WATERSTONE FINANCIAL, INC.

10-Q INDEX

	Page No.

PART I. FINANCIAL INFORMATION	3

Item l. Financial Statements	3

~~Item l. Financial Statements~~	3
Consolidated Statements of Financial Condition as of ~~September 30, 2017~~March 31, 2019 (unaudited) and December 31, ~~2016~~ 2018	3
Consolidated Statements of Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (unaudited)	4
Consolidated Statements of Comprehensive Income for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (unaudited)	5
Consolidated Statements of Changes in ~~Shareholders'~~Shareholders’ Equity for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (unaudited)	6
Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 (unaudited)	7
Notes to Consolidated Financial Statements (unaudited)	89 - 3537

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	3638 - 5653
Item 3. Quantitative and Qualitative Disclosures about Market Risk	5754
Item 4. Controls and Procedures	5755

PART II. OTHER INFORMATION	5855

Item 1. Legal Proceedings	5855
Item 1A. Risk Factors Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Item 3. Defaults Upon Senior Securities Item 4. Mine Safety Disclosures Item 5. Other Information	5855 5855 5955 5956 5956
Item 6. Exhibits	5957
Signatures	5956

- 2 -

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	(Unaudited)
	March 31, 2019			December 31, 2018
Assets	(Dollars In Thousands, except share and per share data)
Cash	$	77,381		$	48,234
Federal funds sold		17,905			25,100
Interest-earning deposits in other financial institutions and other short term investments		9,547			12,767
Cash and cash equivalents		104,833			86,101
Securities available for sale (at fair value)		184,224			185,720
Loans held for sale (at fair value)		123,011			141,616
Loans receivable		1,379,866			1,379,148
Less: Allowance for loan losses		12,561			13,249
Loans receivable, net		1,367,305			1,365,899

Office properties and equipment, net		24,215			24,524
Federal Home Loan Bank stock (at cost)		19,350			19,350
Cash surrender value of life insurance		67,894			67,550
Real estate owned, net		1,649			2,152
Prepaid expenses and other assets		36,184			22,469
Total assets	$	1,928,665		$	1,915,381

Liabilities and Shareholders’ Equity
Liabilities:
Demand deposits	$	128,470		$	139,111
Money market and savings deposits		175,380			163,511
Time deposits		733,491			735,873
Total deposits		1,037,341			1,038,495

Borrowings		448,451			435,046
Advance payments by borrowers for taxes		11,409			4,371
Other liabilities		46,996			37,790
Total liabilities		1,544,197			1,515,702

Shareholders’ equity:
Preferred stock (par value $.01 per share)
Authorized - 50,000,000 shares in 2019 and in 2018, no shares issued		-			-
Common stock (par value $.01 per share)
Authorized - 100,000,000 shares in 2019 and in 2018
Issued - 28,004,135 in 2019 and 28,463,239 in 2018
Outstanding - 28,004,135 in 2019 and 28,463,239 in 2018		280			285
Additional paid-in capital		331,128			330,327
Retained earnings		177,303			187,153
Unearned ESOP shares		(17,507	)		(17,804	)
Accumulated other comprehensive loss, net of taxes		(851	)		(2,361	)
Cost of shares repurchased (7,653,488 shares at March 31, 2019 and 7,171,537 shares at December 31, 2018)		(105,885	)		(97,921	)
Total shareholders’ equity		384,468			399,679
Total liabilities and shareholders’ equity	$	1,928,665		$	1,915,381

See accompanying notes to unaudited consolidated financial statements.

- 3 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three months ended March 31,
	2019			2018
	(In Thousands, except per share amounts)

Interest income:
Loans	$	17,104		$	15,458
Mortgage-related securities		759			638
Debt securities, federal funds sold and short-term investments		1,309			867
Total interest income		19,172			16,963
Interest expense:
Deposits		3,990			2,314
Borrowings		2,246			1,508
Total interest expense		6,236			3,822
Net interest income		12,936			13,141
Provision for loan losses		(680	)		(880	)
Net interest income after provision for loan losses		13,616			14,021
Noninterest income:
Service charges on loans and deposits		379			399
Increase in cash surrender value of life insurance		344			328
Mortgage banking income		23,359			24,187
Other		175			269
Total noninterest income		24,257			25,183
Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		20,639			20,983
Occupancy, office furniture, and equipment		2,776			2,639
Advertising		958			860
Data processing		769			625
Communications		328			382
Professional fees		695			700
Real estate owned		32			317
Loan processing expense		805			988
Other		2,347			2,653
Total noninterest expenses		29,349			30,147
Income before income taxes		8,524			9,057
Income tax expense		1,982			2,104
Net income	$	6,542		$	6,953
Income per share:
Basic	$	0.25		$	0.25
Diluted	$	0.24		$	0.25
Weighted average shares outstanding:
Basic		26,499			27,509
Diluted		26,720			27,802

See accompanying notes to unaudited consolidated financial statements.

- 4 -

WATERSONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF ~~FINANCIAL CONDITION~~COMPREHENSIVE INCOME

(Unaudited)

(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

	Three months ended March 31,
	2019		2018
	(In Thousands)
Net income	$	6,542	$	6,953

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 $(565) and $812 respectively		1,510		(2,159	)
Reclassification adjustment for net deferred tax liability revaluation		-		5

Total other comprehensive income (loss)		1,510		(2,154	)
Comprehensive income	$	8,052	$	4,799

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
	(In Thousands, except per share amounts)
Balances at December 31, 2017		29,501		$	$295		$	326,655	$	183,358		$	(18,991	)	$	(477	)	$	(78,736	)	$	412,104

Comprehensive income:
Net income		-			-			-		6,953			-			-			-			6,953
Other comprehensive loss		-			-			-		-			-			(2,154	)		-			(2,154	)
Total comprehensive income																						4,799

Reclassification for net deferred tax liability revaluation		-			-			-		(5	)		-			-			-			(5	)
ESOP shares committed to be released to Plan participants		-			-			159		-			297			-			-			456
Cash dividend, $0.62 per share		-			-			-		(17,143	)		-			-			-			(17,143	)
Stock compensation activity, net of tax		40			-			494		-			-			-			-			494
Stock compensation expense		-			-			440		-			-			-			-			440
Purchase of common stock returned to authorized but unissued		(217	)		(2	)		-		-			-			-			(3,724	)		(3,726	)
Balances at March 31, 2018		29,324		$	293		$	327,748	$	173,163		$	(18,694	)	$	(2,631	)	$	(82,460	)	$	397,419


Balances at December 31, 2018		28,463		$	$285		$	330,327	$	187,153		$	(17,804	)	$	(2,361	)	$	(97,921	)	$	399,679

Comprehensive income:
Net income		-			-			-		6,542			-			-			-			6,542
Other comprehensive income		-			-			-		-			-			1,510			-			1,510
Total comprehensive income																						8,052

ESOP shares committed to be released to Plan participants		-			-			140		-			297			-			-			437
Cash dividend, $0.62 per share		-			-			-		(16,392	)		-			-			-			(16,392	)
Stock based compensation activity		23			-			292		-			-			-			-			292
Stock compensation expense		-			-			369		-			-			-			-			369
Purchase of common stock returned to authorized but unissued		(482	)		(5	)		-		-			-			-			(7,964	)		(7,969	)
Balances at March 31, 2019		28,004		$	280		$	331,128	$	177,303		$	(17,507	)	$	(851	)	$	(105,885	)	$	384,468

See accompanying notes to unaudited consolidated financial statements.

- 6 -

WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Three months ended March 31,
	2019			2018
	(In Thousands)

Operating activities:
Net income	$	6,542		$	6,953
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		(680	)		(880	)
Provision for depreciation		608			558
Deferred taxes		1,187			(305	)
Stock based compensation		369			440
Net amortization of premium/discount on debt and mortgage related securities		69			148
Amortization of unearned ESOP shares		437			456
Amortization and impairment of mortgage servicing rights		67			49
Gain on sale of loans held for sale		(23,551	)		(20,684	)
Loans originated for sale		(491,239	)		(489,155	)
Proceeds on sales of loans originated for sale		533,395			532,097
Increase in accrued interest receivable		(357	)		(273	)
Increase in cash surrender value of life insurance		(344	)		(328	)
Increase in accrued interest on deposits and borrowings		33			18
Increase in other liabilities		(3,399	)		(2,166	)
Decrease (increase) in prepaid tax expense		122			(783	)
Net (gain) loss related to real estate owned		(12	)		201
Other		(5,483	)		(6,549	)
Net cash provided by operating activities		17,764			19,797

Investing activities:
Net increase in loans receivable		(756	)		(23,103	)
Net change in FHLB stock		-			(1,800	)
Purchases of:
Mortgage related securities		(2,745	)		-
Premises and equipment, net		(330	)		(221	)
Proceeds from:
Principal repayments on mortgage-related securities		5,997			7,245
Maturities of debt securities		250			2,365
Sales of real estate owned		528			1,197
Net cash provided by (used in) investing activities		2,944			(14,317	)

Financing activities:
Net (decrease) increase in deposits		(1,154	)		6,844
Net change in short term borrowings		13,405			(16,920	)
Repayment of long term debt		-			65,000
Proceeds from long term debt		-			-
Cash paid for advance payments by borrowers for taxes		(3,922	)		(5,184	)
Cash dividends on common stock		(2,628	)		(17,188	)
Purchase of common stock returned to authorized but unissued		(7,969	)		(3,726	)
Proceeds from stock option exercises		292			494
Net cash (used in) provided by financing activities		(1,976	)		29,320
Increase in cash and cash equivalents		18,732			34,800
Cash and cash equivalents at beginning of period		86,101			48,607
Cash and cash equivalents at end of period	$	104,833		$	83,407

Supplemental information:
Cash paid or credited during the period for:
Income tax payments	$	1,238		$	2,384
Interest payments		6,203			3,804
Noncash activities:
Loans receivable transferred to real estate owned		30			238
Dividends declared but not paid in other liabilities		17,562			3,850

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"~~“Company”) and the ~~Company's~~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"~~(“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'~~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~~Company’s December 31, ~~2016~~2018 Annual Report on Form 10-K. Operating results for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, ~~2017~~2019 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)~~("ASC") Topic 606 "Revenue from Contracts with Customers." ~~New authoritative~~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~~completed 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~~adopted ASC 606 onas of 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.~~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." ~~New authoritative~~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~~Company adopted ASC 825 as of January 1, 2018 ~~and is not expected to have a~~with no material impact on the Company's statements of ~~operations~~income or financial condition.

~~- 8 -~~

ASC Topic 842 "Leases." ~~New authoritative~~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 asused 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.prospective approach. The Company adopted ~~this standard on~~ASC 842 as of January 1, ~~2017.~~2019 with no impact on statement of income. See ~~Note 9 for~~ the impact on the ~~Company's statement of operations.~~financial condition discussed in Note 16.

ASC Topic 326 "Financial Instruments - Credit Losses." ~~New authoritative~~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~~income and financial condition.

ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs." ~~New authoritative~~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~~Company adopted ASC 310 as of January 1, 2019 with ~~early adoption permitted. The Company is evaluating the new guidance and its~~no material impact on the Company's statements of operations ~~and~~or financial condition.

- 9 -

Note 2— Securities Available for Sale

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

	September 30, 2017									March 31, 2019
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In Thousands)									(In Thousands)
Mortgage-backed securities	$	61,692	$	631	$	(105	)	$	62,218	$	39,062	$	149	$	(267	)	$	38,944
Collateralized mortgage obligations:
Government sponsored enterprise issued		54,949		56		(345	)		54,660		75,716		532		(664	)		75,584
Mortgage-related securities		116,641		687		(450	)		116,878		114,778		681		(931	)		114,528

Government sponsored enterprise bonds		2,500		-		(1	)		2,499
Municipal securities		64,100		1,578		(16	)		65,662		54,921		1,311		(16	)		56,216
Other debt securities		15,005		61		(492	)		14,574		15,002		-		(1,522	)		13,480
Debt securities		81,605		1,639		(509	)		82,735		69,923		1,311		(1,538	)		69,696
Certificates of deposit		1,225		3		(1	)		1,227
	$	199,471	$	2,329	$	(960	)	$	200,840	$	184,701	$	1,992	$	(2,469	)	$	184,224

	December 31, 2016									December 31, 2018
	Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value		Amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In Thousands)									(In Thousands)
Mortgage-backed securities	$	72,858	$	798	$	(243	)	$	73,413	$	42,105	$	91	$	(565	)	$	41,631
Collateralized mortgage obligations:
Government sponsored enterprise issued		62,297		70		(365	)		62,002		75,923		243		(1,211	)		74,955
Mortgage-related securities		135,155		868		(608	)		135,415		118,028		334		(1,776	)		116,586

Government sponsored enterprise bonds		2,500		4		(1	)		2,503
Municipal securities		70,311		685		(300	)		70,696		55,242		825		(119	)		55,948
Other debt securities		17,399		154		(603	)		16,950		15,002		-		(1,816	)		13,186
Debt securities		90,210		843		(904	)		90,149		70,244		825		(1,935	)		69,134
Certificates of deposit		1,225		7		(1	)		1,231
	$	226,590	$	1,718	$	(1,513	)	$	226,795	$	188,272	$	1,159	$	(3,711	)	$	185,720

The ~~Company's~~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~~March 31, 2019, $1.7 million of the ~~Company's~~Company’s mortgage related securities were pledged as collateral to secure ~~repurchase agreement obligations of the Company. As of September 30, 2017, $2.7~~mortgage banking related activities. At December 31, 2018, $1.8 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~~March 31, 2019 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		Amortized Cost		Fair Value
	(In Thousands)				(In Thousands)
Debt and other securities
Due within one year	$	11,214	$	11,207	$	9,095	$	9,088
Due after one year through five years		20,919		21,116		21,068		21,235
Due after five years through ten years		36,891		38,178		29,146		30,165
Due after ten years		13,806		13,461		10,614		9,208
Mortgage-related securities		116,641		116,878		114,778		114,528
	$	199,471	$	200,840	$	184,701	$	184,224

- 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, 2017															March 31, 2019
	Less than 12 months					12 months or longer					Total					Less than 12 months				12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss		Fair value		Unrealized loss			Fair value		Unrealized loss
	(In Thousands)															(In Thousands)
Mortgage-backed securities	$	8,547	$	(42	)	$	3,553	$	(63	)	$	12,100	$	(105	)	$	-	$	-	$	29,148	$	(267	)	$	29,148	$	(267	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		33,229		(313	)		2,188		(32	)		35,417		(345	)		-		-		45,586		(664	)		45,586		(664	)
Government sponsored enterprise bonds		2,499		(1	)		-		-			2,499		(1	)
Municipal securities		10,301		(15	)		101		(1	)		10,402		(16	)		-		-		5,606		(16	)		5,606		(16	)
Other debt securities		-		-			9,508		(492	)		9,508		(492	)		-		-		13,480		(1,522	)		13,480		(1,522	)
Certificates of deposit		489		(1	)		-		-			489		(1	)
	$	55,065	$	(372	)	$	15,350	$	(588	)	$	70,415	$	(960	)	$	-	$	-	$	93,820	$	(2,469	)	$	93,820	$	(2,469	)

	December 31, 2016															December 31, 2018
	Less than 12 months					12 months or longer					Total					Less than 12 months					12 months or longer					Total
	Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss			Fair value		Unrealized loss
	(In Thousands)															(In Thousands)
Mortgage-backed securities	$	23,433	$	(222	)	$	1,068	$	(21	)	$	24,501	$	(243	)	$	3,036	$	(9	)	$	33,029	$	(556	)	$	36,065	$	(565	)
Collateralized mortgage obligations:
Government sponsored enterprise issued		39,395		(365	)		-		-			39,395		(365	)		3,079		(13	)		47,279		(1,198	)		50,358		(1,211	)
Government sponsored enterprise bonds		2,000		(1	)		-		-			2,000		(1	)
Municipal securities		32,141		(300	)		-		-			32,141		(300	)		7,595		(17	)		11,272		(102	)		18,867		(119	)
Other debt securities		-		-			9,397		(603	)		9,397		(603	)		-		-			13,186		(1,816	)		13,186		(1,816	)
Certificates of deposit		489		(1	)		-		-			489		(1	)
	$	97,458	$	(889	)	$	10,465	$	(624	)	$	107,923	$	(1,513	)	$	13,710	$	(39	)	$	104,766	$	(3,672	)	$	118,476	$	(3,711	)

- 11 -

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~~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

	(In Thousands)
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 December 31, 2018		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 March 31, 2019	$	94

As of ~~September 30, 2017,~~March 31, 2019, 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,~~March 31, 2019, this security had an amortized cost of $116,000 and total life-to-date impairment of $94,000.

As of ~~September 30, 2017,~~March 31, 2019, the Company had ~~four~~41 mortgage-backed securities, ~~two~~38 government sponsored enterprise issued securities, ~~one~~16 municipal bond ~~security,~~securities, and ~~one other~~two corporate debt ~~security~~securities which had been in an unrealized loss position for twelve months or ~~longer.~~longer and represents a loss of 2.6% of the aggregate amortized cost. These securities were determined not to be other-than-temporarily impaired as of ~~September 30, 2017.~~March 31, 2019. 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.

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~~three months ended ~~September 30, 2017, proceeds from the sale of securities totaled $448,000~~March 31, 2019 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. ThereMarch 31, 2018, there were no sales of ~~securities during the nine months ended September 30, 2016.~~securities.

- 12 -

Note 3 - Loans Receivable

Loans receivable at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are summarized as follows:

	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
	(In Thousands)				(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family	$	427,195	$	392,817	$	481,807	$	489,979
Multi-family		580,134		558,592		595,467		597,087
Home equity		21,606		21,778		19,379		19,956
Construction and land		16,451		18,179		24,074		13,361
Commercial real estate		181,328		159,401		225,580		225,522
Consumer		266		319		577		433
Commercial loans		34,180		26,798		32,982		32,810
	$	1,261,160	$	1,177,884	$	1,379,866	$	1,379,148

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. While the real estate collateralizing these loans is primarily residential in nature, it ranges from owner-occupied single family homes to large apartment complexes.

Qualifying loans receivable totaling ~~$950.7 million~~$1.09 billion and ~~$911.9 million~~$1.01 billion at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively, are pledged as collateral against ~~$410.0 million and $295.0~~$430.0 million in outstanding Federal Home Loan Bank of Chicago ~~(FHLBC)~~("FHLB") advances under a blanket security agreement at ~~September 30, 2017~~both March 31, 2019 and December 31, ~~2016.~~2018.

Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank. As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, loans aggregating approximately $4.7 million and ~~$5.1~~$5.3 million, respectively, were outstanding to such parties. None of these loans were past due or considered impaired as of ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018.

As of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, 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~~March 31, 2019 and December 31, ~~2016~~2018 follows:

	As of September 30, 2017													As of March 31, 2019
	1-59 Days Past Due⁽¹⁾			60-89 Days Past Due⁽²⁾		90 Days or Greater		Total Past Due		Current⁽³⁾		Total Loans		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)													(In Thousands)
Mortgage loans:
Residential real estate:
One- to four-family		$	1,859	$	192	$	4,161	$	6,212	$	420,983	$	427,195		$	1,624	$	-	$	3,825	$	5,449	$	476,358	$	481,807
Multi-family			332		-		407		739		579,395		580,134			-		-		579		579		594,888		595,467
Home equity			220		-		91		311		21,295		21,606			48		-		91		139		19,240		19,379
Construction and land			-		-		37		37		16,414		16,451			-		-		-		-		24,074		24,074
Commercial real estate			1,270		156		181		1,607		179,721		181,328			-		-		114		114		225,466		225,580
Consumer			-		-		-		-		266		266			-		-		-		-		577		577
Commercial loans			23		-		26		49		34,131		34,180			-		-		13		13		32,969		32,982
Total		$	3,704	$	348	$	4,903	$	8,955	$	1,252,205	$	1,261,160		$	1,672	$	-	$	4,622	$	6,294	$	1,373,572	$	1,379,866

	As of December 31, 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		$	1,523	$	76	$	3,834	$	5,433	$	484,546	$	489,979
Multi-family			-		-		937		937		596,150		597,087
Home equity			216		42		111		369		19,587		19,956
Construction and land			-		-		-		-		13,361		13,361
Commercial real estate			39		-		125		164		225,358		225,522
Consumer			29		-		-		29		404		433
Commercial loans			-		-		18		18		32,792		32,810
Total		$	1,807	$	118	$	5,025	$	6,950	$	1,372,198	$	1,379,148

⁽¹⁾Includes $25,000 and $422,000 at March 31, 2019 and December 31, 2018, respectively, which are on non-accrual status.

⁽²⁾Includes $- and $118,000 at March 31, 2019 and December 31, 2018, respectively, which are on non-accrual status.

⁽³⁾Includes $2.2 million and $990,000 at March 31, 2019 and December 31, 2018, respectively, which are on non-accrual status.

- 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~~three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 in the allowance for loan losses follows:

	One- to Four- Family			Multi-Family			Home Equity		Construction and Land			Commercial Real Estate			Consumer			Commercial			Total				One- to Four- Family			Multi-Family		Home Equity			Construction and Land			Commercial Real Estate			Consumer			Commercial			Total
	(In Thousands)																								(In Thousands)
Nine months ended September 30, 2017
Three months ended March 31, 2019																								Three months ended March 31, 2019
Balance at beginning of period	$	7,164		$	4,809		$	364	$	1,016		$	1,951		$	12		$	713		$	16,029			$	5,742		$	4,153	$	325		$	400		$	2,126		$	20		$	483		$	13,249
Provision (credit) for loan losses		(249	)		(396	)		8		(283	)		(170	)		(2	)		(74	)		(1,166	)			(550	)		174		(47	)		(47	)		(122	)		(13	)		(75	)		(680	)
Charge-offs		(1,092	)		(92	)		-		(14	)		(6	)		-			-			(1,204	)			(24	)		-		(8	)		-			-			-			-			(32	)
Recoveries		200			102			21		80			1			-			-			404				13			4		6			-			1			-			-			24
Balance at end of period	$	6,023		$	4,423		$	393	$	799		$	1,776		$	10		$	639		$	14,063			$	5,181		$	4,331	$	276		$	353		$	2,005		$	7		$	408		$	12,561

Nine months ended September 30, 2016
Three months ended March 31, 2018																						Three months ended March 31, 2018
Balance at beginning of period	$	7,763		$	5,000		$	433		$	904		$	1,680	$	9	$	396	$	16,185			$	5,794		$	4,431		$	356		$	949		$	1,881	$	10		$	656		$	14,077
Provision (credit) for loan losses		141			23			(25	)		(123	)		33		3		288		340				58			(514	)		(19	)		(247	)		25		(1	)		(182	)		(880	)
Charge-offs		(801	)		(488	)		(62	)		(3	)		-		-		-		(1,354	)			(60	)		-			-			-			-		-			-			(60	)
Recoveries		246			134			24			58			-		-		-		462				32			13			7			-			1		-			-			53
Balance at end of period	$	7,349		$	4,669		$	370		$	836		$	1,713	$	12	$	684	$	15,633			$	5,824		$	3,930		$	344		$	702		$	1,907	$	9		$	474		$	13,190

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of ~~September 30, 2017~~March 31, 2019 follows:

	One- to Four- Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total		One- to Four- Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)																(In Thousands)
Allowance related to loans individually evaluated for impairment	$	198	$	-	$	77	$	-	$	38	$	-	$	-	$	313	$	74	$	83	$	31	$	-	$	121	$	-	$	-	$	309
Allowance related to loans collectively evaluated for impairment		5,825		4,423		316		799		1,738		10		639		13,750		5,107		4,248		245		353		1,884		7		408		12,252
Balance at end of period	$	6,023	$	4,423	$	393	$	799	$	1,776	$	10	$	639	$	14,063	$	5,181	$	4,331	$	276	$	353	$	2,005	$	7	$	408	$	12,561

Loans individually evaluated for impairment	$	8,456	$	833	$	302	$	37	$	472	$	-	$	26	$	10,126	$	7,951	$	1,283	$	222	$	-	$	2,855	$	-	$	13	$	12,324
Loans collectively evaluated for impairment		418,739		579,301		21,304		16,414		180,856		266		34,154		1,251,034		473,855		594,185		19,157		24,074		222,725		577		32,969		1,367,542
Total gross loans	$	427,195	$	580,134	$	21,606	$	16,451	$	181,328	$	266	$	34,180	$	1,261,160	$	481,807	$	595,467	$	19,379	$	24,074	$	225,580	$	577	$	32,982	$	1,379,866

~~- 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~~2018 follows:

	One- to Four-Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total		One- to Four-Family		Multi- Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)																(In Thousands)
Allowance related to loans individually evaluated for impairment	$	499	$	-	$	79	$	-	$	83	$	-	$	1	$	662	$	73	$	-	$	46	$	-	$	67	$	-	$	-	$	186
Allowance related to loans collectively evaluated for impairment		6,665		4,809		285		1,016		1,868		12		712		15,367		5,669		4,153		279		400		2,059		20		483		13,063
Balance at end of period	$	7,164	$	4,809	$	364	$	1,016	$	1,951	$	12	$	713	$	16,029	$	5,742	$	4,153	$	325	$	400	$	2,126	$	20	$	483	$	13,249

Loans individually evaluated for impairment	$	10,920	$	3,941	$	442	$	-	$	718	$	-	$	41	$	16,062	$	7,642	$	1,309	$	246	$	-	$	2,885	$	-	$	18	$	12,100
Loans collectively evaluated for impairment		381,897		554,651		21,336		18,179		158,683		319		26,757		1,161,822		482,337		595,778		19,710		13,361		222,637		433		32,792		1,367,048
Total gross loans	$	392,817	$	558,592	$	21,778	$	18,179	$	159,401	$	319	$	26,798	$	1,177,884	$	489,979	$	597,087	$	19,956	$	13,361	$	225,522	$	433	$	32,810	$	1,379,148

- 14 -

The following table presents information relating to the ~~Company's~~Company’s internal risk ratings of its loans receivable as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:

	One to Four- Family		Multi-Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total		One to Four- Family		Multi-Family		Home Equity		Construction and Land		Commercial Real Estate		Consumer		Commercial		Total
	(In Thousands)																(In Thousands)
At September 30, 2017
At March 31, 2019
Substandard	$	8,899	$	833	$	272	$	37	$	1,062	$	-	$	1,595	$	12,698	$	7,951	$	1,283	$	222	$	-	$	660	$	-	$	892	$	11,008
Watch		7,348		498		199		-		456		-		761		9,262		3,928		488		450		-		4,100		-		614		9,580
Pass		410,948		578,803		21,135		16,414		179,810		266		31,824		1,239,200		469,928		593,696		18,707		24,074		220,820		577		31,476		1,359,278
	$	427,195	$	580,134	$	21,606	$	16,451	$	181,328	$	266	$	34,180	$	1,261,160	$	481,807	$	595,467	$	19,379	$	24,074	$	225,580	$	577	$	32,982	$	1,379,866

At December 31, 2016
At December 31, 2018																											��
Substandard	$	12,845	$	1,427	$	428	$	-	$	717	$	-	$	41	$	15,458	$	7,799	$	1,309	$	246	$	-	$	678	$	-	$	889	$	10,921
Watch		10,509		3,975		149		436		1,389		-		3,671		20,129		4,662		491		468		-		4,343		-		906		10,870
Pass		369,463		553,190		21,201		17,743		157,295		319		23,086		1,142,297		477,518		595,287		19,242		13,361		220,501		433		31,015		1,357,357
	$	392,817	$	558,592	$	21,778	$	18,179	$	159,401	$	319	$	26,798	$	1,177,884	$	489,979	$	597,087	$	19,956	$	13,361	$	225,522	$	433	$	32,810	$	1,379,148

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~~A member of the credit department, independent of the loan originator, performs a 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, and commercial real estate that individually, or as part of an overall borrower relationship exceed $1.0 million in potential exposure and review commercial loans that individually, or as part of an overall borrower relationship exceed ~~$1.0 million~~$200,000 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~~Company 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~~Company 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.

- 15 -

The following tables present data on impaired loans at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018.

	As of or for the Nine Months Ended September 30, 2017												As of March 31, 2019
	Recorded Investment		Unpaid Principal		Reserve		Cumulative Charge-Offs		Average Recorded Investment		Interest Paid		Recorded Investment		Unpaid Principal		Reserve		Cumulative Charge-Offs
	(In Thousands)												(In Thousands)
Total Impaired with Reserve
One- to four-family	$	1,568	$	1,568	$	198	$	-	$	1,595	$	57	$	353	$	353	$	74	$	-
Multi-family		-		-		-		-		-		-		347		347		83		-
Home equity		159		159		77		-		165		10		85		85		31		-
Construction and land		-		-		-		-		-		-		-		-		-		-
Commercial real estate		38		447		38		409		45		-		2,471		2,880		121		409
Consumer		-		-		-		-		-		-		-		-		-		-
Commercial		-		-		-		-		-		-		-		-		-		-
		1,765		2,174		313		409		1,805		67		3,256		3,665		309		409
Total Impaired with no Reserve
One- to four-family		6,888		8,385		-		1,497		7,409		251		7,598		8,538		-		940
Multi-family		833		1,699		-		866		834		63		936		1,767		-		831
Home equity		143		143		-		-		147		4		137		137		-		-
Construction and land		37		51		-		14		45		-		-		-		-		-
Commercial real estate		434		434		-		-		436		11		384		384		-		-
Consumer		-		-		-		-		-		-		-		-		-		-
Commercial		26		26		-		-		26		-		13		13		-		-
		8,361		10,738		-		2,377		8,897		329		9,068		10,839		-		1,771
Total Impaired
One- to four-family		8,456		9,953		198		1,497		9,004		308		7,951		8,891		74		940
Multi-family		833		1,699		-		866		834		63		1,283		2,114		83		831
Home equity		302		302		77		-		312		14		222		222		31		-
Construction and land		37		51		-		14		45		-		-		-		-		-
Commercial real estate		472		881		38		409		481		11		2,855		3,264		121		409
Consumer		-		-		-		-		-		-		-		-		-		-
Commercial		26		26		-		-		26		-		13		13		-		-
	$	10,126	$	12,912	$	313	$	2,786	$	10,702	$	396	$	12,324	$	14,504	$	309	$	2,180

- 16 -

	As of or for the Year Ended December 31, 2016													As of December 31, 2018
	Recorded Investment		Unpaid Principal			Reserve		Cumulative Charge-Offs		Average Recorded Investment		Interest Paid		Recorded Investment		Unpaid Principal		Reserve		Cumulative Charge-Offs
	(In Thousands)													(In Thousands)
Total Impaired with Reserve
One- to four-family	$	3,007	$	3,007		$	499	$	-	$	3,063	$	88	$	462	$	462	$	73	$	-
Multi-family		-		-			-		-		-		-		-		-		-		-
Home equity		188		188			79		-		198		15		107		107		46		-
Construction and land		-		-			-		-		-		-		-		-		-		-
Commercial real estate		280		689			83		409		295		15		2,493		2,902		67		409
Consumer		-		-			-		-		-		-		-		-		-		-
Commercial		1		1			1		-		2		-		-		-		-		-
		3,476		3,885			662		409		3,558		118		3,062		3,471		186		409
Total Impaired with no Reserve
One- to four-family		7,913		9,245			-		1,332		8,150		401		7,180		8,120		-		940
Multi-family		3,941		4,952			-		1,011		4,005		230		1,309		2,142		-		833
Home equity		254		254			-		-		258		9		139		139		-		-
Construction and land		-		-			-		-		-		-		-		-		-		-
Commercial real estate		438		438			-		-		442		13		392		392		-		-
Consumer		-		-			-		-		-		-		-		-		-		-
Commercial		40		40			-		-		46		2		18		18		-		-
		12,586		14,929			-		2,343		12,901		655		9,038		10,811		-		1,773
Total Impaired
One- to four-family		10,920		12,252			499		1,332		11,213		489		7,642		8,582		73		940
Multi-family		3,941		4,952			-		1,011		4,005		230		1,309		2,142		-		833
Home equity		442		442			79		-		456		24		246		246		46		-
Construction and land		-		-			-		-		-		-		-		-		-		-
Commercial real estate		718		1,127			83		409		737		28		2,885		3,294		67		409
Consumer		-		-			-		-		-		-		-		-		-		-
Commercial		41		41			1		-		48		2		18		18		-		-
	$	16,062	$	18,814	��	$	662	$	2,752	$	16,459	$	773	$	12,100	$	14,282	$	186	$	2,182

- 17 -


Three months ended March 31, 2019	Average Recorded Investment		Interest Paid
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	354		6
Multi-family		349		10
Home equity		86		2
Construction and land		-		-
Commercial real estate		2,481		26
Consumer		-		-
Commercial		-		-
		3,270		44
Total Impaired with no Reserve
One- to four-family		7,652		114
Multi-family		945		20
Home equity		138		1
Construction and land		-		-
Commercial real estate		388		4
Consumer		-		-
Commercial		16		-
		9,139		139
Total Impaired
One- to four-family		8,006		120
Multi-family		1,294		30
Home equity		224		3
Construction and land		-		-
Commercial real estate		2,869		30
Consumer		-		-
Commercial		16		-
	$	12,409		183

- 18 -

Three months ended March 31, 2018	Average Recorded Investment		Interest Paid
	(In Thousands)
Total Impaired with Reserve
One- to four-family	$	738		9
Multi-family		-		-
Home equity		98		2
Construction and land		-		-
Commercial real estate		32		-
Consumer		-		-
Commercial		-		-
		868		11
Total Impaired with no Reserve
One- to four-family		4,364		64
Multi-family		1,190		21
Home equity		57		1
Construction and land		-		-
Commercial real estate		150		-
Consumer		-		-
Commercial		26		-
		5,787		86
Total Impaired
One- to four-family		5,102		73
Multi-family		1,190		21
Home equity		155		3
Construction and land		-		-
Commercial real estate		182		-
Consumer		-		-
Commercial		26		-
	$	6,655		97

The difference between a ~~loan's~~loan’s recorded investment and the unpaid principal balance represents a partial charge-off resulting from a confirmed loss when the value of the collateral securing the loan is below the loan balance and ~~management's~~management’s assessment that the full collection of the loan balance is not likely.

When a loan is considered impaired, interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the ~~borrower's~~borrower’s financial condition and prospects for repayment, including consideration of the ~~borrower's~~borrower’s sustained historical repayment performance and other relevant factors.

The determination as to whether an allowance is required with respect to impaired loans is based upon an analysis of the value of the underlying collateral and/or the ~~borrower's~~borrower’s intent and ability to make all principal and interest payments in accordance with contractual terms. The evaluation process is subject to the use of significant estimates and actual results could differ from estimates. This analysis is primarily based upon third party appraisals and/or a discounted cash flow analysis. In those cases in which no allowance has been provided for an impaired loan, the Company has determined that the estimated value of the underlying collateral exceeds the remaining outstanding balance of the loan. Of the total ~~$8.4~~$9.1 million of impaired loans as of ~~September 30, 2017~~March 31, 2019 for which no allowance has been provided, ~~$2.4~~$1.8 million in net charge-offs have been recorded to reduce the unpaid principal balance to an amount that is commensurate with the ~~loans'~~loans’ net realizable value, using the estimated fair value of the underlying collateral. To the extent that further deterioration in property values continues, the Company may have to reevaluate the sufficiency of the collateral servicing these impaired loans resulting in additional provisions to the allowance for loans losses or charge-offs.

~~- 17 -~~

At ~~September 30, 2017,~~March 31, 2019, total impaired loans included ~~$5.2~~$6.7 million of troubled debt restructurings. Troubled debt restructurings involve granting concessions to a borrower experiencing financial difficulty by modifying the terms of the loan in an effort to avoid foreclosure. The vast majority of debt restructurings include a modification of terms to allow for an interest only payment and/or reduction in interest rate. The restructured terms are typically in place for six to twelve months. At December 31, ~~2016,~~2018, total impaired loans included ~~$10.1~~$6.7 million of troubled debt restructurings.

- 19 -

The following presents data on troubled debt restructurings:

		As of September 30, 2017															As of March 31, 2019
		Accruing				Non-accruing					Total						Accruing				Non-accruing					Total
		Amount		Number		Amount			Number		Amount			Number			Amount		Number		Amount			Number		Amount			Number
	(Dollars in Thousands)															(Dollars in Thousands)

One- to four-family		$	2,747		2		$	1,204		7		$	3,951		9		$	2,740		2		$	809		5		$	3,549		7
Multi-family			-		-			833		3			833		3			-		-			357		2			357		2
Home Equity			48		1			-		-			48		1
Commercial real estate			291		1			37		1			328		2			2,740		2			13		1			2,753		3
		$	3,086		4		$	2,074		11		$	5,160		15		$	5,480		4		$	1,179		8		$	6,659		12

		As of December 31, 2016															As of December 31, 2018
		Accruing				Non-accruing					Total						Accruing				Non-accruing					Total
		Amount		Number		Amount			Number		Amount			Number			Amount		Number		Amount			Number		Amount			Number
	(Dollars in Thousands)															(Dollars in Thousands)

One- to four-family		$	3,296		3		$	2,399		34		$	5,695		37		$	2,740		2		$	844		5		$	3,584		7
Multi-family			2,514		1			1,427		5			3,941		6			-		-			372		2			372		2
Home equity			49		1			97		1			146		2
Commercial real estate			295		1			60		1			355		2			2,759		2			17		1			2,776		3
		$	6,154		6		$	3,983		41		$	10,137		47		$	5,499		4		$	1,233		8		$	6,732		12

At ~~September 30, 2017, $5.2~~March 31, 2019, $6.7 million in loans had been modified in troubled debt restructurings and ~~$2.1~~$1.2 million of these loans were included in the non-accrual loan total. The remaining ~~$3.1~~$5.5 million, while meeting the internal requirements for modification in a troubled debt restructuring, were current with respect to payments under their original loan terms at the time of the restructuring and, therefore, continued to be included with accruing loans. Provided these loans perform in accordance with the modified terms, they will continue to be accounted for on an accrual basis.

All loans that have been modified in a troubled debt restructuring are considered to be impaired. As such, an analysis has been performed with respect to all of these loans to determine the need for a valuation reserve. When a loan is expected to perform in accordance with the restructured terms and ultimately return to and perform under contract terms, a valuation allowance is established for an amount equal to the excess of the present value of the expected future cash flows under the original contract terms as compared with the modified terms, including an estimated default rate. When there is doubt as to the ~~borrower's~~borrower’s ability to perform under the restructured terms or ultimately return to and perform under market terms, a valuation allowance is established equal to the impairment when the carrying amount exceeds fair value of the underlying collateral. As a result of the impairment analysis, a ~~$96,000~~$121,000 valuation allowance has been established as of ~~September 30, 2017~~March 31, 2019 with respect to the ~~$5.2~~$6.7 million in troubled debt restructurings. As of December 31, ~~2016,~~2018, a ~~$293,000~~$67,000 valuation allowance had been established with respect to the ~~$10.1~~$6.7 million in troubled debt restructurings.

After a troubled debt restructuring reverts to market terms, a minimum of six consecutive contractual payments must be received prior to consideration for a return to accrual status. If an updated credit department review indicates no other evidence of elevated credit risk, the loan is returned to accrual status at that time.

- 1820 -

The following presents troubled debt restructurings by concession type:

		As of September 30, 2017													As of March 31, 2019
	Performing in accordance with modified terms					In Default				Total				Performing in accordance with modified terms					In Default				Total
	Amount			Number		Amount		Number		Amount		Number		Amount			Number		Amount		Number		Amount		Number
	(dollars in thousands)													(Dollars in Thousands)
Interest reduction and principal forbearance		$	4,060		9	$	-		-	$	4,060		9		$	5,804		7	$	521		2	$	6,325		9
Principal forbearance			48		1		-		-		48		1
Interest reduction			356		3		696		2		1,052		5			334		3		-		-		334		3
		$	4,464		13	$	696		2	$	5,160		15		$	6,138		10	$	521		2	$	6,659		12

		As of December 31, 2016													As of December 31, 2018
	Performing in accordance with modified terms					In Default				Total				Performing in accordance with modified terms					In Default				Total
	Amount			Number		Amount		Number		Amount		Number		Amount			Number		Amount		Number		Amount		Number
	(dollars in thousands)													(Dollars in Thousands)
Interest reduction and principal forbearance		$	8,221		22	$	761		2	$	8,982		24		$	5,848		7	$	546		2	$	6,394		9
Principal forbearance			49		1		-		-		49		1
Interest reduction			1,106		22		-		-		1,106		22			338		3		-		-		338		3
		$	9,376		45	$	761		2	$	10,137		47		$	6,186		10	$	546		2	$	6,732		12

There were no loans modified as troubled debt restructurings ~~for~~during the three months ~~or nine months~~ ended ~~September 30, 2017. There was one home equity loan with a balance of $64,000 modified as a troubled debt restructuring modified during the three~~March 31, 2019 and ~~nine months ended September 30, 2016.~~March 31, 2018.

There were no troubled debt restructurings within the past twelve months for which there was a default during the three ~~or nine months~~ ended ~~September 30, 2017~~March 31, 2019 and ~~September 30, 2016.~~March 31, 2018.

The following table presents data on non-accrual loans as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016:~~2018:

	September 30, 2017			December 31, 2016			March 31, 2019			December 31, 2018
	(Dollars in Thousands)						(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	5,709		$	7,623		$	5,211		$	4,902
Multi-family		833			1,427			1,283			1,309
Home equity		223			344			177			201
Construction and land		37			-			-			-
Commercial real estate		181			422			114			125
Commercial		26			41			13			18
Consumer		-			-			-			-
Total non-accrual loans	$	7,009		$	9,857		$	6,798		$	6,555
Total non-accrual loans to total loans receivable		0.56	%		0.84	%		0.49	%		0.48	%
Total non-accrual loans to total assets		0.38	%		0.55	%		0.35	%		0.34	%

- 1921 -

Note 4— Real Estate Owned

Real estate owned is summarized as follows:

	September 30, 2017			December 31, 2016			March 31, 2019			December 31, 2018
	(In Thousands)						(In Thousands)

One- to four-family	$	1,021		$	2,141		$	30		$	163
Multi-family		169			-			-			-
Construction and land		4,822			5,082			2,724			3,327
Commercial real estate		300			300			300			300
Total real estate owned		6,312			7,523			3,054			3,790
Valuation allowance at end of period		(1,744	)		(1,405	)		(1,405	)		(1,638	)
Total real estate owned, net	$	4,568		$	6,118		$	1,649		$	2,152

The following table presents the activity in the ~~Company's~~Company’s real estate owned:

	Nine months ended September 30,						Three months ended March 31,
	2017			2016			2019			2018
	(In Thousands)						(In Thousands)
Real estate owned at beginning of the period	$	6,118			9,190		$	2,152			4,558
Transferred from loans receivable		1,609			3,442			30			238
Sales (net of gains / losses)		(2,654	)		(4,762	)		(533	)		(1,165	)
Write downs		(504	)		(416	)		-			(257	)
Other		(1	)		-			-			-
Real estate owned at the end of the period	$	4,568			7,454		$	1,649			3,374

Residential one- to four-family mortgage loans that were in the process of foreclosure were ~~$3.0~~$2.1 million and ~~$3.1~~$2.2 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively.

- 2022 -

Note 5— Mortgage Servicing Rights

The following table presents the activity in the ~~Company's~~Company’s mortgage servicing rights:

	Nine months ended September 30,						Three months ended March 31,
	2017			2016			2019			2018
	(In Thousands)						(In Thousands)
Mortgage servicing rights at beginning of the period	$	2,260		$	1,422		$	109		$	888
Additions		793			1,486			97			100
Amortization		(71	)		(412	)		(10	)		(49	)
Sales		(2,264	)		-			-			-
Mortgage servicing rights at end of the period		718			2,496			196			939
Valuation allowance at end of period		-			(100	)		(57	)		-
Mortgage servicing rights at end of the period, net	$	718		$	2,396		$	139		$	939

During the ~~nine~~three months ended ~~September 30, 2017, $1.88 billion~~March 31, 2019, $491.2 million in residential loans were originated for ~~sale.~~sale on a consolidated basis. During the same period, sales of loans held for sale totaled ~~$2.03 billion,~~$533.4 million, generating mortgage banking income of ~~$92.8~~$23.4 million. The unpaid principal balance of loans serviced for others was ~~$99.2~~$27.1 million and ~~$318.6~~$14.1 million at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, respectively. These loans are not reflected in the consolidated statements of financial condition.

~~During the nine months ended September 30, 2017, the Company sold~~The fair value of mortgage servicing rights ~~related to $295.1~~were $147,000 at March 31, 2019 and $1.4 million ~~in loans receivable with a book value of $2.3 million for $2.6 million resulting in a gain on sale of $308,000.~~at March 31, 2018. During the ~~nine~~three months ended ~~September 30, 2016,~~March 31, 2019 and March 31, 2018, the Company did not sell any mortgage servicing rights.

The following table shows the estimated future amortization expense for mortgage servicing rights for the periods indicated:

Estimate for the period ending December 31:	(In Thousands)		(In Thousands)
2017	$	25
2018		106
2019		96	$	27
2020		86		26
2021		76		23
2022				19
2023				15
Thereafter		329		29
Total	$	718	$	139

Note 6— Deposits

At ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, time deposits with balances greater than $250,000 amounted to ~~$43.6~~$64.5 million and ~~$44.5~~$60.1 million, respectively.

A summary of the contractual maturities of time deposits at ~~September 30, 2017~~March 31, 2019 is as follows:

	(In Thousands)		(In Thousands)

Within one year	$	514,304	$	564,398
More than one to two years		153,213		155,474
More than two to three years		13,618		10,506
More than three to four years		1,358		2,169
More than four through five years		2,540		944
	$	685,033	$	733,491

- 2123 -

Note 7— Borrowings

Borrowings consist of the following:

		September 30, 2017					December 31, 2016					March 31, 2019					December 31, 2018
		Balance		Weighted Average Rate			Balance		Weighted Average Rate			Balance		Weighted Average Rate			Balance		Weighted Average Rate
		(Dollars in Thousands)										(Dollars in Thousands)
Short term:
Repurchase agreement		$	10,503		3.99	%	$	8,155		3.52	%	$	18,451		5.75	%	$	5,046		5.39	%
Federal Home Loan Bank, Chicago advances			55,000		1.25	%		65,000		0.61	%

Long term:
Federal Home Loan Bank, Chicago advances maturing:
2017			65,000		3.19	%		65,000		3.19	%
2018			65,000		2.97	%		65,000		2.97	%
2021			100,000		0.78	%		100,000		0.78	%
2027	2027		125,000		1.23	%		-		0.00	%		175,000		1.38	%		175,000		1.38	%
Repurchase agreements maturing	2017		15,000		2.89	%		84,000		3.96	%
2028													255,000		2.37	%		255,000		2.37	%
		$	435,503		1.81	%	$	387,155		2.27	%	$	$ 448,451		2.12	%	$	$ 435,046		2.01	%

The short-term repurchase agreement represents the outstanding portion of a total $35.0 million commitment with one unrelated bank. The short-term repurchase agreement is utilized by Waterstone Mortgage Corporation to finance loans originated for sale. This agreement is secured by the underlying loans being financed. Related interest rates are based upon the note rate associated with the loans being financed. The short-term repurchase agreement had a ~~$10.5~~$18.5 million balance at ~~September 30, 2017~~March 31, 2019 and ~~a $8.2~~an $5.0 million balance at December 31, ~~2016.~~

The $55.0 million in short-term advances consists of one $35.0 million short-term advance that has a maturity date of March 15, 2018 and a fixed rate of 1.28% and one $20.0 million short-term advance that has a maturity date of October 4, 2017 and a fixed rate of 1.20%.

~~The $65.0 million in advances due in 2017 consists of three advances with fixed rates ranging from 3.09% to 3.46% callable quarterly until maturity.~~

~~The $65.0 million in advances due in 2018 consists of three advances with fixed rates ranging from 2.73% to 3.11% callable quarterly until maturity.~~

The $100.0 million in advances due in 2021 consists of two advances totaling $50.0 million with fixed rates ranging from 0.67% to 0.73% with a FHLB quarterly call option beginning in June 2018 and one advance for $50.0 million with a fixed rate of 0.85% with a FHLB quarterly call option beginning in September 2018.

The ~~$125.0~~$175.0 million in advances due in 2027 consists of one $50.0 million advance with a fixed rate of 1.24% with a FHLB single call option in May 2019, one $50.0 million advance with a fixed rate of 1.23% with a FHLB single call option in June 2019, ~~and~~ one $25.0 million advance with a fixed rate of 1.23% with a FHLB single call option in August 2019, and one $50.0 million advance with a fixed rate of 1.73% with a FHLB single call option in December 2019.

The ~~$15.0~~$255.0 million ~~repurchase agreement has~~in advances due in 2028 consists of one $25.0 million advance with a fixed rate of ~~2.89% callable~~2.16% with a FHLB single call option in March 2020, two advances totaling $55.0 million with a fixed rate of 2.27% and with a FHLB single call option in March 2021, one advance of $25.0 million with a fixed rate of 2.40% and with a FHLB single call option in May 2020, two advances totaling $50.0 million with fixed rates of 2.34% and 2.48% and with a FHLB single call option in May 2021, one advance of $50.0 million with a fixed rate of 2.34% and with a FHLB quarterly ~~until its maturity~~call option beginning in ~~2017. The repurchase agreement is collateralized by securities available for sale~~June 2020, and one advance of $50.0 million with ~~an estimated fair value~~a fixed rate of ~~$25.6 million at~~2.57% and with a FHLB quarterly call option beginning in September ~~30, 2017 and $93.2 million at December 31, 2016.~~2020.

The Company selects loans that meet underwriting criteria established by the ~~FHLBC~~FHLB as collateral for outstanding advances. The ~~Company's~~Company’s borrowings from the ~~FHLBC~~FHLB are limited to ~~79%~~80% of the carrying value of unencumbered one- to four-family mortgage loans, 75% of the carrying value of ~~home equity~~multi-family loans and ~~51%~~64% of the carrying value of ~~multi-family~~home equity loans. In addition, these advances were collateralized by ~~FHLBC~~FHLB stock of ~~$18.5~~$19.4 million at ~~September 30, 2017~~March 31, 2019 and ~~$13.3~~$19.4 million at December 31, ~~2016.~~2018. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.

- 2224 -

Note 8 – Regulatory Capital

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements, or overall financial performance deemed by the regulators to be inadequate, can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the ~~Company's~~Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Company's and ~~Bank's~~Bank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Company's and ~~Bank's~~Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

The Federal Reserve Board and the Federal Deposit Insurance Corporation ~~(FDIC)~~("FDIC") issued final rules implementing the Basel III regulatory capital framework and related Dodd-Frank Wall Street Reform and Consumer Protection Act changes. The rules revise minimum capital requirements and adjust prompt corrective action thresholds. The final rules revise the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirements and implement a new capital conservation buffer. The rules also permit certain banking organizations to retain, through a one-time election, the existing treatment for accumulated other comprehensive income. The Company and the Bank have made the election to retain the existing treatment for accumulated other comprehensive income. The final rules took effect for the Company and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules.

In addition, as a result of the legislation, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under Prompt Corrective Action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition.

The table below includes the ~~new~~ regulatory capital ratio requirements that became effective on January 1, 2015. Beginning in 2016, an additional capital conservation buffer was added to the minimum requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer ~~will be~~was fully phased-in onas of January 1, 2019 at 2.5%. A banking organization with a conservation buffer of less than 2.5% ~~(or the required phase-in amount in years prior to 2019)~~ will be subject to limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. At ~~September 30, 2017,~~March 31, 2019, the ratios for the Company and the Bank are sufficient to meet the fully phased-in conservation buffer.

The actual and required capital amounts and ratios for the Bank as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018 are presented in the table below:

September 30, 2017
Actual
For Capital
Adequacy
Purposes

Minimum Capital
Adequacy with
Capital Buffer

To Be Well
Capitalized Under
Prompt Corrective
Action Provisions

Amount Ratio Amount Ratio Amount Ratio Amount Ratio
(Dollars In Thousands)
Total Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc. $ 425,064 30.70 % $ 110,755 8.00 % $ 128,061 9.25 % $ N/A N/A
WaterStone Bank 400,873 28.99 % 110,613 8.00 % 127,896 9.25 % 138,266 10.00 %
Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc. 411,001 29.69 % 83,066 6.00 % 100,372 7.25 % N/A N/A
WaterStone Bank 386,810 27.98 % 82,960 6.00 % 100,243 7.25 % 110,613 8.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc. 411,001 29.69 % 62,300 4.50 % 79,605 5.75 % N/A N/A
WaterStone Bank 386,810 27.98 % 62,220 4.50 % 79,503 5.75 % 89,873 6.50 %
Tier 1 Capital (to average assets)
Consolidated Waterstone Financial, Inc. 411,001 21.90 % 75,054 4.00 % N/A N/A N/A N/A
WaterStone Bank 386,810 20.67 % 74,859 4.00 % N/A N/A 93,574 5.00 %
State of Wisconsin (to total assets)
WaterStone Bank 386,810 20.91 % 110,989 6.00 % N/A N/A N/A N/A

	March 31, 2019
	Actual					For Capital Adequacy Purposes					Minimum Capital Adequacy with Capital Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)
Total Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.	$	397,167		27.04	%	$	117,511		8.00	%	$	154,233		10.50	%	$	N/A		N/A
WaterStone Bank		401,987		27.39	%		117,414		8.00	%		154,105		10.50	%		146,767		10.00	%
Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		384,606		26.18	%		88,133		6.00	%		124,855		8.50	%		N/A		N/A
WaterStone Bank		389,426		26.53	%		88,060		6.00	%		124,752		8.50	%		117,414		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		384,606		26.18	%		66,100		4.50	%		102,822		7.00	%		N/A		N/A
WaterStone Bank		389,426		26.53	%		66,045		4.50	%		102,737		7.00	%		95,398		6.50	%
Tier 1 Capital (to average assets)
Consolidated Waterstone Financial, Inc.		384,606		20.10	%		76,521		4.00	%		N/A		N/A			N/A		N/A
WaterStone Bank		389,426		20.36	%		76,521		4.00	%		N/A		N/A			95,651		5.00	%
State of Wisconsin (to total assets)
WaterStone Bank		389,426		20.24	%		115,455		6.00	%		N/A		N/A			N/A		N/A

- 2325 -

																		December 31, 2018
																		Actual					For Capital Adequacy Purposes					Minimum Capital Adequacy with Capital Buffer					To Be Well Capitalized Under Prompt Corrective Action Provisions
	December 31, 2016																	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars In Thousands)																	(Dollars In Thousands)
Total Capital (to risk-weighted assets)																	Total Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.	$	426,496	32.23	%	$	105,870	8.00	%	$	114,141	8.625	%	$	N/A	N/A			$	414,566		28.22	%	$	117,506		8.00	%	$	145,046		9.875	%	$	N/A		N/A
WaterStone Bank		389,602	29.50	%		105,641	8.00	%		113,895	8.625	%		132,052	10.00	%			395,783		26.95	%		117,490		8.00	%		145,027		9.875	%		146,863		10.00	%
Tier 1 Capital (to risk-weighted assets)																	Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		410,467	31.02	%		79,402	6.00	%		87,673	6.625	%		N/A	N/A				401,317		27.32	%		88,130		6.00	%		115,670		7.875	%		N/A		N/A
WaterStone Bank		373,573	28.29	%		79,231	6.00	%		87,484	6.625	%		105,641	8.00	%			382,534		26.05	%		88,118		6.00	%		115,655		7.875	%		117,490		8.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)																	Common Equity Tier 1 Capital (to risk-weighted assets)
Consolidated Waterstone Financial, Inc.		410,467	31.02	%		59,552	4.50	%		67,823	5.125	%		N/A	N/A				401,317		27.32	%		66,097		4.50	%		93,638		6.375	%		N/A		N/A
WaterStone Bank		373,573	28.29	%		59,423	4.50	%		67,676	5.125	%		85,834	6.50	%			382,534		26.05	%		66,088		4.50	%		93,625		6.375	%		95,461		6.50	%
Tier 1 Capital (to average assets)																	Tier 1 Capital (to average assets)
Consolidated Waterstone Financial, Inc.		410,467	23.20	%		70,760	4.00	%		N/A	N/A			N/A	N/A				401,317		21.06	%		76,214		4.00	%		N/A		N/A			N/A		N/A
WaterStone Bank		373,573	21.17	%		70,573	4.00	%		N/A	N/A			88,216	5.00	%			382,534		20.08	%		76,214		4.00	%		N/A		N/A			95,268		5.00	%
State of Wisconsin (to total assets)																	State of Wisconsin (to total assets)
WaterStone Bank		373,573	20.90	%		107,247	6.00	%		N/A	N/A			N/A	N/A				382,534		20.01	%		114,712		6.00	%		N/A		N/A			N/A		N/A

Note 9 – Income Taxes

Income tax expense ~~increased from $12.2~~decreased $122,000, or 5.8%, to $2.0 million for the three months ended March 31, 2019 compared to $2.1 million during the ~~nine~~three months ended September 30, 2016 to $12.4 million for the nine months ended September 30, 2017. This increase was primarily due to the increase in our income before income taxes, which increased from $31.3 million during the nine months ended September 30, 2016 to $35.2 million during the nine months ended September 30, 2017.March 31, 2018. Income tax expense iswas recognized on the statement of income during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 at an effective rate of ~~35.2%~~23.3% of pretax income compared to ~~39.0%~~23.2% during the ~~nine~~three months ended ~~September 30, 2016.~~

March 31, 2018. During ~~nine~~the three months ended ~~September 30, 2017,~~March 31, 2019, the Company recognized a benefit of approximately ~~$827,000~~$92,000 related to stock awards exercised compared to a benefit of $130,000 recognized during the ~~year as a result of adopting the new stock compensation accounting standard.~~three months ended March 31, 2018.

During the quarter ended September 30, 2016, the Company incurred a charge related to stock options awarded in 2007. The deferred tax asset established for the stock options was not fully utilized upon exercise, as the deductible compensation recognized was less than the value of the asset established at the time the award vested. A net expense of $564,000 was charged to income tax for the nine months ended September 30, 2016.

- 2426 -

Note 10 – Offsetting of Assets and Liabilities

The Company enters into agreements under which it sells securities subject to an obligation to repurchase the same or similar securities. In addition, the Company enters into agreements under which it sells loans held for sale subject to an obligation to repurchase the same loans. Under these arrangements, the Company may transfer legal control over the assets but still retain effective control through an agreement that both entitles and obligates the Company to repurchase the assets. As a result, these repurchase agreements are accounted for as collateralized financing arrangements (i.e., secured borrowings) and not as a sale and subsequent repurchase of assets. The obligation to repurchase the assets is reflected as a liability in the Company's consolidated statements of ~~financial~~ condition, while the securities and loans held for sale underlying the repurchase agreements remain in the respective investment securities and loans held for sale asset accounts. In other words, there is no offsetting or netting of the investment securities or loans held for sale assets with the repurchase agreement liabilities. ~~One of the~~The Company's ~~two short-term~~ repurchase ~~agreements and all of the Company's long-term repurchase agreements are~~agreement is subject to master netting agreements, which ~~set~~sets forth the rights and obligations for repurchase and offset. Under the master netting agreement, the Company is entitled to set off the collateral placed with a single counterparty against obligations owed to that counterparty.

The following table presents the liabilities subject to an enforceable master netting agreement as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018.

Gross
Recognized
Liabilities

Gross
Amounts
Offset

Net
Amounts
Presented

Gross
Amounts Not
Offset

Net
Amount

(In Thousands)
September 30, 2017
Repurchase Agreements
Short-term $ 10,503 $ - $ 10,503 $ 10,503 $ -
Long-term 15,000 - 15,000 15,000 -
$ 25,503 $ - $ 25,503 $ 25,503 $ -

December 31, 2016
Repurchase Agreements
Short-term $ 8,155 $ - $ 8,155 $ 8,155 $ -
Long-term 84,000 - 84,000 84,000 -
$ 92,155 $ - $ 92,155 $ 92,155 $ -

	Gross Recognized Liabilities		Gross Amounts Offset		Net Amounts Presented		Gross Amounts Not Offset		Net Amount
	(In Thousands)
March 31, 2019
Repurchase Agreement
Short-term	$	18,451	$	-	$	18,451	$	18,451	$	-
	$	18,451	$	-	$	18,451	$	18,451	$	-

December 31, 2018
Repurchase Agreement
Short-term	$	5,046	$	-	$	5,046	$	5,046	$	-
	$	5,046	$	-	$	5,046	$	5,046	$	-

- 2527 -

Note 11– Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities

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

	September 30, 2017		December 31, 2016		March 31, 2019		December 31, 2018
	(In Thousands)				(In Thousands)
Financial instruments whose contract amounts represent potential credit risk:
Commitments to extend credit under amortizing loans (1)	$	52,948	$	30,903	$	13,355	$	33,762
Commitments to extend credit under home equity lines of credit (2)		14,724		14,367		14,163		14,903
Unused portion of construction loans (3)		18,306		21,137		71,332		79,776
Unused portion of business lines of credit		17,204		15,095		13,501		16,778
Standby letters of credit		259		333		261		860

⁽¹⁾ Commitments for loans are extended to customers for up to 90 days after which they expire. Excludes commitments to originate loans held for sale, which are

discussed in the following footnote.

⁽²⁾ Unused portions of home equity loans are available to the borrower for up to 10 years.

⁽³⁾ Unused portions of construction loans are available to the borrower for up to one year.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements of the Company. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counter-party. Collateral obtained generally consists of mortgages on the underlying real estate.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds mortgages on the underlying real estate as collateral supporting those commitments for which collateral is deemed necessary.

The Company has determined that there are no probable losses related to commitments to extend credit or the standby letters of credit as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018.

In the normal course of business, the Company, or it's subsidiaries, are involved in various legal proceedings. In the opinion of management, any liability resulting from pending proceedings would not be expected to have a material adverse effect on the Company's consolidated financial statements.

Herrington et al. v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a class action lawsuit that was filed in the United States District Court for the Western District of Wisconsin and subsequently compelled to arbitration before the American Arbitration Association. The plaintiff class alleged that Waterstone Mortgage Corporation violated certain provisions of the Fair Labor Standards Act (FLSA) and failed to pay loan officers consistent with their ~~various~~ employment agreements. On July 5, 2017, the arbitrator issued a ~~final award~~Final Award finding Waterstone Mortgage Corporation liable for unpaid minimum wages, overtime, unreimbursed business expenses, and liquidated damages under the FLSA. ~~The arbitrator awarded damages under~~On December 8, 2017, the ~~FLSA~~District Court confirmed the award in large part, and entered a judgment against Waterstone in the amount of ~~$7.3 million, and attorney's~~$7,267,919 in damages to Claimants, $3,298,851 in attorney fees and costs, inand a $20,000 incentive fee to Plaintiff Herrington, plus post-judgment interest. On February 12, 2018, the amount of $3.3 million. While a judgment confirming the arbitrator's award with respect to damages and fees has not yet been issued, if plaintiff prevails on her theories, the Company has estimated that the award, which includes attorney'sDistrict Court awarded post-arbitration fees and costs of approximately $98,000. The judgment was appealed by Waterstone to the Seventh Circuit Court of Appeals, where oral argument was held on May 29, 2018. On October 22, 2018, the Seventh Circuit issued a ruling vacating the District Court's order enforcing the arbitration award. If the District Court determines the agreement only allows for individual arbitration, the award would be vacated and the case sent to individual arbitration for a new proceeding. If the District Court determines the arbitration agreement nevertheless allows for collective arbitration, the District Court could ~~be as high as $11.0 million.~~confirm the prior award.

On December 28, 2018, Plaintiff filed a post-remand brief. In it, Plaintiff asks the District Court to reaffirm the arbitration award entered by the arbitrator in full. Alternatively, she asked the Court to affirm her individual damage award and the awards of 123 other opt-ins whose arbitration agreements permit joinder or class actions. Lastly, Plaintiff asked the District Court to have 154 opt-ins intervene and file an amended complaint for individual relief in court. Waterstone ~~Mortgage Corporation will continue to vigorously defend its interests in this matter, including challenging any findings regarding liability~~opposed the motion on January 28, 2019, and ~~damages through appropriate post-arbitration motions and appeal processes and seeking~~asked the District Court to vacate the prior Final Award in full because Herrington’s arbitration agreement only allows for individual arbitration. Plaintiff filed its reply on February 14, 2019.

On April 25, 2019, the District Court held that Plaintiff’s claims must be resolved through single-plaintiff arbitration. As a result, it vacated the July 5, 2017 arbitration award in its entirety, ~~any~~and closed the case. Given these recent developments, and since the award ~~against the Company. Given the pending legal strategies that are available, we do~~has been vacated, Waterstone does not believe ~~that it~~a loss is probable ~~that the plaintiff will ultimately prevail~~at this time. Accordingly, in ~~this litigation, and estimate the low end of the possible range of loss is $0. In~~ accordance with the authoritative guidance in ~~evaluating~~the evaluation of contingencies, the Company has not recorded an accrual related to this matter. The Company does not yet know whether Plaintiff, or other claimants who were part of the prior arbitration will seek to re-assert their claims in arbitration. As a result, it cannot offer an opinion on the likelihood of an unfavorable outcome on the issue of liability or estimate the range of any possible loss at this time.

- 28 -

Werner et al. v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a putative collection action lawsuit that was filed on August 4, 2017 in the United States District Court for the Western District of Wisconsin, Werner et al. v. Waterstone Mortgage Corporation. Plaintiffs allege that Waterstone Mortgage Corporation violated the Fair Labor Standards Act (FLSA) by failing to pay loan officers minimum and overtime wages. ~~The case is in~~On October 26, 2017, Plaintiffs moved for conditional certification and to provide notice to the ~~very early stages of litigation and~~putative class. On February 9, 2018, the Court ~~has yet~~denied Plaintiffs' motion for conditional certification and notice.

On July 23, 2018, Waterstone filed a motion for partial summary judgment on the claims. It sought to ~~decide if~~(1) dismiss the time-barred claims of four opt-ins and (2) dismiss all other opt-ins due to the denial of conditional certification. In response, all but Werner and Wiesneski filed motions to withdraw their consents to join the case. The Court denied the summary judgment motion on the basis that it was moot due to the opt-in plaintiffs voluntarily dismissing their case.

On October 17, 2018, Werner and Wiesneski asked the Court to send their claims to arbitration. On December 13, 2018, the Court denied the request, finding they had waived their right to arbitrate based on litigating the case ~~can proceed~~in Court for over a year. Thus, the case remained in Court as ~~collective action. The Company intends~~a two-Plaintiff case.

In April 2019, the parties finalized a settlement in principle to ~~vigorously defend its interests in this matter and pursue all possible defenses against~~resolve the claims. ~~Given the early stage~~The Court granted approval of the ~~litigation,~~settlement and dismissed Platiffs’ claims. The amount of the ~~Company is~~settlement would not ~~yet able to make~~have a ~~determination as~~material impact to the ~~likelihood of an unfavorable outcome in this matter, nor is it able to estimate the range of any possible loss.~~financial statements.

~~- 26 -~~

Note 12 – Derivative Financial Instruments

In connection with its mortgage banking activities, the Company enters into derivative financial instruments as part of its strategy to manage its exposure to changes in interest rates. Mortgage banking derivatives include interest rate lock commitments provided to customers to fund mortgage loans to be sold in the secondary market and forward commitments for the future delivery of such loans to third party investors. It is the ~~Company's~~Company’s practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of future changes in interest rates on its commitments to fund the loans as well as on its portfolio of mortgage loans held for sale. The ~~Company's~~Company’s mortgage banking derivatives have not been designated as hedge relationships. These instruments are used to manage the ~~Company's~~Company’s exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements of ASC 815. Changes in the fair value of derivatives not designated in hedging relationships are recorded as a component of mortgage banking income in the ~~Company's~~Company’s consolidated statements of operations. The Company does not use derivatives for speculative purposes.

Forward commitments to sell mortgage loans represent commitments obtained by the Company from a secondary market agency to purchase mortgages from the Company at specified interest rates and within specified periods of time. Commitments to sell loans are made to mitigate interest rate risk on interest rate lock commitments to originate loans and loans held for sale. At ~~September 30, 2017,~~March 31, 2019, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately ~~$349.3~~$255.7 million and interest rate lock commitments with an aggregate notional amount of approximately ~~$201.8~~$350.4 million. The fair value of the forward commitments to sell mortgage loans at ~~September 30, 2017~~March 31, 2019 included a ~~gain~~loss of ~~$604,000~~$1.0 million that is reported as a component of other ~~assets~~liabilities on the Company's consolidated statement of financial condition. The fair value of the interest rate locks at ~~September 30, 2017~~March 31, 2019 included a gain of $3.1 million that is reported as a component of other assets on the Company's consolidated statements of financial condition. At December 31, 2018, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of $276.3 million and interest rate lock commitments with an aggregate notional amount of approximately $164.9 million. The fair value of the forward commitments to sell mortgage loans at December 31, 2018 included a loss of $1.1 million that is reported as a component of other liabilities on the Company's consolidated statement of financial condition. The fair value of the interest rate locks at December 31, 2018 included a gain of $2.0 million that is reported as a component of other assets on the Company's consolidated statements of financial condition.

In determining the fair value of its derivative loan commitments, the Company considers the value that would be generated by the loan arising from exercise of the loan commitment when sold in the secondary mortgage market. That value includes the price that the loan is expected to be sold for in the secondary mortgage market. The fair value of these commitments is recorded on the consolidated statements of financial condition with the changes in fair value recorded as a component of mortgage banking income.

The significant unobservable input used in the fair value measurement of the Company's mortgage banking derivatives, including interest rate lock commitments, is the loan pull through rate. This represents the percentage of loans currently in a lock position which the Company estimates will ultimately close. Generally, the fair value of an interest rate lock commitment will be positively (negatively) impacted when the prevailing interest rate is lower (higher) than the interest rate lock commitment. Generally, an increase in the pull through rate will result in the fair value of the interest rate lock increasing when in a gain position, or decreasing when in a loss position. The pull through rate is largely dependent on the loan processing stage that a loan is currently in and the change in prevailing interest rates from the time of the rate lock. The pull through rate is computed using historical data and the ratio is periodically reviewed by the Company.

Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The ~~Company's~~Company’s agreements to sell residential mortgage loans in the normal course of business usually require certain representations and warranties on the underlying loans sold related to credit information, loan documentation and collateral, which if subsequently are untrue or breached, could require the Company to repurchase certain loans affected. The Company has only been required to make insignificant repurchases as a result of breaches of these representations and warranties. The ~~Company's~~Company’s agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited in that the recourse provision ends after certain payment criteria have been met. With respect to these loans, repurchase could be required if defined delinquency issues arose during the limited recourse period. Given that the underlying loans delivered to buyers are predominantly conventional first lien mortgages and that historical experience shows negligible losses and insignificant repurchase activity, management believes that losses and repurchases under the limited recourse provisions will continue to be insignificant.

- 29 -

Note 13 – Earnings Per Share

Earnings per share are computed using the two-class method. Basic earnings per share is computed by dividing net income allocated to common shares by the weighted average number of common shares outstanding during the applicable period. Diluted earnings per share is computed by dividing net income by the weighted average number of common shares outstanding adjusted for the dilutive effect of all potential common shares.

Presented below are the calculations for basic and diluted earnings per share:

	Three months ended September 30,				Nine months ended September 30,				Three months ended March 31,
	2017		2016		2017		2016		2019		2018
	(In Thousands, except per share amounts)

Net income	$	7,389	$	7,505	$	22,849	$	19,133	$	6,542		6,953
Net income available to unvested restricted shares		-		5		-		12
Net income available to common stockholders	$	7,389	$	7,500	$	22,849	$	19,121

Weighted average shares outstanding		27,532		27,043		27,449		26,976		26,499		27,509
Effect of dilutive potential common shares		421		386		478		307	$	221		293
Diluted weighted average shares outstanding		27,953		27,429		27,927		27,283	$	26,720		27,802

Basic earnings per share	$	0.27	$	0.28	$	0.83	$	0.71	$	0.25		0.25
Diluted earnings per share	$	0.26	$	0.27	$	0.82	$	0.70	$	0.24		0.25

~~- 27 -~~

Note 14 – Fair Value Measurements

ASC Topic 820, "Fair Value Measurements and Disclosures" defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This accounting standard applies to reported balances that are required or permitted to be measured at fair value under existing accounting pronouncements. The standard also emphasizes that fair value (i.e., the price that would be received in an orderly transaction that is not a forced liquidation or distressed sale at the measurement date), among other things, is based on exit price versus entry price, should include assumptions about risk such as nonperformance risk in liability fair values, and is a market-based measurement, not an entity-specific measurement. When considering the assumptions that market participants would use in pricing the asset or liability, this accounting standard establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

The fair value hierarchy prioritizes inputs used to measure fair value into three broad levels.

Level 1 inputs - In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2 inputs - Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets where there are few transactions and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 inputs - Level 3 inputs are unobservable inputs for the asset or liability and include situations where there is little, if any, market activity for the asset or liability.

In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The ~~Company's~~Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

- 30 -

The following table presents information about our assets recorded in our consolidated statement of financial condition at their fair value on a recurring basis as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value.

			Fair Value Measurements Using								Fair Value Measurements Using
	September 30, 2017		Level 1		Level 2		Level 3		March 31, 2019		Level 1		Level 2		Level 3
	(In Thousands)								(In Thousands)

Available for sale securities
Available-for-sale securities
Mortgage-backed securities	$	62,218	$	-	$	62,218	$	-	$	38,944	$	-	$	38,944	$	-
Collateralized mortgage obligations
Government sponsored enterprise issued		54,660		-		54,660		-		75,584		-		75,584		-
Government sponsored enterprise bonds		2,499		-		2,499		-
Municipal securities		65,662		-		65,662		-		56,216		-		56,216		-
Other debt securities		14,574		-		14,574		-		13,480		-		13,480		-
Certificates of deposit		1,227		-		1,227		-
Loans held for sale		175,137		-		175,137		-		123,011		-		123,011		-
Mortgage banking derivative assets		2,572		-		-		2,572		3,141		-		-		3,141
Mortgage banking derivative liabilities										1,005		-		-		1,005

			Fair Value Measurements Using								Fair Value Measurements Using
	December 31, 2016		Level 1		Level 2		Level 3		December 31, 2018		Level 1		Level 2		Level 3
	(In Thousands)								(In Thousands)

Available for sale securities
Available-for-sale securities
Mortgage-backed securities	$	73,413	$	-	$	73,413	$	-	$	41,631	$	-	$	41,631	$	-
Collateralized mortgage obligations
Government sponsored enterprise issued		62,002		-		62,002		-		74,955		-		74,955		-
Government sponsored enterprise bonds		2,503		-		2,503		-
Municipal securities		70,696		-		70,696		-		55,948		-		55,948		-
Other debt securities		16,950		2,541		14,409		-		13,186		-		13,186		-
Certificates of deposit		1,231		-		1,231		-
Loans held for sale		225,248		-		225,248		-		141,616		-		141,616		-
Mortgage banking derivative assets		3,403		-		-		3,403		2,014		-		-		2,014
Mortgage banking derivative liabilities		69		-		-		69		1,116		-		-		1,116

~~- 28 -~~

The following summarizes the valuation techniques for assets recorded in our consolidated statements of financial condition at their fair value on a recurring basis:

~~Available for sale~~Available-for-sale securities – The ~~Company's~~Company’s investment securities classified as available for sale include: mortgage-backed securities, collateralized mortgage obligations, government sponsored enterprise bonds, municipal securities and other debt securities. The fair value of mortgage-backed securities, collateralized mortgage obligations and government sponsored enterprise bonds are determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities, prepayment models and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. These model and matrix measurements are classified as Level 2 in the fair value hierarchy. The fair value of municipal and other debt securities is determined by a third party valuation source using observable market data utilizing a multi-dimensional relational pricing model. Standard inputs to this model include observable market data such as benchmark yields, reported trades, broker quotes, rating updates and issuer spreads. These model measurements are classified as Level 2 in the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of other debt securities, which includes a trust preferred security issued by a financial institution, is determined through quoted prices in active markets and is classified as Level 1 in the fair value hierarchy.comprehensive income.

Loans held for sale – The Company carries loans held for sale at fair value under the fair value option model. Fair value is generally determined by estimating a gross premium or discount, which is derived from pricing currently observable in the secondary market, principally from observable prices for forward sale commitments. Loans held-for-sale are considered to be Level 2 in the fair value hierarchy of valuation techniques. The change in fair value is recorded through an adjustment to the statement of income.

Mortgage banking derivatives - Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company utilizes a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment and then multiplying by quoted investor prices. The Company also utilizes a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. While there are Level 2 and 3 inputs used in the valuation models, the Company has determined that one or more of the inputs significant in the valuation of both of the mortgage banking derivatives fall within Level 3 of the fair value hierarchy. The change in fair value is recorded through an adjustment to the statement of income.

- 31 -

The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during ~~2017~~2019 and ~~2016.~~2018.

Mortgage banking
derivatives, net

(In Thousands)

Balance at December 31, 2015 $ 2,188

Mortgage derivative gain, net 1,146
Balance at December 31, 2016 $ 3,334

Mortgage derivative loss, net (762 )
Balance at September 30, 2017 $ 2,572

	Three months ended March 31,
	2019		2018
	(In Thousands)

Mortgage derivative, net balance at the beginning of the period	$	898		2004
Mortgage derivative gain, net		1,238		977
Mortgage derivative, net balance at the end of the period	$	2,136		2,981

There were no transfers in or out of Level 1, 2 or 3 measurements during the periods.

Assets Recorded at Fair Value on a Non-recurring Basis

The following tables present information about our assets recorded in our consolidated statement of financial condition at their fair value on a non-recurring basis as of ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016,~~2018, and indicate the fair value hierarchy of the valuation techniques utilized to determine such fair value.

			Fair Value Measurements Using								Fair Value Measurements Using
	September 30, 2017		Level 1		Level 2		Level 3		March 31, 2019		Level 1		Level 2		Level 3
	(In Thousands)								(In Thousands)
Impaired loans, net (1)	$	1,452	$	-	$	-	$	1,452	$	2,947	$	-	$	-	$	2,947
Real estate owned		4,568		-		-		4,568		1,649		-		-		1,649
Impaired mortgage servicing rights										130		-		-		130

			Fair Value Measurements Using								Fair Value Measurements Using
	December 31, 2016		Level 1		Level 2		Level 3		December 31, 2018		Level 1		Level 2		Level 3
	(In Thousands)								(In Thousands)
Impaired loans, net (1)	$	2,814	$	-	$	-	$	2,814	$	2,876	$	-	$	-	$	2,876
Real estate owned		6,118		-		-		6,118		2,152		-		-		2,152

(1) Represents collateral-dependent impaired loans, net, which are included in loans.

~~- 29 -~~

Loans – We do not record loans at fair value on a recurring basis. On a non-recurring basis, loans determined to be impaired are analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at net realizable valueA description of the underlying collateral. Fair value is determined based on third party appraisals. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of impaired loans, loans that have been deemed to be impaired are considered to be Level 3 in the fair value hierarchy of valuation ~~techniques. At September 30, 2017, loans determined to be impaired with an outstanding balance of $1.8 million were carried net of specific reserves of $313,000~~methodologies used for a fair value of $1.5 million. At December 31, 2016, loans determined to be impaired with an outstanding balance of $3.5 million were carried net of specific reserves of $662,000 for a fair value of $2.8 million. Impaired loans collateralized by assets which are valued in excess of the net investment in the loan do not require any specific reserves.

Real estate owned – On a non-recurring basis, real estate owned, is recorded in our consolidated statements of financial condition at the lower of cost or fair value. Fair value is determined based on third party appraisals and, if less than the carrying value of the foreclosed loan, the carrying value of the real estate owned is adjusted to the fair value. Appraised values are adjusted to consider disposition costs and also to take into consideration the age of the most recent appraisal. Given the significance of the adjustments made to appraised values necessary to estimate the fair value of the properties, real estate owned is considered to be Level 3 in the fair value hierarchy of valuation techniques. Changes in the value of real estate owned totaled $504,000 and $416,000 during the nine months ended September 30, 2017 and 2016, respectively and are recorded in real estate owned expense. At September 30, 2017 and December 31, 2016, real estate owned totaled $4.6 million and $6.1 million, respectively.

Mortgage servicing rights – The Company utilizes an independent valuation from a third party which uses a discounted cash flow model to estimate the fair value of mortgage servicing rights. The model utilizes prepayment assumptions to project cash flows related to the mortgage servicing rights based upon the current interest rate environment, which is then discounted to estimate an expected fair value of the mortgage servicing rights. The model considers characteristics specific to the underlying mortgage portfolio, such as: contractually specified servicing fees, prepayment assumptions, delinquency rates, late charges and costs to service. Given the significance of the unobservable inputs utilized in the estimation process, mortgage servicing rights are classified as Level 3 within the fair value hierarchy. The Company records the mortgage servicing rights at the lower of amortized cost or fair value. At ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016, there were no impairment identified for mortgage servicing rights.~~

~~For Level 3 assets and liabilities~~instruments measured at fair value, ~~on a recurring or non-recurring basis as of September 30, 2017, the significant unobservable inputs used in the fair value measurements were as follows:~~

Significant Unobservable
Input Value

Fair Value at
September 30, 2017

Valuation
Technique
Significant
Unobservable
Inputs

Minimum
Value

Maximum
Value

Mortgage banking derivatives $ 2,572 Pricing models Pull through rate 65.3 % 99.8 %
Impaired loans 1,452 Market approach Discount rates applied to appraisals 15.0 % 35.0 %
Real estate owned 4,568 Market approach Discount rates applied to appraisals 15.0 % 85.7 %

The significant unobservable inputs used in the fair value measurement of collateral for collateral-dependent impaired loans and real estate owned included in the above table primarily relate to discounting criteria applied to independent appraisals received with respect to the collateral. Discounts applied to the appraisals are dependent on the vintage of the appraisal as well as the ~~marketability~~general classification of such instruments pursuant to the ~~property. The discount factor~~valuation hierarchy, is ~~computed using actual realization rates on properties that have been foreclosed upon and liquidated in the open market.~~set forth below.

The significant unobservable inputs used in the fair value measurement of mortgage servicing rights include the prepayment rate, discount rate and cost to service. The prepayment rate represents the assumed rate of prepayment of the outstanding principal balance of the underlying mortgage notes. Significant increases (decreases) in any of those inputs in isolation could result in a significantly lower (higher) fair value measurement. Although the prepayment rate and discount rate are not directly interrelated, they will generally move in opposite directions.

~~- 30 -~~

Fair value information about financial instruments follows, whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

- 32 -

The carrying amounts and fair values of the ~~Company's~~Company’s financial instruments consist of the following:

	September 30, 2017										December 31, 2016										March 31, 2019										December 31, 2018
	Carrying amount		Fair Value								Carrying amount		Fair Value								Carrying amount		Fair Value								Carrying amount		Fair Value
	Carrying amount		Total		Level 1		Level 2		Level 3		Carrying amount		Total		Level 1		Level 2		Level 3		Carrying amount		Total		Level 1		Level 2		Level 3		Carrying amount		Total		Level 1		Level 2		Level 3
	(In Thousands)																				(In Thousands)
Financial Assets
Cash and cash equivalents	$	92,591	$	92,591	$	74,491	$	18,100	$	-	$	47,217	$	47,217	$	34,967	$	12,250	$	-	$	104,833	$	104,833	$	95,558	$	9,275	$	-	$	86,101	$	86,101	$	73,601	$	12,500	$	-
Securities available-for-sale		200,840		200,840		-		200,840		-		226,795		226,795		2,541		224,254		-		184,224		184,224		-		184,224		-		185,720		185,720		-		185,720		-
Loans held for sale		175,137		175,137		-		175,137		-		225,248		225,248		-		225,248		-		123,011		123,011		-		123,011		-		141,616		141,616		-		141,616		-
Loans receivable		1,261,160		1,284,340		-		-		1,284,340		1,177,884		1,212,967		-		-		1,212,967		1,379,866		1,317,391		-		-		1,317,391		1,379,148		1,311,633		-		-		1,311,633
FHLB stock		18,450		18,450		-		18,450		-		13,275		13,275		-		13,275		-		19,350		19,350		-		19,350		-		19,350		19,350		-		19,350		-
Accrued interest receivable		4,575		4,575		4,575		-		-		4,281		4,281		4,281		-		-		5,694		5,694		5,694		-		-		5,337		5,337		5,337		-		-
Mortgage servicing rights		718		867		-		-		867		2,260		3,232		-		-		3,232		139		147		-		-		147		109		109		-		-		109
Mortgage banking derivative assets		2,572		2,572		-		-		2,572		3,403		3,403		-		-		3,403		3,141		3,141		-		-		3,141		2,014		2,014		-		-		2,014

Financial Liabilities
Deposits		956,773		956,710		271,740		684,970		-		949,411		949,825		282,827		666,998		-		1,037,341		1,037,146		303,850		733,296		-		1,038,495		1,038,544		302,622		735,922		-
Advance payments by borrowers for taxes		25,107		25,107		25,107		-		-		4,716		4,716		4,716		-		-		11,409		11,409		11,409		-		-		4,371		4,371		4,371		-		-
Borrowings		435,503		435,398		-		435,398		-		387,155		390,932		-		390,932		-		448,451		447,401		-		447,401		-		435,046		432,269		-		432,269		-
Accrued interest payable		918		918		918		-		-		916		916		916		-		-		1,428		1,428		1,428		-		-		1,395		1,395		1,395		-		-
Mortgage banking derivative liabilities		-		-		-		-		-		69		69		-		-		69		1,005		1,005		-		-		1,005		1,116		1,116		-		-		1,116

The following methods and assumptions were used by the Company in determining its fair value disclosures for financial instruments.

Cash and Cash Equivalents

The carrying amount reported in the consolidated statements of financial condition for cash and cash equivalents is a reasonable estimate of fair value.

Securities

The fair value of securities is generally determined by a third party valuation source using observable market data utilizing a matrix or multi-dimensional relational pricing model. Standard inputs to these models include observable market data such as benchmark yields, reported trades, broker quotes, issuer spreads, benchmark securities and bid/offer market data. For securities with an early redemption feature, an option adjusted spread model is utilized to adjust the issuer spread. Prepayment models are used for mortgage related securities with prepayment features.

Loans Held for Sale

Fair value is estimated using the prices of the ~~Company's~~Company’s existing commitments to sell such loans and/or the quoted market price for commitments to sell similar loans.

~~- 31 -~~

Loans Receivable

~~Loans determined to be impaired~~The fair value estimation process for the loan portfolio uses an exit price concept and reflects discounts the Company believes are ~~analyzed to determine whether a collateral shortfall exists, and if such a shortfall exists, are recorded on our consolidated statements of financial condition at fair value.~~consistent with discounts in the market place. Fair ~~value is determined based on third party appraisals. Appraised~~ values are ~~adjusted~~estimated for portfolios of loans with similar characteristics. Loans are segregated by type such as one- to ~~consider disposition costs~~four-family, multi-family, home equity, construction and ~~also to take into consideration the age~~land, commercial real estate, commercial, and other consumer. The fair value of ~~the most recent appraisal. With respect to~~ loans ~~that are not considered to be impaired, fair value~~ is estimated by discounting the future ~~contractual~~ cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for similar maturities. The fair value analysis also includes other assumptions to estimate fair value, intended to approximate those a market participant would use in an orderly transaction, with adjustments for discount rates, ~~that reflect a current rate offered to borrowers of similar~~interest rates, liquidity, and credit standing for the remaining term to maturity. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820-10 and generally produces a higher fair value.spreads, as appropriate.

FHLB Stock

For FHLB stock, the carrying amount is the amount at which shares can be redeemed with the FHLB and is a reasonable estimate of fair value.

Deposits and Advance Payments by Borrowers for Taxes

The fair values for interest-bearing and noninterest-bearing negotiable order of withdrawal accounts, savings accounts, and money market accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). The fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates of similar remaining maturities to a schedule of aggregated expected monthly maturities of the outstanding certificates of deposit. The advance payments by borrowers for taxes are equal to their carrying amounts at the reporting date.

- 33 -

Borrowings

Fair values for borrowings are estimated using a discounted cash flow calculation that applies current interest rates to estimated future cash flows of the borrowings.

Accrued Interest Payable and Accrued Interest Receivable

For accrued interest payable and accrued interest receivable, the carrying amount is a reasonable estimate of fair value.

Commitments to Extend Credit and Standby Letters of Credit

Commitments to extend credit and standby letters of credit are generally not marketable. Furthermore, interest rates on any amounts drawn under such commitments would be generally established at market rates at the time of the draw. Fair values for the ~~Company's~~Company’s commitments to extend credit and standby letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements, the ~~counterparty's~~counterparty’s credit standing, and discounted cash flow analyses. The fair value of the ~~Company's~~Company’s commitments to extend credit was not material at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016.~~2018.

Mortgage Banking Derivative Assets and Liabilities

Mortgage banking derivatives include interest rate lock commitments to originate residential loans held for sale to individual customers and forward commitments to sell residential mortgage loans to various investors. The Company relies on a valuation model to estimate the fair value of its interest rate lock commitments to originate residential mortgage loans held for sale, which includes applying a pull through rate based upon historical experience and the current interest rate environment, and then multiplying by quoted investor prices. The Company also relies on a valuation model to estimate the fair value of its forward commitments to sell residential loans, which includes matching specific terms and maturities of the forward commitments against applicable investor pricing available. On the ~~Company's~~Company’s Consolidated Statements of Condition, instruments that have a positive fair value are included in prepaid expenses and other assets, and those instruments that have a negative fair value are included in other liabilities.

~~- 32 -~~

Note 15 – Segment Reporting

Selected financial and descriptive information is required to be provided about reportable operating segments, considering a "management approach" concept as the basis for identifying reportable segments. The management approach is based on the way that management organizes the segments within the enterprise for making operating decisions, allocating resources, and assessing performance. Consequently, the segments are evident from the structure of the enterprise's internal organization, focusing on financial information that an enterprise's chief operating decision-makers use to make decisions about the enterprise's operating matters.

The Company has determined that it has two reportable segments: community banking and mortgage banking. The Company's operating segments are presented based on its management structure and management accounting practices. The structure and practices are specific to the Company and therefore, the financial results of the Company's business segments are not necessarily comparable with similar information for other financial institutions.

Community Banking

The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin along with a loan production office in Minneapolis, Minnesota. Within this segment, the following products and services are provided: (1) lending solutions such as residential mortgages, home equity loans and lines of credit, personal and installment loans, real estate financing, business loans, and business lines of credit; (2) deposit and transactional solutions such as checking, credit, debit and pre-paid cards, online banking and bill pay, and money transfer services; (3) investable funds solutions such as savings, money market deposit accounts, IRA accounts, certificates of deposit, and (4) fixed and variable annuities, insurance as well as trust and investment management accounts.

Consumer products include loan and deposit products: mortgage, home equity loans and lines, personal term loans, demand deposit accounts, interest bearing transaction accounts and time deposits. Consumer products also include personal investment services. Business banking products include secured and unsecured lines and term loans for working capital, inventory and general corporate use, commercial real estate construction loans, demand deposit accounts, interest bearing transaction accounts and time deposits.

- 34 -

Mortgage Banking

The mortgage banking segment provides residential mortgage loans for the primary purpose of sale on the secondary market. Mortgage banking products and services are provided by offices in 24 states with the ability to lend in 47 states.

Presented below is the segment information:

	As of or for the three months ended September 30, 2017												As of or for the three months ended March 31, 2019
	Community Banking			Mortgage Banking			Holding Company and Other			Consolidated			Community Banking			Mortgage Banking			Holding Company and Other			Consolidated
	(In Thousands)												(In Thousands)

Net interest income (loss)	$	13,120		$	(102	)	$	15		$	13,033
Net interest income													$	13,132			(208	)		12			12,936
Provision for loan losses		-			20			-			20			(700	)		20			-			(680	)
Net interest income (loss) after provision for loan losses		13,120			(122	)		15			13,013
Net interest income after provision for loan losses														13,832			(228	)		12			13,616

Noninterest income		1,161			32,318			(425	)		33,054			881			23,571			(195	)		24,257

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,483			21,792			(122	)		26,153			4,756			16,060			(177	)		20,639
Occupancy, office furniture and equipment		733			1,800			-			2,533			972			1,804			-			2,776
FDIC insurance premiums		129			-			-			129
Advertising														181			777			-			958
Data processing														457			308			4			769
Communications														82			246			-			328
Professional fees														268			426			1			695
Real estate owned		(20	)		-			-			(20	)		32			-			-			32
Loan processing expense														-			805			-			805
Other		1,499			4,290			(268	)		5,521			489			1,912			(54	)		2,347
Total noninterest expenses		6,824			27,882			(390	)		34,316			7,237			22,338			(226	)		29,349
Income (loss) before income taxes		7,457			4,314			(20	)		11,751
Income tax expense (benefit)		2,597			1,767			(2	)		4,362
Net income (loss)	$	4,860		$	2,547		$	(18	)	$	7,389
Income before income taxes														7,476			1,005			43			8,524
Income tax expense														1,687			286			9			1,982
Net income													$	5,789			719			34			6,542

Total assets	$	1,859,494		$	203,826		$	(209,192	)	$	1,854,128		$	1,903,985			162,862			(138,182	)		1,928,665

~~- 33 -~~

As of or for the three months ended September 30, 2016

Community
Banking

Mortgage
Banking

Holding Company and
Other
Consolidated
(In Thousands)

Net interest income $ 11,244 $ 10 $ 71 $ 11,325
Provision for loan losses 100 35 - 135
Net interest income (loss) after provision for loan losses 11,144 (25 ) 71 11,190

Noninterest income 1,658 36,124 (370 ) 37,412

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits 4,392 23,295 (114 ) 27,573
Occupancy, office furniture and equipment 740 1,579 - 2,319
FDIC insurance premiums 140 - - 140
Real estate owned 37 - - 37
Other 1,252 4,453 (233 ) 5,472
Total noninterest expenses 6,561 29,327 (347 ) 35,541
Income before income taxes 6,241 6,772 48 13,061
Income tax expense 2,107 2,767 682 5,556
Net income (loss) $ 4,134 $ 4,005 $ (634 ) $ 7,505

Total assets $ 1,777,014 $ 259,636 $ (241,615 ) $ 1,795,035

As of or for the nine months ended September 30, 2017

Community
Banking

Mortgage
Banking

Holding Company and
Other
Consolidated
(In Thousands)

Net interest income $ 37,233 $ 23 $ 153 $ 37,409
Provision for loan losses (1,300 ) 134 - (1,166 )
Net interest income (loss) after provision for loan losses 38,533 (111 ) 153 38,575

Noninterest income 2,968 94,446 (1,182 ) 96,232

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits 12,964 61,134 (366 ) 73,732
Occupancy, office furniture and equipment 2,356 5,231 - 7,587
FDIC insurance premiums 366 - - 366
Real estate owned 258 - - 258
Other 4,382 13,934 (698 ) 17,618
Total noninterest expenses 20,326 80,299 (1,064 ) 99,561
Income before income taxes 21,175 14,036 35 35,246
Income tax expense 6,658 5,716 23 12,397
Net income $ 14,517 $ 8,320 $ 12 $ 22,849

~~- 34 -~~

As of or for the nine months ended September 30, 2016

Community
Banking

Mortgage
Banking

Holding Company and
Other
Consolidated
(In Thousands)

Net interest income $ 30,977 $ 287 $ 209 $ 31,473
Provision for loan losses 200 140 - 340
Net interest income after provision for loan losses 30,777 147 209 31,133

Noninterest income 3,583 92,457 (832 ) 95,208

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits 12,784 58,526 (342 ) 70,968
Occupancy, office furniture and equipment 2,388 4,686 - 7,074
FDIC insurance premiums 500 - - 500
Real estate owned 344 - - 344
Other 3,705 12,790 (387 ) 16,108
Total noninterest expenses 19,721 76,002 (729 ) 94,994
Income before income taxes 14,639 16,602 106 31,347
Income tax expense 4,711 6,797 706 12,214
Net income (loss) $ 9,928 $ 9,805 $ (600 ) $ 19,133

- 35 -

	As of or for the three months ended March 31, 2018
	Community Banking			Mortgage Banking			Holding Company and Other			Consolidated
	(In Thousands)

Net interest income	$	13,304			(192	)		29			13,141
Provision for loan losses		(900	)		20			-			(880	)
Net interest income after provision for loan losses		14,204			(212	)		29			14,021

Noninterest income		939			24,731			(487	)		25,183

Noninterest expenses:
Compensation, payroll taxes, and other employee benefits		4,888			16,241			(146	)		20,983
Occupancy, office furniture and equipment		826			1,813			-			2,639
Advertising		140			720			-			860
Data processing		435			186			4			625
Communications		100			282			-			382
Professional fees		191			514			(5	)		700
Real estate owned		317			-			-			317
Loan processing expense		-			988			-			988
Other		785			2,197			(329	)		2,653
Total noninterest expenses		7,682			22,941			(476	)		30,147
Income before income taxes		7,461			1,578			18			9,057
Income tax expense		1,668			435			1			2,104
Net income	$	5,793			1,143			17			6,953

Total assets	$	1,819,569			158,267			(138,572	)		1,839,264

- 36 -

Note 16 – Leases

The Company has entered into operating lease agreements for two of its community banking branch locations, all of its mortgage banking office location, and some of its office equipment. The leases have fixed terms defined regarding the payments and length. The Company elected not to include short-term leases (i.e., leases with initial terms of twelve months or less), or equipment leases (deemed immaterial) on the consolidated statements of condition. Some of the leases included options to extend the leases. These options are reviewed and factored into the length of the lease if the option is expected to be extended. Leases did not contain an implicit rate; therefore, the Company used the incremental borrowing rates for the discount rate. There were no sale and leaseback transactions, leveraged leases, or lease transactions with related parties during the three months ended March 31, 2019.

At March 31, 2019, the Company had lease liabilities totaling $9.8 million and right-of-use assets totaling $9.3 million related to these leases. Lease liabilities and right-of-use assets are reflected in other liabilities and other assets, respectively, on the consolidated statements of condition.

The cost components of our operating leases were as follows for the three months ended March 31, 2019:

	Three Months Ended March 31, 2019
	(In Thousands)
Operating lease cost	$	758
Variable cost		260
Short-term lease cost		233
Total	$	1,251

At March 31, 2019, the Company had leases that had not yet commenced, but will create approximately $400,000 of additional lease liabilities and right-of-use assets for the Company in the second quarter of 2019.

The table below summarizes other information related to our operating leases:

	Three Months Ended March 31, 2019
	(Dollars in Thousands)
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	731
Initial recognition of right of use asset		9,589
Initial recognition of lease liabilities		10,078
Weighted average remaining lease term - operating leases, in years		3.6
Weighted average discount rate - operating leases		5.9	%

As of March 31, 2019, lease liability information for the Company is summarized in the following table.

Maturity analysis	Operating leases
	(In Thousands)
One year or less	$	3,225
More than one year through two years		2,708
More than two years through three years		1,917
More than three years through four years		1,376
More than four years through five years		992
More than five years		1,162
Total lease payments		11,380
Present value discount		(1,611	)
Lease liability	$	9,769

- 37 -

Item 2. ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Information

This Quarterly Report on Form 10-Q may contain various forward-looking statements, which can be identified by the use of words such as ~~"estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect"~~“estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions and verbs in the future tense. These forward-looking statements include, but are not limited to:

●		Statements of our goals, intentions and expectations;
●		Statements regarding our business plans, prospects, growth and operating strategies;
●		Statements regarding the quality of our loan and investment portfolio; and
●		Estimates of our risks and future costs and benefits.

These forward-looking statements are based on current beliefs and expectations of our management and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

●		general economic conditions, either nationally or in our market area, including employment prospects, that are ~~worse~~different than expected;
●		competition among depository and other financial institutions;
●		inflation and changes in the interest rate environment that reduce our margins and yields, our mortgage banking revenues, the fair value of financial instruments or the origination levels in our lending business, or increase the level of defaults, losses or prepayments on loans we have made and make whether held in portfolio or sold in the secondary markets;
●		adverse changes in the securities or secondary mortgage markets;
●		changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;
●		changes in monetary or fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Federal Reserve Board;
●		our ability to manage market risk, credit risk and operational risk in the current economic conditions;
●		our ability to enter new markets successfully and capitalize on growth opportunities;
●		our ability to successfully integrate acquired entities;
●		decreased demand for our products and services;
●		changes in tax policies or assessment policies;
●		the inability of third-party providers to perform their obligations to us;
●		changes in consumer demand, spending, borrowing and savings habits;
●		changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission or the Public Company Accounting Oversight Board;
●		our ability to retain key employees;
●		cyber attacks, computer viruses and other technological risks that may breach the security of our websites or other systems to obtain unauthorized access to confidential information and destroy data or disable our systems;
●		technological changes that may be more difficult or expensive than expected;
●		the ability of third-party providers to perform their obligations to us;
●		the effects of any federal government shutdown;
●		the ability of the U.S. Government to manage federal debt limits;
●		significant increases in our loan losses; and
●		changes in the financial condition, results of operations or future prospects of issuers of securities that we own.

See also the factors referred to in reports filed by the Company with the Securities and Exchange Commission (particularly those under the caption ~~"Risk Factors"~~“Risk Factors” in Item 1A of the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016)~~2018).

- 38 -

Overview

The following discussion and analysis is presented to assist the reader in understanding and evaluating of the ~~Company's~~Company’s financial condition and results of operations. It is intended to complement the unaudited consolidated financial statements, footnotes, and supplemental financial data appearing elsewhere in this Quarterly Report on Form 10-Q and should be read in conjunction therewith. The detailed discussion in the sections below focuses on the results of operations for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018 and the financial condition as of ~~September 30, 2017~~March 31, 2019 compared to the financial condition as of December 31, ~~2016.~~

~~- 36 -~~

2018.

As described in the notes to the unaudited consolidated financial statements, we have two reportable segments: community banking and mortgage banking. The community banking segment provides consumer and business banking products and services to customers primarily within Southeastern Wisconsin along with a loan production office in Minneapolis, Minnesota. Consumer products include loan products, deposit products, and personal investment services. Business banking products include loans for working capital, inventory and general corporate use, commercial real estate construction loans, and deposit accounts. The mortgage banking segment, which is conducted by offices in 24 states through Waterstone Mortgage Corporation, consists of originating residential mortgage loans primarily for sale in the secondary market.

Our community banking segment generates the significant majority of our consolidated net interest income and requires the significant majority of our provision for loan losses. Our mortgage banking segment generates the significant majority of our noninterest income and a majority of our noninterest expenses. We have provided below a discussion of the material results of operations for each segment on a separate basis for the three ~~and nine~~ months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, which focuses on noninterest income and noninterest expenses. We have also provided a discussion of the consolidated operations of the Company, which includes the consolidated operations of the Bank and Waterstone Mortgage Corporation, for the same periods.

Comparison of Community Banking Segment Results of Operations for the Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018

Net income for each of the three months ended ~~September 30, 2017~~March 31, 2019 and March 31, 2018 totaled ~~$4.9 million compared to net income of $4.1 million for the three months ended September 30, 2016.~~$5.8 million. Net interest income ~~increased $1.9 million~~decreased $172,000 to $13.1 million for the three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$11.2~~$13.3 million for the three months ended ~~September 30, 2016.~~March 31, 2018. Net interest income ~~increased~~decreased due ~~primarily~~ to an increase in deposits expense and the cost of ~~$1.2 million in interest income~~borrowings as deposits and borrowings repriced at higher rates. Partially offseting the ~~average loan balance increased along with a decrease of $712,000~~increase in interest expense, ~~on borrowings as higher rate FHLB borrowings matured~~interest income increased primarily due to an increase in ~~2016~~average loan balances and ~~2017 were replaced with lower rate FHLB borrowings.~~loan rates. Provision for loan losses was a negative provision of $700,000 for the three months ended March 31, 2019 compared to a negative provision of $900,000 for the three months ended March 31, 2018.

Total noninterest income decreased ~~$497,000~~$58,000 due ~~primarily~~ to ~~a decrease~~decreases in loan ~~fees.~~and deposit fees and other income. The ~~loans~~loan fees ~~for the three months ended September 30, 2016 included a significant~~decreased primary due to fewer loan ~~prepayment penalty. The increase~~prepayments. Other income decreased primarily due to decreases in ~~cash~~rental and wealth management income. Cash surrender value of life insurance ~~decreased~~increased as the ~~dividend~~earnings rate ~~on one of the policies decreased in 2017 compared to 2016.~~improved slightly year over year.

Compensation, payroll taxes, and other employee benefits expense ~~increased $91,000~~decreased $132,000 to $4.8 million due primarily to ~~an increase~~a decrease in ~~ESOP~~health insurance expense partially offset by ~~health insurance expense. The Bank also reported~~ an increase in ~~other noninterest expense for the three months ended September 30, 2017 compared to the three months ended September 30, 2016 due to purchasing loans from the mortgage banking segment.~~salaries expense. Occupancy, office furniture, and equipment ~~expense, FDIC premiums,~~increased $146,000 due primarily to increased computer and ~~real~~snow removal expense. Advertising, data processing, and professional fees increased. Real estate owned expense decreased ~~for the three months ended September 30, 2017 compared~~primarily due to ~~the three months ended September 30, 2016.~~a reduction in writedowns. Other noninterest expense decreased resulting from a decrease in loan and hiring costs.

Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016~~2018

Net income totaled ~~$2.5~~$719,000 for the three months ended March 31, 2019 compared to $1.1 million for the three months ended ~~September 30, 2017~~March 31, 2018. We originated $501.4 million in mortgage loans held for sale during the three months ended March 31, 2019, which was a decrease of $14.6 million, or 2.8%, from the $516.0 million originated during the three months ended March 31, 2018. The decrease in loan production volume was driven by a 34.6% decrease in refinance products offset by a 2.8% increase in mortgage purchase products. Total mortgage banking noninterest income decreased $1.2 million, or 4.7%, to $23.6 million during the three months ended March 31, 2019 compared to ~~$4.0~~$24.7 million during the three months ended March 31, 2018. The decrease in mortgage banking noninterest income was related to a 2.8% decrease in volume and a 1.3% decrease in gross margin on loans sold for the three months ended ~~September 30, 2016. Mortgage banking segment revenue decreased $3.8 million, or 10.5%, to $32.3 million for the three months ended September 30, 2017~~March 31, 2019 compared to ~~$36.1 million for~~March 31, 2018. Gross margin on loans sold is the three months ended September 30, 2016. The decrease in revenue was attributable to a $48.0 million, or 6.8%, decrease in origination volume as well as a decrease in margin of approximately 1.5%. The decrease in originations was driven by a 46.5% decrease in the origination of loans made for the purposeratio of mortgage ~~refinance. Driven by an expansion of our branch network, origination volumes of loans made for~~banking income (excluding the ~~purpose of residential purchases increased 3.1% compared to the comparative quarter~~change in ~~the prior year. In addition to the decrease in margin, the value of the~~ interest rate lock ~~pipeline decreased $643,000 compared~~fair value) divided by total loan originations. The gross margin on loans sold compression reflects industry dynamics, as price-based competition has escalated to maintain market share in the ~~prior year period.~~face of lower demand.

Our overall margin can be affected by the mix of both loan type (conventional loans versus governmental) and loan purpose (purchase versus refinance). Conventional loans include loans that conform to Fannie Mae and Freddie Mac standards, whereas governmental loans are those loans guaranteed by the federal government, such as a Federal Housing Authority or U.S. Department of Agriculture loan. Loans originated for the purchase of a residential property, which generally yield a higher margin than loans originated for refinancing existing loans, comprised ~~89.6%~~89.9% of total originations during the three months ended ~~September 30, 2017,~~March 31, 2019, compared to ~~81.7%~~85.1% of total originations during the three months ended ~~September 30, 2016.~~March 31, 2018. The mix of loan type trended towards more governmental loans and less convential loans; with governmental loans and conventional loans comprising 31.6% and ~~more governmental loans; with conventional loans and governmental loans comprising 64.5% and 35.5%~~68.4% of all loan originations, respectively, during the three months ended ~~September 30, 2017,~~March 31, 2019, compared ~~67.0%~~to 30.9% and ~~33.0%~~69.1% of all loan originations, respectively, during the three months ended ~~September 30, 2016.~~March 31, 2018.

Total compensation, payroll taxes and other employee benefits decreased ~~$1.5 million,~~$181,000, or ~~6.5%~~1.1%, to ~~$21.8~~$16.1 million for the three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$23.3~~$16.2 million for the three months ended ~~September 30, 2016.~~March 31, 2018. The decrease in compensation expense was primarily a result of the decrease in ~~mortgage banking income, given our commission-based loan officer compensation model.~~salaries as underperforming branches were closed. In addition to the salaries decrease, commission expense decreased as volumes declined. Occupancy, office furniture, and equipment expense ~~increased $221,000~~decreased as branches closed. Advertising and data processing expenses increased. Communications, professional fees, loan processing, and other noninterest expenses decreased primarily due to ~~$1.8 million as the number of branches increased. Other noninterest expense decreased $163,000, or 3.7%, to $4.3 million as fundings decreased, resulting in less volume-based~~lower legal expenses, ~~offset by increased branch loss reserves, higher advertising expenses,~~loan originations, and ~~higher legal expenses.~~hiring costs.

- 39 -

Consolidated Waterstone Financial, Inc. Results of Operations

	Three months ended September 30,						Three months ended March 31,
	2017			2016			2019			2018
	(Dollars in Thousands, except per share amounts)						(Dollars in Thousands, except per share amounts)

Net income	$	7,389			7,505		$	6,542			6,953
Earnings per share - basic		0.27			0.28			0.25			0.25
Earnings per share - diluted		0.26			0.27			0.24			0.25
Annualized return on average assets		1.56	%		1.66	%		1.39	%		1.57	%
Annualized return on average equity		7.12	%		7.36	%		6.65	%		6.90	%

- 3740 -

Net Interest Income

Average Balance Sheets, Interest and Yields/Costs

The following tables set forth average balance sheets, annualized average yields and costs, and certain other information for the periods indicated. Non-accrual loans are included in the computation of the average balances of loans receivable and held for sale. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense. Yields on interest-earning assets are computed on a fully tax-equivalent yield, where applicable.

	Three months ended September 30,														Three months ended March 31,
	2017							2016							2019							2018
	Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost			Average Balance		Interest		Yield/Cost
	(Dollars in Thousands)														(Dollars in Thousands)
Assets
Interest-earning assets:
Loans receivable and held for sale (1)	$	1,419,477	$	15,855		4.43	%	$	1,333,666	$	14,754		4.40	%	$	1,477,991	$	17,104		4.69	%	$	1,398,043	$	15,458		4.48	%
Mortgage related securities (2)		119,902		647		2.14	%		150,790		743		1.96	%		115,674		759		2.66	%		113,688		638		2.28	%
Debt securities, federal funds sold and short-term investments (2)(3)		215,597		1,118		2.06	%		186,201		1,034		2.21	%		194,669		1,385		2.89	%		165,863		947		2.32	%
Total interest-earning assets		1,754,976		17,620		3.98	%		1,670,657		16,531		3.94	%		1,788,334		19,248		4.37	%		1,677,594		17,043		4.12	%

Noninterest-earning assets		121,982							123,318							125,396							113,317
Total assets	$	1,876,958						$	1,793,975						$	1,913,730						$	1,790,911

Liabilities and equity
Interest-bearing liabilities:
Demand accounts	$	35,211		7		0.08	%	$	35,066		5		0.06	%	$	36,268		8		0.09	%	$	37,384		7		0.08	%
Money market and savings accounts		175,666		104		0.23	%		176,582		97		0.22	%		176,237		275		0.63	%		153,226		90		0.24	%
Time deposits		676,881		1,870		1.10	%		685,969		1,821		1.06	%		735,471		3,707		2.04	%		697,644		2,217		1.29	%
Total interest-bearing deposits		887,758		1,981		0.89	%		897,617		1,923		0.85	%		947,976		3,990		1.71	%		888,254		2,314		1.06	%
Borrowings		461,549		2,439		2.10	%		374,730		3,082		3.27	%		438,905		2,246		2.08	%		379,115		1,508		1.61	%
Total interest-bearing liabilities		1,349,307		4,420		1.30	%		1,272,347		5,005		1.56	%		1,386,881		6,236		1.82	%		1,267,369		3,822		1.22	%

Noninterest-bearing liabilities
Noninterest-bearing deposits		91,710							80,407							97,951							91,806
Other noninterest-bearing liabilities		24,265							35,331							30,027							22,828
Total noninterest-bearing liabilities		115,975							115,738							127,978							114,634
Total liabilities		1,465,282							1,388,085							1,514,859							1,382,003
Equity		411,676							405,890							398,871							408,908
Total liabilities and equity	$	1,876,958						$	1,793,975						$	1,913,730						$	1,790,911

Net interest income / Net interest rate spread (4)				13,200		2.68	%				11,526		2.38	%				13,012		2.55	%				13,221		2.90	%
Less: taxable equivalent adjustment				167		0.03	%				201		0.05	%				76		0.02	%				80		0.02	%
Net interest income / Net interest rate spread, as reported			$	13,033		2.65	%			$	11,325		2.33	%			$	12,936		2.53	%			$	13,141		2.88	%
Net interest-earning assets (5)	$	405,669						$	398,310						$	401,453						$	410,225
Net interest margin(6)						2.95	%						2.70	%						2.93	%						3.18	%
Tax equivalent effect						0.03	%						0.04	%						0.02	%						0.02	%
Net interest margin on a fully tax equivalent basis (6)						2.98	%						2.74	%						2.95	%						3.20	%
Average interest-earning assets to average interest-bearing liabilities						130.06	%						131.31	%						128.95	%						132.37	%

__________

(1) Interest income includes net deferred loan fee amortization income of ~~$178,000~~$130,000 and ~~$229,000~~$192,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively.

(2) Average balance of mortgage related and debt securities are based on amortized historical cost.

(3) Interest income from ~~tax exempt~~tax-exempt securities is computed on a taxable equivalent basis using a tax rate of ~~35%~~21% for ~~all periods presented.~~the three months ended March 31, 2019 and March 31, 2018. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were ~~1.75~~2.73% and ~~1.78%~~2.12% for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively.

(4) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities and is presented on a fully tax equivalent basis.

(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.

(6) Net interest margin represents net interest income divided by average total interest-earning assets.

- 3841 -

Rate/Volume Analysis

The following table sets forth the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionately based on the changes due to rate and the changes due to volume.

	Three months ended September 30,									Three months ended March 31,
	2017 versus 2016									2019 versus 2018
	Increase (Decrease) due to									Increase (Decrease) due to
	Volume			Rate			Net			Volume		Rate			Net
	(In Thousands)									(In Thousands)
Interest income:
Loans receivable and held for sale (1)(2)	$	1,011		$	90		$	1,101		$	905	$	741		$	1,646
Mortgage related securities (3)		(160	)		64			(96	)		11		110			121
Other earning assets (3)(4)		156			(72	)		84
Debt securities, federal funds sold and short-term investments (3)(4)											181		257			438
Total interest-earning assets		1,007			82			1,089			1,097		1,108			2,205

Interest expense:
Demand accounts		-			2			2			-		1			1
Money market and savings accounts		(2	)		9			7			16		169			185
Time deposits		(26	)		75			49			127		1,363			1,490
Total interest-earning deposits		(28	)		86			58			143		1,533			1,676
Borrowings		1,183			(1,826	)		(643	)		259		479			738
Total interest-bearing liabilities		1,155			(1,740	)		(585	)		402		2,012			2,414
Net change in net interest income	$	(148	)	$	1,822		$	1,674		$	695	$	(904	)	$	(209	)

______________

(1) Interest income includes net deferred loan fee amortization income of ~~$178,000~~ $130,000 and ~~$229,000~~$192,000 for the three months ended ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively.

(2) Non-accrual loans have been included in average loans receivable balance.

(3) Includes available for sale securities. Average balance of available for sale securities is based on amortized historical cost.

(4) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of ~~35%~~21% for ~~all periods presented.~~the three months ended March 31, 2019 and March 31, 2018.

Net interest income ~~increased $1.7 million,~~decreased $205,000, or ~~15.1%~~1.6%, to ~~$13.0~~$12.9 million during the three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$11.3~~$13.1 million during the three months ended ~~September 30, 2016.~~March 31, 2018.

●		Interest income on loans increased ~~$1.1~~$1.6 million due primarily to an increase of ~~$85.8~~$79.9 million, or 5.7%, in average loans along with a ~~three~~21 basis point increase in average yield on loans. The increase in average loan balance was driven by a ~~$118.8~~$78.9 million, or ~~10.5%~~6.1%, increase in the average balance of loans held in portfolio ~~partially offset~~and by ~~a decrease~~an increase of ~~$32.9~~$1.0 million, or ~~16.4%~~1.0%, in the average balance of loans held for sale.
●		Interest income from mortgage-related securities ~~decreased $96,000~~increased $121,000 year over year primarily as the yield increased 38 basis points. Additionally, the average balance decreased $30.9 million due to securities paying down in 2016 and into 2017 and fewer purchases occurring to replace those securities due to current market conditions. This was partially offset by an increase in rate.increased $2.0 million.
●		Interest income from other ~~interest earning~~interest-earning assets (comprised of debt securities, federal funds sold and short-term investments) increased ~~$118,000~~$442,000 due to ~~an increase of $29.4 million in average balance, which was due primarily to higher average cash held on hand and commercial paper. This increase in average balance was partially offset by~~ a ~~three~~61 basis point ~~decrease~~increase in the average yield. The ~~decrease~~increase in average yield was driven by higher rate municipal bond securities maturing and being replaced at a slower pace and at a lower rate. Offsetting the decrease from the municipal bonds maturing, the yield on cash increased with a 25 basis point increaseincreases in the Federal Funds interest rate ~~in each of December 2016, March 2017, and June 2017, as well as an~~along with the increase in the ~~cash~~ dividend paid by the FHLB on its stock. The average balance increased $28.8 million to $194.7 million due to the greater amount of cash on hand. Municipal securities that matured throughout the past 12 months were not replaced due to market conditions.
●		Interest expense on time deposits increased ~~$49,000~~$1.5 million, or 67.2%, primarily due to a ~~four~~75 basis point increase of average cost of time deposits, as maturing time deposits have repriced or have been replaced at a ~~slightly~~ higher rate in the current competitive market. ~~Partially offsetting~~In addition to the increase in cost of time deposits, the average balance of time ~~deposit decreased $9.1~~deposits increased $37.8 million compared to the prior year period.
●		Interest expense on money market and savings accounts increased ~~$7,000~~$185,000 due primarily to ~~an increase of one~~a 39 basis point increase in ~~rate partially offset by a decrease~~average cost of money market and savings accounts along with an increase in average balance of ~~$916,000. The increase in rate reflects the Company's strategy to remain aggressive with competitors in this segment of retail funds for more aggressive growth.~~$23.0 million.
●		Interest expense on borrowings ~~decreased $643,000~~increased $738,000, or 48.9%, due to ~~a decrease~~an increase in the average cost of borrowings that resulted from the maturity and replacement of ~~fixed rate~~fixed-rate borrowings since the beginning of the prior year. The average cost of borrowings totaled ~~2.10%~~2.08% during the quarter ended ~~September 30, 2017,~~March 31, 2019, compared to ~~3.27%~~1.61% during the quarter ended ~~September 30, 2016.~~March 31, 2018. In addition to the increase in rate, average borrowing volume increased $59.8 million to $438.9 million during the quarter ended March 31, 2019.

- 3942 -

Provision for Loan Losses

Our provision for loan losses ~~decreased $115,000 as the mortgage banking segment had~~amounted to ~~reserve $20,000 for additional loans during the three months ended September 30, 2017, compared to $135,000~~a negative provision of ~~provision for loan losses~~$680,000 for the three months ended ~~September 30, 2016.~~March 31, 2019, compared to a negative provision of $880,000 for the three months ended March 31, 2018. The ~~community banking segment recorded no~~negative provision ~~during the current quarter~~for loan losses was primarily due ~~to the~~a continued improvement in the overall risk profile of the loan ~~quality metrics including: non-accrual loans, loans rated substandard or watch, and loans past due.~~portfolio.

The provision is primarily a function of the Company's reserving methodology and assessments of certain quantitative and qualitative factors which are used to determine an appropriate allowance for loan losses for the period. See further discussion regarding the allowance for loan losses in the "Asset Quality" section for an analysis of charge-offs, nonperforming assets, specific reserves and additional provisions and the "Allowance for Loan Losses" section.

Noninterest Income

	Three months ended September 30,										Three months ended March 31,
	2017		2016		$ Change			% Change			2019		2018		$ Change			% Change
	(Dollars in Thousands)										(Dollars in Thousands)

Service charges on loans and deposits	$	300	$	789	$	(489	)		(62.0	)%	$	379	$	399	$	(20	)		(5.0	)%
Increase in cash surrender value of life insurance		688		734		(46	)		(6.3	)%		344		328		16			4.9	%
Loss on sale of securities		-		-		-			N/	M
Mortgage banking income		31,863		35,552		(3,689	)		(10.4	)%		23,359		24,187		(828	)		(3.4	)%
Other		203		337		(134	)		(39.8	)%		175		269		(94	)		(34.9	)%
Total noninterest income	$	33,054	$	37,412	$	(4,358	)		(11.6	)%	$	24,257	$	25,183	$	(926	)		(3.7	)%

N/M - Not meaningful

Total noninterest income decreased ~~$4.4 million,~~$926,000, or ~~11.6%~~3.7%, to ~~$33.1~~$24.3 million during the three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$37.4~~$25.2 million during the three months ended ~~September 30, 2016.~~March 31, 2018. The decrease resulted primarily from a decrease in mortgage banking income along with decreases in ~~all~~service charges on loans and deposits and other noninterest income categories.

●		The decrease in mortgage banking income was primarily the result of aan decrease in margin. Gross margin on loans sold decreased 1.3% at the mortgage banking segment. Total loan origination ~~volumes. The~~ volume ~~decreased $48.0~~on a consolidated basis increased $2.1 million, or ~~6.8%~~0.4%, to ~~$662.1~~$491.2 million during the three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~a $710.1~~$489.2 million during the three months ended ~~September 30, 2016.~~March 31, 2018. See "Comparison of Mortgage Banking Segment Operations for the Three Months Ended ~~September 30, 2017~~March 31, 2019 and ~~2016"~~2018" above for additional discussion of the ~~decrease~~increase in mortgage banking income.
●		Service charges on loans and deposits decreased primarily due ~~to a decrease in loan prepayment fees as one significant loan relationship paid off during the three months ended September 30, 2016.~~
●		The decrease in cash surrender value of life insurance was due to a decrease on one policy's annual dividend rate partially offset by an increase in earnings due to a purchase of a $2.5 million policy in June 2017.
●		The $134,000 decrease in other noninterest income was due primarily to a decrease in servicing fee revenue on loans sold at the mortgage banking segment, which resulted from a bulk sale of mortgage servicing rights in the first quarter of 2017.

~~- 40 -~~

~~Noninterest Expenses~~

Three months ended September 30,
2017 2016 $ Change % Change
(Dollars in Thousands)

Compensation, payroll taxes, and other employee benefits $ 26,153 $ 27,573 $ (1,420 ) (5.1 )%
Occupancy, office furniture and equipment 2,533 2,319 214 9.2 %
Advertising 821 661 160 24.2 %
Data processing 623 616 7 1.1 %
Communications 394 374 20 5.3 %
Professional fees 629 474 155 32.7 %
Real estate owned (20 ) 37 (57 ) (154.1 )%
FDIC insurance premiums 129 140 (11 ) (7.9 )%
Other 3,054 3,347 (293 ) (8.8 )%
Total noninterest expenses $ 34,316 $ 35,541 $ (1,225 ) (3.4 )%

Total noninterest expenses decreased $1.2 million, or 3.4%, to $34.3 million during the three months ended September 30, 2017 compared to $35.5 million during the three months ended September 30, 2016.

●		Compensation, payroll taxes and other employee benefit expense at our mortgage banking segment decreased $1.5 million, or 6.5%, to $21.8 million during the three months ended September 30, 2017. The decrease in compensation within our mortgage banking segment correlates to the decrease in mortgage banking income due to the commission-based compensation structure in place for our mortgage banking loan officers.
●		Compensation, payroll taxes and other employee benefit expense at the community banking segment increased $91,000, or 2.1%, to $4.4 million during the three months ended September 30, 2017. This was primarily due to an increase in ESOP expense, which increased due to the increased average stock price of the shares in the second quarter of 2017.
●		Advertising expense increased $160,000, or 24.2%, to $821,000 during the three months ended September 30, 2017. This was primarily due to marketing increases at the mortgage banking segment in an effort to increase volumes.
●		Professional fees increased $155,000, or 32.7%, to $629,000 during the three months ended September 30, 2017. This was primarily due to an increase in legal fees at the mortgage banking segment related to ongoing litigation and an increase in audit and tax expenses at the community banking segment.
●		Occupancy, office furniture and equipment expense increased $214,000 to $2.5 million during the three months ended September 30, 2017, resulting from additional rent expense in the current year period compared to prior year period due to the addition of mortgage banking segment branches. Offsetting the rent increase, there was less depreciation expense at the mortgage banking segment in the quarter ended September 30, 2017 compared to the prior year period. The community banking segment had a slight decrease in expense year over year due to less depreciation and utilities expenses.
●		Net real estate owned expense decreased $57,000, resulting in $20,000 of income during the three months ended September 30, 2017, compared to $37,000 of expense during the three months ended September 30, 2016. Property management expense (other than gains/losses) decreased $71,000 during the three months ended September 30, 2017 compared to the three months ended September 30, 2016 due to a reduction in the number of properties under management. Net gains on sales of REO decreased $38,000 to $153,000 for the three months ended September 30, 2017 compared to $191,000 for the three months ended September 30, 2016. Real estate owned writedowns decreased $25,000 to $40,000 for the three months ended September 30, 2017 compared to $65,000 for the three months ended September 30, 2016.
●		~~FDIC insurance expense decreased during the three months ended September 30, 2017 due to improved asset quality metrics.~~
●		Other noninterest expense decreased $293,000 to $3.1 million during the three months ended September 30, 2017. This decrease was primarily at the mortgage banking segment and resulted from lower volume-based fees as fundings decreased.

~~Income Taxes~~

Driven by an decrease in pre-tax income, income tax expense decreased $1.2 million, or 21.5%, to $4.4 million during the three months ended September 30, 2017, compared to $5.6 million during the three months ended September 30, 2016. Income tax expense was recognized during the three months ended September 30, 2017 at an effective rate of 37.1% compared to an effective rate of 42.5% during the three months ended September 30, 2016. During the quarter ended September 30, 2017, the Company recognized a benefit of approximately $21,000 related to stock awards exercised within the current period as a result of adopting the new stock compensation accounting standard. During the quarter ended September 30, 2016, the Company incurred a charge related to the write-off of a deferred tax asset established with respect to stock options awarded in 2007. The deferred tax asset established for the stock options was not fully utilized upon exercise, as the deductible compensation recognized was less than the value of the asset established at the time the award vested. A net expense of $564,000 was charged to income tax for the quarter ended September 30, 2016.

~~- 41 -~~

~~Comparison of Community Banking Segment for the Nine Months Ended September 30, 2017 and 2016~~

Net income for the nine months ended September 30, 2017 totaled $14.5 million compared to net income of $9.9 million for the nine months ended September 30, 2016. Net interest income increased $6.3 million to $37.2 million for the nine months ended September 30, 2017 compared to $31.0 million for the nine months ended September 30, 2016. Provision for loan losses decreased $1.5 million as asset quality metrics continued to improve. Noninterest income decreased $615,000 as loan prepayment fees decreased and a $107,000 loss on sale of securities occurred in 2017 partially offset by an increase in the cash surrender value of life insurance. Compensation, payroll taxes, and other employee benefits expense increased $180,000 primarily due to increases in salary expense along with an increase in ESOP expense, offset by a decrease in health insurance cost. FDIC premiums and real estate owned expense decreased as asset quality improved and we experienced a reduction of foreclosed properties. Those decreases were partially offset by an increase in other noninterest expense for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016.

~~Comparison of Mortgage Banking Segment Operations for the Nine Months Ended September 30, 2017 and 2016~~

Net income decreased $1.5 million to $8.3 million for the nine months ended September 30, 2017, compared to net income of $9.8 million for the nine months ended September 30, 2016. Mortgage banking segment revenues increased $2.0 million, or 2.2%, to $94.4 million for the nine months ended September 30, 2017 compared to $92.5 million for the nine months ended September 30, 2016. The increase in revenue was attributable to a 7.1% increase in volume origination to $1.88 billion during the nine months ended September 30, 2017 compared to $1.76 billion during the nine months ended September 30, 2016 offset by a decrease in margin. While revenue increased 2.2%, noninterest expenses increased $4.3 million, or 5.7%, to $80.3 million for the nine months ended September 30, 2017 compared to $76.0 million for the nine months ended September 30, 2016.

Loans originated by the mortgage banking segment for the purpose of sale in the secondary market increased $124.9 million, or 7.1%, to $1.88 billion during the nine months ended September 30, 2017, compared to $1.76 billion for the nine months ended September 30, 2016. The increase in originations was driven by an increase in the origination of loans made for the purpose of residential purchases, which yield a higher margin than refinance loans, partially offset by a decrease in the origination of mortgage refinance products. Our origination efforts continue to be focused on loans made for the purpose of residential purchases, as opposed to mortgage refinance. The percentage of origination volume related to purchase activity increased slightly to 89.5% from 85.1% of total originations for the nine months ended September 30, 2017 and 2016, respectively. The mix of loan type trended towards less conventional loans and more governmental loans; with conventional loans and governmental loans comprising 63.9% and 36.1% of all loan originations, respectively, during the nine months ended September 30, 2017, compared 64.6% and 35.4% of all loan originations, respectively, during the nine months ended September 30, 2016.

~~Consolidated Waterstone Financial, Inc. Results of Operations~~

Nine months ended September 30,
2017 2016
(Dollars in Thousands, except per share amounts)

Net income $ 22,849 $ 19,133
Earnings per share - basic 0.83 0.71
Earnings per share - diluted 0.82 0.70
Annualized return on average assets 1.70 % 1.45 %
Annualized return on average equity 7.42 % 6.38 %

~~- 42 -~~

~~Average Balance Sheets, Interest and Yields/Costs~~

Nine months ended September 30,
2017 2016
Average Balance Interest Yield/Cost Average Balance Interest Yield/Cost
(Dollars in Thousands)
Assets
Interest-earning assets:
Loans receivable and held for sale (1) $ 1,357,884 $ 45,078 4.44 % $ 1,274,369 $ 42,611 4.47 %
Mortgage related securities (2) 126,856 2,021 2.13 % 158,854 2,371 1.99 %
Debt securities, federal funds sold and short-term investments (2)(3) 198,947 3,210 2.16 % 208,241 3,309 2.12 %
Total interest-earning assets 1,683,687 50,309 3.99 % 1,641,464 48,291 3.93 %

Noninterest-earning assets 117,316 116,863
Total assets �� $ 1,801,003 $ 1,758,327

Liabilities and equity
Interest-bearing liabilities:
Demand accounts $ 36,419 20 0.07 % $ 33,679 14 0.06 %
Money market and savings accounts 171,659 315 0.25 % 163,550 294 0.24 %
Time deposits 667,168 5,279 1.06 % 673,343 5,169 1.03 %
Total interest-bearing deposits 875,246 5,614 0.86 % 870,572 5,477 0.84 %
Borrowings 401,931 6,756 2.25 % 387,867 10,724 3.69 %
Total interest-bearing liabilities 1,277,177 12,370 1.29 % 1,258,439 16,201 1.72 %

Noninterest-bearing liabilities
Noninterest-bearing deposits 88,454 73,828
Other noninterest-bearing liabilities 23,408 25,537
Total noninterest-bearing liabilities 111,862 99,365
Total liabilities 1,389,039 1,357,804
Equity 411,964 400,523
Total liabilities and equity $ 1,801,003 $ 1,758,327

Net interest income / Net interest rate spread (4) 37,939 2.70 % 32,090 2.21 %
Less: taxable equivalent adjustment 530 0.04 % 617 0.05 %
Net interest income / Net interest rate spread, as reported $ 37,409 2.66 % $ 31,473 2.16 %
Net interest-earning assets (5) $ 406,510 $ 383,025
Net interest margin(6)
2.97 % 2.56 %
Tax equivalent effect 0.04 % 0.05 %
Net interest margin on a fully tax equivalent basis (6) 3.01 % 2.61 %
Average interest-earning assets to average interest-bearing liabilities 131.83 % 130.44 %

~~__________~~

~~(1) Interest income includes net deferred loan fee amortization income of~~ ~~$563,000 and $596,000 for the nine months ended September 30, 2017 and 2016, respectively.~~

~~(2) Average balance of mortgage related and debt securities are based on amortized historical cost.~~

(3) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.80~~% and 1.73% for the nine months ended September 30, 2017 and 2016, respectively.~~

~~(5) Net interest-earning assets represent total interest-earning assets less total interest-bearing liabilities.~~

~~(6) Net interest margin represents net interest income divided by average total interest-earning assets.~~

~~- 43 -~~

~~Rate/Volume Analysis~~

Nine months ended September 30,
2017 versus 2016
Increase (Decrease) due to
Volume Rate Net
(In Thousands)
Interest income:
Loans receivable and held for sale (1)(2) $ 2,758 $ (291 ) $ 2,467
Mortgage related securities (3) (507 ) 157 (350 )
Other earning assets (3) (4) (157 ) 58 (99 )
Total interest-earning assets 2,094 (76 ) 2,018

Interest expense:
Demand accounts - 6 6
Money market and savings accounts 12 9 21
Time deposits (51 ) 161 110
Total interest-earning deposits (39 ) 176 137
Borrowings 406 (4,374 ) (3,968 )
Total interest-bearing liabilities 367 (4,198 ) (3,831 )
Net change in net interest income $ 1,727 $ 4,122 $ 5,849

~~______________~~

~~(1) Interest income includes net deferred loan fee amortization income of $563,000 and $596,000 for the nine months ended September 30, 2017 and 2016, respectively.~~

~~(2) Non-accrual loans have been included in average loans receivable balance.~~

~~(3) Includes available for sale securities. Average balance of available for sale securities is based on amortized historical cost.~~

~~(4) Interest income from tax exempt securities is computed on a taxable equivalent basis using a tax rate of 35% for all periods presented.~~

~~Net interest income increased $5.9 million, or 18.9%, to $37.4 million during the nine months ended September 30, 2017 compared to $31.5 million during the nine months ended September 30, 2016.~~

●		Interest income on loans increased $2.5 million due to an increase in average balance of $83.5 million partially offset by a three basis point decrease in average yield on loans. The increase in average loan balance was driven by a $93.9 million increase in the average balance of loans held in portfolio offset by a decrease in the average balance of loans held for sale of $10.4 million.
●		Interest income from mortgage related securities decreased $350,000 year over year as securities have paid down and less purchases have occurred to replace those securities due to current market conditions.
●		Interest income from other interest earning assets (comprised of debt securities, federal funds sold and short-term investments) decreased due to a $9.2 million decrease in average balance, as municipal securities matured and were not replaced due to market conditions. Those funds were primarily held in a cash account. This decrease in average balance was partially offset by a seven basis point increase in the average yield. The increase in average yield was driven by a 25 basis point increase in the Federal Funds rate in December 2016, March 2017, and June 2017.
●		Interest expense on time deposits increased $110,000 primarily due to a three basis point increase in the average cost of funds, as maturing time deposits have repriced, or have been replaced at a higher rate in the current competitive market. Partially offsetting the increase in rate, the average balance of time deposits decreased $6.2 million compared to the prior year period.
●		Interest expense on money market and savings accounts increased $21,000 due primarily to an increase in average balance along with a slight increase in rate. The increase in volume and rate reflect the Company's strategy to remain competitive and grow this segment of retail funds.
●		Interest expense on borrowings decreased $4.0 million due to a decrease in the average cost of borrowings that resulted from the maturity and replacement of fixed rate borrowings. The average cost of borrowings totaled 2.25% during the nine months ended September 30, 2017, compared to 3.69% during the nine months ended September 30, 2016.

~~- 44 -~~

~~Provision for Loan Losses~~

Our provision for loan losses decreased $1.5 million, to a negative provision of $1.2 million during the nine months ended September 30, 2017, from a provision of $340,000 during the nine months ended September 30, 2016. The negative provision recorded during the current year period reflects the continued improvement in loan quality metrics including: non-accrual loans, loans rated substandard or watch, and loans past due.

~~Noninterest Income~~

Nine months ended September 30,
2017 2016 $ Change % Change
(Dollars in Thousands)

Service charges on loans and deposits $ 1,148 $ 1,742 $ (594 ) (34.1 )%
Increase in cash surrender value of life insurance 1,476 1,446 30 2.1 %
Loss on sale of securities (107 ) - (107 ) N/ M
Mortgage banking income 92,774 91,146 1,628 1.8 %
Other 941 874 67 7.7 %
Total noninterest income $ 96,232 $ 95,208 $ 1,024 1.1 %

N/M - Not meaningful

Total noninterest income increased $1.0 million, or 1.1%, to $96.2 million during the nine months ended September 30, 2017 compared to $95.2 million during the nine months ended September 30, 2016. The increase resulted primarily from an increase in mortgage banking income.

●		The $1.6 million increase in mortgage banking income was the result of an increase in origination volumes but partially offset by a decrease in margins. The volume increased $124.9 million, or 7.1%, to $1.88 billion during the nine months ended September 30, 2017 compared to $1.76 billion during the nine months ended September 30, 2016. See "Comparison of Mortgage Banking Segment Operations for the Nine Months Ended September 30, 2017 and 2016" above, for additional discussion of the increase in mortgage banking income.
●		~~The decrease in service charges on loans and deposits was related~~ to an decrease in loan prepayment fees.
●		The increase in cash surrender value of life insurance was due primarily ~~due~~ to ~~the purchase of a $10.0 million policy~~an increase in ~~March 2016 and a $2.5 million policy in June 2017.~~earnings rate.
●		The ~~$107,000 loss on sale of securities was due to a sale of a municipal bond in June 2017. There were no sales of securities in 2016.~~
●		~~The $67,000 increase~~$94,000 decrease in other noninterest income was due primarily ~~due~~ to ~~a gain on~~an decrease in mortgage servicing rights as there was a bulk sale of mortgage servicing rights for $308,000 during the nine months ended September 30, 2017. There were no bulk sales of mortgage servicing rights during the nine months ended September 30, 2016. Offsetting the gain on sale of mortgage servicing rights, servicing fee income ~~on loans sold decreased from the bulk sale.~~along with decreases in wealth management revenue and rent income.

Noninterest Expenses

	Three months ended March 31,
	2019		2018		$ Change			% Change
	(Dollars in Thousands)

Compensation, payroll taxes, and other employee benefits	$	20,639	$	20,983	$	(344	)		(1.6	)%
Occupancy, office furniture and equipment		2,776		2,639		137			5.2	%
Advertising		958		860		98			11.4	%
Data processing		769		625		144			23.0	%
Communications		328		382		(54	)		(14.1	)%
Professional fees		695		700		(5	)		(0.7	)%
Real estate owned		32		317		(285	)		(89.9	)%
Loan processing expense		805		988		(183	)		(18.5	)%
Other		2,347		2,653		(306	)		(11.5	)%
Total noninterest expenses	$	29,349	$	30,147	$	(798	)		(2.6	)%

- 4543 -

~~Noninterest Expenses~~

Nine months ended September 30,
2017 2016 $ Change % Change
(Dollars in Thousands)

Compensation, payroll taxes, and other employee benefits $ 73,732 $ 70,968 $ 2,764 3.9 %
Occupancy, office furniture and equipment 7,587 7,074 513 7.3 %
Advertising 2,414 1,974 440 22.3 %
Data processing 1,854 1,897 (43 ) (2.3 )%
Communications 1,170 1,088 82 7.5 %
Professional fees 1,953 1,486 467 31.4 %
Real estate owned 258 344 (86 ) (25.0 )%
FDIC insurance premiums 366 500 (134 ) (26.8 )%
Other 10,227 9,663 564 5.8 %
Total noninterest expenses $ 99,561 $ 94,994 $ 4,567 4.8 %

Total noninterest expenses ~~increased $4.6 million,~~decreased $798,000, or ~~4.8%~~2.6%, to ~~$99.6~~$29.3 million during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$95.0~~$30.1 million during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018.

●		Compensation, payroll taxes and other employee ~~benefit~~benefits expense at our mortgage banking segment ~~increased $2.6 million,~~decreased $181,000, or ~~4.5%~~1.1%, to ~~$61.1~~$16.1 million ~~for~~during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. The ~~increase~~decrease in compensation ~~within our mortgage banking segment correlated~~expense was primarily a result of the decrease in salaries as underperforming branches were closed. In addition to the ~~increase in mortgage banking income due to~~salaries decrease, commission expense decreased as volumes declined. Offsetting the ~~commission-based compensation structure in place for our mortgage banking loan officers along with the additional branches brought on during the year.~~decreases, health insurance expense increased.
●		Compensation, payroll taxes and other employee ~~benefit~~benefits expense ~~within~~at the community banking segment ~~increased $180,000~~decreased $132,000, or 2.7%, to $4.8 million during the three months ended March 31, 2019. The decrease was due primarily ~~due~~ to ~~ESOP expense along with an increase to salaries partially offset by~~ a decrease in health ~~insurance. ESOP~~insurance and stock compensation expense ~~increased due to the increased average stock price of the shares through the first nine months of 2017. The~~offset by increases in salaries ~~increase was primarily due to annual wage increases. Health insurance decreased as claims have been lower in 2017 compared to 2016.~~expense.
●		Occupancy, office furniture and equipment expense increased, resulting from additional rent expense in the current year compared to prior year due to the addition of mortgage banking segment branches. Partially offsetting the rent increase, there was less depreciation expense at the mortgage banking segment indecreased $9,000 to $1.8 million during the ~~nine~~three months ended ~~September 30, 2017 compared to the same period during the prior year. Additionally,~~March 31, 2019, primarily resulting from less computer expenses offset by higher rent expense.
●		Occupancy, office furniture and equipment expense at the community banking segment ~~had slightly lower expense year over year~~increased $146,000 to $972,000 during the three months ended March 31, 2019. The increase was due primarily to ~~less depreciation expense.~~installing new ATMs at each of the branches and branch remodels of several of the locations.
●		Advertising expense increased ~~as a result of increased advertising efforts~~$98,000, or 11.4%, to ~~generate more volume~~$958,000 during the three months ended March 31, 2019. This was primarily due to marketing increases at the mortgage banking segment in an effort to increase volumes at the branches. Additionally, the community banking segment increased spending primarily to attract deposits.
●		Data processing expense increased $144,000, or 23.0%, to $769,000 during the three months ended March 31, 2019. This was primarily due to increases at the mortgage banking segment.
●		Professional fees ~~expense increased as~~decreased $5,000, or 0.5%, to $695,000 during the three months ended March 31, 2019. This was primarily due to a ~~result of an increase~~decrease in legal ~~fees~~expenses at the mortgage banking segment ~~primarily related to ongoing litigation. Audit and tax expense increased~~offset by higher consulting fees at the community banking segment.
●		~~Net real~~Real estate owned expense decreased ~~$86,000, to $258,000~~$285,000, resulting in $32,000 of expense during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019, compared to ~~$344,000 for~~$317,000 of expense during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. Property management expense (other than gains/losses) decreased ~~$199,000 to $269,000~~$72,000 during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to the ~~nine~~three months ended ~~September 30, 2016 due~~March 31, 2018 as there are less properties to ~~a reduction in the number of properties under management.~~manage. Net gains on sales of real estate owned decreased ~~$24,000~~$44,000 to ~~$515,000~~$12,000 for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$539,000~~$56,000 for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. Real estate owned writedowns ~~increased $88,000 to $504,000~~decreased $256,000 as there were no writedowns for the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 compared to ~~$416,000~~$256,000 for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018.
●		~~FDIC insurance~~Loan processing expense decreased $183,000, or 18.5%, to $805,000 during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. This was ~~driven by~~primarily due to a decrease in appraisal and credit report fees at the ~~FDIC assessment rate due to improved asset quality metrics.~~mortgage banking segment.
●		Other noninterest expense ~~increased primarily due~~decreased $306,000 to ~~increased expense~~$2.3 million during the three months ended March 31, 2019. The decrease was at the mortgage banking ~~segment. The mortgage~~segment primarily resulted from decreased provision for branch losses and lower hiring costs. In addition, other noninterest expenses decreased at the community banking segment ~~increase was associated with volume-based fees~~ due primarily to ~~the increase~~decreases in loan ~~origination activity.~~and hiring costs.

Income Taxes

~~Driven by an increase in pre-tax income, income~~Income tax expense ~~increased $183,000,~~decreased $122,000, or ~~1.5%~~5.8%, to ~~$12.4~~$2.0 million during the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$12.2~~$2.1 million during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. Income tax expense was recognized during the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 at an effective rate of ~~35.2%~~23.3% compared to ~~39.0% for~~an effective rate of 23.2% during the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, the Company recognized a benefit of approximately ~~$827,000~~$92,000 related to stock awards exercised ~~within 2017 as~~compared to a ~~result~~benefit of ~~adopting~~approximately $130,000 recognized during the ~~new stock compensation accounting standard. During the nine~~three months ended September 30, 2016, the Company incurred a charge related to the write-off of a deferred tax asset established with respect to stock options awarded in 2007. The deferred tax asset established for the stock options was not fully utilized upon exercise, as the deductible compensation recognized was less than the value of the asset established at the time the award vested. A net expense of $564,000 was charged to income tax in the nine months ended September 30, 2016.March 31, 2018.

~~- 46 -~~

Comparison of Financial Condition at ~~September 30, 2017~~March 31, 2019 and December 31, ~~2016~~2018

Total Assets ~~-Total~~ – Total assets increased by ~~$63.5~~$13.3 million, or ~~3.5%~~0.7%, to ~~$1.85~~$1.93 billion at ~~September 30, 2017~~March 31, 2019 from ~~$1.79~~$1.92 billion at December 31, ~~2016.~~2018. The increase in total assets primarily reflects an increase in cash and cash equivalents and ~~loans receivable,~~the right of use assets partially offset by a decrease in loans held for ~~sale~~sale. The increase was funded by additional short-term debt and ~~securities available~~advanced payments by borrowers for ~~sale. Funding needed for loan origination were provided by deposits and additional long-term FHLB debt~~taxes in ~~2017.~~2019.

Cash and Cash Equivalents – Cash and cash equivalents increased ~~$45.4~~$18.7 million, or ~~96.1%~~21.8%, to ~~$92.6~~$104.8 million at ~~September 30, 2017,~~March 31, 2019, compared to ~~$47.2~~$86.1 million at December 31, ~~2016.~~2018. The increase in cash and cash equivalents primarily reflects the increase in ~~deposits~~advanced payments by borrowers for taxes and ~~long-term FHLB borrowings to take advantage of the current interest rate environment in advance of wholesale borrowing maturities.~~short-term borrowings.

Securities Available for Sale – Securities available for sale decreased ~~$26.0~~$1.5 million ~~at September 30, 2017 compared to December~~during the three months ended March 31, ~~2016.~~2019. The decrease was due to paydowns in mortgage related securities and maturities of debt securities exceeding security purchases for the year.

Loans Held for Sale - Loans held for sale decreased $18.6 million to $123.0 million at ~~September 30, 2017~~March 31, 2019 due to the seasonal slowdown ~~of mortgage originations for~~in the ~~purpose of refinance~~first quarter along with the timing of loans sold to investors.

- 44 -

Loans Receivable - Loans receivable held for investment increased ~~$83.3 million~~$718,000 to ~~$1.26~~$1.38 billion at ~~September 30, 2017 from $1.18 billion at December~~March 31, ~~2016.~~2019. The increase in total loans receivable was primarily attributable to increases in the construction and land, commercial real estate, commercial, and consumer loan categories. Partially offsetting those increases, one- to four-family, multi-family, ~~commercial real estate,~~ and ~~commercial categories. Offsetting those increases, the~~ home equity ~~land and construction, and consumer~~ loan categories decreased.

The following table shows loan origination, loan purchases, principal repayment activity, transfers to real estate owned, charge-offs and sales during the periods indicated.

	As of or for the						As of or for the			As of or for the						As of or for the
	Nine months ended September 30,						Year Ended			Three months ended March 31,						Year Ended
	2017			2016			December 31, 2016			2019			2018			December 31, 2018
	(In Thousands)									(In Thousands)
Total gross loans receivable and held for sale at beginning of period	$	1,403,132		$	1,281,450		$	1,281,450		$	1,520,764		$	1,441,710		$	1,441,710
Real estate loans originated for investment:
Residential
One- to four-family		87,473			57,080			78,045			12,334			32,096			126,601
Multi-family		90,422			93,724			118,072			14,769			29,569			123,107
Home equity		655			3,305			5,037			1,194			1,223			4,613
Construction and land		4,539			5,648			5,878			1,367			815			66,265
Commercial real estate		38,904			21,822			35,443			4,172			22,402			58,176
Total real estate loans originated for investment		221,993			181,579			242,475			33,836			86,105			378,762
Consumer loans originated for investment		-			-			-			-			-			142
Commercial business loans originated for investment		12,846			6,920			11,692			3,437			1,542			6,221
Total loans originated for investment		234,839			188,499			254,167			37,273			87,647			385,125

Principal repayments		(148,750	)		(146,941	)		(185,020	)		(36,493	)		(64,491	)		(297,162	)
Transfers to real estate owned		(1,609	)		(3,442	)		(4,590	)		(30	)		(238	)		(545	)
Loan principal charged-off		(1,204	)		(1,354	)		(1,607	)		(32	)		(60	)		(84	)
Net activity in loans held for investment		83,276			36,762			62,950			718			22,858			87,334

Loans originated for sale		1,881,351			1,756,454			2,378,926			491,239			489,155			2,509,827
Loans sold		(1,931,462	)		(1,695,205	)		(2,320,194	)		(509,844	)		(511,413	)		(2,518,107	)
Net activity in loans held for sale		(50,111	)		61,249			58,732			(18,605	)		(22,258	)		(8,280	)
Total gross loans receivable and held for sale at end of period	$	1,436,297		$	1,379,461		$	1,403,132		$	1,502,877		$	1,442,310		$	1,520,764

~~- 47 -~~

Allowance for Loan Losses - The allowance for loan losses decreased ~~$2.0 million September 30, 2017~~$688,000 from December 31, ~~2016.~~2018. The decrease resulted from the negative provision due to improvement of key loan quality metrics decreasing the required allowance related to the loans collectively ~~and specifically~~ reviewed. The overall decrease was primarily related to the ~~one- to~~one-to four-family, ~~multi-family, construction and land,~~ commercial real estate, ~~consumer,~~ and commercial categories. ~~The home equity category increased compared to the balance at December 31, 2016.~~ See Note 3 for further discussion on the ~~Allowance~~allowance for ~~Loan Losses.~~loan losses.

~~Cash surrender value of life insurance~~ – Total cash surrender value of life insurance increased $4.2 million from December 31, 2016. During the nine months ended September 30, 2017, the policy value increased due to continued earnings and dividends along with the annual premiums paid during the year. In addition, a $2.5 million policy was purchased in June 2017.

~~Federal Home Loan Bank stock~~ – Total Federal Home Loan Bank stock increased $5.2 million from December 31, 2016. During the nine months ended September 30, 2017, $9.7 million of stock was purchased when entering into new short-term and long-term FHLB borrowings. A total of $4.5 million of stock was sold as short-term FHLB borrowings matured and our ownership requirement decreased accordingly.

Real Estate Owned – Total real estate owned decreased ~~$1.6 million~~$503,000 from December 31, ~~2016.~~2018. During the ~~nine~~three months ended ~~September 30, 2017, $1.6 million~~March 31, 2019, $30,000 was transferred from loans receivable to real estate owned upon completion of foreclosure. During the same period, sales of real estate owned totaled ~~$2.7 million and writedowns were $504,000 in an effort to sell various aged properties.~~$533,000.

Prepaid expenses and other assets – Total prepaid expenses and other assets increased $13.7 million to $36.2 million at March 31, 2019. The increase was primarily due to recording the right to use asset for operating leases, as a result of adopting the new lease accounting standard.

- 45 -

Deposits – Total deposits ~~increased $7.4~~decreased $1.2 million to ~~$956.8 million~~$1.04 billion at ~~September 30, 2017~~March 31, 2019 from December 31, ~~2016.~~2018. The ~~increase~~decrease was driven by a decrease of $10.6 million in demand deposits and $2.4 million in time deposits offset by an increase of ~~$18.4 million in time deposits and $2.8 million in demand deposits offset by a decrease of $13.8~~$11.9 million in money market and savings deposits.

Borrowings – Total borrowings increased ~~$48.3~~$13.4 million to ~~$435.5~~$448.5 million at ~~September 30, 2017 from December~~March 31, ~~2016.~~2019. The ~~Company borrowed additional short and long term FHLB advances to replace the FHLB advances and repurchase agreements that matured.~~community banking segment had no change in borrowings. External short term borrowings at the mortgage banking segment increased a total of ~~$2.3~~$13.4 million at ~~September 30, 2017~~March 31, 2019 from December 31, ~~2016~~2018 to fund loans held for sale.

Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased ~~$20.4 million.~~$7.0 million from December 31, 2018 to March 31, 2019. The increase was the result of payments received from borrowers for their real estate taxes and is seasonally normal, as balances increase during the course of the calendar year until real estate tax obligations are paid in the fourth quarter.

Other Liabilities - Other liabilities ~~decreased $13.8~~increased $9.6 million ~~at September 30, 2017~~during the three months ended March 31, 2019 compared to December 31, ~~2016.~~2018. The ~~decrease~~increase was primarily due to adding the operating leases to the balance sheet along with declaring a special and regular dividend which had not been paid as of March 31, 2019. Offsetting the increases, other liabilities decreased related to a seasonal decrease in outstanding checks related to advance payments by borrowers for taxes. The Company receives payments from borrowers for their real estate taxes during the course of the calendar year until real estate tax obligations are paid in the fourth quarter. At the time at which the disbursements are made, the outstanding checks are classified as other liabilities. These amounts remain classified as other liabilities until settled.

~~Shareholders'~~Shareholders’ Equity – Shareholders' equity ~~increased by $1.2~~decreased $15.2 million to ~~$411.9~~$384.5 million at ~~September 30, 2017~~March 31, 2019 from December 31, ~~2016.~~2018. Shareholders' equity ~~increased~~decreased primarily due to net income, additional paid in capital as stock options were exercised, accumulated other comprehensive income increasing as the fair value of the security portfolio increased, and unearned ESOP shares as they continue to vest. Partially offsetting these increases was the declaration of regular dividends and a special dividend and the repurchase of stock. Partially offsetting the decreases, the increases related to net income, additional paid in capital as stock options were exercised, the increase in the fair value of the security portfolio, and unearned ESOP shares as they continue to vest.

~~- 48 -~~

ASSET QUALITY

NONPERFORMING ASSETS

	At September 30,			At December 31,			At March 31,			At December 31,
	2017			2016			2019			2018
	(Dollars in Thousands)						(Dollars in Thousands)
Non-accrual loans:
Residential
One- to four-family	$	5,709		$	7,623		$	5,211		$	4,902
Multi-family		833			1,427			1,283			1,309
Home equity		223			344			177			201
Construction and land		37			-			-			-
Commercial real estate		181			422			114			125
Commercial		26			41			13			18
Consumer		-			-			-			-
Total non-accrual loans		7,009			9,857			6,798			6,555

Real estate owned
One- to four-family		1,021			2,141			30			163
Multi-family		169			-			-			-
Construction and land		4,822			5,082			2,724			3,327
Commercial real estate		300			300			300			300
Total real estate owned		6,312			7,523			3,054			3,790
Valuation allowance at end of period		(1,744	)		(1,405	)		(1,405	)		(1,638	)
Total real estate owned, net		4,568			6,118			1,649			2,152
Total nonperforming assets	$	11,577		$	15,975		$	8,447		$	8,707

Total non-accrual loans to total loans, net		0.56	%		0.84	%
Total non-accrual loans to total loans								0.49	%		0.48	%
Total non-accrual loans to total assets		0.38	%		0.55	%		0.35	%		0.34	%
Total nonperforming assets to total assets		0.62	%		0.89	%		0.44	%		0.45	%

- 46 -

All loans that ~~exceed~~are 90 days or more past due with respect to principal and interest are recognized as non-accrual. Troubled debt restructurings that are non-accrual either due to being past due greater than 90 days or which have not yet performed under the modified terms for a reasonable period of time, are included in the table above. In addition, loans that are past due less than 90 days are evaluated to determine the likelihood of collectability given other credit risk factors such as early stage delinquency, the nature of the collateral or the results of a borrower review. When the collection of all contractual principal and interest is determined to be unlikely, the loan is moved to non-accrual status and an updated appraisal of the underlying collateral is ordered. This process generally takes place when a loan is contractually past due between 60 and 90 days. Upon determining the updated estimated value of the collateral, a loan loss provision is recorded to establish a specific reserve to the extent that the outstanding principal balance exceeds the updated estimated net realizable value of the collateral. When a loan is determined to be uncollectible, typically coinciding with the initiation of foreclosure action, the specific reserve is reviewed for adequacy, adjusted if necessary, and charged-off.

The following table sets forth activity in our non-accrual loans for the periods indicated.

	As of or for the Nine Months Ended						At or for the Three Months
	September 30,						Ended March 31,
	2017			2016			2019			2018
	(In Thousands)						(In Thousands)

Balance at beginning of period	$	9,857			17,604		$	6,555			6,068
Additions		2,553			1,990			503			1,001
Transfers to real estate owned		(1,609	)		(3,442	)		(30	)		(238	)
Charge-offs		(649	)		(662	)		(8	)		(5	)
Returned to accrual status		(2,168	)		(3,661	)		(127	)		-
Principal paydowns and other		(975	)		(1,162	)		(95	)		(269	)
Balance at end of period	$	7,009			10,667		$	6,798			6,557

~~- 49 -~~

Total non-accrual loans ~~decreased~~increased by ~~$2.8 million,~~$243,000, or ~~28.9%~~3.7%, to ~~$7.0~~$6.8 million as of ~~September 30, 2017~~March 31, 2019 compared to ~~$9.9~~$6.6 million as of December 31, ~~2016.~~2018. The ratio of non-accrual loans to total loans receivable was ~~0.56%~~0.49% at ~~September 30, 2017~~March 31, 2019 compared to ~~0.84%~~0.48% at December 31, ~~2016.~~2018. During the ~~nine~~three months ended ~~September 30, 2017, $1.6 million~~March 31, 2019, $503,000 in loans were placed on non-accrual status. Offsetting this activity, $30,000 in non-accrual loans were transferred to real estate owned, ~~$649,000~~$8,000 in loan principal was charged off, ~~$2.2 million in loans were~~$127,000 returned to accrual status, and approximately ~~$975,000~~$95,000 in principal payments were ~~received. Offsetting this activity, $2.6 million in loans were placed on non-accrual status~~received during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019.

Of the ~~$7.0~~$6.8 million in total non-accrual loans as of ~~September 30, 2017, $6.6~~March 31, 2019, $6.0 million in loans have been specifically reviewed to assess whether a specific valuation allowance is necessary. A specific valuation allowance is established for an amount equal to the impairment when the carrying value of the loan exceeds the present value of expected future cash flows, discounted at the loan's original effective interest rate or the fair value of the underlying collateral with an adjustment made for costs to dispose of the asset. Based upon these specific reviews, a total of ~~$2.1~~$1.5 million in cumulative partial net charge-offs have been recorded over the life of these loans as of ~~September 30, 2017.~~March 31, 2019. Partially charged-off loans measured for impairment based upon net realizable collateral value are maintained in a "non-performing" status and are disclosed as impaired loans. In addition, specific reserves totaling ~~$284,000~~$178,000 have been recorded as of ~~September 30, 2017.~~March 31, 2019. The remaining ~~$403,000~~$836,000 of non-accrual loans were reviewed on an aggregate basis and ~~$81,000~~$167,000 in general valuation allowance was deemed necessary related to those loans as of ~~September 30, 2017.~~March 31, 2019. The ~~$81,000~~$167,000 in valuation allowance is based upon a migration analysis performed with respect to similar non-accrual loans in prior periods.

The outstanding principal balance of our five largest non-accrual loans as of ~~September 30, 2017~~March 31, 2019 totaled ~~$2.2~~$2.0 million, which represents ~~31.8%~~29.9% of total non-accrual loans as of that date. These five loans ~~are carried net of~~have not had any cumulative life-to-date net ~~charge-offs of $540,000. Aggregate~~charge-offs. An $83,000 specific valuation ~~allowances~~allowance was deemed necessary based on net realizable collateral value with respect to these five loans ~~total $64,000~~ as of ~~September 30, 2017.~~March 31, 2019.

For the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was ~~$417,000.~~$123,000. We received ~~$308,000~~$117,000 of interest payments on such loans during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. Interest payments received are treated as interest income on a cash basis as long as the remaining book value of the loan (i.e., after charge-off of all identified losses) is deemed to be fully collectible. If the remaining book value is not deemed to be fully collectible, all payments received are applied to unpaid principal. Determination as to the ultimate collectability of the remaining book value is supported by an updated credit department evaluation of the borrower's financial condition and prospects for repayment, including consideration of the borrower's sustained historical repayment performance and other relevant factors.

There were no accruing loans past due 90 days or more at ~~September 30, 2017~~March 31, 2019 or December 31, ~~2016.~~2018.

- 47 -

TROUBLED DEBT RESTRUCTURINGS

The following table summarizes information with respect to the accrual status of our troubled debt restructurings:

	As of September 30, 2017						As of March 31, 2019
	Accruing		Non-accruing		Total		Accruing		Non-accruing		Total
	(In Thousands)						(In Thousands)

One- to four-family	$	2,747	$	1,204		3,951	$	2,740	$	809		3,549
Multi-family		-		833		833		-		357		357
Home equity		48		-		48
Commercial real estate		291		37		328		2,740		13		2,753
	$	3,086	$	2,074		5,160	$	5,480	$	1,179		6,659

	As of December 31, 2016						As of December 31, 2018
	Accruing		Non-accruing		Total		Accruing		Non-accruing		Total
							(In Thousands)

One- to four-family	$	3,296	$	2,399		5,695	$	2,740	$	844		3,584
Multi-family		2,514		1,427		3,941		-		372		372
Home equity		49		97		146		-		-		-
Commercial real estate		295		60		355		2,759		17		2,776
	$	6,154	$	3,983		10,137	$	5,499	$	1,233		6,732

~~- 50 -~~

All troubled debt restructurings are considered to be impaired, are risk rated as either substandard or watch and are included in the internal risk rating tables disclosed in the notes to the financial statements. Specific reserves have been established to the extent that collateral-based impairment analyses indicate that a collateral shortfall exists.

We do not participate in government-sponsored troubled debt restructuring programs. Our troubled debt restructurings are short-term modifications. Typical initial restructured terms include six to twelve months of principal forbearance, a reduction in interest rate or both. Restructured terms do not include a reduction of the outstanding principal balance unless mandated by a bankruptcy court. Troubled debt restructuring terms may be renewed or further modified at the end of the initial term for an additional period if performance has been acceptable and the short-term borrower difficulty persists.

If a restructured loan is current in all respects and a minimum of six consecutive restructured payments have been received, it can be considered for return to accrual status. After a restructured loan that is current in all respects reverts to contractual/market terms, if a credit department review indicates no evidence of elevated market risk, the loan is removed from the troubled debt restructuring classification.

- 48 -

LOAN DELINQUENCY

The following table summarizes loan delinquency in total dollars and as a percentage of the total loan portfolio:

	At September 30,			At December 31,			At March 31,			At December 31,
	2017			2016			2019			2018
	(Dollars in Thousands)						(Dollars in Thousands)

Loans past due less than 90 days	$	4,052		$	2,910		$	1,672		$	1,925
Loans past due 90 days or more		4,903			5,289			4,622			5,025
Total loans past due	$	8,955		$	8,199		$	6,294		$	6,950

Total loans past due to total loans receivable		0.71	%		0.70	%		0.46	%		0.50	%

Past due loans ~~increased~~decreased by ~~$756,000,~~$656,000, or ~~9.2%~~9.4%, to ~~$9.0~~$6.3 million at ~~September 30, 2017~~March 31, 2019 from ~~$8.2~~$7.0 million at December 31, ~~2016.~~2018. Loans past due less than 90 days ~~increased~~decreased by ~~$1.1 million,~~$253,000, or ~~39.2%~~13.1%. Loans past due 90 days or more decreased by ~~$386,000,~~$403,000, or ~~7.3%~~8.0%, during the ~~nine~~three months ended ~~September 30, 2017. The $1.1 million increase in loans past due less than 90 days or more was primarily due to one relationship in the one-to four-family loan category.~~March 31, 2019.

~~- 51 -~~

REAL ESTATE OWNED

Total real estate owned decreased by $503,000, or 23.4%, to $1.6 million ~~or 25.3%, to $4.6 million~~ at ~~September 30, 2017,~~March 31, 2019, compared to ~~$6.1~~$2.2 million at December 31, ~~2016.~~2018. During the ~~nine~~three months ended ~~September 30, 2017, $1.6 million~~March 31, 2019, $30,000 was transferred from loans to real estate owned upon completion of foreclosure. During the same period, sales of real estate owned totaled ~~$2.7 million. A total of $504,000 in~~$533,000. There were no write downs which occurred during the ~~nine~~three months ended ~~September 30, 2017.~~March 31, 2019. New appraisals received on real estate owned and collateral dependent impaired loans are based upon an ~~"as~~“as is ~~value"~~value” assumption. During the period of time in which we are awaiting receipt of an updated appraisal, loans evaluated for impairment based upon collateral value are measured by the following:

●		Applying an updated adjustment factor (as described previously) to an existing appraisal;
●		Confirming that the physical condition of the real estate has not significantly changed since the last valuation date;
●		Comparing the estimated current value of the collateral to that of updated sales values experienced on similar collateral;
●		Comparing the estimated current value of the collateral to that of updated values seen on current appraisals of similar collateral; and
●		Comparing the estimated current value to that of updated listed sales prices on our real estate owned and that of similar properties (not owned by the Company).

Virtually all habitable real estate owned (both residential and commercial properties) is managed with the intent of attracting a lessee to generate revenue. Foreclosed properties are recorded at the lower of carrying value or fair value, less costs to sell, with charge-offs, if any, charged to the allowance for loan losses upon transfer to real estate ~~owned.~~owned within 90 days of being transferred. Subsequent write-downs to reflect current fair market value, as well as gains and losses upon disposition and revenue and expenses incurred in maintaining such properties, are treated as period costs and included in real estate owned in the consolidated statements of income. The fair value is primarily based upon updated appraisals in addition to an analysis of current real estate market conditions.

- 49 -

ALLOWANCE FOR LOAN LOSSES

	As of or for the Nine Months Ended						At or for the Three Months
	September 30,						Ended March 31,
	2017			2016			2019			2018
	(Dollars in Thousands)						(Dollars in Thousands)

Balance at beginning of period	$	16,029		$	16,185		$	13,249		$	14,077
Provision for loan losses		(1,166	)		340			(680	)		(880	)
Charge-offs:
Mortgage
One- to four-family		1,092			801			24			60
Multi-family		92			488			-			-
Home equity		-			62			8			-
Commercial real estate		6			-			-			-
Construction and land		14			3			-			-
Consumer		-			-			-			-
Commercial		-			-			-			-
Total charge-offs		1,204			1,354			32			60
Recoveries:
Mortgage
One- to four-family		200			246			13			32
Multi-family		102			134			4			13
Home equity		21			24			6			7
Commercial real estate		1			-			1			1
Construction and land		80			58			-			-
Consumer		-			-			-			-
Commercial		-			-			-			-
Total recoveries		404			462			24			53
Net charge-offs		800			892			8			7
Allowance at end of period	$	14,063		$	15,633		$	12,561		$	13,190

Ratios:
Allowance for loan losses to non-accrual loans at end of period		200.64	%		146.55	%		184.77	%		201.16	%
Allowance for loan losses to loans receivable at end of period		1.12	%		1.36	%		0.91	%		1.00	%
Net charge-offs to average loans outstanding (annualized)		0.09	%		0.11	%		0.00	%		0.00	%
Current period provision for loan losses to net charge-offs		(145.75	)%		38.12	%
Net charge-offs (annualized) to beginning of the period allowance		6.67	%		7.36	%
Provision for loan losses to net charge-offs								(8,500.00	)%		(12,571.43	)%
Net charge-offs to beginning of the period allowance (annualized)								0.24	%		0.20	%

~~- 52 -~~

~~At September 30, 2017, the~~The allowance for loan losses decreased ~~$2.0~~$688,000 to $12.6 million ~~to $14.1 million~~at March 31, 2019, compared to ~~$16.0~~$13.2 million at December 31, ~~2016.~~2018. The decrease in allowance for loan losses reflects the negative provision. The negative provision recorded during the current ~~quarter~~year reflects ~~the~~a continued improvement in the overall risk profile of the loan ~~quality metrics including: non-accrual loans, loans rated substandard or watch, and loans past due.~~portfolio.

Net charge-offs ~~totaled $800,000,~~of $8,000, or ~~an annualized 0.09%~~less than 0.01% of average loans annualized, for the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, compared to ~~$892,000,~~net charge-offs of $7,000, or ~~an annualized 0.11%~~less than 0.01% of average loans annualized, for the ~~nine~~three months ended ~~September 30, 2016.~~March 31, 2018. Of the ~~$800,000~~$32,000 in charge-offs during the ~~nine~~three months ended ~~September 30, 2017, a majority~~March 31, 2019, most of the activity related to loans secured by one- to four-family residential loans.

- 50 -

Our underwriting policies and procedures emphasize that credit decisions must rely on both the credit quality of the borrower and the estimated value of the underlying collateral. Credit quality is assured only when the estimated value of the collateral is objectively determined and is not subject to significant fluctuation.

The allowance for loan losses has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. Any future provisions for loan losses will continue to be based upon our assessment of the overall loan portfolio and the underlying collateral, trends in non-performing loans, current economic conditions and other relevant factors. To the best of ~~management's~~management’s knowledge, all probable losses have been provided for in the allowance for loan losses.

The establishment of the amount of the loan loss allowance inherently involves judgments by management as to the appropriateness of the allowance, which ultimately may or may not be correct. Higher than anticipated rates of loan default would likely result in a need to increase provisions in future years.

Liquidity and Capital Resources

We maintain liquid assets at levels we consider adequate to meet our liquidity needs. We adjust our liquidity levels to fund loan commitments, repay our borrowings, fund deposit outflows and pay real estate taxes on mortgage loans. We also adjust liquidity as appropriate to meet asset and liability management objectives. The level of our liquidity position at any point in time is dependent upon the judgment of the senior management as supported by the Asset/Liability Committee. Liquidity is monitored on a daily, weekly and monthly basis using a variety of measurement tools and indicators.

Our primary sources of liquidity are deposits, amortization and repayment of loans, sales of loans held for sale, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans are a relatively predictable source of funds, deposit flows and loan repayments are greatly influenced by market interest rates, economic conditions, and rates offered by our competitors. We set the interest rates on our deposits to maintain a desired level of total deposits. In addition, we invest excess funds in short-term, interest-earning assets, which provide liquidity to meet lending requirements. Additional sources of liquidity used for the purpose of managing long- and short-term cash flows include advances from the FHLB.

During the ~~nine~~three months ended ~~September 30, 2017~~March 31, 2019 primary uses of cash and cash equivalents included: ~~$1.88 billion~~$491.2 million in funding loans held for sale, ~~$85.7 million~~a $756,000 increase in funding loans receivable, ~~$69.0~~a $1.2 million decrease in ~~repurchase agreements, $23.6~~deposits, a $3.9 million decrease in advance payments by borrowers for taxes, $2.6 million for cash dividends paid, ~~$7.7~~$2.7 million ~~decrease from fewer short-term borrowings, $6.9 million in~~for purchases of mortgage related securities, ~~$6.1~~and $8.0 million in purchases of ~~debt securities, and $5.2 million in purchases of FHLB~~our common stock.

During the ~~nine~~three months ended ~~September 30, 2017,~~March 31, 2019, primary sources of cash and cash equivalents included: ~~$2.03 billion~~$533.4 million in proceeds from the sale of loans held for sale, ~~$125.0~~$13.4 million in additional proceeds from ~~long-term FHLB~~short-term debt, ~~$25.2~~$6.0 million in principal repayments on mortgage related securities, ~~$22.8~~and $6.5 million in net ~~income, $13.9~~income.

During the three months ended March 31, 2018 primary uses of cash and cash equivalents included: $489.2 million ~~from maturities of debt securities, $7.4~~funding loans held for sale, a $23.1 million increase in ~~deposits, $6.0~~funding loans receivable, $17.2 million ~~increase~~for cash dividends paid, $16.9 million repayment of short-term borrowings, a $5.2 million decrease in advance payments by borrowers for taxes, and ~~$3.1~~$3.7 million ~~from real estate owned sales.~~in purchases of our common stock.

During the ~~nine~~three months ended September 30, 2016 primary uses of cash and cash equivalents included: $1.76 billion funding loans held for sale, $220.0 million in the payment of long term debt, $41.1 million increase in loans receivable, purchase of $10.0 million in bank owned life insurance, $3.9 million for the repurchase of common stock, $5.2 million in purchases of mortgage related securities, $4.5 million in purchases of FHLB stock, $4.1 million in purchases of debt securities, and $4.8 million in dividends paid.

~~During the nine months ended September 30, 2016,~~March 31, 2018, primary sources of cash and cash equivalents included: ~~$1.79 billion~~$532.1 million in proceeds from the sale of loans held for sale, ~~$62.3~~$65.0 million ~~increase~~ in ~~deposits, $100.0 million~~additional proceeds from ~~long term borrowings, $56.8 million from short term borrowings, $29.7~~long-term FHLB debt, $7.2 million in principal repayments on mortgage related securities, ~~$6.6~~$7.0 million in net income, $2.4 million from maturities of debt securities, ~~$19.1~~and $6.8 million increase in ~~net income, $11.4 from sales of FHLB stock, and $5.3 million from real estate owned sales.~~deposits.

A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities. At ~~September 30, 2017~~March 31, 2019 and ~~2016,~~2018, respectively, ~~$92.6~~$104.8 million and ~~$54.3~~$83.4 million of our assets were invested in cash and cash equivalents. At ~~September 30, 2017,~~March 31, 2019, cash and cash equivalents ~~are~~were comprised of the following: ~~$39.3~~$77.4 million in cash held at the Federal Reserve Bank and other depository institutions and ~~$53.3~~$27.5 million in federal funds sold and short-term investments. Our primary sources of cash are principal repayments on loans, proceeds from the calls and maturities of debt and mortgage-related securities, increases in deposit accounts and advances from the ~~FHLBC.~~FHLB.

~~- 53 -~~

Liquidity management is both a daily and longer-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the ~~FHLBC~~FHLB which provide an additional source of funds. At ~~September 30, 2017,~~March 31, 2019, we had $55.0 million in short-term advances from the FHLBC. Of the $55.0 million, a total of $35.0 million has a contractual maturity date of March 15, 2018 and a total of $20.0 million has a contractual maturity date of October 4, 2017. At September 30, 2017, we had $410.0$430.0 million in long term advances from the ~~FHLBC~~FHLB with contractual maturity dates in ~~2017, 2018, 2021,~~2027, and ~~2027. The advances with maturity dates in 2017 and 2018 are callable quarterly until maturity. The 2021 advance maturities have quarterly call options beginning in June 2018 and September 2018.~~2028. The 2027 advance maturities have single call options in May 2019, June 2019, August 2019, and ~~August~~December 2019. The 2028 advance maturities have single call options in March 2020, March 2021, May 2020, and May 2021, along with two advances that have quarterly call options beginning in June 2020 and September 2020. As an additional source of funds, ~~we also have~~the mortgage banking segment has a repurchase agreement.As an additional source of funds, the mortgage banking segment has a repurchase agreement. At ~~September 30, 2017,~~March 31, 2019, we had ~~$15.0~~$18.5 million outstanding under the repurchase ~~agreement. The repurchase~~ agreement ~~matures in November 2017.~~with a total outstanding commitment of $35.0 million.

At ~~September 30, 2017,~~March 31, 2019, we had outstanding commitments to originate loans receivable of ~~$52.9~~$13.4 million. In addition, at ~~September 30, 2017,~~March 31, 2019, we had unfunded commitments under construction loans of ~~$18.3~~$71.3 million, unfunded commitments under business lines of credit of ~~$17.2~~$13.5 million and unfunded commitments under home equity lines of credit and standby letters of credit of ~~$14.7~~$14.4 million. At ~~September 30, 2017,~~March 31, 2019, certificates of deposit scheduled to mature in one year or less totaled ~~$514.3~~$564.4 million. Based on prior experience, management believes that, subject to the ~~Bank's~~Bank’s funding needs, a significant portion of such deposits will remain with us, although there can be no assurance that this will be the case. In the event a significant portion of our deposits is not retained by us, we will have to utilize other funding sources, such as ~~FHLBC~~FHLB advances, in order to maintain our level of assets. However, we cannot assure that such borrowings would be available on attractive terms, or at all, if and when needed. Alternatively, we could reduce our level of liquid assets, such as our cash and cash equivalents and securities available-for-sale in order to meet funding needs. In addition, the cost of such deposits may be significantly higher if market interest rates are higher or there is an increased amount of competition for deposits in our market area at the time of renewal.

Waterstone Financial, Inc. is a separate legal entity from WaterStone Bank and must provide for its own liquidity to pay dividends to its shareholders, repurchase shares of its common stock, and for other corporate purposes. The primary source of liquidity for Waterstone Financial, Inc. is dividend payments from WaterStone Bank. The ability of WaterStone Bank to pay dividends is subject to regulatory restrictions. At ~~September 30, 2017,~~March 31, 2019, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totaling ~~$24.5~~$10.9 million.

- 51 -

Capital

Shareholders' equity ~~increased~~decreased by ~~$1.2~~$15.2 million to ~~$411.9~~$384.5 million at ~~September 30, 2017~~March 31, 2019 from December 31, ~~2016.~~2018. Shareholders' equity ~~increased~~decreased primarily due to net income, additional paid in capital as stock options were exercised, accumulated other comprehensive income increasing as the fair value of the security portfolio increased, and unearned ESOP shares as they continue to vest. Partially offsetting these increases was the declaration of regular dividends and a special dividend and the repurchase of stock. Partially offsetting the decreases, the increases related to net income, additional paid in capital as stock options were exercised, the increase in the fair value of the security portfolio, and unearned ESOP shares as they continue to vest.

The Company's Board of Directors authorized athe fifth stock repurchase program in the ~~first~~fourth quarter of ~~2015.~~2018. The ~~Company authorized two stock repurchase programs in~~timing of the ~~second quarter~~purchases will depend on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of ~~2015. These first three programs have been either fulfilled or cancelled and replaced. The Company's Board of Directors authorized a fourth stock repurchase program in the third quarter of 2015.~~capital. The timing of the repurchases will depend on certain factors, including but not limited to, market conditions and prices, available funds and alternative uses of capital. The stock repurchase program may be carried out through open-market purchases, block trades, negotiated private transactions and pursuant to a trading plan that will be adopted in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934. Repurchased shares are held by the Company as authorized but unissued shares.

As of ~~September 30, 2017,~~March 31, 2019, the Company had repurchased ~~5,919,853~~7,497,453 shares at an average price of ~~$13.02~~$13.80 under previously approved stock repurchase plans. As of ~~September 30, 2017,~~March 31, 2019, the Company is authorized to purchase up to ~~916,800~~230,300 additional shares under the current approved stock repurchase program.

WaterStone Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning assets and off-balance sheet items to broad risk categories. At ~~September 30, 2017,~~March 31, 2019, WaterStone Bank exceeded all regulatory capital requirements and is considered ~~"well capitalized"~~“well capitalized” under regulatory guidelines. See ~~"Notes~~“Notes to Consolidated Financial Statements - Note 8 Regulatory Capital."”

~~- 54 -~~

Contractual Obligations, Commitments, Contingent Liabilities, and Off-balance Sheet Arrangements

The following tables present information indicating various contractual obligations and commitments of the Company as of ~~September 30, 2017~~March 31, 2019 and the respective maturity dates.

					More than		More than								More than		More than
					One Year		Three Years		Over						One Year		Three Years		Over
			One Year		Through		Through		Five				One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years		Total		or Less		Three Years		Five Years		Years
	(In Thousands)										(In Thousands)
Demand deposits ~~(4)~~(3)	$	123,133	$	123,133	$	-	$	-	$	-	$	128,470	$	128,470	$	-	$	-	$	-
Money market and savings deposits ~~(4)~~(3)		148,607		148,607		-		-		-		175,380		175,380		-		-		-
Time deposit ~~(4)~~(3)		685,033		514,304		166,831		3,898		-		733,491		564,398		165,980		3,113		-
Bank lines of credit (4)		10,503		10,503		-		-		-
Repurchase agreements (3)												18,451		18,451		-		-		-
Federal Home Loan Bank advances (1)		410,000		185,000		-		100,000		125,000		430,000		-		-		-		430,000
Repurchase agreements (2)(4)		15,000		15,000		-		-		-
Operating leases (3)		8,364		2,824		3,061		1,312		1,167
Operating leases (2)												11,627		3,472		4,625		2,368		1,162
	$	1,400,640	$	999,371	$	169,892	$	105,210	$	126,167	$	1,497,419	$	890,171	$	170,605	$	5,481	$	431,162

⁽¹⁾ Secured under a blanket security agreement on qualifying assets, principally, mortgage loans. Excludes interest which will accrue on the advances.

~~All Federal Home Loan Bank advances with maturities exceeding one year are callable on a quarterly basis.~~

⁽²⁾ ~~The repurchase agreements are callable on a quarterly basis until maturity.~~

⁽³⁾ Represents non-cancelable operating leases for offices and equipment.

⁽⁴⁾⁽³⁾ Excludes interest.

~~Herrington v. Waterstone Mortgage Corporation~~See Note 11 Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to consolidated financial statements for additional information.

Waterstone Mortgage Corporation is a defendant in a class action lawsuit filed in the United States District Court for the Western District of Wisconsin and subsequently compelled to arbitration before the American Arbitration Association. The plaintiff class alleged that Waterstone Mortgage Corporation violated certain provisions of the Fair Labor Standards Act (FLSA) and failed to pay loan officers consistent with their various employment agreements. On July 5, 2017, the arbitrator issued a final award finding Waterstone Mortgage Corporation liable for unpaid minimum wages, overtime, unreimbursed business expenses, and liquidated damages under the FLSA. The arbitrator awarded damages under the FLSA in the amount of $7.3 million, and attorney's fees and costs in the amount of $3.3 million. While a judgment confirming the arbitrator's award with respect to damages and fees has not yet been issued, if plaintiff prevails on her theories, the Company has estimated that the award, which includes attorney's fees and costs, could be as high as $11.0 million. Waterstone Mortgage Corporation will continue to vigorously defend its interests in this matter, including challenging any findings regarding liability and damages through appropriate post-arbitration motions and appeal processes and seeking to vacate in its entirety any award against the Company. Given the pending legal strategies that are available, we do not believe that it is probable that the plaintiff will ultimately prevail in this litigation, and estimate the low end of the possible range of loss is $0. In accordance with the authoritative guidance in evaluating contingencies, the Company has not recorded an accrual related to this matter.

~~Werner v. Waterstone Mortgage Corporation~~

Waterstone Mortgage Corporation is a defendant in a putative collection action lawsuit that was filed on August 4, 2017 in the United States District Court for the Western District of Wisconsin, Werner et al. v. Waterstone Mortgage Corporation. Plaintiffs allege that Waterstone Mortgage Corporation violated the Fair Labor Standards Act (FLSA) by failing to pay loan officers minimum and overtime wages. The case is in the very early stages of litigation and the Court has yet to decide if the case can proceed as collective action. The Company intends to vigorously defend its interests in this matter and pursue all possible defenses against the claims. Given the early stage of the litigation, the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter, nor is it able to estimate the range of any possible loss.

- 5552 -

Off-Balance Sheet Commitments

The following table details the amounts and expected maturities of significant off-balance sheet commitments as of ~~September 30, 2017.~~March 31, 2019.

					More than		More than								More than		More than
					One Year		Three Years		Over						One Year		Three Years		Over
			One Year		Through		Through		Five				One Year		Through		Through		Five
	Total		or Less		Three Years		Five Years		Years		Total		or Less		Three Years		Five Years		Years
	(In Thousands)										(In Thousands)
Real estate loan commitments (1)	$	52,948	$	52,948	$	-	$	-	$	-	$	13,355	$	13,355	$	-	$	-	$	-
Unused portion of home equity lines of credit (2)		14,724		14,724		-		-		-		14,163		14,163		-		-		-
Unused portion of construction loans (3)		18,306		18,306		-		-		-		71,332		71,332		-		-		-
Unused portion of business lines of credit		17,204		17,204		-		-		-		13,501		13,501		-		-		-
Standby letters of credit		259		259		-		-		-		261		261		-		-		-
Total Other Commitments	$	103,441	$	103,441	$	-	$	-	$	-	$	112,612	$	112,612	$	-	$	-	$	-

General: Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract and generally have fixed expiration dates or other termination clauses.

⁽¹⁾ Commitments for loans are extended to customers for up to 90 days after which they expire.

⁽²⁾ Unused portions of home equity loans are available to the borrower for up to 10 years.

⁽³⁾ Unused portions of construction loans are available to the borrower for up to one year.

- 5653 -

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Management of Market Risk

General. The majority of our assets and liabilities are monetary in nature. Consequently, our most significant form of market risk is interest rate risk. Our assets, consisting primarily of mortgage loans, have longer maturities than our liabilities, consisting primarily of deposits. As a result, a principal part of our business strategy is to manage interest rate risk and reduce the exposure of our net interest income to changes in market interest rates. Accordingly, WaterStone ~~Bank's~~Bank’s board of directors has established an Asset/Liability Committee which is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate given our business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the guidelines approved by the board of directors. Management monitors the level of interest rate risk on a regular basis and the Asset/Liability Committee meets at least weekly to review our asset/liability policies and interest rate risk position, which are evaluated quarterly.

We have sought to manage our interest rate risk in order to minimize the exposure of our earnings and capital to changes in interest rates. We have implemented the following strategies to manage our interest rate risk: (i) emphasizing variable rate loans including variable rate one- to four-family, and commercial real estate loans as well as three to five year commercial real estate balloon loans; (ii) reducing and shortening the expected average life of the investment portfolio; and (iii) whenever possible, lengthening the term structure of our deposit base and our borrowings from the ~~FHLBC.~~FHLB. These measures should reduce the volatility of our net interest income in different interest rate environments.

Income Simulation. Simulation analysis is an estimate of our interest rate risk exposure at a particular point in time. At least quarterly we review the potential effect changes in interest rates may have on the repayment or repricing of rate sensitive assets and funding requirements of rate sensitive liabilities. Our most recent simulation uses projected repricing of assets and liabilities at ~~September 30, 2017~~March 31, 2019 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rate assumptions may have a significant impact on interest income simulation results. Because of the large percentage of loans and mortgage-backed securities we hold, rising or falling interest rates may have a significant impact on the actual prepayment speeds of our mortgage related assets that may in turn affect our interest rate sensitivity position. When interest rates rise, prepayment speeds slow and the average expected lives of our assets would tend to lengthen more than the expected average lives of our liabilities and therefore would most likely have a positive impact on net interest income and earnings.

The following interest rate scenario displays the percentage change in net interest income over a one-year time horizon assuming increases of 100, 200 and 300 basis points and a decreases of 100 basis points. The results incorporate actual cash flows and repricing characteristics for balance sheet accounts following an instantaneous parallel change in market rates based upon a static (no growth balance sheet).

Analysis of Net Interest Income Sensitivity

	Immediate Change in Rates							Immediate Change in Rates
		+300		+200	+100	-100		+300	+200	+100	-100
	(Dollar Amounts in Thousands)							(Dollar Amounts in Thousands)
As of March 31, 2017
As of March 31, 2019
Dollar Change	$	2,522		1,746	886	(1,283	)	($1,368)	(689)	(317)	1,068
Percentage Change		4.73	%	3.28	1.66	(2.41	)	(2.79)%	(1.41)	(0.65)	2.18

At ~~September 30, 2017,~~March 31, 2019, a 100 basis point instantaneous increase in interest rates had the effect of ~~increasing~~decreasing forecast net interest income over the next 12 months by ~~2.51%~~0.65% while a 100 basis point decrease in rates had the effect of ~~decreasing~~increasing net interest income by ~~2.89%~~2.18%.

- 54 -

Item 4. Controls and Procedures

Disclosure Controls and Procedures: Company management, with the participation of the ~~Company's~~Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the ~~Company's~~Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ~~"Exchange Act"~~“Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the ~~Company's~~Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the ~~Company's~~Company’s disclosure controls and procedures are effective.

Internal Control Over Financial Reporting: There have been no material changes in the ~~Company's~~Company’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the ~~Company's~~Company’s internal control over financial reporting.

~~- 57 -~~

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

~~Other than as disclosed below, the Company~~The information required by this item is ~~not involved~~set forth in any pending legal proceedings as a defendant other than routine legal proceedings occurring in the ordinary course of business. At September 30, 2017, the Company believes that any liability arising from the resolution of any pending legal proceedings will not be material to its financial condition or results of operations.Part I, Item 1, Note 11 Commitments, Off-Balance Sheet Arrangements, Contingent Liabilities.

~~Herrington v. Waterstone Mortgage Corporation~~

~~Werner v. Waterstone Mortgage Corporation~~

Waterstone Mortgage Corporation is a defendant in a putative collection action lawsuit that was filed on August 4, 2017 in the United States District Court for the Western District of Wisconsin, Werner et al. v. Waterstone Mortgage Corporation. Plaintiffs allege that Waterstone Mortgage Corporation violated the Fair Labor Standards Act (FLSA) by failing to pay loan officers minimum and overtime wages. The case is in the very early stages of litigation and the Court has yet to decide if the case can proceed as collective action. The Company intends to vigorously defend its interests in this matter and pursue all possible defenses against the claims. Given the early stage of the litigation, the Company is not yet able to make a determination as to the likelihood of an unfavorable outcome in this matter, nor is it able to estimate the range of any possible loss.

Item 1A. Risk Factors

There have been no material changes in risk factors applicable to the Company from those disclosed in ~~"Risk Factors"~~“Risk Factors” in Item 1A of the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Following are the ~~Company's~~Company’s monthly common stock repurchases during the ~~third~~first quarter of ~~2017:~~2019:

Period
Total Number of Shares Purchased^(b)
Average Price Paid per Share Total Number of Shares Purchased as Part of Publicly Announced Plans
Maximum
Number of
Shares that May
Yet Be
Purchased Under
the Plan^(a)

July 1, 2017 - July 31, 2017 - $ - - 989,500
August 1, 2017 - August 31, 2017 45,300 17.51 45,300 944,200
September 1, 2017 - September 30, 2017 27,768 17.53 27,400 916,800
Total 73,068 $ 17.52 72,700 916,800

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans		Maximum Number of Shares that May Yet Be Purchased Under the Plan^(a)
January 1, 2019 - January 31, 2019		151,900	$	16.60		151,900		540,800
February 1, 2019 - February 28, 2019		222,600		16.44		222,600		318,200
March 1, 2019 - March 31, 2019		107,451		16.63		87,900		230,300
Total		481,951	$	16.53		462,400		230,300

(a)	On ~~September 4, 2015,~~November 8, 2018, the Board of Directors terminated the then-existing plan and authorized the repurchase of ~~1,500,000~~1,000,000 shares of common stock.
~~(b)~~	During the third quarter of 2017, the Company repurchased 368 shares for minimum tax withholding settlements on equity compensation. These purchases are included in the monthly common stock purchases table above but do not count against the maximum number of shares that may yet be purchased under the Board of Directors' authorization.

~~- 58 -~~

Item 3. Defaults Upon Senior Securities

Not applicable.

- 55 -

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

(a) Exhibits: See Exhibit Index, which follows the signature page hereof.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	WATERSTONE FINANCIAL, INC. (Registrant)
Date: ~~October 27, 2017~~May 3, 2019
	/s/ Douglas S. Gordon
	Douglas S. Gordon
	Chief Executive Officer Principal Executive Officer
Date: ~~October 27, 2017~~May 3, 2019
	/s/ Mark R. Gerke
	Mark R. Gerke
	Chief Financial Officer Principal Financial Officer

- 56 -

~~- 59 -~~

EXHIBIT INDEX

WATERSTONE FINANCIAL, INC.

Form 10-Q for Quarter Ended ~~September 30, 2017~~March 31, 2019

Exhibit No.	Description	Filed Herewith
10.1	Waterstone Financial, Inc. Incentive Plan†(1)
31.1	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Executive Officer of Waterstone Financial, Inc.	X
31.2	Sarbanes-Oxley Act Section 302 Certification signed by the Chief Financial Officer of Waterstone Financial, Inc.	X
32.1	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Executive Officer of Waterstone Financial, Inc.	X
32.2	Certification pursuant to 18 U.S. C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 signed by the Chief Financial Officer of Waterstone Financial, Inc.	X
101	The following financial statements from Waterstone Financial, Inc. Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2017,~~March 31, 2019, formatted in Extensive Business Reporting Language (XBRL): (i) consolidated statements of financial condition, (ii) consolidated statements of income, (iii) consolidated statements of comprehensive income, (iv) consolidated statements of changes in shareholders' equity, (v) consolidated statements of cash flows and (vi) the notes to consolidated financial statements.	X

† Management compensation contract or agreement

(1) Incorporated by reference to Exhibit 10.1 to the Consent Report on Form 8-k filed with the SEC on March 25, 2019 (File No. 001-36271)

- 6057 -

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)

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

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, $0.01 Par Value		WSBF		The NASDAQ Stock Market, LLC

	Mortgage banking derivatives, net
	(In Thousands)

Balance at December 31, 2015	$	2,188

Mortgage derivative gain, net		1,146
Balance at December 31, 2016	$	3,334

Mortgage derivative loss, net		(762	)
Balance at September 30, 2017	$	2,572

					Significant Unobservable Input Value
	Fair Value at September 30, 2017		Valuation Technique	Significant Unobservable Inputs	Minimum Value			Maximum Value

Mortgage banking derivatives	$	2,572	Pricing models	Pull through rate		65.3	%		99.8	%
Impaired loans		1,452	Market approach	Discount rates applied to appraisals		15.0	%		35.0	%
Real estate owned		4,568	Market approach	Discount rates applied to appraisals		15.0	%		85.7	%

Period	Total Number of Shares Purchased^(b)		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans		Maximum Number of Shares that May Yet Be Purchased Under the Plan^(a)
July 1, 2017 - July 31, 2017		-	$	-		-		989,500
August 1, 2017 - August 31, 2017		45,300		17.51		45,300		944,200
September 1, 2017 - September 30, 2017		27,768		17.53		27,400		916,800
Total		73,068	$	17.52		72,700		916,800