An additional amount may be loaned, equal to 10% of unimpaired capital and surplus, if the loan is secured by readily marketable collateral, which generally does not include real estate. As of September 30, 2016, Westbury Bank had no borrowers for which it was not in compliance with the loans-to-one borrower limitations.
Qualified Thrift Lender Test. As a federal savings association, Westbury Bank must satisfy the qualified thrift lender, or “QTL,” test. Under the QTL test, Westbury Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” (primarily residential mortgages and related investments, including mortgage-backed securities) in at least nine months of the most recent 12-month period. “Portfolio assets” generally means total assets of a savings association, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of the savings association’s business.
Alternatively, Westbury Bank may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined in the Internal Revenue Code of 1986, as amended.
A federal savings association that fails the qualified thrift lender test must operate under specified restrictions set forth in the Home Owners’ Loan Act. The Dodd-Frank Act made noncompliance with the QTL test subject to enforcement action for a violation of law. At September 30, 2016, Westbury Bank maintained 70.01% of its portfolio assets in qualified thrift investments and, therefore, satisfied the QTL test. Westbury Bank has satisfied the QTL test in each of the last 12 months.

37



Capital Distributions. Federal regulations govern capital distributions by a federal savings association, which include cash dividends, stock repurchases and other transactions charged to the savings association’s capital account. A federal savings association must file an application for approval of a capital distribution if:
the total capital distributions for the applicable calendar year exceed the sum of the savings association’s net income for that year to date plus the savings association’s retained net income for the preceding two years;
the savings association would not be at least adequately capitalized following the distribution;
the distribution would violate any applicable statute, regulation, agreement or regulatory condition; or
the savings association is not eligible for expedited treatment of its filings.
Even if an application is not otherwise required, every savings association that is a subsidiary of a savings and loan holding company, such as Westbury Bank, must still file a notice with the Federal Reserve Board at least 30 days before the board of directors declares a dividend or approves a capital distribution.
A notice or application related to a capital distribution may be disapproved if:
the federal savings association would be undercapitalized following the distribution;
the proposed capital distribution raises safety and soundness concerns; or
the capital distribution would violate a prohibition contained in any statute, regulation or agreement.
In addition, the Federal Deposit Insurance Act provides that an insured depository institution may not make any capital distribution if, after making such distribution, the institution would fail to meet any applicable regulatory capital requirement. A federal savings association also may not make a capital distribution that would reduce its regulatory capital below the amount required for the liquidation account established in connection with its conversion to stock form. In addition, beginning in 2016, the Bank’s ability to pay dividends will be limited if the Bank does not have the capital conservation buffer required by the new capital rules, which may limit the ability of the Company to pay dividends to its stockholders.
Community Reinvestment Act and Fair Lending Laws. All federal savings associations have a responsibility under the Community Reinvestment Act and related regulations to help meet the credit needs of their communities, including low- and moderate-income borrowers. In connection with its examination of a federal savings association, the OCC is required to assess the federal savings association’s record of compliance with the Community Reinvestment Act. A savings association’s failure to comply with the provisions of the Community Reinvestment Act could, at a minimum, result in denial of certain corporate applications such as branches or mergers, or in restrictions on its activities. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit lenders from discriminating in their lending practices on the basis of characteristics specified in those statutes. The failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions by the OCC, as well as other federal regulatory agencies and the Department of Justice.
The Community Reinvestment Act requires all institutions insured by the FDIC to publicly disclose their rating. Westbury Bank received a “Satisfactory” Community Reinvestment Act rating in its most recent federal examination.
Transactions with Related Parties. A federal savings association’s authority to engage in transactions with its affiliates is limited by Sections 23A and 23B of the Federal Reserve Act and federal regulation. An affiliate is generally a company that controls, or is under common control with, an insured depository institution such as Westbury Bank. The Company is an affiliate of Westbury Bank because of its control of the Bank. In general, transactions between an insured depository institution and its affiliates are subject to certain quantitative limits and

38



collateral requirements. In addition, federal regulations prohibit a savings association from lending to any of its affiliates that are engaged in activities that are not permissible for bank holding companies and from purchasing the securities of any affiliate, other than a subsidiary. Finally, transactions with affiliates must be consistent with safe and sound banking practices, not involve the purchase of low-quality assets and be on terms that are as favorable to the institution as comparable transactions with non-affiliates. Federal regulations require savings associations to maintain detailed records of all transactions with affiliates.
The Bank’s authority to extend credit to its directors, executive officers and 10% stockholders, as well as to entities controlled by such persons, is currently governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O of the Federal Reserve Board. Among other things, these provisions generally require that extensions of credit to insiders:
be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and
not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of Westbury Bank’s capital.
In addition, extensions of credit in excess of certain limits must be approved by the Bank’s loan committee or board of directors. Extensions of credit to executive officers are subject to additional limits based on the type of extension involved.
Enforcement. The OCC has primary enforcement responsibility over federal savings associations and has authority to bring enforcement action against all “institution-affiliated parties,” including directors, officers, stockholders, attorneys, appraisers and accountants who knowingly or recklessly participate in a wrongful action that is likely to have an adverse effect on a federal savings association. Formal enforcement action by the OCC may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institution and the appointment of a receiver or conservator. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. The FDIC also has the authority to terminate deposit insurance or recommend to the OCC that enforcement action be taken with respect to a particular savings association. If such action is not taken, the FDIC has authority to take the action under specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal banking agency to prescribe certain standards for all insured depository institutions. These standards relate to, among other things, internal controls, information systems and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation and other operational and managerial standards as the agency deems appropriate. Interagency guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard. If an institution fails to meet these standards, the appropriate federal banking agency may require the institution to implement an acceptable compliance plan. Failure to implement such a plan can result in further enforcement action, including the issuance of a cease and desist order or the imposition of civil money penalties.
Prompt Corrective Action Regulations. The OCC is required by law to take supervisory actions against undercapitalized savings institutions under its jurisdiction, the severity of which depends upon the institution’s level of capital.
Current OCC prompt corrective action regulations state that to be adequately capitalized, Westbury Bank must have a leverage ratio of at least 4.0%, a CETI capital ratio of at least 4.5%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk-based capital ratio of at least 8.0%. To be well-capitalized, Westbury Bank must have a leverage ratio of at least 5.0%, a CETI capital ratio of at least 6.5%, a Tier 1 risk-based capital ratio of at least

39



8.0%, and a total risk-based capital ratio of at least 10.0%. A savings association that has total risk-based capital of less than 8.0%, a Tier 1 risk-based capital ratio that generally is less than 6.0%, a CETI ratio that is less than 4.5% or a leverage ratio that is less than 4.0% is considered to be undercapitalized. A savings association that has total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 4.0%, a CETI capital ratio that is less than 3.0% or a leverage ratio that is less than 3.0% is considered to be “significantly undercapitalized.” A savings institution that has a tangible capital to assets ratio equal to or less than 2% is deemed to be “critically undercapitalized.”
Generally, the OCC is required to appoint a receiver or conservator for a savings association that is “critically undercapitalized” within specific time frames. The regulations also provide that a capital restoration plan must be filed with the OCC within 45 days of the date that a federal savings association is deemed to have received notice that it is “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized.” Any holding company of a federal savings association that is required to submit a capital restoration plan must guarantee performance under the plan in an amount of up to the lesser of 5% of the savings association’s assets at the time it was deemed to be undercapitalized by the OCC or the amount necessary to restore the savings association to adequately capitalized status. This guarantee remains in place until the OCC notifies the savings association that it has maintained adequately capitalized status for each of four consecutive calendar quarters. Institutions that are undercapitalized become subject to certain mandatory measures such as restrictions on capital distributions and asset growth. The OCC may also take any one of a number of discretionary supervisory actions against undercapitalized federal savings associations, including the issuance of a capital directive and the replacement of senior executive officers and directors.
At September 30, 2016, the Bank met the criteria for being considered “well capitalized.”
Insurance of Deposit Accounts. The Deposit Insurance Fund of the FDIC insures deposits at FDIC-insured financial institutions such as Westbury Bank. Deposit accounts in Westbury Bank are insured by the FDIC generally up to a maximum of $250,000 per separately insured depositor and up to a maximum of $250,000 for self-directed retirement accounts. The FDIC charges insured depository institutions premiums to maintain the Deposit Insurance Fund. Assessments are based on an institution’s average consolidated total assets minus average tangible equity instead of total deposits. Assessment rates (inclusive of possible adjustments) currently range from 2 1/2 to 45 basis points of each institution’s total assets less tangible capital. The FDIC may increase or decrease the scale uniformly, except that no adjustment can deviate more than two basis points from the base scale without notice and comment rulemaking. The FDIC’s current system represents a change, required by the Dodd-Frank Act, from its prior practice of basing the assessment on an institution’s volume of deposits.
In addition to the FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, with the approval of the FDIC, assessments for anticipated payments, issuance costs and custodial fees on bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. For the quarter ended September 30, 2016, the annualized FICO assessment was equal to 0.56 basis points of total assets less tangible capital.
The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the Federal Deposit Insurance Corporation and the Federal Deposit Insurance Corporation has exercised that discretion by establishing a long range fund of 2.0%.
The FDIC has authority to increase insurance assessments. Any significant increases would have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what assessment rates will be in the future.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any

40



applicable law, regulation, rule, order or condition imposed by the FDIC. We do not currently know of any practice, condition or violation that may lead to termination of our deposit insurance.
Prohibitions Against Tying Arrangements. Federal savings associations are prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.
Federal Reserve System. Federal Reserve Board regulations require depository institutions to maintain noninterest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for that portion of transaction accounts aggregating $103.6 million or less (which may be adjusted by the Federal Reserve Board) the reserve requirement is 3.0% and the amounts greater than $103.6 million require a 10.0% reserve (which may be adjusted annually by the Federal Reserve Board between 8.0% and 14.0%). The first $14.5 million of otherwise reservable balances (which may be adjusted by the Federal Reserve Board) are exempted from the reserve requirements. As of September 30, 2016, Westbury Bank was in compliance with these requirements.
Federal Home Loan Bank System. Westbury Bank is a member of the Federal Home Loan Bank System, which consists of 12 regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Chicago, Westbury Bank is required to acquire and hold shares of capital stock in the Federal Home Loan Bank. As of September 30, 2016, Westbury Bank was in compliance with this requirement. Based on redemption provisions of the Federal Home Loan Bank of Chicago, the stock has no quoted market value and is carried at cost. Westbury Bank reviews for impairment based on the ultimate recoverability of the cost basis of the Federal Home Loan Bank of Chicago stock. As of September 30, 2016, no impairment has been recognized.
Westbury Bank’s ability to borrow from the Federal Home Loan Bank of Chicago provides an additional source of liquidity and Westbury Bank has from time to time used advances from the Federal Home Loan Bank to fund its operations.
Other Regulations
Interest and other charges collected or contracted for by Westbury Bank are subject to state usury laws and federal laws concerning interest rates. Westbury Bank’s operations are also subject to federal laws applicable to credit transactions, such as the:
Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;
Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one- to four-family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;
Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;
Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed or other prohibited factors in extending credit;
Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies;

41



Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies;
Truth in Savings Act; and
rules and regulations of the various federal agencies charged with the responsibility of implementing such federal laws.
In addition, the Consumer Financial Protection Bureau issues regulations and standards under these federal consumer protection laws that affect our consumer businesses. These include regulations setting “ability to repay” and “qualified mortgage” standards for residential mortgage loans and mortgage loan servicing and originator compensation standards. Westbury Bank is evaluating recent regulations and proposals, and devotes significant compliance, legal and operational resources to compliance with consumer protection regulations and standards.
The operations of Westbury Bank also are subject to the:
Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;
Electronic Funds Transfer Act and Regulation E promulgated thereunder, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;
Check Clearing for the 21st Century Act (also known as “Check 21”), which gives “substitute checks,” such as digital check images and copies made from that image, the same legal standing as the original paper check;
The USA PATRIOT Act, which requires savings associations to, among other things, establish broadened anti-money laundering compliance programs, and due diligence policies and controls to ensure the detection and reporting of money laundering. Such required compliance programs are intended to supplement existing compliance requirements that also apply to financial institutions under the Bank Secrecy Act and the Office of Foreign Assets Control regulations; and
The Gramm-Leach-Bliley Act, which places limitations on the sharing of consumer financial information by financial institutions with unaffiliated third parties. Specifically, the Gramm-Leach-Bliley Act requires all financial institutions offering financial products or services to retail customers to provide such customers with the financial institution’s privacy policy and provide such customers the opportunity to “opt out” of the sharing of certain personal financial information with unaffiliated third parties.
Holding Company Regulation
General. The Company is a savings and loan holding company within the meaning of HOLA. As such, the Company is registered with the Federal Reserve Board and subject to regulations, examinations, supervision and reporting requirements applicable to savings and loan holding companies. In addition, the Federal Reserve Board has enforcement authority over the Company and its non-savings institution subsidiaries. Among other things, this authority permits the Federal Reserve Board to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution.
Permissible Activities. Under present law, the business activities of the Company are generally limited to those activities permissible for financial holding companies under Section 4(k) of the Bank Holding Company Act of 1956, as amended, provided certain conditions are met, or for multiple savings and loan holding companies. A financial holding company may engage in activities that are financial in nature, including underwriting equity securities and insurance as well as activities that are incidental to financial activities or complementary to a

42



financial activity. A multiple savings and loan holding company is generally limited to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to regulatory approval, and certain additional activities authorized by federal regulations.
Federal law prohibits a savings and loan holding company, including the Company, from directly or indirectly, or through one or more subsidiaries, from acquiring more than 5% of another savings institution or holding company thereof, without prior regulatory approval. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a nonsubsidiary company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the Federal Reserve Board must consider the financial and managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the federal deposit insurance fund, the convenience and needs of the community and competitive factors.
The Federal Reserve Board is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions:
the approval of interstate supervisory acquisitions by savings and loan holding companies; and
the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisition.
The states vary in the extent to which they permit interstate savings and loan holding company acquisitions.
Capital. Savings and loan holding companies historically have not been subject to consolidated regulatory capital requirements. The Dodd-Frank Act, however, required the Federal Reserve Board to establish for all depository institution holding companies minimum consolidated capital requirements that are as stringent as those required for the insured depository subsidiaries. Such regulations became effective January 1, 2015. However, legislation was enacted in December 2014 which required the Federal Reserve Board to amend its "Small Bank Holding Company" exemption from consolidated holding company capital requirements to generally extend the applicability to bank and savings and loan holding companies of up to $1 billion in assets. Regulations doing so were effective May 15, 2015. Consequently, savings and loan holding companies of under $1 billion in consolidated assets remain exempt from consolidated regulatory capital requirements, unless the Federal Reserve determines otherwise in particular cases.
Source of Strength. The Dodd-Frank Act extended the “source of strength” doctrine to savings and loan holding companies. The Federal Reserve Board has issued regulations requiring that all savings and loan holding companies serve as a source of managerial and financial strength to their subsidiary savings associations by providing capital, liquidity and other support in times of financial stress.
Dividends. The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies and savings and loan holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Regulatory guidance provides for prior regulatory consultation with respect to capital distributions in certain circumstances such as where the company’s net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate or earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a savings and loan holding company to pay dividends may be restricted if a subsidiary savings association becomes undercapitalized. The policy statement also states that a savings and loan holding company should inform the Federal Reserve Board supervisory staff prior to redeeming or repurchasing common stock or perpetual preferred stock if the savings and loan holding company is experiencing financial weaknesses or if the repurchase or redemption would result in a net reduction, as of the end of a quarter, in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These

43



regulatory policies may affect the ability of the Company to pay dividends, repurchase shares of common stock or otherwise engage in capital distributions.
Acquisition. Under the Federal Change in Bank Control Act, a notice must be submitted to the Federal Reserve Board if any person (including a company), or group acting in concert, seeks to acquire direct or indirect “control” of a savings and loan holding company. Under certain circumstances, a change of control may occur, and prior notice is required, upon the acquisition of 10% or more of the company’s outstanding voting stock, unless the Federal Reserve Board has found that the acquisition will not result in control of the company. A change in control definitively occurs upon the acquisition of 25% or more of the company’s outstanding voting stock. Under the Change in Bank Control Act, the Federal Reserve Board generally has 60 days from the filing of a complete notice to act, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition.
Emerging Growth Company Status
The Jumpstart Our Business Startups Act (the “JOBS Act”), which was enacted in April 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as an emerging growth company under the JOBS Act.
An “emerging growth company” may choose not to hold stockholder votes to approve annual executive compensation (more frequently referred to as “say-on-pay” votes) or executive compensation payable in connection with a merger (more frequently referred to as “say-on-golden parachute” votes). An emerging growth company also is not subject to the requirement that its auditors attest to the effectiveness of the company’s internal control over financial reporting, and can provide scaled disclosure regarding executive compensation; however, the Company will also not be subject to the auditor attestation requirement or additional executive compensation disclosure so long as it remains a “smaller reporting company” under Securities and Exchange Commission regulations (generally less than $75 million of voting and non-voting equity held by non-affiliates). Finally, an emerging growth company may elect to comply with new or amended accounting pronouncements in the same manner as a private company, but must make such election when the company is first required to file a registration statement. Such an election is irrevocable during the period a company is an emerging growth company. The Company has elected to comply with new or amended accounting pronouncements in the same manner as a private company.
A company loses emerging growth company status on the earlier of: (i) the last day of the fiscal year of the company during which it had total annual gross revenues of $1.0 billion or more; (ii) the last day of the fiscal year of the issuer following the fifth anniversary of the date of the first sale of common equity securities of the company pursuant to an effective registration statement under the Securities Act of 1933; (iii) the date on which such company has, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; or (iv) the date on which such company is deemed to be a “large accelerated filer” under Securities and Exchange Commission regulations (generally, at least $700 million of voting and non-voting equity held by non-affiliates).
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 addresses, among other issues, corporate governance, auditing and accounting, executive compensation, and enhanced and timely disclosure of corporate information. As directed by the Sarbanes-Oxley Act, our Chief Executive Officer and Chief Financial Officer are required to certify that our quarterly and annual reports do not contain any untrue statement of a material fact. The rules adopted by the Securities and Exchange Commission under the Sarbanes-Oxley Act have several requirements, including having these officers certify that: they are responsible for establishing, maintaining and regularly evaluating the effectiveness of our internal control over financial reporting; they have made certain disclosures to our auditors and the audit committee of the Board of Directors about our internal control over financial reporting; and they have included information in our quarterly and annual reports about their evaluation and whether there have been

44



changes in our internal control over financial reporting or in other factors that could materially affect internal control over financial reporting.
TAXATION
Federal Taxation
General. The Company and the Bank are subject to federal income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of federal taxation is intended only to summarize material federal income tax matters and is not a comprehensive description of the tax rules applicable to the Company and the Bank.
Method of Accounting. For federal income tax purposes, the Bank currently reports its income and expenses on the accrual method of accounting and uses a tax year ending September 30 for filing its consolidated federal income tax returns. The Small Business Protection Act of 1996 eliminated the use of the reserve method of accounting for bad debt reserves by savings institutions, effective for taxable years beginning after 1995.
Minimum Tax. The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At September 30, 2016, the Company had $669,000 of minimum tax credit carryforwards which do not expire.
Corporate Dividends. We may exclude from our income 100% of dividends received from the Bank as a member of the same affiliated group of corporations.
State Taxation
The Company and the Bank are subject to Wisconsin’s corporate income tax, which is imposed at a flat rate of 7.9% on apportioned "adjusted gross income." "Adjusted gross income," for purposes of the Wisconsin corporate income tax, begins with taxable income as defined by Section 62 of the Code, and thus, incorporates federal tax law to the extent that it affects the computation of taxable income. Federal taxable income is then adjusted by several modifications pursuant to Wisconsin tax regulation.
Other applicable state taxes include generally applicable sales and use taxes plus real and personal property taxes. The Company and the Bank’s state income tax returns have not been audited in five years.
Availability of Annual Report on Form 10-K
This Annual Report on Form 10-K is available on our website www.westburybankwi.com. Information on the website is not incorporated into, and is not otherwise considered a part of, this Annual Report on Form 10-K.
ITEM 1A.
Risk Factors.
The presentation of Risk Factors is not required for smaller reporting companies such as Westbury Bancorp, Inc.
ITEM 1B.
Unresolved Staff Comments.
None.


45




ITEM 2.
Properties.
We conduct our business at eight banking offices located in Washington and Waukesha Counties, Wisconsin and loan production offices located in Dane and Outagamie Counties, Wisconsin.  We own all of our banking center facilities and lease the loan production offices.  We operate nine ATMs at our branches and one other at a stand-alone location.  We believe that all of our properties and equipment are well maintained, in good operating condition and adequate for all of our present and anticipated needs.  We believe our facilities in the aggregate are suitable and adequate to operate our banking and related business. See Note 7 of the notes to our consolidated financial statements for additional information regarding our premises and equipment.

ITEM 3.
Legal Proceedings.
We are not involved in any pending legal proceedings as a plaintiff or defendant other than routine legal proceedings occurring in the ordinary course of business, and at September 30, 2016, we do not believe we are involved in any legal proceedings or claims, the outcome of which would be material to our financial condition or results of operations.
ITEM 4.
Mine Safety Disclosures.
Not Applicable.

46



PART II
ITEM 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
(a)Market Information, Holders and Dividend Information. Our common stock is traded on the Nasdaq Capital Market under the symbol “WBB.” The number of holders of record of Westbury Bancorp, Inc.’s common stock as of September 30, 2016 was 368. Westbury Bancorp, Inc. common stock began trading on April 11, 2013. Certain shares of Westbury Bancorp, Inc. are held in “nominee” or “street” name and accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number, but we believe it is substantially higher than the number of record holders.
The following table presents quarterly market (showing the high and low trading prices and not necessarily closing market prices) and dividend information for Westbury Bancorp, Inc.’s common stock for each quarter during fiscal years 2016 and 2015, as reported on the Nasdaq Capital Market.
Fiscal Year Ended September 30, 2016
High
Low
Dividends
 
 
 
 
Quarter ended September 30, 2016
$19.97
$18.80
N/A
 
 
 
 
Quarter ended June 30, 2016
$20.26
$18.82
N/A
 
 
 
 
Quarter ended March 31, 2016
$19.70
$17.58
N/A
 
 
 
 
Quarter ended December 31, 2015
$19.07
$17.22
N/A
 
 
 
 
Fiscal Year Ended September 30, 2015
High
Low
Dividends
 
 
 
 
Quarter ended September 30, 2015
$18.16
$17.20
N/A
 
 
 
 
Quarter ended June 30, 2015
$18.03
$16.96
N/A
 
 
 
 
Quarter ended March 31, 2015
$18.59
$16.00
N/A
 
 
 
 
Quarter ended December 31, 2014
$16.46
$14.79
N/A

Westbury Bancorp, Inc. has not declared dividends on its common stock. Dividend payments by Westbury Bancorp, Inc. are dependent in part on dividends it receives from Westbury Bank because Westbury Bancorp, Inc. has no source of income other than dividends from Westbury Bank, earnings from the investment of proceeds from the sale of shares of common stock retained by Westbury Bancorp, Inc. and interest payments with respect to Westbury Bancorp, Inc.’s loan to the Employee Stock Ownership Plan.
Under the rules of the OCC and the Federal Reserve Board, Westbury Bank is not permitted to make a capital distribution if, after making such distribution, it would be undercapitalized. For information concerning additional federal laws and regulations regarding the ability of Westbury Bank to make capital distributions, including the payment of dividends to Westbury Bancorp, Inc., see Item 1 "Business - Taxation" and "Business - Supervision and Regulation - Capital Distributions."
Unlike Westbury Bank, Westbury Bancorp, Inc. is not restricted by OCC regulations on the payment of dividends to its stockholders. However, the Federal Reserve Board has issued a policy statement regarding the payment of dividends by bank holding companies that it has also made applicable to savings and loan holding companies as well. In general, the Federal Reserve Board's policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization's capital needs, asset quality and overall financial condition. Federal Reserve Board guidance provides for prior regulatory review of capital distributions in certain circumstances such as where the company's net income for the past four quarters, net of dividends previously paid over that period, is insufficient to fully fund the dividend or the company's overall rate of earnings retention is inconsistent with the company's capital needs and

47



overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. These regulatory policies could affect the ability of Westbury Bancorp, Inc. to pay dividends or otherwise engage in capital distributions.
(b)Sales of Unregistered Securities. Not applicable.
(c)Use of Proceeds. Not applicable.
(d)Securities Authorized for Issuance Under Equity Compensation Plans.
At September 30, 2016, there were no compensation plans under which equity securities of Westbury Bancorp, Inc. were authorized for issuance other than the Equity Incentive Plan. See Part III, Item 12.
(e)Stock Repurchases.
The table below sets forth Westbury Bancorp, Inc.'s common stock repurchases during the three months ended September 30, 2016. On February 19, 2016, the Company announced that its Board of Directors had authorized the repurchase of up to 422,906 shares of the Company's common stock, representing 10.00% of the Company's outstanding shares. The shares may be purchased in the open market or in privately negotiated transactions from time to time depending on market conditions and other factors. As of September 30, 2016, 131,772 shares had been purchased under the current plan.
Period
(a)
Total number of shares purchased
(b)
Average price paid per share
(c)
Total number of shares purchased as part of publicly announced plans or programs
(d)
Maximum number of shares that may yet be purchased under the plans or programs
(1)
July 1-July 31, 2016 (1)

$


291,134

August 1-August 31, 2016(1)



291,134

September 1-September 30, 2016(1)



291,134

Total

$


 
(1)
Represents the maximum number of shares available for repurchase under the February 19, 2016 repurchase program at each month end.

Stock Performance Graph. Not required for smaller reporting companies.
ITEM 6.
Selected Financial Data.
The following tables set forth consolidated historical financial and other data of Westbury Bancorp, Inc. and its subsidiaries for the fiscal years and at the dates indicated. The following is only a summary and should be read in conjunction with the consolidated financial statements of the Company and related notes to the consolidated financial statements. In 2012, we elected to change our fiscal year from December 31 to September 30. In order to provide comparative information, we have included unaudited information for the year ended September 30, 2012 in addition to the audited information for the fiscal years ended September 30, 2016, 2015, 2014 and 2013 and the nine months ended September 30, 2012. The information at September 30, 2016 and 2015 and for the years ended

48



September 30, 2016 and 2015 is derived in part from the audited consolidated financial statements that appear in this Form 10-K. The information at September 30, 2014, 2013 and 2012 and for the years ended September 30, 2014 and 2013 and for the nine months ended September 30, 2012 is derived in part from audited consolidated financial statements that do not appear in this Form 10-K. The information presented prior to April 9, 2013 is for the Company's predecessor, WBSB Bancorp, MHC.

At September 30,

2016
 
2015
 
2014

2013

2012

(Dollars in thousands)
Selected Financial Condition Data:
 
 
 
 






 
 
 
 





Total assets
$
702,625

 
$
638,929

 
$
568,695

 
$
543,282

 
$
526,466

Cash and cash equivalents
29,613

 
16,488

 
17,608

 
47,665

 
33,141

Investment securities
96,065

 
82,745

 
90,346

 
105,705

 
64,532

Federal Home Loan Bank stock
1,330

 
3,350

 
2,670

 
2,670

 
2,670

Loans held for sale
1,881

 
431

 
326

 
1,028

 
3,022

Loans, net
533,759

 
493,425

 
416,874

 
342,780

 
375,899

Deposits
591,977

 
531,020

 
454,928

 
440,978

 
466,758

Short-term borrowings, including Federal Home Loan Bank of Chicago advances

 
18,000

 
17,000

 

 
1,254

Long-term borrowings, including Federal Home Loan Bank of Chicago advances
20,000

 

 

 

 

Stockholders’ equity
79,629

 
78,812

 
86,487

 
90,602

 
46,864



For the Years Ended September 30,
 
For the Nine Months Ended September 30, 2012

2016
 
2015
 
2014

2013

2012
 
 
 
 
 
 
 
 
 
 
(Unaudited)
 
 

(Dollars in thousands)
Selected Operating Data:
 
 
 
 






 
 



 
 
 
 






 
 


Interest and dividend income
$
22,944

 
$
20,780

 
$
18,322

 
$
18,958

 
$
22,048

 
$
16,338

Interest expense
2,602

 
1,959

 
1,637

 
2,121

 
3,398

 
2,266

Net interest income
20,342

 
18,821

 
16,685

 
16,837

 
18,650

 
14,072

Provision for loan losses
775

 
950

 
550

 
1,380

 
6,172

 
3,019

Net interest income after provision for loan losses
19,567

 
17,871

 
16,135

 
15,457

 
12,478

 
11,053

Noninterest income
6,521

 
6,724

 
6,244

 
8,978

 
10,251

 
8,216

Noninterest expense
20,631

 
22,973

 
24,986

 
23,149

 
26,428

 
18,465

Income (loss) before income taxes
5,457

 
1,622

 
(2,607
)
 
1,286

 
(3,699
)
 
804

Income tax expense (benefit)
1,986

 
(1,902
)
 
(1,172
)
 
348

 
3

 
229

Net income (loss)
$
3,471

 
$
3,524

 
$
(1,435
)
 
$
938

 
$
(3,702
)
 
$
575



49




At or For the Years Ended September 30,

2016
 
2015
 
2014

2013

2012
 
 
 
 
 
 
 
 
 
(Unaudited)
Selected Financial Ratios and Other Data:
 
 
 
 




 
Performance Ratios:
 
 
 
 




 

 
 
 
 




 
Return on assets (ratio of net income (loss) to average total assets)
0.51
%
 
0.57
%
 
(0.26
)%
 
0.17
%
 
(0.67
)%
Return on equity (ratio of net income (loss) to average equity)
4.49
%
 
4.28
%
 
(1.59
)%
 
1.34
%
 
(7.61
)%
Interest rate spread (1)   
3.37
%
 
3.41
%
 
3.44
 %
 
3.72
%
 
3.87
 %
Net interest margin (2)   
3.38
%
 
3.43
%
 
3.46
 %
 
3.71
%
 
3.85
 %
Efficiency ratio (3)   
76.80
%
 
89.93
%
 
108.97
 %
 
89.68
%
 
91.44
 %
Dividend payout ratio
%
 
%
 
 %
 
%
 
 %
Noninterest expense to average total assets
3.03
%
 
3.70
%
 
4.52
 %
 
4.23
%
 
4.76
 %
Average interest-earning assets to average interest-bearing liabilities and deposits
101.85
%
 
103.71
%
 
106.25
 %
 
97.67
%
 
97.24
 %
Loans to deposits
91.07
%
 
93.86
%
 
92.50
 %
 
78.70
%
 
81.97
 %
Basic earnings per share
$
0.94

 
$
0.85

 
$
(0.31
)
 
$
(0.06
)
 
N/A

Diluted earnings per share
$
0.93

 
$
0.85

 
$
(0.31
)
 
$
(0.06
)
 
N/A

Tangible book value per share including ESOP shares
$
19.43

 
$
18.21

 
$
17.04

 
$
17.62

 
N/A

Tangible book value per share excluding ESOP shares
$
21.07

 
$
19.83

 
$
18.40

 
$
19.15

 
N/A


 
 
 
 
 
 
 
 
 
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
Nonperforming assets to total assets
0.09
%
 
0.17
%
 
0.67
 %
 
1.92
%
 
2.50
 %
Nonperforming loans to total loans
0.10
%
 
0.16
%
 
0.34
 %
 
2.52
%
 
2.73
 %
Allowance for loan losses to nonperforming loans
933.10
%
 
572.60
%
 
284.76
 %
 
48.80
%
 
64.10
 %
Allowance for loan losses to total loans
0.97
%
 
0.92
%
 
0.97
 %
 
1.23
%
 
1.75
 %

 
 
 
 
 
 
 
 
 
Capital Ratios:
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
Average equity to average assets
11.38
%
 
13.25
%
 
16.28
 %
 
16.54
%
 
8.76
 %
Equity to total assets at end of period
11.33
%
 
12.34
%
 
15.21
 %
 
16.68
%
 
8.90
 %
Total capital to risk-weighted assets (4)   
13.54
%
 
13.12
%
 
16.18
 %
 
18.85
%
 
11.46
 %
Tier 1 capital to risk-weighted assets (4)   
12.61
%
 
12.25
%
 
15.17
 %
 
17.64
%
 
10.20
 %
CET1 capital to risk-weighted assets (4)
12.61
%
 
12.25
%
 
N/A

 
N/A

 
N/A

Tier 1 capital to average assets (4)   
10.23
%
 
10.01
%
 
11.13
 %
 
12.01
%
 
7.68
 %

 
 
 
 
 
 
 
 
 
Other Data:
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
Number of full service offices
8

 
8

 
9

 
12

 
12

                
(1)
Represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the year.
(2)
Represents net interest income as a percent of average interest-earning assets for the year.
(3)
Represents noninterest expense divided by the sum of net interest income and noninterest income.
(4)
Represents capital ratios of Westbury Bank.


ITEM 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This section is intended to help the reader understand the financial performance of Westbury Bancorp, Inc. and its subsidiaries through a discussion of the factors affecting our financial condition at September 30, 2016 and 2015 and our results of operations for the years ended September 30, 2016 and 2015.
This section should be read in conjunction with the consolidated financial statements and notes to the consolidated financial statements that appear elsewhere in this Annual Report on Form 10-K.

50



Overview
We provide financial services to individuals, families and businesses through our main office and seven branches located in Washington County and Waukesha County and loan production offices located in Dane County and Outagamie County, Wisconsin. Additionally, although our operations are not focused in Milwaukee County, we are affected by conditions in Milwaukee County because our loan portfolio includes a significant number of loans that are secured by real estate or that have borrowers located in Milwaukee County. In addition, a number of our customers who reside in Washington or Waukesha Counties are employed in Milwaukee County, and the operations of our commercial customers depend in part on sales of products and services to individuals or other businesses located in Milwaukee County and the surrounding area.
Our principal business consists of attracting retail deposits from the general public in our market area and investing those deposits, together with funds generated from operations, and borrowings, in commercial and multifamily real estate loans, one- to four-family residential real estate loans, commercial business loans, and, to a lesser extent, construction loans and consumer loans, including home equity lines of credit and automobile loans. A significant majority of our deposits are transaction accounts, which we believe are less susceptible to large-scale withdrawals than certificates of deposit as a result of changes in interest rates, and which we believe have a lower cost of funds over various interest cycles. At September 30, 2016, approximately 75.2% of our deposits were transaction accounts. We also purchase investment securities consisting primarily of securities issued by the United States government and its agencies and government-sponsored enterprises, mortgage-backed securities and collateralized mortgage obligations issued by government-sponsored enterprises, municipal securities and corporate securities.
At September 30, 2016, we had total assets of $702.6 million, total deposits of $592.0 million and total stockholders' equity of $79.6 million, compared to total assets of $638.9 million, total deposits of $531.0 million and total stockholders' equity of $78.8 million at September 30, 2015.

The results of our operations depend primarily on our net interest income. Net interest income is the difference between the interest income we earn on our interest-earning assets and the interest we pay on our interest-bearing liabilities. Our results of operations also are affected by our provisions for loan losses, non-interest income and non-interest expense. Non-interest income currently consists primarily of service charges on deposit accounts, loan servicing income, gain on sales of securities and loans, debit card income, income from bank-owned life insurance and miscellaneous other income. Non-interest expense currently consists primarily of expenses related to compensation and employee benefits, occupancy and equipment, data processing, federal deposit insurance premiums, professional fees, advertising and other operating expenses.
Our results of operations also may be affected significantly by general and local economic and competitive conditions, changes in market interest rates, governmental policies and actions of regulatory authorities.

Business Strategy
Our goal is to operate Westbury Bank as a profitable, independent, community-oriented commercial bank delivering attractive returns to our shareholders by providing superior customer service and innovative financial products to individuals and small businesses in our market area. We believe a disciplined approach to managing the size, composition and growth of our balance sheet, including the use of financial modeling techniques to price products favorably and competitively and to manage expenses, will enable us to optimize profitability.
We will also continue to fulfill the three-part institutional vision included in our mission statement:
Build long-term, mutually beneficial relationships with our communities, customers and employees;
Provide superior customer service and innovative financial products designed to meet the needs of individuals and small businesses in our communities; and

51



Return a portion of the benefits of our profitable operations to the communities in which we do business through charitable giving and community involvement.
Maintain Our Improved Asset Quality. We actively monitor and manage all segments of our loan portfolio in an effort to proactively identify and mitigate credit risks within our loan portfolio. We conduct both internal and external reviews of our loan portfolio designed to provide early detection of potential problem loans and timely resolution of non-performing and classified loans, and have tasked a management committee with conducting internal reviews and stress-testing. Specifically, we conduct internal reviews of all loans above $250,000, and third party reviews on all loans above $750,000 as well as a certain portion of new loans and a sample of loans originated by each loan officer, on an annual basis. In addition, in recent years, we have implemented more stringent underwriting policies and procedures, including increased emphasis on lower debt to income ratios, higher credit scores, and lower loan to value ratios. With respect to commercial business, commercial real estate and multifamily lending, we have also enhanced the information required with respect to a borrower’s financial condition and business prospects, and perform an internal valuation of underlying property in addition to obtaining third party appraisals. Finally, we have hired additional personnel with experience managing commercial loan administration, collection and workouts. We are committed to devoting significant resources to maintaining low levels of loan delinquencies and to minimize problem assets as we increase our commercial business, commercial real estate and multifamily lending. We also intend to continually enhance our loan underwriting, administration and collection procedures, and to implement improved credit risk management and asset-liability management techniques, such as portfolio stress testing, portfolio credit analysis, and credit decision monitoring matrices.
Increase Commercial Business, Commercial Real Estate and Multi-Family Lending. We believe that, with the recent downward trends in interest rates on residential mortgage loans, particularly on the variable rate residential mortgage loans that we retain in our portfolio, a prudent approach to expanding our balance sheet is to increase the growth of commercial business, commercial real estate and multifamily loans in order to increase our profitability. In the past several years, because commercial lending is based on relationships, we have hired specialized commercial lending officers with strong borrower relationships. This has resulted in an increase in our commercial real estate, multifamily and commercial business lending activities, as well as enhancements to our commercial lending policies and procedures. At September 30, 2016, we had $345.5 million of commercial real estate, commercial business and multifamily loans, representing 64.1% of our total loans, and we originated $49.4 million of commercial real estate, commercial business and multifamily loans during the year ended September 30, 2016 and $78.1 million of such loans during the year ended September 30, 2015. We expect that a disciplined approach to increasing our commercial business, commercial real estate and multifamily lending will diversify and increase the yield on our loan portfolio.
We have in recent periods identified multi-family, commercial real estate and construction loans as areas for lending emphasis. We have had, in particular, higher levels of commercial real estate lending (including non-owner occupied commercial real estate loans) in recent periods. Although we believe we have employed the appropriate management, sales, and administrative personnel (including personnel tasked with managing and monitoring loan concentrations in these areas), as well as installed the appropriate systems and procedures, to support this lending emphasis and higher levels of loans in these categories, these types of loans have historically carried greater risk of payment default than loans to retail borrowers. As the volume of commercial lending in these loan categories increases, our credit risk may increase. Construction loans have the additional risk of potential non-completion of the project. In the event of increased defaults from commercial borrowers or non-completion of construction projects, our provision for loan losses would further increase and loans may be written off and, therefore, earnings would be reduced. In addition, costs associated with the administration of problem loans increase and, therefore, earnings would be further reduced. Further, as the portion of the Company's loans secured by real estate increases (including those related to construction projects), the Company becomes increasingly exposed to fluctuations in real estate values and the real estate markets, as well as being exposed to potential environmental liabilities and related compliance burdens.  If we fail to adequately monitor and evaluate trends in the real estate markets and to assess potential environmental risks, the value of the collateral we hold may be less than expected.


52



Continue to Originate Low-Cost Transaction Account Deposits. We offer checking accounts, passbook and statement savings accounts and money market accounts, which generally are lower cost sources of funds than certificates of deposit, are generally less sensitive to withdrawal when interest rates fluctuate, and provide the opportunity for generation of deposit-related fee income. At September 30, 2016, approximately 75.2% of our deposits were transaction accounts. We intend to pursue increased origination of these low cost deposits, with particular focus on transaction accounts, by implementing marketing and promotional programs, offering remote deposit capture services to business customers, and broadening banking relationships with lending customers, particularly as we expand our commercial business, commercial real estate and multifamily lending activities.
Continue to Originate and Sell Certain Residential Real Estate Loans. Residential mortgage lending has historically comprised a significant portion of our operations. We recognize that the origination of one- to four-family real estate loans is essential to maintaining customer relations and our status as a community-oriented bank. During the year ended September 30, 2016, we originated $93.7 million in residential real estate loans and sold $48.4 million for gains on sale of $779,000, and during the year ended September 30, 2015, we originated $67.3 million in residential real estate loans and sold $29.2 million for gains on sale of $448,000. Accordingly, we will continue to originate one- to four-family residential mortgage loans and home equity loans and lines of credit. We intend to maintain an appropriately sized portfolio of short-term fixed rate and adjustable-rate residential mortgage loans to increase the yield of our loan portfolio, assist in the management of our interest rate risk and manage both the maturity of the loan portfolio and the time it takes for loans to reprice in accordance with their terms. We intend to sell the majority of the long-term fixed-rate residential mortgage loans in the secondary market to generate gains on sale and manage the overall maturity of our loan portfolio.
Leverage Our Competitive Strengths to Attract and Retain Customers. We believe that our competitive strengths are personalized, superior customer service, extensive knowledge of our local markets, high visibility community activities and technology-driven financial products. We believe that we can leverage these strengths to attract and retain customers from an increasing population of potential customers dislocated as a result of large bank consolidations in our market area and individuals seeking personalized, best-in-class customer service. We also plan to continue to update existing technologies and implement new technologies to enhance the customer experience and increase the efficiency of our operations. We also believe that we can capitalize on commercial deposit and personal banking relationships derived from an increase in commercial business, commercial real estate and multifamily lending.
Critical Accounting Policies
Certain of our accounting policies are important to the portrayal of our financial condition, since they require management to make difficult, complex or subjective judgments, some of which may relate to matters that are inherently uncertain. Estimates associated with these policies are susceptible to material changes as a result of changes in facts and circumstances. Facts and circumstances which could affect these judgments include, but are not limited to, changes in interest rates, changes in the performance of the economy and changes in the financial condition of borrowers.
The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for qualifying public companies. As an “emerging growth company” we have elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, our financial statements may not be comparable to the financial statements of public companies that comply with such new or revised accounting standards.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are: loss exposure at default; the amount and timing of future cash flows on impacted loans; value of collateral; and determination of loss factors to be applied to the various elements of the portfolio. All of these

53



estimates are susceptible to significant change. Management reviews the level of the allowance quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectability of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, bank regulators, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
Deferred Tax Assets. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance when it is more likely than not that some portion of the deferred tax asset will not be realized. We exercise significant judgment in evaluating the amount and timing of recognition of the resulting tax liabilities and assets. These judgments require us to make projections of future taxable income. The judgments and estimates we make in determining our deferred tax assets, which are inherently subjective, are reviewed on a continual basis as regulatory and business factors change. Any reduction in estimated future taxable income may require us to record a valuation allowance against our deferred tax assets.
Comparison of Financial Condition at September 30, 2016 and September 30, 2015
Total Assets. Total assets increased by $63.7 million, or 10.0%, to $702.6 million at September 30, 2016 from $638.9 million at September 30, 2015. The increase was primarily the result of the successful implementation of our strategies to increase the loan portfolio, particularly in multifamily, commercial real estate and commercial business loans.
Net Loans. Net loans increased by $40.3 million, or 8.2%, to $533.8 million at September 30, 2016 from $493.4 million at September 30, 2015. During the year ended September 30, 2016, commercial real estate loans increased $18.1 million, or 11.1%, multifamily loans increased $17.9 million, or 16.9%, one- to four-family residential real estate loans increased $5.4 million, or 3.5%, and commercial business loans increased $2.6 million, or 6.9%, while construction and land development loans decreased by $2.6 million, or 13.8%.
Investment Securities. Investment securities available for sale increased $13.5 million, or 16.8%, to $93.8 million at September 30, 2016 from $80.3 million at September 30, 2015. Investment securities held to maturity decreased $166,000 to $2.3 million at September 30, 2016 from $2.5 million at September 30, 2015 as we received principal payments upon the maturity of bonds.
In the available for sale portfolio, mortgage-backed securities and collateralized mortgage obligations decreased $776,000, or 1.4%, to $55.0 million at September 30, 2016 from $55.7 million at September 30, 2015 and corporate securities decreased $2.9 million to zero at September 30, 2016 from $2.9 million at September 30, 2015. Municipal securities increased $17.1 million, or 79.0%, to $38.8 million at September 30, 2016 from $21.7 million at September 30, 2015.
The yield on our combined portfolio of investment securities decreased to 2.00% at September 30, 2016 compared to 2.18% at September 30, 2015. Net unrealized gain on securities available for sale increased $343,000 from September 30, 2015 to September 30, 2016, reflecting the effect of a general decrease in market interest rates between periods.
At September 30, 2016, investment securities classified as available-for-sale consisted entirely of government-sponsored mortgage-backed securities, collateralized mortgage obligations, government-sponsored

54



debentures, municipal securities and corporate securities. Investment securities classified as held-to-maturity consisted entirely of municipal securities.
Foreclosed Real Estate. Foreclosed real estate held for sale decreased $184,000, or 65.0%, to $99,000 at September 30, 2016 from $283,000 at September 30, 2015, as a result of sales of properties of $356,000 and write-downs of foreclosed real estate to their realizable value of $26,000, offset by new foreclosures of $170,000.
Real Estate Held for Investment. Real estate held for investment decreased $2.0 million, to zero at September 30, 2016 from $2.0 million at September 30, 2015. The decrease resulted from the designation of one property as held for sale and the transfer of another property to office properties and equipment during fiscal 2016. The property transferred to real estate held for sale was transferred at its fair value and subsequently sold.
Real Estate Held for Sale. Real estate held for sale decreased $882,000 to zero at September 30, 2016 from $882,000 at September 30, 2015. The decrease resulted from the sale of two properties during the year.
Office Properties and Equipment. Office properties and equipment increased $1.5 million, or 11.1%, to $15.4 million at September 30, 2016 from $13.9 million at September 30, 2015. The increase resulted from the transfer of a property from real estate held for investment.
Cash Surrender Value of Life Insurance. The cash surrender value of bank-owned life insurance (“BOLI”), which provides us with a funding source for our employee benefit plan obligations, increased $1.1 million, to $14.2 million at September 30, 2016 from $13.2 million at September 30, 2015 as we purchased single premium life insurance on our president and CEO for $637,000 in addition to regular income earned on these policies during the year.
We are the beneficiary and owner of the BOLI policies, and as such, the investment is carried at the cash surrender value of the underlying policies. BOLI also generally provides us with other income that is non-taxable. Regulations generally limit our investment in BOLI to 25% of our tier 1 capital plus our allowance for loan losses. At September 30, 2016, this limit was $19.2 million.
Deferred Taxes. Deferred taxes decreased $2.1 million, or 28.1%, to $5.4 million at September 30, 2016 from $7.5 million at September 30, 2015 as a result of income tax liability incurred during the year. See "Comparison of Operating Results for the Years Ended September 30, 2016 and September 30, 2015 - Provision for Income Taxes" for additional discussion of management's analysis of the Company's deferred tax assets.
Deposits. Deposits increased $61.0 million, or 11.5%, to $592.0 million at September 30, 2016 from $531.0 million at September 30, 2015. Our core deposits, which we consider to be our non-interest bearing and interest bearing checking accounts, passbook and statement savings accounts, and variable rate money market accounts, increased $36.7 million, or 9.0%, to $445.5 million at September 30, 2016 from $408.8 million at September 30, 2015. Certificates of deposit and other time deposits increased $24.3 million, or 19.8%, to $146.5 million at September 30, 2016 from $122.3 million at September 30, 2015 as we increased our use of internet-listing service deposits by $5.5 million to $53.9 million at September 30, 2016 from $48.4 million at September 30, 2015.
Short Term Advances from FHLB. Short-term advances from the FHLB decreased by $18.0 million, or 100.0%, to zero at September 30, 2016 from $18.0 million at September 30, 2015 as we secured longer term financing from the FHLB during the year. We anticipate continuing to use short term advances to fund a portion of our growth as needed.

Long Term Advances from FHLB. Long-term advances from the FHLB increased by $20.0 million to $20.0 million at September 30, 2016 from zero at September 30, 2015. In anticipation of a long term trend of rising interest rates as the Federal Open Market Committee began to raise the Fed Funds rate in December 2015, we locked in long-term advances with terms from three to eight years during fiscal 2016.


55



Total Stockholders' Equity. Total stockholders' equity increased $817,000, or 1.0%, to $79.6 million at September 30, 2016 from $78.8 million at September 30, 2015. The increase resulted from net income of $3.5 million for 2016 and increases as a result of shares issued under the Company's equity incentive and ESOP plans and unrealized gain on available-for-sale securities, offset by the repurchase of 237,014 shares of the Company's common stock during 2016 at a cost of $4.5 million.
Comparison of Operating Results for the Years Ended September 30, 2016 and September 30, 2015
General. Net income for the year ended September 30, 2016 was $3.5 million, compared to $3.5 million for the year ended September 30, 2015, a decrease of $53,000. The decrease in net income was primarily due to an increase in income tax expense of $3.9 million and a decrease in non-interest income of $203,000, offset by a decrease in non-interest expense of $2.3 million, an increase in net interest income of $1.5 million, and a decrease in provision for loan losses of $175,000.
Interest and Dividend Income. Interest and dividend income increased $2.2 million, or 10.4%, to $22.9 million for the year ended September 30, 2016 from $20.8 million for the year ended September 30, 2015. Average interest-earning assets during the year ended September 30, 2016 increased $54.7 million, or 9.9%, to $605.6 million from $550.9 million for the year ended September 30, 2015. This increase was primarily the result of an increase in average loan balances and an increase in average nontaxable investment securities offset by a decrease in average taxable investment securities balances. The increase in average loan balances of $52.2 million, or 11.4%, to $511.5 million for the year ended September 30, 2016 from $459.3 million for the year ended September 30, 2015 resulted from our efforts to effectively grow our loan portfolio, in particular our commercial loans during 2016. The average yield on loans decreased by 6 basis points to 4.09% for the year ended September 30, 2016 from 4.15% for the year ended September 30, 2015, reflecting the effects of downward pressure on loan pricing caused by the prolonged low interest rate environment. The average balance of nontaxable investment securities increased $5.3 million, or 111.8%, to $10.0 million for the year ended September 30, 2016 from $4.7 million for the year ended September 30, 2015. The average yield on nontaxable investment securities decreased by 50 basis points to 3.12% for the year ended September 30, 2016 from 3.62% for the year ended September 30, 2015. The average balance of taxable investment securities decreased $1.8 million, or 2.3%, to $76.9 million for the year ended September 30, 2016 from $78.7 million for the year ended September 30, 2015. The average yield on taxable investment securities increased by 24 basis points to 2.20% for the year ended September 30, 2016 from 1.96% for the year ended September 30, 2015. We adjusted our portfolio mix during fiscal 2016 by selling taxable municipal securities and corporate securities while purchasing non-taxable municipal securities.
Interest Expense. Total interest expense increased $643,000, or 32.8%, to $2.6 million for the year ended September 30, 2016 from $2.0 million for the year ended September 30, 2015.
Interest expense on deposit accounts increased $446,000, or 23.2%, to $2.4 million for the year ended September 30, 2016 from $1.9 million for the year ended September 30, 2015. The increase was primarily due to an increase in average deposits and interest-bearing liabilities to $594.6 million for the year ended September 30, 2016 compared to $531.2 million for the year ended September 30, 2015. Interest expense on deposit accounts also increased to a lesser extent as a result of an increase in our cost of funds of 4 basis points to 0.42% for the year ended September 30, 2016 from 0.38% for the year ended September 30, 2015.
Interest expense on Federal Home Loan Bank of Chicago advances increased $197,000 to $234,000 for the year ended September 30, 2016 from $37,000 for the year ended September 30, 2015. The average balance of advances increased by $6.3 million to $33.2 million for the year ended September 30, 2016 from $26.9 million for the year ended September 30, 2015. The cost of funds on advances increased 57 basis points to 0.71% for the year ended September 30, 2016 from 0.14% for the year ended September 30, 2015 as we increased our usage of long-term FHLB advances versus short-term advances during the year.
Net Interest Income. Net interest income increased $1.5 million, or 8.1%, to $20.3 million for the year ended September 30, 2016 from $18.8 million for the year ended September 30, 2015. The average net loan balance increased by $52.2 million, or 11.4%, to $511.5 million for the year ended September 30, 2016 from

56



$459.3 million for the year ended September 30, 2015 and the average interest bearing deposits increased by $29.0 million, or 6.9% to $450.8 million for the year ended September 30, 2016 from $421.8 million for the year ended September 30, 2015. We experienced a decrease in our interest rate spread to 3.37% for the year ended September 30, 2016 from 3.41% for the year ended September 30, 2015, and a decrease in our net interest margin to 3.38% for the year ended September 30, 2016 from 3.43% for the year ended September 30, 2015. The decrease in our interest rate spread and net interest margin reflected the effect of downward pressure on loan pricing caused by the prolonged low interest rate environment and its adverse impact on our ability to further reduce rates on transaction accounts.
Provision for Loan Losses. Based on our analysis of the factors described in “Critical Accounting Policies—Allowance for Loan Losses,” we recorded a provision for loan losses of $775,000 for the year ended September 30, 2016 and $950,000 for the year ended September 30, 2015. The decrease in the provision for loan losses between periods resulted from slower growth in the loan portfolio during 2016 compared to 2015 and a reduction in net charge-offs to $129,000 for the year ended September 30, 2016 compared to $424,000 for the year ended September 30, 2015. The allowance for loan losses was $5.2 million, or 0.97% of total loans, at September 30, 2016 compared to $4.6 million, or 0.92% of total loans, at September 30, 2015. Total non-performing loans were $562,000 at September 30, 2016, compared to $803,000 at September 30, 2015. As a percentage of non-performing loans, the allowance for loan losses was 933.1% at September 30, 2016 compared to 572.6% at September 30, 2015. Total classified loans were $1.9 million at September 30, 2016, compared to $3.8 million at September 30, 2015.
The allowance for loan losses reflects the estimate we believe to be appropriate to cover incurred probable losses which were inherent in the loan portfolio at September 30, 2016 and 2015, respectively.
Non-Interest Income. Non-interest income decreased $203,000, or 3.0%, to $6.5 million for the year ended September 30, 2016 from $6.7 million for the year ended September 30, 2015. The decrease in non-interest income was due primarily to decreases in rental income from real estate operations of $478,000, in fees on deposit accounts of $318,000, and in servicing fee income of $104,000, offset by an increase in gains on sales of securities of $461,000 and gains on sales of loans of $331,000.
The decrease in rental income from real estate operations resulted from receipt of payment from the tenant in the property which we have designated as real estate held for sale, buying out the remaining years of their lease in the year ended September 30, 2015. The decrease in fees on deposit accounts resulted from the growth in our checking accounts. The decrease in servicing fee income resulted from increased amortization of originated mortgage servicing rights during the year as refinancing activity increased due to increased demand for fixed rate mortgages in the prolonged low interest rate environment. The increase in gain on sales of securities resulted from the favorable interest rate environment as we restructured our investment portfolio during the year. The increase in gain on sales of loans resulted from increased demand for fixed rate mortgages during the year which we sold into the secondary market.
Non-Interest Expense. Non-interest expense decreased $2.3 million, or 10.2%, to $20.6 million for the year ended September 30, 2016 from $23.0 million for the year ended September 30, 2015. During the year ended September 30, 2016, we marketed and sold a property in real estate held for sale. Valuation adjustments totaling $276,000 were recorded during the year as the property was exposed to the market. During the year ended September 30, 2015, we closed one branch office, designated real estate held for investment as held for sale and bought out a service contract. The cost of these actions for the year ended September 30, 2015 was $1.6 million. We believe that these actions have resulted in reducing current operating expenses and will result in reduced operating expenses in the future.
In addition, salaries and employee benefits expense increased $499,000. This increase was offset by decreases in other expenses of $396,000.
The increase in salaries and employee benefits expense resulted from the acceleration of the payment of our ESOP loan which increases the expense related to the release of shares within the ESOP plan. Additionally, we

57



incurred increased expenses related to the staffing of our Madison commercial loan production office. The decrease in other expenses was the result of the expiration of service contracts which were not renewed.

Provision for Income Taxes. Income tax expense was $2.0 million for the year ended September 30, 2016 compared to a benefit of $1.9 million for the year ended September 30, 2015. The effective tax rate as a percent of pre-tax income was 36.4% and (117.2)% for the years ended September 30, 2016 and 2015, respectively. The benefit in 2015 was a result of the reversal of a valuation allowance on our deferred tax asset during the year ended September 30, 2015.
We performed an evaluation of our deferred tax assets at September 30, 2016 and 2015. A deferred tax asset valuation allowance is established to reduce the net carrying amount of deferred tax assets if it is determined to be more likely than not that all or some portion of the deferred tax asset will not be realized. In making the determination whether a deferred tax asset is more likely than not to be realized, we seek to evaluate all available positive and negative evidence including the possibility of future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial results. At both September 30, 2016 and 2015, we determined that our deferred tax asset was more likely than not to be realized and that a valuation allowance was not required to be recorded.
Analysis of Net Interest Income
Net interest income represents the difference between the income we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Net interest income also depends upon the relative amounts of interest-earning assets and interest-bearing liabilities and the interest rates earned or paid on them. The following table sets forth average balance sheets, average yields and costs, and certain other information for the periods indicated. Average balances are derived from daily average balances for all periods. Non-accrual loans were included in the computation of average balances, but have been reflected in the tables as loans carrying a zero yield. No tax equivalent yield adjustments have been made. The yields set forth below include the effect of loan fees, discounts and premiums that are amortized or accreted to interest income.

58



 
 
For the Years Ended September 30,
 
 
2016
 
2015
 
2014
 
 
Average Outstanding Balance
 
Interest
 
Yield/Cost
 
Average Outstanding Balance
 
Interest
 
Yield/Cost
 
Average Outstanding Balance
 
Interest
 
Yield/Cost
 
 
(Dollars in Thousands)
Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loans
 
$
511,526

 
$
20,914

 
4.09
%
 
$
459,334

 
$
19,058

 
4.15
%
 
$
364,094

 
$
16,248

 
4.46
%
Taxable securities
 
76,884

 
1,691

 
2.20

 
78,719

 
1,544

 
1.96

 
96,866

 
1,876

 
1.94

Securities exempt from federal income taxes(1)
 
9,956

 
311

 
3.12

 
4,701

 
170

 
3.62

 
4,061

 
120

 
2.95

Fed funds sold and other interest-earning deposits
 
7,216

 
134

 
1.86

 
8,127

 
66

 
0.81

 
18,701

 
119

 
0.64

Total interest-earning assets
 
605,582

 
23,050

 
3.81
%
 
550,881

 
20,838

 
3.78
%
 
483,722

 
18,363

 
3.80
%
Noninterest-earning assets
 
74,603

 
 
 
 
 
70,184

 
 
 
 
 
69,446

 
 
 
 
Total assets
 
$
680,185

 
 
 
 
 
$
621,065

 
 
 
 
 
$
553,168

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and stockholders' equity:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Noninterest-bearing demand deposits
 
$
110,600

 

 
%
 
$
82,524

 

 
%
 
77,646

 

 
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Checking accounts
 
142,252

 
398

 
0.28

 
144,203

 
392

 
0.27

 
138,600

 
438

 
0.32

Passbook and statement savings
 
130,363

 
181

 
0.14

 
124,962

 
182

 
0.15

 
121,141

 
175

 
0.14

Variable rate money market
 
47,267

 
205

 
0.43

 
43,367

 
142

 
0.33

 
21,448

 
42

 
0.20

Certificates of deposit
 
130,955

 
1,584

 
1.21

 
109,269

 
1,206

 
1.10

 
90,638

 
974

 
1.07

Total interest bearing deposits
 
450,837

 
2,368

 
0.53

 
421,801

 
1,922

 
0.46

 
371,827

 
1,629

 
0.44

      Total deposits
 
561,437

 
2,368

 
0.42

 
504,325

 
1,922

 
0.38

 
449,473

 
1,629

 
0.36

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Short-term FHLB advances
 
17,562

 
49

 
0.28

 
26,856

 
37

 
0.14

 
5,807

 
8

 
0.14

Long-term FHLB advances
 
15,601

 
185

 
1.19

 

 

 

 

 

 

Total FHLB advances
 
33,163

 
234

 
0.71
%
 
26,856

 
37

 
0.14
%
 
5,807

 
8

 
0.14
%
Total deposits and interest-bearing liabilities
 
594,600

 
2,602

 
0.44
%
 
531,181

 
1,959

 
0.37
%
 
455,280

 
1,637

 
0.36
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other liabilities
 
8,207

 
 
 
 
 
7,595

 
 
 
 
 
7,843

 
 
 
 
Total liabilities
 
602,807

 
 
 
 
 
538,776

 
 
 
 
 
463,123

 
 
 
 
Stockholders' equity
 
77,378

 
 
 
 
 
82,289

 
 
 
 
 
90,045

 
 
 
 
Total liabilities and stockholders' equity
 
$
680,185

 
 
 
 
 
$
621,065

 
 
 
 
 
$
553,168

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net interest income
 
 
 
$
20,448

 
 
 
 
 
$
18,879

 
 
 
 
 
$
16,726

 
 
Net interest rate spread
 
   
 
 
 
3.37
%
 
   
 
 
 
3.41
%
 
   
 
 
 
3.44
%
Net interest-earning assets
 
$
10,982

 
 
 
 
 
$
19,700

 
 
 
 
 
$
28,442

 
 
 
 
Net interest margin
 
 
 
 
 
3.38
%
 
 
 
 
 
3.43
%
 
   
 
 
 
3.46
%
Average of interest-earning assets to interest-bearing liabilities
 
 
 
 
 
101.85
%
 
 
 
 
 
103.71
%
 
   
 
 
 
106.25
%
1.
Non-taxable investment income is presented on a fully tax equivalent basis assuming a 34% federal tax rate.
Rate/Volume Analysis
The following table presents, for the last two fiscal years, the dollar amount of changes in interest income and interest expense for the major categories of our interest-earning assets and interest-bearing liabilities. Information is provided for each category of interest-earning assets and interest-bearing liabilities with respect to (i) changes attributable to changes in volume (i.e., changes in average balances multiplied by the prior-period average

59



rate) and (ii) changes attributable to rate (i.e., changes in average rate multiplied by prior-period average balances). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately to the change due to volume and the change due to rate.

Years Ended September 30, 2016 vs. 2015
 
Years Ended September 30, 2015 vs. 2014

Increase (Decrease) Due to
 
Total Increase (Decrease)
 
Increase (Decrease) Due to
 
Total Increase (Decrease)

Volume
 
Rate
 
 
Volume
 
Rate
 

(Dollars in thousands)
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Loans
$
2,127

 
$
(271
)
 
$
1,856

 
$
3,827

 
$
(1,017
)
 
$
2,810

Taxable securities
(35
)
 
182

 
147

 
(351
)
 
19

 
(332
)
Securities exempt from federal income taxes(1)
161

 
(20
)
 
141

 
21

 
29

 
50

Fed funds sold and other interest-earning deposits
(6
)
 
74

 
68

 
(100
)
 
47

 
(53
)
Total interest-earning assets
2,247

 
(35
)
 
2,212

 
3,397

 
(922
)
 
2,475


 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
NOW accounts
(3
)
 
9

 
6

 
16

 
(62
)
 
(46
)
Passbook and statement savings
2

 
(3
)
 
(1
)
 
2

 
5

 
7

Variable rate money market
15

 
48

 
63

 
61

 
39

 
100

Certificates of deposit
252

 
126

 
378

 
204

 
28

 
232

Short-term FHLB advances
(6
)
 
18

 
12

 
29

 

 
29

Long-term FHLB advances
185

 

 
185

 

 

 

Total interest-bearing liabilities
445

 
198

 
643

 
312

 
10

 
322


 
 
 
 
 
 
 
 
 
 
 
Change in net interest income
$
1,802

 
$
(233
)
 
$
1,569

 
$
3,085

 
$
(932
)
 
$
2,153

1. Non-taxable investment income is presented on a fully tax equivalent basis assuming a 34% federal tax rate.

Liquidity and Capital Resources
Our primary sources of funds are deposits, principal and interest payments on loans and securities, proceeds from the sale of loans, proceeds from maturities and calls of securities and Federal Home Loan Bank advances. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions, and competition. Our most liquid assets are cash and short-term investments including interest-earning demand deposits. The levels of these assets are dependent on our operating, financing, lending, and investing activities during any given period.
Our cash flows are comprised of three primary classifications: cash flows from operating activities, investing activities, and financing activities. Net cash provided by operating activities was $6.8 million and $7.1 million for the years ended September 30, 2016 and 2015, respectively. Net cash used in investing activities, which consists primarily of disbursements for loan originations and the purchase of securities, offset by principal collections on loans, proceeds from the sale of securities and proceeds from maturing securities and pay downs on mortgage-backed securities, was $52.2 million and $72.5 million for the years ended September 30, 2016 and 2015, respectively. During the year ended September 30, 2016 we purchased $61.1 million and sold $36.0 million in securities held as available-for-sale, and during the year ended September 30, 2015, we purchased $28.5 million and sold $27.7 million in securities held as available-for-sale. Net cash provided by financing activities was $58.6 million for the year ended September 30, 2016, consisting primarily of increases in deposit accounts of $61.0 million and Federal Home Loan Bank long-term advances of $20.0 million, partially offset by the decrease in Federal Home Loan Bank short-term advances of $18.0 million and by repurchases of the Company's common stock of $4.5 million. Net cash provided by financing activities was $64.3 million for the year ended September 30, 2015, consisting primarily of increases in deposit accounts of $76.1 million and Federal Home Loan Bank advances of $1.0 million, partially offset by repurchases of the Company's common stock of $12.8 million.

60



At September 30, 2016, Westbury Bank exceeded all of its regulatory capital requirements to be categorized as well capitalized with a tier 1 leverage capital level of $71.4 million, or 10.23% of adjusted total assets, which is above the required level of $34.9 million, or 5.00%; common equity tier 1 risk-based capital of $71.4 million, or 12.61% of risk-weighted assets, which was above the required level of $36.8 million, or 6.50%; tier 1 risk-based capital of $71.4 million, or 12.61% of risk-weighted assets, which was above the required level of $45.3 million, or 8.00%; and total risk-based capital of $76.6 million, or 13.54% of risk-weighted assets, which was above the required level of $56.6 million, or 10.00%. At September 30, 2015, Westbury Bank exceeded all of its regulatory capital requirements to be categorized as well capitalized with a tier 1 leverage capital level of $64.2 million, or 10.01% of adjusted total assets, which was above the required level of $32.0 million, or 5.00%; tier 1 risk-based capital of $64.2 million, or 12.25% of risk-weighted assets, which was above the required level of $42.0 million, or 8.00%; and total risk-based capital of $68.8 million, or 13.12% of risk-weighted assets, which was above the required level of $52.4 million, or 10.00%. Accordingly, Westbury Bank was categorized as well capitalized at September 30, 2016 and 2015, respectively. Management is not aware of any conditions or events since the most recent notification that would change our category.
At September 30, 2016, we had outstanding commitments to originate loans of $3.5 million and stand-by letters of credit of $1.1 million. We also had unused commercial lines of credit of $68.8 million and unused home equity lines of credit of $27.3 million. We anticipate that we will have sufficient funds available to meet our current loan origination commitments. Certificates of deposit that are scheduled to mature in less than one year from September 30, 2016 totaled $67.6 million. Management expects that a substantial portion of the maturing certificates of deposit will be renewed. However, if a substantial portion of these deposits is not retained, we may utilize Federal Home Loan Bank advances or raise interest rates on deposits to attract new accounts, which may result in higher levels of interest expense.
Off-Balance Sheet Arrangements. In the normal course of operations, we engage in a variety of financial transactions that, in accordance with U.S. generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments, lines of credit and standby letters of credit.
We have not engaged in any other off-balance-sheet transactions in the normal course of our lending activities.
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Management of Market Risk
Our asset/liability management strategy attempts to manage the impact of changes in interest rates on net interest income, our primary source of earnings.
Our Board of Directors is responsible for the review and oversight of our Asset/Liability Committee, which is comprised of our executive management team and other essential operational staff. This committee is charged with developing and implementing an asset/liability management plan, and meets at least quarterly to review pricing and liquidity needs and assess our interest rate risk. We currently utilize a third-party modeling program, prepared on a monthly basis, to evaluate our sensitivity to changing interest rates, given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the Board of Directors. In addition, we regularly perform a “gap analysis” of the discrepancy between the repricing of our assets and liabilities.
In order to monitor and manage interest rate risk, we use the economic value of equity at risk (“EVE”) methodology. This methodology calculates the difference between the market value, as measured by the present value of expected cash flows, of the Bank's assets and liabilities. The comparative scenarios assume immediate parallel shifts in the yield curve in increments of 100 basis point (bp) rate movements. A basis point equals one-hundredth of one percent, and 100 basis points equals one percent. An increase in interest rates from 3% to 4%

61



would mean, for example, a 100 basis point increase in the “Change in Interest Rates” column below. The model is run at least quarterly showing shocks from +300bp to -100bp, because a decline of greater than -100bp is currently highly unlikely in the current low interest rate environment. The Board of Directors and management review the methodology’s measurements on a quarterly basis.
The interest rate scenarios are used for analytical purposes and do not necessarily represent management’s view of future market movements. Results of the modeling are used to provide a measure of the degree of volatility interest rate movements may have in influencing our earnings. Modeling the sensitivity of earnings to interest rate risk is decidedly reliant on numerous assumptions embedded in the model. These assumptions include, but are not limited to, management’s best assessment of the effect of changing interest rates on the prepayment speeds of certain assets and liabilities, projections for account balances in each of the product lines offered and the historical behavior of deposit rates and balances in relation to changes in interest rates. These assumptions are inherently changeable, and as a result, the model is not expected to precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from the simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions. Assumptions are supported with annual back testing of the model to actual market rate shifts.
The table below sets forth, as of September 30, 2016, the estimated changes in EVE that would result from the designated changes in the United States Treasury yield curve under an instantaneous parallel shift for Westbury Bank. Computations of prospective effects of hypothetical interest rate changes are based on numerous assumptions including relative levels of market interest rates, loan prepayments and deposit decay, and should not be relied upon as indicative of actual results.
At September 30, 2016
 
 
 
 
Estimated Increase (Decrease) in EVE
 
EVE as Percentage of Economic Value of Assets(3)
Changes in Interest Rates (basis points) (1)
 
Estimated EVE(2)
 
Amount
 
Percent
 
EVE Ratio
 
Changes in Basis Points
 
 
(Dollars in thousands)
 
 
 
 
 
 
 
 
 
 
 
+300
 
$
104,584

 
$
12,808

 
13.96
 %
 
15.78
%
 
2.70
 %
+200
 
104,989

 
13,213

 
14.40

 
15.51

 
2.43

+100
 
102,540

 
10,764

 
11.73

 
14.83

 
1.75

0
 
91,776

 

 

 
13.08

 

-100
 
76,459

 
(15,317
)
 
(16.69
)
 
10.79

 
(2.29
)
                    
(1)
Assumes instantaneous parallel changes in interest rates.
(2)
EVE or Economic Value of Equity at Risk measures the Bank’s exposure to equity due to changes in a forecast interest rate environment.
(3)
EVE Ratio represents Economic Value of Equity divided by the economic value of assets which should translate into built in stability for future earnings.

The table above indicates that at September 30, 2016, in the event of an instantaneous parallel 100 basis point decrease in interest rates, we would experience a 16.69% decrease in EVE. In the event of an instantaneous 100 basis point increase in interest rates, we would experience a 11.73% increase in EVE.
Depending on the relationship between long-term and short-term interest rates, market conditions and consumer preference, we may place greater emphasis on maximizing our net interest margin than on strictly matching the interest rate sensitivity of our assets and liabilities. We believe that the increased net income which may result from an acceptable mismatch in the actual maturity or re-pricing of our assets and liabilities can, during periods of declining or stable interest rates, provide sufficient returns to justify an increased exposure to sudden and unexpected increases in interest rates. We believe that our level of interest rate risk is acceptable using this approach.

62



ITEM 8.
Financial Statements and Supplementary Data.
The Company’s Consolidated Financial Statements are presented in this Annual Report beginning on page F-1.
ITEM 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
ITEM 9A.
Controls and Procedures.
Evaluation of disclosure controls and procedures.    An evaluation was performed under the supervision and with the participation of the Company’s management, including the Principal Executive Officer and the Principal Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2016. Based upon that evaluation, the Company’s management, including the Principal Executive Officer and the Principal Financial Officer concluded that, as of September 30, 2016, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that the information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosures.
Changes in internal control over financial reporting.    There has been no change in the Company’s internal control over financial reporting during the Company’s fourth quarter of the fiscal year ended September 30, 2016 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Management's annual report on internal controls over financial reporting. The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s system of internal control over financial reporting is designed under the supervision of management, including our Chief Executive Officer and Chief Financial Officer, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles (“GAAP”) and necessarily include some amounts based on management's best estimates and judgments.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with GAAP, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections on any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate.
As of September 30, 2016, management assessed the effectiveness of the Company’s internal control over financial reporting based upon the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework of 2013. Based upon its assessment, management believes that the Company’s internal control over financial reporting as of September 30, 2016 is effective using these criteria. This annual report does not include an attestation report of the Company’s registered

63



public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit the Company (as a smaller reporting company) to provide only management’s report in this annual report.

ITEM 9B.
Other Information.
None.



    
64






Part III
ITEM 10.
Directors, Executive Officers and Corporate Governance.
Information in response to this item is incorporated herein by reference to "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance," "Code of Ethics," "Nominating and Corporate Governance Committee," and "Executive Officers" in the Company's definitive Proxy Statement for its Annual Meeting of Shareholders on February 15, 2017 ("the 2017 Annual Meeting Proxy Statement").
The Audit Committee of the Company's Board of Directors is an "audit committee" for purposes of Section 3(a)(58)(A) of the Securities Exchange Act of 1934. The members of the Audit Committee as of the date of filing this report with the Securities and Exchange Commission are four independent outside directors: James L. Mohr, Andrew J. Gumm, Rondi Rohr-Dralle and Terry Wendorff.
ITEM 11.
Executive Compensation.
Information in response to this item is incorporated by reference to "Compensation Committee," "Executive Officer Compensation," "Outstanding Equity Awards at Fiscal Year End," "Stock Benefit Plan," and "Director Compensation" in the 2017 Annual Meeting Proxy Statement.


ITEM 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information in response to this item is incorporated herein by reference to "Voting Securities and Principal Holders" in the 2017 Annual Meeting Proxy Statement.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of September 30, 2016 with respect to compensation plans under which shares of our common stock may be issued:
Plan Category
Number of Shares to be Issued upon Exercise of Outstanding Options, warrants and rights
Weighted Average Exercise Price of Outstanding Options, warrants and rights
Number of Shares Remaining Available for Future Issuance Under Equity Compensation Plans (Excluding Shares Reflected in the first column) (1)
Equity compensation plans approved by stockholders
474,132

$
16.46

33,595

Equity compensation plans not approved by stockholders
N/A

N/A

N/A

Total
474,132

$
16.46

33,595

(1) Includes unexercised options and unissued restricted shares.



ITEM 13.
Certain Relationships and Related Transactions, and Director Independence.

    
65




Information in response to this item is incorporated herein by reference to "Board and Committee Independence" and "Transactions With Certain Related Persons" in the 2017 Annual Meeting Proxy Statement.


ITEM 14.
Principal Accounting Fees and Services.
Information in response to this item is incorporated by reference to “Proposal II - Ratification of Appointment of Independent Registered Public Accounting Firm” in the 2017 Annual Meeting Proxy Statement.


    
66




PART IV
ITEM 15.
Exhibits and Financial Statement Schedules
(a)(1)
Financial Statements
The documents filed as a part of this Form 10-K are:
(A)
Report of Independent Registered Public Accounting Firm;
(B)
Consolidated Balance Sheets – September 30, 2016 and 2015;
(C)
Consolidated Statements of Operations for the years ended September 30, 2016 and 2015;
(D)
Consolidated Statements of Comprehensive Income for the years ended September 30, 2016 and 2015;
(E)
Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2016 and 2015;
(F)
Consolidated Statements of Cash Flows for the years ended September 30, 2016 and 2015; and
(G)
Notes to Consolidated Financial Statements.
(a)(2)
Financial Statement Schedules
All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements.

    
67





(a)(3)
Exhibits
3.1
Articles of Incorporation of Westbury Bancorp, Inc.*
3.2
Amended and Restated Bylaws of Westbury Bancorp, Inc.**
4
Form of Common Stock Certificate of Westbury Bancorp, Inc.*
10.1
Form of Employee Stock Ownership Plan*
10.2
Salary Continuation Agreement by and between Westbury Bank and Raymond F. Lipman****
10.3
Amended and Restated Salary Continuation Agreement by and between Westbury Bank and Kirk J. Emerich*****
10.4
Amended and Restated Employment Agreement between Westbury Bank and Raymond F. Lipman****
10.5
Employment Agreement between Westbury Bank and Kirk J. Emerich***
10.6
Amended and Restated Employment Agreement between Westbury Bank and Greg J. Remus****
10.7
Deferred Compensation Plan for Directors and Key Management Employees of Westbury Bank*
10.8
Split-Dollar Insurance Agreement between Westbury Bank and Greg J. Remus*****
21
Subsidiaries*
23
Consent of Independent Registered Public Accounting Firm
31.1
Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2016 and 2015, (ii) the Consolidated Statements of Operations for the years ended September 30, 2016 and 2015, (iii) the Consolidated Statements of Comprehensive Income for the years ended September 30, 2016 and 2015, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2016 and 2015, (v) the Consolidated Statements of Cash Flows for the years ended September 30, 2016 and 2015, and (vi) the notes to the Consolidated Financial Statements

                
*
Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-184594), initially filed October 25, 2012.
**
Incorporated by reference to the Annual Report on Form 10-K filed on December 9, 2014.
***
Incorporated by reference to the Current Report on Form 8-K filed on February 20, 2014.
****
Incorporated by reference to the Current Report on Form 8-K filed on August 26, 2015.
*****
Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2015.




    
68




EXHIBIT INDEX
3.1
Articles of Incorporation of Westbury Bancorp, Inc.*
3.2
Amended and Restated Bylaws of Westbury Bancorp, Inc.**
4
Form of Common Stock Certificate of Westbury Bancorp, Inc.*
10.1
Form of Employee Stock Ownership Plan*
10.2
Salary Continuation Agreement by and between Westbury Bank and Raymond F. Lipman*
10.3
Amended and Restated Salary Continuation Agreement by and between Westbury Bank and Kirk J. Emerich*****
10.4
Amended and Restated Employment Agreement by and between Westbury Bank and Raymond F. Lipman****
10.5
Employment Agreement between Westbury Bank and Kirk J. Emerich***
10.6
Amended and Restated Employment Agreement between Westbury Bank and Greg J. Remus****
10.7
Deferred Compensation Plan for Directors and Key Management Employees of Westbury Bank*
10.8
Split-Dollar Insurance Agreement between Westbury Bank and Greg J. Remus*****
21
Subsidiaries*
23
Consent of Independent Registered Public Accounting Firm
31.1
Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2
Certification required pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101
Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Balance Sheets as of September 30, 2016 and 2015, (ii) the Consolidated Statements of Operations for the years ended September 30, 2016 and 2015, (iii) the Consolidated Statements of Comprehensive Income for the years ended September 30, 2016 and 2015, (iv) the Consolidated Statements of Changes in Stockholders’ Equity for the years ended September 30, 2016 and 2015, (v) the Consolidated Statements of Cash Flows for the years ended September 30, 2016 and 2015, and (vi) the notes to the Consolidated Financial Statements

                
*
Incorporated by reference to the Registration Statement on Form S-1 (file no. 333-184594), initially filed October 25, 2012.
**
Incorporated by reference to the Annual Report on Form 10-K filed on December 9, 2014.
***
Incorporated by reference to the Current Report on Form 8-K filed on February 20, 2014.
****
Incorporated by reference to the Current Report on Form 8-K filed on August 26, 2015.
*****
Incorporated by reference to the Current Report on Form 8-K filed on December 23, 2015.





    
69




Signatures

Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
 
Westbury Bancorp, Inc.
 
 
 
 
 
 
 
 
By:
/s/ Greg J. Remus
Date:
December 2, 2016
 
 
Greg J. Remus
 
 
 
 
President and Chief Executive Officer
 
 
 
 
(Duly Authorized Representative)


Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


    
70




Signatures
 
Title
 
Date
/s/ Raymond F. Lipman
 
Chairman of the Board
 
December 2, 2016
Raymond F. Lipman
 
 
 
 
 
 
 
 
 
/s/ Greg J. Remus
 
President and Chief Executive Officer (Principal Executive Officer)
 
December 2, 2016
Greg J. Remus
 
 
 
 
 
 
 
 
 
/s/ Kirk J. Emerich
 
Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)
 
December 2, 2016
Kirk J. Emerich
 
 
 
 
 
 
 
 
 
/s/ Russell E. Brandt
 
Director
 
December 2, 2016
Russell E. Brandt
 
 
 
 
 
 
 
 
 
/s/ William D. Gehl
 
Director
 
December 2, 2016
William D. Gehl
 
 
 
 
 
 
 
 
 
/s/ Andrew J. Gumm
 
Director
 
December 2, 2016
Andrew J. Gumm
 
 
 
 
 
 
 
 
 
/s/ David Jorgensen
 
Director
 
December 2, 2016
David Jorgensen
 
 
 
 
 
 
 
 
 
/s/ James L. Mohr
 
Director
 
December 2, 2016
James L. Mohr
 
 
 
 
 
 
 
 
 
/s/ Rondi Rohr-Dralle
 
Director
 
December 2, 2016
Rondi Rohr-Dralle
 
 
 
 
 
 
 
 
 
/s/ James A. Spella
 
Director
 
December 2, 2016
James A. Spella
 
 
 
 
 
 
 
 
 
/s/ Terry Wendorff
 
Director
 
December 2, 2016
Terry Wendorff
 
 
 
 
 
 
 
 
 

    
71




Contents

Report of Independent Registered Public Accounting Firm
F-2
Financial Statements
 
Consolidated balance sheets
F-3
Consolidated statements of operations
F-4
Consolidated statements of comprehensive income
F-5
Consolidated statements of changes in stockholders' equity
F-6
Consolidated statements of cash flows
F-7
Notes to consolidated financial statements
F-9


    
F- 1




Report of Independent Registered Public Accounting Firm


To the Board of Directors and Stockholders
Westbury Bancorp, Inc. and Subsidiary



We have audited the accompanying consolidated balance sheets of Westbury Bancorp, Inc. and Subsidiary as of September 30, 2016 and 2015, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Westbury Bancorp, Inc. and Subsidiary as of September 30, 2016 and 2015, and the results of their operations and their cash flows for the years then ended, in conformity with U.S. generally accepted accounting principles.



/s/ RSM US LLP
Milwaukee, Wisconsin
December 2, 2016

    
F- 2




Westbury Bancorp, Inc. and Subsidiary

Consolidated Balance Sheets
September 30, 2016 and 2015
(Dollars in Thousands, except per share data)
 
 
September 30, 2016
 
September 30, 2015
Assets
 
 
 
 
Cash and due from banks
 
$
19,125

 
$
9,963

Interest-earning deposits
 
10,488

 
6,525

Cash and cash equivalents
 
29,613

 
16,488

 
 
 
 
 
Securities available-for-sale
 
93,772

 
80,286

Securities held to maturity, at amortized cost ($2,392 and $2,490 fair value at September 30, 2016 and 2015, respectively)
 
2,293

 
2,459

Loans held for sale, at lower of cost or fair value
 
1,881

 
431

Loans, net of allowance for loan losses of $5,244 and $4,598 at September 30, 2016 and 2015, respectively
 
533,759

 
493,425

Federal Home Loan Bank stock, at cost
 
1,330

 
3,350

Foreclosed real estate
 
99

 
283

Real estate held for investment
 

 
2,047

Real estate held for sale
 

 
882

Office properties and equipment, net
 
15,410

 
13,867

Cash surrender value of life insurance
 
14,233

 
13,167

Mortgage servicing rights
 
800

 
1,210

Deferred taxes
 
5,425

 
7,546

Other assets
 
4,010

 
3,488

 
 
 
 
 
Total assets
 
$
702,625

 
$
638,929

 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
Liabilities
 
 
 
 
Deposits
 
$
591,977

 
$
531,020

Short-term advances from Federal Home Loan Bank
 

 
18,000

Long-term advances from Federal Home Loan Bank
 
20,000

 

Advance payments by borrowers for property taxes and insurance
 
5,455

 
5,382

Other liabilities
 
5,564

 
5,715

Total liabilities
 
622,996

 
560,117

Commitments and Contingencies (Notes 7, 8, 11, 16, 18 and 19)
 
 
 

 
 
 
 
 
Stockholders' Equity
 
 
 
 
Preferred stock $0.01 par value, 50,000,000 shares authorized; none issued or outstanding
 

 

Common stock $0.01 par value, 100,000,000 shares authorized; 5,347,641 and 5,341,114 shares issued at September 30, 2016 and 2015, respectively
 
54

 
53

Additional paid-in capital
 
51,463

 
50,145

Retained earnings
 
52,185

 
48,714

Unearned Employee Stock Ownership Plan (ESOP) shares
 
(3,188
)
 
(3,548
)
Accumulated other comprehensive income
 
561

 
352

Less common stock repurchased, 1,249,123 and 1,012,109 shares at cost, at September 30, 2016 and 2015, respectively
 
(21,446
)
 
(16,904
)
Total stockholders' equity
 
79,629

 
78,812

 
 
 
 
 
Total liabilities and stockholders' equity
 
$
702,625

 
$
638,929


See Notes to Consolidated Financial Statements.

    
F- 3




Westbury Bancorp, Inc. and Subsidiary

Consolidated Statements of Operations
Years Ended September 30, 2016 and 2015
(Dollars in Thousands, except per share data)
 
 
2016
 
2015
Interest and dividend income:
 
 
 
 
Loans
 
$
20,914

 
$
19,058

Investments - nontaxable
 
205

 
112

Investments - taxable
 
1,691

 
1,544

Interest bearing deposits
 
134

 
66

Total interest and dividend income
 
22,944

 
20,780

Interest expense:
 
 
 
 
Deposits
 
2,368

 
1,922

Short-term advances from the Federal Home Loan Bank
 
49

 
37

Long-term advances from the Federal Home Loan Bank
 
185

 

Total interest expense
 
2,602

 
1,959

Net interest income before provision for loan losses
 
20,342

 
18,821

Provision for loan losses
 
775

 
950

Net interest income after provision for loan losses
 
19,567

 
17,871

Non-interest income:
 
 
 
 
Service fees on deposit accounts
 
3,984

 
4,302

Gain on sales of loans, net
 
779

 
448

Servicing fee income, net of amortization and impairment
 
(34
)
 
70

Insurance and securities sales commissions
 
229

 
296

Gain on sales of securities
 
557

 
96

Gain on sales of branches and other assets
 
1

 
7

Increase in cash surrender value of life insurance
 
429

 
424

Rental income from real estate operations
 
433

 
911

Other income
 
143

 
170

Total non-interest income
 
6,521

 
6,724

Non-interest expense:
 
 
 
 
Salaries and employee benefits
 
10,361

 
9,862

Commissions
 
204

 
263

Occupancy
 
1,264

 
1,331

Furniture and equipment
 
500

 
480

Data processing
 
3,090

 
3,219

Advertising
 
187

 
196

Real estate held for investment
 
358

 
440

Net loss from operations and sale of foreclosed real estate
 
8

 
818

FDIC insurance premiums
 
410

 
419

Valuation loss on real estate held for sale
 
276

 
975

Branch realignment
 

 
251

Buyout of service contract
 

 
350

Other expenses
 
3,973

 
4,369

Total non-interest expense
 
20,631

 
22,973

Income before income tax expense (benefit)
 
5,457

 
1,622

Income tax expense (benefit)
 
1,986

 
(1,902
)
Net income
 
$
3,471

 
$
3,524

Earnings per share:
 
 
 
 
   Basic
 
0.94

 
0.85

   Diluted
 
0.93

 
0.85


See Notes to Consolidated Financial Statements.

    
F- 4




Westbury Bancorp, Inc. and Subsidiary

Consolidated Statements of Comprehensive Income
Years Ended September 30, 2016 and 2015
(Dollars in Thousands)

 
 
2016
 
2015
Net income
 
$
3,471

 
$
3,524

 
 
 
 
 
Other comprehensive income, before tax:
 
 
 
 
Unrealized gains on available-for-sale securities
 
900

 
752

Reclassification adjustment for realized gains included in net income
 
(557
)
 
(96
)
Other comprehensive income, before tax
 
343

 
656

 Income tax expense related to items of other comprehensive income
 
(134
)
 
(258
)
Other comprehensive income, net of tax
 
209

 
398

Comprehensive income
 
$
3,680

 
$
3,922


See Notes to Consolidated Financial Statements.


    
F- 5




Westbury Bancorp, Inc. and Subsidiary

Consolidated Statements of Changes in Stockholders' Equity
Years Ended September 30, 2016 and 2015
(Dollars in Thousands, except per share data)
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Unearned
ESOP
Shares
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common Stock Repurchased
 
Total
Balance, September 30, 2014
 
$

 
$
53

 
$
49,164

 
$
45,190

 
$
(3,754
)
 
$
(46
)
 
$
(4,120
)
 
$
86,487

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 

 

 

 
3,524

 

 

 

 
3,524

Other comprehensive income, net of tax
 

 

 

 

 

 
398

 

 
398

Repurchase of 740,813 shares of common stock
 

 

 

 

 

 

 
(12,784
)
 
(12,784
)
Stock based compensation expense
 

 

 
809

 

 

 

 

 
809

Allocation, or commitment to be allocated, of 20,570 shares by ESOP
 

 

 
172

 

 
206

 

 

 
378

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2015
 
$

 
$
53

 
$
50,145

 
$
48,714

 
$
(3,548
)
 
$
352

 
(16,904
)
 
$
78,812

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
$

 
$

 
$

 
$
3,471

 
$

 
$

 
$

 
$
3,471

Other comprehensive income, net of tax
 

 

 

 

 

 
209

 

 
209

Repurchase of 237,014 shares of common stock
 

 

 

 

 

 

 
(4,542
)
 
(4,542
)
Exercise of 10,193 stock options
 

 
1

 
154

 

 

 

 

 
155

Stock based compensation expense
 

 

 
839

 

 

 

 

 
839

Allocation, or commitment to be allocated, of 35,997 shares by ESOP
 

 

 
325

 

 
360

 

 

 
685

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, September 30, 2016
 
$

 
$
54

 
$
51,463

 
$
52,185

 
$
(3,188
)
 
$
561

 
$
(21,446
)
 
$
79,629


See Notes to Consolidated Financial Statements.

    
F- 6




Westbury Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 2016 and 2015
(Dollars in Thousands)
 
 
2016
 
2015
Cash Flows From Operating Activities
 
 
 
 
Net income
 
$
3,471

 
$
3,524

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Provision for loan losses
 
775

 
950

Depreciation and amortization
 
766

 
668

Depreciation on real estate held for investment
 
78

 
125

Net amortization of securities premiums and discounts
 
508

 
497

Amortization and impairment of mortgage servicing rights
 
410

 
416

Capitalization of mortgage servicing rights
 

 
(2
)
Gain on sales of available-for-sale securities
 
(557
)
 
(96
)
Gain on sales of branches and other assets
 
(1
)
 
(7
)
Write-down of real estate held-for-sale
 
276

 
975

(Gain) loss on sale of foreclosed real estate
 
(28
)
 
17

Write-down of foreclosed real estate
 
26

 
609

Loans originated for sale
 
(49,818
)
 
(29,283
)
Proceeds from sale of loans
 
49,147

 
29,626

Gain on sale of loans, net
 
(779
)
 
(448
)
ESOP compensation expense
 
685

 
378

Stock based compensation expense
 
839

 
809

Deferred income taxes
 
1,987

 
(2,102
)
Increase in cash surrender value of life insurance
 
(429
)
 
(424
)
Net change in:
 
 
 
 
Other assets
 
(521
)
 
22

Other liabilities and advance payments by borrowers for property taxes and insurance
 
(78
)
 
867

Net cash provided by operating activities
 
6,757

 
7,121

 
 
 
 
 
Cash Flows From Investing Activities
 
 
 
 
Purchases of securities available-for-sale
 
(61,065
)
 
(28,454
)
Proceeds from sales of securities available-for-sale
 
35,980

 
27,687

Proceeds from maturities, prepayments, and calls of securities available-for-sale
 
11,991

 
11,082

Purchase of securities held-to-maturity
 

 
(3,025
)
Proceeds from maturities, prepayments, and calls of securities held-to-maturity
 
166

 
566

Proceeds from real estate held for investment
 
185

 

Purchase of real estate held for investment
 
(18
)
 
(19
)
Purchase of FHLB stock
 
(29
)
 
(680
)
Redemption of FHLB stock
 
2,049

 

Net increase in loans
 
(41,279
)
 
(78,020
)
Purchase of bank-owned life insurance
 
(637
)
 

Purchases of office properties and equipment
 
(507
)
 
(3,651
)
Proceeds from sales of real estate held-for-sale
 
606

 

Proceeds from sales of foreclosed real estate
 
356

 
1,965

Net cash used in investing activities
 
(52,202
)
 
(72,549
)



    
F- 7




Westbury Bancorp, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Years Ended September 30, 2016 and 2015
(Dollars in Thousands)
Continued

 
 
2016
 
2015
Cash Flows From Financing Activities
 
 
 
 
Net increase in deposits
 
60,957

 
76,092

Proceeds from long-term Federal Home Loan Bank advances
 
20,000

 

Net proceeds (repayment) of short-term Federal Home Loan Bank advances
 
(18,000
)
 
1,000

Proceeds from exercise of stock options
 
155

 

Repurchase of common stock
 
(4,542
)
 
(12,784
)
Net cash provided by financing activities
 
58,570

 
64,308

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
13,125

 
(1,120
)
 
 
 
 
 
Cash and cash equivalents at beginning
 
16,488

 
17,608

 
 
 
 
 
Cash and cash equivalents at end
 
$
29,613

 
$
16,488

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 
 
 
Interest paid (including amounts credited to deposits)
 
$
2,602

 
$
1,957

 
 
 
 
 
Supplemental Schedules of Noncash Operating and Investing Activities
 
 
 
 
Loans receivable transferred to foreclosed real estate
 
$
170

 
$
519

Real estate held for investment transferred to real estate held for sale
 

 
1,610

Office properties and equipment transferred to real estate held for sale
 

 
247

Real estate held for investment transferred to office properties and equipment
 
1,802

 

See Notes to Consolidated Financial Statements.

    
F- 8


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Note 1.Nature of Operations and Summary of Significant Accounting Policies

Nature of operations: Westbury Bancorp, Inc. (the "Company") is a Maryland savings and loan holding company headquartered in West Bend, Wisconsin and provides a variety of financial services to individuals and small businesses throughout Southeastern Wisconsin. The Company owns 100% of the stock of Westbury Bank (the "Bank"). The Bank's primary deposit products are checking, savings, money market and term certificate accounts and its primary lending products are consumer, commercial and residential mortgage loans. The Bank is subject to competition from other financial institutions and non-financial institutions providing financial products. Additionally, the Company and the Bank are subject to the regulations of certain regulatory agencies and undergo periodic examination by those regulatory agencies.

Organization and principles of consolidation:  The consolidated financial statements include the accounts of the Company and the Bank.  The financial statements of the Bank include the accounts of its wholly-owned subsidiary, CRH, Inc., a Wisconsin real estate holding company. CRH was dissolved during the year ended September 30, 2016. The financial statements of the Bank also include one wholly-owned limited liability company (LLC) formed to own certain of the Bank’s foreclosed properties. All significant intercompany balances and transactions have been eliminated in consolidation.

Jumpstart Our Business Startups Act: The Jumpstart Our Business Startups Act (the JOBS Act), which was signed into law on April 5, 2012, has made numerous changes to the federal securities laws to facilitate access to capital markets. Under the JOBS Act, a company with total annual gross revenues of less than $1.0 billion during its most recently completed fiscal year qualifies as an “emerging growth company.” The Company qualifies as an “emerging growth company” and believes that it will continue to qualify as an “emerging growth company” until five years from the completion of the stock offering, which occurred on April 9, 2013.

As an “emerging growth company,” the Company has elected to use the extended transition period to delay adoption of new or revised accounting pronouncements applicable to public companies until such pronouncements are made applicable to private companies. Accordingly, the financial statements may not be comparable to the financial statements of companies that comply with such new or revised accounting standards.

Use of estimates: In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America (U.S. GAAP), management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.

Cash and cash equivalents: For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, due from banks, and interest-bearing deposits.

The Company maintains amounts due from banks that, at times, may exceed federally insured limits. Management monitors these correspondent relationships and has historically experienced no losses. Accordingly, in the opinion of management, no material risk of loss exists.

Securities: Unless classified as "held-to-maturity", all securities are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income, net of the related deferred tax effect. Securities are classified as "held-to-maturity" and recorded at amortized cost when management has the ability and intent to hold the securities to maturity.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of individual available-for-sale securities below their amortized cost basis that are deemed to be other-than-temporary impairment losses are reflected as realized losses. In determining whether an other-than-temporary impairment exists, management considers many factors including (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent or requirement of the Company to sell its investment in the issuer prior to any anticipated recovery in fair value.


    
F- 9


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


If the Company intends to sell an impaired security, it records an other-than-temporary loss in an amount equal to the entire difference between the fair value and amortized cost of the security. If a security is determined to be other-than-temporarily impaired, but the Company does not intend to sell the security, only the credit portion of the estimated loss is recognized in earnings, with the other portion of the loss recognized in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of principal cash flows not expected to be received over the remaining term of the security as estimated based on cash flow projections discounted at the applicable original yield of the security.

Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Loans held for sale: Loans held for sale are recorded at the lower of cost or fair value as determined on an aggregate basis. Fees received from the borrower and the direct costs of loan originations are deferred and recorded as an adjustment to the sales price, when such loans are sold.

Loans: The Company grants commercial, mortgage and consumer loans to customers principally located in Southeastern Wisconsin. The ability of the Company’s loan customers to meet the terms of their loans is dependent upon the general economic conditions in this area and real estate values.
 
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and deferred loan fees or costs on an originated basis. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees and certain direct loan origination costs on loans receivable are deferred, and the net amounts amortized as an adjustment of the related loan’s yield. These amounts are amortized, using the level-yield method, over the contractual life of the related loans. Unamortized deferred amounts are included in interest income upon repayment or sale of the related loan.

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

Allowance for loan losses: For all portfolio segments, the allowance for loan losses is maintained at the level considered adequate by management of the Company to provide for losses that are probable. The allowance is increased by provisions charged to operating expense and reduced by net charge-offs. In determining the adequacy of the allowance balance, the Company makes continuous evaluations of the loan portfolio and related off-balance sheet commitments, considers current economic conditions and historical loss experience, and reviews specific problem loans and other factors.

When establishing the allowance for loan losses, management categorizes loans into risk categories generally based on the nature of the collateral and the basis of repayment. These risk categories and their relevant risk characteristics are as follows:

Single family: Single family loans are real estate loans generally smaller in size and are homogeneous because they exhibit similar characteristics. Single family loans are underwritten by evaluating the credit history of the borrower, the ability of the borrower to meet the debt service requirements of the loan and total debt obligations, as well as the underlying collateral and the loan to collateral value. Also included in this category are junior liens on 1-4 family residential properties. These loans consist of closed-end loans secured by junior liens on 1-4 family residential properties. Underwriting standards for single family loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements.

Construction and land development: These loans are secured by vacant land and/or property that are in the process of improvement, including (a) land development preparatory to erecting vertical improvements or (b) the on-site construction of industrial, commercial, residential, or farm buildings. Repayment of these loans can be dependent on the sale of the property to third parties or the successful completion of the improvements by the builder for the end user. For purposes of this classification, “construction” includes not only construction of new structures, but any loans originated to finance additions or alterations to existing structures and the demolition of existing structures to make way for new structures. Until a permanent

    
F- 10


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


loan originates, or payoff occurs, all construction loans secured by real estate are reported in this loan pool. Loans to finance construction and land development that are not secured by real estate are segmented and reported separate from this pool. In the event a loan is made on property that is not yet improved for the planned development, there is the risk that necessary approvals will not be granted or will be delayed. Construction loans also run the risk that improvements will not be completed on time or in accordance with specifications and projected costs.

Commercial business: Commercial business loans are extended primarily to middle market customers.  Such credits typically comprise working capital loans, loans for physical asset expansion, asset acquisition loans and other business loans. Loans to closely held businesses will generally be guaranteed in full or for a meaningful amount by the owners of the business. Commercial business loans are made based primarily on the historical and projected cash flow of the borrower and secondarily on the underlying collateral provided by the borrower.  The cash flows of borrowers, however, may not behave as forecasted and collateral securing loans may fluctuate in value due to economic or individual performance factors.  Minimum standards and underwriting guidelines have been established for all commercial and industrial loan types.

Multifamily: Multifamily loans include loans to finance non-farm properties with five or more units in structures primarily to accommodate households on a temporary or permanent basis. Such credits are typically originated to finance the acquisition of an apartment or condo building/complex. Multifamily loans are made based primarily on the historical and projected cash flow of the subject multifamily property, with assumptions made for vacancy rates. Cash flows and ultimate loan performance rely on the receipt of rental income from the tenants of the property who are themselves subject to fluctuations in national and local economic and unemployment trends.

Commercial real estate: These loans are primarily secured by office and industrial buildings, warehouses, small retail shopping facilities and various special purpose properties, including hotels and restaurants.  These loans are subject to underwriting standards and processes similar to commercial business loans.  These loans are viewed primarily as cash flow loans and the repayment of these loans is largely dependent on the successful operation of the property.  Loan performance may be adversely affected by factors impacting the general economy or conditions specific to the real estate market such as geographic location and/or property type.

Consumer and other: These loans may take the form of installment loans, demand loans, or single payment loans, and are extended to individuals for household, family, and other personal expenditures. These loans generally include direct consumer automobile loans extended by the Company for the purpose of purchasing a new or used vehicle for personal use. Consumer and installment loans are underwritten by evaluating the credit history of the borrower and the ability of the borrower to meet the debt service requirements of the loan and total debt obligations. Also included in this category are home equity lines of credit. These loans consist of revolving open-end lines of credit secured by 1-4 family residential properties extended to individuals for household, family or other personal expenditures. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, loan-to-value and affordability ratios, risk-based pricing strategies, and documentation requirements.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. In addition, regulatory agencies, as an integral part of their examination processes, periodically review the Company’s allowance for loan losses, and may require the Company to recognize adjustments to its allowance based on their judgments of information available to them at the time of their examinations.

The allowance consists of specific and general components. The specific component relates to loans that are classified as impaired, and an allowance is established when the collateral value, discounted cash flows or observable market price of the impaired loan are lower than the carrying value of that loan. The general component covers non-impaired loans and is based on the Company’s own loss experience over the most recent twenty quarters, adjusted for qualitative factors. These qualitative factors consider local economic trends, concentrations, management experience and other elements of the Company’s lending operations.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining the impairment include payment status, collateral value, and the probability

    
F- 11


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.

Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either the fair value of collateral, if the loan is collateral dependent, the present value of expected future cash flows discounted at the loan’s effective interest rate, or the loan’s obtainable market price.

Single family and consumer and other loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual homogeneous loans for impairment disclosures, unless such loans are the subject of a restructuring agreement due to the financial difficulties of the borrower, the loans are related with another commercial type loan or the loans experience significant payment delinquencies and are not insured.

Troubled debt restructurings: Loans are accounted for as troubled debt restructurings when a borrower is experiencing financial difficulties that lead to a restructuring of the loan, and the Company grants a “concession” to the borrower that they would not otherwise consider. These concessions include a modification of terms such as a reduction of the stated interest rate or loan balance, a reduction of accrued interest, an extension of the maturity date at an interest rate lower than a current market rate for a new loan with similar risk, or some combination thereof to facilitate repayment.

Troubled debt restructurings are classified as impaired loans. Payment performance prior and subsequent to the restructuring is taken into account in assessing whether it is likely that the borrower can meet the new terms. A period of sustained repayment, for at least six months, is generally required for return to accrual status. This may result in the loan being returned to accrual status at the time of restructuring. A loan that is modified at a market rate of interest will not be classified as a troubled debt restructuring or impaired in the calendar year subsequent to the restructuring if it is in compliance with the modified terms.

Federal Home Loan Bank stock: Federal Home Loan Bank (FHLB) stock consists of the Company’s required investment in the capital stock of the FHLB. No ready market exists for these securities and they have no quoted market value; as such the stock is carried at cost. Management reviews FHLB stock for impairment based on the ultimate recoverability of the cost basis in the FHLB stock, and no impairment has been identified as a result of these reviews.

Foreclosed real estate: Real estate acquired by foreclosure or by deed in lieu of foreclosure is initially recorded at fair value less cost to sell at the date of foreclosure, establishing a new cost basis. Costs relating to the development and improvement of property are capitalized; holding costs are charged to expense. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of their carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation allowance are included in net expenses from foreclosed real estate.

Real estate held for investment/sale: Real estate held for investment consists of rental properties. Rental properties are carried at the lower of cost less provisions for depreciation computed by the straight-line method over the estimated life of the property, or fair value less costs to sell. Rental revenue is recognized on a straight-line basis over the term of the lease unless another systemic and rational basis is more representative of the time pattern in which the use benefit is derived from the leased property. The difference between rental income earned on a straight-line basis and the cash rent due under provisions of the lease agreements is recorded as deferred rent receivable and is included as a component of other assets in the accompanying consolidated balance sheets.

A property is considered held for sale when a contract for sale is entered into or when management has committed to a plan to sell an asset, the asset is actively marketed, and sale is expected to occur within one year. Property reported as held for sale is reported at the lower of the carrying amount or fair value less costs to sell and is not depreciated.

The Company evaluates the carrying value of all real estate held when an indicator of impairment is deemed to exist. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount which the carrying amount of the asset exceeds the fair value of the asset.


    
F- 12


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


Office properties and equipment: Office properties including equipment are stated at cost less accumulated depreciation, and include expenditures for new facilities and items that substantially increase the useful lives of existing buildings and equipment. Expenditures for normal repairs and maintenance are charged to expense as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts and the resulting gain or loss is recorded.

Cash surrender value of life insurance: The Company has purchased bank-owned life insurance policies on certain executives. Bank-owned life insurance is recorded at its cash surrender value. Changes in the cash surrender values are included in non-interest income.

Mortgage servicing rights: Mortgage servicing rights (MSRs) are initially recognized at fair value when loans have been sold to investors and are amortized over the lives of the loans. Upon sale of loans with servicing retained, the servicing rights are recorded at fair value and remaining proceeds received are allocated to the loan. Amortization of MSRs is based on the ratio of net servicing income received in the current period, to total remaining net servicing income projected to be realized from the MSRs. MSRs are periodically assessed for impairment, which is calculated using estimated net cash flow analysis on a discounted basis. Impairment is recognized in the statement of income, during the period in which it occurs, as an adjustment to the corresponding valuation allowance. For purposes of performing an impairment evaluation, the serviced loan portfolio is stratified on the basis of certain risk characteristics including loan type (i.e., fixed or adjustable interest rates).

Transfers of financial assets: Transfers of financial assets are accounted for as sales only when the control over the financial assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of the right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity or the ability to unilaterally cause the holder to return specific assets.

Employee stock ownership plan: The Company has an employee stock ownership plan (ESOP) covering substantially all employees. The cost of shares issued to the ESOP but not yet allocated to participants is presented in the consolidated balance sheets as a reduction of stockholders' equity. Compensation expense is recorded based on the market price of the shares as they are committed to be released for allocation to participant accounts.

Stock-based compensation: The Company accounts for its equity awards in accordance with ASC Topic 718.  ASC Topic 718 requires public companies to recognize compensation expense related to stock-based equity awards in their income statements.  See Note 14 below for more information. 

Income taxes: The Company, the Bank, and its subsidiaries file consolidated federal income tax returns and combined state income tax returns. Accordingly, amounts equal to tax benefits of those companies having taxable federal losses or credits are reimbursed by the other companies that incur tax liabilities.

Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates as of the date of enactment.

The Company accounts for uncertainty in income taxes to determine whether tax benefits claimed or expected to be claimed on a tax return, should be recorded in the consolidated financial statements. The Company may recognize the tax benefit for an uncertain tax position if it is more-likely-than-not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being utilized upon ultimate settlement.

It is the Company’s policy that interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of operations.


    
F- 13


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


Derivative financial instruments and hedging activities: All derivatives are recognized in the consolidated balance sheets at their fair value. Derivative contracts are maintained related to commitments to fund residential mortgages (interest rate locks) in connection with residential mortgages intended for sale. Such commitments are recorded at fair value in other assets or liabilities, with changes in fair value recorded in net gain or loss on sale of mortgage loans. Fair value is based on fees currently charged to enter into similar agreements, and for fixed rate commitments, also considers the committed rates and current levels of interest rates. Derivative contracts are also maintained related to certificates of deposit, for which changes in the fair value of the derivative are recorded in earnings.

Comprehensive income: Comprehensive income consists of net income and other comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available-for-sale, which are also recognized as separate components of equity.

Reclassification: Certain amounts in the 2015 consolidated financial statements have been reclassified to conform to the 2016 presentation. These reclassifications had no effect on net income or stockholders' equity.

Segment reporting: The Company views the Bank as one operating segment, therefore, separate reporting of financial segment information is not considered necessary. The Company approaches the Bank and its other subsidiaries as one business enterprise, which operates in a single economic environment, since the products and services, types of customers and regulatory environment all have similar characteristics.

Recent accounting pronouncements: In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 is intended to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2018 and interim periods within annual periods beginning after December 15, 2019. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

In August 2014, the FASB issued ASU 2014-14, Receivables - Troubled Debt Restructuring by Creditors (Topic 310) - Classification of Certain Government-Guaranteed Mortgage Loans Upon Foreclosure. ASU 2014-14 is intended to clarify the accounting for and improve the consistency of balance sheet classification of certain foreclosed mortgage loans that are either fully or partially guaranteed under government programs. Greater consistency in classification of such mortgage loans upon foreclosure is expected to provide more decision-useful information about a creditor's foreclosed mortgage loans that are expected to be recovered, at least in part, through government guarantees. ASU 2014-14 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10) - Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 is intended to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. ASU 2016-01 is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods beginning after December 15, 2019. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 is intended to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. ASU 2016-02 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company is evaluating the potential impact of ASU 2016-02 on the consolidated financial statements and related disclosures.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). ASU 2016-09 is intended to simplify the accounting for share-based payment transactions, including income tax consequences, classification of awards as either assets or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017 and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. Adoption by the Company is not expected to have a material impact on the consolidated financial statements and related disclosures.



    
F- 14


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326). ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity. ASU 2016-13 replaces the "incurred loss impairment methodology" with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. ASU 2016-13 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company is evaluating the potential impact of ASU 2016-13 on the consolidated financial statements and related disclosures.

Note 2.    Cash and Due from Banks

The Bank is required to maintain average balances on hand or with the Federal Reserve Bank, based upon a percentage of certain deposits. These required reserve balances totaled approximately $13,552 and $12,038 at September 30, 2016 and 2015, respectively.

    
F- 15


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    




Note 3.    Investment Securities

The amortized costs and fair values of securities available-for-sale are summarized as follows:


 
September 30, 2016
 
 
Gross
Gross
 
 
Amortized
Unrealized
Unrealized
Fair
 
Cost
Gains
Losses
Value
 
 
Available for Sale
 
 
 
 
 U.S. Government and agency securities
$
24

$
1

$

$
25

 U.S. Government agency residential mortgage-backed securities
40,289

504

(43
)
40,750

 U.S. Government agency collateralized mortgage obligations
2,674

24

(18
)
2,680

 U.S. Government agency commercial mortgage-backed securities
11,376

150


11,526

 Municipal securities-tax exempt
25,730

51

(99
)
25,682

 Municipal securities-taxable
12,756

358

(5
)
13,109

 Corporate securities




      Total Available for Sale
92,849

1,088

(165
)
93,772

Held to Maturity
 
 
 
 
Municipal securities-tax exempt
2,293

99


2,392

      Total Investment Securities
$
95,142

$
1,187

$
(165
)
$
96,164

 
 
 
 
 
 
September 30, 2015
 
 
Gross
Gross
 
 
Amortized
Unrealized
Unrealized
Fair
 
Cost
Gains
Losses
Value
 
 
Available for Sale
 
 
 
 
 U.S. Government and agency securities
$
24

$
1

$

$
25

 U.S. Government agency residential mortgage-backed securities
39,380

456

(144
)
39,692

 U.S. Government agency collateralized mortgage obligations
1,963

18

(40
)
1,941

 U.S. Government agency commercial mortgage-backed securities
13,993

121

(15
)
14,099

 Municipal securities-tax exempt
2,209

7

(15
)
2,201

 Municipal securities-taxable
19,285

215

(34
)
19,466

 Corporate securities
2,852

12

(2
)
2,862

      Total Available for Sale
79,706

830

(250
)
80,286

Held to Maturity
 
 
 
 
Municipal securities-tax exempt
2,459

31


2,490

      Total Investment Securities
$
82,165

$
861

$
(250
)
$
82,776



    
F- 16


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The amortized cost and fair value of investment securities, by contractual maturity at September 30, 2016, are shown in the following table. Actual maturities differ from contractual maturities for mortgage-backed securities and collateralized mortgage obligations because the mortgages underlying the securities may be called or repaid without penalty. Therefore, these securities are not presented in the maturity categories in the table below.

 
September 30, 2016
 
Amortized Cost
Fair Value
 
 
Available for sale:
 
 
Due in one year or less
$
85

$
85

Due after one year through five years
10,129

10,257

Due after five years through ten years
22,087

22,269

Due after ten years
6,209

6,205

U.S. Government agency collateralized mortgage obligations
2,674

2,680

U.S. Government agency residential mortgage-backed securities
40,289

40,750

U.S. Government agency commercial mortgage-backed securities
11,376

11,526

 
$
92,849

$
93,772

Held to maturity:
 
 
Due in one year or less
$
168

$
168

Due after one year through five years
703

716

Due after five years through ten years
982

1,039

Due after ten years
440

469

 
2,293

2,392

Total
$
95,142

$
96,164


Proceeds from sales of securities available-for-sale during the years ended September 30, 2016 and 2015 were $35,980 and $27,687, respectively. Gross realized gains, during the years ended September 30, 2016 and 2015, on these sales amounted to $570 and $174, respectively. Gross realized losses on these sales were $13 and $78 during the years ended September 30, 2016 and 2015, respectively.

Securities with carrying values of $24,364 and $2,929 at September 30, 2016 and September 30, 2015, respectively, were pledged for purposes required or permitted by law.

    
F- 17


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Information pertaining to securities with gross unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are summarized as follows:

 
September 30, 2016
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Unrealized
 
Fair
Unrealized
 
Fair
Unrealized
 
Value
Loss
 
Value
Loss
 
Value
Loss
U.S. Government and agency securities
$

$

 
$

$

 
$

$

U.S. Government agency residential mortgage-backed securities
2,726

(5
)
 
3,020

(38
)
 
5,746

(43
)
U.S. Government agency collateralized mortgage obligations


 
576

(18
)
 
576

(18
)
U.S. Government agency commercial mortgage-backed securities


 


 


 Municipal securities-tax exempt
18,314

(99
)
 


 
18,314

(99
)
 Municipal securities-taxable
550

(5
)
 


 
550

(5
)
 Corporate securities


 


 


 
$
21,590

$
(109
)
 
$
3,596

$
(56
)
 
$
25,186

$
(165
)
 
 
 
 
 
 
 
 
 
 
September 30, 2015
 
Less than 12 Months
 
12 Months or Longer
 
Total
 
Fair
Unrealized
 
Fair
Unrealized
 
Fair
Unrealized
 
Value
Loss
 
Value
Loss
 
Value
Loss
U.S. Government and agency securities
$

$

 
$

$

 
$

$

U.S. Government agency residential mortgage-backed securities
7,270

(59
)
 
6,168

(85
)
 
13,438

(144
)
U.S. Government agency collateralized mortgage obligations


 
627

(40
)
 
627

(40
)
U.S. Government agency commercial mortgage-backed securities
3,511

(15
)
 


 
3,511

(15
)
 Municipal securities-tax exempt
1,027

(15
)
 


 
1,027

(15
)
 Municipal securities-taxable
2,634

(30
)
 
151

(4
)
 
2,785

(34
)
 Corporate securities
510

(2
)
 


 
510

(2
)
 
$
14,952

$
(121
)
 
$
6,946

$
(129
)
 
$
21,898

$
(250
)

At September 30, 2016, the investment portfolio included 5 securities available-for-sale which had been in unrealized loss positions for greater than twelve months and 58 securities which had been in unrealized loss positions for less than twelve months. At September 30, 2015, the investment portfolio included 9 securities available-for-sale which had been in unrealized loss positions for greater than twelve months and 22 securities which had been in unrealized loss positions for less than twelve months. These securities are considered to be acceptable credit risks. Based upon an evaluation of the available evidence, including recent changes in market rates, credit rating information and information obtained from regulatory filings, management believes the decline in fair value for these securities is temporary. In addition, the Company does not intend to sell these investment securities for a period of time sufficient to allow for anticipated recovery. The Company does not have any current requirement to sell its investment in the issuer prior to any anticipated recovery in fair value.



    
F- 18


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Note 4.
Loans
A summary of the balances of loans follows:
 
September 30,
2016
September 30,
2015
 
 
Real Estate:
 
 
Single family
$
158,541

$
153,141

Multifamily
123,623

105,750

Commercial real estate non-owner occupied
117,971

110,833

Commercial real estate owner occupied
63,108

52,124

Construction and land development
16,230

18,831

Total Real Estate
479,473

440,679

Commercial Business
40,836

38,200

 
 
 
Consumer:
 
 
Home equity lines of credit
14,969

14,881

Education
3,401

4,106

Other
462

523

Total Consumer
18,832

19,510

 
 
 
Total Loans
539,141

498,389

Less:
 
 
Net deferred loan fees
138

366

Allowance for loan losses
5,244

4,598

Net Loans
$
533,759

$
493,425



    
F- 19


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The following tables present the contractual aging of the recorded investment in past due loans by class of loans as of September 30, 2016 and September 30, 2015:
 
 
 
 
Loans Past
 
 
 
30-59 Days
60-89 Days
Due 90 Days
 
September 30, 2016
Current
Past Due
Past Due
or More
Total
 
 
Single family
$
157,803

$
239

$
426

$
73

$
158,541

Multifamily
123,623




123,623

Commercial real estate non-owner occupied
117,971




117,971

Commercial real estate owner occupied
63,108




63,108

Construction and land development
16,230




16,230

Commercial business
40,836




40,836

Consumer and other:
 
 
 
 
 
    Home equity lines of credit
14,942



27

14,969

    Education
3,202

11

39

149

3,401

    Other
462




462

 
$
538,177

$
250

$
465

$
249

$
539,141

 
 
 
 
 
 
 
 
 
 
Loans Past
 
 
 
30-59 Days
60-89 Days
Due 90 Days
 
September 30, 2015
Current
Past Due
Past Due
or More
Total
 
 
Single family
$
152,245

$
473

$
83

$
340

$
153,141

Multifamily
105,750




105,750

Commercial real estate non-owner occupied
110,833




110,833

Commercial real estate owner occupied
52,124




52,124

Construction and land development
18,827

4



18,831

Commercial business
38,200




38,200

Consumer and other:
 
 
 
 
 
    Home equity lines of credit
14,691



190

14,881

    Education
3,782

79


245

4,106

    Other
523




523

 
$
496,975

$
556

$
83

$
775

$
498,389


There were no loans past due ninety days or more still accruing interest as of September 30, 2016 and September 30, 2015.

The following table presents the recorded investment in nonaccrual loans by class of loans as of September 30, 2016 and September 30, 2015:
 
September 30,
2016
September 30,
2015
 
 
Single family
$
338

$
340

Multifamily


Commercial real estate non-owner occupied


Commercial real estate owner occupied


Construction and land development


Commercial business


Consumer and other:
 
 
Home equity lines of credit
36

203

Education
188

260

Other


 
$
562

$
803


As part of the on-going monitoring of the credit quality of the Company’s loan portfolio, management categorizes loans into risk categories based on relevant information about the ability of the borrowers to service their debt and comply with various terms of their loan agreements. The Company considers current financial information, historical payment experience, credit

    
F- 20


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


documentation, public information and current economic trends when categorizing loans into risk categories. Generally, all sizable credits receive a financial review no less than annually to monitor and adjust, if necessary, the credit’s risk profile. Credits classified as watch, special mention, substandard and doubtful generally receive a review quarterly.

The Company categorizes loans into the following risk categories based on relevant information about the ability of borrowers to service their debt:

Pass - A pass asset is well protected by the current worth and paying capacity of the obligor (or guarantors, if any) or by the fair value, less costs to acquire and sell in a timely manner, of any underlying collateral.

Watch - A watch asset has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the Company’s credit position at some future date. Watch assets are not adversely classified and do not expose the Company to sufficient risk to warrant adverse classification.

Special Mention - A special mention asset has characteristics of deterioration in quality exhibited by any number of well-defined weaknesses requiring significant corrective action. The repayment ability of the borrower has not been validated, or has become marginal or weak and the loan may have exhibited some overdue payments or payment extensions and/or renewals.

Substandard - A substandard asset is an asset with a well-defined weakness that jeopardizes repayment in whole, or in part, of the debt. These credits are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. These assets are characterized by the distinct possibility that the Company will or has sustained some loss of principal and/or interest if the deficiencies are not corrected.

Doubtful - A doubtful asset is an asset that has all the weaknesses inherent in the substandard classification with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. These credits have a high probability for loss, yet because certain important and reasonably specific pending factors may work toward the strengthening of the asset, its classification of loss is deferred until its more exact status can be determined.

Homogeneous loan types are assessed for credit quality based on the contractual aging status of the loan and payment activity. In certain cases, based upon payment performance, the loan being related with another commercial type loan or for other reasons, a loan may be categorized into one of the risk categories noted above. Such assessment is completed at the end of each reporting period.

    
F- 21


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



The following tables present the risk category of loans evaluated by internal asset classification based on the most recent analysis performed and the contractual aging as of September 30, 2016 and 2015:

September 30, 2016
Pass
Watch
Special Mention
Substandard
Doubtful
Total
 
 
Single family
$
156,042

$
744

$

$
1,755

$

$
158,541

Multifamily
121,878

1,745




123,623

Commercial real estate non-owner occupied
116,880

695

396



117,971

Commercial real estate owner occupied
59,993

3,115




63,108

Construction and land development
16,228



2


16,230

Commercial business
31,677

8,945

214



40,836

Consumer and other:
 
 
 
 
 
 
Home equity lines of credit
14,874



95


14,969

Education
3,401





3,401

Other
462





462

      Total
$
521,435

$
15,244

$
610

$
1,852

$

$
539,141


September 30, 2015
Pass
Watch
Special Mention
Substandard
Doubtful
Total
 
 
Single family
$
150,421

$
1,135

$

$
1,585

$

$
153,141

Multifamily
103,117

2,633




105,750

Commercial real estate non-owner occupied
109,208

1,215

410



110,833

Commercial real estate owner occupied
49,896

1,921


307


52,124

Construction and land development
18,831





18,831

Commercial business
36,561



1,639


38,200

Consumer and other:
 
 
 
 
 
 
Home equity lines of credit
14,636



245


14,881

Education
4,106





4,106

Other
523





523

 
$
487,299

$
6,904

$
410

$
3,776

$

$
498,389


    
F- 22


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The following tables provide additional detail of the activity in the allowance for loan losses, by portfolio segment, for the years ended September 30, 2016 and 2015:

Year Ended September 30, 2016
 
 
Commercial Real Estate - Non-owner Occupied
Commercial Real Estate - Owner-Occupied
Construction and Land Development
Commercial Business
Consumer and Other
 
Single Family
Multifamily
Total
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Beginning balance
$
1,073

$
1,013

$
1,091

$
513

$
330

$
498

$
80

$
4,598

      Provision for loan losses
70

2

428

298

14

(30
)
(7
)
775

      Loans charged-off
(176
)





(10
)
(186
)
      Recoveries
13



2


32

10

57

Ending balance
$
980

$
1,015

$
1,519

$
813

$
344

$
500

$
73

$
5,244

 
 
 
 
 
 
 
 
 
Period-ended amount allocated for:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$


$

$


$

$
52

$
52

Collectively evaluated for impairment
980

1,015

1,519

813

344

500

21

5,192

Ending Balance
$
980

$
1,015

$
1,519

$
813

$
344

$
500

$
73

$
5,244

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,455

$
1,745

$

$

$

$

$
88

$
3,288

Collectively evaluated for impairment
157,086

121,878

117,971

63,108

16,230

40,836

18,744

535,853

Ending Balance
$
158,541

$
123,623

$
117,971

$
63,108

$
16,230

$
40,836

$
18,832

$
539,141

 
 
 
 
 
 
 
 
 
Year Ended September 30, 2016
 
 
Commercial Real Estate - Non-owner Occupied
Commercial Real Estate - Owner-Occupied
Construction and Land Development
Commercial Business
Consumer and Other
 
Single Family
Multifamily
Total
 
 
Allowance for loan losses:
 
 
 
 
 
 
 
 
Beginning balance
$
1,072

$
757

$
679

$
733

$
301

$
454

$
76

$
4,072

      Provision for loan losses
240

355

475

(204
)
29

36

19

950

      Loans charged-off
(257
)
(99
)
(63
)
(52
)

(14
)
(26
)
(511
)
      Recoveries
18



36


22

11

87

Ending balance
$
1,073

$
1,013

$
1,091

$
513

$
330

$
498

$
80

$
4,598

 
 
 
 
 
 
 
 
 
Period-ended amount allocated for:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
22


$

$

$

$

55

$
77

Collectively evaluated for impairment
1,051

1,013

1,091

513

330

498

25

4,521

Ending Balance
$
1,073

$
1,013

$
1,091

$
513

$
330

$
498

$
80

$
4,598

 
 
 
 
 
 
 
 
 
Loans:
 
 
 
 
 
 
 
 
Individually evaluated for impairment
$
1,595

$
1,832

$

$

$

$

$
225

$
3,652

Collectively evaluated for impairment
151,546

103,918

110,833

52,124

18,831

38,200

19,285

494,737

Ending Balance
$
153,141

$
105,750

$
110,833

$
52,124

$
18,831

$
38,200

$
19,510

$
498,389



    
F- 23


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The following tables present additional detail of impaired loans, segregated by segment, as of and for the years ended September 30, 2016 and 2015. The unpaid principal balance represents the recorded balance prior to any partial charge-offs. The recorded investment represents customer balances net of any partial charge-offs recognized on the loans by loan category. The interest income recognized column represents all interest income reported on either a cash or accrual basis after the loan became impaired.

 
 
Unpaid
 
Allowance for
Average
Interest
 
 
Principal
Recorded
Loan Losses
Recorded
Income
September 30, 2016
 
Balance
Investment
Allocated
Investment
Recognized
 
 
 
With no related allowance recorded:
 
 
 
 
Single family
 
$
1,594

$
1,455

$

$
1,337

$
71

Multifamily
 
1,794

1,745


1,790

76

Commercial real estate non-owner occupied
 





Commercial real estate owner occupied
 





Construction and land development
 
4





Commercial business
 





Consumer and other
 
115

36


64


 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
Single family
 



289


Multifamily
 





Commercial real estate non-owner occupied
 





Commercial real estate owner occupied
 





Construction and land development
 





Commercial business
 





Consumer and other
 
52

52

52

54

3

 
 
$
3,559

$
3,288

$
52

$
3,534

$
150


 
 
Unpaid
 
Allowance for
Average
Interest
 
 
Principal
Recorded
Loan Losses
Recorded
Income
September 30, 2015
 
Balance
Investment
Allocated
Investment
Recognized
 
 
 
With no related allowance recorded:
 
 
 
 
Single family
 
$
1,314

$
1,183

$

$
1,275

$
47

Multifamily
 
1,913

1,832


1,874

80

Commercial real estate non-owner occupied
 



84


Commercial real estate owner occupied
 



338


Construction and land development
 





Commercial business
 





Consumer and other
 
271

170


202


 
 
 
 
 
 
 
With an allowance recorded:
 
 
 
 
 
 
Single family
 
412

412

22

351

14

Multifamily
 





Commercial real estate non-owner occupied
 





Commercial real estate owner occupied
 



33


Construction and land development
 





Commercial business
 





Consumer and other
 
55

55

55

57

3

 
 
$
3,965

$
3,652

$
77

$
4,214

$
144



    
F- 24


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The following is a summary of troubled debt restructured loans (TDRs) at September 30, 2016 and 2015:
 
September 30,
2016
September 30,
2015
 
 
Troubled debt restructurings - accrual
$
3,021

$
3,134

Troubled debt restructurings - nonaccrual


 
$
3,021

$
3,134


Modifications of loan terms in a TDR are generally in the form of an extension of payment terms or lowering of the interest rate, although occasionally the Bank has reduced the outstanding principal balance.

There were no loans modified in a TDR during the years ended September 30, 2016 and 2015.

There were no re-defaults of TDR loans that occurred during the years ended September 30, 2016 and 2015.

Certain of the Bank’s directors and executive officers are loan customers of the Bank. As of September 30, 2016 and 2015, loans of approximately $7,813 and $3,334, respectively, were outstanding to such parties. These loans were made on substantially the same terms as those prevailing for comparable transactions with other persons and do not involve more than the normal risk of collectability.

An analysis of such loans is as follows:
 
Years Ended September 30,

2016
2015
 
 
Balance, beginning
$
3,334

$
4,653

New loans originated
927

1,629

Draws on lines of credit
186

222

Principal repayments
(1,490
)
(3,170
)
Other1
4,856


Balance, ending
$
7,813

$
3,334


1 An officer, with an existing loan, was promoted to executive officer position during the year. Additionally, a director resigned and a new director was appointed during the year. Each had loans from the Bank.

Note 5.
Foreclosed Real Estate
An analysis of foreclosed real estate for the years ended September 30, 2016 and 2015 is as follows:

 
Years Ended September 30,
 
2016
 
2015
 
 
Balance, beginning
$
283

 
$
2,355

Transfer of loans
170

 
519
Writedown to realizable value
(26)

 
(609)
Proceeds on sale
(356)

 
(1,965)
Gain (loss) on sale
28

 
(17)
Balance, ending
$
99

 
$
283


    
F- 25


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Note 6.
Mortgage Servicing Rights
Loans serviced for others approximated $126,124 and $160,812 at September 30, 2016 and 2015, respectively. These loans are not reflected in the accompanying consolidated financial statements and were sold without recourse, with the exception of approximately $12,367 and $18,828 at September 30, 2016 and 2015, respectively, which were sold to the FHLB with limited recourse (see Note 16).

 
Years Ended September 30,
 
2016
 
2015
 
 
Mortgage servicing rights:
 
 
 
Balance at beginning of year
$
1,315

 
$
1,784

    Additions

 
2
    Disposals

 

    Amortization
(303
)
 
(471)
Balance at end of year
1,012

 
1,315
 
 
 
 
Valuation allowances:
 
 
 
Balance at beginning of year
105

 
160
    Additions
107

 

    Reductions

 
(55)
    Write-downs

 

Balance at end of year
212

 
105
 
 
 
 
Mortgage servicing rights, net
$
800

 
$
1,210



The fair value of mortgage servicing rights was $800 and $1,210 as of September 30, 2016 and 2015, respectively. The fair value of servicing rights was determined using the following assumptions as of:

 
September 30,
 
September 30,
 
2016
 
2015
 
 
 
 
Discount rates
10.5 to 11.0%
 
10.5 to 11.0%
Prepayment speed range
15.6 to 38.9
 
11.4 to 31.7
Weighted average default rate
0.61%
 
0.83%


    
F- 26


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Note 7.
Office Properties and Equipment
The components of office properties and equipment as of the 2016 and 2015 fiscal year end were as follows:

 
September 30,
 
September 30,
 
2016
 
2015
Land and land improvements
$
4,979

 
$
4,970

Office buildings and improvements
17,103

 
13,951

Furniture and equipment
4,447

 
4,066

Leasehold improvements
191

 
191

Future expansion sites

 

 
26,720

 
23,178

Less accumulated depreciation and amortization
(11,310
)
 
(9,311
)
 
 
 
 
 
$
15,410

 
$
13,867


Depreciation and amortization expense of approximately $766 and $668 on office properties and equipment is included in furniture and equipment and occupancy expenses for the years ended September 30, 2016 and 2015, respectively.

The Company leases, to various tenants, space in certain of its office properties under noncancelable operating leases. Gross rental income was $209 and $138 for the years ended September 30, 2016 and 2015, respectively. Minimum future rental income under the terms of noncancelable leases is as follows:

Years Ending September 30,
 
 
2017
 
$
388

2018
 
266

2019
 
171

2020
 
75

2021
 
71

Thereafter
 
126

 
 
 
 
 
$
1,097



The Company is obligated under noncancelable operating leases for land, facilities and equipment, certain of which provide for increased rentals based upon increases in cost of living adjustments and other operating costs. This includes a noncancelable operating lease for land in relation to an office property with an original lease term of 50 years. Total rent expense was approximately $125 and $305 for the years ended September 30, 2016 and 2015, respectively.

The approximate minimum annual rentals and commitments under noncancelable agreements and leases with remaining terms in excess of one year are as follows:
Years Ending September 30,
 
 
2017
 
$
306

2018
 
318

2019
 
335

2020
 
303

2021
 
210

Thereafter
 
6,582

 
 
 
 
 
$
8,054


During 2016, the Company designated one property as office properties and equipment that had previously been reported as real estate held for investment.


    
F- 27


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


During 2015, the Company designated one property as real estate held for sale that had previously been reported as office properties and equipment. That property was transferred to real estate held for sale at fair value. See Note 9 for additional information.

Note 8.
Real Estate Held for Investment
The following table presents real estate held for investment as of:

 
September 30,
 
September 30,
 
2016
 
2015
Office properties and improvements
$
105

 
$
3,393

Less-accumulated depreciation and amortization
(105
)
 
(1,346
)
 
 
 
 
 
$

 
$
2,047


Depreciation expense of $78 and $125 on real estate held for investment is included in real estate held for investment expense for the year ended September 30, 2016 and 2015, respectively.

The Company leased, to various tenants, office properties classified as real estate held for investment, under noncancelable operating leases. Gross rental income was $215 and $733 for the year ended September 30, 2016 and 2015, respectively.

Note 9. Real Estate Held for Sale and Branch Closings

During the year ended September 30, 2015, the Company designated two office properties as available for sale. One property was transferred from real estate held for investment at its fair value and the other was transferred from office properties and equipment at its fair value. A valuation allowance of $975 was established at the time of transfer and reported as valuation loss on real estate held for sale in the statement of operations for the year ended September 30, 2015. During the year ended September 30, 2016, the Company sold these two office properties, with an additional $276 reported as valuation loss on real estate held for sale in the accompanying statement of operations.

During the year ended September 30, 2015, the Company closed one branch office which was operated in a leased facility. The total expenses of $251 for lease buyouts, write-off of undepreciated leasehold improvements and severance pay for the year ended September 30, 2015 were included in branch realignment expense in the statement of operations for the year ended September 30, 2015.
 
Note 10. Deposits

The following table presents the composition of deposits as of:
 
September 30, 2016
September 30, 2015
 
Amount
Percent
Amount
Percent
Negotiable order for withdrawal accounts:
 
 
 
 
Non-interest bearing
$
111,841

18.89
%
$
101,486

19.11
%
Interest bearing
135,866

22.95
%
131,968

24.85
%
 
247,707

41.84
%
233,454

43.96
%
 
 
 
 
 
Passbook and Statement Savings
133,155

22.50
%
127,431

24.00
%
Variable Rate Money Market Accounts
64,593

10.91
%
47,876

9.02
%
Certificates of Deposit
146,522

24.75
%
122,259

23.02
%
 
$
591,977

100.00
%
$
531,020

100.00
%

Certificate accounts equal to or greater than one hundred thousand dollars totaled $89,588 and $64,155 as of September 30, 2016 and 2015, respectively. Of these amounts, $26,154 and $8,775 are equal to or greater than two hundred fifty thousand dollars as of September 30, 2016 and 2015, respectively.

A summary of certificate accounts by scheduled maturity as of September 30, 2016 is as follows:

 
 
September 30,
 
 
2016
2017
 
$
67,602

2018
 
35,434

2019
 
23,379

2020
 
15,018

2021
 
5,089

 
 
 
 
 
$
146,522


Note 11. Advances From the Federal Home Loan Bank

The Bank maintains a master contract agreement with the Federal Home Loan Bank of Chicago (FHLB) that provides for borrowing up to the maximum of 75 percent of the book value of the Bank’s first lien 1-4 family and multifamily real estate loans. The FHLB provides both fixed and floating rate advances. Floating rate advances are tied to short-term market rates of interest, such as LIBOR, Federal Funds or Treasury Bill rates. Fixed rate advances are priced in reference to market rates of interest at the time of the advance, namely the rates that the FHLB pays to borrowers at various maturities. In either case, interest is payable monthly with principal payable at maturity.

Advances are generally secured by a security agreement pledging a portion of the Bank’s residential real estate loans. Pledged real estate mortgages and home equity lines of credit had a carrying value of $273,826 and $150,226 as of September 30, 2016, and September 30, 2015, respectively.

Advances from the Federal Home Loan Bank were as follows as of September 30, 2016 and 2015:

 
September 30,
 
2016
 
2015
 
Amount
Weighted Average Cost
 
Amount
Weighted Average Cost
Overnight advances
$

%
 
$
18,000

0.13
%
Long-term advances (mature October 2018 through February 2024)
20,000

1.02

 



The Federal Home Loan Bank long-term advances have maturities ranging from October 2018 to February 2024.

A summary of Federal Home Loan Bank advances by scheduled maturity as of September 30, 2016 is as follows:

 
 
September 30,
 
 
2016
 
 
 
2017
 
$

2018
 

2019
 
4,000

2020
 
3,000

2021
 
3,000

Thereafter
 
10,000

 
 
 
 
 
$
20,000




    
F- 28


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


Note 12. Regulatory Capital

The federal banking agencies have recently adopted regulations that substantially amend the capital regulations currently applicable to us. These regulations implement the Basel III regulatory capital reforms and changes required by the Dodd-Frank Act.

Effective January 1, 2015 (with some changes transitioned into full effectiveness over two to four years), the Bank became subject to new capital requirements adopted by the OCC. These new requirements create a new required ratio for common equity Tier 1 ("CETI") capital, increase the leverage and Tier 1 capital ratios, change the risk weight of certain assets for purposes of the risk-based capital ratios, create an additional capital conservation buffer over the required capital ratios and change what qualifies as capital for purposes of meeting these various capital requirements. Beginning in 2016, failure to maintain the required capital conservation buffer will limit the ability of the Bank to pay dividends, repurchase shares or pay discretionary bonuses. The Company is exempt from consolidated capital requirements as those requirements do not apply to certain small savings and loan holding companies with assets under $1 billion.

Under the new capital regulations, the minimum capital ratios are: (1) CETI capital ratio of 4.5% of risk-weighted assets; (2) a Tier 1 capital ratio of 6.0% of risk-weighted assets: (3) a total capital ratio of 8.0% of risk-weighted assets; and (4) a leverage ratio of 4.0%. CETI generally consists of common stock and retained earnings, subject to applicable regulatory adjustments and deductions.

There are a number of changes in what constitutes regulatory capital, some of which are subject to transition periods. These changes include the phasing-out of certain instruments as qualifying capital. The Bank does not use any of these instruments. Under the new requirements for total capital, Tier 2 capital is no longer limited to the amount of Tier 1 capital included in total capital. Mortgage servicing rights, certain deferred tax assets and investments in unconsolidated subsidiaries over designated percentages of CETI will be deducted from capital. The Bank has elected to permanently opt-out of the inclusion of accumulated other comprehensive income in our capital calculations, as permitted by the regulations. This opt-out will reduce the impact of market volatility on our regulatory capital levels.

The new requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures. These include a 150% risk weight (increased from 100%) for certain high volatility commercial real estate acquisition, development and construction loans and for non-residential mortgage loans that are 90 days past due or otherwise in non-accrual status; a 20% (increased from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable; a 250% risk weight (increased from 100%) for mortgage servicing and deferred tax assets that are not deducted from capital; and increased risk weights (0% to 600%) for equity exposures.

In addition to the minimum CETI, Tier 1 and total capital ratios, the Bank will have to maintain a capital conservation buffer consisting of additional CETI capital greater than 2.5% of risk-weighted assets above the required minimum levels in order to avoid limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses based on percentages of eligible retained income that could be utilized for such actions. This new capital conservation buffer requirement will be phased in beginning in January 2016 at 0.625% of risk-weighted assets and increasing each year until fully implemented in January 2019.

The OCC's prompt corrective action standards also changed effective January 1, 2015. Under the new standards, in order to be considered well-capitalized, the Bank must have a CETI ratio of 6.5% (new), a Tier 1 ratio of 8.0% (increased from 6.0%), a total risk-based capital ratio of 10.0% (unchanged) and a leverage ratio of 5.0% (unchanged). The Bank meets all these new requirements, including the full capital conservation buffer.
 
The Bank’s actual capital amounts and ratios and those required by the above regulatory standards are presented in the following tables. For September 30, 2016, we have included the 0.625% increase for 2016 in our minimum capital adequacy ratios in the table below:


    
F- 29


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


At September 30, 2016
 
 
 
 
 
 
 
 
 
Actual
For Capital Adequacy Purposes
For Capital Adequacy Purposes with Capital Buffer
To Be Well Capitalized Under Prompt Corrective Action Provisions
 
Amount
Ratio
Amount
Ratio
Amount
Ratio
Amount
Ratio
 
 
CET1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
      Westbury Bank
$
71,383

12.61
%
$
25,472

4.50
%
$
29,010

5.125
%
$
36,793

6.50
%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
Westbury Bank
71,383

12.61
%
33,963

6.00
%
37,500

6.625
%
45,283

8.00
%
Total capital (to risk-weighted assets)
 
 
 
 
 
 
 
 
Westbury Bank
76,627

13.54
%
45,283

8.00
%
48,821

8.625
%
56,604

10.00
%
Leverage (to adjusted total assets)
 
 
 
 
 
 
 
 
Westbury Bank
71,383

10.23
%
27,911

4.00
%
N/A

N/A

34,889

5.00
%
 
 
 
 
 
 
 
 
 
At September 30, 2015
 
 
 
 
 
 
 
Actual
For Capital Adequacy Purposes
To Be Well Capitalized Under Prompt Corrective Action Provisions
 
Amount
Ratio
Amount
Ratio
Amount
Ratio
 
 
CET1 capital (to risk-weighted assets)
 
 
 
 
 
 
      Westbury Bank
$
64,155

12.25
%
$
23,598

4.50
%
$
34,085

6.50
%
Tier 1 capital (to risk-weighted assets)
 
 
 
 
 
 
Westbury Bank
64,155

12.25
%
31,463

6.00
%
41,951

8.00
%
Total capital (to risk-weighted assets)
 
 
 
 
 
 
Westbury Bank
68,753

13.12
%
41,951

8.00
%
52,439

10.00
%
Leverage (to adjusted total assets)
 
 
 
 
 
 
Westbury Bank
64,155

10.01
%
25,636

4.00
%
32,045

5.00
%

The following table reconciles the Bank’s stockholders’ equity to regulatory capital as of September 30, 2016 and September 30, 2015:
 
September 30,
2016
September 30,
2015
 
 
 
Stockholder's equity of the Bank
$
73,332

$
70,976

Less: Unrealized gain on securities
(561
)
(352
)
Disallowed investment in subsidiary

(3,296
)
Disallowed deferred tax assets
(1,388
)
(3,173
)
Tier 1, CET1 and leverage capital
71,383

64,155

Plus: Allowable general valuation allowances
5,244

4,598

Total capital
$
76,627

$
68,753


Note 13. Employee Benefit Plans

The Bank maintains a contributory, defined-contribution profit-sharing plan (the "Plan") for all employees meeting certain minimum age and service requirements. The Plan qualifies under Section 401(k) of the Internal Revenue Code. Participants may elect to defer a portion of their compensation (between 2 percent and 10 percent) and contribute this amount to the Plan. The Bank makes a matching contribution based on the amount contributed by a participant. In addition, a discretionary contribution may be made each year as determined annually by the Board of Directors. This discretionary Bank contribution is allocated to each participant based on his or her compensation. The aggregate benefit payable to any employee is dependent upon his or her rate of contribution, the earnings of the Plan assets, and the length of time such employee has been a participant

    
F- 30


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


in the Plan. The expense related to this Plan was $199 and $171 for the years ended September 30, 2016 and 2015, respectively.

The Bank maintains a leveraged employee stock ownership plan ("ESOP") that covers all employees meeting certain minimum age and service requirements. The ESOP was established in conjunction with the Company's stock offering completed in April 2013 and operates on a plan year ending December 31. The ESOP initially borrowed $4.1 million and used those funds to acquire 411,403 shares, or 8.0% of the total number of shares issued by the Company in its initial public offering. The shares were acquired at a price of $10.00 per share. The Bank makes annual contributions to the ESOP equal to the ESOP's debt service. The ESOP shares were pledged as collateral for its debt. Additional principal payments, which serve to pay down the debt and accelerate the release of ESOP shares, may be made by the Bank at the discretion of its Board of Directors. As the debt is repaid, shares are released from collateral and allocated to active participants, based on the proportion of debt service paid in the year. The Company accounts for its ESOP in accordance with ASC 718-40. Accordingly, because the debt is intercompany, it is eliminated in consolidation for presentation in these financial statements. The shares pledged as collateral are reported as unearned ESOP shares in the balance sheet. Total ESOP shares may be reduced as a result of employees leaving the Company as shares that have previously been released to those exiting employees may be removed from the ESOP and transferred to that employee. As shares are committed to be released from collateral, the Company reports compensation expense equal to the current market price of the shares, and the shares become outstanding for EPS computations. During each of 2016 and 2015, 35,997 and 20,570 shares were committed to be released, respectively, 5,142 of which were released and available for allocation at December 31, 2015 and 2014, respectively, concurrent with the payment of the annual debt service on the ESOP loan. Total ESOP compensation expense of $685 and $378 was incurred for the years ended September 30, 2016 and 2015, respectively.

The ESOP shares as of September 30, 2016 and 2015 were as follows:


September 30, 2016
September 30, 2015

 

Shares allocated to active participants
52,773

34,132

Shares committed to be released
30,855

15,428

Unallocated shares
318,838

354,835

Total ESOP shares
402,466

404,395

Fair value of unallocated shares
$
6,227

$
6,323


Note 14. Compensation Equity Plans

ASC Topic 718 requires that the grant date fair value of equity awards to employees be recognized as compensation expense over the period during which an employee is required to provide service in exchange for such award.

The following table summarizes the impact of the Company's share-based payment plans in the financial statements for the periods shown:

 
Years Ended September 30,
 
2016
2015
 
 
Total cost of stock grant plan during the year
$
595

$
614

Total cost of stock option plan during the year
244

195

Total cost of share-based payment plans during the year
$
839

$
809

 
 
 
Amount of related income tax benefit recognized in income
$
329

$
317


The Company adopted the Westbury Bancorp Inc 2014 Equity Incentive Plan (the "Incentive Plan") in 2014. In June 2014, the Company's stockholders approved the Incentive Plan which authorized the issuance of up to 203,665 restricted stock awards

    
F- 31


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands Except Per Share Data

and up to 509,162 stock options. As of September 30, 2016 there were 8,758 restricted stock awards and 24,837 options available for future grants.

Annual equity-based incentive awards are typically granted to selected officers and employees mid-year. Options are granted with an exercise price equal to no less than the market price of the Company's shares at the date of grant: those option awards generally vest over five years of service and have 10-year contractual terms. Restricted shares typically vest over a five year period. Equity awards may also be granted at other times throughout the year in connection with the recruitment and retention of officers and employees.

    
F- 32


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands Except Per Share Data


The following table summarizes stock options activity for the year ended September 30, 2016:

 
Number of Options
Weighted Average Exercise Price
Weighted Average Remaining Contractual Term (in years)
Aggregate Intrinsic Value (in thousands)
Options outstanding as of September 30, 2015
406,409

$
15.68

 
 
Granted
89,939

19.82

 
 
Exercised
10,193

15.20

 
 
Expired or canceled


 
 
Forfeited
12,023

16.29

 
 
Options outstanding as of September 30, 2016
474,132

$
16.46

8.31
$
1,456

Options exercisable as of September 30, 2016
135,807

$
15.49

7.89
$
548


The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model based on certain assumptions. Expected volatility is based on the average volatility of Company shares and the expectations of future volatility of Company shares. The risk free interest rate for periods within the contractual term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. Since options were first awarded in June 2014 and the Company has had a minimal number of options exercised by participants in the Incentive Plan, the expected life of options is estimated based on the assumption that options will be exercised evenly throughout their life after vesting and represents the period of time that options granted are expected to remain outstanding.

The following assumptions were used for options granted during the years ended September 30, 2016 and 2015:

 
For the Years Ended September 30,
 
2016
2015
Risk-free interest rate
1.28
%
2.09
%
Expected volatility
11.08
%
7.44
%
Expected dividend yield
%
%
Expected life of options (years)
7.5

7.5

Weighted average fair value per option of options granted during the year
$
3.30

$
2.94


The total intrinsic value of options exercised during the years ended September 30, 2016 and 2015 was $35 and $0, respectively.

    
F- 33


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands Except Per Share Data


The following is a summary of changes in restricted shares for the year ended September 30, 2016:

 
Number of Shares
Weighted Average Grant Date Fair Value
Shares Outstanding at September 30, 2015
158,052

$
15.20

Granted
2,000

18.00

Vested
39,503

15.20

Forfeited
5,666

16.19

Shares Outstanding at September 30, 2016
114,883

$
15.20


The total intrinsic value of restricted shares that vested during the years ended September 30, 2016 and 2015 was $785 and $703, respectively.

As of September 30, 2016, there was $2.7 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements (including share option and nonvested share awards) granted under the Incentive Plan. At September 30, 2016, the weighted-average period over which the unrecognized compensation expense is expected to be recognized was approximately 3.02 years.

Note 15. Deferred Compensation

Certain key employees of Westbury Bank have entered into non-qualified salary continuation plans with the Bank. These plans provide for payments of specific amounts over 10 to 20 year periods subsequent to each participant’s retirement. The related deferred compensation liabilities of the Company are being accrued ratably to the respective normal retirement dates of each participant. As of September 30, 2016 and 2015, approximately $1,912 and $1,996 are accrued related to these plans. The expense for compensation under these plans was approximately $(21) and $59 for the years ended September 30, 2016 and 2015, respectively.

Although not part of the plans, the Company has purchased life insurance on the lives of certain employees electing to participate in the plans, which could provide funding for the payment of benefits under the plans. At September 30, 2016 and 2015, the cash surrender value of such life insurance policies totaled $14,233 and $13,167, respectively.

The Company currently defers its directors’ fees at the discretion of the individual director, with payments made at the request of each Director. The balances of deferred directors’ fees were $546 and $623 at September 30, 2016 and 2015, respectively.

Note 16. Guarantees

The Bank has executed commitments under the Mortgage Partnership Finance (MPF) program with the FHLB to guarantee the payment of any realized losses that exceed the FHLB’s first loss account for mortgages delivered under the commitments. The Bank receives credit enhancement fees from the FHLB for providing this guarantee and continuing to manage the credit risk of the MPF program mortgage loans. The liability representing the present value of the credit enhancement fees less any expected losses in the mortgages delivered under the commitments was not material. The maximum potential amount of future payments that the Bank could be required to make under the limited recourse guarantee was approximately $687 and $1,109
at September 30, 2016 and 2015, respectively. Under the commitments, the Bank agrees to service the loans and, therefore, is responsible for any necessary foreclosure proceedings. Any future recoveries on any losses would not be paid by the FHLB under the commitments. Historically, the Bank has not incurred a loss on loans sold to the FHLB with these recourse provisions and management has determined there are no probable losses related to these loans at September 30, 2016, or 2015.

    
F- 34


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    




Note 17. Income Taxes

The following table presents the provision for income taxes as of:
 
Years Ended September 30,
 
2016
 
2015
 
 
Current (benefit) expense
$
(1
)
 
$
200

Deferred (benefit)/expense
1,987

 
(2,102
)
 
 
 
 
 
$
1,986

 
$
(1,902
)

A reconciliation of expected income tax expense (benefit) to the income tax expense (benefit) included in the consolidated statements of operations is as follows:
 
Year Ended September 30,
 
2016
 
2015
 
 
 
% of Pretax
 
 
 
% of Pretax
 
Amount
 
Income
 
Amount
 
Income
 
 
Computed "expected" tax expense
$
1,855

 
34.00
 %
 
$
552

 
34.00
 %
Net increase in cash surrender of life insurance
(146
)
 
(2.68
)%
 
(144
)
 
(8.89
)%
Tax-exempt interest, net
(67
)
 
(1.23
)%
 
(37
)
 
(2.29
)%
Increase from state income tax benefit, net
400

 
7.32
 %
 
119

 
7.32
 %
Equity incentive plans
45

 
0.82
 %
 
92

 
5.66
 %
Reversal of deferred tax asset valuation allowance

 
 %
 
(2,447
)
 
(150.76
)%
Other, net
(101
)
 
(1.85
)%
 
(37
)
 
(2.21
)%
 
 
 
 
 
 
 
 
 
$
1,986

 
36.38
 %
 
$
(1,902
)
 
(117.17
)%


    
F- 35


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The net deferred tax asset includes the following amounts of deferred tax assets and liabilities as of:
 
 
September 30,
 
 
2016
 
2015
 
 
 
Deferred tax assets:
 
 
 
 
Allowance for loan losses
 
$
2,056

 
$
1,803

Non-qualified option expense
 
90

 
48

Restricted stock expense
 
57

 
306

Deferred compensation
 
750

 
783

Deferred directors fees
 
214

 
244

Loss carryforward
 
3,668

 
5,229

Non accrual interest
 
2

 
12

Foreclosed real estate writedowns
 

 
508

Charitable contribution
 
130

 
404

Other
 
263

 
458

 
 
 
 
 
       Total deferred tax assets
 
7,230

 
9,795

 
 
 
 
 
Deferred tax liabilities:
 
 
 
 
   Prepaid expenses
 
(217
)
 
(244
)
   Mortgage servicing rights
 
(314
)
 
(475
)
   Office properties and equipment basis difference
 
(768
)
 
(1,007
)
   Federal Home Loan Bank stock basis difference
 
(144
)
 
(295
)
   Unrealized gain on securities available-for-sale
 
(362
)
 
(228
)
 
 
 
 
 
       Total deferred tax liabilities
 
(1,805
)
 
(2,249
)
 
 
 
 
 
Valuation allowance
 

 

 
 
 
 
 
       Net deferred tax asset
 
$
5,425

 
$
7,546

 
 
 
 
 

The Company has State of Wisconsin net operating loss carryforwards of approximately $14,197 and $18,534 at September 30, 2016 and 2015, respectively, which can be used to offset its future state taxable income. The carryforwards start to expire in 2024.

The Company has Federal net operating loss carryforwards of approximately $6,854 and $10,904 at September 30, 2016 and 2015, respectively, which can be used to offset its future federal taxable income. These Federal carryforwards start to expire in 2030.

The Internal Revenue Code of 1986, as amended, imposes an alternative minimum tax at a rate of 20% on a base of regular taxable income plus certain tax preferences, referred to as “alternative minimum taxable income.” The alternative minimum tax is payable to the extent alternative minimum taxable income is in excess of an exemption amount. Net operating losses can, in general, offset no more than 90% of alternative minimum taxable income. Certain payments of alternative minimum tax may be used as credits against regular tax liabilities in future years. At September 30, 2016, the Company had $669 of minimum tax credit carryforwards which do not expire.
In assessing the reliability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

Management performed an evaluation of the Company's deferred tax assets as of September 30, 2016 and 2015. In making the determination whether a deferred tax asset is more likely than not to be realized, we seek to evaluate all available positive and negative evidence. Negative evidence considered included our pre-tax losses and relatively high level of net loan charge-offs, loan loss provisions and OREO losses from 2009 through 2014. Positive evidence reviewed included our historical earnings performance prior to the recession and during the two most recent years, our projected earnings forecast, significantly reduced

    
F- 36


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


levels of non-performing assets, loan loss provisions and net charge-offs in 2015 and 2016, the reduction of credit risk in our loan portfolio, and potential use of tax strategies. Based on our analysis at September 30, 2016 and September 30, 2015, including evidence related to the substantially reduced risk profile of the loan portfolio and our improved earnings forecasts (supported by the growth in net interest income and the reduction of operating expenses) we concluded that there is more positive evidence than negative regarding the utilization of our deferred tax asset and that the recorded deferred tax asset, with no valuation reserve required at September 30, 2016 and 2015, is realizable.

Under the Internal Revenue Code and Wisconsin Statutes, the Bank is permitted to deduct, for tax years beginning before 1997, an annual addition to a reserve for bad debts. The amount differs from the provision for loan losses recorded for financial accounting purposes. Under prior law, bad debt deductions for income tax purposes were included in taxable income of later years only if the bad debt reserves were used for purposes other than to absorb bad debt losses. Because the Company did not intend to use the reserve for purposes other than to absorb losses, no deferred income taxes were provided. Retained earnings as of September 30, 2016 and 2015, include approximately $3,227 for which no deferred federal or state income taxes were provided. If in the future the Company no longer qualifies as a bank for tax purposes, an income tax expense of $1,266 would be incurred.

The Company files income tax returns in the U.S. federal jurisdiction and the state of Wisconsin. With few exceptions, the Company is no longer subject to U.S. federal tax examinations by tax authorities for years before 2013 and state tax examinations by tax authorities for years before 2012.

Note 18. Commitments and Contingencies

Financial Instruments with Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets. The contractual amounts of those instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.

The following off-balance sheet instruments were outstanding whose contract amounts represent credit risk:
 
September 30,
2016
September 30,
2015
Commitments to extend mortgage credit:
 
 
    Fixed rate
$
2,013

$
8,443

    Adjustable rate
1,442

9,929

 
 
 
Unused commercial loan lines of credit
68,752

54,225

Unused home equity line of credit
27,315

26,164

Standby letters of credit
1,076

884

Commitment to sell loans
1,881

431


Commitments to extend credit are agreements to lend funds to a customer as long as there is no violation of any condition established in the underlying contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. As some such commitments expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The Company generally extends credit only on a secured basis. Collateral obtained varies but consists primarily of one-to-four family residences.


    
F- 37


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


Unfunded commitments under lines of credit are commitments for possible future extensions of credit to existing customers. These lines of credit may be uncollateralized and ultimately may not be drawn upon to the total extent to which the Company is committed.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements, and, generally, have terms of one year or less. 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 collateral supporting those commitments if deemed necessary. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the summary above. If the commitment is funded, the Company would be entitled to seek recovery from the customer. At September 30, 2016 and 2015, no amounts have been recorded as liabilities for the Company’s potential obligations under these guarantees.

Litigation

In the normal course of business, the Company is involved in various legal proceedings. In the opinion of management, any liability resulting from such proceedings would not have a material adverse effect on the Company’s consolidated financial statements.

Note 19. Derivative Activities

The Company has on deposit certain certificates of deposit with embedded derivatives where the related interest earned by the account holder is calculated based on changes in the S&P 500. The Company enters into interest rate swaps and options to offset the variability in interest expense related to these certificates of deposits. At September 30, 2016 and 2015, the Company had approximately $315 and $377, respectively, in notional amount of swaps where the Company pays a fixed or LIBOR-based interest rate and receives a variable rate based on the S&P 500. The fair values of the embedded derivatives, swaps and options are reported in the accompanying consolidated balance sheets, and the changes in fair value of the embedded derivatives, swaps and options are reported as gains or losses in the accompanying consolidated statements of operations. The fair value of the derivative liability was $98 and $110 as of September 30, 2016 and 2015, respectively, and the related derivative asset was $98 and $110 as of September 30, 2016 and 2015, respectively. The change in fair value was not significant as of September 30, 2016 and 2015.

Commitments to originate residential mortgage loans held for sale and forward commitments to sell residential mortgage loans are defined as derivatives. The fair value related to these commitments was not material as of September 30, 2016 and 2015.


    
F- 38


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


Note 20. Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity's own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, ASC Topic 820 establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity’s own assumptions about the assumptions that market participants would use in pricing an asset or liability.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Securities available-for-sale: The fair value of the Company’s securities available-for-sale is determined using Level 2 inputs, which are derived from readily available pricing sources and third-party pricing services for comparable instruments. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, treasury yield curves, trading levels, credit information and credit terms, among other factors. In certain cases where Level 1 or Level 2 are not available, securities are classified within Level 3 of the hierarchy.

Derivatives: The fair values of the Company’s embedded derivatives related to certain certificates of deposit are determined using inputs that are observable or that can be corroborated by observable market data (such as the S&P 500 Index and the 10-year U.S. Treasury rate) and, therefore, are classified within Level 2 of the valuation hierarchy.

    
F- 39


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Assets and liabilities recorded at fair value on a recurring basis: The following table summarizes assets measured at fair value on a recurring basis, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value as of:
 
 
Fair Value Measurements
September 30, 2016
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Other Unobservable Inputs (Level 3)
 
 
Assets
 
 
 
 
Securities available-for-sale
 
 
 
 
U.S. Government and agency securities
$
25

$

$
25

$

U.S. Government agency residential mortgage-backed securities
40,750


40,750


U.S. Government agency collateralized mortgage obligations
2,680


2,680


U.S. Government agency commercial mortgage-backed securities
11,526


11,526


Municipal securities-tax exempt
25,682


25,682


Municipal securities-taxable
13,109


13,109


Corporate securities




Total securities available-for-sale
$
93,772

$

$
93,772

$

 
 
 
 
 
     Derivatives
$
98

$

$
98

$

Liabilities
 
 
 
 
     Derivatives
$
98

$

$
98

$

 
 
 
 
 
 
 
Fair Value Measurements
September 30, 2015
Total
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Other Unobservable Inputs (Level 3)
 
 
Assets
 
 
 
 
Securities available-for-sale
 
 
 
 
U.S. Government and agency securities
$
25

$

$
25

$

U.S. Government agency residential mortgage-backed securities
39,692


39,692


U.S. Government agency collateralized mortgage obligations
1,941


1,941


U.S. Government agency commercial mortgage-backed securities
14,099


14,099


Municipal securities-tax exempt
2,201


2,201


Municipal securities-taxable
19,466


19,466


Corporate securities
2,862


2,862


Total securities available-for-sale
$
80,286

$

$
80,286

$

 
 
 
 
 
     Derivatives
$
110

$

$
110

$

Liabilities
 
 
 
 
     Derivatives
$
110

$

$
110

$


The Company did not have any transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the years ended September 30, 2016 and 2015. The Company’s policy for determining transfers between levels occurs at the end of the reporting period when circumstances in the underlying valuation criteria change and result in a transfer between levels.

Assets recorded at fair value on a nonrecurring basis: The Company may be required, from time to time, to measure certain instruments at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles.

Impaired loans: The Company does not record loans at fair value on a recurring basis. The specific reserves for collateral-dependent impaired loans are based on the fair value of the collateral less estimated costs to sell. The fair value of collateral is

    
F- 40


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


determined based on appraisals. In some cases, adjustments were made to the appraised values due to various factors including age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in the collateral. When significant adjustments were based on unobservable inputs, the resulting fair value measurement has been categorized as a Level 3 measurement. Impaired loans with a carrying amount of $52 and $467 have a valuation allowance of $52 and $77 included in the allowance for loan losses as of September 30, 2016 and 2015, respectively.

Foreclosed real estate:  The Company does not record foreclosed real estate owned at a fair value on a recurring basis.  The fair value of foreclosed real estate was determined using Level 3 inputs based on appraisals or broker pricing opinions.  In some cases, adjustments were made to these values due to various factors including the age of the appraisal, age of comparables included in the appraisal, and known changes in the market and in collateral.  Foreclosed real estate is measured at fair value less estimated costs to sell at the date of foreclosure.  Subsequent to foreclosure, additional writedowns may be recorded based on changes to the fair value of the assets.

Mortgage servicing rights: Mortgage servicing rights (MSRs) do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Company estimates the fair value of MSRs using discounted cash flow models incorporating numerous assumptions from the perspective of market participants including servicing income, servicing costs, market discount rates, prepayment speeds, and default rates. Due to the nature of the valuation inputs, MSRs are classified within Level 3 of the valuation hierarchy. As of September 30, 2016, mortgage servicing rights with a carrying amount of $1,012 have a valuation allowance of $212 to reflect their fair value of $800. As of September 30, 2015, mortgage servicing rights with a carrying amount of $1,315 have a valuation allowance of $105 to reflect their fair value of $1,210.

Real estate held for sale: The Company does not record real estate held for sale at a fair value on a recurring basis. The fair value of real estate held for sale was determined using Level 3 inputs based on appraisals or broker pricing opinions. In some cases, adjustments were made to these values due to various factors including the age of the appraisal, age of comparables included in the appraisal, and known changes in the market. Real estate held for sale is measured at fair value less estimated costs to sell at the time of transfer. Subsequent to transfer, additional writedowns may be recorded based on changes to the fair value of the assets.



    
F- 41


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


 
 
Fair Value Measurements
 
 
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Other Unobservable Inputs
 
Total
(Level 1)
(Level 2)
(Level 3)
 
 
September 30, 2016
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
  Impaired loans
$

$

$

$

  Foreclosed real estate
99



99

  Mortgage servicing rights
800



800

  Real estate held for sale




 
 
 
 
 
 
 
Fair Value Measurements
 
 
Quoted Prices in Active Markets for Identical Assets
Significant Other Observable Inputs
Significant Other Unobservable Inputs
 
Total
(Level 1)
(Level 2)
(Level 3)
 
 
September 30, 2015
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
  Impaired loans
$
390

$

$

$
390

  Foreclosed real estate
283



283

  Mortgage servicing rights
1,210



1,210

  Real estate held for sale
882



882

 
 
 
 
 


Disclosure of fair value information about financial instruments, for which it is practicable to estimate that value, is required whether or not recognized in the accompanying consolidated balance sheets. 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 instruments. Certain financial instruments with a fair value that is not practicable to estimate and all non-financial instruments are excluded from the disclosure requirements. Accordingly, the aggregate fair value amounts presented do not necessarily represent the underlying value of the Company for assets and liabilities not previously described. The Company, in estimating its fair value disclosures for financial instruments not described above, used the following methods and assumptions:

Cash and cash equivalents: The carrying amounts of cash and cash equivalents reported in the consolidated balance sheets approximated those assets’ fair values.

Securities held to maturity: The fair values of securities held to maturity are based on quoted market prices for similar securities, adjusted for differences in security characteristics.

Loans: For variable-rate mortgage loans that re-price frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for fixed rate residential mortgage loans are based on quoted market prices for similar loans sold in conjunction with sale transactions, adjusted for differences in loan characteristics. The fair values for commercial real estate loans, rental property mortgage loans, and consumer and other loans are estimated using discounted cash flow analyses and using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Loans held for sale: Fair value of loans held for sale are based on commitments on hand from investors or prevailing market prices.

    
F- 42


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Federal Home Loan Bank stock: The carrying amount of FHLB stock approximates its fair value based on the redemption provisions of the FHLB.

Accrued interest receivable and payable: The carrying amounts of accrued interest receivable and payable approximate their fair values.

Deposits: The fair value disclosed for interest-bearing and non-interest-bearing checking accounts, savings accounts, and money market accounts are equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values of fixed rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit.

Advances from the Federal Home Loan Bank: The fair values of long term FHLB advances are estimated using discounted cash flow analyses, based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements. The carrying amounts of short term FHLB advances reported in the consolidated balance sheets approximated those liabilities’ fair values.
  

Advance payments by borrowers for property taxes and insurance: The carrying amounts of the advance payments by borrowers for property taxes and insurance approximate their fair values.

Mortgage banking derivatives: The fair value of commitments to originate mortgage loans held for sale is estimated by comparing the Company’s cost to acquire mortgages and the current price for similar mortgage loans, taking into account the terms of the commitments and the credit worthiness of the counterparties. The fair value of forward commitments to sell residential mortgage loans is the estimated amount that the Bank would receive or pay to terminate the forward delivery contract at the reporting date based on market prices for similar financial instruments. The fair value of these derivative financial instruments was not material at September 30, 2016 or 2015.


    
F- 43


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


The estimated fair values and related carrying amounts of the Company’s financial instruments as of September 30, 2016 and 2015, are as follows:
 
September 30, 2016
 
 
 
Quoted Prices in
 
 
 
 
 
Active Markets for
Significant Other
Significant Other
 
Carrying
Estimated Fair
Identical Assets
Observable Inputs
Unobservable Inputs
 
Amount
Value
(Level 1)
(Level 2)
(Level 3)
 
 
Financial assets:
 
 
 
 
 
Cash and cash equivalents
$
29,613

$
29,613

$
29,613



Securities available for sale
93,772

93,772


93,772


Securities held to maturity
2,293

2,392


2,392


Loans, net
533,759

536,434



536,434

Loans held for sale, net
1,881

1,881


1,881


Federal Home Loan Bank stock
1,330

1,330



1,330

Mortgage servicing rights
800

800



800

Accrued interest receivable
2,173

2,173

2,173



Derivative asset
98

98


98


 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
Deposits
591,977

574,787

111,841


462,946

Short-term advances from Federal Home Loan Bank





Long-term advances from Federal Home Loan Bank
20,000

19,472



19,472

Advance payments by borrowers for property taxes and insurance
5,455

5,455

5,455



Accrued interest payable
5

5

5



Derivative liability
98

98


98


 
 
 
 
 
 
 
September 30, 2015
 
 
 
Quoted Prices in
 
 
 
 
 
Active Markets for
Significant Other
Significant Other
 
Carrying
Estimated Fair
Identical Assets
Observable Inputs
Unobservable Inputs
 
Amount
Value
(Level 1)
(Level 2)
(Level 3)
 
 
Financial assets:
 
 
 
 
 
Cash and cash equivalents
$
16,488

$
16,488

$
16,488



Securities available for sale
80,286

80,286


80,286


Securities held to maturity
2,459

2,490


2,490


Loans, net
493,425

493,480



493,480

Loans held for sale, net
431

431


431


Federal Home Loan Bank stock
3,350

3,350



3,350

Mortgage servicing rights
1,210

1,210



1,210

Accrued interest receivable
1,965

1,965

1,965



Derivative asset
110

110


110


 
 
 
 
 
 
Financial liabilities:
 
 
 
 
 
Deposits
531,020

508,339

101,486


406,853

Short-term advances from Federal Home Loan Bank
18,000

18,000


18,000


Long-term advances from Federal Home Loan Bank





Advance payments by borrowers for property taxes and insurance
5,382

5,382

5,382



Accrued interest payable
5

5

5



Derivative liability
110

110


110




    
F- 44


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands Except Per Share Data


Note 21. Earnings per Share

Earnings per common share is computed using the two-class method. Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding, adjusted for weighted average unallocated ESOP shares, during the applicable period, excluding outstanding participating securities. Participating securities include non-vested restricted stock awards and restricted stock units, though no actual shares of common stock related to restricted stock units are issued until the settlement of such units, to the extent holders of these securities receive non-forfeitable dividends or dividend equivalents at the same rate as holders of the Company's common stock. Diluted earnings per share is computed using the weighted-average number of shares determined for the basic earnings per common share computation plus the dilutive effect of stock compensation using the treasury stock method.
 
The following table presents a reconciliation of the number of shares used in the calculation of basic and diluted earnings per common share (in thousands, except share and per share data).



Years Ended September 30,

2016
 
2015
 
 
 
 
Net income
$
3,471

 
$
3,524

Basic potential common shares:
 
 

   Weighted average shares outstanding
4,036,705

 
4,493,441

   Weighted average unallocated Employee
 
 

      Stock Ownership Plan shares
(340,272
)
 
(365,976
)
Basic weighted average shares outstanding
3,696,433

 
4,127,465


 
 

Dilutive effect of equity awards
33,645

 
1,133


 
 

Diluted weighted average shares outstanding
3,730,078

 
4,128,598


 
 

Basic earnings per share
$
0.94

 
$
0.85


 
 

Diluted earnings per share
$
0.93

 
$
0.85



    
F- 45


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    


Note 22. Condensed Parent Company Financial Information

The condensed financial statements of Westbury Bancorp, Inc. (parent company only) as of, and for the years ended, September 30, 2016 and 2015, are presented below:

Balance Sheets
 
 
 
 
September 30,
 
2016
2015
Assets
 
 
Cash and interest bearing deposits
$
251

$
1,440

Investments
55

115

Loan to ESOP
3,620

3,778

Investment in subsidiary
75,872

74,201

Other assets
2,397

2,660

   Total assets
$
82,195

$
82,194

Liabilities and Stockholders' Equity
 
 
Other liabilities
$
26

$
157

Stockholders' equity
82,169

82,037

Total liabilities and stockholders' equity
$
82,195

$
82,194


Statements of Operations
 
 
 
 
Years Ended September 30,
 
2016
2015
Interest and other income
$
131

$
190

Interest and other expense
499

668

Loss before income tax benefit and equity in undistributed net income of subsidiary
(368
)
(478
)
Income tax benefit
(77
)
(217
)
Loss before equity in undistributed net income of subsidiary
(291
)
(261
)
Equity in undistributed net income of subsidiary
3,762

3,785

   Net income
$
3,471

$
3,524



    
F- 46


Westbury Bancorp, Inc and Subsidiary
Notes to Consolidated Financial Statements
Dollars in Thousands


                    



Statements of Cash Flows
 
 
Years Ended September 30,
 
2016
2015
Cash Flows From Operating Activities
 
 
  Net income
$
3,471

$
3,524

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
  Equity in income of subsidiary
(3,762
)
(3,785
)
  Net change in other liabilities
(131
)
42

  Net change in other assets
1,102

(185
)
       Net cash provided by (used in) operating activities
680

(404
)
 
 
 
Cash Flows From Investing Activities
 
 
  Purchase of securities

(729
)
  Sales and maturities of securities
60

7,226

  Payments received on ESOP loan
158

153

  Dividend received from bank subsidiary
2,300

1,100

        Net cash provided by investing activities
2,518

7,750

 
 
 
Cash Flows From Financing Activities
 
 
   Stock options exercised
155


   Repurchase of common stock
(4,542
)
(12,784
)
         Net cash used in financing activities
(4,387
)
(12,784
)
         Net decrease in cash
(1,189
)
(5,438
)
Cash
 
 
   Beginning of year
1,440

6,878

   End of year
$
251

$
1,440



    
F- 47