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


Form 10-Q


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


For the quarterly period ended SeptemberJune 30, 20172020


OR


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




Commission File Number 001-36271


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


Maryland90-1026709
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification No.)
  
11200 W. Plank Court Wauwatosa, Wisconsin53226
(Address of principal executive offices)(Zip Code)


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


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

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

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


YesT            No      ☐□


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


YesT            No      ☐□


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


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


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


Yes      ☐□            No      T☐


The number of shares outstanding of the issuer'sissuer’s common stock, $0.01 par value per share, was 29,489,34625,906,848 at October 26, 2017.August 5, 2020.






WATERSTONE FINANCIAL, INC.


10-Q INDEX


 Page No.
  
PART I. FINANCIAL INFORMATION
 3
 
Item l. Financial Statements
 3
Consolidated Statements of Financial Condition as of SeptemberJune 30, 20172020 (unaudited) and December 31, 20162019
3
Consolidated Statements of Income for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)
4
Consolidated Statements of Comprehensive Income for the three and ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)
5
Consolidated Statements of Changes in Shareholders'Shareholders’ Equity for the ninethree and six months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)
 6
6-7
Consolidated Statements of Cash Flows for the ninesix months ended SeptemberJune 30, 20172020 and 20162019 (unaudited)
 7
8
Notes to Consolidated Financial Statements (unaudited)
 8 - 35
9-38
  
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
 36 - 56
39-59
Item 3. Quantitative and Qualitative Disclosures about Market Risk
 57
60
Item 4. Controls and Procedures
 57
61
  
PART II. OTHER INFORMATION
 58
  
Item 1. Legal Proceedings
 58
61
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
 5861
5861
5961
5962
5962
Item 6. Exhibits
 59
62
Signatures
 59
62
  

- 2 -


PART I — FINANCIAL INFORMATION


Item 1. Financial Statements



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


  (Unaudited)    
  September 30, 2017  December 31, 2016 
Assets (Dollars In Thousands, except share and per share data) 
Cash $39,308  $7,878 
Federal funds sold  34,916   26,828 
Interest-earning deposits in other financial institutions and other short term investments  18,367   12,511 
Cash and cash equivalents  92,591   47,217 
Securities available for sale (at fair value)  200,840   226,795 
Loans held for sale (at fair value)  175,137   225,248 
Loans receivable  1,261,160   1,177,884 
Less: Allowance for loan losses  14,063   16,029 
Loans receivable, net  1,247,097   1,161,855 
         
Office properties and equipment, net  22,889   23,655 
Federal Home Loan Bank stock (at cost)  18,450   13,275 
Cash surrender value of life insurance  65,665   61,509 
Real estate owned, net  4,568   6,118 
Prepaid expenses and other assets  26,891   24,947 
Total assets $1,854,128  $1,790,619 
         
Liabilities and Shareholders' Equity        
Liabilities:        
Demand deposits $123,133  $120,371 
Money market and savings deposits  148,607   162,456 
Time deposits  685,033   666,584 
Total deposits  956,773   949,411 
         
Borrowings  435,503   387,155 
Advance payments by borrowers for taxes  25,107   4,716 
Other liabilities  24,815   38,647 
Total liabilities  1,442,198   1,379,929 
         
Shareholders' equity:        
Preferred stock (par value $.01 per share)        
Authorized -  50,000,000 shares in 2017 and in 2016, no shares issued  -   - 
Common stock (par value $.01 per share)        
Authorized - 100,000,000 shares in 2017 and in 2016        
Issued - 29,483,346 in 2017 and 29,430,123 in 2016        
Outstanding - 29,483,346 in 2017 and 29,430,123 in 2016  295   294 
Additional paid-in capital  325,753   322,934 
Retained earnings  183,578   184,565 
Unearned ESOP shares  (19,288)  (20,178)
Accumulated other comprehensive income (loss), net of taxes  328   (378)
Cost of shares repurchased (6,030,900 shares at September 30, 2017 and 5,908,150 shares at December 31, 2016)  (78,736)  (76,547)
Total shareholders' equity  411,930   410,690 
Total liabilities and shareholders' equity $1,854,128  $1,790,619 

 (Unaudited)    
  June 30, 2020  December 31, 2019 
Assets (Dollars In Thousands, except share and per share data) 
Cash $63,636  $52,814 
Federal funds sold  11,992   12,704 
Interest-earning deposits in other financial institutions and other short term investments  1,291   8,782 
Cash and cash equivalents  76,919   74,300 
Securities available for sale (at fair value)  164,112   178,476 
Loans held for sale (at fair value)  383,389   220,123 
Loans receivable  1,433,803   1,388,031 
Less: Allowance for loan losses  17,734   12,387 
Loans receivable, net  1,416,069   1,375,644 
         
Office properties and equipment, net  24,183   25,028 
Federal Home Loan Bank stock (at cost)  26,720   21,150 
Cash surrender value of life insurance  70,718   69,665 
Real estate owned, net  702   748 
Prepaid expenses and other assets  54,761   31,213 
Total assets $2,217,573  $1,996,347 
         
Liabilities and Shareholders’ Equity        
Liabilities:        
Demand deposits $171,016  $130,063 
Money market and savings deposits  247,233   197,942 
Time deposits  739,417   739,771 
Total deposits  1,157,666   1,067,776 
         
Borrowings  599,102   483,562 
Advance payments by borrowers for taxes  20,828   4,212 
Other liabilities  54,358   47,111 
Total liabilities  1,831,954   1,602,661 
         
Shareholders’ equity:        
Preferred stock (par value $0.01 per share)        
Authorized -  50,000,000 shares at June 30, 2020 and at December 31, 2019, 0 shares issued  -   - 
Common stock (par value $0.01 per share)        
Authorized - 100,000,000 shares at June 30, 2020 and at December 31, 2019        
Issued - 25,843,314 at June 30, 2020 and 27,148,411 at December 31, 2019        
Outstanding - 25,843,314 at June 30, 2020 and 27,148,411 at December 31, 2019  258   271 
Additional paid-in capital  192,762   211,997 
Retained earnings  205,863   197,393 
Unearned ESOP shares  (16,023)  (16,617)
Accumulated other comprehensive income, net of taxes  2,759   642 
Total shareholders’ equity  385,619   393,686 
Total liabilities and shareholders’ equity $2,217,573  $1,996,347 

See Accompanying Notesaccompanying notes to Unaudited Consolidated Financial Statements.

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,  Three months ended June 30,  Six months ended June 30, 
 2017  2016  2017  2016  2020  2019  2020  2019 
 (In Thousands, except per share amounts)  (In Thousands, except per share amounts) 
                        
Interest income:                        
Loans $15,855  $14,754  $45,078  $42,611  $18,493  $18,026  $36,180  $35,130 
Mortgage-related securities  647   743   2,021   2,371   670   764   1,372   1,523 
Debt securities, federal funds sold and short-term investments  951   833   2,680   2,692   698   1,123   1,761   2,432 
Total interest income  17,453   16,330   49,779   47,674   19,861   19,913   39,313   39,085 
Interest expense:                                
Deposits  1,981   1,923   5,614   5,477   3,947   4,344   8,265   8,334 
Borrowings  2,439   3,082   6,756   10,724   2,665   2,588   5,273   4,834 
Total interest expense  4,420   5,005   12,370   16,201   6,612   6,932   13,538   13,168 
Net interest income  13,033   11,325   37,409   31,473   13,249   12,981   25,775   25,917 
Provision for loan losses  20   135   (1,166)  340 
Provision (credit) for loan losses  4,500   30   5,285   (650)
Net interest income after provision for loan losses  13,013   11,190   38,575   31,133   8,749   12,951   20,490   26,567 
Noninterest income:                                
Service charges on loans and deposits  300   789   1,148   1,742   2,231   390   2,712   769 
Increase in cash surrender value of life insurance  688   734   1,476   1,446   520   507   873   851 
Loss on sale of securities  -   -   (107)  - 
Mortgage banking income  31,863   35,552   92,774   91,146   63,774   34,105   94,180   57,464 
Other  203   337   941   874   379   188   603   363 
Total noninterest income  33,054   37,412   96,232   95,208   66,904   35,190   98,368   59,447 
Noninterest expenses:                                
Compensation, payroll taxes, and other employee benefits  26,153   27,573   73,732   70,968   36,889   27,074   61,290   47,713 
Occupancy, office furniture, and equipment  2,533   2,319   7,587   7,074   2,534   2,680   5,275   5,456 
Advertising  821   661   2,414   1,974   864   963   1,764   1,921 
Data processing  623   616   1,854   1,897   1,095   869   2,101   1,638 
Communications  394   374   1,170   1,088   317   353   655   681 
Professional fees  629   474   1,953   1,486   1,077   789   2,909   1,484 
Real estate owned  (20)  37   258   344   33   19   44   51 
FDIC insurance premiums  129   140   366   500 
Loan processing expense  1,208   879   2,284   1,684 
Other  3,054   3,347   10,227   9,663   3,672   1,729   6,575   4,076 
Total noninterest expenses  34,316   35,541   99,561   94,994   47,689   35,355   82,897   64,704 
Income before income taxes  11,751   13,061   35,246   31,347   27,964   12,786   35,961   21,310 
Income tax expense  4,362   5,556   12,397   12,214   7,016   3,143   8,944   5,125 
Net income $7,389  $7,505  $22,849  $19,133  $20,948  $9,643  $27,017  $16,185 
Income per share:                                
Basic $0.27  $0.28  $0.83  $0.71  $0.86  $0.37  $1.08  $0.61 
Diluted $0.26  $0.27  $0.82  $0.70  $0.85  $0.37  $1.08  $0.61 
Weighted average shares outstanding:                                
Basic  27,532   27,043   27,449   26,976   24,464   26,242   24,934   26,370 
Diluted  27,953   27,429   27,927   27,283   24,513   26,412   25,071   26,572 


See Accompanying Notesaccompanying notes to Unaudited Consolidated Financial Statements.
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 
 Three months ended June 30,  Six months ended June 30, 
  2020  2019  2020  2019 
  (In Thousands) 
Net income $20,948  $9,643  $27,017  $16,185 
                 
Other comprehensive income, net of tax:                
Net unrealized holding gain on available for sale securities:                
Net unrealized holding gain arising during the period, net of tax expense of $(476), ($562), $(795), ($1,127), respectively  1,267   1,506   2,117   3,016 
Total other comprehensive income  1,267   1,506   2,117   3,016 
Comprehensive income $22,215  $11,149  $29,134  $19,201 


See Accompanying Notesaccompanying notes to Unaudited Consolidated Financial Statements.


unaudited consolidated financial statements.
- 5 -




WATERSTONE FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'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.

 Common Stock  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Unearned
ESOP
Shares
  
Accumulated
Other
Comprehensive Income (Loss)
  
Total
Shareholders'
Equity
 
  Shares  Amount                
For the six months ended June 30, 2020 (In Thousands, except per share amounts) 
Balances at January 1, 2020  27,148  $271  $211,997  $197,393  $(16,617) $642  $393,686 
                             
Comprehensive income:                            
Net income  -   -   -   27,017   -   -   27,017 
Other comprehensive income  -   -   -   -   -   2,117   2,117 
Total comprehensive income                          29,134 
                             
ESOP shares committed to be released to Plan participants  -   -   228   -   594   -   822 
Cash dividend declared, $0.74 per share  -   -   -   (18,547)  -   -   (18,547)
Stock compensation activity, net of tax  45   1   530   -   -   -   531 
Stock compensation expense  -   -   389   -   -   -   389 
Purchase of common stock returned to authorized but unissued  (1,350)  (14)  (20,382)  -   -   -   (20,396)
Balances at June 30, 2020  25,843  $258  $192,762  $205,863  $(16,023) $2,759  $385,619 
                             
For the six months ended June 30, 2019 (In Thousands, except per share amounts) 
Balances at January 1, 2019  28,463  $285  $232,406  $187,153  $(17,804) $(2,361) $399,679 
                             
Comprehensive income:                            
Net income  -   -   -   16,185   -   -   16,185 
Other comprehensive income  -   -   -   -   -   3,016   3,016 
Total comprehensive income                          19,201 
                             
ESOP shares committed to be released to Plan participants  -   -   281   -   594   -   875 
Cash dividend declared, $0.74 per share  -   -   -   (19,518)  -   -   (19,518)
Stock based compensation activity  31   -   394   -   -   -   394 
Stock compensation expense  -   -   598   -   -   -   598 
Purchase of common stock returned to authorized but unissued  (868)  (9)  (14,417)  -   -   -   (14,426)
Balances at June 30, 2019  27,626  $276  $219,262  $183,820  $(17,210) $655  $386,803 
- 6 -



 Common Stock  
Additional
Paid-In
Capital
  
Retained
Earnings
  
Unearned
ESOP
Shares
  
Accumulated
Other
Comprehensive Income (Loss)
  
Total
Shareholders'
Equity
 
  Shares  Amount                
For the three months ended June 30, 2020 (In Thousands, except per share amounts) 
Balances at April 1, 2020  26,275  $263  $198,579  $187,812  $(16,320) $1,492  $371,826 
                             
Comprehensive income:                            
Net income  -   -   -   20,948   -   -   20,948 
Other comprehensive income  -   -   -   -   -   1,267   1,267 
Total comprehensive income                          22,215 
                             
ESOP shares committed to be released to Plan participants  -   -   76   -   297   -   373 
Cash dividend declared, $0.12 per share  -   -   -   (2,897)  -   -   (2,897)
Stock compensation activity, net of tax  6   -   78   -   -   -   78 
Stock compensation expense  -   -   175   -   -   -   175 
Purchase of common stock returned to authorized but unissued  (438)  (5)  (6,146)  -   -   -   (6,151)
Balances at June 30, 2020  25,843  $258  $192,762  $205,863  $(16,023) $2,759  $385,619 
                             
For the three months ended June 30, 2019 (In Thousands, except per share amounts) 
Balances at April 1, 2019  28,004  $280  $225,243  $177,303  $(17,507) $(851) $384,468 
                             
Comprehensive income:                            
Net income  -   -   -   9,643   -   -   9,643 
Other comprehensive income  -   -   -   -   -   1,506   1,506 
Total comprehensive income                          11,149 
                             
ESOP shares committed to be released to Plan participants  -   -   141   -   297   -   438 
Cash dividend declared, $0.12 per share  -   -   -   (3,126)  -   -   (3,126)
Stock based compensation activity  8   -   102   -   -   -   102 
Stock compensation expense  -   -   229   -   -   -   229 
Purchase of common stock returned to authorized but unissued  (386)  (4)  (6,453)  -   -   -   (6,457)
Balances at June 30, 2019  27,626  $276  $219,262  $183,820  $(17,210) $655  $386,803 

See accompanying notes to unaudited consolidated financial statements.
- 7 -


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


 Six months ended June 30, 
 Nine months ended September 30,  2020  2019 
 2017  2016  (In Thousands) 
 (In Thousands)       
Operating activities:            
Net income $22,849  $19,133  $27,017  $16,185 
Adjustments to reconcile net income to net cash provided by (used in) operating activities:        
Provision for loan losses  (1,166)  340 
Adjustments to reconcile net income to used in provided by operating activities:        
Provision (credit) for loan losses  5,285   (650)
Provision for depreciation  1,549   2,061   1,290   1,215 
Deferred taxes  (1,855)  1,768 
Stock based compensation  1,427   1,430   389   598 
Net amortization of premium/discount on debt and mortgage related securities  524   749   79   113 
Amortization of unearned ESOP shares  1,462   1,168   822   875 
Amortization and impairment of mortgage servicing rights  71   513   247   109 
Gain on sale of loans held for sale  (94,219)  (93,481)  (94,345)  (58,304)
Loans originated for sale  (1,881,351)  (1,756,454)  (1,795,178)  (1,270,121)
Proceeds on sales of loans originated for sale  2,025,682   1,788,685   1,726,257   1,225,989 
Increase in accrued interest receivable  (294)  (204)
Decrease (increase) in accrued interest receivable  283   (259)
Increase in cash surrender value of life insurance  (1,476)  (1,446)  (873)  (851)
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   - 
(Decrease) increase in accrued interest on deposits and borrowings  (155)  136 
Decrease in prepaid tax expense  3,731   76 
Net gain related to real estate owned  (11)  (123)  (5)  (20)
Gain on sale of mortgage servicing rights  (308)  - 
Other  440   (3,784)
Net cash provided by (used in) operating activities  73,536   (36,307)
Change in other assets and other liabilities  (7,198)  (14,736)
Net cash used in operating activities  (134,209)  (97,877)
                
Investing activities:                
Net increase in loans receivable  (85,685)  (41,096)
Net change in FHLB stock  (5,175)  6,900 
Net (increase) decrease in loans receivable  (46,009)  7,697 
Purchases of:                
FHLB stock  (5,570)  (2,925)
Mortgage related securities  (4,455)  (6,759)
Debt securities  (6,140)  (4,140)  (2,500)  - 
Mortgage related securities  (6,940)  (5,236)
Bank owned life insurance  (180)  (180)
Premises and equipment, net  (939)  (925)  (478)  (1,722)
Bank owned life insurance  (2,680)  (10,180)
Proceeds from:                
Principal repayments on mortgage-related securities  25,177   29,689   20,791   12,930 
Maturities of debt securities  13,941   6,620   3,360   1,835 
Sale of debt securities  448   - 
Sales of real estate owned  3,104   5,304   353   1,204 
Net cash used in investing activities  (64,889)  (13,064)
Net cash (used in) provided by investing activities  (34,688)  12,080 
                
Financing activities:                
Net increase in deposits  7,362   62,288   89,890   16,501 
Net change in short term borrowings  (7,652)  56,780   115,540   18,635 
Repayment of long term debt  (69,000)  (220,000)  -   (100,000)
Proceeds from long term debt  125,000   100,000   -   165,000 
Net change in advance payments by borrowers for taxes  6,021   9,405 
Cash paid for advance payments by borrowers for taxes  4,710   3,511 
Cash dividends on common stock  (23,636)  (4,832)  (18,759)  (19,774)
Purchase of common stock returned to authorized but unissued  (2,190)  (3,858)  (20,396)  (14,426)
Proceeds from stock option exercises  822   3,437   531   394 
Net cash provided by financing activities  36,727   3,220   171,516   69,841 
Increase (decrease) in cash and cash equivalents  45,374   (46,151)  2,619   (15,956)
Cash and cash equivalents at beginning of period  47,217   100,471   74,300   86,101 
Cash and cash equivalents at end of period $92,591  $54,320  $76,919  $70,145 
                
Supplemental information:                
Cash paid or credited during the period for:                
Income tax payments $14,141  $11,009  $7,068  $3,904 
Interest payments  12,368   16,816   13,693   13,032 
Noncash activities:                
Loans receivable transferred to real estate owned  1,609   3,442   299   743 
Dividends declared but not paid in other liabilities  3,877   2,322   3,289   3,541 


See Accompanying Notesaccompanying notes to Unaudited Consolidated Financial Statements.unaudited consolidated financial statements.
- 78 -




Note 1 — Basis of Presentation


The unaudited interim consolidated financial statements include the accounts of Waterstone Financial, Inc. (the "Company"“Company”) and the Company'sCompany’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 1113 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'sCompany’s December 31, 20162019 Annual Report on Form 10-K. Operating results for the ninesix months ended SeptemberJune 30, 20172020 are not necessarily indicative of the results that may be expected for the year ending December 31, 20172020 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.fair value measurements. Actual results could differ from those estimates.


Impacts of COVID-19

In March, 2020, the World Health Organization declared the outbreak of COVID-19 as a global pandemic, which continues to spread throughout the United States and around the world. The declaration of a global pandemic indicates that almost all public commerce and related business activities must be, to varying degrees, curtailed with the goal of decreasing the rate of new infections. The outbreak of COVID-19 could adversely impact a broad range of industries in which the Company’s customers operate and impair their ability to fulfill their financial obligations to the Company. On March 3, 2020, the Federal Open Market Committee reduced the target federal funds rate by 50 basis points to 1.00% to 1.25%. This rate was further reduced to a target range of 0% to 0.25% on March 16, 2020. These reductions in interest rates and other effects of the COVID-19 outbreak may adversely affect the Company’s financial condition and results of operations. As a result of the spread of the COVID-19 coronavirus, economic uncertainties have arisen which are likely to negatively impact net interest income and noninterest income. Other financial impact could occur though such potential impacts are unknown at this time.

Subsequent Events

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date the unaudited consolidated financial statements included in this Quarterly Report on Form 10-Q were issued. There were no significant subsequent events for the quarter ended June 30, 2020 through the issuance date of these unaudited consolidated financial statements that warranted adjustment to or disclosure in the unaudited consolidated financial statements.

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Reclassifications

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.income.  The Company reclassified the Cost of Shares Repurchased line item presented in prior periods to the Additional Paid in Capital line item in the Consolidated Statements of Financial Condition.  The Cost of Shares Repurchased column was reclassified to the Additional Paid in Capital line in the Consolidated Statements of Changes in Shareholders’ Equity.


Impact of Recent Accounting Pronouncements


Accounting Standards Codification (ASC) Topic 606 "Revenue from Contracts with Customers." New authoritative accounting guidance under ASC Topic 606, "Revenue from Contracts with Customers" amended prior guidance to require an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and to provide clarification on identifying performance obligations and licensing implementation guidance. The new authoritative guidance was initially effective for reporting periods after January 1, 2017 but was deferred to January 1, 2018. The Company's revenue is comprised of interest and non-interest revenue. The guidance does not apply to revenue associated with financial instruments, including loans and securities.  The Company is substantially complete with its overall assessment of revenue streams and reviewing of related contracts potentially affected by the guidance, including asset management fees, deposit related fees, and other non-interest related fees. The Company's assessment suggests that adoption of this guidance should not materially change the method in which we currently recognize revenue for these revenue streams. In addition, the Company is evaluating the guidance's expanded disclosure requirements. The Company plans to adopt ASC 606 on January 1, 2018 utilizing the modified retrospective approach with a cumulative effect adjustment to opening retained earnings, if such adjustment is deemed to be material.

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

- 8 -
ASC Topic 842 "Leases." New authoritative accounting guidance under ASC Topic 842, "Leases" amended prior guidance to require lessees to recognize the assets and liabilities arising from all leases on the balance sheet. The new authoritative guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. In addition, the qualifications for a sale and leaseback transaction have been amended. The new authoritative guidance also requires qualitative and quantitative disclosures by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. The new authoritative guidance will be effective for reporting periods after January 1, 2019. The Company is evaluating the new guidance and its impact on the Company's statements of operations and financial condition.

ASC Topic 718 "Compensation - Stock Compensation." New authoritative accounting guidance under ASC Topic 718, "Compensation - Stock Compensation" amended prior guidance on several aspects, including the income tax consequences, classification of awards as either equity or liability, and classification on the statement of cash flows. The new authoritative guidance allows for all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense in the income statement. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. An entity also should recognize excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. For earnings per share, anticipated excess tax benefits will not be included in assumed proceeds when applying the treasury method for computing dilutive shares.  For the statement of cash flows, excess tax benefits should be classified along with other income tax cash flows as an operating activity, and cash paid by an employer when directly withholding shares for tax withholding purposes should be classified as a financing activity. The new authoritative guidance also allows an entity to make an entity-wide accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. In addition, the threshold to qualify for equity classification permits withholding up to the maximum statutory tax rates in the applicable jurisdictions. The Company adopted this standard on January 1, 2017. See Note 9 for the impact on the Company's statement of operations.

ASC Topic 326 "Financial Instruments - Credit Losses." New authoritative 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

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was signed into law. It included an option for reporting periods after January 1,entities to delay the adoption of ASC Topic 326 until the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. Due to the uncertainty on the economy and unemployment from COVID-19, the Company has determined to delay its adoption of ASC Topic 326 and has calculated and recorded its provision for loan losses under the incurred loss model that existed prior to ASC Topic 326.

The Company has input the available historical Company data to build an internal model and is evaluatingreviewing the new guidance and its impact onassumptions to support the Company's statements of operations and financial condition.

ASC Topic 310 "Receivables - Nonrefundable Fees and Other Costs." New authoritative accounting guidancecalculation under ASC Topic 310 "Receivables - Nonrefundable Fees326. Management’s methodology for estimating the allowance for credit losses under the current expected credit losses (CECL) model includes the use of relevant available information, from internal and Other Costs" amends prior guidanceexternal sources, relating to past events, current conditions, and reasonable and supportable forecasts. Historical credit loss experience by shorteningvintage classified by loans with similar risk profiles provides the amortization periodbasis for certain callable debt securities held atthe estimation of expected credit losses. Adjustments to historical loss information are considered for differences in current loan-specific risk characteristics such as changes in underwriting standards, portfolio mix, portfolio volume, delinquency rates, interest rates, or other relevant factors. Management will continue to review and adjust these and other factors. Ongoing evaluations have been performed by vintage adjusted for prepayments. For two portfolio segments, management expects to use a premium requiringweighted average remaining maturity methodology, which contemplates loss expectations on a pool basis, relying on historic loss rates.

Management is validating the premium to be amortizedCECL model and methodologies; however we expect an initial increase to the earliest call date. The new authoritative guidanceallowance for credit loss, including reserves for unfunded commitments, not to exceed 130% of the December 31, 2019 allowance.  When finalized, this one-time increase as a result of the adoption of CECL will be recorded, net of tax, as an adjustment to retained earnings effective on the earlier of the termination date of the national emergency declaration by the President or December 31, 2020. This estimate is subject to change based on continuing refinement and validation of the model and methodologies.

Financial statement users should be aware that the allowance for reporting periods after January 1, 2019 with early adoption permitted. The Companycredit loss is, evaluatingby design, inherently sensitive to changes in economic outlook, loan and lease portfolio composition, portfolio duration, and other factors.

As we continue to evaluate the new guidanceprovisions of ASC Topic 326 as of and for the six months ended June 30, 2020, we are considering the following in developing our forecast and its impacteffect on the Company's statementsour CECL calculations:

Duration, extent and severity of operations and financial condition.COVID-19;

Effect of government assistance; and
Unemployment and effect on economies and markets.

- 910 -


Note 2— Securities Available for Sale


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


 September 30, 2017  June 30, 2020 
 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  $28,320  $1,392  $-  $29,712 
Collateralized mortgage obligations:                                
Government sponsored enterprise issued  54,949   56   (345)  54,660   66,610   2,377   -   68,987 
Private-label issued  3,776   28   -   3,804 
Mortgage-related securities  116,641   687   (450)  116,878   98,706   3,797   -   102,503 
                                
Government sponsored enterprise bonds  2,500   -   (1)  2,499 
Municipal securities  64,100   1,578   (16)  65,662   48,421   2,229   -   50,650 
Other debt securities  15,005   61   (492)  14,574   12,500   -   (1,541)  10,959 
Debt securities  81,605   1,639   (509)  82,735   60,921   2,229   (1,541)  61,609 
Certificates of deposit  1,225   3   (1)  1,227 
 $199,471  $2,329  $(960) $200,840  $159,627  $6,026  $(1,541) $164,112 




 December 31, 2016  December 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 $72,858  $798  $(243) $73,413  $33,773  $422  $(45) $34,150 
Collateralized mortgage obligations:                                
Government sponsored enterprise issued  62,297   70   (365)  62,002   81,232   776   (254)  81,754 
Mortgage-related securities  135,155   868   (608)  135,415   115,005   1,198   (299)  115,904 
                                
Government sponsored enterprise bonds  2,500   4   (1)  2,503 
Municipal securities  70,311   685   (300)  70,696   51,898   1,795   (1)  53,692 
Other debt securities  17,399   154   (603)  16,950   10,000   -   (1,120)  8,880 
Debt securities  90,210   843   (904)  90,149   61,898   1,795   (1,121)  62,572 
Certificates of deposit  1,225   7   (1)  1,231 
 $226,590  $1,718  $(1,513) $226,795  $176,903  $2,993  $(1,420) $178,476 



The Company'sCompany’s mortgage-backed securities and collateralized mortgage obligations issued by government sponsored enterprises are guaranteed by Fannie Mae, Freddie Mac or Ginnie Mae. At SeptemberJune 30, 2017, $25.62020, $1.0 million of the Company’s mortgage related securities were pledged as collateral to secure mortgage banking related activities and $6.9 million were pledged as collateral to secure back-to-back swaps. At December 31, 2019, $1.2 million of the Company's mortgage related securities were pledged as collateral to secure repurchase agreement obligations of the Company.  As of September 30, 2017, $2.7 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities.At December 31, 2016, $93.2 million of the Company's government sponsored enterprise bonds and $2.4 million of the Company's mortgage related securities were pledged as collateral to secure mortgage banking related activities, respectively.

- 10 -

The amortized cost and fair values of investment securities by contractual maturity at SeptemberJune 30, 20172020 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  $4,208  $4,244 
Due after one year through five years  20,919   21,116   34,829   35,902 
Due after five years through ten years  36,891   38,178   21,236   20,625 
Due after ten years  13,806   13,461   648   838 
Mortgage-related securities  116,641   116,878   98,706   102,503 
 $199,471  $200,840  $159,627  $164,112 


- 11 -


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  June 30, 2020 
 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) $-  $-  $-  $-  $-  $- 
Collateralized mortgage obligations:                                                
Government sponsored enterprise issued  33,229   (313)  2,188   (32)  35,417   (345)  -   -   -   -   -   - 
Government sponsored enterprise bonds  2,499   (1)  -   -   2,499   (1)
Private label issued  -   -   -   -   -   - 
Municipal securities  10,301   (15)  101   (1)  10,402   (16)  -   -   -   -   -   - 
Other debt securities  -   -   9,508   (492)  9,508   (492)  2,467   (33)  8,492   (1,508)  10,959   (1,541)
Certificates of deposit  489   (1)  -   -   489   (1)
 $55,065  $(372) $15,350  $(588) $70,415  $(960) $2,467  $(33) $8,492  $(1,508) $10,959  $(1,541)




 December 31, 2016  December 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 $23,433  $(222) $1,068  $(21) $24,501  $(243) $2,929  $(20) $2,849  $(25) $5,778  $(45)
Collateralized mortgage obligations:                                                
Government sponsored enterprise issued  39,395   (365)  -   -   39,395   (365)  21,723   (136)  7,180   (118)  28,903   (254)
Government sponsored enterprise bonds  2,000   (1)  -   -   2,000   (1)
Municipal securities  32,141   (300)  -   -   32,141   (300)  100   (1)  -   -   100   (1)
Other debt securities  -   -   9,397   (603)  9,397   (603)  
-
   
-
   
8,880
   
(1,120
)
  
8,880
   
(1,120
)
Certificates of deposit  489   (1)  -   -   489   (1)
 $97,458  $(889) $10,465  $(624) $107,923  $(1,513) $24,752  $(157) $18,909  $(1,263) $43,661  $(1,420)


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'ssecurity’s decline in market value is other-than-temporary, management considers the length of time and extent to which the fair value has been less than cost, the financial condition of the issuer and the underlying obligors, quality of credit enhancements, volatility of the fair value of the security, the expected recovery period of the security and ratings agency evaluations. In addition, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds and the value of any underlying collateral.

- 11 -
The following table presents the change in other-than-temporary credit related impairment charges on securities available for sale for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive loss.

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


As of SeptemberJune 30, 2017,2020, the Company held one1 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.  There have been no additional credit losses related to the security.  As of SeptemberJune 30, 2017,2020, this security had an amortized cost of $116,000 and total life-to-date impairment of $94,000.


As of SeptemberJune 30, 2017,2020, the Company had four mortgage-backed securities, two government sponsored enterprise issued securities, one municipal bond security, and one other1 corporate debt security which had been in an unrealized loss position for twelve months or longer. These securities werelonger and this security represents a loss of 15.1% of its aggregate amortized cost. The security was determined not to be other-than-temporarily impaired as of SeptemberJune 30, 2017.2020. The Company has determined that the decline in fair value of these securitiesthe security is primarily attributable to an increase in market interest rates compared to the stated rates on these securitiesthis security 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 securitiesthe security before recovery of the amortized cost basis, these securities areit is not considered other-than-temporarily impaired. The unrealized losses for the corporate 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 floating rate that is indexed to the 10 year Treasury interest rate that is reset on a quarterly 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 ninesix months ended SeptemberJune 30, 2017, proceeds from the sale of securities totaled $448,0002020 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 SeptemberJune 30, 2017 was reclassified from accumulated other comprehensive income. There2019, there were no0 sales of securities during the nine months ended September 30, 2016.securities.




- 12 -


Note 3 - Loans Receivable


Loans receivable at SeptemberJune 30, 20172020 and December 31, 20162019 are summarized as follows:


 September 30, 2017  December 31, 2016  June 30, 2020  December 31, 2019 
 (In Thousands)  (In Thousands) 
Mortgage loans:            
Residential real estate:            
One- to four-family $427,195  $392,817  $467,346  $480,280 
Multi-family  580,134   558,592   598,924   584,859 
Home equity  21,606   21,778   16,409   18,071 
Construction and land  16,451   18,179   48,850   37,033 
Commercial real estate  181,328   159,401   244,775   236,703 
Consumer  266   319   860   832 
Commercial loans  34,180   26,798   56,639   30,253 
 $1,261,160  $1,177,884  $1,433,803  $1,388,031 


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$1.08 billion and $911.9 million1.07 billion at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively, arewere pledged as collateral against $410.0$574.0 million and $295.0$470.0 million in outstanding Federal Home Loan Bank of Chicago (FHLBC)("FHLB") advances under a blanket security agreement at SeptemberJune 30, 20172020 and December 31, 2016.2019.


Certain of the Company's executive officers, directors, employees, and their related interests have loans with the Bank. As of September 30, 2017 and December 31, 2016, loans aggregating approximately $4.7 million and $5.1 million, respectively, wereLoans outstanding to such parties.  Noneparties were approximately $6.4 million as of June 30, 2020 and $6.3 million as of December 31, 2019.  NaN of these loans were past due or considered impaired as of SeptemberJune 30, 20172020 or December 31, 2016.2019.


As of SeptemberJune 30, 20172020 and December 31, 2016,2019, there were no0 loans 90 or more days past due and still accruing interest.


An analysis of past due loans receivable as of SeptemberJune 30, 20172020 and December 31, 20162019 follows:


As of September 30, 2017 As of June 30, 2020 
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  $2,452  $12  $3,446  $5,910  $461,436  $467,346 
Multi-family  332   -   407   739   579,395   580,134   -   -   356   356   598,568   598,924 
Home equity  220   -   91   311   21,295   21,606   29   6   40   75   16,334   16,409 
Construction and land  -   -   37   37   16,414   16,451   -   -   -   -   48,850   48,850 
Commercial real estate  1,270   156   181   1,607   179,721   181,328   -   -   67   67   244,708   244,775 
Consumer  -   -   -   -   266   266   -   -   -   -   860   860 
Commercial loans  23   -   26   49   34,131   34,180   39   -   -   39   56,600   56,639 
Total $3,704  $348  $4,903  $8,955  $1,252,205  $1,261,160  $2,520  $18  $3,909  $6,447  $1,427,356  $1,433,803 

As of December 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 
 (In Thousands) 
Mortgage loans:                 
Residential real estate:                 
One- to four-family $1,179  $638  $3,969  $5,786  $474,494  $480,280 
Multi-family  -   -   360   360   584,499   584,859 
Home equity  -   10   -   10   18,061   18,071 
Construction and land  -   -   -   -   37,033   37,033 
Commercial real estate  -   -   303   303   236,400   236,703 
Consumer  -   -   -   -   832   832 
Commercial loans  6   -   -   6   30,247   30,253 
Total $1,185  $648  $4,632  $6,465  $1,381,566  $1,388,031 



(1)  Includes $226,000 and $53,000 at June 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

(2)   Includes $12,000 and $291,000 at June 30, 2020 and December 31, 2019, respectively, which are on non-accrual status.

(3)   Includes $1.4 million and $2.0 million at June 30, 2020 and December 31, 2019, 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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 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                      
Six months ended June 30, 2020Six months ended June 30, 2020                
Balance at beginning of period $7,164  $4,809  $364  $1,016  $1,951  $12  $713  $16,029  $4,907  $4,138  $201  $610  $2,145  $14  $372  $12,387 
Provision (credit) for loan losses  (249)  (396)  8   (283)  (170)  (2)  (74)  (1,166)  754   1,728   12   542   1,972   25   252   5,285 
Charge-offs  (1,092)  (92)  -   (14)  (6)  -   -   (1,204)  (7)  (5)  (13)  -   -   (1)  (8)  (34)
Recoveries  200   102   21   80   1   -   -   404   61   9   18   1   7   -   -   96 
Balance at end of period $6,023  $4,423  $393  $799  $1,776  $10  $639  $14,063  $5,715  $5,870  $218  $1,153  $4,124  $38  $616  $17,734 


Nine months ended September 30, 2016                      
Six months ended June 30, 2019Six months ended June 30, 2019                   
Balance at beginning of period $7,763  $5,000  $433  $904  $1,680  $9  $396  $16,185  $5,742  $4,153  $325  $400  $2,126  $20  $483  $13,249 
Provision (credit) for loan losses  141   23   (25)  (123)  33   3   288   340   (449)  154   (54)  12   (214)  (3)  (96)  (650)
Charge-offs  (801)  (488)  (62)  (3)  -   -   -   (1,354)  (25)  (1)  (8)  -   -   (5)  -   (39)
Recoveries  246   134   24   58   -   -   -   462   35   9   12   -   1   -   -   57 
Balance at end of period $7,349  $4,669  $370  $836  $1,713  $12  $684  $15,633  $5,303  $4,315  $275  $412  $1,913  $12  $387  $12,617 


A summary of the activity for the three months ended June 30, 2020 and 2019 in the allowance for loan losses follows:

 
One- to
Four- Family
  Multi-Family  Home Equity  Construction and Land  Commercial Real Estate  Consumer  Commercial  Total 
  (In Thousands) 
Three months ended June 30, 2020                
Balance at beginning of period $4,714  $4,301  $239  $687  $2,803  $23  $459  $13,226 
Provision (credit) for loan losses  988   1,568   (20)  466   1,318   15   165   4,500 
Charge-offs  (1)  (5)  (13)  -   -   -   (8)  (27)
Recoveries  14   6   12   -   3   -   -   35 
Balance at end of period $5,715  $5,870  $218  $1,153  $4,124  $38  $616  $17,734 

Three months ended June 30, 2019                   
Balance at beginning of period $5,181  $4,331  $276  $353  $2,005  $7  $408  $12,561 
Provision (credit) for loan losses  101   (20)  (7)  59   (92)  10   (21)  30 
Charge-offs  (1)  (1)  -   -   -   (5)  -   (7)
Recoveries  22   5   6   -   -   -   -   33 
Balance at end of period $5,303  $4,315  $275  $412  $1,913  $12  $387  $12,617 

- 14 -


A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of SeptemberJune 30, 20172020 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  $27  $-  $-  $-  $-  $-  $-  $27 
Allowance related to loans collectively evaluated for impairment  5,825   4,423   316   799   1,738   10   639   13,750   5,688   5,870   218   1,153   4,124   38   616   17,707 
Balance at end of period $6,023  $4,423  $393  $799  $1,776  $10  $639  $14,063  $5,715  $5,870  $218  $1,153  $4,124  $38  $616  $17,734 
                                                                
Loans individually evaluated for impairment $8,456  $833  $302  $37  $472  $-  $26  $10,126  $7,478  $639  $77  $-  $343  $-  $-  $8,537 
Loans collectively evaluated for impairment  418,739   579,301   21,304   16,414   180,856   266   34,154   1,251,034   459,868   598,285   16,332   48,850   244,432   860   56,639   1,425,266 
Total gross loans $427,195  $580,134  $21,606  $16,451  $181,328  $266  $34,180  $1,261,160  $467,346  $598,924  $16,409  $48,850  $244,775  $860  $56,639  $1,433,803 

- 14 -

A summary of the allowance for loan loss for loans evaluated individually and collectively for impairment by collateral class as of December 31, 20162019 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  $32  $-  $-  $-  $7  $-  $-  $39 
Allowance related to loans collectively evaluated for impairment  6,665   4,809   285   1,016   1,868   12   712   15,367   4,875   4,138   201   610   2,138   14   372   12,348 
Balance at end of period $7,164  $4,809  $364  $1,016  $1,951  $12  $713  $16,029  $4,907  $4,138  $201  $610  $2,145  $14  $372  $12,387 
                                                                
Loans individually evaluated for impairment $10,920  $3,941  $442  $-  $718  $-  $41  $16,062  $8,725  $667  $84  $-  $581  $-  $-  $10,057 
Loans collectively evaluated for impairment  381,897   554,651   21,336   18,179   158,683   319   26,757   1,161,822   471,555   584,192   17,987   37,033   236,122   832   30,253   1,377,974 
Total gross loans $392,817  $558,592  $21,778  $18,179  $159,401  $319  $26,798  $1,177,884  $480,280  $584,859  $18,071  $37,033  $236,703  $832  $30,253  $1,388,031 


- 15 -


The following table presents information relating to the Company'sCompany’s internal risk ratings of its loans receivable as of SeptemberJune 30, 20172020 and December 31, 2016:2019:


 
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 June 30, 2020                        
Substandard $8,899  $833  $272  $37  $1,062  $-  $1,595  $12,698  $7,478  $639  $265  $-  $343  $-  $732  $9,457 
Watch  7,348   498   199   -   456   -   761   9,262   8,685   -   6   3,494   5,090   -   1,380   18,655 
Pass  410,948   578,803   21,135   16,414   179,810   266   31,824   1,239,200   451,183   598,285   16,138   45,356   239,342   860   54,527   1,405,691 
 $427,195  $580,134  $21,606  $16,451  $181,328  $266  $34,180  $1,261,160  $467,346  $598,924  $16,409  $48,850  $244,775  $860  $56,639  $1,433,803 
                                                                
At December 31, 2016                                
At December 31, 2019                                
Substandard $12,845  $1,427  $428  $-  $717  $-  $41  $15,458  $8,725  $668  $285  $-  $581  $-  $754  $11,013 
Watch  10,509   3,975   149   436   1,389   -   3,671   20,129   5,975   -   3   -   1,412   -   847   8,237 
Pass  369,463   553,190   21,201   17,743   157,295   319   23,086   1,142,297   465,580   584,191   17,783   37,033   234,710   832   28,652   1,368,781 
 $392,817  $558,592  $21,778  $18,179  $159,401  $319  $26,798  $1,177,884  $480,280  $584,859  $18,071  $37,033  $236,703  $832  $30,253  $1,388,031 


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 anA 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 loans 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 BankCompany will sustain some loss if the deficiencies are not corrected.  Finally, a loan is considered to be impaired when it is probable that the BankCompany 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.
- 16 -


The following tables present data on impaired loans at SeptemberJune 30, 20172020 and December 31, 2016.2019.


 As of or for the Nine Months Ended September 30, 2017  As of June 30, 2020 
 
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  $212  $212  $27  $- 
Multi-family  -   -   -   -   -   -   -   -   -   - 
Home equity  159   159   77   -   165   10   -   -   -   - 
Construction and land  -   -   -   -   -   -   -   -   -   - 
Commercial real estate  38   447   38   409   45   -   -   -   -   - 
Consumer  -   -   -   -   -   -   -   -   -   - 
Commercial  -   -   -   -   -   -   -   -   -   - 
  1,765   2,174   313   409   1,805   67   212   212   27   - 
Total Impaired with no Reserve                                        
One- to four-family  6,888   8,385   -   1,497   7,409   251   7,266   8,283   -   1,017 
Multi-family  833   1,699   -   866   834   63   639   1,456   -   817 
Home equity  143   143   -   -   147   4   77   77   -   - 
Construction and land  37   51   -   14   45   -   -   -   -   - 
Commercial real estate  434   434   -   -   436   11   343   343   -   - 
Consumer  -   -   -   -   -   -   -   -   -   - 
Commercial  26   26   -   -   26   -   -   -   -   - 
  8,361   10,738   -   2,377   8,897   329   8,325   10,159   -   1,834 
Total Impaired                                        
One- to four-family  8,456   9,953   198   1,497   9,004   308   7,478   8,495   27   1,017 
Multi-family  833   1,699   -   866   834   63   639   1,456   -   817 
Home equity  302   302   77   -   312   14   77   77   -   - 
Construction and land  37   51   -   14   45   -   -   -   -   - 
Commercial real estate  472   881   38   409   481   11   343   343   -   - 
Consumer  -   -   -   -   -   -   -   -   -   - 
Commercial  26   26   -   -   26   -   -   -   -   - 
 $10,126  $12,912  $313  $2,786  $10,702  $396  $8,537  $10,371  $27  $1,834 

 As of December 31, 2019 
  
Recorded
Investment
  
Unpaid
Principal
  Reserve  
Cumulative
Charge-Offs
 
  (In Thousands) 
Total Impaired with Reserve            
One- to four-family $217  $217  $32  $- 
Multi-family  -   -   -   - 
Home equity  -   -   -   - 
Construction and land  -   -   -   - 
Commercial real estate  7   416   7   409 
Consumer  -   -   -   - 
Commercial  -   -   -   - 
   224   633   39   409 
Total Impaired with no Reserve                
One- to four-family  8,508   9,531   -   1,023 
Multi-family  667   1,491   -   824 
Home equity  84   84   -   - 
Construction and land  -   -   -   - 
Commercial real estate  574   574   -   - 
Consumer  -   -   -   - 
Commercial  -   -   -   - 
   9,833   11,680   -   1,847 
Total Impaired                
One- to four-family  8,725   9,748   32   1,023 
Multi-family  667   1,491   -   824 
Home equity  84   84   -   - 
Construction and land  -   -   -   - 
Commercial real estate  581   990   7   409 
Consumer  -   -   -   - 
Commercial  -   -   -   - 
  $10,057  $12,313  $39  $2,256 

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


The difference between a loan'sloan’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'smanagement’s assessment that the full collection of the loan balance is not likely.

- 17 -


The following tables present data on impaired loans for the six months ended June 30, 2020 and 2019.

 Six months ended June 30, 
  2020  2019 
  
Average
Recorded
Investment
  
Interest
Paid
  
Average
Recorded
Investment
  
Interest
Paid
 
  (In Thousands) 
Total Impaired with Reserve            
One- to four-family $215  $8  $353  $11 
Multi-family  -   -   348   16 
Home equity  -   -   85   5 
Construction and land  -   -   -   - 
Commercial real estate  -   -   13   - 
Consumer  -   -   -   - 
Commercial  -   -   -   - 
   215   8   799   32 
Total Impaired with no Reserve                
One- to four-family  7,361   189   6,727   213 
Multi-family  650   34   935   41 
Home equity  79   2   46   2 
Construction and land  -   -   -   - 
Commercial real estate  346   8   380   9 
Consumer  -   -   -   - 
Commercial  -   -   11   1 
   8,436   233   8,099   266 
Total Impaired                
One- to four-family  7,576   197   7,080   224 
Multi-family  650   34   1,283   57 
Home equity  79   2   131   7 
Construction and land  -   -   -   - 
Commercial real estate  346   8   393   9 
Consumer  -   -   -   - 
Commercial  -   -   11   1 
  $8,651  $241  $8,898  $298 

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'sborrower’s financial condition and prospects for repayment, including consideration of the borrower'sborrower’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'sborrower’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$8.3 million of impaired loans as of SeptemberJune 30, 20172020 for which no allowance has been provided, $2.41.8 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 resultingwhich may result in additional provisions to the allowance for loans losses or charge-offs.

- 17 -

At SeptemberJune 30, 2017,2020, total impaired loans included $5.2$3.9 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, 2016,2019, total impaired loans included $10.1$4.0 million of troubled debt restructurings.

- 18 -


The following presents data on troubled debt restructurings:


 As of September 30, 2017  As of June 30, 2020 
 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  $2,737   2  $591   4  $3,328   6 
Multi-family  -   -   833   3   833   3   -   -   282   2   282   2 
Home Equity  48   1   -   -   48   1 
Commercial real estate  291   1   37   1   328   2   276   1   -   -   276   1 
 $3,086   4  $2,074   11  $5,160   15  $3,013   3  $873   6  $3,886   9 


 As of December 31, 2016  As of December 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 $3,296   3  $2,399   34  $5,695   37  $2,740   2  $685   5  $3,425   7 
Multi-family  2,514   1   1,427   5   3,941   6   -   -   308   2   308   2 
Home equity  49   1   97   1   146   2 
Commercial real estate  295   1   60   1   355   2   278   1   7   1   285   2 
 $6,154   6  $3,983   41  $10,137   47  $3,018   3  $1,000   8  $4,018   11 


At SeptemberJune 30, 2017, $5.22020, $3.9 million in loans had been modified in troubled debt restructurings and $2.1 million$873,000 of these loans were included in the non-accrual loan total. The remaining $3.1$3.0 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'sborrower’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 $96,0000 valuation allowance has been establishedwas recorded as of SeptemberJune 30, 20172020 with respect to the $5.2$3.9 million in troubled debt restructurings. As of December 31, 2016,2019, a $293,000$7,000 valuation allowance had been established with respect to the $10.1$4.0 million in troubled debt restructurings.


After a troubled debt restructuring reverts to market terms, a minimum of six6 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.

- 1819 -


The following presents troubled debt restructurings by concession type:


 As of September 30, 2017  As of June 30, 2020 
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  $3,572   6  $-   -  $3,572   6 
Principal forbearance  48   1   -   -   48   1 
Interest reduction  356   3   696   2   1,052   5   314   3   -   -   314   3 
 $4,464   13  $696   2  $5,160   15  $3,886   9  $-   -  $3,886   9 


 As of December 31, 2016  As of December 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 $8,221   22  $761   2  $8,982   24  $3,246   6  $448   2  $3,694   8 
Principal forbearance  49   1   -   -   49   1 
Interest reduction  1,106   22   -   -   1,106   22   324   3   -   -   324   3 
 $9,376   45  $761   2  $10,137   47  $3,570   9  $448   2  $4,018   11 


There were no0 loans modified as troubled debt restructurings for 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 and nineor six months ended SeptemberJune 30, 2016.2020 and June 30, 2019.


There were no0 troubled debt restructurings within the past twelve months for which there was a default during the three or ninesix months ended SeptemberJune 30, 20172020 and SeptemberJune 30, 2016.2019.


The provisions of the CARES Act included an election to not apply the guidance on accounting for troubled debt restructurings to loan modifications, such as extensions or deferrals, related to COVID-19 made between March 1, 2020 and the earlier of (i) December 31, 2020 or (ii) 60 days after the end of the COVID-19 national emergency. The relief can only be applied to modifications for borrowers that were not more than 30 days past due as of December 31, 2019. The Company elected to adopt these provisions of the CARES Act.  At June 30, 2020, the Company had approximately $121.8 million in outstanding loans subject to interest and principal deferrals agreements.

The following table presents data on non-accrual loans as of SeptemberJune 30, 20172020 and December 31, 2016:2019:


 September 30, 2017  December 31, 2016  June 30, 2020  December 31, 2019 
 (Dollars in Thousands)  (Dollars in Thousands) 
Non-accrual loans:            
Residential      
Residential real estate:      
One- to four-family $5,709  $7,623  $4,753  $5,985 
Multi-family  833   1,427   639   667 
Home equity  223   344   77   70 
Construction and land  37   -   -   - 
Commercial real estate  181   422   67   303 
Commercial  26   41   -   - 
Consumer  -   -   -   - 
Total non-accrual loans $7,009  $9,857  $5,536  $7,025 
Total non-accrual loans to total loans receivable  0.56%  0.84%  0.39%  0.51%
Total non-accrual loans to total assets  0.38%  0.55%  0.25%  0.35%

- 1920 -


Note 4— Real Estate Owned


Real estate owned is summarized as follows:


 September 30, 2017  December 31, 2016  June 30, 2020  December 31, 2019 
 (In Thousands)  (In Thousands) 
            
One- to four-family $1,021  $2,141  $-  $46 
Multi-family  169   -   -   - 
Construction and land  4,822   5,082   1,256   1,256 
Commercial real estate  300   300   -   - 
Total real estate owned  6,312   7,523   1,256   1,302 
Valuation allowance at end of period  (1,744)  (1,405)  (554)  (554)
Total real estate owned, net $4,568  $6,118  $702  $748 


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


 Nine months ended September 30,  Six months ended June 30, 
 2017  2016  2020  2019 
 (In Thousands)  (In Thousands) 
Real estate owned at beginning of the period $6,118   9,190  $748  $2,152 
Transferred from loans receivable  1,609   3,442   299   743 
Sales (net of gains / losses)  (2,654)  (4,762)  (345)  (1,201)
Write downs  (504)  (416)  -   - 
Other  (1)  -   -   (10)
Real estate owned at the end of the period $4,568   7,454  $702  $1,684 


Residential one- to four-family mortgage loans that were in the process of foreclosure were $3.0 million at June 30, 2020 and $3.1$2.3 million at September 30, 2017 and December 31, 2016, respectively.2019.


- 2021 -


Note 5— Mortgage Servicing Rights


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


 Nine months ended September 30,  Six months ended June 30, 
 2017  2016  2020  2019 
 (In Thousands)  (In Thousands) 
Mortgage servicing rights at beginning of the period $2,260  $1,422  $282  $109 
Additions  793   1,486   4,931   175 
Amortization  (71)  (412)  (226)  (29)
Sales  (2,264)  -   -   - 
Mortgage servicing rights at end of the period  718   2,496   4,987   255 
Valuation allowance at end of period  -   (100)
Valuation allowance during the period  (21)  (80)
Mortgage servicing rights at end of the period, net $718  $2,396  $4,966  $175 


During the ninesix months ended SeptemberJune 30, 2017, $1.882020, $1.80 billion 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$1.73 billion, generating mortgage banking income of $92.8$94.2 million. The unpaid principal balance of loans serviced for others was $99.2$706.5 million and $318.6$64.9 million at SeptemberJune 30, 20172020 and December 31, 2016,2019, respectively. These loans are not reflected in the consolidated statements of financial condition.


During the nine months ended September 30, 2017, the Company soldThe fair value of mortgage servicing rights related to $295.1were $6.4 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 June 30, 2020 and $186,000 at June 30, 2019. During the ninesix months ended SeptemberJune 30, 2016,2020 and June 30, 2019, 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 
2020  86  $559 
2021  76   979 
2022  775 
2023  699 
2024  593 
Thereafter  329   1,361 
Total $718  $4,966 


Note 6— Deposits


At SeptemberJune 30, 20172020 and December 31, 2016,2019, time deposits with balances greater than $250,000 amounted to $43.6$74.5 million and $44.5$70.6 million, respectively.


A summary of the contractual maturities of time deposits at SeptemberJune 30, 20172020 is as follows:


 (In Thousands)  (In Thousands) 
      
Within one year $514,304  $727,895 
More than one to two years  153,213   6,175 
More than two to three years  13,618   3,267 
More than three to four years  1,358   999 
More than four through five years  2,540   1,081 
 $685,033  $739,417 


- 2122 -


Note 7— Borrowings


Borrowings consist of the following:


  September 30, 2017  December 31, 2016  June 30, 2020  December 31, 2019 
  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% $25,102   3.25% $13,562   4.66%
Federal Home Loan Bank, Chicago advances   55,000   1.25%  65,000   0.61%
Federal Home Loan Bank, Chicago  104,000   0.20%  -   - 
                                 
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%  50,000   1.73%  50,000   1.73%
Repurchase agreements maturing2017  15,000   2.89%  84,000   3.96%
2028  255,000   2.37%  255,000   2.37%
2029  165,000   1.61%  165,000   1.61%
   $435,503   1.81% $387,155   2.27% $599,102   1.81% $483,562   2.11%


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$25.1 million balance at SeptemberJune 30, 20172020 and a $8.2$13.6 million balance at December 31, 2016.2019.


The $55.0Company 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. The Company's repurchase agreement is subject to master netting agreements, which 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 $104.0 million in short-term advances consists of one $35.01 $25.0 million short-term advance that haswith a fixed rate of 0.19% and a maturity date of March 15, 2018 andJuly 7, 2020, 1 $10.0 million advance with a fixed rate of 1.28%0.28% and one $20.0 million short-term advance that has a maturity date of October 4, 2017 andJuly 7, 2020, 1 $20.0 million advance with a fixed rate of 1.20%.0.20% and a maturity date of July 14, 2020, 1 $20.0 million advance with a fixed rate of 0.19% and a maturity date of July 20, 2020, 1 $25.0 million advance with a fixed rate of 0.23% and a maturity date of August 5, 2020, and 1 $4.0 million advance with a fixed rate of 0.00% and a maturity date of May 1, 2021.


The $65.0$50.0 million advance due in 2027 has a fixed rate of 1.73% and has a contractual maturity date in December 2027.

The $255.0 million in advances due in 20172028 consists of three1 $25.0 million advance with a fixed rate of 2.16%, 2 advances totaling $55.0 million with a fixed rates ranging from 3.09% to 3.46% callable quarterly until maturity.

The $65.0rate of 2.27% and with a FHLB single call option in March 2021, 1 advance of $25.0 million in advances due in 2018 consistswith a fixed rate 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 two2.40%, 2 advances totaling $50.0 million with fixed rates ranging from 0.67% to 0.73%of 2.34% and 2.48% and with a FHLB single call option in May 2021, 1 advance of $50.0 million with a fixed rate of 2.34% and with a FHLB quarterly call option beginning in June 20182020, and one1 advance forof $50.0 million with a fixed rate of 0.85%2.57% and with a FHLB quarterly call option beginning in September 2018.2020.


The $125.0$165.0 million in advances due in 20272029 consists of one1 $50.0 million advance with a fixed rate of 1.24%1.98% with a FHLB singlequarterly call option in May 2019, one2022, 1 $50.0 million advance with a fixed rate of 1.23%1.75% with a FHLB singlequarterly call option beginning in June 2019, and oneAugust 2021, 1 $25.0 million advance with a fixed rate of 1.23%1.52% with a FHLB singlequarterly call option beginning in August 2019.

The $15.0November 2020, and 1 advance of $40.0 million repurchase agreement haswith a fixed rate of 2.89% callable1.02% and with a FHLB quarterly until its maturity in 2017. The repurchase agreement is collateralized by securities available for sale with an estimated fair value of $25.6 million at September 30, 2017 and $93.2 million at December 31, 2016.call option currently available.


The Company selects loans that meet underwriting criteria established by the FHLBCFHLB as collateral for outstanding advances. The Company'sCompany’s borrowings from the FHLBCFHLB are limited to 79%80% of the carrying value of unencumbered one- to four-family mortgage loans, 75% of the carrying value of home equitymulti-family loans and 51%64% of the carrying value of multi-familyhome equity loans. In addition, these advances were collateralized by FHLBCFHLB stock of $18.526.7 million at SeptemberJune 30, 20172020 and $13.3$21.2 million at December 31, 2016.2019. In the event of prepayment, the Company is obligated to pay all remaining contractual interest on the advance.

- 2223 -



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'sCompany’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'sBank’s assets, liabilities, and certain off-balance-sheet items, as calculated under regulatory accounting practices. The Company's and Bank'sBank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.


As required by applicable legislation, the federal banking agencies were 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 Reserve Boardfederal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. Beginning in the Federal Deposit Insurance Corporation (FDIC) issuedsecond quarter 2020 and until the end of the year, a banking organization that has a leverage ratio of 8% or greater and meets certain other criteria may elect to use the Community Bank Leverage Ratio framework; and qualified community banks will have until January 1, 2022, before the Community Bank Leverage Ratio requirement is re-established at greater than 9%. Pursuant to Section 4012 of the CARES Act and related interim final rules, implementing the Basel IIICommunity Bank Leverage Ratio will be 8% beginning in the second quarter and for the remainder of calendar year 2020, 8.5% for calendar year 2021, and 9%  thereafter.  A financial institution can elect to be subject to this new definition, and opt-out of this new definition, at any time. As a qualified community bank, we elected to opt-out of this definition during the second quarter of 2020.

Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If only adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital frameworkdistributions are limited, as is asset growth and related Dodd-Frank Wall Street Reformexpansion, and Consumer Protection Act changes. capital restoration plans are required.

The rules reviseminimum capital ratios set forth in the Regulatory Capital Plans will be increased and other minimum capital requirements will be established if and adjustas necessary. In accordance with the Regulatory Capital Plans, the Bank will not pursue any acquisition or growth opportunity, declare any dividend or conduct any stock repurchase that would cause the Bank's total risk-based capital ratio and/or its Tier 1 leverage ratio to fall below the established minimum capital levels or the capital levels required for capital adequacy plus the captial conservation buffer. The minimum captial conservation buffer is 2.5%.

As of June 30, 2020, the Bank was well-capitalized, with all capital ratios exceeding the well-capitalized requirement. There are no conditions or events that management believes have changed the Bank’s prompt corrective action thresholds. capitalization category.

The final rules reviseBank is subject to regulatory restrictions on the regulatory capital elements, add a new common equity Tier I capital ratio, increase the minimum Tier 1 capital ratio requirementsamount of dividends it may declare and implement a new capital conservation buffer. The rules also permit certain banking organizationspay 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 without prior regulatory approval, and the Bank on January 1, 2015, subject to a transition period for certain parts of the rules.

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 minimumnotification requirements for capital adequacy purposes, subject to a three year phase-in period. The capital conservation buffer will be fully phased-in on 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 yearsdividends that do not require 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, the ratios for the Company and the Bank are sufficient to meet the fully phased-in conservation buffer.regulatory approval.

- 24 -


The actual and required capital amounts and ratios for the Bank as of SeptemberJune 30, 20172020 and December 31, 20162019 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 

 June 30, 2020 
  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. $402,690   23.64% $136,268   8.00% $178,851   10.50% $N/A   N/A 
WaterStone Bank  386,104   22.68%  136,165   8.00%  178,717   10.50%  170,207   10.00%
Tier 1 Capital (to risk-weighted assets)                         
Consolidated Waterstone Financial, Inc.  384,956   22.60%  102,201   6.00%  144,784   8.50%  N/A   N/A 
WaterStone Bank  368,370   21.64%  102,124   6.00%  144,676   8.50%  136,165   8.00%
Common Equity Tier 1 Capital (to risk-weighted assets)                     
Consolidated Waterstone Financial, Inc.  384,956   22.60%  76,651   4.50%  119,234   7.00%  N/A   N/A 
WaterStone Bank  368,370   21.64%  76,593   4.50%  119,145   7.00%  110,634   6.50%
Tier 1 Capital (to average assets)                         
Consolidated Waterstone Financial, Inc.  384,956   17.80%  86,495   4.00%  N/A   N/A   N/A   N/A 
WaterStone Bank  368,370   17.04%  86,495   4.00%  N/A   N/A   108,119   5.00%
State of Wisconsin (to total assets)                         
WaterStone Bank  368,370   16.62%  133,021   6.00%  N/A   N/A   N/A   N/A 
- 2325 -

  December 31, 2016 
  (Dollars In Thousands) 
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 
WaterStone Bank  389,602   29.50%  105,641   8.00%  113,895   8.625%  132,052   10.00%
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 
WaterStone Bank  373,573   28.29%  79,231   6.00%  87,484   6.625%  105,641   8.00%
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 
WaterStone Bank  373,573   28.29%  59,423   4.50%  67,676   5.125%  85,834   6.50%
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 
WaterStone Bank  373,573   21.17%  70,573   4.00%  N/A   N/A   88,216   5.00%
State of Wisconsin (to total assets)                                
WaterStone Bank  373,573   20.90%  107,247   6.00%  N/A   N/A   N/A   N/A 


 December 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. $404,748   26.17% $123,731   8.00% $162,398   10.50% $N/A   N/A 
WaterStone Bank  353,357   22.85%  123,716   8.00%  162,378   10.50%  154,646   10.00%
Tier 1 Capital (to risk-weighted assets)                         
Consolidated Waterstone Financial, Inc.  392,361   25.37%  92,799   6.00%  131,465   8.50%  N/A   N/A 
WaterStone Bank  340,970   22.05%  92,787   6.00%  131,449   8.50%  123,716   8.00%
Common Equity Tier 1 Capital (to risk-weighted assets)                 
Consolidated Waterstone Financial, Inc.  392,361   25.37%  69,599   4.50%  108,265   7.00%  N/A   N/A 
WaterStone Bank  340,970   22.05%  69,590   4.50%  108,252   7.00%  100,520   6.50%
Tier 1 Capital (to average assets)                         
Consolidated Waterstone Financial, Inc.  392,361   19.69%  79,691   4.00%  N/A   N/A   N/A   N/A 
WaterStone Bank  340,970   17.11%  79,691   4.00%  N/A   N/A   99,614   5.00%
State of Wisconsin (to total assets)                         
WaterStone Bank  340,970   17.11%  119,590   6.00%  N/A   N/A   N/A   N/A 


Note 9 – Income Taxes


Income tax expense increased from $12.2totaled $8.9 million for the six months ended June 30, 2020 compared to $5.1 million during the ninesix months ended SeptemberJune 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, 2017.2019. Income tax expense iswas recognized on the statement of income during the ninesix months ended SeptemberJune 30, 20172020 at an effective rate of 35.2%24.9% of pretax income compared to 39.0%24.0% during the ninesix months ended SeptemberJune 30, 2016.

2019. During ninethe six months ended SeptemberJune 30, 2017,2020, the Company recognized a benefit of approximately $827,000$47,000 related to stock awards exercised compared to a benefit of $100,000 recognized during the year 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 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 ninesix months ended SeptemberJune 30, 2016.

- 24 -
2019.
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 Company's two short-term repurchase agreements and all of the Company's long-term repurchase agreements are subject to master netting agreements, which set 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 and December 31, 2016.

  
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  $- 

- 25 -
Note 11–10– 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  June 30, 2020  December 31, 2019 
 (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  $16,775  $13,389 
Commitments to extend credit under home equity lines of credit (2)  14,724   14,367   13,570   13,776 
Unused portion of construction loans (3)  18,306   21,137   76,156   90,439 
Unused portion of business lines of credit  17,204   15,095   22,803   14,623 
Standby letters of credit  259   333   874   885 



(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.


- 26 -


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 no0 probable losses related to commitments to extend credit or the standby letters of credit as of SeptemberJune 30, 20172020 and December 31, 2016.2019.


Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The 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 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,  historical experience has resulted in insignificant losses and repurchase activity. The Company's reserve for losses related to these recourse provisions totaled $2.9 million and $921,000 as of June 30, 2020 and December 31, 2019, respectively.

In the normal course of business, the Company, or it'sits 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 iswas 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 awardFinal Award finding Waterstone Mortgage Corporation liable for unpaid minimum wages, overtime, unreimbursed business expenses, and liquidated damages under the FLSA. The arbitrator awarded damages underOn December 8, 2017, the FLSADistrict Court confirmed the award in large part, and entered a judgment against Waterstone in the amount of $7.3 milllion in damages to Claimants, $3.3 million and attorney'sin attorney fees and costs, and a $20,000 incentive fee to Plaintiff Herrington.

Subsequently, the Seventh Circuit Court of Appeals issued a ruling in October 2018 vacating the amountDistrict Court’s order enforcing the arbitration award, and remanded the case to the District Court.   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, and issued a revised judgement in Waterstone’s favor.

In May 2019, Herrington re-initiated her individual arbitration. The arbitrator issued a written award on February 18, 2020 and in which he found Waterstone liable for damages, based on an assumed workweek of $3.3 million. While a judgment confirming50 hours and $100 in unreimbursed expenses per workweek, awarding Herrington $14,952 in damages on her claims.  Herrington has since sought $4.9 million in fees and costs on her award, which includes fees dating back to 2011 and the arbitrator'svacated proceeding. On May 6, 2020, the arbitrator issued an award that would allow Herrington to recover $1.1 million in attorney fees and costs.

Herrington has moved to confirm the award and Waterstone has subsequently moved to vacate the award in court.  If the award is confirmed, Waterstone retains its appellate rights to challenge the award before the Seventh Circuit. Waterstone believes that it has meaningful avenues to vacate the award.  However, given the details of these recent developments, Waterstone does believe that it has met the criteria with respect to damages and fees has not yet been issued, if plaintiff prevails on her theories,recognizing a loss contingency under relevant accounting principles. As such, 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 continuerecorded a loss reserve with respect 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 infor approximately $1.1 million during the three months ended March 31, 2020.

Waterstone is actively pursuing claims against 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 accrualformer attorneys related to this matter.their prior representation of Waterstone in the Herrington v. Waterstone arbitration and related matters.


WernerVarious Claimants v. Waterstone Mortgage Corporation


Waterstone Mortgage Corporation is a defendant in a putative collection action lawsuit that was filed on August 4, 2017 inSubsequent to the aforementioned decision by the United States District Court for the Western District of Wisconsin, Werner et al. v. Waterstone Mortgage Corporation. Plaintiffs allegewhich ruled that Waterstone Mortgage Corporation violatedclaims brought forth under the Fair Labor Standards Act (FLSA) by failing to pay loan officers minimum and overtime wages. The case isHerrington class action lawsuit must be resolved through single-plaintiff arbitration, in May 2019, approximately 89 of the prior claimants in the very early stagesaforementioned class action lawsuit filed new demands in arbitration asserting similar claims (“the Arbitrations”). Currently, the total amount of litigationarbitrations is approximately 100, as some other individuals who filed in court have been compelled to arbitration. Waterstone has answered the arbitration demands and denies the Court has yet to decide if the case can proceed as collective action. The Company intendsallegations, and Waterstone will continue to vigorously defend its interests in these matters. The first hearings are scheduled for the latter half of 2020.  Waterstone does not believe a loss is probable at this mattertime, as that term is used in assessing loss contingencies. Accordingly, in accordance with the authoritative guidance in the evaluation of contingencies, the Company has not recorded an accrual related to these matters. However, an unfavorable outcome is reasonably possible with respect to these individual matters and pursue all possible defenses againstWaterstone would not characterize the claims.chance of any loss as “remote.” Given the early stage of the litigation,individual proceedings, Waterstone cannot yet offer an opinion on 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 theestimated range of any possible loss.loss, in the event of an unfavorable opinion in any of the proceedings.


- 2627 -



Note 1211 – Derivative Financial Instruments


Mortgage Banking Derviatives

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'sCompany’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'sCompany’s mortgage banking derivatives have not been designated as hedge relationships. These instruments are used to manage the Company'sCompany’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'sCompany’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 SeptemberJune 30, 2017,2020, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of approximately $349.3$766.8 million and interest rate lock commitments with an aggregate notional amount of approximately $201.8$523.1 million.  The fair value of the forward commitments to sell mortgage loans at SeptemberJune 30, 20172020 included a loss of $2.1 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 June 30, 2020 included a gain of $604,000$10.7 million that is reported as a component of other assets on the Company's consolidated statements of financial condition. At December 31, 2019, the Company had forward commitments to sell mortgage loans with an aggregate notional amount of $345.0 million and interest rate lock commitments with an aggregate notional amount of approximately $174.3 million.  The fair value of the forward commitments to sell mortgage loans at December 31, 2019 included a gain of $3,000 that is reported as a component of other assets on the Company's consolidated statement of financial condition.  The fair value of the interest rate locks at September 30, 2017December 31, 2019 included a gain of $2.0$1.8 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.


Residential mortgage loans sold to others are predominantly conventional residential first lien mortgages. The Company's agreements to sell residential mortgage loanssignificant unobservable input used in the normal coursefair value measurement of business usually require certain representations and warrantiesthe 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 underlying loans sold relatedloan 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.

Interest Rate Swaps

The Company may offer derivative contracts to credit information, loan documentationits customers in connection with their risk management needs. The Company manages the risk associated with these contracts by entering into an equal and collateral, which if subsequently are untrue or breached, could requireoffsetting derivative with a third-party dealer through back-to-back swaps. These derivatives generally work together as an economic interest rate hedge, but the Company does not designate them for hedge accounting treatment.  Consequently, changes in fair value of the corresponding derivative financial asset or liability are recorded as either a charge or credit to repurchase certain loans affected.current earnings during the period in which the changes occurred. The fair value of the swaps is recorded as both an asset and a liability, in other assets and other liabilities on the Company's consolidated statement of financial condition, respectively, in equal amounts for these transactions.

The aggregate amortizing notional value of back-to-back swaps with various commercial borrowers was $100.5 million at June 30, 2020 and $30.9 million at December 31, 2019. The Company has only been requiredreceives fixed rates and pays floating rates based upon LIBOR on the swaps with commercial borrowers. These swaps mature in December 2029 to make insignificant repurchasesJune 2037. Commercial borrower swaps are completed independently with each borrower and are not subject to master netting arrangements. These commercial borrower swaps were reported as a resultcomponent of breachesother assets on the Company's consolidated statement of financial condition of $6.3 million as of June 30, 2020 and $680,000 as of December 31, 2019. As of June 30, 2020 and December 31, 2019, 0 back-to-back swaps were in default.

The aggregate amortizing notional value of back-to-back swaps with dealer counterparties was $100.5 million as of June 30, 2020 and $30.9 million as of December 31, 2019. The Company pays fixed rates and receives floating rates based upon LIBOR on the swaps with dealer counterparties. These swaps maturity dates range from December 2029 to June 2037. Dealer counterparty swaps are subject to master netting agreements among the contracts within our Bank and are reported as a component of other liabilities on the Company's consolidated statement of financial condition of $6.3 million as of June 30, 2020 and $680,000 as of December 31, 2019. No right of offset existed with dealer counterparty swaps as of June 30, 2020 and December 31, 2019.

All changes in the fair value of these representationsinstruments are recorded in other non-interest income. The Company pledged $6.9 million in mortgage backed securities to secure its obligation under these contracts at June 30, 2020 and warranties. The Company's agreements to sell residential mortgage loans also contain limited recourse provisions. The recourse provisions are limited$710,000 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.cash at December 31, 2019.

- 28 -



Note 1312 – 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.


There were 130,400 and 105,000 antidilutive shares of common stock for the three months endedJune 30, 2020 and 2019, respectively.There were 123,000 and 105,000 antidilutive shares of common stock for the six months ended June 30, 2020 and 2019, respectively.

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 June 30,  Six months ended June 30, 
 2017  2016  2017  2016  2020  2019  2020  2019 
 (In Thousands, except per share amounts)  (In Thousands, except per share amounts) 
                        
Net income $7,389  $7,505  $22,849  $19,133  $20,948  $9,643  $27,017  $16,185 
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   24,464   26,242   24,934   26,370 
Effect of dilutive potential common shares  421   386   478   307   49   170   137   202 
Diluted weighted average shares outstanding  27,953   27,429   27,927   27,283   24,513   26,412   25,071   26,572 
                                
Basic earnings per share $0.27  $0.28  $0.83  $0.71  $0.86  $0.37  $1.08  $0.61 
Diluted earnings per share $0.26  $0.27  $0.82  $0.70  $0.85  $0.37  $1.08  $0.61 
- 27 -


Note 1413 – 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'sCompany’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.

- 29 -


The following table presents information about our assets recorded in our consolidated statementstatements of financial condition at their fair value on a recurring basis as of SeptemberJune 30, 20172020 and December 31, 2016,2019, 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  June 30, 2020  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
                        
Available for sale securities            
Assets            
Available-for-sale securities            
Mortgage-backed securities $62,218  $-  $62,218  $-  $29,712  $-  $29,712  $- 
Collateralized mortgage obligations                                
Government sponsored enterprise issued  54,660   -   54,660   -   68,987   -   68,987   - 
Government sponsored enterprise bonds  2,499   -   2,499   - 
Private-label issued  3,804   -   3,804   - 
Municipal securities  65,662   -   65,662   -   50,650   -   50,650   - 
Other debt securities  14,574   -   14,574   -   10,959   -   10,959   - 
Certificates of deposit  1,227   -   1,227   - 
Loans held for sale  175,137   -   175,137   -   383,389   -   383,389   - 
Mortgage banking derivative assets  2,572   -   -   2,572   10,741   -   -   10,741 
Interest rate swap assets  6,289   -   6,289   - 
Liabilities                
Mortgage banking derivative liabilities  2,112   -   -   2,112 
Interest rate swap liabilities  6,289   -   6,289   - 


    Fair Value Measurements Using     Fair Value Measurements Using 
 December 31, 2016  Level 1  Level 2  Level 3  December 31, 2019  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
                        
Available for sale securities            
Assets            
Available-for-sale securities            
Mortgage-backed securities $73,413  $-  $73,413  $-  $34,150  $-  $34,150  $- 
Collateralized mortgage obligations                                
Government sponsored enterprise issued  62,002   -   62,002   -   81,754   -   81,754   - 
Government sponsored enterprise bonds  2,503   -   2,503   - 
Municipal securities  70,696   -   70,696   -   53,692   -   53,692   - 
Other debt securities  16,950   2,541   14,409   -   8,880   -   8,880   - 
Certificates of deposit  1,231   -   1,231   - 
Loans held for sale  225,248   -   225,248   -   220,123   -   220,123   - 
Mortgage banking derivative assets  3,403   -   -   3,403   1,835   -   -   1,835 
Interest rate swap assets  680   -   680   - 
Liabilities                
Mortgage banking derivative liabilities  69   -   -   69   -   -   -   - 
Interest rate swap liabilities  680   -   680   - 

- 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 saleAvailable-for-sale securities – The Company'sCompany’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.

- 30 -


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.


Interest rate swap assets/liabilities - The Company offers loan level swaps to its customers and offsets its exposure from such contracts by entering into mirror image swaps with a financial institution / swap counterparty. The fair values of derivatives are based on valuation models using observable market data as of the measurement date.  Our derivatives are traded in an over-the-counter market where quoted market prices are not always available.  Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs.  The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position.  The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. Interest rate swap assets and liabilities 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 operations, within other income and other expense.

The table below presents reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 20172020 and 2016.2019.


  
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 
 Six months ended June 30, 
  2020  2019 
  (In Thousands) 
       
Mortgage derivative, net balance at the beginning of the period $1,835  $898 
Mortgage derivative gain, net  6,794   1,384 
Mortgage derivative, net balance at the end of the period $8,629  $2,282 


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 statementstatements of financial condition at their fair value on a non-recurring basis as of SeptemberJune 30, 20172020 and December 31, 2016,2019, 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  June 30, 2020  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
Impaired loans, net (1) $1,452  $-  $-  $1,452  $185  $-  $-  $185 
Real estate owned  4,568   -   -   4,568   702   -   -   702 
Impaired mortgage servicing rights  224   -   -   224 


    Fair Value Measurements Using     Fair Value Measurements Using 
 December 31, 2016  Level 1  Level 2  Level 3  December 31, 2019  Level 1  Level 2  Level 3 
 (In Thousands)  (In Thousands) 
Impaired loans, net (1) $2,814  $-  $-  $2,814  $185  $-  $-  $185 
Real estate owned  6,118   -   -   6,118   748   -   -   748 
Impaired mortgage servicing rights  206   -   -   206 


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

- 2931 -



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 value 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 SeptemberJune 30, 2017,2020, loans determined to be impaired with an outstanding balance of $1.8 million$212,000 were carried net of specific reserves of $313,000$27,000 for a fair value of $1.5 million.$185,000. At December 31, 2016,2019, loans determined to be impaired with an outstanding balance of $3.5 million$224,000 were carried net of specific reserves of $662,000$39,000 for a fair value of $2.8 million.$185,000. 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 inThere were 0 writedowns during the value ofsix months ended June 30, 2020 and 2019, respectively. At June 30, 2020 and December 31, 2019, real estate owned totaled $504,000$702,000 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,$748,000, 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 SeptemberJune 30, 20172020 and December 31, 20162019, there were no$98,000 and $77,000, respectively, of impairment identified foron mortgage servicing rights.


For Level 3 assets and liabilities measured at fair value on a recurring or non-recurring basis as of SeptemberJune 30, 2017,2020, the significant unobservable inputs used in the fair value measurements were as follows:


          
Significant Unobservable
Input Value
     
Significant Unobservable
Input Value
 
 
Fair Value at
September 30, 2017
 
Valuation
Technique
Significant
Unobservable
Inputs
 
Minimum
Value
  
Maximum
Value
  
Fair Value at
June 30, 2020
 
Valuation
Technique
Significant
Unobservable
Inputs
 
Minimum
Value
  
Maximum
Value
  Weighted Average 
                       
Mortgage banking derivatives $2,572 Pricing modelsPull through rate  65.3%  99.8% $8,629 Pricing modelsPull through rate  28.0%  95.0%  84.0%
Impaired loans  1,452 Market approachDiscount rates applied to appraisals  15.0%  35.0%  185 Market approachDiscount rates applied to appraisals  15.0%  15.0%  15.0%
Real estate owned  4,568 Market approachDiscount rates applied to appraisals  15.0%  85.7%  702 Market approachDiscount rates applied to appraisals  35.0%  59.0%  46.0%
Mortgage servicing rights  224 Pricing modelsPrepayment rate  7.0%  36.0%  11.3%
        Discount rate  11.0%  13.5%  12.1%
        Cost to service $81.49  $426.61  $87.95 


The significant unobservable inputA description of the valuation methodologies used in thefor instruments measured at 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.

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 marketabilitygeneral classification of such instruments pursuant to the property. The discount factorvaluation 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'sCompany’s financial instruments consist of the following:


 September 30, 2017  December 31, 2016  June 30, 2020  December 31, 2019 
 
Carrying
amount
  Fair Value  
Carrying
amount
  Fair Value  
Carrying
amount
  Fair Value  
Carrying
amount
  Fair Value 
 Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3  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  $-  $76,919  $76,919  $76,919  $-  $-  $74,300  $74,300  $65,800  $8,500  $- 
Securities available-for-sale  200,840   200,840   -   200,840   -   226,795   226,795   2,541   224,254   -   164,112   164,112   -   164,112   -   178,476   178,476   -   178,476   - 
Loans held for sale  175,137   175,137   -   175,137   -   225,248   225,248   -   225,248   -   383,389   383,389   -   383,389   -   220,123   220,123   -   220,123   - 
Loans receivable  1,261,160   1,284,340   -   -   1,284,340   1,177,884   1,212,967   -   -   1,212,967   1,433,803   1,509,054   -   -   1,509,054   1,388,031   1,426,224   -   -   1,426,224 
FHLB stock  18,450   18,450   -   18,450   -   13,275   13,275   -   13,275   -   26,720   26,720   -   26,720   -   21,150   21,150   -   21,150   - 
Accrued interest receivable  4,575   4,575   4,575   -   -   4,281   4,281   4,281   -   -   5,061   5,061   5,061   -   -   5,344   5,344   5,344   -   - 
Mortgage servicing rights  718   867   -   -   867   2,260   3,232   -   -   3,232   4,966   6,388   -   -   6,388   282   282   -   -   282 
Mortgage banking derivative assets  2,572   2,572   -   -   2,572   3,403   3,403   -   -   3,403   10,741   10,741   -   -   10,741   1,835   1,835   -   -   1,835 
Interest rate swap asset  6,289   6,289   -   6,289   -   680   680   -   680   - 
                                                                                
Financial Liabilities                                                                                
Deposits  956,773   956,710   271,740   684,970   -   949,411   949,825   282,827   666,998   -   1,157,666   1,157,834   418,249   739,585   -   1,067,776   1,070,083   328,005   742,078   - 
Advance payments by borrowers for taxes  25,107   25,107   25,107   -   -   4,716   4,716   4,716   -   -   20,828   20,828   20,828   -   -   4,212   4,212   4,212   -   - 
Borrowings  435,503   435,398   -   435,398   -   387,155   390,932   -   390,932   -   599,102   619,497   -   619,497   -   483,562   483,846   -   483,846   - 
Accrued interest payable  918   918   918   -   -   916   916   916   -   -   1,404   1,404   1,404   -   -   1,559   1,559   1,559   -   - 
Mortgage banking derivative liabilities  -   -   -   -   -   69   69   -   -   69   2,112   2,112   -   -   2,112   -   -   -   -   - 
Interest rate swap liability  6,289   6,289   -   6,289   -   680   680   -   680   - 


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.

- 33 -


Loans Held for Sale


Fair value is estimated using the prices of the Company'sCompany’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 impairedThe 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 adjustedestimated for portfolios of loans with similar characteristics. Loans are segregated by type such as one- to consider disposition costsfour-family, multi-family, home equity, construction and also to take into consideration the ageland, 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 similarinterest 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.


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'sCompany’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'scounterparty’s credit standing, and discounted cash flow analyses. The fair value of the Company'sCompany’s commitments to extend credit was not material at SeptemberJune 30, 20172020 and December 31, 2016.2019.


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 Consolidated StatementsCompany’s consolidated statements of Condition,financial 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.


Interest Rate Swap Assets and Liabilities

The carrying value and fair value of existing derivative financial instruments are based upon independent valuation models, which use widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities.
- 3234 -



Note 1514 – 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 two2 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.


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 2421 states with the ability to lend in 48 states.


  As of or for the three months ended September 30, 2017 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income (loss) $13,120  $(102) $15  $13,033 
Provision for loan losses  -   20   -   20 
Net interest income (loss) after provision for loan losses  13,120   (122)  15   13,013 
                 
Noninterest income  1,161   32,318   (425)  33,054 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  4,483   21,792   (122)  26,153 
Occupancy, office furniture and equipment  733   1,800   -   2,533 
FDIC insurance premiums  129   -   -   129 
Real estate owned  (20)  -   -   (20)
Other  1,499   4,290   (268)  5,521 
Total noninterest expenses  6,824   27,882   (390)  34,316 
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 
                 
Total assets $1,859,494  $203,826  $(209,192) $1,854,128 


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  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 

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  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 


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Presented below is the segment information:

 As of or for the three months ended June 30, 2020 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income (loss) $13,701  $(511) $59  $13,249 
Provision for loan losses  4,325   175   -   4,500 
Net interest income (loss) after provision for loan losses  9,376   (686)  59   8,749 
                 
Noninterest income  2,936   64,218   (250)  66,904 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  4,906   32,139   (156)  36,889 
Occupancy, office furniture and equipment  866   1,668   -   2,534 
Advertising  297   567   -   864 
Data processing  678   413   4   1,095 
Communications  91   226   -   317 
Professional fees  226   850   1   1,077 
Real estate owned  33   -   -   33 
Loan processing expense  -   1,208   -   1,208 
Other  532   3,239   (99)  3,672 
Total noninterest expenses  7,629   40,310   (250)  47,689 
Income before income taxes  4,683   23,222   59   27,964 
Income tax expense  574   6,440   2   7,016 
Net income $4,109  $16,782  $57  $20,948 
                 
Total assets $2,141,415  $439,444  $(363,286) $2,217,573 

 As of or for the three months ended June 30, 2019 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income (loss) $13,530  $(529) $(20) $12,981 
Provision for loan losses  -   30   -   30 
Net interest income (loss) after provision for loan losses  13,530   (559)  (20)  12,951 
                 
Noninterest income  1,079   34,364   (253)  35,190 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  4,671   22,579   (176)  27,074 
Occupancy, office furniture and equipment  944   1,736   -   2,680 
Advertising  220   743   -   963 
Data processing  493   372   4   869 
Communications  93   260   -   353 
Professional fees  160   620   9   789 
Real estate owned  19   -   -   19 
Loan processing expense  -   879   -   879 
Other  635   1,186   (92)  1,729 
Total noninterest expenses  7,235   28,375   (255)  35,355 
Income (loss) before income taxes  7,374   5,430   (18)  12,786 
Income tax expense  1,594   1,545   4   3,143 
Net income (loss) $5,780  $3,885  $(22) $9,643 
                 
Total assets $1,958,339  $290,977  $(234,178) $2,015,138 

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 As of or for the six months ended June 30, 2020 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income (loss) $26,609  $(890) $56  $25,775 
Provision for loan losses  5,075   210   -   5,285 
Net interest income (loss) after provision for loan losses  21,534   (1,100)  56   20,490 
                 
Noninterest income  3,964   95,016   (612)  98,368 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  10,074   51,526   (310)  61,290 
Occupancy, office furniture and equipment  1,880   3,395   -   5,275 
Advertising  545   1,219   -   1,764 
Data processing  1,283   808   10   2,101 
Communications  188   467   -   655 
Professional fees  424   2,470   15   2,909 
Real estate owned  44   -   -   44 
Loan processing expense  -   2,284   -   2,284 
Other  1,112   5,791   (328)  6,575 
Total noninterest expenses  15,550   67,960   (613)  82,897 
Income before income taxes  9,948   25,956   57   35,961 
Income tax expense  1,728   7,208   8   8,944 
Net income $8,220  $18,748  $49  $27,017 

 As of or for the six months ended June 30, 2019 
  
Community
Banking
  
Mortgage
Banking
  
Holding Company and
Other
  Consolidated 
  (In Thousands) 
             
Net interest income (loss) $26,662  $(737) $(8) $25,917 
Provision (credit) for loan losses  (700)  50   -   (650)
Net interest income (loss) after provision for loan losses  27,362   (787)  (8)  26,567 
                 
Noninterest income  1,960   57,935   (448)  59,447 
                 
Noninterest expenses:                
Compensation, payroll taxes, and other employee benefits  9,427   38,639   (353)  47,713 
Occupancy, office furniture and equipment  1,916   3,540   -   5,456 
Advertising  401   1,520   -   1,921 
Data processing  950   680   8   1,638 
Communications  175   506   -   681 
Professional fees  428   1,046   10   1,484 
Real estate owned  51   -   -   51 
Loan processing expense  -   1,684   -   1,684 
Other  1,124   3,098   (146)  4,076 
Total noninterest expenses  14,472   50,713   (481)  64,704 
Income before income taxes  14,850   6,435   25   21,310 
Income tax expense  3,281   1,831   13   5,125 
Net income $11,569  $4,604  $12  $16,185 

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Note 15 – Leases

The Company has entered into operating lease agreements for 2 of its community banking branch locations, all of its mortgage banking office locations, 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 financial 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 or six months ended June 30, 2020 and June 30, 2019.

At June 30, 2020, the Company had lease liabilities totaling $7.7 million and right-of-use assets totaling $7.2 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 financial condition.

The cost components of our operating leases were as follows for the three and six months ended June 30, 2020 and June 30, 2019:

 Three months ended June 30, 2020  Three months ended June 30, 2019  Six months ended June 30, 2020  Six months ended June 30, 2019 
  (In Thousands) 
Operating lease cost $770  $804  $1,594  $1,562 
Variable cost  131   156   240   416 
Short-term lease cost  121   294   314   527 
Total $1,022  $1,254  $2,148  $2,505 

At June 30, 2020, the Company had leases that had not yet commenced, but will create approximately $718,000 of additional lease liabilities and right-of-use assets for the Company in the third quarter of 2020.

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

 Six months ended June 30, 2020 
  (Dollars in Thousands) 
Cash paid for amounts included in the measurement of lease liabilities   
Operating cash flows from operating leases $1,807 
Initial recognition of right of use asset  437 
Initial recognition of lease liabilities  437 
Weighted average remaining lease term - operating leases, in years  3.1 
Weighted average discount rate - operating leases  5.9%

As of June 30, 2020, lease liability information for the Company is summarized in the following table.

Maturity analysis Operating leases 
  (In Thousands) 
One year or less $3,042 
More than one year through two years  2,134 
More than two years through three years  1,589 
More than three years through four years  962 
More than four years through five years  157 
More than five years  940 
Total lease payments  8,824 
Present value discount  (1,157)
Lease liability $7,667 

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Item 2.  Management'sManagement’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 worsedifferent than expected;
●the effect of any pandemic; including COVID-19;
● 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'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016)2019).




The risks included here are not exhaustive. Other sections of this report may include additional factors which could adversely affect our business and financial performance. New risks emerge from time to time and it is not possible for management to predict all such risks, nor can it assess the impact of all such risks on our business or the extent to which any risk, or combination of risks, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.


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Overview


The following discussion and analysis is presented to assist the reader in understanding and evaluating of the Company'sCompany’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 ninesix months ended SeptemberJune 30, 20172020 and 20162019 and the financial condition as of SeptemberJune 30, 20172020 compared to the financial condition as of December 31, 2016.
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2019.
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 2421 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 ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, 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.

Significant Items

Earnings comparisons for the three and six months ended June 30, 2020 and 2019 were impacted by the Significant Items summarized below.

COVID-19 and the CARES Act

The COVID-19 pandemic has caused economic and social disruption on an unprecedented scale. While some industries have been impacted more severely than others, all businesses have been impacted to some degree. This disruption has resulted in the shuttering of businesses across the country, significant job loss, and aggressive measures by the federal government.

Congress, the President, and the Federal Reserve have taken several actions designed to cushion the economic fallout. Most notably, the Coronavirus Aid, Relief and Economic Security (“CARES”) Act was signed into law at the end of March 2020 as a $2 trillion legislative package. The goal of the CARES Act is to prevent a severe economic downturn through various measures, including direct financial aid to American families and economic stimulus to significantly impacted industry sectors. The package also includes extensive emergency funding for hospitals and providers. In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts are expected to have a material impact on our operations. While it is not possible to know the full universe or extent of these impacts as of the date this filing, we are disclosing potentially material items of which we are aware.

The CARES Act allows for a temporary delay in the adoption of accounting guidance under Accounting Standards Codification Topic 326, “Financial Instruments – Credit Losses (“CECL”) until the earlier of December 31, 2020 or after the end of the COVID-19 national emergency.  During the quarter ended March 31, 2020, pursuant to the recently-enacted CARES Act and guidance from the Securities and Exchange Commission (“SEC”) and Financial Accounting Standards Board (“FASB”), we elected to delay adoption of CECL.  Our June 30, 2020 financial statements include an allowance for loan losses that was prepared under the existing incurred loss methodology.
Under the CARES Act, loans less than 30 days past due as of December 31, 2019 and COVID-19 modifications are considered current. A financial institution suspended the requirements under accounting principles generally accepted in the United States (US GAAP) for loan modifications related to COVID-19 that would otherwise be categorized as a troubled debt restructuring (“TDR”).  This includes a suspension of the requirement to determine impairment of these modifications for accounting purposes.  In keeping with regulatory guidance to work with borrowers during this unprecedented situation, the Company has executed a payment deferral program for our lending clients that are adversely affected by the pandemic.  As of June 30, 2020, the Company had modified 191 loans totaling $113.9 million consisting of payment of interest (deferral of principal) for a period ranging from 90 to 180 days.  In addition, as of that same date the Company had modified 16 loans totaling $7.9 million consisting of the deferral of principal and interest for a period of three to eight months.  In accordance with interagency guidance issued in April 2020, these short-term deferrals are not considered troubled debt restructurings.
The CARES Act authorized the Small Business Administration (“SBA”) to temporarily guarantee loans under a new loan program call the Paycheck Protection Program (“PPP”).  As a qualified SBA lender, we were automatically authorized to originate PPP loans.  The Company is actively participating in assisting our customers with applications for resources through the program.  PPP loans will have: (a) an interest rate of 1.0%, (b) a two-year loan term to maturity; and (c) principal and interest payments deferred for six months from the date of disbursement.  The SBA will guarantee 100% of the PPP loans made to eligible borrowers.  The entire principal amount of the borrower’s PPP loan, including any accrued interest, is eligible to be reduced by the loan forgiveness amount under the PPP.  As of June 30, 2020, we have funded 264 loans totaling $29.8 million.
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Our fee income could be reduced due to COVID-19.  In keeping with guidance from regulators, we are working with COVID-19 affected customers to waive fees from a variety of sources, such as, but not limited to, insufficient funds and overdraft fees, ATM fees, account maintenance fees, etc.  These reductions in fees are thought, at this time, to be temporary in conjunction with the length of the expected COVID-19 related economic crisis.  At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact is likely to impact our fee income in future periods.
Our interest income could be reduced due to COVID-19.  In keeping with guidance from regulators, we are actively working with COVID-19 affected borrowers to defer their payments, interest, and fees.  While interest and fees will still accrue to income, through normal GAAP accounting, should eventual credit losses on these deferred payments emerge, interest income and fees accrued would need to be reversed.  In such a scenario, interest income in future periods could be negatively impacted.  At this time, we are unable to project the materiality of such an impact, but recognize the breadth of the economic impact may affect our borrowers’ ability to repay in future periods.

Capital and liquidity

As of June 30, 2020, all of our capital ratios, and our subsidiary bank’s capital ratios, were in excess of all regulatory requirements.  While we believe that we have sufficient capital to withstand an extended economic recession brought about by COVID-19, our reported and regulatory capital ratios could be adversely impacted by further credit losses.  
We maintain access to multiple sources of liquidity.  Wholesale funding markets have remained open to us, but rates for short term funding have recently been volatile.  If funding costs are elevated for an extended period of time, it could have an adverse effect on our net interest margin.  If an extended recession caused large numbers of our deposit customers to withdraw their funds, we might become more reliant on volatile or more expensive sources of funding.

There were no Significant Items during the three and six months ended June 30, 2019.

Comparison of Community Banking Segment Results of Operations for the Three Months Ended SeptemberJune 30, 20172020 and 20162019


Net income for the three months ended September 30, 2017 totaled $4.9 million compared to net income of $4.1 million for the three months ended SeptemberJune 30, 2016. Net interest income increased $1.9 million2020 compared to $13.1$5.8 million for the three months ended SeptemberJune 30, 2017 compared2019. Net interest income increased $171,000 to $11.2$13.7 million for the three months ended SeptemberJune 30, 2016.  Net interest income increased due primarily2020 compared to an increase of $1.2$13.5 million in interest income as the average loan balance increased along with a decrease of $712,000 in interest expense on borrowings as higher rate FHLB borrowings matured in 2016 and 2017 were replaced with lower rate FHLB borrowings.

Total noninterest income decreased $497,000 due primarily to a decrease in loan fees.  The loans fees for the three months ended SeptemberJune 30, 2016 included2019.  Interest income on loans increased on volume offset by a decrease in interest earned in the other interest-earning asset categories. Interest expense decreased as funding rates decreased.

The Company delayed adoption of ASC Topic 326 as permited under the CARES Act. The Company calculated the current quarter allowance using the incurred loss model. There was a provision for loan losses of $4.3 million for the three months ended June 30, 2020 compared to no provision for the three months ended June 30, 2019. During the three months ended June 30, 2020, we made adjustments to our qualitative factors, primarily to account for the significant increase in the unemployment rate.

Total noninterest income increased $1.9 million due primarily to increases in loan fees. The loan fees increased primarily due to loan prepayment penalty.  The increase in cashfees and fees earned on loan swaps. Cash surrender value of life insurance decreasedincreased as the dividend rate on one of the policies decreased in 2017 comparedbalance increased year over year. Other income slightly increased primarily due to 2016.wealth management and rental income.


Compensation, payroll taxes, and other employee benefits expense increased $91,000$235,000 to $4.9 million due primarily to an increase in ESOPsalaries expense partiallyand variable compensation offset by lower health insurance expense. The Bank also reported an increase in other noninterestOccupancy, office furniture and equipment decreased due primarily to decreased computer expense. Data processing and advertising expense increased primarily due to the rollout of a new ditigal banking platform during the three months ended June 30, 2020. Professional fees increased for the three months ended SeptemberJune 30, 2017 compared2020 due to additional audit fees in 2020. Other noninterest expense decreased as a result of regulator fees and a credit for FDIC insurance received during the three months ended SeptemberJune 30, 2016 due to purchasing loans from the mortgage banking segment.  Occupancy, office furniture, and equipment expense, FDIC premiums, and real estate owned expense decreased for the three months ended September 30, 2017 compared to the three months ended September 30, 2016.2020.


Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended SeptemberJune 30, 20172020 and 20162019


Net income totaled $2.5$16.8 million for the three months ended SeptemberJune 30, 20172020 compared to $4.0$3.9 million for the three months ended SeptemberJune 30, 2016.  Mortgage2019. We originated $1.14 billion in mortgage loans held for sale (including sales to the community banking segment revenue decreased $3.8segment) during the three months ended June 30, 2020, which represents an increase of $349.4 million, or 10.5%44.1%, from the $793.3 million originated during the three months ended June 30, 2019. The increase in loan production volume was driven by a $410.3 million, or 417.0%, increase in refinance products as mortgage rates decreased. Mortgage purchase products decreased $60.7 million, or 8.7% due to inventory shortages in a number of our markets. Total mortgage banking noninterest income increased $29.9 million, or 86.9%, to $32.3$64.2 million during the three months ended June 30, 2020 compared to $34.4 million during the three months ended June 30, 2019.  The increase in mortgage banking noninterest income was related to a 44.1% increase in volume and a 27.0% increase in gross margin on loans originated and sold for the three months ended SeptemberJune 30, 20172020 compared to $36.1 million forJune 30, 2019.  Gross margin on loans originated and 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 forbanking income (excluding the purpose of residential purchases increased 3.1% compared to the comparative quarterchange in the prior year. In addition to the decrease in margin, the value of the interest rate lock pipeline decreased $643,000 comparedfair value) divided by total loan originations. The gross margin on loans originated and sold expansion reflects increased industry demand due to the prior year period.current low rate environment.  We sell loans on both a servicing-released and a servicing-retained basis.  Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.

- 41 -
Our

Additionally, 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%55.5% of total originations during the three months ended SeptemberJune 30, 2017,2020, compared to 81.7%87.6% of total originations during the three months ended SeptemberJune 30, 2016.2019, respectively, as refinance demand accelerated from the low rate environment.  The mix of loan type trended towards lessmore conventional loans and moreless governmental loans; with conventional loans and governmental loans comprising 64.5%75.8% and 35.5%24.2% of all loan originations, respectively, during the three months ended SeptemberJune 30, 2017,2020, compared 67.0%to 70.2% and 33.0%29.8% of all loan originations, respectively, during the three months ended SeptemberJune 30, 2016.2019.


Total compensation, payroll taxes and other employee benefits decreased $1.5increased $9.6 million, or 6.5%42.3%, to $21.8$32.1 million for the three months ended SeptemberJune 30, 20172020 compared to $23.3$22.6 million for the three months ended SeptemberJune 30, 2016.2019.  The decreaseincrease in compensation expense was primarily a result of the decreaseincrease in mortgage banking income, given our commission-based loan officer compensation model.commission expense as fundings increased, bonus and incentives due to record originations. In addition, branch manager pay increased as branches were more profitable. Professional fees increased due to ongoing litigation costs. Occupancy, office furniture, and equipment and advertising expense decreased due to lower rent and marketing expenses driven by a reduction in branches compared to the prior year. Data processing and loan processing expenses increased $221,000due primarily to $1.8 million as the number of branches increased.new contracts and increased application and funding volumes. Other noninterest expense decreased $163,000, or 3.7%,increased primarily due to $4.3 milliona increased provision for loan sale losses as fundings decreased, resulting in less volume-based expenses offset by increased branch loss reserves, higher advertising expenses,there was additional uncertainity regarding selling loans to third party investors from COVID-19 pandemic challenges and higher legal expenses.
servicing fees as loans with mortgage servicing rights retained increased.

Consolidated Waterstone Financial, Inc. Results of Operations


 Three months ended September 30,  Three months ended June 30, 
 2017  2016  2020  2019 
 (Dollars in Thousands, except per share amounts)  (Dollars in Thousands, except per share amounts) 
            
Net income $7,389   7,505  $20,948   9,643 
Earnings per share - basic  0.27   0.28   0.86   0.37 
Earnings per share - diluted  0.26   0.27   0.85   0.37 
Annualized return on average assets  1.56%  1.66%  3.87%  1.95%
Annualized return on average equity  7.12%  7.36%  22.39%  9.96%
                



- 3742 -

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 June 30, 
 2017  2016  2020  2019 
 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% $$1,759,970  $$18,493   4.23% $$1,552,199  $$18,026   4.66%
Mortgage related securities (2)  119,902   647   2.14%  150,790   743   1.96%  105,727   670   2.55%  114,537   764   2.68%
Debt securities, federal funds sold and short-term investments (2)(3)  215,597   1,118   2.06%  186,201   1,034   2.21%  164,306   768   1.88%  180,111   1,198   2.67%
Total interest-earning assets  1,754,976   17,620   3.98%  1,670,657   16,531   3.94%  2,030,003   19,931   3.95%  1,846,847   19,988   4.34%
                                                
Noninterest-earning assets  121,982           123,318           147,342           136,263         
Total assets $1,876,958          $1,793,975          $$2,177,345          $$1,983,110         
                                                
Liabilities and equity                                                
Interest-bearing liabilities:                                                
Demand accounts $35,211   7   0.08% $35,066   5   0.06% $$45,289   9   0.08% $$35,744   8   0.09%
Money market and savings accounts  175,666   104   0.23%  176,582   97   0.22%
Money market, savings, and escrow accounts  252,500   464   0.74%  193,542   318   0.66%
Time deposits  676,881   1,870   1.10%  685,969   1,821   1.06%  730,573   3,474   1.91%  736,798   4,018   2.19%
Total interest-bearing deposits  887,758   1,981   0.89%  897,617   1,923   0.85%  1,028,362   3,947   1.54%  966,084   4,344   1.80%
Borrowings  461,549   2,439   2.10%  374,730   3,082   3.27%  609,863   2,665   1.76%  504,940   2,588   2.06%
Total interest-bearing liabilities  1,349,307   4,420   1.30%  1,272,347   5,005   1.56%  1,638,225   6,612   1.62%  1,471,024   6,932   1.89%
                                                
Noninterest-bearing liabilities                                                
Noninterest-bearing deposits  91,710           80,407           115,605           91,545         
Other noninterest-bearing liabilities  24,265           35,331           47,140           32,143         
Total noninterest-bearing liabilities  115,975           115,738           162,745           123,688         
Total liabilities  1,465,282           1,388,085           1,800,970           1,594,712         
Equity  411,676           405,890           376,375           388,398         
Total liabilities and equity $1,876,958          $1,793,975          $$2,177,345          $$1,983,110         
                                                
Net interest income / Net interest rate spread (4)      13,200   2.68%      11,526   2.38%      13,319   2.33%      13,056   2.45%
Less: taxable equivalent adjustment      167   0.03%      201   0.05%      70   0.02%      75   0.02%
Net interest income / Net interest rate spread, as reported     $13,033   2.65%     $11,325   2.33%     $$13,249   2.31%     $$12,981   2.43%
Net interest-earning assets (5) $405,669          $398,310          $$391,778          $$375,823         
Net interest margin (6)
          2.95%          2.70%          
2.62
%
          2.82%
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%          2.64%          2.84%
Average interest-earning assets to average interest-bearing liabilities          130.06%          131.31%          123.91%          125.55%
__________
(1) Interest income includes net deferred loan fee amortization income of $178,000$428,000 and $229,000 $192,000 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, respectively.
(2) Average balance of mortgage related and debt securities are based on amortized historical cost.
(3) Interest income from tax exempttax-exempt securities is computed on a taxable equivalent basis using a tax rate of 35%21% for all periods presented.the three months ended June 30, 2020 and 2019. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.751.71% and 1.78%2.50% for the three months ended SeptemberJune 30, 20172020 and 2016,2019, 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.

- 3843 -




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 June 30, 
 2017 versus 2016  2020 versus 2019 
 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  $1,519  $(1,052) $467 
Mortgage related securities (3)  (160)  64   (96)  (58)  (36)  (94)
Other earning assets (3)(4)  156   (72)  84 
Debt securities, federal funds sold and short-term investments (3)(4)  (118)  (312)  (430)
Total interest-earning assets  1,007   82   1,089   1,343   (1,400)  (57)
                        
Interest expense:                        
Demand accounts  -   2   2   2   (1)  1 
Money market and savings accounts  (2)  9   7 
Money market, savings, and escrow accounts  104   42   146 
Time deposits  (26)  75   49   (34)  (510)  (544)
Total interest-earning deposits  (28)  86   58   72   (469)  (397)
Borrowings  1,183   (1,826)  (643)  255   (178)  77 
Total interest-bearing liabilities  1,155   (1,740)  (585)  327   (647)  (320)
Net change in net interest income $(148) $1,822  $1,674  $1,016  $(753) $263 
______________
(1)   Interest income includes net deferred loan fee amortization income of $178,000 $428,000 and $229,000$192,000 for the three months ended SeptemberJune 30, 20172020 and 2016,2019, 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 June 30, 2020 and June 30, 2019.



Net interest income increased $1.7$268,000, or 2.1%, to $13.2 million or 15.1%,during the three months ended June 30, 2020 compared to $13.0 million during the three months ended SeptemberJune 30, 2017 compared to $11.3 million during the three months ended September 30, 2016.2019.


● Interest income on loans increased $1.1 million$467,000 due primarily to an increase of $85.8$207.8 million, or 13.4%, in average loans along withoffset by a three43 basis point increasedecrease in average yield on loans.loans as London Interbank Offered Rate (LIBOR) and U.S. Treasury rates continued to decrease. The increase in average loan balance was driven by a $118.8$44.5 million, or 10.5%3.2%, increase in the average balance of loans held in portfolio partially offsetand by a decreasean increase of $32.9$163.3 million, or 16.4%92.9%, in the average balance of loans held for sale.
● Interest income from mortgage-related securities decreased $96,000 year over year$94,000 primarily as the yield decreased 13 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.$8.8 million.
● Interest income from other interest earninginterest-earning assets (comprised of debt securities, federal funds sold and short-term investments) increased $118,000decreased $425,000 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 three79 basis point decrease in the average yield. The decrease in average yield was primarily driven by the decrease in federal funds rate over the past year and as higher rate municipal bondyielding securities maturing and being replaced at a slower pace and athave matured.  The average balance decreased $15.8 million to $164.3 million due to a lower rate.cash balance on hand and municipal securities balances as maturities occurred throughout the past 12 months were not replaced due to market conditions.  Offsetting those decreases, the decrease from the municipal bonds maturing, the yield on cashbalance of FHLB stock increased with a 25 basis point increase in the Federal Funds rate in each of December 2016, March 2017, and June 2017, as well as an increase in the cash dividend paid by theadditional FHLB on its stock.borrowings.
● Interest expense on time deposits increased $49,000decreased $544,000, or 13.5%, primarily due to a four28 basis point increase ofdecrease in 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 the increase in cost of time deposits,deposits. Additionally, the average balance of time depositdeposits decreased $9.1$6.2 million compared to the prior year period.
● Interest expense on money market, savings, and savingsescrow accounts increased $7,000$146,000, or 45.9%, due primarily to an increase of oneeight basis point increase in rate partially offset by a decreaseaverage cost of money market, savings, and escrow accounts along with an increase in average balance of $916,000. The increase in rate reflects$59.0 million. Money market accounts have been a focus over the Company's strategy to remain aggressive with competitors in this segment of retail funds for more aggressive growth.year and the Company has aggressively marketed new customers through various new offerings and new branches that opened within the past 12 months.
● Interest expense on borrowings decreased $643,000increased $77,000, or 3.0%, due to a decreasean increase of $104.9 million to $609.9 million in average borrowing volume during the quarter ended June 30, 2020. The increase was primarily due to the funding of the loans held for sale. Offsetting the increase in volume, the average cost of borrowings thatdecreased 30 basis points to 1.76% during the three months ended June 30, 2020, compared to 2.06% during the three months ended June 30, 2019. The decrease in the cost of borrowings resulted from the maturity and replacement of fixed rate borrowings since the beginning of the prior year.  The average cost of borrowings totaled 2.10% during the quarter ended September 30, 2017, compared to 3.27% during the quarter ended September 30, 2016.new short-term fundings borrowed at a lower rate.



- 3944 -


Provision for Loan Losses


OurThe Company delayed adoption of ASC Topic 326 as permited under the CARES Act. The Company calculated the current quarter allowance using the incurred loss model. The provision for loan losses decreased $115,000 as the mortgage banking segment had to reserve $20,000was $4.5 million for additional loans during the three months ended SeptemberJune 30, 2017,2020 compared to $135,000 of$30,000 in provision for loan losses for the three months ended SeptemberJune 30, 2016. The2019 as economic conditions worsened due to the COVID-19 pandemic. Additional qualitative risk factors were applied to each of the loan categories primarily to account for the significant increase in the unemployment rate.  We had a provision for loan losses of $4.3 million at the community banking segment recorded no provision duringand $175,000 for the current quarter due tomortgage banking segment. Net recoveries were $8,000 for the continued improvement in loan quality metrics including: non-accrual loans, loans rated substandard or watch, and loans past due.three months ended June 30, 2020.


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 June 30, 
 2017  2016  $ Change  % Change  2020  2019  $ Change  % Change 
 (Dollars in Thousands)  (Dollars in Thousands) 
                        
Service charges on loans and deposits $300  $789  $(489)  (62.0)% $2,231  $390  $1,841   472.1%
Increase in cash surrender value of life insurance  688   734   (46)  (6.3)%  520   507   13   2.6%
Loss on sale of securities  -   -   -   N/M
Mortgage banking income  31,863   35,552   (3,689)  (10.4)%  63,774   34,105   29,669   87.0%
Other  203   337   (134)  (39.8)%  379   188   191   101.6%
Total noninterest income $33,054  $37,412  $(4,358)  (11.6)% $66,904  $35,190  $31,714   90.1%
                
N/M - Not meaningful                
                


Total noninterest income decreased $4.4increased $31.7 million, or 11.6%90.1%, to $33.1$66.9 million during the three months ended SeptemberJune 30, 20172020 compared to $37.4$35.2 million during the three months ended SeptemberJune 30, 2016.2019. The decreaseincrease resulted primarily from a decreasean increase in mortgage banking income along with decreasesincreases in all othernoninterest income categories.


● The decreaseincrease in mortgage banking income was primarily the result of an increase in loan origination volume and gross margin on loans originated and sold. Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a decrease in origination volumes.  The volume decreased $48.0consolidated basis increased $328.6 million, or 6.8%42.2%, to $662.1$1.11 billion during the three months ended June 30, 2020 compared to $778.9 million during the three months ended SeptemberJune 30, 2017 compared to a $710.1 million during2019. Gross margin on loans originated and sold increased 27.0% at the three months ended September 30, 2016.mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the Three Months Ended SeptemberJune 30, 20172020 and 2016"2019" above for additional discussion of the decreaseincrease in mortgage banking income.
● Service charges on loans and deposits decreasedincreased primarily due to a decrease in loan prepayment fees as one significantand fees earned on loan relationship paid off during the three months ended September 30, 2016.swaps.
● The decreaseincrease in cash surrender value of life insurance was due primarily 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.balance.
● The $134,000 decreaseincrease in other noninterest income was due primarily to a decreaseincreases in mortgage servicing fee income, wealth management revenue, onand rental income. Mortgage servicing fee income increased as loans sold at the mortgage banking segment, which resulted from a bulk sale of mortgagewith servicing rights in the first quarter of 2017.
retained increased due to market conditions.



Noninterest Expenses


  Three months ended June 30, 
  2020  2019  $ Change  % Change 
  (Dollars in Thousands) 
             
Compensation, payroll taxes, and other employee benefits $36,889  $27,074  $9,815   36.3%
Occupancy, office furniture and equipment  2,534   2,680   (146)  (5.4)%
Advertising  864   963   (99)  (10.3)%
Data processing  1,095   869   226   26.0%
Communications  317   353   (36)  (10.2)%
Professional fees  1,077   789   288   36.5%
Real estate owned  33   19   14   73.7%
Loan processing expense  1,208   879   329   37.4%
Other  3,672   1,729   1,943   112.4%
     Total noninterest expenses $47,689  $35,355  $12,334   34.9%
- 4045 -
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 $1.2increased $12.3 million, or 3.4%34.9%, to $34.3$47.7 million during the three months ended SeptemberJune 30, 20172020 compared to $35.5$35.4 million during the three months ended SeptemberJune 30, 2016.2019.


● Compensation, payroll taxes and other employee benefitbenefits expense at our mortgage banking segment decreased $1.5increased $9.6 million, or 6.5%42.3%, to $21.8$32.1 million during the three months ended SeptemberJune 30, 2017.2020. The decreaseincrease in compensation within our mortgage banking segment correlates to the decreaseexpense was primarily a result of an increase in mortgage banking income due to the commission-based compensation structure in place for our mortgage banking loan officers.commission expense as fundings increased and branch manager pay increased as branches were more profitable.
● Compensation, payroll taxes and other employee benefitbenefits expense at the community banking segment increased $91,000,$235,000, or 2.1%5.0%, to $4.4$4.9 million during the three months ended SeptemberJune 30, 2017. This2020. The increase was due primarily due to an increase in ESOPsalaries expense which increased due to annual raises and variable compensation as executives are eligible for a greater payout. Offsetting the increased average stock price of the shares in the second quarter of 2017.
●Advertisingincreases, health insurance 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.decreased with fewer claims.
● Occupancy, office furniture and equipment expense increased $214,000at the mortgage banking segment decreased $68,000 to $2.5$1.7 million during the three months ended SeptemberJune 30, 2017,2020, primarily resulting from additionallower rent expense offset by an increase in computer equipment expense to accomodate remote working.
●Occupancy, office furniture and equipment expense at the current year period comparedcommunity banking segment decreased $78,000 to prior year period$866,000 during the three months ended June 30, 2020. The decrease was due primarily to decreased computer expenses.
●Advertising expense decreased $99,000, or 10.3%, to $864,000 during the three months ended June 30, 2020. This was primarily due to the addition of mortgage banking segment branches. Offsetting the rent increase, there was less depreciation expensemarketing decreases at the mortgage banking segment inas volumes were largely driven by lower rates. Advertising at the quarter ended September 30, 2017 compared to the prior year period. The community banking segment had a slight decreaseincreased to promote the new ditigal banking platform that launched in expense year over year due to less depreciation and utilities expenses.the quarter.
● Net real estate ownedData processing expense decreased $57,000, resulting in $20,000 of incomeincreased $226,000, or 26.0%, to $1.1 million during the three months ended SeptemberJune 30, 2017, compared2020. This was primarily due to $37,000 of expensea new ditigal banking platform rollout at the community banking segment and new contracts at the mortgage banking segment as technology investments continue to increase.
●Professional fees increased $288,000, or 36.5%, to $1.1 million during the three months ended SeptemberJune 30, 2016. Property management2020. This was primarily due to an increase in legal expenses at the mortgage banking segment for ongoing litigation costs.
●Loan processing expense (other than gains/losses) decreased $71,000increased $329,000, or 37.4%, to $1.2 million during the three months ended SeptemberJune 30, 2017 compared to the three months ended September 30, 20162020. This was primarily due to a reductionan increase in loan costs associated with 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.application volumes as mortgage rates declined.
● Other noninterest expense decreased $293,000increased $1.9 million, or 112.4%, to $3.1$3.7 million during the three months ended SeptemberJune 30, 2017. This decrease was primarily2020. The increase at the mortgage banking segment and resultedwas primarily due to an increased provision for loan sale losses as there was additional uncertainity regarding selling loans to third party investors from lower volume-based feesCOVID-19 pandemic challenges. Offsetting the increase, other noninterest expenses decreased at the community banking segment as fundings decreased.the FDIC issued a credit for the three months ended June 30, 2020 along with a decrease in other regulator fees.




Income Taxes


Driven by an decrease in pre-tax income, incomeIncome tax expense decreased $1.2totaled $7.0 million or 21.5%,for the three months ended June 30, 2020 compared to $4.4$3.1 million during the three months ended SeptemberJune 30, 2017, compared to $5.6 million2019. Income tax expense was recognized on the statement of income during the three months ended SeptemberJune 30, 2016. Income tax expense was recognized2020 at an effective rate of 25.1% of pretax income compared to 24.6% during the three months ended SeptemberJune 30, 2017 at an effective2019. The increase in rate of 37.1% comparedis primarily due 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.higher pretax income.


- 41 -

Comparison of Community Banking Segment for the NineSix Months Ended SeptemberJune 30, 20172020 and 20162019


Net income decreased $3.3 million for the ninesix months ended SeptemberJune 30, 2017 totaled $14.52020 to $8.2 million compared to net income of $9.9$11.6 million for the ninesix months ended SeptemberJune 30, 2016.2019.  Net interest income increased $6.3 milliondecreased $53,000 to $37.2$26.6 million for the ninesix months ended SeptemberJune 30, 20172020 compared to $31.0$26.7 million for the ninesix months ended SeptemberJune 30, 2016.2019.  Net interest income decreased due to an increase in interest expense as the average amount of borrowings increased.  Partially offsetting the increase in interest expense, interest income increased primarily due loan interest as average loan balance increased.

The Company delayed adoption of ASC Topic 326 as permited under the CARES Act. The Company calculated the current quarter allowance using the incurred loss model. Provision for loan losses decreased $1.5was $5.1 million for the six months ended June 30, 2020 compared to a negative provision of $700,000 for the six months ended June 30, 2019 as asset quality metrics continuedeconomic conditions significantly worsened during the six months ended June 30, 2020.

Total noninterest income increased $2.0 million due primarily to improve. Noninterest income decreased $615,000 asincreases in loan fees. The loan fees increased primarily due to loan prepayment fees decreased and a $107,000 lossfees earned on sale of securities occurred in 2017 partially offset by an increase in the cashloan swaps. Cash surrender value of life insurance.  insurance increased as the balance increased year over year. Other income slightly increased primarily due to wealth management and rental income.

Compensation, payroll taxes, and other employee benefits expense increased $180,000$647,000 to $10.1 million due primarily to an increase in salaries expense and variable compensation offset by lower equity award expense. Occupancy, office furniture and equipment decreased due primarily to computer and snow plowing expense. Data processing and advertising expense increased primarily due to increases in salary expense along with an increase in ESOP expense, offset bythe rollout of a decrease in health insurance cost. FDIC premiums andnew ditigal banking platform during the six months ended June 30, 2020. Communications expenese increased while professional fees, 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.expenses decreased.

- 46 -


Comparison of Mortgage Banking Segment Operations for the Nine SixMonths Ended SeptemberJune 30, 20172020 and 20162019


Net income decreased $1.5 million to $8.3totaled $18.7 million for the ninesix months ended SeptemberJune 30, 2017,2020 compared to net income of $9.8$4.6 million for the ninesix months ended SeptemberJune 30, 2016. Mortgage2019. We originated $1.85 billion in mortgage loans held for sale (including sales to the community banking segment revenues increased $2.0segment) during the six months ended June 30, 2020, which represents an increase of $556.8 million, or 2.2%43.0%, to $94.4 million forfrom the nine$1.29 billion originated during the six months ended SeptemberJune 30, 2017 compared to $92.5 million for the nine months ended September 30, 2016.2019. The increase in revenueloan production volume was attributabledriven by a $584.2 million, or 392.1%, increase in refinance products as mortgage rates decreased. Mortgage purchase products decreased $37.1 million, or 2.4% due to inventory shortgage issues. Total mortgage banking noninterest income increased $37.1 million, or 64.0%, to $95.0 million during the six months ended June 30, 2020 compared to $57.9 million during the six months ended June 30, 2019.  The increase in mortgage banking noninterest income was related to a 7.1%43.0% increase in volume origination to $1.88 billion duringand an 11.9% increase in gross margin on loans originated and sold for the ninesix months ended SeptemberJune 30, 20172020 compared to $1.76 billion duringJune 30, 2019.  Gross margin on loans originated and sold is 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 theratio of mortgage banking segment forincome (excluding the purpose of salechange 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.interest rate lock fair value) divided by total loan originations. The increase in originations was drivengross margin on loans originated and sold reflects industry demand due to the low rate environment resulting in higher volume.  We sell loans on both a servicing-released and a servicing-retained basis.  Waterstone Mortgage Corporation has contracted with a third party to service the loans for which we retain servicing.

Additionally, our overall margin can be affected by an increase in the originationmix of both loan type (conventional loans made forversus 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 purposefederal government, such as a Federal Housing Authority or U.S. Department of residential purchases, which yield a higher margin than refinance loans, partially offset by a decrease in the origination of mortgage refinance products.Agriculture loan. 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 slightlydecreased to 89.5%60.4% from 85.1%88.5% of total originations for the ninesix months ended SeptemberJune 30, 20172020 and 2016, respectively.2019, respectively, as refinance demand accelerated from the low rate environment. The mix of loan type trended towards lessmore conventional loans and moreless governmental loans; with conventional loans and governmental loans comprising 63.9%74.1% and 36.1%25.9% of all loan originations, respectively, during the ninesix months ended SeptemberJune 30, 2017,2020, compared 64.6%to 69.5% and 35.4%30.5% of all loan originations, respectively, during the ninesix months ended SeptemberJune 30, 2016.2019.

Total compensation, payroll taxes and other employee benefits increased $12.9, or 33.4%, to $51.5 million for the six months ended June 30, 2020 compared to $38.6 million for the six months ended June 30, 2019.  The increase in compensation expense was primarily a result of the increase in commission expense as fundings increased, bonus and incentives due to record originations. In addition, branch manager pay increased as branches were more profitable. Occupancy, office furniture, and equipment expense decreased due to lower rent expense as underperforming branches closed. Advertising expense decreased as the low rate environment attracted customers. Loan processing expenses increased for the six months ended June 30, 2020 as loan costs increased due to loan application volume.  Professional fees and data processing expenses increased primarily due to a $1.1 million legal award ruling (see further discussion in Note 10 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to unaudited consolidated financial statements for additional information) along with ongoing litigation costs and new contracts.  Other noninterest expense increased primarily due to increased provision for loan sale losses as there was additional uncertainity regarding selling loans to third party investors from COVID-19 pandemic challenges.

Consolidated Waterstone Financial, Inc. Results of Operations
 Nine months ended September 30,  Six months ended June 30, 
 2017  2016  2020  2019 
 (Dollars in Thousands, except per share amounts)  (Dollars in Thousands, except per share amounts) 
            
Net income $22,849  $19,133  $27,017  $$16,185 
Earnings per share - basic  0.83   0.71   1.08   0.61 
Earnings per share - diluted  0.82   0.70   1.08   0.61 
Annualized return on average assets  1.70%  1.45%  2.59%  1.67%
Annualized return on average equity  7.42%  6.38%  14.03%  8.28%
                




- 4247 -


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.


 Nine months ended September 30,  Six months ended June 30, 
 2017  2016  2020  2019 
 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) $1,357,884  $45,078   4.44% $1,274,369  $42,611   4.47% $$1,661,033  $$36,180   4.38% $$1,515,300  $$35,130   4.68%
Mortgage related securities (2)  126,856   2,021   2.13%  158,854   2,371   1.99%  108,908   1,372   2.53%  115,102   1,523   2.67%
Debt securities, federal funds sold and short-term investments (2)(3)  198,947   3,210   2.16%  208,241   3,309   2.12%  185,395   1,902   2.06%  187,350   2,583   2.78%
Total interest-earning assets  1,683,687   50,309   3.99%  1,641,464   48,291   3.93%  1,955,336   39,454   4.06%  1,817,752   39,236   4.35%
                                                
Noninterest-earning assets  117,316           116,863           139,820           130,852         
Total assets��$1,801,003          $1,758,327          $$2,095,156          $$1,948,604         
                                                
Liabilities and equity                                                
Interest-bearing liabilities:                                                
Demand accounts $36,419   20   0.07% $33,679   14   0.06% $$42,587   17   0.08% $$36,005   16   0.09%
Money market and savings accounts  171,659   315   0.25%  163,550   294   0.24%
Money market, savings, and escrow accounts  235,721   891   0.76%  184,937   593   0.65%
Time deposits  667,168   5,279   1.06%  673,343   5,169   1.03%  732,360   7,357   2.02%  736,138   7,725   2.12%
Total interest-bearing deposits  875,246   5,614   0.86%  870,572   5,477   0.84%  1,010,668   8,265   1.64%  957,080   8,334   1.76%
Borrowings  401,931   6,756   2.25%  387,867   10,724   3.69%  552,729   5,273   1.92%  472,105   4,834   2.06%
Total interest-bearing liabilities  1,277,177   12,370   1.29%  1,258,439   16,201   1.72%  1,563,397   13,538   1.74%  1,429,185   13,168   1.86%
                                                
Noninterest-bearing liabilities                                                
Noninterest-bearing deposits  88,454           73,828           104,116           94,730         
Other noninterest-bearing liabilities  23,408           25,537           40,264           30,331         
Total noninterest-bearing liabilities  111,862           99,365           144,380           125,061         
Total liabilities  1,389,039           1,357,804           1,707,777           1,554,246         
Equity  411,964           400,523           387,379           394,358         
Total liabilities and equity $1,801,003          $1,758,327          $$2,095,156          $$1,948,604         
                                                
Net interest income / Net interest rate spread (4)      37,939   2.70%      32,090   2.21%      25,916   2.32%      26,068   2.49%
Less: taxable equivalent adjustment      530   0.04%      617   0.05%      141   0.02%      151   0.01%
Net interest income / Net interest rate spread, as reported     $37,409   2.66%     $31,473   2.16%     $$25,775   2.30%     $$25,917   2.48%
Net interest-earning assets (5) $406,510          $383,025          $$391,939          $$388,567         
Net interest margin (6)
          2.97%          2.56%          2.65%          2.88%
Tax equivalent effect          0.04%          0.05%          0.02%          0.01%
Net interest margin on a fully tax equivalent basis (6)          3.01%          2.61%          2.67%          2.89%
Average interest-earning assets to average interest-bearing liabilities          131.83%          130.44%          125.07%          127.19%
__________
(1)  Interest income includes net deferred loan fee amortization income of $563,000$599,000 and $596,000$322,000 for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, 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%21% for all periods presented.the six months ended June 30, 2020 and 2019. The yields on debt securities, federal funds sold and short-term investments before tax-equivalent adjustments were 1.801.91% and 1.73%2.62% for the ninesix months ended SeptemberJune 30, 20172020 and 2016,2019, 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.

- 4348 -



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.




 Nine months ended September 30,  Six months ended June 30, 
 2017 versus 2016  2020 versus 2019 
 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) $2,758  $(291) $2,467  $3,050  $(2,000) $1,050 
Mortgage related securities (3)  (507)  157   (350)  (78)  (73)  (151)
Other earning assets (3) (4)  (157)  58   (99)
Debt securities, federal funds sold and short-term investments (3) (4)  (26)  (655)  (681)
Total interest-earning assets  2,094   (76)  2,018   2,946   (2,728)  218 
                        
Interest expense:                        
Demand accounts  -   6   6   3   (2)  1 
Money market and savings accounts  12   9   21 
Money market, savings, and escrow accounts  182   116   298 
Time deposits  (51)  161   110   (37)  (331)  (368)
Total interest-earning deposits  (39)  176   137   148   (217)  (69)
Borrowings  406   (4,374)  (3,968)  750   (311)  439 
Total interest-bearing liabilities  367   (4,198)  (3,831)  898   (528)  370 
Net change in net interest income $1,727  $4,122  $5,849  $2,048  $(2,200) $(152)
______________
(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,
(1)
Interest income includes net deferred loan fee amortization income of  $599,000 and $322,000 for the six months ended June 30, 2020 and 2019, 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 six months ended June 30, 2020 and 2019.




Net interest income increased $5.9 million,decreased $142,000, or 18.9%0.5%, to $37.4$25.8 million during the ninesix months ended SeptemberJune 30, 20172020 compared to $31.5$25.9 million during the ninesix months ended SeptemberJune 30, 2016.2019.


● Interest income on loans increased $2.5$1.1 million due primarily to an increase of $145.7 million, or 9.6%, in average balance of $83.5 million partiallyloans offset by a three30 basis point decrease in average yield on loans.loans as London Interbank Offered Rate (LIBOR) and U.S. Treasury rates continue to decrease. The increase in average loan balance was driven by a $93.9$30.6 million, or 2.2%, increase in the average balance of loans held in portfolio offsetand by a decreasean increase of $115.1 million, or 83.0%, in the average balance of loans held for sale of $10.4 million.sale.
● Interest income from mortgage related securities decreased $350,000 year over year$151,000 primarily as securities have paid down and less purchases have occurred to replace those securities due to current market conditions.the yield decreased 14 basis points. Additionally, the average balance decreased $6.2 million.
● Interest income from other interest earninginterest-earning assets (comprised of debt securities, federal funds sold and short-term investments) decreased $671,000 due to a $9.2 million71 basis point decrease in the average yield. The decrease in average yield was primarily driven by the decrease in federal funds rate over the past year and as higher yielding securities have matured.  The average balance asdecreased $2.0 million to $185.4 million due to lower municipal securities maturedbalances as maturities occurred throughout the past 12 months and were not replaced due to market conditions.  Those funds were primarily held in aOffsetting those decreases, the cash account. This decrease in averageon hand increased and the 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.of FHLB stock increased with additional FHLB borrowings.
● Interest expense on time deposits increased $110,000decreased $368,000, or 4.8%, primarily due to a three10 basis point increasedecrease 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,deposits. Additionally, the average balance of time deposits decreased $6.2$3.8 million compared to the prior year period.
● Interest expense on money market, savings, and savingsescrow accounts increased $21,000$298,000, or 50.3%, due primarily to an 11 basis point increase in average cost of money market, savings, and escrow accounts along with an increase in average balance along withof $50.8 million. Money market accounts have been a slight increase in rate.  The increase in volumefocus over the year and rate reflect the Company's strategy to remain competitiveCompany has aggressively marketed new customers through various new offerings and grow this segment of retail funds.new branches that opened within the past 12 months.
● Interest expense on borrowings decreased $4.0 millionincreased $439,000, or 9.1%, due to a decreasean increase of $80.6 million to $552.7 million in average borrowing volume during the six months ended June 30, 2020. The increase was primarily due to the funding of the loans held for sale. Offsetting the increase in volume, the average cost of borrowings thatdecreased 14 basis points to 1.92% during the six months ended June 30, 2020, compared to 2.06% during the six  months ended June 30, 2019. The decrease in the cost of borrowings 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.new short-term fundings borrowed at a lower rate.


- 4449 -



Provision for Loan Losses


OurThe Company delayed adoption of ASC Topic 326 as permited under the CARES Act. The Company calculated the current year allowance using the incurred loss model. The provision for loan losses decreased $1.5was $5.3 million for the six months ended June 30, 2020 compared to a negative provision for loan losses of $1.2 million during$650,000 for the ninesix months ended SeptemberJune 30, 2017, from2019 as economic conditions worsened due to the COVID-19 pandemic. Additional qualitative risk factors were applied to each of the loan categories primarily to account for the significant increase in the unemployment rate.  We had a provision for loan losses of $340,000 during$5.1 million at the ninecommunity banking segment and $210,000 for the mortgage banking segment. Net recoveries were $62,000 for the six months ended SeptemberJune 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.2020.


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


 Nine months ended September 30,     Six months ended June 30, 
 2017  2016  $ Change  % Change  2020  2019  $ Change  % Change 
 (Dollars in Thousands)     (Dollars in Thousands) 
                        
Service charges on loans and deposits $1,148  $1,742  $(594)  (34.1)% $2,712  $769  $1,943   252.7%
Increase in cash surrender value of life insurance  1,476   1,446   30   2.1%  873   851   22   2.6%
Loss on sale of securities  (107)  -   (107)  N/M
Mortgage banking income  92,774   91,146   1,628   1.8%  94,180   57,464   36,716   63.9%
Other  941   874   67   7.7%  603   363   240   66.1%
Total noninterest income $96,232  $95,208  $1,024   1.1% $98,368  $59,447  $38,921   65.5%
                
N/M - Not meaningful                
                

Total noninterest income increased $1.0$38.9 million, or 1.1%65.5%, to $96.2$98.4 million during the ninesix months ended SeptemberJune 30, 20172020 compared to $95.2$59.4 million during the ninesix months ended SeptemberJune 30, 2016.2019. The increase resulted primarily from an increase in mortgage banking income.income along with increases in all noninterest income categories.


● The $1.6 million increase in mortgage banking income was primarily the result of an increase in loan origination volumes but partially offsetvolume and gross margin on loans originated and sold. Gross margin on loans originated and sold is the ratio of mortgage banking income (excluding the change in interest rate lock fair value) divided by total loan originations. Total loan origination volume on a decrease in margins.  The volumeconsolidated basis increased $124.9$525.1 million, or 7.1%41.3%, to $1.88$1.80 billion during the ninesix months ended SeptemberJune 30, 20172020 compared to $1.76$1.27 billion during the ninesix months ended SeptemberJune 30, 2016.2019. Gross margin on loans originated and sold increased 11.9% at the mortgage banking segment. See "Comparison of Mortgage Banking Segment Results of Operations for the NineSix Months Ended SeptemberJune 30, 20172020 and 2016"2019" above for additional discussion of the increase in mortgage banking income.
● The decrease in serviceService charges on loans and deposits was relatedincreased primarily due to an decrease in loan prepayment fees.fees and fees earned on loan swaps.
● The increase in cash surrender value of life insurance was due primarily due to the purchase of a $10.0 million policyan increase in March 2016 and a $2.5 million policy in June 2017.balance.
● 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 in other noninterest income was due primarily due to a gain onincreases 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, onwealth management revenue, and rental income. Mortgage servicing fee income increased as loans sold decreased from the bulk sale.with servicing rights retained increased due to market conditions.





Noninterest Expenses


  Six months ended June 30, 
  2020  2019  $ Change  % Change 
  (Dollars in Thousands) 
             
Compensation, payroll taxes, and other employee benefits $61,290  $47,713  $13,577   28.5%
Occupancy, office furniture and equipment  5,275   5,456   (181)  (3.3)%
Advertising  1,764   1,921   (157)  (8.2)%
Data processing  2,101   1,638   463   28.3%
Communications  655   681   (26)  (3.8)%
Professional fees  2,909   1,484   1,425   96.0%
Real estate owned  44   51   (7)  (13.7)%
Loan processing expense  2,284   1,684   600   35.6%
Other  6,575   4,076   2,499   61.3%
     Total noninterest expenses $82,897  $64,704  $18,193   28.1%
- 4550 -
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$18.2 million, or 4.8%28.1%, to $99.6$82.9 million during the ninesix months ended SeptemberJune 30, 20172020 compared to $95.0$64.7 million during the ninesix months ended SeptemberJune 30, 2016.2019.


● Compensation, payroll taxes and other employee benefit expense at our mortgage banking segment increased $2.6$12.9 million, or 4.5%33.4%, to $61.1$51.5 million for the ninesix months ended SeptemberJune 30, 2017.2020. The increase in compensation within our mortgage banking segment correlated to theexpense was primarily a result of an increase in mortgage banking income due to the commission-based compensation structure in place for our mortgage banking loan officers along with the additionalcommission expense as fundings increased and branch manager pay increased as branches brought on during the year.were more profitable.
● Compensation, payroll taxes and other employee benefitbenefits expense withinat the community banking segment increased $180,000$647,000, or 6.9%, to $10.1 million during the six months ended June 30, 2020. The increase was due primarily due to ESOP expense along with an increase toin salaries partially offset by a decrease in health insurance. ESOP expense increased due to the increased average stock price of the shares through the first nine months of 2017.  The salaries increase was primarily due to annual wage increases. Health insuranceraises and variable compensation as executives are eligible for a greater payout. Offsetting the increases, equity award expense decreased as claims have been lowera majority of awards granted in 2017 compared to 2016.2015 had a final vesting in 2019.
● 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 $145,000 to $3.4 million during the ninesix months ended SeptemberJune 30, 2017 compared2020, resulting from lower rent expense as a result of underperforming branches closing.  Offsetting the decreases, computer expenses increased to the same period during the prior year.  Additionally,accomodate remote working.
●Occupancy, office furniture and equipment expense at the community banking segment had slightlydecreased $36,000 to $1.9 million during the six months ended June 30, 2020.  The decrease was due primarily to lower expense year over year due to less depreciationcomputer and snow plowing expense.
● Advertising expense increased as a result of increased advertising efforts to generate more volumedecreased $301,000 at the mortgage banking segment branches.as lower rates generated customer activity.  Offsetting the decrease at the mortgage banking segment, advertising increased $144,000 at the community banking segment to promote the opening of a new branch and the new digital banking platform.
● Data processing expense increased $463,000, or 28.3%, to $2.1 million during the six months ended June 30, 2020. This was primarily due to the new ditigal banking platform rollout at the community banking segment and new contracts at the mortgage banking segment as technology investments continue to increase.
●
Professional fees expense increased $1.4 million, or 96.0%, to $2.9 million primarily as a result of an increase in legal fees at the mortgage banking segment primarily relatedfor a $1.1 million legal award ruling (see further discussion in Note 10 - Commitments, Off-Balance Sheet Arrangements, and Contingent Liabilities of the notes to unaudited consolidated financial statements for additional information) and ongoing litigation.  Audit and taxlitigation costs along with an increase in audit expense increased at the community banking segment.
● Net real estate ownedLoan processing expense decreased $86,000,increased $600,000, or 35.6%, to $258,000$2.3 million during the ninesix months ended SeptemberJune 30, 2017 compared to $344,000 for the nine months ended September 30, 2016. Property management expense (other than gains/losses) decreased $199,000 to $269,000 during the nine months ended September 30, 2017 compared to the nine months ended September 30, 20162020. This was primarily due to a reductionan increase in loan costs associated with the number of properties under management. Net gains on sales of real estate owned decreased $24,000 to $515,000 for the nine months ended September 30, 2017 compared to $539,000 for the nine months ended September 30, 2016. Real estate owned writedowns increased $88,000 to $504,000 for the nine months ended September 30, 2017 compared to $416,000 for the nine months ended September 30, 2016.
●FDIC insurance expense decreased during the nine months ended September 30, 2017. This was driven by a decrease in the FDIC assessment rate due to improved asset quality metrics.application volumes as mortgage rates declined.
● Other noninterest expense increased primarily$2.5 million for the six months ended June 30, 2020 due to increased expensean increase at the mortgage banking segment.  The increase at the mortgage banking segment increase was associated with volume-based feesprimarily due to an increased provision for loan sale losses as there was additional uncertainity regarding selling loans to third party investors from COVID-19 pandemic challenges. Offsetting the increase, other noninterest expenses decreased at the community banking segment as the FDIC issued a credit for the six months ended June 30, 2020 along with a decrease in loan origination activity.other regulator fees.




Income Taxes


Driven by an increase in pre-tax income, incomeIncome tax expense increased $183,000, or 1.5%,totaled $8.9 million for the six months ended June 30, 2020 compared to $12.4$5.1 million during the ninesix months ended SeptemberJune 30, 2017, compared to $12.2 million during the nine months ended September 30, 2016.2019. Income tax expense was recognized on the statement of income during the ninesix months ended SeptemberJune 30, 20172020 at an effective rate of 35.2%24.9% of pretax income compared to 39.0% for24.0% during the ninesix months ended SeptemberJune 30, 2016.2019. During the ninesix months ended SeptemberJune 30, 2017,2020, the Company recognized a benefit of approximately $827,000$47,000 related to stock awards exercised within 2017 ascompared to a resultbenefit of adopting$100,000 recognized during the new stock compensation accounting standard.  During the ninesix months ended SeptemberJune 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, 2016.2019.


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Comparison of Financial Condition at SeptemberJune 30, 20172020 and December 31, 20162019


Total Assets -Total – Total assets increased by $63.5$221.2 million, or 3.5%11.1%, to $1.85$2.22 billion at SeptemberJune 30, 20172020 from $1.79$2.00 billion at December 31, 2016.2019. The increase in total assets primarily reflects an increase in cashloans held for sale, loans receivable and cash equivalentsprepaid expenses and loans receivable,other assets due to an increase in the fair market value of the loan rate lock commitments partially offset by a decrease in loans held for sale and securities available for sale. Funding neededThe total assets increase reflects liability increases in deposits, additional short-term debt, advance payments by borrowers for loan origination were provided by depositstaxes, and additional long-term FHLB debt in 2017.other liabilities due to hedging liabilities.


Cash and Cash Equivalents – Cash and cash equivalents increased $45.4$2.6 million, or 96.1%3.5%, to $92.6$76.9 million at SeptemberJune 30, 2017,2020, compared to $47.2$74.3 million at December 31, 2016.2019.  The increase in cash and cash equivalents primarily reflects the additional source of funds through an increase in deposits 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$14.4 million at Septemberduring the six months ended June 30, 2017 compared to December 31, 2016.2020. The decrease was primarily due to paydowns in mortgage relatedmortgage-related securities and maturities of debt securities exceeding security purchases for the year.


Loans Held for Sale - Loans held for sale decreasedincreased $163.3 million to $383.4 million at SeptemberJune 30, 20172020 due to the slowdownincrease of refinancing activity resulting from the reduction in mortgage originations for the purpose of refinance along with timing of loans sold to investors.rates.


Loans Receivable - Loans receivable held for investment increased $83.3$45.8 million to $1.26$1.43 billion at SeptemberJune 30, 2017 from $1.18 billion at December 31, 2016.2020.  The increase in total loans receivable was primarily attributable to increases in commercial real estate, construction and land, multi-family, commercial, and consumer loan categories. The growth in the commercial loan category was driven by $29.8 million of PPP loans originated during the three months ended June 30, 2020. 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.

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


 As of or for the  As of or for the  For the  For the 
 Nine months ended September 30,  Year Ended  Six months ended June 30,  
Year Ended
 
 2017  2016  December 31, 2016  2020  2019  December 31, 2019 
 (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 
Real estate loans originated for investment:                     
Residential                     
One- to four-family  87,473   57,080   78,045  $56,970  $32,170  $95,461 
Multi-family  90,422   93,724   118,072   102,432   33,005   110,136 
Home equity  655   3,305   5,037   3,232   2,820   5,804 
Construction and land  4,539   5,648   5,878   21,995   5,391   59,814 
Commercial real estate  38,904   21,822   35,443   25,638   10,451   49,710 
Total real estate loans originated for investment  221,993   181,579   242,475   210,267   83,837   320,925 
Consumer loans originated for investment  -   -   -   275   -   55 
Commercial business loans originated for investment  12,846   6,920   11,692   41,482   4,412   7,517 
Total loans originated for investment  234,839   188,499   254,167  $252,024  $88,249  $328,497 
                        
Principal repayments  (148,750)  (146,941)  (185,020)
Transfers to real estate owned  (1,609)  (3,442)  (4,590)
Loan principal charged-off  (1,204)  (1,354)  (1,607)
Net activity in loans held for investment  83,276   36,762   62,950 
            
Loans originated for sale  1,881,351   1,756,454   2,378,926 
Loans sold  (1,931,462)  (1,695,205)  (2,320,194)
Net activity in loans held for sale  (50,111)  61,249   58,732 
Total gross loans receivable and held for sale at end of period $1,436,297  $1,379,461  $1,403,132 




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Allowance for Loan Losses - The allowance for loan losses decreased $2.0increased $5.3 million September 30, 2017 from December 31, 2016.2019. The decreaseincrease resulted from the negativea provision due to improvement of key loan quality metrics decreasingincreased economic uncertainity increasing the required allowance related to the loans collectively and specifically reviewed. The overall decreaseincrease was primarily related to each of the one- to four-family, multi-family, home equity, 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 Allowanceallowance 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$46,000 from December 31, 2016.2019.  During the ninesix months ended SeptemberJune 30, 2017, $1.6 million was2020, $299,000 of loans were transferred from loans receivable to real estate owned upon completion of foreclosure.  During the same period, sales of real estate owned totaled $2.7$345,000. There were no writedowns during the six months ended June 30, 2020.

Prepaid expenses and other assets– Total prepaid expenses and other assets increased $23.5 million to $54.8 million at June 30, 2020. The increase was primarily due to increases in loan rate lock commitments, funding receivables from investors, and writedowns were $504,000 in an effort to sell various aged properties.receivables from back-to-back interest rate swaps.


Deposits – Total deposits increased $7.4$89.9 million to $956.8 million$1.16 billion at SeptemberJune 30, 2017 from December 31, 2016.2020.  The increase was driven by an increase of $18.4$49.3 million in timemoney market and savings deposits and $2.8$41.0 million in demand deposits offset by a decrease of $13.8 million$354,000 in money market and savingstime deposits.


Borrowings – Total borrowings increased $48.3$115.5 million, or 23.9%, to $435.5$599.1 million at SeptemberJune 30, 2017 from December 31, 2016.2020. The Company borrowed additional short and long termcommunity banking segment added $104.0 million in short-term FHLB advances to replace the FHLB advances and repurchase agreements that  matured.borrowings. External short termshort-term borrowings at the mortgage banking segment increased a total of $2.3$11.5 million at SeptemberJune 30, 20172020 from December 31, 2016 to fund loans held for sale.2019.


Advance Payments by Borrowers for Taxes - Advance payments by borrowers for taxes increased $20.4 million.$16.6 million to $20.8 million at June 30, 2020. 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 $13.8increased $7.2 million to $54.4 million at SeptemberJune 30, 20172020 compared to December 31, 2016. The decrease was2019. Other liabilities increased primarily due to liabilies resulting from payables due on back-to-back swaps, accrued compensation, and forward commitments to sell loans at the mortgage banking segment. Offsetting the increase, 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.liabilities in the statements of financial condition. These amounts remain classified as other liabilities until settled.


Shareholders'Shareholders’ Equity – Shareholders' equity increased by $1.2decreased $8.1 million to $411.9$385.6 million at SeptemberJune 30, 20172020 from December 31, 2016.2019.  Shareholders' equity increaseddecreased primarily due to the declaration of regular and special dividends and the repurchase of stock.  Partially offsetting the decreases, there were increases related to net income, additional paid inpaid-in capital as stock options were exercised, accumulated other comprehensive income increasing asequity awards vesting, 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.

vesting.
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ASSET QUALITY


NONPERFORMING ASSETS




 At September 30,  At December 31,  At June 30,  At December 31, 
 2017  2016  2020  2019 
 (Dollars in Thousands)  (Dollars in Thousands) 
Non-accrual loans:            
Residential            
One- to four-family $5,709  $7,623  $4,753  $5,985 
Multi-family  833   1,427   639   667 
Home equity  223   344   77   70 
Construction and land  37   -   -   - 
Commercial real estate  181   422   67   303 
Commercial  26   41   -   - 
Consumer  -   -   -   - 
Total non-accrual loans  7,009   9,857   5,536   7,025 
                
Real estate owned                
One- to four-family  1,021   2,141   -   46 
Multi-family  169   -   -   - 
Construction and land  4,822   5,082   1,256   1,256 
Commercial real estate  300   300   -   - 
Total real estate owned  6,312   7,523   1,256   1,302 
Valuation allowance at end of period  (1,744)  (1,405)  (554)  (554)
Total real estate owned, net  4,568   6,118   702   748 
Total nonperforming assets $11,577  $15,975  $6,238  $7,773 
                
Total non-accrual loans to total loans, net  0.56%  0.84%
Total non-accrual loans to total loans  0.39%  0.51%
Total non-accrual loans to total assets  0.38%  0.55%  0.25%  0.35%
Total nonperforming assets to total assets  0.62%  0.89%  0.28%  0.39%


All loans that exceedare 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 9089 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 Six Months 
 September 30,  Ended June 30, 
 2017  2016  2020  2019 
 (In Thousands)  (In Thousands) 
            
Balance at beginning of period $9,857   17,604  $7,025  $6,555 
Additions  2,553   1,990   1,422   764 
Transfers to real estate owned  (1,609)  (3,442)  (299)  (743)
Charge-offs  (649)  (662)  (3)  (8)
Returned to accrual status  (2,168)  (3,661)  (1,033)  (127)
Principal paydowns and other  (975)  (1,162)  (1,576)  (756)
Balance at end of period $7,009   10,667  $5,536  $5,685 

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Total non-accrual loans decreased by $2.8$1.5 million, or 28.9%21.2%, to $5.5 million as of June 30, 2020 compared to $7.0 million as of September 30, 2017 compared to $9.9 million as of December 31, 2016.2019.  The ratio of non-accrual loans to total loans receivable was 0.56%0.39% at SeptemberJune 30, 20172020 compared to 0.84%0.51% at December 31, 2016.2019.  During the ninesix months ended SeptemberJune 30, 2017, $1.6 million in non-accrual loans were transferred to real estate owned, $649,000 in loan principal was charged off, $2.2 million in loans were returned to accrual status and approximately $975,000 in principal payments were received.  Offsetting this activity, $2.62020, $1.4 million in loans were placed on non-accrual status. Offsetting this activity, $1.0 million returned to accrual status, $1.6 million in principal payments were received, and $299,000 transferred to real estate owned during the ninesix months ended SeptemberJune 30, 2017.2020.


Of the $7.0$5.5 million in total non-accrual loans as of SeptemberJune 30, 2017, $6.62020, $4.6 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$1.2 million in cumulative partial net charge-offs have been recorded over the life of these loans as of SeptemberJune 30, 2017.2020.  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$27,000 have been recorded as of SeptemberJune 30, 2017.2020.  The remaining $403,000$917,000 of non-accrual loans were reviewed on an aggregate basis and $81,000$183,000 in general valuation allowance was deemed necessaryappropriate related to those loans as of SeptemberJune 30, 2017.2020.   The $81,000$183,000 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 SeptemberJune 30, 20172020 totaled $2.2$1.6 million, which represents 31.8%29.7% of total non-accrual loans as of that date.  These five loans are carried net ofhave not had any cumulative life-to-date net charge-offs of $540,000.  Aggregateand $27,000 in specific valuation allowancesallowance was deemed necessary based on net realizable collateral value with respect to these five loans total $64,000 as of SeptemberJune 30, 2017.2020.


For the ninesix months ended SeptemberJune 30, 2017,2020, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $417,000.$195,000. We received $308,000$160,000 of interest payments on such loans during the ninesix months ended SeptemberJune 30, 2017.2020. 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 SeptemberJune 30, 20172020 or December 31, 2016.2019.




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 June 30, 2020 
 Accruing  Non-accruing  Total  Accruing  Non-accruing  Total 
 (In Thousands)  (In Thousands) 
                  
One- to four-family $2,747  $1,204   3,951  $2,737  $591  $3,328 
Multi-family  -   833   833   -   282   282 
Home equity  48   -   48 
Commercial real estate  291   37   328   276   -   276 
 $3,086  $2,074   5,160  $3,013  $873  $3,886 
                        
 As of December 31, 2016  As of December 31, 2019 
 Accruing  Non-accruing  Total  Accruing  Non-accruing  Total 
    (In Thousands) 
                        
One- to four-family $3,296  $2,399   5,695  $2,740  $685  $3,425 
Multi-family  2,514   1,427   3,941   -   308   308 
Home equity  49   97   146 
Commercial real estate  295   60   355   278   7   285 
 $6,154  $3,983   10,137  $3,018  $1,000  $4,018 

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- 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 unaudited consolidated 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.

We modified loans for borrowers that were not considered troubled debt under the CARES Act.  Loans less than 30 days past due as of December 31, 2019 were allowed for modifications if the borrower experienced a COVID-19 hardship. As of June 30, 2020, the Company modified $113.9 million of loans for a period ranging from 90 to 180 days consisting of principal payment deferral. As of June 30, 2020, the Company modified $7.9 million of loans, consisting of the deferral of principal and interest for a period of three to eight months.  In accordance with the CARES Act, these short term deferrals are not considered troubled debt restructurings.

The following table summarizes information with respect to the loans modified under the CARES Act as of June 30, 2020.

 June 30, 2020 
    
Loan modifications:   
Residential real estate:   
One- to four-family $40,603 
Multi-family  5,169 
Home equity  331 
Construction and land  - 
Commercial real estate  72,500 
Commercial  3,193 
Consumer  - 
Total loan modifications $121,796 
Total loan modifications to total loans receivable  8.49%

A loan with a total balance of $55,000 that was modified did not make their contractual interest-only payment as of June 30, 2020.

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 June 30,  At December 31, 
 2017  2016  2020  2019 
 (Dollars in Thousands)  (Dollars in Thousands) 
            
Loans past due less than 90 days $4,052  $2,910  $2,538  $1,833 
Loans past due 90 days or more  4,903   5,289   3,909   4,632 
Total loans past due $8,955  $8,199  $6,447  $6,465 
                
Total loans past due to total loans receivable  0.71%  0.70%  0.45%  0.47%




Past due loans increaseddecreased by $756,000,$18,000, or 9.2%0.3%, to $9.0$6.4 million at SeptemberJune 30, 20172020 from $8.2$6.5 million at December 31, 2016.2019.  Loans past due less than 90 days increased by $1.1 million,$705,000, or 39.2%.38.5%, primarily in the one- to four-family loan category.  Loans past due 90 days or more decreased by $386,000,$723,000, or 7.3%15.6%, during the ninesix months ended SeptemberJune 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.



2020.
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REAL ESTATE OWNED


Total real estate owned decreased by $1.6 million,$46,000, or 25.3%6.1%, to $4.6 million$702,000 at SeptemberJune 30, 2017,2020, compared to $6.1 million$748,000 at December 31, 2016.2019.  During the ninesix months ended SeptemberJune 30, 2017, $1.6 million was2020, $299,000 of loans were 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$345,000.  There were no write downs occurred during the ninesix months ended SeptemberJune 30, 2017.2020. 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.



ALLOWANCE FOR LOAN LOSSES




  As of or for the Nine Months Ended 
  September 30, 
  2017  2016 
  (Dollars in Thousands) 
       
Balance at beginning of period $16,029  $16,185 
Provision for loan losses  (1,166)  340 
Charge-offs:        
Mortgage        
One- to four-family  1,092   801 
Multi-family  92   488 
Home equity  -   62 
Commercial real estate  6   - 
Construction and land  14   3 
Consumer  -   - 
Commercial  -   - 
Total charge-offs  1,204   1,354 
Recoveries:        
Mortgage        
One- to four-family  200   246 
Multi-family  102   134 
Home equity  21   24 
Commercial real estate  1   - 
Construction and land  80   58 
Consumer  -   - 
Commercial  -   - 
Total recoveries  404   462 
Net charge-offs  800   892 
Allowance at end of period $14,063  $15,633 
         
Ratios:        
Allowance for loan losses to non-accrual loans at end of period  200.64%  146.55%
Allowance for loan losses to loans receivable at end of period  1.12%  1.36%
Net charge-offs to average loans outstanding (annualized)  0.09%  0.11%
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%



  At or for the Six Months 
  Ended June 30, 
  2020  2019 
  (Dollars in Thousands) 
       
Balance at beginning of period $12,387  $13,249 
Provision (credit) for loan losses  5,285   (650)
Charge-offs:        
Mortgage        
One- to four-family  7   25 
Multi-family  5   1 
Home equity  13   8 
Commercial real estate  -   - 
Construction and land  -   - 
Consumer  1   5 
Commercial  8   - 
Total charge-offs  34   39 
Recoveries:        
Mortgage        
One- to four-family  61   35 
Multi-family  9   9 
Home equity  18   12 
Commercial real estate  7   1 
Construction and land  1   - 
Consumer  -   - 
Commercial  -   - 
Total recoveries  96   57 
Net recoveries  (62)  (18)
Allowance at end of period $17,734  $12,617 
         
Ratios:        
Allowance for loan losses to non-accrual loans at end of period  320.34%  221.93%
Allowance for loan losses to loans receivable at end of period  1.24%  0.92%
Net recoveries to average loans outstanding (annualized)  (0.01)%  0.00%
(Provision) credit for loan losses to net recoveries  (8,524.19)%  3,611.11%
Net recoveries to beginning of the period allowance (annualized)  (1.01)%  (0.27)%
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At September 30, 2017, the

The allowance for loan losses decreased $2.0increased $5.3 million to $14.1$17.7 million at June 30, 2020, compared to $16.0$12.4 million at December 31, 2016.2019.  The decreaseincrease in allowance for loan losses reflects the negative$5.3 million provision. The negative provision recorded during the current quarteryear reflects an increased allocation related to the continued improvementeconomic condition qualatitive factor as a result of the COVID-19 pandemic in each of the loan quality metrics including: non-accrual loans, loans rated substandardcategories.

We had net recoveries of $62,000, or watch, and loans past due.

Net charge-offs totaled $800,000, or an annualized 0.09%0.01% of average loans annualized, for the ninesix months ended SeptemberJune 30, 2017,2020, compared to $892,000,net recoveries of $18,000, or an annualized 0.11%less than 0.01% of average loans annualized, for the ninesix months ended SeptemberJune 30, 2016.2019. Of the $800,000$62,000 in charge-offsrecoveries during the ninesix months ended SeptemberJune 30, 2017, a2020, the majority of the activity related to loans secured by one- to four-family residential loans.


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'smanagement’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 ninesix months ended SeptemberJune 30, 20172020, primary uses of cash and cash equivalents included: $1.88$1.80 billion in funding loans held for sale, $85.7$46.0 million increase infor funding of loans receivable, $69.0 decrease$20.4 million in repurchase agreements, $23.6purchases of our common stock, $18.8 million for cash dividends paid, $7.7$5.6 million decrease from fewer short-term borrowings, $6.9for purchases of FHLB stock, $4.5 million infor purchases of mortgage related securities, $6.1and $2.5 million infor purchases of debt securities, and $5.2 million in purchases of FHLB stock.securities.


During the ninesix months ended SeptemberJune 30, 2017,2020, primary sources of cash and cash equivalents included: $2.03$1.73 billion in proceeds from the sale of loans held for sale, $125.0$104.0 million in proceeds from long-termshort-term FHLB debt, $25.2borrowings, $11.5 million in  proceeds from additional short-term borrowings, $89.9 million from an increase in deposits, $20.8 million in principal repayments on mortgage related securities, $22.8$3.4 million in maturities of debt securities, $27.0 million in net income, $13.9 million from maturities of debt securities, $7.4 million increase in deposits, $6.0and a $4.7 million increase in advance payments by borrowers for taxes, and $3.1 million from real estate owned sales.taxes.


During the ninesix months ended SeptemberJune 30, 20162019, primary uses of cash and cash equivalents included: $1.76$1.27 billion in 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$19.8 million for the repurchase of common stock, $5.2cash dividends paid, $6.8 million infor purchases of mortgage related securities, $4.5and $14.4 million in purchases of FHLB stock, $4.1 million in purchases of debt securities, and $4.8 million in dividends paid.our common stock.


During the ninesix months ended SeptemberJune 30, 2016,2019, primary sources of cash and cash equivalents included: $1.79$1.23 billion in proceeds from the sale of loans held for sale, $62.3$65.0 million in additional proceeds from long-term borrowings, $16.5 million from an increase in deposits, $100.0$18.6 million in additional proceeds from long termshort-term borrowings, $56.8 million from short term borrowings, $29.7$12.9 million in principal repayments on mortgage related securities, $6.6$7.7 million from maturities of debt securities, $19.1a decrease in loans receivable, and $16.2 million in net income, $11.4 from sales of FHLB stock, and $5.3 million from real estate owned sales.income.

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A portion of our liquidity consists of cash and cash equivalents, which are a product of our operating, investing and financing activities.  At SeptemberJune 30, 20172020 and 2016,2019, respectively, $92.6$76.9 million and $54.3$70.1 million of our assets were invested in cash and cash equivalents.  At SeptemberJune 30, 2017,2020, cash and cash equivalents arewere comprised of the following: $39.3$63.6 million in cash held at the Federal Reserve Bank and other depository institutions and $53.3$13.3 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, and repurchase agreements from other institutions.

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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 FHLBCFHLB which provide an additional source of funds.  At SeptemberJune 30, 2017,2020, we had $55.0$470.0 million in short-termlong-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 million in long term advances from the FHLBCFHLB with contractual maturity dates in 2017, 2018, 2021,2027, 2028, and 2027.2029.  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.  The 20272028 advance maturities have single call options in March 2021 and May 2019, June 2019,2021, along with two advances that have quarterly call options. One advance is currently callable quarterly and the other advance callable date begins in September 2020. The 2029 advance maturities have quarterly call option currently available and the other options beginning November 2020, August 2019.2021, and May 2022. We had $104.0 million in short-term advances with the FHLB and contractual maturities in July 2020, August 2020, and May 2021. As an additional source of funds, we also havethe mortgage banking segment has a repurchase agreement. At SeptemberJune 30, 2017,2020, we had $15.0$25.1 million outstanding under the repurchase agreement.  The repurchase agreement matures in November 2017.with a total outstanding commitment of $35.0 million. 


At SeptemberJune 30, 2017,2020, we had outstanding commitments to originate loans receivable of $52.9$16.8 million.  In addition, at SeptemberJune 30, 2017,2020, we had unfunded commitments under construction loans of $18.3$76.2 million, unfunded commitments under business lines of credit of $17.2$22.8 million and unfunded commitments under home equity lines of credit and standby letters of credit of $14.7$14.4 million.  At SeptemberJune 30, 2017,2020, certificates of deposit scheduled to mature in one year or less totaled $514.3$727.9 million.  Based on prior experience, management believes that, subject to the Bank'sBank’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 FHLBCFHLB 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 SeptemberJune 30, 2017,2020, Waterstone Financial, Inc. (on an unconsolidated basis) had liquid assets totaling $24.5$14.7 million.

Capital


Shareholders' equity increased by $1.2decreased $8.1 million to $411.9$385.6 million at SeptemberJune 30, 20172020 from December 31, 2016.2019.  Shareholders' equity increaseddecreased primarily due to the declaration of regular and special dividends and the repurchase of stock.  Partially offsetting the decreases, there were increases related to net income, additional paid inpaid-in capital as stock options were exercised, accumulated other comprehensive income increasing asequity awards vesting, 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.vesting.


The Company's Board of Directors authorized a stock repurchase program in the firstsecond quarter of 2015.  The Company authorized two stock repurchase programs2019 and it was completed in the second quarter 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.  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.

2020. As of SeptemberJune 30, 2017,2020, the Company had repurchased 5,919,8539,727,753 shares at an average price of $13.02$14.25 under previously approved stock repurchase plans. As of September 30, 2017, the Company is authorized to purchase up to 916,800 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 SeptemberJune 30, 2017,2020, WaterStone Bank exceeded all regulatory capital requirements and is considered "well capitalized"“well capitalized” under regulatory guidelines. See "Notes“Notes to Unaudited Consolidated Financial Statements - Note 8 - Regulatory Capital."”



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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 SeptemberJune 30, 20172020 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  $-  $-  $-  $171,016  $$171,016  $$-  $$-  $$- 
Money market and savings deposits (4)(3)  148,607   148,607   -   -   -   247,233   247,233   -   -   - 
Time deposit (4)(3)  685,033   514,304   166,831   3,898   -   739,417   727,895   9,442   2,080   - 
Bank lines of credit (4)  10,503   10,503   -   -   - 
Repurchase agreements (3)  25,102   25,102   -   -   - 
Federal Home Loan Bank advances (1)  410,000   185,000   -   100,000   125,000   574,000   104,000   -   -   470,000 
Repurchase agreements (2)(4)  15,000   15,000   -   -   - 
Operating leases (3)  8,364   2,824   3,061   1,312   1,167 
Operating leases (2)  9,620   3,129   3,786   1,765   940 
 $1,400,640  $999,371  $169,892  $105,210  $126,167  $1,766,388  $$1,278,375  $$13,228  $$3,845  $$470,940 


(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. See call provisions in Note 7 - Borrowings.
(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

Waterstone Mortgage Corporation is a defendant in a class action lawsuit filed in the United States District Court for the Western District of WisconsinSee Note 10 - Commitments, Off-Balance Sheet Arrangements, and subsequently compelled to arbitration before the American Arbitration Association. The plaintiff class alleged that Waterstone Mortgage Corporation violated certain provisionsContingent Liabilities of the Fair Labor Standards Act (FLSA) and failednotes to pay loan officers consistent with their various employment agreements. On July 5, 2017, the arbitrator issued a final award finding Waterstone Mortgage Corporation liableunaudited consolidated financial statements 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.additional information.


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.



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Off-Balance Sheet Commitments


The following table details the amounts and expected maturities of significant off-balance sheet commitments as of SeptemberJune 30, 2017.2020.


       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  $-  $-  $-  $16,775  $16,775  $-  $-  $- 
Unused portion of home equity lines of credit (2)  14,724   14,724   -   -   -   13,570   13,570   -   -   - 
Unused portion of construction loans (3)  18,306   18,306   -   -   -   76,156   76,156   -   -   - 
Unused portion of business lines of credit  17,204   17,204   -   -   -   22,803   22,803   -   -   - 
Standby letters of credit  259   259   -   -   -   874   874   -   -   - 
Total Other Commitments $103,441  $103,441  $-  $-  $-  $130,178  $130,178  $-  $-  $- 




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.




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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'sBank’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 SeptemberJune 30, 20172020 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 (nono growth, balance sheet).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 June 30, 2020                
Dollar Change $2,522   1,746   886   (1,283) $$1,970   2,139   1,092   (2,156)
Percentage Change  4.73%  3.28   1.66   (2.41)  3.43%  3.73   1.90   (3.76)


At SeptemberJune 30, 2017,2020, a 100 basis point instantaneous increase in interest rates had the effect of increasing forecast net interest income over the next 12 months by 2.51%1.90% while a 100 basis point decrease in rates had the effect of decreasing net interest income by 2.89%3.76%.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures: Company management, with the participation of the Company'sCompany’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company'sCompany’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'sCompany’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company'sCompany’s disclosure controls and procedures are effective.


Internal Control Over Financial Reporting: There have been no material changes in the Company'sCompany’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'sCompany’s internal control over financial reporting.



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PART II. OTHER INFORMATION



Item 1. Legal Proceedings


Other than as disclosed below, the CompanyThe information required by this item is not involvedset 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.
Herrington v. Waterstone Mortgage Corporation

Waterstone Mortgage Corporation is a defendant in a class action lawsuit filed in the United States District Court for the Western District of WisconsinPart I, Item 1, Note 10 - Commitments, Off-Balance Sheet Arrangements, 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.Contingent Liabilities.

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
ThereExcept as previously disclosed, 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'sCompany’s Annual Report on Form 10-K for the year ended December 31, 2016.2019.


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


Following are the Company'sCompany’s monthly common stock repurchases during the thirdsecond quarter of 2017:2020:


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)
 
April 1, 2020 - April 30, 2020  201,556  $$13.94   201,556   234,926 
May 1, 2020 - May 31, 2020  234,926   14.14   234,926   - 
June 1, 2020 - June 30, 2020  1,178   14.68   -   - 
Total  437,660  $$14.05   436,482   - 


(a)On September 4, 2015,May 30, 2019, the Board of Directors terminatedannounced the completion of the then-existing stock repurchase plan and authorized the repurchase of 1,500,0002,000,000 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 thepursuant to a new share repurchase plan. The maximum numberamount of shares that may yet bewere purchased under the Board of Directors' authorization.this plan.


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Item 3. Defaults Upon Senior Securities




Not applicable.




Item 4. Mine Safety Disclosures




Not applicable.

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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
/s/ Douglas S. Gordon
Douglas S. Gordon
Chief Executive Officer
Principal Executive Officer
Date:  October 27, 2017
/s/  Mark R. Gerke
Mark R. Gerke
Chief Financial Officer
Principal Financial Officer










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EXHIBIT INDEX

WATERSTONE FINANCIAL, INC.

Form 10-Q for Quarter Ended September 30, 2017




Exhibit No. Description Filed Herewith 
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 SeptemberJune 30, 2017,2020, formatted in Inline 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
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) X 





    
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:  August 6, 2020
/s/ Douglas S. Gordon
Douglas S. Gordon
Chief Executive Officer
Principal Executive Officer
Date:  August 6, 2020
/s/  Mark R. Gerke
Mark R. Gerke
Chief Financial Officer
Principal Financial Officer



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