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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, 2018

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 every Interactive Data File required to be submitted 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 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 
 
 
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 28,829,339 at October 29, 2018.
 

WATERSTONE FINANCIAL, INC.

10-Q INDEX

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

 
 
- 2 -

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

   
(Unaudited)
       
   
September 30, 2018
   
December 31, 2017
 
Assets
 
(Dollars In Thousands, except share and per share data)
 
Cash
 
$
32,966
   
$
22,306
 
Federal funds sold
   
18,352
     
17,034
 
Interest-earning deposits in other financial institutions and other short term investments
   
7,538
     
9,267
 
Cash and cash equivalents
   
58,856
     
48,607
 
Securities available for sale (at fair value)
   
179,076
     
199,707
 
Loans held for sale (at fair value)
   
192,674
     
149,896
 
Loans receivable
   
1,357,656
     
1,291,814
 
Less: Allowance for loan losses
   
13,226
     
14,077
 
Loans receivable, net
   
1,344,430
     
1,277,737
 
                 
Office properties and equipment, net
   
22,417
     
22,941
 
Federal Home Loan Bank stock (at cost)
   
19,575
     
16,875
 
Cash surrender value of life insurance
   
67,198
     
65,996
 
Real estate owned, net
   
2,170
     
4,558
 
Prepaid expenses and other assets
   
33,007
     
20,084
 
Total assets
 
$
1,919,403
   
$
1,806,401
 
                 
Liabilities and Shareholders' Equity
               
Liabilities:
               
Demand deposits
 
$
130,969
   
$
129,597
 
Money market and savings deposits
   
159,742
     
148,804
 
Time deposits
   
713,739
     
688,979
 
Total deposits
   
1,004,450
     
967,380
 
                 
Borrowings
   
451,132
     
386,285
 
Advance payments by borrowers for taxes
   
30,460
     
4,876
 
Other liabilities
   
28,717
     
35,756
 
Total liabilities
   
1,514,759
     
1,394,297
 
                 
Shareholders' equity:
               
Preferred stock (par value $.01 per share)
               
Authorized -  50,000,000 shares in 2018 and in 2017, no shares issued
   
-
     
-
 
Common stock (par value $.01 per share)
               
Authorized - 100,000,000 shares in 2018 and in 2017
               
Issued - 29,049,939 in 2018 and 29,501,346 in 2017
               
Outstanding - 29,049,939 in 2018 and 29,501,346 in 2017
   
291
     
295
 
Additional paid-in capital
   
329,743
     
326,655
 
Retained earnings
   
184,697
     
183,358
 
Unearned ESOP shares
   
(18,101
)
   
(18,991
)
Accumulated other comprehensive loss, net of taxes
   
(3,808
)
   
(477
)
Cost of shares repurchased (6,583,837 shares at September 30, 2018 and 6,030,900 shares at December 31, 2017)
   
(88,178
)
   
(78,736
)
Total shareholders' equity
   
404,644
     
412,104
 
Total liabilities and shareholders' equity
 
$
1,919,403
   
$
1,806,401
 

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,
 
   
2018
   
2017
   
2018
   
2017
 
   
(In Thousands, except per share amounts)
 
                         
Interest income:
                       
Loans
 
$
17,340
   
$
15,855
   
$
49,498
   
$
45,078
 
Mortgage-related securities
   
643
     
647
     
1,925
     
2,021
 
Debt securities, federal funds sold and short-term investments
   
1,063
     
951
     
2,949
     
2,680
 
Total interest income
   
19,046
     
17,453
     
54,372
     
49,779
 
Interest expense:
                               
Deposits
   
3,063
     
1,981
     
8,087
     
5,614
 
Borrowings
   
2,133
     
2,439
     
5,574
     
6,756
 
Total interest expense
   
5,196
     
4,420
     
13,661
     
12,370
 
Net interest income
   
13,850
     
13,033
     
40,711
     
37,409
 
Provision for loan losses
   
40
     
20
     
(1,060
)
   
(1,166
)
Net interest income after provision for loan losses
   
13,810
     
13,013
     
41,771
     
38,575
 
Noninterest income:
                               
Service charges on loans and deposits
   
442
     
300
     
1,332
     
1,148
 
Increase in cash surrender value of life insurance
   
695
     
688
     
1,496
     
1,476
 
Loss on sale of securities
   
-
     
-
     
-
     
(107
)
Mortgage banking income
   
32,653
     
31,863
     
88,930
     
92,774
 
Other
   
272
     
203
     
805
     
941
 
Total noninterest income
   
34,062
     
33,054
     
92,563
     
96,232
 
Noninterest expenses:
                               
Compensation, payroll taxes, and other employee benefits
   
27,453
     
26,153
     
74,670
     
73,732
 
Occupancy, office furniture, and equipment
   
2,751
     
2,533
     
7,995
     
7,587
 
Advertising
   
1,224
     
821
     
3,084
     
2,414
 
Data processing
   
809
     
623
     
2,057
     
1,854
 
Communications
   
412
     
394
     
1,229
     
1,170
 
Professional fees
   
583
     
629
     
1,930
     
1,953
 
Real estate owned
   
(128
)
   
(20
)
   
63
     
258
 
FDIC insurance premiums
   
131
     
129
     
361
     
366
 
Other
   
3,191
     
3,054
     
9,921
     
10,227
 
Total noninterest expenses
   
36,426
     
34,316
     
101,310
     
99,561
 
Income before income taxes
   
11,446
     
11,751
     
33,024
     
35,246
 
Income tax expense
   
2,743
     
4,362
     
7,948
     
12,397
 
Net income
 
$
8,703
   
$
7,389
   
$
25,076
   
$
22,849
 
Income per share:
                               
Basic
 
$
0.32
   
$
0.27
   
$
0.91
   
$
0.83
 
Diluted
 
$
0.31
   
$
0.26
   
$
0.90
   
$
0.82
 
Weighted average shares outstanding:
                               
Basic
   
27,451
     
27,532
     
27,488
     
27,449
 
Diluted
   
27,680
     
27,953
     
27,765
     
27,927
 

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,
 
   
2018
   
2017
   
2018
   
2017
 
   
(In Thousands)
 
Net income
 
$
8,703
   
$
7,389
   
$
25,076
   
$
22,849
 
                                 
Other comprehensive (loss) income, net of tax:
                               
Net unrealized holding (loss) gain on available for sale securities:
                               
Net unrealized holding (loss) gain arising during the period, net of tax benefit (expense) of $240, ($59), $1,254, ($416), respectively
   
(641
)
   
91
     
(3,336
)
   
641
 
Reclassification adjustment for net loss included in net income during the period, net of tax benefit of $0, $0, $0, ($42) respectively
   
-
     
-
     
-
     
65
 
Reclassification adjustment for net deferred tax liability revaluation
   
-
     
-
     
5
     
-
 
Total other comprehensive (loss) income
   
(641
)
   
91
     
(3,331
)
   
706
 
Comprehensive income
 
$
8,062
   
$
7,480
   
$
21,745
   
$
23,555
 

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, 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 compensation activity, net of tax
   
176
     
2
     
820
     
-
     
-
     
-
     
-
     
822
 
Stock compensation expense
   
-
     
-
     
1,427
     
-
     
-
     
-
     
-
     
1,427
 
Purchase 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
 
                                                                 
                                                                 
Balances at December 31, 2017
   
29,501
   
$
295
   
$
326,655
   
$
183,358
   
$
(18,991
)
 
$
(477
)
 
$
(78,736
)
 
$
412,104
 
                                                                 
Comprehensive income:
                                                               
Net income
   
-
     
-
     
-
     
25,076
     
-
     
-
     
-
     
25,076
 
Other comprehensive loss
   
-
     
-
     
-
     
-
     
-
     
(3,331
)
   
-
     
(3,331
)
Total comprehensive income
                                                           
21,745
 
                                                                 
Reclassification for net deferred tax liability revaluation
   
-
     
-
     
-
     
(5
)
   
-
     
-
     
-
     
(5
)
ESOP shares committed to be released to Plan participants
   
-
     
-
     
472
     
-
     
890
     
-
     
-
     
1,362
 
Cash dividend, $0.86 per share
   
-
     
-
     
-
     
(23,732
)
   
-
     
-
     
-
     
(23,732
)
Stock based compensation activity
   
102
     
1
     
1,289
     
-
     
-
     
-
     
-
     
1,290
 
Stock compensation expense
   
-
     
-
     
1,327
     
-
     
-
     
-
     
-
     
1,327
 
Purchase of common stock returned to authorized but unissued
   
(553
)
   
(5
)
   
-
     
-
     
-
     
-
     
(9,442
)
   
(9,447
)
Balances at September 30, 2018
   
29,050
   
$
291
   
$
329,743
   
$
184,697
   
$
(18,101
)
 
$
(3,808
)
 
$
(88,178
)
 
$
404,644
 

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,
 
   
2018
   
2017
 
   
(In Thousands)
 
Operating activities:
           
Net income
 
$
25,076
   
$
22,849
 
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
               
Provision for loan losses
   
(1,060
)
   
(1,166
)
Provision for depreciation
   
1,704
     
1,549
 
Stock based compensation
   
1,327
     
1,427
 
Net amortization of premium/discount on debt and mortgage related securities
   
373
     
524
 
Amortization of unearned ESOP shares
   
1,362
     
1,462
 
Amortization and impairment of mortgage servicing rights
   
146
     
71
 
Gain on sale of loans held for sale
   
(85,366
)
   
(94,219
)
Loans originated for sale
   
(1,927,627
)
   
(1,881,351
)
Proceeds on sales of loans originated for sale
   
1,970,215
     
2,025,682
 
Increase in accrued interest receivable
   
(457
)
   
(294
)
Increase in cash surrender value of life insurance
   
(1,496
)
   
(1,476
)
Increase in accrued interest on deposits and borrowings
   
268
     
2
 
Increase in other liabilities
   
3,108
     
336
 
Increase in prepaid tax expense
   
(266
)
   
(2,088
)
Loss on sale of securities
   
-
     
107
 
Net gain related to real estate owned
   
(211
)
   
(11
)
Gain on sale of mortgage servicing rights
   
-
     
(308
)
Other
   
(10,840
)
   
440
 
Net cash (used in) provided by operating activities
   
(23,744
)
   
73,536
 
                 
Investing activities:
               
Net increase in loans receivable
   
(66,178
)
   
(85,685
)
Net change in FHLB stock
   
(2,700
)
   
(5,175
)
Purchases of:
               
Debt securities
   
-
     
(6,140
)
Mortgage related securities
   
(13,179
)
   
(6,940
)
Premises and equipment, net
   
(1,257
)
   
(939
)
Bank owned life insurance
   
(180
)
   
(2,680
)
Mortgage banking branch
   
(163
)
   
-
 
Proceeds from:
               
Principal repayments on mortgage-related securities
   
22,216
     
25,177
 
Maturities of debt securities
   
8,590
     
13,941
 
Sales of debt securities
   
-
     
448
 
Sales of real estate owned
   
3,128
     
3,104
 
Bank owned life insurance
   
474
     
-
 
Net cash used in investing activities
   
(49,249
)
   
(64,889
)
                 
Financing activities:
               
Net increase in deposits
   
37,070
     
7,362
 
Net change in short term borrowings
   
(25,153
)
   
(7,652
)
Repayment of long term debt
   
(165,000
)
   
(69,000
)
Proceeds from long term debt
   
255,000
     
125,000
 
Net change in advance payments by borrowers for taxes
   
13,268
     
6,021
 
Cash dividends on common stock
   
(23,786
)
   
(23,636
)
Purchase of common stock returned to authorized but unissued
   
(9,447
)
   
(2,190
)
Proceeds from stock option exercises
   
1,290
     
822
 
Net cash provided by financing activities
   
83,242
     
36,727
 
Increase in cash and cash equivalents
   
10,249
     
45,374
 
Cash and cash equivalents at beginning of period
   
48,607
     
47,217
 
Cash and cash equivalents at end of period
 
$
58,856
   
$
92,591
 
                 
Supplemental information:
               
Cash paid or credited during the period for:
               
Income tax payments
 
$
7,763
   
$
14,141
 
Interest payments
   
13,393
     
12,368
 
Noncash activities:
               
Loans receivable transferred to real estate owned
   
545
     
1,609
 
Dividends declared but not paid in other liabilities
   
3,458
     
3,877
 
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, 2017 Annual Report on Form 10-K. Operating results for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 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." 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 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 completed its overall assessment of revenue streams and related contracts affected by the guidance, including asset management fees, deposit related fees, and other non-interest related fees.  The Company adopted ASC 606 as of January 1, 2018 with no impact on total shareholders' equity or net income.

Revenue Recognition
 
The Company recognizes revenue as it is earned and noted no impact to its revenue recognition policies as a result of the adoption of ASC 606.  The following is a discussion of revenues within the scope of the new revenue guidance:
 
Debit and credit card interchange fee income - Card processing fees consist of interchange fees from consumer debit and credit card networks and other card related services.  Interchange fees are based on purchase volumes and other factors and are recognized as transactions occur.
Service charges on deposit accounts - Revenue from service charges on deposit accounts is earned through deposit-related services; as well as overdraft, non-sufficient funds, account management and other deposit-related fees.  Revenue is recognized for these services either over time, corresponding with deposit accounts' monthly cycle, or at a point in time for transactional related services and fees.
Service charges on loan accounts - Revenue from loan accounts consists primarily of fees earned on prepayment penalties.  Revenue is recognized for these services at a point in time for transactional related services and fees.

- 8 -

ASC Topic 825 "Financial Instruments." 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 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 Company adopted ASC 825 as of January 1, 2018 with no material impact on the Company's statements of operations or financial condition.

ASC Topic 842 "Leases." 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 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 authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 326 "Financial Instruments - Credit Losses." 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 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 authoritative guidance will be effective for reporting periods after January 1, 2020. The Company is evaluating the guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs." 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 guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 220 "Income Statement - Reporting Comprehensive Income." Authoritative accounting guidance under ASC Topic 220, "Income Statement - Reporting Comprehensive Income" allows Companies to make a one-time reclassification from accumulated other comprehensive income (loss) to retained earnings for the effects of remeasuring deferred income taxes originally recorded in other comprehensive income as a result of the change in the federal income tax rate by the Tax Cuts and Jobs Act.  The Company adopted this guidance as of January 1, 2018 with no impact on total shareholders' equity or net income.

 
 
 
- 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, 2018
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
45,384
   
$
94
   
$
(1,112
)
 
$
44,366
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
66,072
     
-
     
(2,248
)
   
63,824
 
Mortgage-related securities
   
111,456
     
94
     
(3,360
)
   
108,190
 
                                 
Government sponsored enterprise bonds
   
500
     
-
     
(1
)
   
499
 
Municipal securities
   
56,415
     
526
     
(291
)
   
56,650
 
Other debt securities
   
15,003
     
-
     
(1,511
)
   
13,492
 
Debt securities
   
71,918
     
526
     
(1,803
)
   
70,641
 
Certificates of deposit
   
245
     
-
     
-
     
245
 
   
$
183,619
   
$
620
   
$
(5,163
)
 
$
179,076
 


   
December 31, 2017
 
   
Amortized cost
   
Gross unrealized gains
   
Gross unrealized losses
   
Fair value
 
   
(In Thousands)
 
Mortgage-backed securities
 
$
57,351
   
$
324
   
$
(240
)
 
$
57,435
 
Collateralized mortgage obligations:
                               
Government sponsored enterprise issued
   
61,313
     
3
     
(816
)
   
60,500
 
Mortgage-related securities
   
118,664
     
327
     
(1,056
)
   
117,935
 
                                 
Government sponsored enterprise bonds
   
2,500
     
-
     
(3
)
   
2,497
 
Municipal securities
   
62,516
     
1,334
     
(81
)
   
63,769
 
Other debt securities
   
15,005
     
12
     
(492
)
   
14,525
 
Debt securities
   
80,021
     
1,346
     
(576
)
   
80,791
 
Certificates of deposit
   
980
     
1
     
-
     
981
 
   
$
199,665
   
$
1,674
   
$
(1,632
)
 
$
199,707
 


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, 2018, $1.9 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities. At December 31, 2017, $2.5 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.

The amortized cost and fair values of investment securities by contractual maturity at September 30, 2018 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
 
$
2,750
   
$
2,746
 
Due after one year through five years
   
26,710
     
26,503
 
Due after five years through ten years
   
31,038
     
31,405
 
Due after ten years
   
11,665
     
10,232
 
Mortgage-related securities
   
111,456
     
108,190
 
   
$
183,619
   
$
179,076
 

- 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:

   
September 30, 2018
 
   
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
 
$
24,121
   
$
(530
)
 
$
17,479
   
$
(582
)
 
$
41,600
   
$
(1,112
)
Collateralized mortgage obligations:
                                               
  Government sponsored enterprise issued
   
30,376
     
(779
)
   
31,427
     
(1,469
)
   
61,803
     
(2,248
)
Government sponsored enterprise bonds
   
-
     
-
     
499
     
(1
)
   
499
     
(1
)
Municipal securities
   
27,459
     
(253
)
   
2,117
     
(38
)
   
29,576
     
(291
)
Other debt securities
   
4,980
     
(23
)
   
8,512
     
(1,488
)
   
13,492
     
(1,511
)
   
$
86,936
   
$
(1,585
)
 
$
60,034
   
$
(3,578
)
 
$
146,970
   
$
(5,163
)


   
December 31, 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
 
$
35,136
   
$
(143
)
 
$
4,464
   
$
(97
)
 
$
39,600
   
$
(240
)
Collateralized mortgage obligations:
                                               
Government sponsored enterprise issued
   
37,949
     
(348
)
   
21,651
     
(468
)
   
59,600
     
(816
)
Government sponsored enterprise bonds
   
2,497
     
(3
)
   
-
     
-
     
2,497
     
(3
)
Municipal securities
   
17,096
     
(80
)
   
100
     
(1
)
   
17,196
     
(81
)
Other debt securities
   
-
     
-
     
9,508
     
(492
)
   
9,508
     
(492
)
   
$
92,678
   
$
(574
)
 
$
35,723
   
$
(1,058
)
 
$
128,401
   
$
(1,632
)

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, 2016
 
$
94
 
Credit-related impairments related to securities for which an other- than-temporary impairment was not previously recognized
   
-
 
Credit-related impairments on securities as of December 31, 2017
   
94
 
Credit-related impairments related to securities for which an other- than-temporary impairment was not previously recognized
   
-
 
Credit-related impairments on securities as of September 30, 2018
 
$
94
 

As of September 30, 2018, 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, 2018, this security had an amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of September 30, 2018, the Company had 22 mortgage-backed securities, 26 government sponsored enterprise issued securities, six municipal bond securities, and one corporate debt security which had been in an unrealized loss position for twelve months or longer and represents a loss of 5.6% of the aggregate amortized cost. These securities were determined not to be other-than-temporarily impaired as of September 30, 2018. 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 -

The unrealized losses for the other debt security with an unrealized loss greater than 12 months is due to the current slope of the yield curve.  The security currently earns a fixed interest rate but transitions in the future to a floating rate that is indexed to the 10 year Treasury interest rate.  The Company does not intend to sell nor does it believe that it will be required to sell the security before recovery of their amortized cost basis.

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, 2018, there were no sales of securities. 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, net of tax, from accumulated other comprehensive income.


 
 
 
 
 
 
 
 
 
 
 
- 12 -

Note 3 - Loans Receivable

Loans receivable at September 30, 2018 and December 31, 2017 are summarized as follows:

   
September 30, 2018
   
December 31, 2017
 
   
(In Thousands)
 
Mortgage loans:
           
Residential real estate:
           
One- to four-family
 
$
485,449
   
$
439,597
 
Multi-family
   
586,563
     
578,440
 
Home equity
   
20,417
     
21,124
 
Construction and land
   
8,947
     
19,859
 
Commercial real estate
   
222,742
     
195,842
 
Consumer
   
400
     
255
 
Commercial loans
   
33,138
     
36,697
 
   
$
1,357,656
   
$
1,291,814
 

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 $1.01 billion and $971.3 million at September 30, 2018 and December 31, 2017, respectively, are pledged as collateral against $435.0 million and $375.0 million in outstanding Federal Home Loan Bank of Chicago ("FHLBC") advances under a blanket security agreement at September 30, 2018 and December 31, 2017.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank.  As of September 30, 2018 and December 31, 2017, loans aggregating approximately $3.2 million and $4.5 million, respectively, were outstanding to such parties.  None of these loans were considered impaired as of September 30, 2018 or December 31, 2017.

As of September 30, 2018 and December 31, 2017, 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, 2018 and December 31, 2017 follows:
 
As of September 30, 2018
 
 
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
 
$
3,792
   
$
27
   
$
3,720
   
$
7,539
   
$
477,910
   
$
485,449
 
Multi-family
   
355
     
-
     
593
     
948
     
585,615
     
586,563
 
Home equity
   
263
     
-
     
111
     
374
     
20,043
     
20,417
 
Construction and land
   
-
     
-
     
-
     
-
     
8,947
     
8,947
 
Commercial real estate
   
-
     
-
     
172
     
172
     
222,570
     
222,742
 
Consumer
   
34
     
-
     
-
     
34
     
366
     
400
 
Commercial loans
   
-
     
-
     
26
     
26
     
33,112
     
33,138
 
Total
 
$
4,444
   
$
27
   
$
4,622
   
$
9,093
   
$
1,348,563
   
$
1,357,656
 
 
 
As of December 31, 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
 
$
1,494
   
$
146
   
$
3,516
   
$
5,156
   
$
434,441
   
$
439,597
 
Multi-family
   
-
     
128
     
192
     
320
     
578,120
     
578,440
 
Home equity
   
68
     
-
     
56
     
124
     
21,000
     
21,124
 
Construction and land
   
-
     
-
     
-
     
-
     
19,859
     
19,859
 
Commercial real estate
   
-
     
-
     
184
     
184
     
195,658
     
195,842
 
Consumer
   
-
     
-
     
-
     
-
     
255
     
255
 
Commercial loans
   
-
     
42
     
26
     
68
     
36,629
     
36,697
 
Total
 
$
1,562
   
$
316
   
$
3,974
   
$
5,852
   
$
1,285,962
   
$
1,291,814
 
 
(1)
Includes $442,000 and $241,000 at September 30, 2018 and December 31, 2017, respectively, which are on non-accrual status.
(2)
Includes $- and $15,000 at September 30, 2018 and December 31, 2017, respectively, which are on non-accrual status.
(3)
Includes $1.5 million and $1.8 million at September 30, 2018 and December 31, 2017, respectively, which are on non-accrual status.

- 13 -

A summary of the activity for the nine months ended September 30, 2018 and 2017 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, 2018
                                           
Balance at beginning of period
 
$
5,794
   
$
4,431
   
$
356
   
$
949
   
$
1,881
   
$
10
   
$
656
   
$
14,077
 
Provision (credit) for loan losses
   
205
     
(491
)
   
(57
)
   
(702
)
   
133
     
4
     
(152
)
   
(1,060
)
Charge-offs
   
(68
)
   
(13
)
   
(1
)
   
-
     
-
     
-
     
-
     
(82
)
Recoveries
   
150
     
82
     
18
     
40
     
1
     
-
     
-
     
291
 
Balance at end of period
 
$
6,081
   
$
4,009
   
$
316
   
$
287
   
$
2,015
   
$
14
   
$
504
   
$
13,226
 

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
 

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of September 30, 2018 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
 
$
51
   
$
-
   
$
32
   
$
-
   
$
21
   
$
-
   
$
-
   
$
104
 
Allowance related to loans collectively evaluated for impairment
   
6,030
     
4,009
     
284
     
287
     
1,994
     
14
     
504
     
13,122
 
Balance at end of period
 
$
6,081
   
$
4,009
   
$
316
   
$
287
   
$
2,015
   
$
14
   
$
504
   
$
13,226
 
                                                                 
Loans individually evaluated for impairment
 
$
7,903
   
$
981
   
$
217
   
$
-
   
$
457
   
$
-
   
$
26
   
$
9,584
 
Loans collectively evaluated for impairment
   
477,546
     
585,582
     
20,200
     
8,947
     
222,285
     
400
     
33,112
     
1,348,072
 
Total gross loans
 
$
485,449
   
$
586,563
   
$
20,417
   
$
8,947
   
$
222,742
   
$
400
   
$
33,138
   
$
1,357,656
 

- 14 -

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 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
 
$
77
   
$
-
   
$
44
   
$
-
   
$
34
   
$
-
   
$
-
   
$
155
 
Allowance related to loans collectively evaluated for impairment
   
5,717
     
4,431
     
312
     
949
     
1,847
     
10
     
656
     
13,922
 
Balance at end of period
 
$
5,794
   
$
4,431
   
$
356
   
$
949
   
$
1,881
   
$
10
   
$
656
   
$
14,077
 
                                                                 
Loans individually evaluated for impairment
 
$
7,418
   
$
1,007
   
$
185
   
$
-
   
$
540
   
$
-
   
$
26
   
$
9,176
 
Loans collectively evaluated for impairment
   
432,179
     
577,433
     
20,939
     
19,859
     
195,302
     
255
     
36,671
     
1,282,638
 
Total gross loans
 
$
439,597
   
$
578,440
   
$
21,124
   
$
19,859
   
$
195,842
   
$
255
   
$
36,697
   
$
1,291,814
 

The following table presents information relating to the Company's internal risk ratings of its loans receivable as of September 30, 2018 and December 31, 2017:

   
One
to Four- Family
   
Multi-Family
   
Home
Equity
   
Construction
and Land
   
Commercial
Real Estate
   
Consumer
   
Commercial
   
Total
 
   
(In Thousands)
 
At September 30, 2018
                                               
Substandard
 
$
8,061
   
$
981
   
$
249
   
$
-
   
$
732
   
$
-
   
$
936
   
$
10,959
 
Watch
   
6,053
     
326
     
421
     
-
     
109
     
-
     
923
     
7,832
 
Pass
   
471,335
     
585,256
     
19,747
     
8,947
     
221,901
     
400
     
31,279
     
1,338,865
 
   
$
485,449
   
$
586,563
   
$
20,417
   
$
8,947
   
$
222,742
   
$
400
   
$
33,138
   
$
1,357,656
 
                                                                 
At December 31, 2017
                                                               
Substandard
 
$
7,581
   
$
1,135
   
$
138
   
$
-
   
$
1,124
   
$
-
   
$
1,585
   
$
11,563
 
Watch
   
4,939
     
330
     
401
     
-
     
295
     
-
     
741
     
6,706
 
Pass
   
427,077
     
576,975
     
20,585
     
19,859
     
194,423
     
255
     
34,371
     
1,273,545
 
   
$
439,597
   
$
578,440
   
$
21,124
   
$
19,859
   
$
195,842
   
$
255
   
$
36,697
   
$
1,291,814
 

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.  A member of the credit department, independent of the loan originator, performs a loan review 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.

- 15 -

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, 2018 and December 31, 2017.

   
As of or for the Nine Months Ended September 30, 2018
 
   
Recorded
Investment
   
Unpaid
Principal
   
Reserve
   
Cumulative
Charge-Offs
   
Average
Recorded
Investment
   
Interest
Paid
 
   
(In Thousands)
 
Total Impaired with Reserve
                                   
One- to four-family
 
$
467
   
$
467
   
$
51
   
$
-
   
$
468
   
$
24
 
Multi-family
   
-
     
-
     
-
     
-
     
-
     
-
 
Home equity
   
76
     
76
     
32
     
-
     
79
     
4
 
Construction and land
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial real estate
   
21
     
430
     
21
     
409
     
28
     
-
 
Consumer
   
-
     
-
     
-
     
-
     
-
     
-
 
Commercial
   
-
     
-