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EX-32.2 - Waterstone Financial, Inc.exhibit322.htm
EX-32.1 - Waterstone Financial, Inc.exhibit321.htm
EX-31.2 - Waterstone Financial, Inc.exhibit312.htm
EX-31.1 - Waterstone Financial, Inc.exhibit311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2017

OR

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


Commission File Number 001-36271

WATERSTONE FINANCIAL, INC.
(Exact name of registrant as specified in its charter)

Maryland
90-1026709
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
   
11200 W. Plank Court Wauwatosa, Wisconsin
53226
(Address of principal executive offices)
(Zip Code)

(414) 761-1000
(Registrant's telephone number, including area code)

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

Yes      T            No      

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

Yes      T            No      

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

Large accelerated filer 
Accelerated filer T
Non-accelerated filer 
Smaller reporting company 
Emerging growth company 
 
(Do not check if smaller reporting company)
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.             

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

Yes                  No      T

The number of shares outstanding of the issuer's common stock, $0.01 par value per share, was 29,555,466 at July 28, 2017.
 

WATERSTONE FINANCIAL, INC.

10-Q INDEX

   
Page No.
 
       
    3  
         
    3  
    3  
    4  
    5  
    6  
    7  
    8 - 34  
         
    35 - 53  
    54  
    55  
         
    55  
         
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55
55
56
56
56
 
    56  
    56  
         

 
 
 
- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

   
(Unaudited)
       
   
June 30, 2017
   
December 31, 2016
 
Assets
 
(Dollars In Thousands, except share and per share data)
 
Cash
 
$
84,013
   
$
7,878
 
Federal funds sold
   
29,382
     
26,828
 
Interest-earning deposits in other financial institutions and other short term investments
   
16,165
     
12,511
 
Cash and cash equivalents
   
129,560
     
47,217
 
Securities available for sale (at fair value)
   
209,079
     
226,795
 
Loans held for sale (at fair value)
   
196,644
     
225,248
 
Loans receivable
   
1,225,762
     
1,177,884
 
Less: Allowance for loan losses
   
14,612
     
16,029
 
Loans receivable, net
   
1,211,150
     
1,161,855
 
                 
Office properties and equipment, net
   
23,170
     
23,655
 
Federal Home Loan Bank stock (at cost)
   
18,675
     
13,275
 
Cash surrender value of life insurance
   
64,978
     
61,509
 
Real estate owned, net
   
4,784
     
6,118
 
Prepaid expenses and other assets
   
28,270
     
24,947
 
Total assets
 
$
1,886,310
   
$
1,790,619
 
                 
Liabilities and Shareholders' Equity
               
Liabilities:
               
Demand deposits
 
$
119,585
   
$
120,371
 
Money market and savings deposits
   
153,743
     
162,456
 
Time deposits
   
664,065
     
666,584
 
Total deposits
   
937,393
     
949,411
 
                 
Borrowings
   
498,103
     
387,155
 
Advance payments by borrowers for taxes
   
18,842
     
4,716
 
Other liabilities
   
23,965
     
38,647
 
Total liabilities
   
1,478,303
     
1,379,929
 
                 
Shareholders' equity:
               
Preferred stock (par value $.01 per share)
               
Authorized -  50,000,000 shares in 2017 and in 2016, no shares issued
   
-
     
-
 
Common stock (par value $.01 per share)
               
Authorized - 100,000,000 shares in 2017 and in 2016
               
Issued - 29,554,466 in 2017 and 29,430,123 in 2016
               
Outstanding - 29,554,466 in 2017 and 29,430,123 in 2016
   
296
     
294
 
Additional paid-in capital
   
325,003
     
322,934
 
Retained earnings
   
179,512
     
184,565
 
Unearned ESOP shares
   
(19,584
)
   
(20,178
)
Accumulated other comprehensive income (loss), net of taxes
   
237
     
(378
)
Cost of shares repurchased (5,957,833 shares at June 30, 2017 and 5,908,150 shares at December 31, 2016)
   
(77,457
)
   
(76,547
)
Total shareholders' equity
   
408,007
     
410,690
 
Total liabilities and shareholders' equity
 
$
1,886,310
   
$
1,790,619
 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 3 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In Thousands, except per share amounts)
 
                         
Interest income:
                       
Loans
 
$
14,985
   
$
14,073
   
$
29,223
   
$
27,857
 
Mortgage-related securities
   
678
     
790
     
1,374
     
1,628
 
Debt securities, federal funds sold and short-term investments
   
877
     
885
     
1,729
     
1,859
 
Total interest income
   
16,540
     
15,748
     
32,326
     
31,344
 
Interest expense:
                               
Deposits
   
1,838
     
1,835
     
3,633
     
3,554
 
Borrowings
   
2,221
     
3,748
     
4,317
     
7,642
 
Total interest expense
   
4,059
     
5,583
     
7,950
     
11,196
 
Net interest income
   
12,481
     
10,165
     
24,376
     
20,148
 
Provision for loan losses
   
25
     
-
     
(1,186
)
   
205
 
Net interest income after provision for loan losses
   
12,456
     
10,165
     
25,562
     
19,943
 
Noninterest income:
                               
Service charges on loans and deposits
   
481
     
616
     
848
     
953
 
Increase in cash surrender value of life insurance
   
470
     
471
     
788
     
712
 
Loss on sale of securities
   
(107
)
   
-
     
(107
)
   
-
 
Mortgage banking income
   
36,224
     
34,980
     
60,911
     
55,594
 
Other
   
173
     
284
     
738
     
537
 
Total noninterest income
   
37,241
     
36,351
     
63,178
     
57,796
 
Noninterest expenses:
                               
Compensation, payroll taxes, and other employee benefits
   
27,584
     
25,709
     
47,579
     
43,395
 
Occupancy, office furniture, and equipment
   
2,527
     
2,419
     
5,054
     
4,755
 
Advertising
   
869
     
655
     
1,593
     
1,313
 
Data processing
   
633
     
638
     
1,231
     
1,281
 
Communications
   
397
     
372
     
776
     
714
 
Professional fees
   
717
     
489
     
1,324
     
1,012
 
Real estate owned
   
(133
)
   
163
     
278
     
307
 
FDIC insurance premiums
   
117
     
155
     
237
     
360
 
Other
   
3,476
     
3,631
     
7,173
     
6,316
 
Total noninterest expenses
   
36,187
     
34,231
     
65,245
     
59,453
 
Income before income taxes
   
13,510
     
12,285
     
23,495
     
18,286
 
Income tax expense
   
4,622
     
4,518
     
8,035
     
6,658
 
Net income
 
$
8,888
   
$
7,767
   
$
15,460
   
$
11,628
 
Income per share:
                               
Basic
 
$
0.32
   
$
0.29
   
$
0.56
   
$
0.43
 
Diluted
 
$
0.32
   
$
0.29
   
$
0.55
   
$
0.43
 
Weighted average shares outstanding:
                               
Basic
   
27,487
     
26,919
     
27,406
     
26,942
 
Diluted
   
27,955
     
27,204
     
27,913
     
27,243
 

See Accompanying Notes to Unaudited Consolidated Financial Statements.
 
- 4 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In Thousands)
 
Net income
 
$
8,888
   
$
7,767
   
$
15,460
   
$
11,628
 
                                 
Other comprehensive income, net of tax:
                               
Net unrealized holding gain on available for sale securities:
                               
Net unrealized holding gain arising during the period, net of tax expense of ($204), ($528), ($356), ($1,728), respectively
   
316
     
815
     
550
     
2,675
 
                                 
Reclassification adjustment for net loss included in net income during the period, net of tax benefit of ($42), $0, ($42), $0, respectively
   
65
     
-
     
65
     
-
 
                                 
Total other comprehensive income
   
381
     
815
     
615
     
2,675
 
Comprehensive income
 
$
9,269
   
$
8,582
   
$
16,075
   
$
14,303
 

See Accompanying Notes to Unaudited Consolidated Financial Statements.


 
 
 
 
 
 
 
 
- 5 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Unaudited)


   
Common Stock
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Unearned
ESOP
Shares
   
Accumulated
Other
Comprehensive Income (Loss)
   
Cost of
Shares
Repurchased
   
Total
Shareholders'
Equity
 
   
Shares
   
Amount
                                     
   
(Dollars In Thousands, except per share amounts)
 
Balances at December 31, 2015
   
29,407
   
$
$294
   
$
317,022
   
$
168,089
   
$
(21,365
)
 
$
582
   
$
(72,692
)
 
$
391,930
 
                                                                 
Comprehensive income:
                                                               
Net income
   
-
     
-
     
-
     
11,628
     
-
     
-
     
-
     
11,628
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
2,675
     
-
     
2,675
 
Total comprehensive income
                                                           
14,303
 
                                                                 
ESOP shares committed to be released to Plan participants
   
-
     
-
     
145
     
-
     
594
     
-
     
-
     
739
 
Cash dividend, $0.13 per share
   
-
     
-
     
-
     
(3,554
)
   
-
     
-
     
-
     
(3,554
)
Stock compensation activity, net of tax
   
40
     
-
     
78
     
-
     
-
     
-
     
-
     
78
 
Stock compensation expense
   
-
     
-
     
942
     
-
     
-
     
-
     
-
     
942
 
Repurchase of common stock returned to authorized but unissued
   
(284
)
   
(2
)
   
-
     
-
     
-
     
-
     
(3,855
)
   
(3,857
)
Balances at June 30, 2016
   
29,163
   
$
$292
   
$
318,187
   
$
176,163
   
$
(20,771
)
 
$
3,257
   
$
(76,547
)
 
$
400,581
 
                                                                 
                                                                 
Balances at December 31, 2016
   
29,430
   
$
$294
   
$
322,934
   
$
184,565
   
$
(20,178
)
 
$
(378
)
 
$
(76,547
)
 
$
410,690
 
                                                                 
Comprehensive income:
                                                               
Net income
   
-
     
-
     
-
     
15,460
     
-
     
-
     
-
     
15,460
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
615
     
-
     
615
 
Total comprehensive income
                                                           
16,075
 
                                                                 
ESOP shares committed to be released to Plan participants
   
-
     
-
     
315
     
-
     
594
     
-
     
-
     
909
 
Cash dividend, $0.74 per share
   
-
     
-
     
-
     
(20,513
)
   
-
     
-
     
-
     
(20,513
)
Stock based compensation activity
   
174
     
2
     
806
     
-
     
-
     
-
     
-
     
808
 
Stock compensation expense
   
-
     
-
     
948
     
-
     
-
     
-
     
-
     
948
 
Repurchase of common stock returned to authorized but unissued
   
(50
)
   
-
     
-
     
-
     
-
     
-
     
(910
)
   
(910
)
Balances at June 30, 2017
   
29,554
   
$
$296
   
$
325,003
   
$
179,512
   
$
(19,584
)
 
$
237
   
$
(77,457
)
 
$
408,007
 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 6 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

   
Six months ended June 30,
 
   
2017
   
2016
 
   
(In Thousands)
 
             
Operating activities:
           
Net income
 
$
15,460
   
$
11,628
 
Adjustments to reconcile net income to net cash provided by (used in)operating activities:
               
Provision for loan losses
   
(1,186
)
   
205
 
Provision for depreciation
   
1,043
     
1,447
 
Stock based compensation
   
948
     
942
 
Net amortization of premium/discount on debt and mortgage related securities
   
365
     
510
 
Amortization of unearned ESOP shares
   
909
     
739
 
Amortization and impairment of mortgage servicing rights
   
49
     
389
 
Gain on sale of loans held for sale
   
(60,277
)
   
(54,929
)
Loans originated for sale
   
(1,219,226
)
   
(1,046,354
)
Proceeds on sales of loans originated for sale
   
1,308,107
     
1,058,992
 
Increase in accrued interest receivable
   
(153
)
   
(21
)
Increase in cash surrender value of life insurance
   
(788
)
   
(712
)
Increase (decrease) in accrued interest on deposits and borrowings
   
70
     
(211
)
(Decrease) increase in other liabilities
   
(560
)
   
4,149
 
Increase in accrued tax receivable
   
(1,132
)
   
(367
)
Loss on sale of securities
   
107
     
-
 
Net loss related to real estate owned
   
102
     
3
 
Gain on sale of mortgage servicing rights
   
(308
)
   
-
 
Other
   
(1,899
)
   
(9,447
)
Net cash provided by (used in) operating activities
   
41,524
     
(33,037
)
                 
Investing activities:
               
Net increase in loans receivable
   
(49,033
)
   
(18,910
)
Net change in FHLB stock
   
(5,400
)
   
4,650
 
Purchases of:
               
Mortgage related securities
   
(4,976
)
   
(5,236
)
Premises and equipment, net
   
(695
)
   
(689
)
Bank owned life insurance
   
(2,680
)
   
(10,180
)
Proceeds from:
               
Principal repayments on mortgage-related securities
   
16,940
     
19,115
 
Maturities of debt securities
   
5,845
     
5,945
 
Sale of debt securities
   
448
     
-
 
Sales of real estate owned
   
2,119
     
3,712
 
Net cash used in investing activities
   
(37,432
)
   
(1,593
)
                 
Financing activities:
               
Net (decrease) increase in deposits
   
(12,018
)
   
49,348
 
Net change in short term borrowings
   
34,948
     
(6,458
)
Repayment of long term debt
   
(24,000
)
   
(70,000
)
Proceeds from long term debt
   
100,000
     
50,000
 
Net change in advance payments by borrowers for taxes
   
(241
)
   
175
 
Cash dividends on common stock
   
(20,336
)
   
(2,671
)
Purchase of common stock returned to authorized but unissued
   
(910
)
   
(3,857
)
Proceeds from stock option exercises
   
808
     
78
 
Net cash provided by financing activities
   
78,251
     
16,615
 
Increase (decrease) in cash and cash equivalents
   
82,343
     
(18,015
)
Cash and cash equivalents at beginning of period
   
47,217
     
100,471
 
Cash and cash equivalents at end of period
 
$
129,560
   
$
82,456
 
                 
Supplemental information:
               
Cash paid or credited during the period for:
               
Income tax payments
 
$
9,332
   
$
6,545
 
Interest payments
   
7,880
     
11,407
 
Noncash activities:
               
Loans receivable transferred to real estate owned
   
923
     
3,123
 
Dividends declared but not paid in other liabilities
   
3,514
     
2,304
 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

- 7 -

Note 1 — Basis of Presentation

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

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

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

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information, Rule 10-01 of Regulation S-X and the instructions to Form 10-Q. The financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, results of operations, changes in shareholders' equity, and cash flows of the Company for the periods presented.

The accompanying unaudited consolidated financial statements and related notes should be read in conjunction with the Company's December 31, 2016 Annual Report on Form 10-K. Operating results for the six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other period.

The preparation of the unaudited consolidated financial statements requires management of the Company to make a number of estimates and assumptions relating to the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the period. Significant items subject to such estimates and assumptions include the allowance for loan losses, deferred income taxes and real estate owned. Actual results could differ from those estimates.

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

Impact of Recent Accounting Pronouncements

Accounting Standards Codification (ASC) Topic 606 "Revenue from Contracts with Customers." New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide clarification on identifying performance obligations and licensing implementation guidance. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company is evaluating the new guidance but does not expect it to have a material impact on the Company's statements of operations or financial condition.

ASC Topic 825 "Financial Instruments." New authoritative accounting guidance under ASC Topic 825, "Financial Instruments" amended prior guidance to require equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. An entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer. The new guidance simplifies the impairment assessment of equity investments without readily determinable fair values, requires public entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes, requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from changes in the instrument-specific credit risk when the entity has selected the fair value option for financial instruments and requires separate presentation of financial assets and liabilities by measurement category and form of financial asset. The new authoritative guidance will be effective for reporting periods after January 1, 2018 and is not expected to have a material impact on the Company's statements of operations or financial condition.

ASC Topic 842 "Leases." New authoritative accounting guidance under ASC Topic 842, "Leases" amended prior guidance to require lessees to recognize the assets and liabilities arising from all leases on the balance sheet. The new authoritative guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. In addition, the qualifications for a sale and leaseback transaction have been amended. The new authoritative guidance also requires qualitative and quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

- 8 -

ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718, "Compensation - Stock Compensation" amended prior guidance on several aspects, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The new authoritative guidance allows for all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. For earnings per share, anticipated excess tax benefits will not be included in assumed proceeds when applying the treasury method for computing dilutive shares.  For the statement of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The new authoritative guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The Company adopted this standard on January 1, 2017 and the standard did not have a material impact on its consolidated financial statements.

ASC Topic 326 "Financial Instruments - Credit Losses." New authoritative accounting guidance under ASC Topic 326, "Financial Instruments - Credit Losses" amended the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information for credit loss estimates. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount. The new authoritative guidance also requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected (net of the allowance for credit losses). In addition, the credit losses relating to available-for-sale debt securities should be recorded through an allowance for credit losses rather than a write-down. The new authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

 
 
 
 
 
 
 
 
- 9 -

Note 2— Securities Available for Sale

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

   
June 30, 2017
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
66,297
   
$
612
   
$
(163
)
 
$
66,746
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
56,695
     
64
     
(319
)
   
56,440
 
Mortgage-related securities
   
122,992
     
676
     
(482
)
   
123,186
 
                                 
Government sponsored enterprise bonds
   
2,500
     
1
     
(2
)
   
2,499
 
Municipal securities
   
63,747
     
1,590
     
(8
)
   
65,329
 
Other debt securities
   
17,397
     
52
     
(612
)
   
16,837
 
Debt securities
   
83,644
     
1,643
     
(622
)
   
84,665
 
Certificates of deposit
   
1,225
     
4
     
(1
)
   
1,228
 
   
$
207,861
   
$
2,323
   
$
(1,105
)
 
$
209,079
 


   
December 31, 2016
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
72,858
   
$
798
   
$
(243
)
 
$
73,413
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
62,297
     
70
     
(365
)
   
62,002
 
Mortgage-related securities
   
135,155
     
868
     
(608
)
   
135,415
 
                                 
Government sponsored enterprise bonds
   
2,500
     
4
     
(1
)
   
2,503
 
Municipal securities
   
70,311
     
685
     
(300
)
   
70,696
 
Other debt securities
   
17,399
     
154
     
(603
)
   
16,950
 
Debt securities
   
90,210
     
843
     
(904
)
   
90,149
 
Certificates of deposit
   
1,225
     
7
     
(1
)
   
1,231
 
   
$
226,590
   
$
1,718
   
$
(1,513
)
 
$
226,795
 


The Company's mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At June 30, 2017, $63.9 million of the Company's mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company.  As of June 30, 2017, $2.9 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2016, $93.2 million of the Company's government sponsored enterprise bonds and $2.4 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities, respectively.

The amortized cost and fair values of investment securities by contractual maturity at June 30, 2017 are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
Amortized
Cost
   
Fair
Value
 
   
(In Thousands)
 
Debt and other securities
           
Due within one year
 
$
9,486
   
$
9,484
 
Due after one year through five years
   
20,358
     
20,504
 
Due after five years through ten years
   
38,150
     
39,470
 
Due after ten years
   
16,875
     
16,435
 
Mortgage-related securities
   
122,992
     
123,186
 
   
$
207,861
   
$
209,079
 

- 10 -

Gross unrealized losses on securities available for sale and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position were as follows:

   
June 30, 2017
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
10,436
   
$
(144
)
 
$
1,054
   
$
(19
)
 
$
11,490
   
$
(163
)
Collateralized mortgage obligations:
                                               
  Government sponsored enterprise issued
   
37,476
     
(319
)
   
-
     
-
     
37,476
     
(319
)
Government sponsored enterprise bonds
   
1,998
     
(2
)
   
-
     
-
     
1,998
     
(2
)
Municipal securities
   
9,322
     
(8
)
   
-
     
-
     
9,322
     
(8
)
Other debt securities
   
-
     
-
     
9,388
     
(612
)
   
9,388
     
(612
)
Certificates of deposit
   
489
     
(1
)
   
-
     
-
     
489
     
(1
)
   
$
59,721
   
$
(474
)
 
$
10,442
   
$
(631
)
 
$
70,163
   
$
(1,105
)


   
December 31, 2016
 
   
Less than 12 months
   
12 months or longer
   
Total
 
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
   
Fair value
   
Unrealized loss
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
23,433
   
$
(222
)
 
$
1,068
   
$
(21
)
 
$
24,501
   
$
(243
)
Collateralized mortgage obligations:
                                               
Government sponsored enterprise issued
   
39,395
     
(365
)
   
-
     
-
     
39,395
     
(365
)
Government sponsored enterprise bonds
   
2,000
     
(1
)
   
-
     
-
     
2,000
     
(1
)
Municipal securities
   
32,141
     
(300
)
   
-
     
-
     
32,141
     
(300
)
Other debt securities
   
-
     
-
     
9,397
     
(603
)
   
9,397
     
(603
)
Certificates of deposit
   
489
     
(1
)
   
-
     
-
     
489
     
(1
)
   
$
97,458
   
$
(889
)
 
$
10,465
   
$
(624
)
 
$
107,923
   
$
(1,513
)

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment. In evaluating whether a security's decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral.
The following table presents the change in other-than-temporary credit related impairment charges on securities available for sale for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive loss.

   
(In Thousands)
 
Credit-related impairments on securities as of December 31, 2015
 
$
117
 
Credit-related impairments related to securities for which an other- than-temporary impairment was not previously recognized
   
-
 
Decrease in credit-related impairments related to securities for which an other-than-temporary impairment was previously recognized
   
(23
)
Credit-related impairments on securities as of December 31, 2016
   
94
 
Credit-related impairments related to securities for which an other- than-temporary impairment was not previously recognized
   
-
 
Increase in credit-related impairments related to securities for which an other-than-temporary impairment was previously recognized
   
-
 
Credit-related impairments on securities as of June 30, 2017
 
$
94
 

As of June 30, 2017, the Company held one municipal security that had previously been deemed to be other-than-temporarily impaired. The security was issued by a tax incremental district in a municipality located in Wisconsin. During the year ended December 31, 2012, the Company received audited financial statements with respect to the municipal issuer that called into question the ability of the underlying taxing district that issued the security to operate as a going concern. During the year ended December 31, 2012, the Company's analysis of this security resulted in $77,000 in credit losses charged to earnings with respect to this municipal security. An additional $17,000 credit loss was charged to earnings during the year ended December 31, 2014 with respect to this security as a sale occurred at a discounted price. As of June 30, 2017, this security had a combined amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of June 30, 2017, the Company had one mortgage-backed security and one other debt security which had been in an unrealized loss position for twelve months or longer. These securities were determined not to be other-than-temporarily impaired as of June 30, 2017. The Company has determined that the decline in fair value of these securities is primarily attributable to an increase in market interest rates compared to the stated rates on these securities and is not attributable to credit deterioration. As the Company does not intend to sell nor is it more likely than not that it will be required to sell these securities before recovery of the amortized cost basis, these securities are not considered other-than-temporarily impaired.

- 11 -

Deterioration of general economic market conditions could result in the recognition of future other than temporary impairment losses within the investment portfolio and such amounts could be material to our consolidated financial statements.

During the six months ended June 30, 2017, proceeds from the sale of securities totaled $448,000 and resulted in losses totaling $107,000. The $107,000 included in loss on sale of available for sale securities in the consolidated statements of income during the six months ended June 30, 2017 was reclassified from accumulated other comprehensive income. There were no sales of securities during the six months ended June 30, 2016.



Note 3 - Loans Receivable

Loans receivable at June 30, 2017 and December 31, 2016 are summarized as follows:

   
June 30, 2017
   
December 31, 2016
 
   
(In Thousands)
 
Mortgage loans:
           
Residential real estate:
           
One- to four-family
 
$
412,139
   
$
392,817
 
Multi-family
   
574,468
     
558,592
 
Home equity
   
21,046
     
21,778
 
Construction and land
   
14,906
     
18,179
 
Commercial real estate
   
176,934
     
159,401
 
Consumer
   
291
     
319
 
Commercial loans
   
25,978
     
26,798
 
   
$
1,225,762
   
$
1,177,884
 

The Company provides several types of loans to its customers, including residential, construction, commercial and consumer loans. Significant loan concentrations are considered to exist for a financial institution when there are amounts loaned to one borrower or to multiple borrowers engaged in similar activities that would cause them to be similarly impacted by economic or other conditions. While the Company's credit risks are geographically concentrated in the Milwaukee metropolitan area, there are no concentrations with individual or groups of related borrowers.

Qualifying loans receivable totaling $933.3 million and $911.9 million at June 30, 2017 and December 31, 2016, respectively, are pledged as collateral against $415.0 million in outstanding Federal Home Loan Bank of Chicago (FHLBC) advances under a blanket security agreement.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank.  As of June 30, 2017 and December 31, 2016, loans aggregating approximately $4.6 million and $5.1 million, respectively, were outstanding to such parties.  None of these loans were considered impaired as of June 30, 2017 or December 31, 2016.

As of June 30, 2017 and December 31, 2016, there were no loans 90 or more days past due and still accruing interest.

- 12 -

An analysis of past due loans receivable as of June 30, 2017 and December 31, 2016 follows:

 
As of June 30, 2017
 
 
1-59 Days Past Due (1)
   
60-89 Days Past Due (2)
   
90 Days or Greater
   
Total Past Due
   
Current (3)
   
Total Loans
 
 
(In Thousands)
 
Mortgage loans:
                                 
Residential real estate:
                                 
One- to four-family
 
$
1,924
   
$
1,057
   
$
4,317
   
$
7,298
   
$
404,841
   
$
412,139
 
Multi-family
   
129
     
-
     
763
     
892
     
573,576
     
574,468
 
Home equity
   
155
     
-
     
56
     
211
     
20,835
     
21,046
 
Construction and land
   
-
     
-
     
37
     
37
     
14,869
     
14,906
 
Commercial real estate
   
164
     
212
     
186
     
562
     
176,372
     
176,934
 
Consumer
   
-
     
-
     
-
     
-
     
291
     
291
 
Commercial loans
   
-
     
-
     
26
     
26
     
25,952
     
25,978
 
Total
 
$
2,372
   
$
1,269
   
$
5,385
   
$
9,026
   
$
1,216,736
   
$
1,225,762
 

 
As of December 31, 2016
 
 
1-59 Days Past Due (1)
   
60-89 Days Past Due (2)
   
90 Days or Greater
   
Total Past Due
   
Current (3)
   
Total Loans
 
 
(In Thousands)
 
Mortgage loans:
                                 
Residential real estate:
                                 
One- to four-family
 
$
2,403
   
$
7
   
$
4,623
   
$
7,033
   
$
385,784
   
$
392,817
 
Multi-family
   
376
     
-
     
401
     
777
     
557,815
     
558,592
 
Home equity
   
82
     
-
     
35
     
117
     
21,661
     
21,778
 
Construction and land
   
-
     
-
     
-
     
-
     
18,179
     
18,179
 
Commercial real estate
   
-
     
-
     
203
     
203
     
159,198
     
159,401
 
Consumer
   
-
     
-
     
-
     
-
     
319
     
319
 
Commercial loans
   
42
     
-
     
27
     
69
     
26,729
     
26,798
 
Total
 
$
2,903
   
$
7
   
$
5,289
   
$
8,199
   
$
1,169,685
   
$
1,177,884
 

(1)
Includes $59,000 and $148,000 at June 30, 2017 and December 31, 2016, respectively, which are on non-accrual status.
(2)
Includes $1.3 million and $- at June 30, 2017 and December 31, 2016, respectively, which are on non-accrual status.
(3)
Includes $1.9 million and $4.4 million at June 30, 2017 and December 31, 2016, respectively, which are on non-accrual status.

A summary of the activity for the six months ended June 30, 2017 and 2016 in the allowance for loan losses follows:

   
One- to
Four- Family
   
Multi-Family
   
Home Equity
   
Construction and Land
   
Commercial Real Estate
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Six months ended June 30, 2017
                                           
Balance at beginning of period
 
$
7,164
   
$
4,809
   
$
364
   
$
1,016
   
$
1,951
   
$
12
   
$
713
   
$
16,029
 
Provision (credit) for loan losses
   
(187
)
   
(376
)
   
1
     
(310
)
   
(166
)
   
(1
)
   
(147
)
   
(1,186
)
Charge-offs
   
(392
)
   
(44
)
   
-
     
(14
)
   
-
     
-
     
-
     
(450
)
Recoveries
   
119
     
43
     
17
     
40
     
-
     
-
     
-
     
219
 
Balance at end of period
 
$
6,704
   
$
4,432
   
$
382
   
$
732
   
$
1,785
   
$
11
   
$
566
   
$
14,612
 

Six months ended June 30, 2016
                                           
Balance at beginning of period
 
$
7,763
   
$
5,000
   
$
433
   
$
904
   
$
1,680
   
$
9
   
$
396
   
$
16,185
 
Provision (credit) for loan losses
   
(103
)
   
(5
)
   
(2
)
   
(13
)
   
52
     
1
     
275
     
205
 
Charge-offs
   
(464
)
   
(445
)
   
(62
)
   
(3
)
   
-
     
-
     
-
     
(974
)
Recoveries
   
178
     
59
     
19
     
33
     
-
     
-
     
-
     
289
 
Balance at end of period
 
$
7,374
   
$
4,609
   
$
388
   
$
921
   
$
1,732
   
$
10
   
$
671
   
$
15,705
 

- 13 -

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of June 30, 2017 follows:

   
One- to
Four- Family
   
Multi-
Family
   
Home
Equity
   
Construction
and Land
   
Commercial
Real Estate
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Allowance related to loans individually evaluated for impairment
 
$
986
   
$
45
   
$
85
   
$
-
   
$
58
   
$
-
   
$
-
   
$
1,174
 
Allowance related to loans collectively evaluated for impairment
   
5,718
     
4,387
     
297
     
732
     
1,727
     
11
     
566
     
13,438
 
Balance at end of period
 
$
6,704
   
$
4,432
   
$
382
   
$
732
   
$
1,785
   
$
11
   
$
566
   
$
14,612
 
                                                                 
Loans individually evaluated for impairment
 
$
10,024
   
$
3,686
   
$
273
   
$
37
   
$
691
   
$
-
   
$
26
   
$
14,737
 
Loans collectively evaluated for impairment
   
402,115
     
570,782
     
20,773
     
14,869
     
176,243
     
291
     
25,952
     
1,211,025
 
Total gross loans
 
$
412,139
   
$
574,468
   
$
21,046
   
$
14,906
   
$
176,934
   
$
291
   
$
25,978
   
$
1,225,762
 

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 2016 follows:

   
One- to
Four-Family
   
Multi-
Family
   
Home
Equity
   
Construction
and Land
   
Commercial
Real Estate
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
Allowance related to loans individually evaluated for impairment
 
$
499
   
$
-
   
$
79
   
$
-
   
$
83
   
$
-
   
$
1
   
$
662
 
Allowance related to loans collectively evaluated for impairment
   
6,665
     
4,809
     
285
     
1,016
     
1,868
     
12
     
712
     
15,367
 
Balance at end of period
 
$
7,164
   
$
4,809
   
$
364
   
$
1,016
   
$
1,951
   
$
12
   
$
713
   
$
16,029
 
                                                                 
Loans individually evaluated for impairment
 
$
10,920
   
$
3,941
   
$
442
   
$
-
   
$
718
   
$
-
   
$
41
   
$
16,062
 
Loans collectively evaluated for impairment
   
381,897
     
554,651
     
21,336
     
18,179
     
158,683
     
319
     
26,757
     
1,161,822
 
Total gross loans
 
$
392,817
   
$
558,592
   
$
21,778
   
$
18,179
   
$
159,401
   
$
319
   
$
26,798
   
$
1,177,884
 

The following table presents information relating to the Company's internal risk ratings of its loans receivable as of June 30, 2017 and December 31, 2016:

   
One
to Four- Family
   
Multi-Family
   
Home
Equity
   
Construction
and Land
   
Commercial
Real Estate
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
At June 30, 2017
                                               
Substandard
 
$
9,647
   
$
1,198
   
$
242
   
$
37
   
$
691
   
$
-
   
$
906
   
$
12,721
 
Watch
   
9,702
     
2,989
     
53
     
-
     
598
     
-
     
1,372
     
14,714
 
Pass
   
392,790
     
570,281
     
20,751
     
14,869
     
175,645
     
291
     
23,700
     
1,198,327
 
   
$
412,139
   
$
574,468
   
$
21,046
   
$
14,906
   
$
176,934
   
$
291
   
$
25,978
   
$
1,225,762
 
                                                                 
At December 31, 2016
                                                               
Substandard
 
$
12,845
   
$
1,427
   
$
428
   
$
-
   
$
717
   
$
-
   
$
41
   
$
15,458
 
Watch
   
10,509
     
3,975
     
149
     
436
     
1,389
     
-
     
3,671
     
20,129
 
Pass
   
369,463
     
553,190
     
21,201
     
17,743
     
157,295
     
319
     
23,086
     
1,142,297
 
   
$
392,817
   
$
558,592
   
$
21,778
   
$
18,179
   
$
159,401
   
$
319
   
$
26,798
   
$
1,177,884
 

- 14 -

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

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

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

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

The following tables present data on impaired loans at June 30, 2017 and December 31, 2016.

   
As of or for the Six Months Ended June 30, 2017
 
   
Recorded
Investment
   
Unpaid
Principal
   
Reserve
   
Cumulative
Charge-Offs
   
Average
Recorded
Investment
   
Interest
Paid
 
   
(In Thousands)
 
Total Impaired with Reserve
                                   
One- to four-family
 
$
3,384
   
$
3,384
   
$
986
   
$
-
   
$
3,410
   
$
65
 
Multi-family
   
373
     
373
     
45
     
-
     
374
     
-
 
Home equity
   
163
     
163
     
85
     
-
     
167
     
6
 
Construction and land
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial real estate
   
255
     
664