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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 September 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 29,489,346 at October 26, 2017.
 
 

WATERSTONE FINANCIAL, INC.

10-Q INDEX

 
Page No.
   
 3
   
 3
 3
 4
 5
 6
 7
 8 - 35
   
 36 - 56
 57
 57
   
 58
   
 58
 58
58
59
59
59
 59
 59
   

 
 
 
 
 
 
 
 
 
 
- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

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

   
(Unaudited)
       
   
September 30, 2017
   
December 31, 2016
 
Assets
 
(Dollars In Thousands, except share and per share data)
 
Cash
 
$
39,308
   
$
7,878
 
Federal funds sold
   
34,916
     
26,828
 
Interest-earning deposits in other financial institutions and other short term investments
   
18,367
     
12,511
 
Cash and cash equivalents
   
92,591
     
47,217
 
Securities available for sale (at fair value)
   
200,840
     
226,795
 
Loans held for sale (at fair value)
   
175,137
     
225,248
 
Loans receivable
   
1,261,160
     
1,177,884
 
Less: Allowance for loan losses
   
14,063
     
16,029
 
Loans receivable, net
   
1,247,097
     
1,161,855
 
                 
Office properties and equipment, net
   
22,889
     
23,655
 
Federal Home Loan Bank stock (at cost)
   
18,450
     
13,275
 
Cash surrender value of life insurance
   
65,665
     
61,509
 
Real estate owned, net
   
4,568
     
6,118
 
Prepaid expenses and other assets
   
26,891
     
24,947
 
Total assets
 
$
1,854,128
   
$
1,790,619
 
                 
Liabilities and Shareholders' Equity
               
Liabilities:
               
Demand deposits
 
$
123,133
   
$
120,371
 
Money market and savings deposits
   
148,607
     
162,456
 
Time deposits
   
685,033
     
666,584
 
Total deposits
   
956,773
     
949,411
 
                 
Borrowings
   
435,503
     
387,155
 
Advance payments by borrowers for taxes
   
25,107
     
4,716
 
Other liabilities
   
24,815
     
38,647
 
Total liabilities
   
1,442,198
     
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 - 29,483,346 in 2017 and 29,430,123 in 2016
               
Outstanding - 29,483,346 in 2017 and 29,430,123 in 2016
   
295
     
294
 
Additional paid-in capital
   
325,753
     
322,934
 
Retained earnings
   
183,578
     
184,565
 
Unearned ESOP shares
   
(19,288
)
   
(20,178
)
Accumulated other comprehensive income (loss), net of taxes
   
328
     
(378
)
Cost of shares repurchased (6,030,900 shares at September 30, 2017 and 5,908,150 shares at December 31, 2016)
   
(78,736
)
   
(76,547
)
Total shareholders' equity
   
411,930
     
410,690
 
Total liabilities and shareholders' equity
 
$
1,854,128
   
$
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 September 30,
   
Nine months ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In Thousands, except per share amounts)
 
                         
Interest income:
                       
Loans
 
$
15,855
   
$
14,754
   
$
45,078
   
$
42,611
 
Mortgage-related securities
   
647
     
743
     
2,021
     
2,371
 
Debt securities, federal funds sold and short-term investments
   
951
     
833
     
2,680
     
2,692
 
Total interest income
   
17,453
     
16,330
     
49,779
     
47,674
 
Interest expense:
                               
Deposits
   
1,981
     
1,923
     
5,614
     
5,477
 
Borrowings
   
2,439
     
3,082
     
6,756
     
10,724
 
Total interest expense
   
4,420
     
5,005
     
12,370
     
16,201
 
Net interest income
   
13,033
     
11,325
     
37,409
     
31,473
 
Provision for loan losses
   
20
     
135
     
(1,166
)
   
340
 
Net interest income after provision for loan losses
   
13,013
     
11,190
     
38,575
     
31,133
 
Noninterest income:
                               
Service charges on loans and deposits
   
300
     
789
     
1,148
     
1,742
 
Increase in cash surrender value of life insurance
   
688
     
734
     
1,476
     
1,446
 
Loss on sale of securities
   
-
     
-
     
(107
)
   
-
 
Mortgage banking income
   
31,863
     
35,552
     
92,774
     
91,146
 
Other
   
203
     
337
     
941
     
874
 
Total noninterest income
   
33,054
     
37,412
     
96,232
     
95,208
 
Noninterest expenses:
                               
Compensation, payroll taxes, and other employee benefits
   
26,153
     
27,573
     
73,732
     
70,968
 
Occupancy, office furniture, and equipment
   
2,533
     
2,319
     
7,587
     
7,074
 
Advertising
   
821
     
661
     
2,414
     
1,974
 
Data processing
   
623
     
616
     
1,854
     
1,897
 
Communications
   
394
     
374
     
1,170
     
1,088
 
Professional fees
   
629
     
474
     
1,953
     
1,486
 
Real estate owned
   
(20
)
   
37
     
258
     
344
 
FDIC insurance premiums
   
129
     
140
     
366
     
500
 
Other
   
3,054
     
3,347
     
10,227
     
9,663
 
Total noninterest expenses
   
34,316
     
35,541
     
99,561
     
94,994
 
Income before income taxes
   
11,751
     
13,061
     
35,246
     
31,347
 
Income tax expense
   
4,362
     
5,556
     
12,397
     
12,214
 
Net income
 
$
7,389
   
$
7,505
   
$
22,849
   
$
19,133
 
Income per share:
                               
Basic
 
$
0.27
   
$
0.28
   
$
0.83
   
$
0.71
 
Diluted
 
$
0.26
   
$
0.27
   
$
0.82
   
$
0.70
 
Weighted average shares outstanding:
                               
Basic
   
27,532
     
27,043
     
27,449
     
26,976
 
Diluted
   
27,953
     
27,429
     
27,927
     
27,283
 

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

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

   
Three months ended September 30,
   
Nine months ended September 30,
 
   
2017
   
2016
   
2017
   
2016
 
   
(In Thousands)
 
Net income
 
$
7,389
   
$
7,505
   
$
22,849
   
$
19,133
 
                                 
Other comprehensive income (loss), net of tax:
                               
Net unrealized holding gain (loss) on available for sale securities:
                               
Net unrealized holding gain (loss) arising during the period, net of tax (expense) benefit of ($59), $385, ($416), ($1,341), respectively
   
91
     
(596
)
   
641
     
2,079
 
                                 
Reclassification adjustment for net loss included in net income during the period, net of tax benefit of $0, $0, ($42), $0, respectively
   
-
     
-
     
65
     
-
 
                                 
Total other comprehensive income (loss)
   
91
     
(596
)
   
706
     
2,079
 
Comprehensive income
 
$
7,480
   
$
6,909
   
$
23,555
   
$
21,212
 

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
   
-
     
-
     
-
     
19,133
     
-
     
-
     
-
     
19,133
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
2,079
     
-
     
2,079
 
Total comprehensive income
                                                           
21,212
 
                                                                 
ESOP shares committed to be released to Plan participants
   
-
     
-
     
278
     
-
     
890
     
-
     
-
     
1,168
 
Cash dividend, $0.21 per share
   
-
     
-
     
-
     
(5,762
)
   
-
     
-
     
-
     
(5,762
)
Stock compensation activity, net of tax
   
263
     
3
     
3,434
     
-
     
-
     
-
     
-
     
3,437
 
Stock compensation expense
   
-
     
-
     
1,430
     
-
     
-
     
-
     
-
     
1,430
 
Repurchase of common stock returned to authorized but unissued
   
(284
)
   
(3
)
   
-
     
-
     
-
     
-
     
(3,855
)
   
(3,858
)
Balances at September 30, 2016
   
29,386
   
$
$294
   
$
322,164
   
$
181,460
   
$
(20,475
)
 
$
2,661
   
$
(76,547
)
 
$
409,557
 
                                                                 
                                                                 
Balances at December 31, 2016
   
29,430
   
$
$294
   
$
322,934
   
$
184,565
   
$
(20,178
)
 
$
(378
)
 
$
(76,547
)
 
$
410,690
 
                                                                 
Comprehensive income:
                                                               
Net income
   
-
     
-
     
-
     
22,849
     
-
     
-
     
-
     
22,849
 
Other comprehensive income
   
-
     
-
     
-
     
-
     
-
     
706
     
-
     
706
 
Total comprehensive income
                                                           
23,555
 
                                                                 
ESOP shares committed to be released to Plan participants
   
-
     
-
     
572
     
-
     
890
     
-
     
-
     
1,462
 
Cash dividend, $0.86 per share
   
-
     
-
     
-
     
(23,836
)
   
-
     
-
     
-
     
(23,836
)
Stock based compensation activity
   
176
     
2
     
820
     
-
     
-
     
-
     
-
     
822
 
Stock compensation expense
   
-
     
-
     
1,427
     
-
     
-
     
-
     
-
     
1,427
 
Repurchase of common stock returned to authorized but unissued
   
(123
)
   
(1
)
   
-
     
-
     
-
     
-
     
(2,189
)
   
(2,190
)
Balances at September 30, 2017
   
29,483
   
$
$295
   
$
325,753
   
$
183,578
   
$
(19,288
)
 
$
328
   
$
(78,736
)
 
$
411,930
 

See Accompanying Notes to Unaudited Consolidated Financial Statements.

 
- 6 -

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

   
Nine months ended September 30,
 
   
2017
   
2016
 
   
(In Thousands)
 
Operating activities:
           
Net income
 
$
22,849
   
$
19,133
 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
               
Provision for loan losses
   
(1,166
)
   
340
 
Provision for depreciation
   
1,549
     
2,061
 
Stock based compensation
   
1,427
     
1,430
 
Net amortization of premium/discount on debt and mortgage related securities
   
524
     
749
 
Amortization of unearned ESOP shares
   
1,462
     
1,168
 
Amortization and impairment of mortgage servicing rights
   
71
     
513
 
Gain on sale of loans held for sale
   
(94,219
)
   
(93,481
)
Loans originated for sale
   
(1,881,351
)
   
(1,756,454
)
Proceeds on sales of loans originated for sale
   
2,025,682
     
1,788,685
 
Increase in accrued interest receivable
   
(294
)
   
(204
)
Increase in cash surrender value of life insurance
   
(1,476
)
   
(1,446
)
Increase (decrease) in accrued interest on deposits and borrowings
   
2
     
(615
)
Increase in other liabilities
   
336
     
5,893
 
Increase in accrued tax receivable
   
(2,088
)
   
(172
)
Loss on sale of securities
   
107
     
-
 
Net gain related to real estate owned
   
(11
)
   
(123
)
Gain on sale of mortgage servicing rights
   
(308
)
   
-
 
Other
   
440
     
(3,784
)
Net cash provided by (used in) operating activities
   
73,536
     
(36,307
)
                 
Investing activities:
               
Net increase in loans receivable
   
(85,685
)
   
(41,096
)
Net change in FHLB stock
   
(5,175
)
   
6,900
 
Purchases of:
               
Debt securities
   
(6,140
)
   
(4,140
)
Mortgage related securities
   
(6,940
)
   
(5,236
)
Premises and equipment, net
   
(939
)
   
(925
)
Bank owned life insurance
   
(2,680
)
   
(10,180
)
Proceeds from:
               
Principal repayments on mortgage-related securities
   
25,177
     
29,689
 
Maturities of debt securities
   
13,941
     
6,620
 
Sale of debt securities
   
448
     
-
 
Sales of real estate owned
   
3,104
     
5,304
 
Net cash used in investing activities
   
(64,889
)
   
(13,064
)
                 
Financing activities:
               
Net increase in deposits
   
7,362
     
62,288
 
Net change in short term borrowings
   
(7,652
)
   
56,780
 
Repayment of long term debt
   
(69,000
)
   
(220,000
)
Proceeds from long term debt
   
125,000
     
100,000
 
Net change in advance payments by borrowers for taxes
   
6,021
     
9,405
 
Cash dividends on common stock
   
(23,636
)
   
(4,832
)
Purchase of common stock returned to authorized but unissued
   
(2,190
)
   
(3,858
)
Proceeds from stock option exercises
   
822
     
3,437
 
Net cash provided by financing activities
   
36,727
     
3,220
 
Increase (decrease) in cash and cash equivalents
   
45,374
     
(46,151
)
Cash and cash equivalents at beginning of period
   
47,217
     
100,471
 
Cash and cash equivalents at end of period
 
$
92,591
   
$
54,320
 
                 
Supplemental information:
               
Cash paid or credited during the period for:
               
Income tax payments
 
$
14,141
   
$
11,009
 
Interest payments
   
12,368
     
16,816
 
Noncash activities:
               
Loans receivable transferred to real estate owned
   
1,609
     
3,442
 
Dividends declared but not paid in other liabilities
   
3,877
     
2,322
 

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 subsidiary, Waterstone Mortgage Corporation.

WaterStone Bank conducts its community banking business from 11 banking offices located in Milwaukee, Washington and Waukesha Counties, Wisconsin, as well as a loan production office in Minneapolis, Minnesota. WaterStone Bank's principal lending activity is originating one- to four-family, 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 nine months ended September 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's revenue is comprised of interest and non-interest revenue. The guidance does not apply to revenue associated with financial instruments, including loans and securities.  The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the guidance, including asset management fees, deposit related fees, and other non-interest related fees. The Company's assessment suggests that adoption of this guidance should not materially change the method in which we currently recognize revenue for these revenue streams. In addition, the Company is evaluating the guidance's expanded disclosure requirements. The Company plans to adopt ASC 606 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

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.

- 8 -

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.

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. See Note 9 for the impact on the Company's statement of operations.

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.

ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs." New authoritative accounting guidance under ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs" amends prior guidance by shortening the amortization period for certain callable debt securities held at a premium requiring the premium to be amortized to the earliest call date. The new authoritative guidance will be effective for reporting periods after January 1, 2019 with early adoption permitted. 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:

   
September 30, 2017
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
61,692
   
$
631
   
$
(105
)
 
$
62,218
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
54,949
     
56
     
(345
)
   
54,660
 
Mortgage-related securities
   
116,641
     
687
     
(450
)
   
116,878
 
                                 
Government sponsored enterprise bonds
   
2,500
     
-
     
(1
)
   
2,499
 
Municipal securities
   
64,100
     
1,578
     
(16
)
   
65,662
 
Other debt securities
   
15,005
     
61
     
(492
)
   
14,574
 
Debt securities
   
81,605
     
1,639
     
(509
)
   
82,735
 
Certificates of deposit
   
1,225
     
3
     
(1
)
   
1,227
 
   
$
199,471
   
$
2,329
   
$
(960
)
 
$
200,840
 


   
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 September 30, 2017, $25.6 million of the Company's mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company.  As of September 30, 2017, $2.7 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.

- 10 -

The amortized cost and fair values of investment securities by contractual maturity at September 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
 
$
11,214
   
$
11,207
 
Due after one year through five years
   
20,919
     
21,116
 
Due after five years through ten years
   
36,891
     
38,178
 
Due after ten years
   
13,806
     
13,461
 
Mortgage-related securities
   
116,641
     
116,878
 
   
$
199,471
   
$
200,840
 

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

   
September 30, 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
 
$
8,547
   
$
(42
)
 
$
3,553
   
$
(63
)
 
$
12,100
   
$
(105
)
Collateralized mortgage obligations:
                                               
  Government sponsored enterprise issued
   
33,229
     
(313
)
   
2,188
     
(32
)
   
35,417
     
(345
)
Government sponsored enterprise bonds
   
2,499
     
(1
)
   
-
     
-
     
2,499
     
(1
)
Municipal securities
   
10,301
     
(15
)
   
101
     
(1
)
   
10,402
     
(16
)
Other debt securities
   
-
     
-
     
9,508
     
(492
)
   
9,508
     
(492
)
Certificates of deposit
   
489
     
(1
)
   
-
     
-
     
489
     
(1
)
   
$
55,065
   
$
(372
)
 
$
15,350
   
$
(588
)
 
$
70,415
   
$
(960
)


   
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.

- 11 -

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 September 30, 2017
 
$
94
 

As of September 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 September 30, 2017, this security had an amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of September 30, 2017, the Company had four mortgage-backed securities, two government sponsored enterprise issued securities, one municipal bond 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 September 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.

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 nine months ended September 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 nine months ended September 30, 2017 was reclassified from accumulated other comprehensive income. There were no sales of securities during the nine months ended September 30, 2016.



 
 
 
 
 
 
- 12 -

Note 3 - Loans Receivable

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

   
September 30, 2017
   
December 31, 2016
 
   
(In Thousands)
 
Mortgage loans:
           
Residential real estate:
           
One- to four-family
 
$
427,195
   
$
392,817
 
Multi-family
   
580,134
     
558,592
 
Home equity
   
21,606
     
21,778
 
Construction and land
   
16,451
     
18,179
 
Commercial real estate
   
181,328
     
159,401
 
Consumer
   
266
     
319
 
Commercial loans
   
34,180
     
26,798
 
   
$
1,261,160
   
$
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 $950.7 million and $911.9 million at September 30, 2017 and December 31, 2016, respectively, are pledged as collateral against $410.0 million and $295.0 million in outstanding Federal Home Loan Bank of Chicago (FHLBC) advances under a blanket security agreement at September 30, 2017 and December 31, 2016.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank.  As of September 30, 2017 and December 31, 2016, loans aggregating approximately $4.7 million and $5.1 million, respectively, were outstanding to such parties.  None of these loans were considered impaired as of September 30, 2017 or December 31, 2016.

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

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

 
As of September 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
 
$
1,859
   
$
192
   
$
4,161
   
$
6,212
   
$
420,983
   
$
427,195
 
Multi-family
   
332
     
-
     
407
     
739
     
579,395
     
580,134
 
Home equity
   
220
     
-
     
91
     
311
     
21,295
     
21,606
 
Construction and land
   
-
     
-
     
37
     
37
     
16,414
     
16,451
 
Commercial real estate
   
1,270
     
156
     
181
     
1,607
     
179,721
     
181,328
 
Consumer
   
-
     
-
     
-
     
-
     
266
     
266
 
Commercial loans
   
23
     
-
     
26
     
49
     
34,131
     
34,180
 
Total
 
$
3,704
   
$
348
   
$
4,903
   
$
8,955
   
$
1,252,205
   
$
1,261,160
 
 

 
- 13 -

 
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 $96,000 and $148,000 at September 30, 2017 and December 31, 2016, respectively, which are on non-accrual status.
(2)
Includes $24,000 and $- at September 30, 2017 and December 31, 2016, respectively, which are on non-accrual status.
(3)
Includes $2.0 million and $4.4 million at September 30, 2017 and December 31, 2016, respectively, which are on non-accrual status.

A summary of the activity for the nine months ended September 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)
 
Nine months ended September 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
   
(249
)
   
(396
)
   
8
     
(283
)
   
(170
)
   
(2
)
   
(74
)
   
(1,166
)
Charge-offs
   
(1,092
)
   
(92
)
   
-
     
(14
)
   
(6
)
   
-
     
-
     
(1,204
)
Recoveries
   
200
     
102
     
21
     
80
     
1
     
-
     
-
     
404
 
Balance at end of period
 
$
6,023
   
$
4,423
   
$
393
   
$
799
   
$
1,776
   
$
10
   
$
639
   
$
14,063
 

Nine months ended September 30, 2016
                                           
Balance at beginning of period
 
$
7,763
   
$
5,000
   
$
433
   
$
904
   
$
1,680
   
$
9
   
$
396
   
$
16,185
 
Provision (credit) for loan losses
   
141
     
23
     
(25
)
   
(123
)
   
33
     
3
     
288
     
340
 
Charge-offs
   
(801
)
   
(488
)
   
(62
)
   
(3
)
   
-
     
-
     
-
     
(1,354
)
Recoveries
   
246
     
134
     
24
     
58
     
-
     
-
     
-
     
462
 
Balance at end of period
 
$
7,349
   
$
4,669
   
$
370
   
$
836
   
$
1,713
   
$
12
   
$
684
   
$
15,633
 

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of September 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
 
$
198
   
$
-
   
$
77
   
$
-
   
$
38
   
$
-
   
$
-
   
$
313
 
Allowance related to loans collectively evaluated for impairment
   
5,825
     
4,423
     
316
     
799
     
1,738
     
10
     
639
     
13,750
 
Balance at end of period
 
$
6,023
   
$
4,423
   
$
393
   
$
799
   
$
1,776
   
$
10
   
$
639
   
$
14,063
 
                                                                 
Loans individually evaluated for impairment
 
$
8,456
   
$
833
   
$
302
   
$
37
   
$
472
   
$
-
   
$
26
   
$
10,126
 
Loans collectively evaluated for impairment
   
418,739
     
579,301
     
21,304
     
16,414
     
180,856
     
266
     
34,154
     
1,251,034
 
Total gross loans
 
$
427,195
   
$
580,134
   
$
21,606
   
$
16,451
   
$
181,328
   
$
266
   
$
34,180
   
$
1,261,160
 

- 14 -

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 September 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 September 30, 2017
                                               
Substandard
 
$
8,899
   
$
833
   
$
272
   
$
37
   
$
1,062
   
$
-
   
$
1,595
   
$
12,698
 
Watch
   
7,348
     
498
     
199
     
-
     
456
     
-
     
761
     
9,262
 
Pass
   
410,948
     
578,803
     
21,135
     
16,414
     
179,810
     
266
     
31,824
     
1,239,200
 
   
$
427,195
   
$
580,134
   
$
21,606
   
$
16,451
   
$
181,328
   
$
266
   
$
34,180
   
$
1,261,160
 
                                                                 
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
 

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.

- 15 -

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 September 30, 2017 and December 31, 2016.

   
As of or for the Nine Months Ended September 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
 
$
1,568
   
$
1,568
   
$
198
   
$
-
   
$
1,595
   
$
57
 
Multi-family
   
-
     
-
     
-
     
-
     
-
     
-
 
Home equity
   
159
     
159
     
77
     
-
     
165
     
10
 
Construction and land
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial real estate
   
38
     
447
     
38
     
409
     
45
     
-
 
Consumer
   
-
     
-